VIRIDIAN INSIGHTS

• • SHOCKER: THE DEA WAS NEVER A FAN OF RESCHEDULING!
    • This week, it came out that the DEA was internally working to stack the deck against rescheduling and was never really on board with the idea.
    • Maybe the behind-the-scenes skullduggery is a revelation, but didn’t we kind of know they were being dragged along on S3, kicking and screaming? One indication is that the DEA head never signed off on the HHS recommendation; instead, it was the AG. We didn’t make enough of that fact at the time, but in retrospect, it was telling.
    • But what’s more perplexing to us is why Trump doesn’t grab hold of the popular issue and reiterate his support for rescheduling and SAFER. Chances are, that would be all it would take. Politicians and civil servants anxious to keep their jobs would fall in line. But instead, he has been totally silent and, worse yet, stacked the DEA with hardliners.
    • It now seems to us that the only way to get things running is for Trump to support the issue actively. Granted, he has plenty of things to worry about with the stock market caving, tariffs flying left and right, and the consumer pulling in his horns. As we have said many times, cannabis is not a vote-driving issue. People can easily get cannabis nearly anywhere in the country, so their motivation to really push for reforms that mainly impact corporate taxes and stock listings is pretty diluted.
    • But what is the alternative? The DEA doesn’t need to do anything at this juncture. All that was promised was a review after 90 days, but there was nothing concrete.
    • The real push needs to be fiscally motivated. Don’t count on anyone in D.C. to be a believer in the plant. But show them how they can be heroes with Elon by helping him save billions? Now we may be talking!
  • EIGHT OF THE LARGEST MSOS HAVE REPORTED 4^TH QTR EARNINGS, AND THE RESULTS WERE MIXED: GTI, TRULIEVE, AND TERRASCEND BEAT ESTIMATES WHILE VERANO, CURALEAF, AND AYR MISSED.
    • 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. For those who have already reported, we show actuals.

• • The chart below aggregates consensus estimates for eleven MSOs, including Curaleaf (CURA: TSX), Green Thumb (GTII: CSE), Verano (VRNO: Cboe), Trulieve (TRUL: CSE), Cresco (CL: CSE), TerrAscend (TSND: TSX), MariMed (MRMD: CSE), Planet 13 (PLTH: CSE), Jushi (JUSHF: OTCQX), and AYR (AYR.A: CSE)
  • With y/o/y declines for the group in q4’24, ongoing price compression, and an increasingly stressed consumer, the projections look a bit aggressive. The projected margin for 2025 corresponds closely to Q4 numbers, but will we get to the 1.5% revenue growth rate?
  • The 4.7% growth projection for 2026 seems likely to depend on either PA or VA turning rec, and if that happens, the uptick in revenues seems reasonable.

• CANNABIST ANNOUNCED A BOLD DEBT RESTRUCTURING PLAN THAT FEELS LIKE DEJA-VU
  • Cannabist’s announced debt restructuring plan looks eerily similar to the one that AYR executed at the beginning of 2024: The company is giving up around 25% of its equity to extend debt maturities to 2028 with two six-month extensions. Cannabis, as AYR did, is seeking court approval under a plan of arrangement pursuant to the Canada Business Corporations Act (CBCA). The importance of using this device is that, if successful, there will be no “hold-outs” who elect to keep their existing bonds. The company now has about 70% of the debtholders on board with the plan, which likely signals its approval.
  • Holders of existing notes will receive dollar-for-dollar exchanges into similar coupons with longer maturities. Holders who commit to the plan early will also receive a pro-rata share of a $1.5M early consent fee.
  • Like AYR, the company is not extinguishing any debt in the plan. It will remain arguably overleveraged, but the stakes are survival and this plan gives the company significant time to improve its profitability and make other operating and capital structure moves.
  • We applaud Cannabis management for making an early move to address a worrisome upcoming series of debt maturities. We had ranked the company’s situation as one of the most perilous (along with AYR)
  • Our option theoretic methodology previously took the Cannabist total-liabilities-to-market-cap of around 26.9x and back solved through the option model to find the implication that the market believed the value of Cannabist’s assets was only around 65% of its liabilities. Its stock was, therefore, trading as an out-of-the-money option. One critical assumption we used was that the maturity of the equity option was only 2 years, as that was when the proverbial sh**t was due to hit the fan from the company’s debt maturities.
  • But what if we now took that same asset value and went the other way? All things being equal (i.e., no change in assets or liabilities), except now the company has until at least the end of 2028 to fix itself. What would that mean for the stock price, total liabilities to market cap, and perceived credit risk?
  • Our calculations show that the completion of the restructuring could have a dramatic impact on the stock. In fact, we think it could go up by a factor of 2.5x to around $.14 per share! Total liabilities to market cap would improve from 26.9x to 10.7x, still a stressed credit but not disastrous. We haven’t seen the positive impact played out in the chaotic cannabis stock market, but given the alternatives, Cannabis equity holders should be pleased about this deal.

• • 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.
    • Successful completion of the Cannabist plan discussed above should have a positive impact on the market psychology regarding the other troublesome maturities. However, that effect has been clouded by overall market turmoil. And lest we seem Pollyannaish, we do recognize that several companies are looking increasingly troublesome. The graph below shows three relevant data points:
      • The green bars show the 3/7/25 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.
      • AYR (AYR.A: CSE) took a turn for the worse on all three indicators this week after a disappointing earnings release. The company’s Viridian Credit Rank worsened from #16 to #21, Its asset coverage declined to .60x, and its market fell to the point where its 2026 debt maturities now represent over 12 times the market cap. The announced Cannabist deal looks surprisingly like the one AYR did at the beginning of 2024. Can AYR turn around and do it again? With the debt trading at significant discounts and the equity trading like an out-of-the-money option, it’s going to take something big to pull AYR out of the fire. Selling AYR’s four stores in Illinois is not likely to be sufficient to make much difference. Where is Irwin Simon when you need him? Of course, all of this could turn on the dime if Trump got active in pushing for rescheduling and SAFER.

• • PHARMACAN, ANOTHER 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.
  • FOUR KEY GRAPHS THAT SEEK TO MAP THE OPTIONS AVAILABLE TO THE MSOs BASED ON THEIR VALUATION, LEVERAGE, AND LIQUIDITY
    • 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 6x and total liabilities to market cap under 2x. The group includes Vext, GTI, and Trulieve. 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. a range that signals stress if not distress.
  • 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.
  • 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. Five, including Schwazze, Cannabist, Ascend, MariMed, and 4Front These companies are high-risk with both high market leverage and low liquidity.

• VALUATION METRICS SUGGEST STRONG DOUBT REGARDING RESCHEDULING AND OTHER CANNABIS REGULATORY REFORM
  • The chart below shows that cannabis companies are trading at historically low valuation metrics – significantly lower than before S3 was a gleam in HHS’s eyes. Granted, there are a host of industry-specific problems that go beyond regulatory reform: slowing growth, wholesale pricing pressure, a weary consumer, etc.
  • We continue to believe that at current levels, U.S. MSOs have enormous upside potential. However, it may take some political catalysts to achieve these returns, and the market is beyond worrying about timing and is concerned that these reforms may never transpire. 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.
  • However, it is increasingly important to focus on building a diversified portfolio of companies that can make it without help from Washington because it’s anyone’s guess when that will arrive. Focus on the top 10 companies in our credit rankings. There ARE investable companies besides GTI. Put them in your portfolio and follow the total liabilities to market cap indicator, as well as the credit tracker rankings.

• • MSO STOCK LIQUIDITY REBOUNDS FROM ALL-TIME LOWS
    • The average daily dollar volume of $15M for the week ending 3/7/25 was well above average YTD, but most of the activity happened on Monday, and the volume tailed off steeply after that.
    • 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 984 is a significant improvement from last week’s 1867. However, it still 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 197 days to trade out of his position.

• • GIVING CREDIT WHERE CREDIT IS DUE
    • The chart below shows our updated 3/7/25 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.
    • Last week, we made a significant change in our evaluation of liquidity. We used to add the long-term liability account “uncertain tax liabilities” to current liabilities in the calculation of the current ratio and, in our bespoke ratio, the free cash flow adjusted current ratio. Our rationale was that the IRS did not recognize the long-term nature of this liability and could theoretically press for immediate payment. Our thinking has changed. While we still maintain that these unpaid 280e taxes should be considered debt and included in leverage calculations, we do not think there is a credible case for the IRS to demand immediate payment. At worst, these amounts will be subject to some sort of payment plan. The biggest beneficiary of this model change is TerrAscend, which has improved by four ranking notches.
    • The blue squares show the offered-side trading yields for each Company. Cannabist yields have come down significantly to the mid-20% range since the announcement of the company’s restructuring plan.
    • AYR was the biggest loser, dropping four ranking notches and increasing yield significantly. Can the company pull a rabbit out of the hat?