VIRIDIAN INSIGHTS

• GREENLANE – NEW MEME STOCK COMBINED WITH A BUYOUT DISGUISED AS A CAPITAL RAISE
  • On August 12, 2024, Greenlane (GNLN: Nasdaq) announced a securities purchase agreement for $6.5M with an unnamed institutional investor.
  • The transaction contemplates the investor purchasing 2.36M units at a price of approximately $2.75 per unit.
  • Each unit consists of either a common share or pre-funded warrant, along with two five-year warrants at a $2.50 exercise price.
  • The company had pre-investment fully diluted shares of 1.56M, according to FactSet. So, doing the simple math, one can calculate that the new fully diluted shares should be 8.64M shares, and the new investor would end up owning approximately 82% of the company!
  • And here is where it gets interesting. After closing on Friday, August 9 at $2.47, the shares shot up to $11.5M on 8/12/24 with an enormous volume of 47M shares (90-day avg volume is about 0.5M shares).
  • What is driving the stock? And do the people buying the stock at over $10 today understand that the company cut a deal to sell a controlling interest at less than $3?
  • The only other two pieces of news that could potentially explain the stock performance are:
    • Greenlane signed a non-binding letter of intent to become the exclusive distributor of Safety Strips’ fentanyl, xylazine, and drink spike detection test strips in the U.S. While this is undoubtedly good news, it does not account for the jump. A company I.R. spokesperson commented, “We think it is significant but does not change the main course of our business.”
    • Greenlane announced that its CEO, Barbara Sher, purchased 12,500 shares between 8/5/24 and 8/9/24 at an average price of $2.66 per share. While an insider purchase is always a good thing, we don’t think a $37k purchase by the CEO is enough of a signal to take the stock from under $3 to over $10.
    • As with other meme stocks, there doesn’t seem to be any rational reason for the meteoric rise of the stock. A true test of the management will be whether they will work quickly to sell more stock at $10+.

• WHERE THERE IS SMOKE… IRWIN NATURAL FILES FOR CHAPTER 11.
  • On August 9, 2024, Irwin Naturals (IWINF: OTC), a distributor of herbal supplements and CBD oils and topicals, filed for Chapter 11 after an accelerating battle with its East West Bank, the company’s lead lender.
    • In May, Irwin failed to make scheduled payments under its $40M credit line. The company has also failed to file financial statements since September 2023.
    • In June, the bank accused Klee Irwin, the founder and CEO, of diverting funds for personal use and exercised its voting rights to take control of the company and remove Klee Irwin from the Board of Directors. The bank sued for the appointment of a receiver.
    • Klee Irwin followed through on his threat to file Chapter 11, and in the filing, the company suggests that it believes there will be recoveries for unsecured creditors.
    • We suspect that more trouble is ahead in hemp land as states like Missouri continue to clamp down on the most profitable side of the business, hemp-derived intoxicants. Most of the companies involved are small and private, but we expect more reorganizations and receiverships in the rest of 2024.
• 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.
  • 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?
  • Our conversation with the SPAC’s management shed a bit of light. They are primarily focused on plant-touching and licensed operations. Distressed asset purchases are not out of the question, but they do want to stick to assets that can be cash flow positive, absent any debt overhang. They recognize that they may well have to aggregate more than one purchase to reach a qualifying investment. And they are not overly concerned that an imminent rescheduling will change the valuation landscape before they can get invested.
  • The SPAC has a considerable advantage in having the largest pool of equity that has been raised in years. We are looking forward to watching this play out! 

• 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!
• WHEN WILL THE UPSIDE KICK IN?
  • 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 and most of its components continue to languish.
  • 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.

• Q2 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.
  • Seven out of twelve have reported significant EBITDA beats ranging from 9% to 20%. In aggregate, the group on the chart beat estimates by 3.9% for the quarter.

• CANSORTIUM RISK ARB SPREAD RETURNS TO NORMAL
  • The arb spread on the Cansortium/RIV deal is now around 50%, demonstrating a reasonable blend of optimism and skepticism 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.

• • • CANNABIS STOCK LIQUIDITY RECOVERS SLIGHTLY
      • The average daily dollar volume of $21M for the week ended 8/9/24 is the highest since late June. Similarly, liquidity in terms of Days to Trade Market Cap (see below) has bounced back to less dismal levels.
      • 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 679 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 136 days to trade out of his position, quite an improvement from last week’s figure of 223 days.
      • 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 8/9/24 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), Verano (VRNO: Cboe), Vext (VEXT: CSE), and Glass House(GLASF: CSE) all registered model credit quality gains this week.
      • Cannabist debt pricing has weakened and is now the highest yield on the chart. At current levels, with improved liquidity coming from the sale of assets to Verano, we believe Cannabist debt is attractive.
      • 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).