VIRIDIAN INSIGHTS

• Statements by a hedge fund manager and comments by Vice President Harris were the rumors driving surges in cannabis equity prices. While we cannot handicap what is happening behind closed doors at the DEA, we have pointed out that several significant MSOs like GTI, Verano, and Trulieve are not dependent on a kick save from 280e relief. That may not save the stocks in the event of an adverse rescheduling announcement (which we continue to view as unlikely) since the entire market would likely trade off sharply; it at least means that these companies are not facing a fiscal cliff or a need to dilute shareholders to pay off debt.
• COMPANIES EXCEEDED 4^TH QUARTER 2023 EBITDA ESTIMATES, AND ANALYSTS RESPONDED BY LOWERING 2024 EXPECTATIONS! Viridian continues to believe there is upside room in the consensus estimate:
• The Table below shows the consensus estimates, the actuals, and the percentage beats. Viridian compared the price gain in the stocks net of the movement in the MSOS etf against the percentage beat (miss) in quarterly EBITDA. Surprisingly, there was a close correspondence with a .75 correlation.
• Analysts may be too cautious with the group’s 2024 revenue growth projection of 6.0%. A year of Maryland and Ohio and near-term price stability in several key markets suggests a higher growth expectation may be in order.
• Similarly, we believe the 25.7% 2024 consensus EBITDA margins may be too low as they are only 100bp higher than the 2022 figures. The industry found religion in 2022 and 2023, stringently managing costs and tightening working capital controls. The industry is poised to be more efficient and profitable as growth returns.

• VALUATION, LEVERAGE, AND LIQUIDITY
  • The two graphs below show the Enterprise value to 2024 EBITDA multiples against two leverage measures. In the first graph, we have calculated an Adjusted Net Debt/ 2024 EBITDA figure by adding any accrued taxes over 90 days of tax expense to debt before subtracting cash to arrive at Adjusted Net Debt. We would expect any regular company to have accrued taxes equal to their last quarterly tax expense and consider that a standard working capital item. Several companies on the Chart have far greater than 90 days of accrued taxes, and we consider the excess to be debt. Verano’s excess tax liabilities equal nearly 40% of its debt. Other companies with relatively high imputed tax debt include Curaleaf (CURA: CSE) and 4Front (FFNT: CSE) at 19%, and Terrascend (TSND: TSX) at 17%.
  • The first graph shows that ten of the seventeen 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 five companies are now over that threshold.
  • The second graph looks at leverage through the lens of total liabilities to market cap. This measure separates the companies into two groups that relate to the market’s belief of whether a company can discharge its liabilities without highly dilutive actions, like discounted stock sales or refinancing debt with a heavy warrant or share consideration.
  • Companies that have too much debt but have low liabilities to market cap are candidates for stock sales or debt for equity exchanges. These companies include Cresco and TerrAscend. Alternatively, these companies may delever by using their high valuation to buy cash flow. TerrAscend spoke to this possibility on its earnings call.
  • Goodness Growth is in precisely the opposite situation. It is not as levered as Curaleaf on an adjusted Debt to EBITDA basis. Still, its stock is trading at such low multiples that the prospect of issuing equity to reduce debt seems unlikely. Goodness Growth will likely have to sell assets or sell itself to work out of its overleveraged situation.
  • Jushi, AYR, Cannabist, and 4Front appear significantly overleveraged in both an EBITDA and Market Cap sense. However, each has some element of optionality that might prove 2024 EBITDA estimates too conservative. For Jushi, it is Pennsylvania and Virginia. For AYR, it is Florida. Cannabist is in Ohio, New York, Pennsylvania, and Florida. 4Front is levered to Illinois.
  • 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.
  • Looking at leverage in two ways and having a comprehensive measure of liquidity can give investors a good idea of possible scenarios for today’s overleveraged companies. Companies with low valuation metrics, high EBITDA and market cap basis leverage, and low liquidity include Jushi, 4Front, AYR, and Goodness Growth. Cannabist appears to have reasonable near-term liquidity; however, it is very highly levered and trading at discounted multiples.

• • • CANNABIS STOCK LIQUIDITY FAILS TO REBOUND DESPITE PRICE GAINS
      • 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. Its most recent reading of 502 days is above the downward trend line shown on the graph. The reality is that very little new institutional capital has come into the cannabis market. The investors are still the same, and many are not committing additional funds to the industry until some of the regulatory smoke clears. Will rescheduling change this? Perhaps, but not directly. Still, at the margin, the cash-flow-enhancing impacts of Schedule 3 will make cannabis more investible and attract more capital.

• • • GIVING CREDIT WHERE CREDIT IS DUE
      • The Chart below shows our updated 3/15/24 credit rankings for the 30 U.S. cannabis companies with over $5M 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.
      • This week’s scores incorporate new financial statements from Q4:23, and the impact on rankings was sometimes dramatic. Curaleaf improved by two notches, while Trulieve deteriorated by three. Their debt trading nearly on top of each other now makes more sense.
      • Planet 13 benefitted from better liquidity and the proforma impact of its equity raise, which was painful to equity holders but improved credit quality.
      • 4Front gained three places, but our leverage versus liquidity charts clarify that the company’s 22/30 ranking is appropriate. The company is an outlier on leverage and liquidity and is particularly vulnerable to any bad news on rescheduling.
      • Based on this week’s rankings, Cresco’s debt appears significantly undervalued.

• THERE IS STILL CONSIDERABLE UPSIDE POTENTIAL
  • The Chart below shows enterprise to next-twelve-month valuation multiples now compared to previous times when positive regulatory/legislative news hit.

• The Chart demonstrates a healthy investor skepticism regarding positive regulatory/legislative events in Washington, D.C.
• EV/NTM EBITDA Multiples were up sharply this week and are now 16.3% below the levels after the 5th SAFE Act passage in the House in February 2022. Still, the rescheduling news is more significant as it dramatically impacts cash flows. If valuations multiples rose to where they were after the announcement of the Schumer-Booker bill, the incremental gains would equal 102.7%. We view a DEA announcement ratifying the HHS recommendation to be much more significant than introducing the Schumer-Booker bill, which most observers viewed as DOA and had no immediate impact on operator cash flows. Accordingly, we believe there is considerably more runway for price increases, perhaps reaching the 5/7/21 multiples of 18.35x, producing 111.1% returns from current levels.