VIRIDIAN INSIGHTS

• • CAN “HOPE” BE A NEGATIVE FORCE?
    • Cannabis, perhaps more so than any other industry, was founded on hope. Prior to any legalization, it was the hope that one could evade the long arm of the law. Since legalization, it has been hope that the company could continue to raise capital until that liftoff moment of free cash flow generation. The industry has come a very long way in the last ten years, driven by that very hope and ingrained optimism.
    • But can hope be a negative force? Arguably, yes, if it leads to forgoing the actions that it takes to react appropriately to the environment.
    • We have long argued that the periodic emergence of new legalization bills of all shapes and sizes, as well as rumors of “imminent” regulatory actions, have been one of the primary causes for the virtual shutdown of the plant-touching cannabis equity capital market. More than 2.5x as much equity capital was raised by U.S. plant-touching businesses in the first 4 months of 2021 than in all of the time since then. Logjam, based on the hope that the latest new reform measure announced or rumored has locked up the market. And it makes total sense: what CFO wants to risk the embarrassment of raising equity at a low price, knowing that if one of the reforms actually happens, his stock is likely to double or more? Similarly, an investor looking at a company raising equity capital in this climate has to be skeptical. He has to be thinking, “That company must really be desperate to sell stock now!.” So, the result has been that almost all new capital raised has been debt. The result is that a significant number of companies (see our debt charts below) have taken on more leverage than can be sustained, at least in the current regulatory/tax environment.
    • But when the rubber hit the road, and that excess debt became problematic, “hope” led to another perverse result: the rise of the zombie cannabis company. Hope-based “kick the can down the road” restructurings, or what has commonly become known as “Amend, Extend, and Pretend,” have neither fixed the companies’ balance sheets nor given them the requisite financial flexibility to thrive in an increasingly brutal environment.
    • One of the first highly public instances of this phenomenon was Gotham Green’s management of its debt issues with MedMen. Beginning with Gotham’s original loan of $100M (with up to $250M available) in March 2019, Gotham granted four amendments between August 2019 and December 2020. The amendments had a common theme: waive existing covenant violations, push out maturities, grant extensions of small additional credit amounts to help manage liquidity issues, tighten future covenants and or provisions that granted Gotham more control, and obtain new warrants or reduce strike prices of existing warrants to capture an ever greater share of the equity. A classic set of maneuvers based on the realization that 1) the equity is an out-of-the-money option, and as such, the debt is impaired. 2) Something like legalization might happen that could bail out the company, and it’s worth playing for optionality. MedMen became one of the first and most publicized zombies. In the end, MedMen found another “investor” with the $100M Serruya Private equity investment in August 2021. Gotham agreed to some dilution and to partially subordinate some of their debt to allow the recap. Were Gotham’s actions the correct ones? Quite possibly, given the view at the time, they were. But would things have worked out better for creditors had Gotham pulled the plug early? Almost certainly, as we all know how the story ended.
    • What factors conspire to create zombies in cannabis?
      • Lack of bankruptcy increases the uncertainty of workouts. Chapter 11 devolves to extend and pretend or receivership, with little in between.
      • Creditors do not have any desire to own these assets.
      • By the time creditors decide that more drastic action is required, the companies are deeply cash flow negative, making any operational restructuring impossible.
    • StateHouse is a good modern example of the extend and pretend playbook being carried to its conclusion. Pelorus essentially threw good money after bad in trying to maintain optionality and “hope.” In the end, they would have been better off taking more drastic action earlier.
    • The most recent example of this phenomenon is the Cannabist restructuring agreement that the requisite number of bondholders has approved. It is the epitome of the amend, extend, and pretend strategy. The deal, which looks eerily similar to the one AYR closed in early 2024, kicks the can down the road by granting extensions to 2028, with two additional extensions of six months each available. The deal does nothing to reduce debt, which, at over 7x consensus 2025 EBITDA, is unsustainable even in a non-280E environment. This is clearly a deal driven by hope—hope that stocks will surge on cannabis reform and the company will be able to issue equity, hope that the company can turn around profitability at some of its operations, and hope that it will continue to find buyers of unprofitable operations.
    • Will other upcoming debt refinancings/restructurings follow the same playbook? Chances are good that they will. But perhaps it’s time to make more radical changes and put companies on a footing that allows them real hope as thriving, stable enterprises instead of zombies. We will be presenting an outline of such a strategy in our upcoming talk at MJUNPACKED on Thursday in Atlantic City. See you there!
  • CURALEAF ANNOUNCED PLANS TO OPEN A HEMP DISPENSARY IN WEST PALM BEACH, FLORIDA: IF YOU CAN’T BEAT THEM, JOIN THEM.
    • The press release indicates that the store will stock both the company’s Select brand and a wide selection of third-party brands.
    • The product assortment will focus on hemp-derived THC beverages and edibles.
    • The move makes complete sense, going along with Curaleaf’s 2024 launch of the Hemp Company.
    • Will this be the first of a wave of MSO Hemp dispensary openings? And what’s the chance that the product assortment starts to cross the line into smokeable/vapable hemp-derived intoxicants?
    • It’s easy to see the impetus for moving into hemp since the Hemp space has what the THC space desperately needs: Growth. It’s not exactly a closely held secret that hemp intoxicants, along with illicit THC vendors, have hit the THC industry right where it hurts. After all, what is the most significant incentive for an investor to consider crossing the gap and investing in a federally illegal substance? Growth right? Lately, however, growth has not been abundantly evidenced. Analysts are actually projecting flat revenues for the top 12 MSOs for 2025.
    • Why is hemp growing and THC isn’t? In a nutshell, price and convenience. The Hemp intoxicant space, along with the illicit THC space, both drive home one point: there is a significant portion of the market that doesn’t care about seed-to-sale tracking and a COA on every bottle. They will gladly trade that for the ability to purchase at their gas station or, better yet, online through the mail, especially if it costs less. The THC market wants people to fear untested and untracked hemp products, but perhaps THC is overtested and over-tracked in ways that don’t add much value to the product.
    • In a way, it depends on your view of what cannabis represents. If cannabis is medicine, then perhaps it really should be heavily regulated by the FDA and heavily tested as well. But if cannabis is more analogous to wine or spirits, only less dangerous, then a whole other set of policy structures is appropriate. Alcohol is certainly tested, but not every bottle or even every batch. The testing is more sporadic and random. And as for potency limits or purchasing limits? You can easily walk into a liquor store and purchase enough Jack Daniels to kill five people, but nobody will question your right to make that purchase. Why potency or quantity limits for cannabis, which most people agree is less dangerous?
    • So what is keeping the MSOs from creeping farther across the line and beginning to sell THCA flower, or D8? We see three reasons: reputational risk, political risk, and economic risk.
    • On the reputational side, we see general agreement around the idea that hemp THC beverages are “OK.” And a short step away are hemp THC gummies. But smokable hemp intoxicants are still controversial, and top MSOs seem unwilling to offend any of their constituencies, especially investors, by jumping across the line quite yet. But that’s an economic calculus, not one driven by any deeply held principle. The Curaleaf hemp dispensary is just the first salvo in the fight.
    • On the political side, cannabis operators correctly believe that if they jump fully into the hemp intoxicant business, without even the figleaf of only doing drinks, it will be virtually impossible to continue pushing for the elimination of these products. And make no mistake, MSOs in limited license states are still hoping they can stuff the genie back into the bottle! As time drags on with no new Farm Bill in sight and statewide legislation proving difficult, if not unworkable, we expect to see defections.
    • On the economic side, perhaps licensed cannabis operators fear that such operations will cannibalize their licensed, tested, and over-costed THC operations. When we were in Key West last year, we wandered into a shop called Green Place on Duval Street. Blazoned in bold lettering across the entrance was a sign proclaiming, “Tourists welcome, no medical card required.” In the store, we found an assortment of flower, vapes, and prerolls that we were hard-pressed to identify as anything other than Weed, but under the guise of the farm bill, this was all hemp. We do not doubt that this idea will spread further in the months to come.
    • The production cost, regulatory, and distribution advantages of hemp make it a classic case of market disruption that is difficult, if not impossible, to stop.
  • IN ANY OTHER MARKET, CANNABIST EQUITY WOULD BE GETTING SOME CREDIT FOR ITS DEBT RESTRUCTURING PLAN
    • Cannabist’s bonds have rallied a bit since the announcement of the deal, but we expected to see a boost in the stock, which has not yet occurred. CBST has approval from approximately 70% of its bondholders, clearing the 66 2/3% level generally required. A special meeting of bondholders is scheduled for April 29.
    • Cannabist’s announced debt restructuring plan looks eerily similar to the one that AYR executed at the beginning of 2024: The company gave up around 25% of its equity to extend debt maturities to 2028 with two six-month extensions. Holders of existing notes will receive dollar-for-dollar exchanges into similar coupons with longer maturities. Holders who committed 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 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 calculations show that the completion of the restructuring should have had a significant impact on the stock. In fact, we think it could go up by a factor of 2.6x to around $.13 per share! Total liabilities to market cap would improve from 26.9x to 10.7x, still a distressed credit but not disastrous. So far, the equity market has not realized the value of the 2-3 year reprieve. Despite the 25% dilution they suffer under the deal, equity holders should be cheering. They own an out-of-the-money option that has just been given three extra years to expiration. And in cannabis, 3 years can make an untold difference.
  • 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 4/25/25 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 red 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 black dots represent 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 (except Cannabist) 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) continues to head in the wrong direction. 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 around 18 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. We would not be surprised if AYR attempted to sell its Virginia assets, which are probably worth more than the Illinois properties, but they may still not be enough to make much progress on the looming debt maturities. AYR’s bonds are offered at yields of more than 45%. The market is pretty clearly considering AYR a restructuring candidate rather than a refinancing candidate. Recent management changes seem to ratify that view.
      • Meanwhile, two of the companies on the graph, FFNT and GRAM, defaulted on their mission-critical leases with IIPR. We didn’t expect things to come to a head quite this fast.

• • • 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 appears as a leverage outlier using the new metrics relative to AYR, which seemed more leveraged using standard measures.
      • Glass House is a valuation outlier. 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 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, Curaleaf, Cresco, and MariMed. Verano, Curaleaf, and Cresco all have significant 2026 maturities, but we do not believe they are likely to have difficulties refinancing their debt.
    • On the right lies Jushi and Ascend, both between 6x and 12x. 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. Note that we recently modified our treatment of this ratio by removing uncertain tax liabilities from current liabilities where we used to place them. The result is that no company is currently significantly below 1x free cash flow adjusted current ratio.
  • 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. Note: SHWZ, CBST, AYR, and 4Front are now off the chart to the right, with extreme market leverage indicating significant distress.

• • 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. We are not pollyannish about the issues and do realize the industry has a number of deep-seated problems, like competition with hemp, wholesale price compression, and dependence on new markets for growth. Moreover, it likely requires some political catalysts to achieve significant gains, 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 TRADING VOLUME JUMPS ON REPORTS OF TRUMP ADVOCACY
  • The average daily dollar volume of $12M for the week ending 4/25/25 was well above the average LTM volume. The increase was primarily driven by a $28M spike on Thursday on reports that Trump has instructed party officials to get SAFE banking done before the midterms. 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 1229 is a substantial improvement from last week’s 2140 reading. Still, a DTTMC of 1229 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 246 days to trade out of his position. A market with this lack of liquidity is virtually uninvestable by institutional capital.

• • GIVING CREDIT WHERE CREDIT IS DUE
    • The chart below shows our updated 4/25/25 credit rankings for 31 U.S. cannabis companies. The number below the ticker symbol indicates the change in credit ranking since last week. A negative number suggests credit deterioration, while a positive number indicates improvement.
    • The blue squares show the offered-side trading yields for each Company. Cannabis yield increased about 25-50bps over the last two weeks, reflecting higher yields in Treasuries and the generally unsettled business environment.  AYR 13s of 26 are offered in small sizes at yields in the mid-40% range, indicating a market belief that restructuring rather than refinancing is the base case assumption.