Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry January 31st, 2021 - February 4th, 2022

February 9, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity: There were five more transactions and a $424.4 million higher volume this week than the prior week. Compared to last year's same week, two fewer transactions closed with a $341.4 million higher volume. The average deal size was $46.8 million this week vs. $13.4 million in the same week last year.

Capital raise activity jumped upward this week based on renewed hopes of enacting the Safe Act. Total capital raises for the first five weeks of 2022 total $766M, down 48% from last year's total. Reduced equity issues (down 79% y/o/y in the U.S. and 94% in Canada) were partially made up for by strong debt issuance (up 544% y/o/y in the U.S. and 169% in Canada.

This week's six Debt issues (shown by the light green bars in the graph below) raised $405M, led by three MSO issues (Goodness Growth $55M, Verano $100M, and Columbia Care $185M) along with one sizeable Canadian issue (Decibel $54M). Equity issuance continued to be muted despite the 10.6% rally in cannabis equities, as shown by the MSOS ETF. Five issues totaled $110 million, including an $85M closed-end investment corp IPO For Silver Spike Investment Corp.

EQUITY

Cannabis stocks were up sharply for the 5th week of the year, with the AdvisorShares Pure U.S. Cannabis ETF up 10.6% after a decline of 6.7% in week 4. Through Tuesday, February 7th, the ETF remains 13.6% below its year-end 2021 level.

Four relatively small and predominantly private equity deals closed this week for total gross proceeds of $15.28M.

The biggest gainers and losers for the week included:

Largest Equity Raise: On February 3rd, 2022, Silver Spike Investment Corp. (Nasdaq: SSIC), a closed-end management investment company managed by Silver Spike Capital LLC, priced an $85M IPO.

• 6.0 million shares were sold at $14 per share.
• The transaction is likely to lead to more debt capital raises as the fund's investment objective is to achieve superior risk-adjusted returns by investing in secured and unsecured debt, equity warrants, and direct equity investments.
• SSIC intends to operate as a BDC and target private, leveraged middle-market companies with EBITDA between $5Mand $50M.
• SSIC will focus on direct origination with an average investment size of between $5M and $40M

Although SSIC will compete with real estate sector companies like IIPR and AFC Gamma, we view this as an attractive risk/reward proposition for several reasons:

1. The projected rapid growth of the cannabis industry over the next five years will require significant capital spending and fostering strong loan demand.
2. Many cannabis companies carry conservative leverage and strong collateral coverage.
3. Attached warrants can significantly boost the returns of the portfolio, particularly given the relative likelihood of legalization in the 3-5 year time frame.

Public Company Listings: Two of the six companies that raised capital this week were public. Both trade and in Canada on the CSE and in the U.S. on OTCQX.

Equity vs. Debt Cap Raises: Equity accounted for four of the six capital raises and 16.8% of the proceeds.

DEBT

Debt accounted for 72% of trailing 4-week capital raises. The credit quality of the issuers was decidedly higher this week, with three issues in the top 18 credits with over $150M market cap as ranked by the Viridian Capital Credit Tracker.

There were six closed debt deals this week with total gross proceeds of $405.3M.

The Largest Debt Deal: On February 3rd, 2022, Columbia Care (CSE: CCHW)(OTCQX: CCHWF), the seventh-largest U.S. MSO by market cap, completed a private placement of $185M 9.5% Notes due 2026.

• The notes are Senior Secured first lien obligations.
• The notes have a par call in February 2024.
• The Viridian Credit Tracker ranks Columbia Care as the 14th best U.S. cannabis credit. The ranking algorithm penalizes CCHW for its higher-than-peer leverage (as measured by 2022 EBITDA to Total liabilities and Total Liabilities to Market cap) and its lower-than-peer profitability (as measured by its annualized funds from operation to total assets and consensus 2022 EBITDA margin).
• We recognize the potential for growth in the markets the company alluded to in its press release, including New Jersey, New York, and Virginia. We would expect to see Columbia Care ascend to a higher ranking once the impacts of these growth possibilities are more fully realized.

The Viridian Capital Chart of the Week (copied below) shows the effective cost of recent debt issues relative to the Viridian Capital Credit Score. Note the apparent mispricing of the Goodness Growth and Medicine Man issues. We expect increased secondary market trading data will allow us to address better the question of whether Columbia Care's pricing at 9.5% is sufficient compensation to adequately reward investors for our modeled increase in credit risk from Verano and Curaleaf at 8.5% and 8%, respectively. The Incremental 100-150 basis points seems reasonable.

Sometimes the most interesting deal is the one that DIDN't happen

On February 1st, 2022, Innovative Industrial Properties (NYSE: IIPR), the largest REIT focused on the cannabis industry, announced a $300M six-year senior unsecured note offering at its IIP Operating partnership level.

The Notes were to be pari-passu with the existing 3.75s of 2024 and 5.5s of 2026. They were structured as senior unsecured obligations at the operating subsidiary level with full senior guarantees from the holding company.

On February 4th, 2022, IIPR announced that it would not be proceeding with the issue "due to market conditions."

The pulling of the deal is surprising because the real estate-backed finance sector has been a highly active section of the market for the last six months.

Issuance has been particularly active in debt, with approximately $625M raised in the LTM period, including a $300M 5.5% IIPR deal in May 2021.

Cannabis financing companies have been expanding rapidly as their clients, principally the MSOs, expand their operations into new states and pursue tuck-in acquisitions to scale in existing states.

The group, including AFC Gamma (Nasdaq: AFCG), Chicago Atlantic (Nasdaq: REFI), Innovative Properties (NYSE: IIPR), NewLake Capital (Nasdaq: NLCP), Pelorus (Private), and Power Reit (Nasdaq: PW), are enjoying lending spreads that would make traditional lenders incredulous.

IIPR has a debt cost of around 6.5% (assuming the same 470bp spread to the five-year treasury at which they did their last deal in May 2021). On the asset side, IIPR typically sets initial base rents in the 10-16% range with three, 4-4.5% escalators built-in.

There are some differences between the companies in that NewLake, Pelorus, and PowerReit are most similar to IIPR, focusing on sale-leaseback transactions. In contrast, AFC Gamma and Chicago Atlantic pursue a secured lending approach. Still, the essentials are the same: lending into a market hungry for debt capital at very high spreads.

These financiers have an incentive to build their loan/lease portfolios as rapidly as prudent underwriting allows. As long as the underlying credits remain solvent, they possess a business model akin to a money-printing machine. In addition, we believe that institutional lenders, who might not feel comfortable lending directly to cannabis companies, have indirectly participated in cannabis debt via investments in these companies.

So what is the catch, and why did IIPR pull their deal? The bond market is indeed pricing in higher inflation through higher interest rates. The five-year Treasury yield has increased by over 40 basis points in the last month, so it may not be an ideal time to market a big debt deal. Could this be it? In the face of 1200 basis point lending spreads, it seems unlikely.

IIPR stock does seem to have underperformed both its peer group and the MSOS ETF YTD. IIPR is down over 25% YTD vs. a decline of only about 10% for its peer group, perhaps reflecting the increased aggressiveness of recently financed AFC Gamma, NewLake and Chicago Atlantic, or an increased preference for secured debt as opposed to sales leasebacks.

However, we believe the reintroduction of the SAFE Act banking bill is probably to blame. Renewed hope of banking reform spiked the MSOS ETF index upward by over 10% this week. But what is good for the goose is not necessarily good for the gander. The bill would open up the cannabis lending market to more competitors and reduce the lending spreads of the company's in this sector. We do not think the bill is likely to pass, and we think its impact would take time to percolate through the market. Moreover, the short-term effect would be to increase the value of existing lending portfolios. It seems likely that IIPR is waiting for the renewed hope of banking reform to fade back before pursuing a new debt raise.

MERGERS & ACQUISITIONS

Transactional Activity: Nine M&A transactions closed this week with a total transaction value of $617.5M compared to five deals for $24.4M in the prior year. Eight of this week's nine deals were completed by public buyers if we account for the reverse merger of Merida Merger Corp into Leafly Holdings Inc.

YTD M&A activity is up about 83.6% from 2021, with $1.12BM in transactions. Four transactions greater than $100M account for 81% of YTD closed deals, including this week's $445M Leafly despacking transaction and a $137M acquisition of a German Biotech company.

Long-term strategic acquisitions, like last week's announced Verano / Goodness Growth deal, are likely to become a more significant part of the 2022 M&A picture. Historically, however, the vast majority of acquisitions we have tracked in the U. S. have been public companies buying private companies, accounting for 646 of the 806 U.S. targeted deals (80%) and $13.8B of the $18.0B transaction value (77%) since the beginning of 2019. Public/Public transactions have only accounted for 3.5% of the transactions and 17.7% of the transaction value.

The valuation gap between the largest MSOs and the less than $300M market cap group, which are their primary targets, is a significant driver of M&A activity since it creates the regular opportunity for accretive transactions.

The graph below shows Enterprise Value to Next Twelve months EBITDA estimates for companies larger than $750M market cap and those less than $300M market cap. Note that the valuation gap was at its peak in February 2021 when optimism about the potential for federal legalization was rampant. We find it interesting that despite generally declining valuation multiples for large and small companies, the gap between them has remained remarkably steady at an average of 4 multiple points of EV/EBITDA. The percentage gap is increasing over this period.

With multiple drivers of ongoing consolidation in place, we continue to believe 2022 will see a robust M&A environment.

Largest M&A Deal of the week: On February 4th, Merida Merger Corp. (Nasdaq: MCMU) completed its despacing transaction by merging with Leafly Holdings.

• Merida will assume the Leafly name, and the company will trade on the Nasdaq with the symbol LFLY.
• The transaction consideration of $444.7M included stock valued at $$339.77M, cash of $13.9M, and earnouts totaling $90 million.
• The transaction values Leafly at 11.0x LTM ended 9/30/21 revenues with earnouts included and 8.8x without the earnouts.
• Seatle-based Leafly operates as an online platform to buy and learn about cannabis products. The company maintains an extensive content library, including detailed information about cannabis strains, retailers, and current events. In addition, Leafly offers subscription-based products and digital advertising used by over 7,800 cannabis brands and 4,600 retailers.

M&A by Sector: The buyers and sellers in this week's deals were from the following sectors:

VIEW DEAL TRACKERS

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)
• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
• Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
• Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
• Credit Ratings (Leverage and Liquidity Ratios)

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About Viridian Capital Advisors, LLC

Viridian Capital Advisors (www.viridianca.com) is a financial and strategic advisory firm dedicated to the cannabis market. We are a data- and market intelligence-driven firm that provides investment, M&Amp;Amp;A, corporate development, and investor relations services to emerging growth companies and qualified investors in the cannabis sector. Our banking practice, through broker-dealer Bradley Woods & Co. Ltd. (Member FINRA/SIPC), provides capital and M&Amp;Amp;A services to fund the growth of our clients, while our advisory practice helps to position and build their businesses. Our team's decades of high level operating and transactional experience on Wall Street in a variety of emerging sectors, allows Viridian to provide comprehensive strategic and financial solutions that assist cannabis enterprises in realizing their full potential.

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