Viridian Key Insights

        VIRIDIAN INSIGHTS

• • OOPS! I DID IT AGAIN – PHARMACANN DEFAULT PART 2
    • • Wow! That was fast! On 12/29/24, IIPR announced that Pharmacann was in default of its eleven leases. Then, on 1/31/25, IIPR announced an agreement to cure the defaults and halt lease payments on two of the eleven leases, subject to a few conditions. Then, on 3/14/24, IIPR announced that Pharmacann was back in default on all eleven leases. We do not remember any company going into, out of, and back into default in less than three months.
      • So what went wrong? Can Pharmacann’s cash flow or liquidity have changed so radically over less than three months? We doubt it. So what are the possibilities?
      • One of the critical conditions of the agreement between Pharmacann and IIPR was that Pharmacann needed to refinance its estimated $125M of 12% of senior secured notes of 6/30/25. Maybe the company was not able to get this done. We expected this to be a tough slog as the existing notes were offered at 70, indicating a belief that they had little possibility of a par payout. We thought that Pharmacann would probably have to provide a pretty hefty amount of equity kickers in terms of shares or warrants to convince bondholders to extend/refinance this debt.
      • Or perhaps the bondholders would only grant extensions if the company was able to extract better lease terms from IIPR? After all, the company only received annual rent reductions of about $2.6M-$2.8M in the agreement.
      • Or could it go the other way? Maybe the company is using the default as a lever to obtain concessions from the note holders. The argument would go something like this,” if you don’t grant us extensions on reasonable terms, we will lose our cultivation and processing facilities in New York, Illinois, Maryland, Ohio, and Pennsylvania. This is an extinction-level event that will make getting much recovery on your bonds doubtful. So get real!”
      • Still, another potential stumbling block was the requirement to obtain additional equity from Pharmacann’s owners. It is unknown how much was required by the IIPR settlement, but there is clearly a good money after bad problem here. Adding equity is simply priming the pump for the bonds to be made whole. We say that without any specific knowledge of the company’s financial statements, but we do know that when your bonds are trading at distressed levels, and you are threatened with the loss of your key cultivation assets, it’s a difficult time to raise equity.
      • In the original Viridian analysis, we predicted a negotiated settlement. Any other outcome was reminiscent of the Cold War concept of MUTUALLY ASSURED DESTRUCTION (MAD). For IIPR, failing to find a negotiated solution was a difficult pill to swallow as it would almost certainly have had to cut its dividend and face a potentially elongated and costly re-leasing program. For Pharmacann, the loss of the entire leased portfolio would have likely forced the company to liquidate.
      • Things keep getting stranger in Canna land!
  • 4^TH QUARTER EARNINGS REPORTS ARE LARGELY FINISHED WITH DECIDEDLY MIXED RESULTS
    • The table below is arranged in order of increasing percent gains in the 4^th quarter of 2024 EBITDA compared to the same quarter in 2023. We believe too much attention is placed on quarterly beats (misses) vs analyst estimates. First off, the analysts’ estimates are heavily “guided” by the companies in the weeks prior to releases, and secondly, short of dramatic surprises, these beats (misses) rarely seem to drive the market for more than a day or so.
    • Instead, the table below focuses on the y/o/y gains in Revenues and EBITDA, which we view as more fundamental. Is the market growing or not? And, is it becoming more or less profitable?
    • Eight of the twelve companies had lower revenues in Q4’24 than the previous year, and in the aggregate, revenues were down 3.4%. EBITDA for the group was down 5.0%, reflecting y/o/y margin pressures.

• • The Viridian Chart of the Week takes this data and decomposes the percentage change in EBITDA into components of revenues and EBITDA margins. We also did the same exercise for projected 2025 EBITDA vs 2024. For 2025, the outlook is for flat revenues and lower margins. See the Chart of the Week for a graphical portrayal.
• SHOCKER: THE DEA WAS NEVER A FAN OF RESCHEDULING!
  • Last week, it came out that the DEA was internally working to stack the deck against rescheduling and was never really on board with the idea.
  • Maybe the behind-the-scenes skullduggery is a revelation, but didn’t we kind of know they were being dragged along on S3, kicking and screaming? One indication is that the DEA head never signed off on the HHS recommendation; instead, it was the AG. We didn’t make enough of that fact at the time, but in retrospect, it was telling.
  • But what’s more perplexing to us is why Trump doesn’t grab hold of the popular issue and reiterate his support for rescheduling and SAFER. Chances are, that would be all it would take. Politicians and civil servants anxious to keep their jobs would fall in line. But instead, he has been totally silent and, worse yet, stacked the DEA with hardliners.
  • It now seems to us that the only way to get things running is for Trump to support the issue actively. Granted, he has plenty of things to worry about with the stock market caving, tariffs flying left and right, and the consumer pulling in his horns. As we have said many times, cannabis is not a vote-driving issue. People can easily get cannabis nearly anywhere in the country, so their motivation to really push for reforms that mainly impact corporate taxes and stock listings is pretty diluted.
  • But what is the alternative? The DEA doesn’t need to do anything at this juncture. All that was promised was a review after 90 days, but there was nothing concrete.
  • The real push needs to be fiscally motivated. Don’t count on anyone in D.C. to be a believer in the plant. But show them how they can be heroes with Elon by helping him save billions? Now we may be talking!

• CANNABIST’S BOLD DEBT RESTRUCTURING PLAN FEELS LIKE DEJA-VU
  • Cannabist’s announced debt restructuring plan looks eerily similar to the one that AYR executed at the beginning of 2024: The company is giving up around 25% of its equity to extend debt maturities to 2028 with two six-month extensions. Cannabis, as AYR did, is seeking court approval under a plan of arrangement pursuant to the Canada Business Corporations Act (CBCA). The importance of using this device is that, if successful, there will be no “hold-outs” who elect to keep their existing bonds. The company now has about 70% of the debtholders on board with the plan, which likely signals its approval.
  • Holders of existing notes will receive dollar-for-dollar exchanges into similar coupons with longer maturities. Holders who commit 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 option theoretic methodology previously took the Cannabist total-liabilities-to-market-cap of around 26.9x and back solved through the option model to find the implication that the market believed the value of Cannabist’s assets was only around 65% of its liabilities. Its stock was, therefore, trading as an out-of-the-money option. One critical assumption we used was that the maturity of the equity option was only 2 years, as that was when the proverbial sh**t was due to hit the fan from the company’s debt maturities.
  • But what if we now took that same asset value and went the other way? All things being equal (i.e., no change in assets or liabilities), except now the company has until at least the end of 2028 to fix itself. What would that mean for the stock price, total liabilities to market cap, and perceived credit risk?
  • Our calculations show that the completion of the restructuring could have a dramatic impact on the stock. In fact, we think it could go up by a factor of 2.5x to around $.14 per share! Total liabilities to market cap would improve from 26.9x to 10.7x, still a stressed credit but not disastrous. We haven’t seen the positive impact played out in the chaotic cannabis stock market, but given the alternatives, Cannabis equity holders should be pleased about this deal.
• 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 3/7/25 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 purple 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 red line represents 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 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) took a turn for the worse on all three indicators this week after a disappointing earnings release. 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 over 12 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. Where is Irwin Simon when you need him? Of course, all of this could turn on the dime if Trump got active in pushing for rescheduling and SAFER.

• • 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.
    • TerrAscend and, particularly, Glass House are valuation outliers. 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.

• 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. However, it may take some political catalysts to achieve these returns, 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 STOCK LIQUIDITY REBOUNDS FROM ALL-TIME LOWS
    • The average daily dollar volume of $13M for the week ending 3/14/25 was still above average YTD.
    • 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 1084 is a slight deterioration from last week’s 984. It 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 217 days to trade out of his position.

• • GIVING CREDIT WHERE CREDIT IS DUE
    • The chart below shows our updated 3/14/25 credit rankings for 31 U.S. cannabis companies. 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.
    • Last week, we made a significant change in our evaluation of liquidity. We used to add the long-term liability account “uncertain tax liabilities” to current liabilities in the calculation of the current ratio and, in our bespoke ratio, the free cash flow adjusted current ratio. Our rationale was that the IRS did not recognize the long-term nature of this liability and could theoretically press for immediate payment. Our thinking has changed. While we still maintain that these unpaid 280e taxes should be considered debt and included in leverage calculations, we do not think there is a credible case for the IRS to demand immediate payment. At worst, these amounts will be subject to some sort of payment plan. The biggest beneficiary of this model change is TerrAscend, which has improved by four ranking notches.
    • The blue squares show the offered-side trading yields for each Company. Cannabist yields have come down significantly to the mid-20% range since the announcement of the company’s restructuring plan.