VIRIDIAN INSIGHTS

• GLASS HOUSE ANNOUNCES $25M AT THE MARKET EQUITY PROGRAM.
  • And just when we have been saying that the equity market for plant-touching companies was in a deep freeze!
  • Our position was simple: No company would want to raise equity at current prices, and any investor looking at a company trying to raise equity at these prices would have to consider that company desperate and shy away.
  • But a quick look at our MSO financial charts would show that this does not apply to Glass House. The company is trading at nearly six multiple points higher than the next MSO. It jumps out as a serious valuation outlier. We have always advised that every investor should own a bit of Glass House in their portfolio, if only as a hedge against the ravages of interstate commerce and the total commodification of the market. But frankly, we have been getting a bit queasy about the valuation.
• Glass House can afford to take a hit on the deal announcement, but they have even warded that off by saying that they will wait until the right moment. We are not sure we could be that patient if we were them. Trading at 12x when everyone else is under 6, we would be hitting that bid hard!

• VIRIDIAN’S CHART OF THE WEEK EXPLORED HOW THE TOTAL LIABILITIES TO MARKET CAP RATIO CAN BE USED IN CONJUNCTION WITH THE BLACK SCHOLES OPTION PRICING MODEL TO CALCULATE IMPLIED ASSET VALUE COVERAGE OF LIABILITIES
  • The exercise demonstrated why Viridian has maintained that Total Liabilities to Market Cap is the one ratio you should calculate if you are only able to calculate one ratio.
  • True to our intuition, the market is actually telling you that if a company has over about 5x on this ratio, then the market value of its assets is likely to be less than its liabilities. And we can quantify just how far underwater the equity is. See our Chart of the Week for more details, or talk to us about this.

• CANOPY FINALLY COMPLETES ITS ACQUISITION OF ACREAGE. AND AFTER 5 ½ YEARS SINCE THE DEAL WAS ANNOUNCED, ITS HARD TO DETERMINE WHO IS SAVING WHOM IN THIS TRANSACTION.
  • Can we first stipulate that neither company is quite what it used to be when the deal was announced? In April 2019, with Bruce Linton at the helm and fresh off a $4B investment by Constellation, Canopy was flying high. Similarly, Acreage, with founder Kevin Murphy presiding, was enjoying the position of being in more state markets than any other MSO. It would take years to reveal that the ½ inch-deep and a-mile-wide strategy was deeply flawed.
  • Flash forward to winter 2024, and neither company looks financially sound. Canopy has never had positive EBITDA despite many promises, and its cash horde has diminished into a net debt position. Meanwhile, Acreage was ranked #28/31 in its last appearance on our weekly credit screen.
  • So what’s the prognosis? Well, we don’t see any near-term event that will allow Canopy to consolidate its U.S. operations into its financial statements. Still, arguably, its U.S. assets may be its savings grace if it can maintain them until then. In the near term, Acreage may need more of Daddy’s cash. The company’s recent total liabilities to market cap of 82 implies that its assets are only worth about 42% of its liabilities. So, like all out-of-the-money option holders, Canopy wants to keep the game going and roll the dice.
• THE EXTENSION OF OUR OPTIONS VALUATION FRAMEWORK TO THE DEBT SHOWS THAT “AMEND, EXTEND, AND PRETEND” IS A RATIONAL STRATEGY.
  • In our equity analysis, we presented what to some is a counterintuitive, though theoretically sound viewpoint: if you are an equity holder in a distressed business, where the value of the assets is perhaps only slightly over or under the amount of debt, you should want high risk and high volatility. In essence, you are behind, and there are only a few innings left in the game (until your debt matures). Most of the upside accrues to you, and your debtholders take the hit on the downside. After all, the worst your equity can be worth is zero, So swing for the fences, try to steal bases, etc.
  • That is, of course, why restrictive debt covenants exist. They give the debtholders the right to call the game early, preventing the equity from gambling away all of the value.
  • The framework has some interesting ramifications. What if the value of the assets is less than the face value of the debt? What should a rational debt holder do? It turns out that “amend, pretend, and extend” is not irrational. Allowing for a little extra risk may not be unreasonable either because, in this situation, the upside will be captured by the debt. So, we see the behavior of lenders like Gotham Green, who were faced with a situation like MedMen. It might not have turned out as desired, but the strategy was rational. Provide minimum liquidity, allow growth even if it entails risk, but keep a tight rein through covenants. Eat more and more of the equity through more warrants and reduced exercise prices so that if the risk really pays off, you get more than debt returns. It’s all entirely rational. The more challenging decision is when do you actually throw in the towel and call a hard default?
  • We are starting to see more of that, as in Pelorus/StateHouse. Whether it becomes a trend depends on the direction of asset values. We never thought we would be looking at market caps where they are, nearing the end of 2024. We know there is a massive upside, but have we hit bottom yet?
• MSO VALUATION AND FINANCIAL FLEXIBILITY DEPICTED BY FOUR GRAPHS. BOTTOM LINE: MSOs ARE TRADING AT HIGHER VALUATION MULTIPLES AND HAVE HIGHER LEVERAGE THAN STANDARD MEASURES INDICATE!
  • The four 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. Four 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. However, several upside catalysts seem to be neutralized in the short run. Florida rec is indefinitely delayed, PA rec does not seem to be happening this year, and VA rec is probably on hold until 2026.
  • 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 (both not pictured because they are off the scale to the right), 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!

• AFTER A BRIEF FLURRY, TRADING LIQUIDITY IS BACK TO POOR.
  • The average daily dollar volume of $16M for the week ending 12/6/24 is significantly below the 52-week average of $28M.
  • 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 881 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 176 days to trade out of his position.

• GIVING CREDIT WHERE CREDIT IS DUE
  • The chart below shows our updated 12/6/24 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. The prices shown have become a bit dated, so we will consider them only indicative. We expect updated pricing to reflect the dislocations observed in the equity market.
  • This is the last week that Acreage will appear on our screen due to its acquisition by another ne’er-do-well credit, Canopy.
  • AYR has become the poster child of the 2026 debt “tsunami.” We generally don’t think the 2026 issues are nearly as severe as the press has made out, but AYR may be an exception. 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 3.7x the company’s market cap, compared to 1.1x on 11/1/24. The 3.7x exceeds the level of maturity AYR faced at the end of 2024 before it conducted a somewhat disastrous restructuring/refinancing deal. Our latest work on asset coverage of liabilities did not provide comfort. AYR’s 14.4 total liabilities to market cap implies a market belief that the company’s assets are only worth around 60% of its liabilities. 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’s cultivation and retail facilities, which evidently require some refurbishment. So, what would a license in VA bring?