VIRIDIAN INSIGHTS

• NEW YORK – 93 STEPS FORWARD AND 105 BACKWARD?
  • • New York now has 436 licensed adult-use dispensaries, a gain of 93 since the end of 2024.
    • This week, however, the OCM admitted that it had miscalculated compliance with a law that forbids cannabis dispensaries from being located within 500 feet of a school or place of worship. Sounds simple, but the OCM measured the distance from the entrance of the dispensary to the entrance of the school building, whereas they should have been measuring to the nearest property line of the school or place of worship.
    • As a result, 105 granted licenses, including 60 that are operational, were informed that they may need to relocate to comply with the requirements prior to their next license renewal. The ruling also affects an additional 47 pending applicants.
    • The state established a fund and is offering up to $250,000 to assist with relocation or capital improvements. That’s nice, but do they know how difficult it is to find a compliant location in the first place?
    • One possible “kick save” is that the OCM is requesting legislation to address the problem. The relief legislation is expected to be introduced in early 2026, but there is no guarantee of its passage.
    • Just when we thought NY had finally gotten its act together!
• TEXAS SPECIAL LEGISLATIVE SESSION- AND THE HERDING OF CATS
  • We talked a couple of weeks ago about the fact that the two key components of Abbott’s proposals seem sort of reasonable:
    • Age Restrictions, including child-resistant packaging, restrictions on sales near schools, and limiting marketing to minors.
    • Comprehensive hemp product regulation, including prohibiting synthetic cannabinoids, including D8 & D10, requiring mandatory testing, and limiting potency.
  • But it appears that the anti-hemp legislators have grabbed the microphone and have doubled down on House and Senate bills that mirror the original hemp shutdown legislation.
  • Uncertainty is high regarding the eventual resolution, and it is possible that Abbott would repeat his veto if the laws advance.
  • One thing is clear, though: Hemp is under attack, and its opponents do not care how many jobs or how much tax revenue need to be sacrificed to rein it in.
  • Shame on us for momentarily thinking politicians could actually achieve reasonable results.
• WHAT HAPPENED TO “IT WILL BE “ONE OF MY FIRST PRIORITIES AFTER TAKING OFFICE?”
  • That’s what Cole said about cannabis rescheduling in his April 2025 Senate Judiciary Committee hearing.
  • However, last week, after taking office, Cole released a strategic priorities document that completely omitted cannabis rescheduling.
  • We hope he is just waiting for marching orders from Trump, but this is cannabis politics, and there are absolutely zero rules.
  • We have always thought that Cannabis would be a natural issue for Trump.
    • First off, Cannabis is the ultimate in States’ rights issues. The very existence of the industry owes to the willingness of the states to thumb their nose at the federal government. Trump is no anarchist in that regard, but he is still a big supporter of states’ rights
    • Next, cannabis reforms can add billions to the economy by fostering job growth, increasing tax revenues, and reducing significant expenses in police, courts, and jails, among others. This goes along well with his pro-business and cost-cutting leanings.
    • Promoting Cannabis is consistent with his tough stand on opioids, fentanyl, and drug gangs. Some states, like Utah, have explicitly stated that they believe their medical cannabis program can be the off-ramp for opioid abuse. Trump is skilled enough to make the point that being hard on hard drugs and pro-cannabis are consistent positions.
    • Cannabis is an immensely popular issue favored by a strong majority of voters. With midterms coming up fast, Cannabis is an issue that Trump can steal from the Democrats and use to solidify his base.
  • Nonetheless, Trump has studiously avoided any direct comment on the matter.
  • The closest Trump has come to doing so is his public support for Joe Gruters to lead the RNC. Gruters has been a highly vocal cannabis supporter and was a strong proponent of the Florida adult rec initiative. His choice as RNC chairman cannot possibly be an accident, can it?
• Our chart of the week showed that expectations for Q2 earnings are pretty ugly, with an aggregate decline of about 12.4% in EBITDA y/o/y for U.S. MSOs.
  • Yesterday, Tilray Brands (TLRY: Nasdaq), the veritable poster child of ugly earnings releases, led the way with its quarterly and full-year results for the period ended April 2025.
  • We are not overly concerned that the company took a $1.4 billion impairment charge on the goodwill it recorded in connection with its Aphria acquisition. After all, it’s a non-cash charge and hardly a surprise.
  • And to be fair, it’s not as though the company is on the ropes, despite having registered negative cash flow from operations for eight of the last ten quarters.
  • Instead, we think a few fiscal 2025 numbers summarize well the basic issue with Tilray:
    • Cash flow from operations:  $-94.6M
    • Cash flow from investments: $-46.7M
    • Free Cash Flow: $-141.3M
    • Increase in share capital $161.2M
  • Tilray has a negative cash flow before considering any capital expenditures or acquisitions, and it is financing this shortfall through the ongoing issuance of stock. On the one hand, we somewhat admire the ability to continue selling stock in a money-losing, negative cash flow business. Continual acquisitions, mixed in with restructuring charges and write-offs, make it difficult to determine what same-store operations look like, and that may not be an accident. Because fundamentally, it’s a race. Can the company become cash flow positive before equity investors tire of priming the pump?
• TIME IS ALMOST OUT FOR AYR.
  • Ayr is now two days away from facing an event of default under its Senior Note indenture. And its temporary waiver with the majority of senior note holders is set to expire on July 29^th. The bonds, offered at around 50, seem to indicate that another receivership is likely.
  • We hope that is not the case. Our analysis suggests that a significantly better recovery for bondholders is possible through restructuring the company’s balance sheet through debt-for-equity swaps.
  • One major impediment seems to be that major bondholders don’t want to own the company, even if it means a better recovery.
  • If we were Chicago Atlantic/Vireo, we would be looking closely at this opportunity.
• 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 approximately $2.3 billion of debt maturing in 2026. (IAnthus maturities are actually in 6/27, but close enough!). Putting that figure into perspective, $2.3B 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 prepackaged bankruptcy (or any bankruptcy, for that matter), restructuring is rightfully a prospect to be feared in the Cannabis Industry.
  • 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 green bars show the 7/25/25 market-implied asset coverage of total liabilities. We arrive at this by viewing the equity as a call option on the asset value of the firm, with a strike price equal to its liabilities, and assuming maturities of 2026, as well as volatility of 40% and a risk-free rate of 4.25%. This provides us with all the elements of the Black-Scholes option pricing formula except for the current asset value. By iterating on 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 less than 1x asset coverage of liabilities, debt providers are effectively 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 considers 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 the 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 twelve companies from CNTMF (Fluent) to the right side of this graph represent higher risk. They have less than 1x asset value coverage, generally poor Viridian Credit Ranks, and maturing debt that is a multiple of their market capitalization (except AAWH). Companies in this position represent approximately $700M of the maturing debt.
    • Conversely, the sixteen 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 one times their market capitalization (except Cresco). These companies represent $1.6 billion of the $2.3 billion total (70%), and we believe they should all be able to refinance their maturities without undue hardship. Verano (VRNO: Cboe) is on the bubble. Our credit scoring system ranks them favorably; however, the asset valuation methodology yields a 1.1x asset value coverage. Part of this may be the unresolved contingent liability from the Vireo suit. Despite these issues, we believe the chances of Verano being unable to refinance its liabilities are relatively remote, especially since it is virtually all Chicago Atlantic debt.

• 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 Enterprise Value (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 the Cannabis Industry due to the mission-critical nature of many long-term leases and the absence of bankruptcy protection in This Sector. 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, as lease expense is deducted prior to calculating EBITDA.
  • The second graph utilizes EBITDA and employs traditional calculations for both debt and enterprise values, excluding 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. Finally, the unpredictability of the resolution of the matter regarding the recent raids.

• The third graph examines leverage through the lens of total liabilities to market capitalization. We believe this is the single best measure of leverage because it is a direct reflection of the market’s assessment of a company’s assets in excess of its liabilities, and it is sensitive to changes in the market’s perception of a company’s future prospects.
  • On the bottom left are companies with an Adj. EV/2025 EBITDAR ratio of under 6x and total liabilities to market cap of 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.
  • Between 2x and 5x total liabilities to market cap, we find Verano, Curaleaf, Cresco, and MariMed. Verano, Curaleaf, and Cresco all have significant 2026 maturities; however, we do not believe they are likely to face 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, which utilized option modeling of equity prices, showed that the market believes each of these companies has significantly less asset value than its liabilities.

• The fourth graph introduces the free cash flow adjusted current ratio liquidity measure into the mix. Note that we have recently modified our treatment of this ratio by removing uncertain tax liabilities from current liabilities, where they were previously placed. 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 characterized by high market leverage and low liquidity, making them high-risk. 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 UPSIDE POTENTIAL FROM ANY REGULATORY REFORM, BUT EQUALLY POWERFUL MARKET SKEPTICISM
  • Despite three-week gains that exceeded any similar period since the original August 2023 HHS announcement supporting rescheduling, cannabis stocks continue to trade at significantly lower multiples than before the HHS announcement. Granted, there are a host of industry-specific problems that extend beyond regulatory reform, including slowing growth, wholesale pricing pressure, and a weary consumer.
  • We continue to believe that at current levels, U.S. MSOs have enormous upside potential. We are not Pollyannish about the issues and recognize that the industry faces several deep-seated problems, including competition with Hemp, wholesale price compression, and a reliance on new markets for growth.
  • Moreover, we have been “Schumered” a few too many times to fully buy into the newfound optimism in the market. We would rather miss the first 50% gain than get suckered again. We will know it’s real when the big dog speaks. There is more than enough gain to be had; we will be patient.

• CANNABIS STOCK VOLUME AND LIQUIDITY REMAIN BETTER THAN ANY PERIOD SINCE FEBRUARY
  • The average daily dollar volume of $15 million for the week ending July 25 increased from the previous week’s $12 million. Taken as a whole, the three-week period had better volume and liquidity than any period since the end of 2024. The current Days to Trade the Market Cap (DTTMC) of 992 similarly represents a reversal of the downward trend in liquidity that has been in play since the election. A DTTMC of 992 implies that an investor who acquired a 5% position in the stock, assuming they wanted to be less than 25% of the average daily dollar volume, would require 198 days to trade out of their position, a figure that almost seems acceptable only because recent readings have greatly exceeded a year. Will this spike in liquidity continue? We doubt it, but would love to be proven wrong.

• GIVING CREDIT WHERE CREDIT IS DUE
  • The chart below displays our updated credit rankings for 31 U.S. cannabis companies as of July 25, 2025. 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. Cresco and Curaleaf are both trading at higher yields than their credit quality warrants. This suggests several possible trades: sell Ascend and TerrAscend and buy Curaleaf. Sell Verano and buy Cresco. Each of these trades picks up credit quality and yield.
  • For investors with a significantly higher risk tolerance, we note that AYR 13s of 2026 are now trading flat and are offered at 55. While this aligns directly with our option-based asset value coverage metric, we believe that a restructuring has the potential to produce a significantly higher value for the senior secured debt. AYR skipped the June 30 payment on its 13% notes, and it now has until July 31 to cure the default before it becomes an event of default under the note indenture. The company has obtained an extension through July 29, 2025, from the majority of the senior secured notes for certain events of default relating to the late filing of interim financials, as well as specific payment defaults under other outstanding debt. AYR also received notice from the agent under its Pledge Agreement dated October 1, 2021, that due to purported defaults under the Pledge Agreement and loan documents, the agent intends to reclaim all equity interests in PA Natural Medicine LLC, which owns three dispensaries in Pennsylvania. All of these items suggest that the timing is growing short for AYR to complete a negotiation of a restructuring plan.