(Bloomberg) -- CannTrust Holdings Inc. tumbled a record 22% Monday after Canadian regulators found it grew pot in unlicensed rooms, resulting in a hold on inventory that will lead to temporary product shortages.
CannTrust said Health Canada has given a non-compliant rating to its greenhouse in Pelham, Ontario because it was found to have grown pot in five unlicensed rooms between October and March. The rooms were licensed in April. Health Canada also found that CannTrust employees provided inaccurate information to the regulator.
As a result, the government has placed a hold on about 5,200 kilograms (11,464 pounds) of dried cannabis that was harvested from the unlicensed rooms until it deems CannTrust is compliant with regulations. CannTrust has also placed a voluntary hold on another 7,500 kilograms equivalent that was produced in the same rooms. This will lead to temporary shortages for customers and medical patients, the company said in a statement.
“We have made many changes to make this right with Health Canada,” Chief Executive Officer Peter Aceto said in the statement. “We made errors in judgment, but the lessons we have learned here will serve us well moving forward.”
Analysts at Bank of America Merrill Lynch downgraded CannTrust’s stock two notches to underperform from buy and cut their price target to C$4.50 from C$9, saying the sales pressure could continue into 2020.
“Due to uncertainty on go-forward financials, exacerbated by likely diminishing investor confidence, we see shares remaining weak,” analyst Christopher Carey wrote in a note. He added that sales in the September quarter are likely to be “materially impacted”, and he expects gross margin pressure as CannTrust fills supply gaps by sourcing pot from other producers at a higher cost.
Vaughan, Ontario-based CannTrust has retained external advisers for an independent review of its compliance processes. It said the financial impact is unknown until Health Canada completes its quality testing of the product.
CannTrust was down 20% to C$5.19 at 11:10 a.m. in Toronto. The company’s shares have fallen by about 60% since late March, making it the worst-performing pot stock on Canada’s benchmark S&P/TSX Composite Index. An equity offering in May that was led by Bank of America Merrill Lynch and other big U.S. banks sent the stock tumbling after it was priced well below CannTrust’s recent highs.
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