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A broad downturn in cannabis stocks alongside a major regulatory breach at CannTrust Holdings Inc. is making it harder for Canadian producers to raise capital.

On Friday, cannabis grower Flowr Corp. cancelled a $125-million public offering, citing in a news release “prevailing market conditions which were not conducive to the completion of the Offering on terms that would be in the best interest of Flowr’s current shareholders.”

The Kelowna, B.C.-based company, which is hoping to list on the Nasdaq Stock Exchange, also said that it is "assessing the timing of its Nasdaq listing, as a result of the current market conditions.”

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The cancellation of Flowr’s deal comes two weeks after the revelation of an industry-shaking breach of Health Canada rules by CannTrust, one of the country’s leading licensed producers. CannTrust acknowledged on July 8 that it was under investigation by Health Canada for growing thousands of kilograms of cannabis in unlicensed rooms.

The Flowr offering was supposed to be underwritten by Credit Suisse Group AG, Barclays PLC and BMO Nesbitt Burns. In May, Credit Suisse was part of the syndicate of banks that underwrote a US$195.5-million financing by CannTrust, less than two months before Health Canada began its investigation.

Flowr declined to give more detail about why it cancelled the offering. Credit Suisse, Barclays and BMO did not respond to requests for comment.

“In the case of CannTrust, the financing that they did right before the entire episode had substantial, highly credible syndicate partners, and those partners now have egg on their face. That is super negative for the entire sector and will have ripple effects that will play out over months and years,” said Dan Sutton, chief executive officer of private Vancouver-based licensed producer Tantalus Labs. Mr. Sutton spoke to The Globe and Mail on Tuesday, ahead of Flowr’s announcement, about the general challenge cannabis companies are having raising capital.

The situation at CannTrust isn’t the only headwind for the industry. In early July, Bruce Linton, the highest profile chief executive in the space, was fired by Canopy Growth Corp., after the company posted poor financial results for its most recent quarter.

“Quarterly revenues have been disappointing virtually across the board. The market is not as mature as the investment community had hoped it would be at this time, and as a result you’re seeing an exit of resources from the sector,” Mr. Sutton said.

Flowr, a mid-sized producer, posted a $5.8-million loss on $1.6-million in sales in its most recent quarter.

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The company was hoping to use the proceeds from the offering to finance the acquisition of Portuguese cannabis firm Holigen Holdings Ltd., of which Flowr already owns 20 per cent.

“There is too much uncertainty or lack of visibility about how [international medical markets] will play out right now. An equity raise in an environment where Bruce Linton has been fired and CannTrust have been caught carrying out [an] illegal grow also does not help,” Ryan Tomkins, an analyst with investment bank Jefferies International Ltd., wrote in a research note about Flowr on Friday.

Beyond high-profile events that have shaken investor confidence in recent weeks, cannabis capital markets are undergoing a broader shift in Canada, as the hype that led up to recreational legalization is replaced by more sober assessment of companies’ ability to make a profit.

“Our view was that there would be a normalization in the equity markets; that the best opportunities had largely been priced accurately; and that there would be a shift in capital from everybody that had a business plan to people that actually could execute on a business plan,” said Michael Ruscetta, CEO of Trichome Financial Corp., which does private debt financing for the cannabis industry.

Mr. Ruscetta, who spoke to The Globe before the Flowr announcement, said there is a huge demand for capital in the young and rapidly expanding industry, but there’s also a declining willingness by investors to put money into highly speculative cannabis ventures.

“If you’re private and need capital, it is exceedingly difficult. If you are public in Canada and say have a market cap of less than $500-million, it’s not super easy. There’s been a big bifurcation in the market. There’s haves and have-nots, and there’s a lot of have-nots,” Mr. Ruscetta said.

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The other change has to do with investor interest shifting toward the United States, particularly after large U.S. multi-state cannabis operators started listing on Canadian stock exchanges a year ago.

“Capital has absolutely flowed [to the U.S.], and deservedly so. There are bigger market opportunities, and in many cases companies are generating real EBITDA and real cash flow, which very few here [in Canada] have been able to do. So where would you rather be? I’d actually like to apply a multiple to real EBITDA, not EBITDA that’s two years in the future,” Mr. Ruscetta said. (EBITDA means earnings before interest, taxes, depreciation and amortization.)

Flowr Corp. stock jumped more than 20 per cent on Friday following the news that the deal was cancelled. Before Friday’s announcement, Flowr shares had lost more than 40 per cent of their value over the preceding month.

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