By Shanti S Nair and Debroop Roy

(Reuters) – CannTrust Holdings Inc’s shares plunged about 23% to a more than one-and-half-year low on Monday, after Health Canada found the weed producer grew cannabis in unlicensed rooms, and then restricted the company from clearing its inventory.

Health Canada found the company was growing cannabis in five unlicensed rooms between October 2018 and March 2019 and inaccurate information was provided to the agency by CannTrust’s employees.

The regulator placed a hold on about 5,200 kilograms (11,500 pounds) of dried cannabis that were harvested in the rooms, while CannTrust also put a voluntary hold on 7,500 kg of cannabis equivalents inventory that was produced in those rooms.

The regulator said that last month it had conducted an unannounced inspection at CannTrust’s facility in Pelham, Ontario, which resulted in a number of observations and an overall “Non-Compliant” rating.

Health Canada inspectors returned to the Pelham facility in July, where they seized 4,327 kg of “implicated product,” and obtained samples for further testing, the regulator said.

“It (the non-compliance) adds a meaningful overhang to the story over the next several quarters, at least,” RBC Capital Markets analyst Douglas Miehm said, citing risks to revenue growth.

The company did not disclose the financial impact from the non-compliance, while Miehm said he believes volumes from the held inventory represent the majority of CannTrust’s products.

Ontario-based CannTrust said it accepted Health Canada’s findings, adding it had taken actions to ensure current and future compliance.

Health Canada said the company has 10 days to respond to the inspection report.

“We made errors in judgment,” Chief Executive Officer Peter Aceto said. The hold on inventory would lead to temporary product shortages, the company said, adding it was exploring options to mitigate this.

According to Seaport Global analyst Brett Hundley, the CannTrust inventory on hold currently represents about 2% of Canadian cannabis industry sales.

“It’s meaningful enough – when considered against current market supply constraints – to lead to a potential bump in industry pricing over the near term,” Hundley said.

He added that customers could look to shift orders to other producers which could lead to a domino effect on prices.

Canada became the first developed country to legalize the use of recreational cannabis last year, creating a multi-billion dollar industry that has been plagued by supply constraints and prices that are higher than those on the black market.

CannTrust’s Toronto-listed shares closed down about 23%, touching a session low of C$5.

(Reporting by Debroop Roy and Shanti S Nair in Bengaluru, Additional reporting by Aakash Jagadeesh Babu; editing by Maju Samuel, Shounak Dasgupta and Chris Reese)