VIRIDIAN INSIGHTS

• CANSORTIUM AND RIV CLEAR FINAL MAJOR HURDLE FOR MERGER
  • On October 10, 2024, RIV Capital and Cansortium received New York State Cannabis Control Board approval for a change of control.
  • The only other significant transaction which must be completed prior to closing is the Smith Transaction.
  • The risk/arb spread is down to 32%, but that still seems quite wide, given the stated intent to close the transaction before year-end.

• IS IT POSSIBLE THAT STATEHOUSE SECURED DEBT IS ONLY WORTH 50% OF FACE VALUE?
  • The Receivership and bankruptcy proceedings seem likely to signal the breakup and sale of the company to satisfy creditors. The very rough liquidation analysis below comes up with around 50% recovery on secured debt.
  • We have assumed no net value for net assets held for sale, prepaids, or notes receivable. We have also been draconian in evaluating receivables over 90 days past due as worth only 20%. 

• • We anticipate that the sale of the StateHouse assets will put further pressure on asset values in California.
• DOES 4FRONT NEED MORE THAN A BRIDGE?
  • The prevailing assumption in the market has been that if they can just get their monster grow facility in Illinois fully up and running, the rest will work out.
  • But what if the base rent is relatively high? Just how much additional cash flow is the facility likely to produce?
  • The Viridian estimates below indicate that the facility will likely produce around an incremental $5M cash flow to the company after paying lease expenses. It’s profitable but not fortune-changing. Bottom line? Canaccord will still be earning their fees.

• MSO FINANCIAL FLEXIBILITY DEPICTED BY FOUR GRAPHS FEATURING OUR NEWEST VALUATION AND LEVERAGE METRICS
  • The three graphs below seek to map the financial options available to eighteen of the largest MSOs based on their Valuation, Leverage, and Liquidity. We have updated our measures to look at 2025 EBITDAR estimates as we believe most investors are now looking to these values in their valuations.
  • The first two graphs present different versions of EV/EBITDA on the vertical axis and Debt/EBITDA on the horizontal axis.
  • The first graph presents our latest view of the most appropriate valuation and financial statement-based leverage metrics: Adjusted E.V. / 2025 EBITDAR and Adjusted net debt / 2025 EBITDAR. 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 and the absence of bankruptcy protection in cannabis. 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. Our calculation of enterprise value is now market cap plus debt plus leases plus tax debt minus cash. We now use EBITDAR rather than EBITDA since lease expense is taken out prior to EBITDA.
  • The second graph utilizes EBITDA and employs the traditional calculations of both debt and enterprise values, leaving out leases and taxes.
  • Our adoption of new metrics tends to make the companies look less cheap and more leveraged.
  • Surprisingly, eight of the companies on the enhanced metric chart are still above 3x leverage, which we have identified as the boundary of sustainability in a 280e environment. Three companies now exceed 4x leverage, which we believe will be close to the maximum sustainable post 280e.
  • Valuation metrics can be deceiving when a company is just achieving positive cash flow status. Glass House, for example, has enormous valuation multiples. Still, it is based on small EBITDAs that are likely to expand significantly in the next several years.

• The third 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.
  • On the bottom left are companies with Adj E.V./2025 EBITDAR of under 7x and total liabilities to market cap under 2x. The group includes Vext, GTI, PLTH, Verano, and Cresco. Companies in this quadrant are right to consider stock repurchases or using cash in acquisitions. They can afford some additional debt and can take advantage of the ongoing dislocation in equity prices.
  • In the middle, between 2x and 5x total liabilities/market cap, we see Ascend, AYR, Jushi, and MariMed. Each of these has significant upside catalysts that could mitigate or exacerbate the excess leverage. For example, Jushi is levered to potential adult rec developments in Pennsylvania and Virginia, and AYR has significant Florida torque.
  • On the right lies Cannabist and Schwazze (not pictured). We applaud Cannabist management. They have seen the writing on the wall: too levered to issue equity or debt, its only option was asset sales. We have not yet modeled the announced asset sales into Cannabist’s credit picture as we are not sure how much EBITDA will be lost in the transactions. We will await adjusted equity analyst estimates. Note that Schwazze now has total liabilities to market cap in excess of 28x, a level that generally indicates deep distress. The uncertainty is heightened by the company’s failure to file 2^nd quarter financial statements and the potential for significant revisions to prior statements.
  • 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 fourth 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 (including Schwazze, not pictured).
• The bottom left group, including Curaleaf, Verano, and Vireo, has low leverage but is below the critical 1x liquidity level. This suggests that Curaleaf and Verano should take advantage of the robust debt market to augment their liquidity. Vireo is a more challenging call. Their adjusted net debt/ EBITDAR is relatively high, which makes them an unlikely net debt issuer and suggests asset sales.
• On the top left, we find companies with adequate liquidity and low market leverage, including both GTI and TerrAscend, due to their recent refinancings.
• Companies in the lower middle-to-right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment. AYR has significant optionality based on the Florida vote. If things go the company’s way, they will probably have significantly lower market leverage, allowing for more financial flexibility. Cannabist’s liquidity is understated in the graph and is likely to be OK based on announced asset sales. 4Front and Schwazze, despite making moves to restructure their debt, continue to have inadequate liquidity and excess leverage and should be watched carefully. We note that FFNT has no consensus on 2025 EBITDA estimates, but a full year of Illinois cultivation will probably make leverage look significantly better.

• • A DOUBLING STILL POSSIBLE FOR INVESTORS WILLING TO WITHSTAND ELECTION-YEAR VOLATILITY
    • 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.
    • Notably, the discussion of SAFER has begun again. We hesitate to put much stock in such debate in an election year. Still, the ongoing talks do point to another critical catalyst, one that many institutional investors believe is more important than S3.

• • CANNABIS STOCK LIQUIDITY STUCK AT ABYSMAL
    • The average daily dollar volume of $11M for the week ending 10/18/24 is below the $17M trailing 12-week average but in line with last week’s figure.
    • 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 1282, a modest improvement from last week’s reading of 1365, 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 256 days to trade out of his position.
    • As the presidential election cycle accelerates, we expect more trading volume and price volatility.

• GIVING CREDIT WHERE CREDIT IS DUE
  • The chart below shows our updated 10/18/24 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.
  • We have made recent upgrades to our credit model to more accurately treat lease liabilities and account for non-payment of taxes as a financing source.
  • 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.
  • AYR is significantly undervalued, having recently obtained a Virginia license and having one of the highest Florida torques. The risk is that the company has one of the more difficult refinancing tasks coming up in 2026. The company’s projected fixed charge coverage is under 2x for 2026, absent any uptick from Florida.
  • The new Acreage deal at approximately 18% seems a bit rich to us, but it largely depends on the degree to which Canopy can and will support the company in the future.