• Debt accounted for 45% of trailing 8-week capital raises, down sharply due to last week’s significant Compass Pathways equity transaction. We expect this ratio to be volatile because of the limited capital raise activity. With cannabis stocks trading at or near their 52-week lows, we expect debt to continue to account for more than 50% of capital raises. Several large MSOs have now come close to maxing out their debt capacity and may be forced to issue equity, even at the cost of dilution.

The Week’s Largest Closed Debt Issue:

• On August 24, 2023, Glass House Brands (GLAS.A.U: NEO)(GLASF: OTCQX), the seventh largest U.S. cannabis company by market cap, closed the first tranche of a planned $15M private placement of Series D Preferred Stock with warrants for total proceeds of $10.9M.
• The cash dividend rate is 15% but increases to 20% at the end of five years. Accordingly, we consider the effective maturity to be five years as the company has ample incentive to refund the issue before the coupon increase.
• Each $1000 face value share of preferred also received 200 five-year warrants to purchase common shares at $6.00 (64% premium to the stock price at closing). The 2.18M total warrants provide 120% warrant coverage for the issue.
• The warrants increase the effective cost of the issue to 18.92%, which we consider excellent execution for an unsecured, mezzanine debt-like instrument like the Series D preferred.
• The Viridian Capital Credit Model ranks Glass House quite highly at #5 of 21 based on its low market leverage, solid liquidity, and positive cash flow from operations.
• Proceeds will fund the beginning of the retrofit of Greenhouse 5 at the company’s SoCal Farm. Glass House expects the first harvest from the facility to be by Q2 2024.
• Glass House’s preferred issue is an innovative blend of debt and equity, which, while having quite a high effective cost, minimizes dilution to the company’s shareholders. We do not view this issue as permanent capital due to its steeply rising rate in 5 years; however, it provides the company with the needed funds to expand its revenue-generating capacity in a challenging capital markets environment.