Viridian Key Insights

        VIRIDIAN INSIGHTS

• • THE CANNABIS EQUITY MARKET WAS WHIPSAWED BY THE INTRODUCTION OF THE STATES 2.0 ACT- HASN’T EVERYONE SEEN THIS MOVIE BEFORE?
    • Cannabis prices soared by double digits on Friday on the news of the Bill’s introduction before falling by similar percents on Monday, on the sobering realization that the ACT has very little chance for passage despite containing some solid provisions.
    • The ACT ensures that states can establish their own cannabis policies, whether for medical or recreational use, without the threat of federal enforcement actions.
    • The ACT would eliminate 280E
    • These two provisions would essentially combine S3 and SAFER and if only the Bill stopped there!!!! But…..
    • STATES would establish the FDA (for product safety) and Alcohol and Tobacco Tax and Trade Bureau (for taxation and a national track and trace system) as industry regulators rather than the DEA—truly an out-of-the-frying pan into the fire move.
    • The final provision makes the entire bill introduction nothing but a pipe dream: the ACT would allow for interstate commerce. We believe the chances of interstate commerce being approved in the next five years to be virtually zero. One needs only look at who the winners and losers would be. Winners include low-cost western states with significant overcapacity, desperate to find higher-priced outlets for their production. Other winners include the cannabis consumer, who would benefit from lower prices. Losers would consist of virtually everyone else. Limited license states in the Midwest and East approved medical and recreational cannabis essentially for two reasons: taxes and jobs, and interstate commerce would threaten both. MSOs who have invested in production facilities in these states would face enormous write-offs on facilities that would become economically obsolete virtually overnight. Similarly, social equity licensees, who depend on the market insulation of limited licenses, would be hard-pressed to compete against low-cost (and even lower profitability) states. Interstate commerce will eventually happen, but the industry is in no position to withstand its economic effects at this time. It belongs in the class of things where you should “be careful what you wish for.”
    • However, rescheduling and a version of SAFER are still not out of the question. Both are possible with the support of one man, Donald Trump. Will Trump see the political lure of completing a campaign promise that reduces federal wasteful spending, increases jobs and tax revenues, and is immensely popular? More importantly, what can the industry do to put it on Trump’s priority list?
  • CURALEAF ANNOUNCED PLANS TO OPEN A HEMP DISPENSARY IN WEST PALM BEACH, FLORIDA: IF YOU CAN’T BEAT THEM, JOIN THEM.
    • The press release indicates that the store will stock both the company’s Select brand and a wide selection of third-party brands.
    • The product assortment will focus on hemp-derived THC beverages and edibles.
    • The move makes complete sense, going along with Curaleaf’s 2024 launch of the Hemp Company.
    • Will this be the first of a wave of MSO Hemp dispensary openings? And what’s the chance that the product assortment starts to cross the line into smokeable/vapable hemp-derived intoxicants?
    • It’s easy to see the impetus for moving into hemp since the Hemp space has what the THC space desperately needs: Growth. It’s not exactly a closely held secret that hemp intoxicants, along with illicit THC vendors, have hit the THC industry right where it hurts. After all, what is the most significant incentive for an investor to consider crossing the gap and investing in a federally illegal substance? Growth right? Lately, however, growth has not been abundantly evidenced. Analysts are actually projecting flat revenues for the top 12 MSOs for 2025.
    • Why is hemp growing and THC isn’t? In a nutshell, price and convenience. The Hemp intoxicant space, along with the illicit THC space, both drive home one point: there is a significant portion of the market that doesn’t care about seed-to-sale tracking and a COA on every bottle. They will gladly trade that for the ability to purchase at their gas station or, better yet, online through the mail, especially if it costs less. The THC market wants people to fear untested and untracked hemp products, but perhaps THC is overtested and over-tracked in ways that don’t add much value to the product.
    • In a way, it depends on your view of what cannabis represents. If cannabis is medicine, then perhaps it really should be heavily regulated by the FDA and heavily tested as well. But if cannabis is more analogous to wine or spirits, only less dangerous, then a whole other set of policy structures is appropriate. Alcohol is certainly tested, but not every bottle or even every batch. The testing is more sporadic and random. And as for potency limits or purchasing limits? You can easily walk into a liquor store and purchase enough Jack Daniels to kill five people, but nobody will question your right to make that purchase. Why potency or quantity limits for cannabis, which most people agree is less dangerous?
    • So what is keeping the MSOs from creeping farther across the line and beginning to sell THCA flower, or D8? We see three reasons: reputational risk, political risk, and economic risk.
    • On the reputational side, we see general agreement around the idea that hemp THC beverages are “OK.” And a short step away are hemp THC gummies. But smokable hemp intoxicants are still controversial, and top MSOs seem unwilling to offend any of their constituencies, especially investors, by jumping across the line quite yet. But that’s an economic calculus, not one driven by any deeply held principle. The Curaleaf hemp dispensary is just the first salvo in the fight.
    • On the political side, cannabis operators correctly believe that if they jump fully into the hemp intoxicant business, without even the figleaf of only doing drinks, it will be virtually impossible to continue pushing for the elimination of these products. And make no mistake, MSOs in limited license states are still hoping they can stuff the genie back into the bottle! As time drags on with no new Farm Bill in sight and statewide legislation proving difficult, if not unworkable, we expect to see defections.
    • On the economic side, perhaps licensed cannabis operators fear that such operations will cannibalize their licensed, tested, and over-costed THC operations. When we were in Key West last year, we wandered into a shop called Green Place on Duval Street. Blazoned in bold lettering across the entrance was a sign proclaiming, “Tourists welcome, no medical card required.” In the store, we found an assortment of flower, vapes, and prerolls that we were hard-pressed to identify as anything other than Weed, but under the guise of the farm bill, this was all hemp. We do not doubt that this idea will spread further in the months to come.
    • The production cost, regulatory, and distribution advantages of hemp make it a classic case of market disruption that is difficult, if not impossible, to stop.
  • IN ANY OTHER MARKET, CANNABIST WOULD BE GETTING SOME CREDIT FOR ITS DEBT RESTRUCTURING PLAN
    • Cannabist’s bonds have rallied a bit since the announcement of the deal, but we expected to see a boost in the stock, which has not yet occurred. CBST has approval from approximately 70% of its bondholders, clearing the 66 2/3% level generally required. A special meeting of bondholders is scheduled for April 29.
    • Cannabist’s announced debt restructuring plan looks eerily similar to the one that AYR executed at the beginning of 2024: The company gave up around 25% of its equity to extend debt maturities to 2028 with two six-month extensions. Holders of existing notes will receive dollar-for-dollar exchanges into similar coupons with longer maturities. Holders who committed to the plan early will also receive a pro-rata share of a $1.5M early consent fee.
    • Like AYR, the company is not extinguishing any debt in the plan. It will remain arguably overleveraged, but the stakes are survival and this plan gives the company significant time to improve its profitability and make other operating and capital structure moves.
    • We applaud Cannabis management for making an early move to address a worrisome upcoming series of debt maturities. We had ranked the company’s situation as one of the most perilous (along with AYR).
    • Our calculations show that the completion of the restructuring should have had a significant impact on the stock. In fact, we think it could go up by a factor of 2.6x to around $.13 per share! Total liabilities to market cap would improve from 26.9x to 10.7x, still a distressed credit but not disastrous. So far, the equity market has not realized the value of the 2-3 year reprieve.
  • 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 about $2.6B of debt maturing in 2026. (IAnthus maturities are actually in 6/27, but close enough!). Putting that figure into perspective, $2.6B 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 prepack bankruptcy (or any bankruptcy for that matter), restructuring is rightfully a prospect to be feared in cannabis.
    • 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.
    • Successful completion of the Cannabist plan discussed above should have a positive impact on the market psychology regarding the other troublesome maturities. However, that effect has been clouded by overall market turmoil. And lest we seem Pollyannaish, we do recognize that several companies are looking increasingly troublesome. The graph below shows three relevant data points:
      • The green bars show the 4/18/25 market-implied asset coverage of total liabilities. We arrive at this by looking at the equity as a call option on the asset value of the firm, with a strike price of its liabilities, and with assumed maturities (2026) as well as volatility assumptions (40%) and risk-free rate (4.25%). This gives us all of the elements of the Black-Scholes option pricing formula except for the current asset value. By iterating 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 under 1x asset coverage of liabilities, debt providers are genuinely 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 takes into account 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 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 seven companies from ITHUF to the right side of this graph (except Cannabist) represent high risk. They have less than 1x asset value coverage, poor Viridian Credit Ranks, and maturing debt that is a multiple of market cap. Companies in this position represent approximately $867M of the maturing debt. Conversely, the five 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 1x market cap. These companies represent $1.6B of the $2.6B total (62%), and we believe they should all be able to refinance their maturities without undue pain.
      • AYR (AYR.A: CSE) continues to head in the wrong direction. The company’s Viridian Credit Rank worsened from #16 to #21, Its asset coverage declined to .60x, and its market fell to the point where its 2026 debt maturities now represent around 18 times the market cap. The announced Cannabist deal looks surprisingly like the one AYR did at the beginning of 2024. Can AYR turn around and do it again? With the debt trading at significant discounts and the equity trading like an out-of-the-money option, it’s going to take something big to pull AYR out of the fire. Selling AYR’s four stores in Illinois is not likely to be sufficient to make much difference. We would not be surprised if AYR attempted to sell its Virginia assets, which are probably worth more than the Illinois properties, but they may still not be enough to make much progress on the looming debt maturities. AYR’s bonds are offered at yields of more than 45%. The market is pretty clearly considering AYR a restructuring candidate rather than a refinancing candidate. Recent management changes seem to ratify that view.
      • Meanwhile, two of the companies on the graph, FFNT and GRAM, defaulted on their mission-critical leases with IIPR. We didn’t expect things to come to a head quite this fast.

• • • 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 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 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 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 and TerrAscend appear as leverage outliers using the new metrics relative to AYR and Cannabist, 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.

• • 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 EV/2025 EBITDAR of under 6x and total liabilities to market cap under 2x. The group includes Vext, 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.
    • In the middle, between 2x and 5x total liabilities/market cap, we see Verano, Cresco, and MariMed. Verano and Cresco both have significant 2026 maturities, but we do not believe either is likely to have difficulties refinancing their debt.
    • On the right lies Jushi and Ascend, both between 6x and 10x. 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 using option modeling of equity prices showed that the market believes each of these companies has significantly less asset value than liabilities.

• • 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.
  • 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 high-risk with both high market leverage and low liquidity. 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 DOUBT REGARDING RESCHEDULING AND OTHER CANNABIS REGULATORY REFORM
    • The chart below shows that cannabis companies are trading at historically low valuation metrics – significantly lower than before S3 was a gleam in HHS’s eyes. Granted, there are a host of industry-specific problems that go beyond regulatory reform: slowing growth, wholesale pricing pressure, a weary consumer, etc.
    • We continue to believe that at current levels, U.S. MSOs have enormous upside potential. We are not pollyannish about the issues and do realize the industry has a number of deep-seated problems, like competition with hemp, wholesale price compression, and dependence on new markets for growth. Moreover, it likely requires some political catalysts to achieve significant gains, and the market is beyond worrying about timing and is concerned that these reforms may never transpire. 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 possibility.
    • However, it is increasingly important to focus on building a diversified portfolio of companies that can make it without help from Washington because it’s anyone’s guess when that will arrive. Focus on the top 10 companies in our credit rankings. There ARE investable companies besides GTI. Put them in your portfolio and follow the total liabilities to market cap indicator, as well as the credit tracker rankings.

• MSO TRADING VOLUME FALLS ON TARIFF CHAOS
  • The average daily dollar volume of $7M for the week ending 4/18/25 was the lowest reading since the end of 2023. Volume spiked upward to $12M on Friday with the news of the introduction of the States Act.
  • 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 2140 is the highest weekly reading we have tracked. A DTTMC of 2140 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 428 days to trade out of his position. A market with this horrific liquidity is virtually uninvestable by institutional capital.

• • GIVING CREDIT WHERE CREDIT IS DUE
    • The chart below shows our updated 4/18/25 credit rankings for 31 U.S. cannabis companies. 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. Cannabis yield increased about 25-50bps over the last two weeks, reflecting higher yields in Treasuries and the generally unsettled business environment.  AYR 13s of 26 are offered in small sizes at yields in the mid-40 % range, indicating a market belief that restructuring rather than refinancing is the base case assumption.