Viridian Key Insights

        VIRIDIAN INSIGHTS

• • ARE WE CRAZY TO THINK WE ARE ACTUALLY CLOSER THAN EVER BEFORE TO MEANINGFUL PROGRESS IN CANNABIS REFORM?
    • Previous administrations let the perfect become the enemy of the good. Not enough social justice provisions, reparations, or investments in harmed communities? Then scrap the entire bill.
    • Trump is not likely to repeat this mistake.
    • He has installed loyalists in every possible post, and we are literally just a Trump pronouncement away from real progress. His control over his party is unargued, and bureaucrats know full well that if they refuse to do his bidding, they will be looking for another job next week.
    • We never felt that a pronouncement of support from Joe Biden would get the job done, and we were proven right. However, we do believe that if Trump publicly reaffirmed his campaign pledges with respect to rescheduling and SAFER, they would both happen.
    • So, what will it take to get his attention and get Cannabis to the top of his list of priorities?
      • First off, Cannabis is the ultimate in States’ rights issues. The very existence of the industry owes to the willingness of the states to thumb their nose at the federal government. Trump is no anarchist in that regard, but he is still a big supporter of states ‘ rights
      • Next, cannabis reforms can add billions to the economy by fostering job growth, higher tax revenues, and significant expense reductions in police, courts, jails, etc. This goes along well with his pro-business and cost-cutting leanings.
      • Promoting Cannabis is consistent with his tough stand on opioids, fentanyl, and drug gangs. Some states, like Utah, have explicitly stated that they believe their medical cannabis program can be the off-ramp for opioid abuse. Trump is skilled enough to make the point that being hard on hard drugs and pro-cannabis are consistent positions.
      • Cannabis is an immensely popular issue favored by a strong majority of voters. With midterms coming up fast, Cannabis is an issue that Trump can steal from the Democrats and use to solidify his base.
      • How about a coordinated Twitter campaign to make these points to the first President actually reachable by social media?
  • MOST Q1’25 EARNINGS RELEASES ARE OUT AND THEY ARE LARGELY AS EXPECTED
    • The table below shows the Q1’25 revenues and EBITDA for the ten companies in relation to the previous quarter, year-ago quarter, and analyst estimates.
    • Four of the ten beat EBITDA estimates; however, eight had lower EBITDA in Q1’25 than in the previous year’s quarter.

• • The chart decomposes the y/o/y % changes in EBITDA into the components related to revenue changes and the components caused by changes in EBITDA margins. Most of the decline (shown by the green bars) was due to lower EBITDA margins. Note: Glass House does not appear on the chart because the percentage change in EBITDA is not well defined (moving from a negative EBITDA to a positive EBITDA).

• • The ongoing mystery remains analysts’ projections for the second half of 2025. The chart below shows revised analyst estimates for revenues and EBITDA for twelve of the largest MSOs (including Cresco and AYR), which have not yet reported Q1’25)
  • First-half projections track with the actuals from Q1. Similarly, 2^nd half revenues continue to be slightly down y/o/y. Surprisingly, the 2^nd half EBITDA is projected to be up even though revenues are expected to be down, implying EBITDA margin expansion.

• • FLORIDA FAILED TO STEM THE TIDE OF HEMP INTOXICANTS FOR AT LEAST ANOTHER YEAR
    • 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 a nearly 4% decline in 2025 revenues for the top 12 MSOs.
    • 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. In fact, the whole idea that hemp THC beverages are OK but THCA flower and other smokable hemp intoxicants aren’t, strikes us as less than intellectually honest. After all, it is the same molecule.
    • 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 disruption that is difficult, if not impossible, to stop.
  • THE CANNABIST DEBT MARKET IS RUNNING A REAL-TIME VALUATION EXPERIMENT THAT POINTS TO POTENTIAL CHANGES AHEAD.
    • • Cannabist has just executed a classic “Amend, Extend and Pretend” maneuver wherein they granted debtholders about 25% of the equity to get them to extend maturities to 2028 with options to extend another year to 2029 (beyond the next Presidential election). The intent is clear; debtholders did not want to play tough and end up owning the company. They would rather claim some fees and hope that things get better. The equity holders, meanwhile, get a three-year stay of execution. The important thing here is that nothing was done to delever the company, which remains significantly overlevered.
      • Despite this lack of progress, we thought that both the bonds and the stock would react significantly better to the deal than they have. We thought the stock could more than double on the option value of potentially three extra years. And we felt that without the spectre of default hanging over the company, the bonds would trade to something in the low 20% range. However, the bonds are quoted in the low 30% range on the offered side of the market. The bond market doesn’t seem all that comforted by the extensions.
      • Meanwhile, we are still waiting to see what kind of plan AYR comes up with. At MJUNPACKED, we showed what a more fulsome debt restructuring plan might look like – one that actually reduced leverage to a sustainable level. Still, the most likely case is another kick of the proverbial can. The difference is that Cannabist bonds are now telling us that just eliminating the near-term default risk isn’t going to result in 13% coupon bonds trading anywhere near par. AYR 13s are now quoted at around 66 to yield nearly 45% on the offered side. If we assume that they extend the maturity by 3 years and the bond trades to 25% (slightly better than Cannabist as AYR is less levered), then the new bond would trade to about 75. So yes, 75 is better than 66, but in the last restructuring about a year ago, the new bonds traded briefly to a bit over 80. The message is diminishing returns to the kick the can down the road strategy. And more importantly, the Cannabist/AYR picture shows that debtholders are starting to get the joke.
  • 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 5/9/25 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.
      • In our presentation at MJUNPACKED, we outlined what a comprehensive debt restructuring plan would look like for AYR. We utilized $120M of debt/equity swaps and $30M of asset sales, along with extensions of maturities of remaining debt. Our plan would actually fix AYR’s capital structure and result in a sustainable debt/ 2025 EBITDA of around 2.4x. Still, the odds have to favor a repeat of the amend, extend, and pretend play that the company painfully executed in February 2024.

• • 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 appears as a leverage outlier using the new metrics relative to AYR, 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 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, Curaleaf, Cresco, and MariMed. Verano, Curaleaf, and Cresco all have significant 2026 maturities, but we do not believe they are likely to have difficulties refinancing their debt.
    • On the right lies Jushi and Ascend, both between 6x and 12x, 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. Note that we recently modified our treatment of this ratio by removing uncertain tax liabilities from current liabilities where we used to place them. The result is that no company is currently significantly below 1x free cash flow adjusted current ratio.
  • 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 CONTINUE TO SUGGEST STRONG UPSIDE POTENTIAL FROM ANY 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.

• • CANNABIS STOCKS HAD THEIR LOWEST VOLUME IN THE LAST TWELVE MONTHS.
    • The average daily dollar volume of $6M for the week ending 5/9/25 was the lowest volume for the last twelve months. The current DTTMC of 2587 represents a market with monumental illiquidity. A DTTMC of 2587 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 517 days to trade out of his position. A market with this lack of liquidity is virtually uninvestable by institutional capital. Liquidity has been trending worse since the election, responding to stalled cannabis reform and general economic uncertainty.

• • GIVING CREDIT WHERE CREDIT IS DUE
    • The chart below shows our updated 5/9/25 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. 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.