VIRIDIAN INSIGHTS

• THE IRS IS UNHAPPY ABOUT COMPANIES NOT PAYING THEIR 280e TAXES
• Luke Orner, a senior IRS lawyer, reiterated the IRS’s uncompromising position on 280e at a recent conference:
  • The IRS believes the outside counsel’s opinions that 280e is unconstitutional are not “bulletproof,” and it will continue to defend and enforce 280e unless the Supreme Court issues a different interpretation.
  • The IRS will continue to enforce 280e for all years prior to rescheduling, potentially a big deal with around $700M to $1B on the line for the top MSOs for 2024 alone.
• GREEN THUMB GETS AUTHORIZATION TO BUY BACK MORE SHARES
  • Green Thumb’s (GTII: CSE) Board authorized a $50M share repurchase representing up to 10.57M shares.
  • The company clearly has the financial flexibility to undertake this program and has shown it isn’t just an empty promise. GTI bought back 6.5M shares for a total of $73.3M under its previous buyback program that expired on September 10, 2024. The average purchase price was $11.27, which is higher than it has traded for the last month.
  • Still, $50M is less than 2% of GTI’s market cap, so let’s not get too excited.
  • Perhaps the only real knock on GTI is that it hasn’t been aggressive enough in scooping up assets at distressed prices during the capital crunch. We thought, for example, that GTI was a logical buyer of Cansortium (TIUM.USD: CSE), given GTI’s desire to expand in Florida. With S3 delayed, we would have expected GTI to take advantage of its financial flexibility to grow.
• MSO FINANCIAL FLEXIBILITY DEPICTED BY FOUR GRAPHS FEATURING OUR NEWEST VALUATION AND LEVERAGE METRICS
  • The three graphs below seek to map the financial options available to eighteen of the largest MSOs based on their Valuation, Leverage, and Liquidity. We have updated our measures to look at 2025 EBITDA estimates as we believe most investors are now looking to these values in their valuations.
  • 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 E.V. / 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 2025 estimates generally reduces both leverage and valuation multiples.
  • Comparing our new enhanced metrics to standard calculations produces several changes in the perception of relative valuation and leverage.
  • Our new metrics make GTI look less leveraged than PLTH compared to standard metrics. MariMed now appears less leveraged than Ascend, whereas standard metrics reverse this order. Jushi and Cannabist now appear more leveraged than standard metrics make them look. We caution that Cannabist is shown based on its June financials while its subsequent asset sales are likely to make dramatic changes in the financial structure, which we have not yet modeled.
  • Surprisingly, eight 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.
  • The new metrics make Curaleaf and TerrAscend valuations look significantly higher than GTI, whereas standard metrics reduce this effect.

• 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 E.V./2025 EBITDAR of under 7x and total liabilities to market cap under 2x. The group includes Vext, GTI, PLTH, Verano, and Cresco. 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 Ascend, AYR, Jushi, and MariMed. Each of these has significant upside catalysts that could mitigate or exacerbate the excess leverage. For example, Jushi is levered to potential adult rec developments in Pennsylvania and Virginia, and AYR has significant Florida torque.
  • On the right lies Cannabist and Schwazze (not pictured). We applaud Cannabist management. They have seen the writing on the wall: too levered to issue equity or debt, its only option was asset sales. Its exit from Florida and agreements to sell out of Arizona and portions of Virginia are further ratification of this. The debt market recognized the company’s progress this week with significant credit spread tightening. We have not yet modeled the announced asset sales into Cannabist’s credit picture as we are not sure how much EBITDA will be lost in the transactions. We will await adjusted equity analyst estimates. Note that Schwazze now has total liabilities to market cap in excess of 23x, a level that generally indicates deep distress. The uncertainty is heightened by the company’s failure to file 2^nd quarter financial statements and the potential for significant revisions to prior statements.
  • 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 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. Surprisingly, eight of the companies fall into this bucket (including Schwazze, not pictured).
• The bottom left group, including Curaleaf, Verano, and Vireo, has low leverage but is below the critical 1x liquidity level. This suggests that Curaleaf and Verano should take advantage of the robust debt market to augment their liquidity. Vireo is a more challenging call. Their adjusted net debt/ EBITDAR is relatively high, which makes them an unlikely net debt issuer and suggests asset sales.
• On the top left, we find companies with adequate liquidity and low market leverage, including both GTI and TerrAscend, due to their recent refinancings.
• Companies in the lower middle-to-right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment. AYR has significant optionality based on the Florida vote. If things go the company’s way, they will probably have significantly lower market leverage, allowing for more financial flexibility. Cannabist’s liquidity is understated in the graph and is likely to be OK based on announced asset sales. 4Front and Schwazze, despite making moves to restructure their debt, continue to have inadequate liquidity and excess leverage and should be watched carefully. We note that FFNT has no consensus on 2025 EBITDA estimates, but a full year of Illinois cultivation will probably make leverage look significantly better.

• MASSIVE UPSIDE STILL EXISTS FOR INVESTORS WILLING TO WITHSTAND ELECTION-YEAR
  • THE CANNABIS DEBT CAPITAL MARKET IS HOT!
    • Last week’s two refinancing deals by Green Thumb (GTII: CSE)(GTBIF: OTCQX) and Acreage Holdings (ACRG.A: CSE)(ACRDF: OTCQX) demonstrate the breadth of the debt capital markets:

  Green Thumb

  • We are not surprised by the execution on the $150M GTI refinancing. As the highest-ranked credit in the Viridian Credit Tracker model, we always thought GTI would achieve an attractive rate on its refinancing. At 500bps over SOFR, the initial rate of 10.31% is equivalent to a fixed rate of 9.06% using the 5-year SOFR swap curve.
  • The fixed equivalent rate on the GTI loan represents a 560bps point spread to treasuries, which is still relatively high given our perception of GTI as a solid B.B. credit. The BofA BB US High yield index of effective yield is now at 5.32%, representing a spread of about 186 basis points over Treasuries. This gap demonstrates that cannabis debt still has a significant amount of potential tightening, particularly on the best credits like GTI, Trulieve, and Verano.
  • The all-bank investor syndicate is the first syndicated bank loan in cannabis and a precursor to future debt developments, including a high-yield bond market for cannabis companies.

  Acreage Holdings

  • The $58.5M Acreage Holdings refinancing tells quite a different story about the cannabis capital markets: even a credit that we rank near the bottom of our rankings can get refinanced today.
  • The terms were relatively ugly. A 13.5% coupon with a 10-point OID on a 3-year maturity produces a yield of 17.9%, nearly 1445 basis points over the equivalent Treasury, well over the classic 1000bps definition of distressed debt.
  • Acreage ranks as #28/31 on the weekly credit ranking of MSOs contained in the GIVING CREDIT WHERE CREDIT IS DUE section below, a level generally indicative of distress. The ranking is likely to improve based on greater liquidity from the financing, and the implicit support of Canopy is a credit factor that doesn’t factor into our numerical scoring.
  • Even though the 17.9% rate seems painful, it pales in comparison with the pain that AYR had to endure to close their refinancing earlier in the year. AYR gave up a 13% coupon with a 20-point OID plus around 25% of the company’s equity. Without the equity, that equated to over 22%, but with the equity, we calculated a rate well over 30%. We believe AYR is (and was) a significantly better credit, which demonstrates how far the market has come.

• MASSIVE UPSIDE STILL EXISTS FOR INVESTORS WILLING TO WITHSTAND ELECTION-YEAR VOLATILITY
  • 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.
  • Notably, the discussion of SAFER has begun again. We hesitate to put much stock in such debate in an election year. Still, the ongoing talks do point to another critical catalyst, one that many institutional investors believe is more important than S3.

• • HOW LOW CAN CANNABIS STOCK LIQUIDITY GO?
    • The average daily dollar volume of $14M for the week ended 9/20/24 is below the $18M trailing 12-week average.
    • 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 995, a significant deterioration from last week’s reading of 763, 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 199 days to trade out of his position.
    • As the presidential election cycle accelerates, we expect more trading volume and price volatility.

• GIVING CREDIT WHERE CREDIT IS DUE
  • GIVING CREDIT WHERE CREDIT IS DUE
    • The chart below shows our updated 9/20/24 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. Specifically,
    • We still believe that both Cannabist and AYR have significant potential for appreciation. AYR just obtained a Virginia license and has one of the highest Florida torques.
    • The new Acreage deal at approximately 18% seems a bit rich to us, but it largely depends on the degree to which Canopy can and will support the company in the future.