VIRIDIAN INSIGHTS

• GREEN THUMB’S AGRIFY STRATEGY COMES INTO FOCUS- FACED WITH A LACK OF ATTRACTIVE GROWTH OPPORTUNITIES, BUY BACK STOCK AND DIVERSIFY.
  • On November 5, 2024, Agrify announced Green Thumb Industries had acquired an equity stake in the company through a purchase of common stock and warrants and was further investing up to $20M in a convertible secured note, $10M of which will be drawn at closing.
  • In addition, AGFY’s Chairman and Founder Raymond Chang resigned, and the board appointed Ben Kovler from GTI as chairman.
  • On November 12, 2024, Agrify announced plans to acquire the Senorita Brand of Hemp Derived Legal THC Beverages. Consideration for the transaction will be 530,000 shares of Agrify Stock, now worth a bit over $4M. The additional capital invested by GTI into Agrify will help the brand grow.
  • We have to admit that we missed the point of this deal. Like many others, we viewed the acquisition as another Kovler end-run attempt at uplisting, like his overture to Boston Beer. We should have thought through the logic better. After all, why capitalize a nearly defunct shell with over $20M of new capital if all you care about is its listing? We should have anticipated that the capital was a war chest for acquisition.
  • Kovler has been consistent. He has avoided major cannabis acquisitions for the last few years. His first share repurchase program netted around $70M of stock purchases, and his current program is targeted at $50M. While these amounts are small relative to GTI’s market cap, the point is clear: GTI is taking advantage of asymmetrical information in its investing strategy. They know more about the prospects of their businesses than any sell-side analyst could ever know, and they are choosing to buy stock with funds that could be used to purchase dispensaries or cultivation sites. Now, he is diversifying into hemp-based THC products.
  • The somewhat scary reality is that the most respected and well-run cannabis company in the country is investing significant sums in areas unrelated to its core business.
• CANNABIS STOCKS SUFFER THE STEEPEST SIX-DAY DECLINE IN THE INDUSTRY’S HISTORY. FACING UP TO THE “GROWTH PANIC”
  • The 31 stocks we cover in our Credit Tracker screening fell nearly $2.7B (23.5%) in the first trading session after the election. In our Valuation Tracker segment on Friday, our analysis showed that the decline was justified purely by the Florida AU failure. Our reasoning was simple: Assume that the potential doubling of Florida’s $2.1B annual revenue was forgone. Assume further that we could attach 30% EBITDA margins to that revenue and value that EBITDA at a 5x multiple. The result: a bit over $3B in lower market cap
  • We had less explanation for the second stage of the downturn between 11/6 and 11/11 when those same stocks lost an additional $1.5B (17.0%). What was the cause? We call it a “Growth Panic.” Our theory is that investors have started to question one of the critical foundations of cannabis stock valuation: growth.
  • Florida was a wake-up call to what most of us already knew. Virtually all cannabis growth is a transfer of illicit sales to legal sales, and the biggest jumpstart to this process is when a state goes adult rec.
  • Besides Florida, both North Dakota and South Dakota rejected proposals for adult rec use. Virginia, another state on the precipice of A.U., appears to be stuck and probably won’t convert until after a new Governor is installed in 2026. The Republican wins in Pennsylvania similarly challenge what was conventional wisdom that P.A. would go in 2025. Without these state conversions, where will the jolt to growth come from? Maybe New York will get its act together. Maybe.
  • Another challenge that has become clear to everyone is that, for any given market, it’s not a question of whether price compression will arrive but only when. And recently, the honeymoon period of high profitability has gotten shorter as capacity rushes in to fill those initial gaps. Price compression is now a significant factor in both New Jersey and Florida.
  • Disappointing earnings reports are another factor. Analysts had pretty lackluster expectations for 3^rd quarter releases, but one by one, most of the companies missed even those expectations. Common explanations from several operators included “weakening consumer demand.”
  • Yet another factor whose size is difficult to estimate is the impact of hemp-derived intoxicants. One way to appreciate the threat is to figure that there are over 150,000 convenience stores in the country versus around 12,000 dispensaries. The hemp-derived intoxicants sold in those stores are largely untested, untraced, and automatically exempt from 280e. Anecdotally, we can say that customers are happy to trade the low prices and convenience of being able to get high from gas station cannabinoids against the safety of track and trace and testing. Essentially, customers don’t seem to care. One needs to go no farther than Texas to see this in action. So not only do we have illicit weed sold on every corner in NYC, but we have nearly perfect substitutes sold in a tremendous number of convenience stores. Not to mention, the products are now sold directly to consumers online. The fact that this is a real threat to growth is obvious, but how big is it?
  • Still other growth challenges come from the ongoing capital crunch, which restrains the ability of companies to fund growth.
  • Analysts are ignoring the threat, projecting both 8% revenue growth and increasing margins for 2025. We hope they are right!

• CANOPY GROWTH PAYS OFF $100M DEBT WHILE SINGING “DON’T STOP BELIEVING”
  • On October 17, 2024, Canopy Growth announced that it had paid off $100M of its Senior Secured Term Loan for $97.5M.
  • The company stated that the repayment of the debt would result in annualized interest savings of approximately $14M, implying a 14% rate on the debt.
  • The early debt retirement allowed the maturity of the debt to be extended from 3/18/26 to 12/18/26. The maturity of the remaining debt can be further extended to September 18, 2027, if the company makes another $100M payment by March 2025.
  • Did the company make the right decision to pay off this debt? The answer is not obvious and demands balancing two opposing needs: Liquidity vs Leverage.
  • On the leverage front, using cash to repay debt does not change net debt, and therefore, Net Debt/EBITDA is unchanged. On the other hand, our favorite leverage indicator, total liabilities/market cap, goes down. Market cap is unaffected, but total liabilities go down, and that has to be considered a positive.
  • Conversely, using cash to pay off a debt that does not mature for seventeen months represents an unambiguous reduction in liquidity.
  • To analyze the net impact of the transaction, we used the Viridian Credit tracker model. We expected that the positive effect on leverage would outweigh the negative impact on liquidity. However, we were surprised to find that was not the result.
  • Our leverage rankings rely on four metrics: Total Liab/Mkt cap went from .97 before the payment to .79 after the payment, clearly an improvement, but in terms of relative ranking, only a one-notch improvement from #14 to #13. EBITDAR/ Adj net debt was unchanged. Funds from operation to liabilities improved slightly, but FFO is still negative, and the relative ranking did not change. The bottom line is that our leverage ranking for Canopy did not change.
  • Our liquidity ranking, however, took a big hit, deteriorating from #10/23 to #19/23.
  • There is also a less quantitative impact that is important here: By using cash to pay off debt early, Canopy can signal that it doesn’t think it will have any problem funding operations. The psychology is important. If the equity market believes this, as this week’s share price gains seem to indicate, the company will continue to be able to sell equity to maintain liquidity even as operations remain cash-negative.
  • On the whole, we question the logic of spending so much cash and reducing near-term liquidity in order to achieve a marginal debt extension more than a year from now. If Canopy was cash flow positive, we might have a different view. Note: Canopy’s recently released quarterly results don’t change our mind.

• CHICAGO ATLANTIC’S $50M DEBT DEAL AT 9% IS A STUDY IN CONTRASTS
  • On the one hand, a peek at the debt positions in the company’s recent registration statement makes clear that we would do this trade all day long! Borrow at 9% and lend at 16-19%; What’s not to love about that?
  • The contrast comes in when we consider the BBB+ rating from Egan Jones that Chicago Atlantic got for the debt. The ICE BofA BBB Corporate Index of Effective Yield is now at 5.29%. This implies a spread of nearly 500bps over similarly rated non-cannabis-related corporations. Witness also the recent Green Thumb transaction at 500 over SOFR, which swaps to a 9.06% fixed rate. So, is an unsecured bond implicitly backed by a portfolio of cannabis credits priced right on top of the debt of the best cannabis credit?
  • One thing we speculate: Investors buying the Chicago Atlantic Debt would love to be able to directly lend to the space or purchase cannabis debt in the market, but they cannot, chiefly for reputational, listing, or custody reasons. So they are, in essence, lending to cannabis one step removed, giving up a lot of the direct lending yield while still achieving a highly attractive credit spread. Let’s split the difference, and all go home happy! Cheers!
• 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 Jushi, AYR, Ascend, and Schwazze (not pictured). AYR has moved into our danger zone, but its metrics are not nearly as troublesome as the Schwazze. 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 (note that Curaleaf just did this). 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. 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.

• EV/LTM MULTIPLES ARE NOW LOWER THAN BEFORE THE ORIGINAL HHS RESCHEDULING ANNOUNCEMENT ON 8/30/23
  • 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.
  • Despite the challenges to growth discussed above, we believe that many companies have become stupidly cheap. We recommend a “don’t step in the doggy do do” strategy. With refinancing risks made worse by cratering stock prices, this is no time to be a hero. Focus on building a diversified portfolio of companies ranked in the top 10 in our credit rankings. Put them in your portfolio and follow the total liabilities to market cap indicator that we recommended several weeks ago, as well as the credit tracker rankings. And resist the urge to look at the stock prices every day!

• TRADING VOLUME SOARS ON ELECTION AND FLORIDA VOTE
  • The average daily dollar volume of $55M for the week ending 11/8/24 was the highest for the last two years.
  • 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 265, the lowest since we began tracking the series, 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 53 days to trade out of his position.
  • We expect volumes to recede as the holidays approach and the significant news items become more scarce.

• • The graph below shows the liquidity of 14 prominent MSOs/SSOs. The stacked bars show the total average daily dollar volume broken into the two exchanges that the companies trade on. The green line shows the Days to Trade Market Cap (DTTMC) using the average daily dollar volume since 9/30/24. AYR and Trulieve, two companies with the highest exposure to Florida, were among the most liquid stocks this week.

• GIVING CREDIT WHERE CREDIT IS DUE
  • The chart below shows our updated 11/11/24 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. Note: The prices shown were obtained prior to the election, as well as some of the recent earnings releases. We consider them to be only indicative, as we expect updated pricing to reflect the dislocations observed in the equity market.
  • There have been significant ranking changes since last week, spurred by new earnings releases, the Florida debacle, and the election, as well as what we discuss elsewhere as a “growth panic.”
  • Glass House was one of the biggest gainers, picking up three ranking slots based mainly on the fact that its stock has suffered far less than the MSOs. One puzzling ranking change is the 5-notch improvement in Cansortium. The Cansortium/RIV arb spread narrowing shows a growing comfort that the deal will close. Despite Cansortium being primarily Florida, its stock didn’t get hit nearly as hard as other Florida-centric names like AYR and Trulieve.
  • On the downside, Verano lost five notches both from Florida impacts as well as weaker 3^rd quarter numbers.
  • AYR’s yield doesn’t look nearly as cheap as it did pre-Florida. We expected the revenue gains for the company in Florida to fuel solid cash flow gains since much of the spending for cultivation improvements has already occurred. There are no near-term debt triggers because the company’s maturities have substantially been pushed out to December 2026. However, the approximately $300 million of 2026 maturities now represent 3.6x the company’s market cap, compared to 1.1x on 11/1/24. The 3.6x exceeds the level of maturities AYR faced at the end of 2024 before it conducted a somewhat disastrous restructuring/refinancing deal. We see asset sales as a possibility to close that gap, and the company’s new Virginia license jumps up as a prime possibility. Verano just paid $90M for a combination of Cannabist cultivation and retail facilities, which evidently require some refurbishment. So what would a license in V.A. bring?
  • Curaleaf debt is overvalued. Investors can pick up stronger credit and extra yield from Cresco.