VIRIDIAN INSIGHTS

• CANNABIS DEBT CAPITAL MARKETS ARE ON FIRE!
  • Better-than-expected executions this week from TerrAscend (TSND: TSX) and Jushi (JUSH: CSE) continue the tone set by Ascend (AAWH: CSE) two weeks ago.
  • But why are the credit markets so enamored of cannabis all of a sudden? We think this may indicate that debt investors have embraced the cash flow positive impacts of S3, even while the equity market couldn’t seem to care less.
• ARE SPACs REALLY BACK?
  • We thought we must have misheard the news that Mercer Park had completed a $200M SPAC IPO. It’s not exactly like the cannabis equity markets have been so buoyant over the last few weeks!
  • The timing might be good, though, if they can quickly line up some deals before the impact of 280e actually hits.
  • The prospectus said the right things, mentioning companies “priced near their lows,” possible “rescue financing,” and possible “roll-up strategies.
  • Although we are incredulous, the above descriptions don’t sound too unlike the California landscape! We believe that eventually, someone will roll up some of the significant distressed assets in CA, but is now the time?
  • We are also a bit surprised by the size of the deal. Usually, SPACs end up pursuing company(s) with total enterprise values of around 4x the initial IPO raise, which makes for a substantial acquisition here! There are a few large U.S. private MSOs left. Might one or more of them be targets?
  • We don’t know, but we do know it is going to be fun to watch.
• THE VERANO PURCHASE OF PORTIONS OF CANNABIST’S VIRGINIA AND ARIZONA ASSETS FOR A TOTAL VALUE OF $105M IS A SIGN OF RENEWED VIGOR IN THE CANNABIS M&A MARKET.
  • Verano is purchasing six dispensaries and one cultivation and production facility in Virginia. Verano will become the sole cannabis operator and retailer for the HAS 5 in Eastern Virginia. Cannabist (CBST: Cboe) will retain its assets in the Richmond region with five dispensaries and 80k square feet of cultivation and manufacturing space.
  • The total transaction value for the Virginia assets is $90M: $20M in cash, $40M in Class A shares, and $30M in a seller note.
  • Verano is purchasing all of Cannabist’s assets in Arizona, including one cultivation facility, one production facility, and two dispensaries.
  • The total transaction value for Arizona is $15M, payable in cash.
  • We are not surprised that Cannabist continues to sell assets. The company has weak liquidity and excess leverage.
  • We ARE surprised by the timing of the transaction, having believed that a re-acceleration of M&A would not unfold until after a rescheduling ruling.
  • We do not have enough information on the acquired properties to calculate purchase multiples. Still, as a whole, Verano is trading at around 5.75x 2024 EBITDA while Cannabist is trading closer to 7.4x, so this is a strategic transaction, not one motivated by accretiveness.
  • Granted, Cannabist may be a motivated seller, but Verano is using $40M of its stock in the deals at pre-S3 pop levels! Verano must feel it is getting a good enough deal to make up for potentially leaving some stock on the table. This is the sort of compromise that it takes to get deals done in this complicated environment. Congratulations to both companies!
• OK, SO WE ACCEPT THAT INVESTORS WILL NOT GIVE ANY CREDIT TO S3 UNTIL IT’S A TOTALLY DONE DEAL, BUT NOW RECESSION WORRIES IN WHAT EVERYONE THINKS IS A RECESSION-RESISTANT INDUSTRY?
  • Cannabis just can’t seem to get a break. S3 appears on track. The Democrats are up in the polls. The debt capital markets are on fire, with the most volume since late 2022, but the MSOS is down 8% for the week?
  • 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 assumption. We recommend a balanced portfolio that leans toward the companies in the top half of the Viridian Credit Tracker model ranking.

• EARLY EARNINGS REPORTS SUPPORT OUR CONTENTION THAT ANALYSTS ARE BEING TOO CONSERVATIVE
  • The graph below shows the Q2 percentage revenue and EBITDA beats for the MSOs that have reported so far.
  • Three out of four have reported significant EBITDA beats ranging from 9% to 20%.
  • Ascend Wellness, the only one of the four that missed estimates blamed its performance on tougher market conditions in Massachusetts and New Jersey.
  • The relief from the previous week’s debt refinancing cushioned the market reception to the misses.

• CANSORTIUM RISK ARB SPREAD RETURNS TO NORMAL
  • After more than a week of flashing bright red, the arb spread on the Cansortium/RIV deal has returned to around 40%, demonstrating renewed optimism that the deal will be closed. The spread is equal to the percentage profit an investor would make if they could purchase RIV stock, instantly exchange it into Cansortium at the announced deal exchange rate, and sell the Cansortium stock.
  • The announced merger with RIV Capital enhances Cansortium’s credit profile, and the Viridian Credit Tracker model ranking improves from #18 to #8.
  • Cansortium’s net cash position goes from -$60.7M to $5.1M, dramatically improving its Viridian Capital Liquidity ranking from #23/30 to #9/30.
  • Leverage is also significantly reduced, predominantly from the conversion of $175M of Hawthorne debt into Cansortium equity. The conversion also demonstrates support from Hawthorne’s parent, Scotts Miracle Grow.
  • The combined company will jump to a #10 size ranking compared to the #21 ranking Cansortium had prior to the announcement.

• 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), 4Front (FFNT: CSE), and Terrascend (TSND: TSX). We have adjusted our accrued tax liabilities for comparability by adding back the tax liabilities that Trulieve, TerrAscend, and AYR moved into long-term liability accounts.
  • The first graph shows that twelve of the eighteen 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 nine 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 four groups:
    • On the bottom left are companies with low valuation multiples but also low market leverage. The group includes Verano, Trulieve, Cresco, and MariMed. The other three show that the market is not yet willing to fully embrace the Florida rec story.
    • In the middle, between 2x and 4x total liabilities/market cap, we see 4Front, Ascend, AYR, Goodness Growth, and Jushi. Each of these has more than 4x debt/ EBITDA, which is borderline in terms of sustainability, even in a non-280e world. However, each also has significant upside catalysts that could mitigate or exacerbate the excess leverage. FFNT is ramping up production at its mammoth Illinois cultivation facility. Jushi is levered to potential adult rec developments in Pennsylvania and Virginia.
    • On the right lies Cannabist. (the sharp decline in Schwazze stock price has pushed it off the chart to the right, serious distress indications. Cannabist has seen the writing on the wall: to levered to issue equity or debt, its only option was asset sales, and its exit from Florida was a recognition of this. The announcement of the sale of its Arizona properties and portions of Virginia are further ratification of this.
    • At the top left are companies with high valuation metrics and low leverage. These companies should look to do an equity issuance depending on their positioning in the liquidity graph below.
  • 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. Surprisingly, eight of the companies fall into this bucket. This graph also breaks the sector into three distinct groupings. The bottom left group has low leverage but also modest liquidity. Some of the companies, including Verano, MariMed, and Cresco, have sufficient but not comfortable levels of liquidity, while others, including Curaleaf, TerrAscend, and Glass House, are below the critical 1x liquidity line. Companies on the lower right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment.
  • Schwazze has alleviated some, but not all, of its near-term liquidity problem by extending the maturities of $32M to its debt. Its free cash flow adjusted current ratio remains under 1x, indicating additional financing may be required. The market is still skittish about the Company, as is evidenced by its 35x total liabilities to market cap, the highest in the group by far.

• 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), 4Front (FFNT: CSE), and Terrascend (TSND: TSX). We have adjusted our accrued tax liabilities for comparability by adding back the tax liabilities that Trulieve, TerrAscend, and AYR moved into long-term liability accounts.
  • The first graph shows that twelve of the eighteen 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 nine 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 four groups:
    • On the bottom left are companies with low valuation multiples but also low market leverage.   The group includes Verano, Trulieve, Cresco, and MariMed. The other three show that the market is not yet willing to fully sign on to the Florida rec story.
    • In the middle, between 2x and 4x total liabilities/market cap, we see 4Front, Ascend, AYR, Goodness Growth, and Jushi. Each of these has more than 4x debt/ EBITDA, which is borderline in terms of sustainability, even in a non-280e world. However, each also has significant upside catalysts that could mitigate or exacerbate the excess leverage. FFNT is ramping up production at its mammoth Illinois cultivation facility. Ascend has a $275M term loan maturing in August 2025 that will need to be extended or refinanced. This loan is 110% of the Company’s market cap, which is higher than the percentage of debt maturities that AYR restructured at the end of 2023. Jushi is levered to potential adult rec developments in Pennsylvania and Virginia.
    • On the right lie Cannabist and Shwazze. The high level of market leverage tells us that the market questions whether they can discharge their liabilities without significantly dilutive actions, and doubts are also shown by their 22/31 and 20/31 positioning in our weekly credit ranking. Cannabist has seen the writing on the wall: to levered to issue equity or debt, its only option was asset sales, and its exit from Florida was a recognition of this.
    • At the top left are companies with high valuation metrics and low leverage. These companies should look to do an equity issuance depending on their positioning in the liquidity graph below.
  • 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. Surprisingly, eight of the companies fall into this bucket. This graph also breaks the sector into three distinct groupings. The bottom left group has low leverage but also modest liquidity. Some of the companies, including Verano, MariMed, and Cresco, have sufficient but not comfortable levels of liquidity, while others, including Curaleaf, TerrAscend, and Glass House, are below the critical 1x liquidity line. Companies on the lower right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment.
  • Schwazze has alleviated some, but not all, of its near-term liquidity problem by extending the maturities of $32M to its debt. Its free cash flow adjusted current ratio remains under 1x, indicating additional financing may be required. The market is still skittish about the Company, as is evidenced by its 12.12x status on total liabilities to market cap.
  • Ascend’s new financing significantly improves the Company’s liquidity. However, its free cash flow adjusted current ratio remains unchanged since the original debt maturity was not yet included in current liabilities.

• • • CANNABIS STOCK LIQUIDITY SINKS TO ITS LOWEST
      • The average daily dollar volume of $13M for the week ended 8/2/24 is the lowest of the year. Liquidity in terms of Days to Trade Market Cap (see below) is the worst since the beginning of 2023 despite several uplistings in the interim.
      • 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 weekly reading of 1114 days on 8/2/24 was the worst reading of the year. An 1114 DTTMC 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 223 days to trade out of his position. The age-old chicken and egg question: are there no institutional investors because market liquidity is so low, or is market liquidity so low because there are no institutional investors?
      • We are firmly in the grip of the summer doldrums, but exciting macro events seem likely for the month ahead. Will trading volumes accelerate accordingly?

• GIVING CREDIT WHERE CREDIT IS DUE
• The chart below shows our updated 8/2/24 credit rankings for the 31 U.S. cannabis companies with over $3M 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. We are expecting the round of recent refinancings to re-rate the landscape of cannabis debt. However, we cannot yet prove this thesis.
• Curaleaf (CURA: TSX), Ascend (AAWH: CSE), and TerrAscend (TSND: TSX) all registered substantial model credit quality gains this week. Vext (VEXT: CSE) was the most significant deterioration, as several other companies improved past it.
• We are still expecting to hear news about a Green Thumb (GTII: CSE) debt refinancing, especially given the reception to credits lower down the credit ladder such as Ascend, TerrAscend, and Jushi (JUSH: CSE).