VIRIDIAN INSIGHTS

• • A PREVIEW OF 4TH QTR. 2024 EARNINGS RELEASES: REVENUE ARE EXPECTED TO BE DOWN AND SO ARE MARGINS
    • The chart below, arranged in order of release date, shows consensus estimates for Q4:24 earnings compared to the previous quarter and the year-earlier quarter for fourteen of the most significant MSOs.
    • Viridian tries to get an early read on the estimates so that we can see what the analysts are thinking before they are “nudged” by the companies in the weeks prior to releases. Last week, Glass House came out with updated guidance that increased q4 revenue guidance by 31% to $53M and EBITDA guidance from $4M to $8M. We updated our numbers to show this new guidance.
    • Despite the guidance from GLASF, nine of the 14 companies are projected to have lower y/o/y revenues for the quarter, and aggregate revenues are expected to fall by 2.5%. Similarly, nine of the fourteen are expected to have lower y/o/y EBITDA, and the aggregate is projected to be down by 6.8%, reflecting a projected 4.4% lower aggregate EBITDA margin.

• • The chart below is an updated version of a previous Viridian Chart of the Week, which breaks down the y/o/y forecasted changes in EBITDA into two components: that which is attributable to changes in revenues and that which is due to changes in EBITDA margins.
  • The preponderance of orange on the chart says that most of the variation in forecasted EBITDA from the year-ago period is due to changes (primarily reductions) in expected EBITDA margins. The cause is not hard to guess: continued cost inflation matched with consumer pullback and wholesale price compression.

• • Besides revenues and EBITDA, what else should investors focus on in the upcoming releases?
    • We are generally more interested in the magnitude of estimate revisions than in the magnitude of revenue or EBITDA misses or beats.
    • Cash and Net Debt. The capital markets environment has not gotten easier, and maintaining a good liquidity position and reducing debt are still key. The Viridian Chart of the Week focused on cash flow from operations, which for ten of the twelve companies reviewed, is projected to be positive for Q424. Will this result in balance sheet improvement?
    • Cash Flow From Operations. For the first nine months of 2024, cash flow was profoundly boosted by increases in “uncertain tax liabilities,” the catchy name for 280e taxes that were expenses through the income statement but not paid. We will pay particular attention to how much these liabilities increased at year-end and any signals from the companies regarding any changes in their tax strategies.
    • Will companies flesh out new strategies for attacking the hemp beverage market? Curaleaf and GTI have jumped in, but we expect more to follow.
    • Will companies directly address their strategy regarding 2026 debt maturities?

• GAUGING THE RISK OF THE 2026 DEBT MATURITY BUBBLE
  • Much has been made of the upcoming wave of cannabis debt maturities in 2026. The sheer size is undoubtedly intimidating. The companies pictured on the graph below collectively have about $2.6B of debt maturing in 2026. (IAnthus maturities are actually in 6/27, but close enough!). Putting that figure into perspective, $2.6B is greater than the total capital raised for the cultivation & retail sector for any year since 2018 except for 2021.
  • Viridian is generally more constructive about the issue than most other industry observers. We observe that in the high-yield bond market, it is virtually never the case that debt is paid off in cash. It is generally refinanced, OR the company is forced to restructure. Obviously, given the lack of prepack bankruptcy (or any bankruptcy for that matter), restructuring is rightfully a prospect to be feared in cannabis.
  • So, how do we gauge the risk of something going wrong in 2026? Refinancing risk is a peculiar mixture of market psychology and financial realities. The graph below shows three relevant data points:
    • The green bars show the 2/21/25 market-implied asset coverage of total liabilities. We arrive at this by looking at the equity as a call option on the asset value of the firm, with a strike price of its liabilities, and with assumed maturities (2026) as well as volatility assumptions (40%) and risk-free rate (4.25%). This gives us all of the elements of the Black-Scholes option pricing formula except for the current asset value. By iterating the solution of the BS model, we can find the market’s assumption for asset value. The importance of this data point should be obvious. For companies with under 1x asset coverage of liabilities, debt providers are genuinely making an equity bet. They do not have adequate asset value coverage to fall back upon.
    • The purple line represents the Viridian Capital credit ranking, which takes into account four key credit factors: Liquidity, Leverage, Profitability, and Size. Refinancing will be more difficult for weaker credits (higher numbers). Companies with ranks of under 16 are in the top half of the Viridian-ranked universe of credits.
    • The red line represents the multiple of market cap that 2026 debt maturities represent. Clearly, the larger the debt maturities relative to the market cap, the more difficult we would expect refinancing to be. The seven companies from ITHUF to the right side of this graph represent high risk. They have less than 1x asset value coverage, poor Viridian Credit Ranks, and maturing debt that is a multiple of market cap. Companies in this position represent approximately $867M of the maturing debt. Conversely, the five companies on the left-hand side of the graph represent low refinancing risk. They have solid asset coverage, strong Viridian Credit Ranks, and maturing debt that is less than 1x market cap. These companies represent $1.6B of the $2.6B total (62%), and we believe they should all be able to refinance their maturities without undue pain.

• • PHARMACAN, AN EARLY TEST OF THE REFINANCING CLIMATE
    • One of the critical conditions of the agreement between Pharmacann and IIPR is that Pharmacann must be able to refinance its estimated $125M of 12% of senior secured notes of 6/30/25. Pharmacann will be the first test of a problematic refinancing. We expect the company to need a pretty hefty amount of equity kickers in terms of shares or warrants to convince bondholders to extend/refinance this debt. One unknown that may be material is the amount of new equity that Pharmacann will receive from existing investors. The equity raise is a mandated feature of the IIPR settlement, but the amount was not disclosed.
    • Pharmacann is private and is basically flying under the radar which is trained so intensely on companies like AYR who have significant debt maturities in 2026.
    • Pharmacann bonds do occasionally trade, however, and currently, they are quoted 70 bid / 80 offer, according to Ventum Capital. This distressed pricing demonstrates significant market doubt that the company will be able to refinance this debt. If Pharmacann fails to refinance the debt, the agreements, waivers, etc, with IIPR are eliminated, and the company will be in default on substantially all of its leases.
  • IF TRUMP IS TRULY PRO-CANNABIS, WHY HAS HE REMAINED TOTALLY SILENT ON THE ISSUE, AND WHY IS HE STACKING THE RELEVANT AGENCIES WITH ANTI-CANNABIS HARDLINERS?
    • If the appointment of an anti-cannabis former DEA agent as acting head of the DEA wasn’t bad enough…
    • Trump named Terrance Cole as the permanent DEA head, and he doesn’t appear to be any more favorable for cannabis.
    • Most recently, he nominated former U.S. Attorney and current GOP Senator from West Virginia Mike Stewart as the lead attorney at HHS. Stewart is vocally anti-cannabis, calling current products “genetically engineered” “gateway drugs” that lead to greater misuse of opioids! Wow! How many discredited concepts can you string together?
    • Meanwhile, a few weeks ago, Republican Senators Lankford of Oklahoma and Ricketts of Nebraska introduced the “No Deductions for Marijuana Business Act,” which would prevent cannabis businesses from deducting standard business expenses such as payroll and rent even if cannabis is rescheduled to S3! A similar bill was introduced in the House last week.
    • The one pro-cannabis individual in sight, Robert Kennedy, the new head of HHS, appears to have been muzzled. He stated in his confirmation hearings that he would defer to the DEA on matters relating to rescheduling. Perhaps that was simply what he thought he had to say to get confirmed, but it certainly doesn’t make us feel more comfortable.
    • In addition, Trump’s new attorney general, Pam Bondi, has remained conspicuously silent regarding her position on cannabis reform.
    • We never expected rapid action, and in fact, in a recent column, we explained why very few people outside the cannabis industry really care about cannabis reform. Still, we have held on to the hope that Trump will be a more effective cannabis reform president than his predecessors. (yes, we know that is a low hurdle). However, Trump’s complete and utter silence since the election regarding cannabis reform is causing everyone, including us, considerable angst.
    • We understand that the war on Fentanyl and the Mexican cartels necessitates a “hard on drugs” stance, but at this point, we are unsure what it will take to get Trump’s attention to follow through on his cannabis pledges.
    • If Trump makes it clear that he wants rescheduling and/or SAFER to go through, it is likely that these initiatives will proceed. But, absent a personal push from him, we are not sure that even a re-emboldened Robert Kennedy will be enough. Perhaps a DOGE push to save the substantial direct and indirect costs of anti-cannabis legislation and regulation will be the industry’s best bet.
  • MSOs ARE TRADING AT HIGHER VALUATION MULTIPLES AND HAVE HIGHER LEVERAGE THAN STANDARD MEASURES INDICATE! MSO VALUATION AND FINANCIAL FLEXIBILITY DEPICTED BY FOUR GRAPHS.
    • 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 EV / 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, nine 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.
    • Jushi and TerrAscend appear as leverage outliers using the new metrics relative to AYR and Cannabist, which seemed more leveraged using standard measures.
    • TerrAscend and, particularly, Glass House are valuation outliers. We have been positive on Glass House for quite a while, but the multiple spread to the nearest competitor is straining our resolve. We note GLASF’s $25M at the market equity issuance facility as another factor likely to restrain price appreciation.

• 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 EV/2025 EBITDAR of under 7x and total liabilities to market cap under 2x. The group includes Vext, GTI, Trulieve, and Curaleaf. 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 Verano, Cresco, and MariMed. Verano and Cresco both have significant 2026 maturities, but we do not believe either is likely to have difficulties refinancing their debt.
  • On the right lies Jushi and Ascend, both between 6x and 10x.
  • AYR, 4Front, Cannabist, and Schwazze are now off the chart to the right, signaling profound credit risk. Our recent work using option modeling of equity prices showed that the market believes each of these companies has significantly less asset value than liabilities.

• 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 TerrAscend, has low leverage but is below the critical 1x liquidity level. Companies in this range should consider taking advantage of the robust debt market to bolster liquidity.
• On the top left, we find companies with adequate liquidity and low market leverage, including both GTI and Planet 13.
• Companies in the lower middle-to-right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment. Aside from Curaleaf, Verano, and TerrAscend, mentioned above, seven other companies have less than 1x free cash flow adjusted current ratios, including Schwazze, AYR, Jushi, Cannabist, TerrAscend, Ascend, and 4Front. These companies are high-risk with both high market leverage and low liquidity. Some of these companies score lowly on our liquidity measure because we have elected to count excess tax debt as a current liability.

• EV/LTM MULTIPLES ARE NOW SIGNIFICANTLY 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 possibility.
  • 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!

• MSO STOCK LIQUIDITY REMAINS CLOSE TO ALL-TIME LOWS
  • The average daily dollar volume of $10M for the week ending 2/21/25 was close to the lowest volume mark for the last twelve months of $9M, registered in the previous week.
  • 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 1,421 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 284 days to trade out of his position, a modest improvement from last week’s figure of 313 days.

• GIVING CREDIT WHERE CREDIT IS DUE
  • The chart below shows our updated 2/21/25 credit rankings for 31 U.S. cannabis companies. 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. Cannabist yields are quoted at over 35% and are “off the chart.” Yields this high suggest that the bond market expects some restructuring of the debt. Jushi’s yield is an average of the yields on its first-priority and second-priority obligations.
  • 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 5.7x the company’s market cap, compared to 1.1x on 11/1/24. The 5.7x 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 total liabilities to market cap implies a market belief that the company’s assets are only worth less than 60% of its liabilities. The recent resignation of the company’s CFO is certainly not a positive sign.