VIRIDIAN INSIGHTS

• CANSORTIUM / RIV MANAGEMENT ANNOUNCES PRE-MERGER INTEGRATION STEPS
  • In a joint press release, Cansortium (TIUM.U: CSE) and RIV Capital (RIV: CSE) announced several integration actions taken pre-merger:
    • Adoption of best practices and SOPs across the two companies
    • Joint, strategic product planning
    • Expanding House of Brands, including introduction of Fluent brands to the New York Market
    • Innovative product launches
    • Strategic capital deployment
    • Enhancing in-store customer experience.
  • The press release was clearly intended to convey strong momentum for the transaction ahead of the August 23 and August 27 RIV and Cansortium shareholder votes.
  • The release had the desired effect. The market arb spread on the Cansortium/RIV deal is now around 32%, demonstrating reasonable optimism that the agreement will be closed. The spread is equal to the percentage profit an investor would make if they could purchase RIV stock, instantly exchange it into Cansortium at the announced deal exchange rate, and sell the Cansortium stock.
  • We will be closely monitoring the shareholder votes.
• WHEN WILL THE UPSIDE KICK IN?
  • Cannabis just can’t seem to get a break. S3 appears on track. The Democrats are up in the polls. The debt capital markets are on fire, with the most volume since late 2022, but the MSOS and most of its components continue to languish.
  • We continue to believe that at current levels, U.S. MSOs have enormous upside potential. The graph below shows the multiples reached after a number of past legislative/regulatory events. It makes clear that a doubling of prices is a reasonable assumption. We recommend a balanced portfolio that leans toward the companies in the top half of the Viridian Credit Tracker model ranking.

• WHAT FINANCIAL OPTIONS DO THE MSOs HAVE? THREE GRAPHS TELL THE STORY
  • The three graphs below seek to map the financial options available to eighteen of the largest MSOs based on their Valuation, Leverage, and Liquidity.
  • In the first graph, E.V./ 2024 EBITDA is plotted against Adjusted Net Debt/ 2024 EBITDA. In calculating Adjusted Net Debt, we make several key assumptions: 1) Leases that are included on the balance sheet are considered debt. We view most leases in the cannabis space as equivalents to equipment loans or mortgage loans. While it is true that a lease default does not necessarily trigger a cascade of events leading to bankruptcy, the distinction is often meaningless in cannabis due to the mission-critical nature of many long-term leases. 2) We consider any accrued taxes (including uncertain tax liability accounts listed as long-term liabilities) in excess of the most recent quarterly tax expense to be debt.
• The first graph shows that thirteen of the eighteen companies have net debt / 2024 EBITDA over 3x, which we view as the cutoff of sustainability in a 280e world. We view 4x as sustainable in a post-280e environment, and nine companies are now over that threshold.
  • Companies like Green Thumb (GTII: CSE), Trulieve (TRUL: CSE), and Verano, with less than 2x Debt / EBITDA and relatively low E.V./ 2024 EBITDA valuation multiples, are good candidates for debt-funded Equity repurchases and/or acquisitions using relatively high percentages of debt financed cash consideration.
  • Companies like TerrAscend, with relatively high leverage but also high valuations, should look to complete acquisitions using their stock as consideration.
  • Finally, companies like Cannabist (CBST: Cboe) and 4Front, with low valuations but excessive debt loads, are probably best served by asset sales.
• The second graph looks at leverage through the lens of total liabilities to market cap. We believe this is the single best measure of leverage because it is a direct reflection of the market’s assessment of the value of a company’s assets in excess of its liabilities and is sensitive to changes in market perception of a company’s future.
  • We have excluded Schwazze from this graph because the company now has total liabilities to market cap of close to 18x, indicating a market perception of low asset value coverage and potential distress. Interestingly, the company’s Adj. Net Debt/ 2024 EBITDA of 5.63x is high but not indicative of distress. What is the market trying to tell us about Schwazze?

• • On the bottom left are companies with low valuation multiples but also less than 2x total liabilities to market cap. The group includes Verano, Trulieve, Cresco, and MariMed. MariMed’s placement in this graph suggests that the market is far more confident about the company’s sustainability than its 5.63x adj. net debt to 2024 EBITDA would indicate.
  • In the middle, between 2x and 4x total liabilities/market cap, we see Ascend, AYR, and Jushi. Each of these has more than 4x debt/ EBITDA, which is borderline in terms of sustainability, even in a non-280e world. However, each also has significant upside catalysts that could mitigate or exacerbate the excess leverage. FFNT is ramping up production at its mammoth Illinois cultivation facility. Jushi is levered to potential adult rec developments in Pennsylvania and Virginia.
  • On the right lies Cannabist. Cannabist has seen the writing on the wall: to levered to issue equity or debt, its only option was asset sales, and its exit from Florida was a recognition of this. The announcement of the sale of its Arizona properties and portions of Virginia are further ratification of this.
  • At the top left are companies with high valuation metrics and low leverage. These companies should look to do an equity issuance depending on their positioning in the liquidity graph below.

• The third graph introduces the free cash flow adjusted current ratio liquidity measure into the mix. Companies with less than 1x on this measure will likely have to raise capital next year. Surprisingly, eight of the companies fall into this bucket. This graph also breaks the sector into three distinct groupings. The bottom left group has low leverage but also modest liquidity. Some of the companies, including Verano, MariMed, and Cresco, have sufficient but not comfortable levels of liquidity, while others, including Curaleaf, TerrAscend, and Glass House, are below the critical 1x liquidity line. Companies on the lower right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment.

• • • ARE SPACs REALLY BACK?
      • We thought we must have misheard the news that Mercer Park had completed a $200M SPAC IPO. It’s not exactly like the cannabis equity markets have been so buoyant over the last few weeks!
      • But then we thought, “How great would it be to have a pot of $200M to deploy now before any significant S3 bump is felt?
      • A brief conversation with the SPAC’s management shed a bit of light on the SPAC strategy. They are primarily focused on plant-touching and licensed operations. Distressed asset purchases are not out of the question, but they do want to stick to assets that can be cash flow positive, absent any debt overhang. They recognize that they may well have to aggregate more than one purchase to reach a qualifying investment. And they are not overly concerned that an imminent rescheduling will change the valuation landscape before they can get invested.
      • The SPAC has a considerable advantage in having the largest pool of equity that has been raised in years. We are looking forward to watching this play out! 
    • THE VERANO PURCHASE OF PORTIONS OF CANNABIST’S VIRGINIA AND ARIZONA ASSETS FOR A TOTAL VALUE OF $105M IS A SIGN OF RENEWED VIGOR IN THE CANNABIS M&A MARKET.
      • Verano is purchasing six dispensaries and one cultivation and production facility in Virginia. Verano will become the sole cannabis operator and retailer for the HAS 5 in Eastern Virginia. Cannabist (CBST: Cboe) will retain its assets in the Richmond region with five dispensaries and 80k square feet of cultivation and manufacturing space.
      • The total transaction value for the Virginia assets is $90M: $20M in cash, $40M in Class A shares, and $30M in a seller note.
      • Verano is purchasing all of Cannabist’s assets in Arizona, including one cultivation facility, one production facility, and two dispensaries.
      • The total transaction value for Arizona is $15M, payable in cash.
      • We are not surprised that Cannabist continues to sell assets. The company has weak liquidity and excess leverage.
      • We ARE surprised by the timing of the transaction, having believed that a re-acceleration of M&A would not unfold until after a rescheduling ruling.
      • We do not have enough information on the acquired properties to calculate purchase multiples. Still, as a whole, Verano is trading at around 5.75x 2024 EBITDA while Cannabist is trading closer to 7.4x, so this is a strategic transaction, not one motivated by accretiveness.
      • Granted, Cannabist may be a motivated seller, but Verano is using $40M of its stock in the deals at pre-S3 pop levels! Verano must feel it is getting a good enough deal to make up for potentially leaving some stock on the table. This is the sort of compromise that it takes to get deals done in this complicated environment. Congratulations to both companies!
    • CANNABIS STOCK LIQUIDITY RECOVERS SLIGHTLY
      • The average daily dollar volume of $23M for the week ended 8/16/24 is the highest since late June. Similarly, liquidity in terms of Days to Trade Market Cap (see below) has bounced back to less dismal levels.
      • The Days to Trade Market Cap (DTTMC) series depicts the number of days it would take to trade the market cap of a stock or group of stocks. The current DTTMC of 641 implies that an investor who acquired a 5% position in the stock, assuming he wanted to be less than 25% of the average daily dollar volume, would require 128 days to trade out of his position, quite an improvement from last week’s figure of 136 days.
      • We are firmly in the grip of the summer doldrums, but exciting macro events seem likely for the month ahead. Will trading volumes accelerate accordingly?

• • • GIVING CREDIT WHERE CREDIT IS DUE
      • The chart below shows our updated 8/16/24 credit rankings for the 31 U.S. cannabis companies with over $3M market cap. The number below the ticker symbol indicates the change in credit ranking since last week, where a negative number suggests credit deterioration, while a positive indicates improvement.
      • The blue squares show the offered-side trading yields for each Company. Trading yields have declined significantly since the HHS rescheduling announcement. We are expecting the round of recent refinancings to re-rate the landscape of cannabis debt. Specifically,
      • The Viridian Credit Tracker model shows a few significant credit quality movements this week. Glass House (GLASF: CSE) was the largest gainer, picking up eight ranking slots to #4, in the most significant one-week change we have seen any MSO make. The company’s median level liquidity is bolstered by top five rankings in leverage, profitability, and size.
      • Acreage (ACRDF: CSE) was the biggest loser, dropping five ranking notches after a lackluster earnings release.
      • Cannabist debt pricing has weakened and is now the highest yield on the chart. At current levels, with improved liquidity coming from the sale of assets to Verano, we believe Cannabist debt is attractive.
      • We are still expecting to hear news about a Green Thumb (GTII: CSE) debt refinancing, especially given the reception to credits lower down the credit ladder such as Ascend, TerrAscend, and Jushi (JUSH: CSE).