Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry February 14th, 2021 - February 18th, 2022

February 23, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity: There were the same number of transactions but a $43.0 million lower volume this week than the prior week. Compared to last year's same week, six fewer transactions closed with a $425.0 million lower volume. The average deal size was $13.3 million this week vs. $39.8 million in the same week last year.

This week, capital raise activity slowed to less than ½ of its $206M monthly average for the LTM. After two weeks of solid equity price growth, cannabis stocks declined moderately this week.

Total capital raises for the first seven weeks of 2022 total $995M, down 60% from last year. Reduced equity issuance (down 82% y/o/y in the U.S. and 967 in Canada) was partially made up for by strong debt issuance (up 652% y/o/y in the U.S. and 224% in Canada.

This week's two Debt issues (shown by the light green bars in the graph below) raised 11M, led by the Flower One Term Loan Financing. Five equity deals closed with total proceeds of $82M, led by the $28.4 Aelis Farma S.A.S. I.P.O.

Cap Raises by Sector:

EQUITY

Equity prices were down 6.1% for the week, as measured by the MSOS ETF. The ETF is now down 9.1% for the year.

The biggest gainers and losers for the week included:

A Seminal Equity Raise: On February 15, 2022, Cann Beverage announced the completion of a $27M Series A funding round.

• This year, Cann significantly increased its retail sales with expansion into three new U.S. States, Illinois, Massachusetts, and Arizona.
• New celebrity investors including Nina Dobrev, Adam Devine, Zoey Deutch, Jordan Cooper, Sara Foster, and Rosario Dawson join current investors Gwyneth Paltrow, Baron Davis, Rebel Wilson, and Kate Hudson.
• Recent transactions in the T.H.C. beverage space are beginning to demonstrate the growing investor appeal of the segment.
• T.H.C. beverages are expected to have compounded growth rates of over 50% over the next four years. The form factor increasingly appeals to cannabis users seeking a more socially acceptable consumption than smoking.
• Cann also announced a partnership with Truss Beverage Co., a joint venture between MolsonCoors and Hexo, to sell its products in Canada.

Another interesting Equity Deal: A stock chart worthy of psychedelics, made worse by a highly dilutive stock issue.

On February 15, 2022, Enveric Biosciences (Nasdaq: ENVB), "an innovative biotechnology company developing next-generation mental health and oncology treatments and clinical discovery platform, leveraging psychedelic-derived molecules for the mind and synthetic cannabinoids for the body," announced the closing of a $10M public units offering.

• Enveric sold 20 million units at $.50 per unit.
• Each unit consisted of one common share and one warrant with a five-year term and a 10% exercise premium.
• Proceeds were earmarked for working capital and other general corporate purposes.

Enveric stock closed at $.66 before the deal announcement on February 10. Enveric stock has declined 58% since the deal announcement and 70% since the beginning of the year.

Analysis of the deal

The unit's pricing at $.50 represented a 24% discount to the pre-announcement price. This discount is not particularly unusual for issues that represent substantial increases to a company's share count. The 20M shares issued in this transaction increased Enveric's share count by 61%.

The real issue is the warrants. Typically, the company includes either ½ warrant or a whole warrant for each common share in a unit deal. Enveric is at the high end of this range, but this is not unusual. What is off-market is the warrants themselves. First, they have unusually low exercise premiums of only 10%, and secondly, they are five years in duration. This combination of features makes this warrant package worth at least $.13 per unit for a net share price discount of 26%. We track dozens of unit transactions every year, and in the last 100 such transactions we have logged in the Viridian Deal Tracker, the average discount has been 7%. There was only one transaction with over 20% discount, the Skye Bioscience offering in September 2021.

The warrants alone would have crushed the stock, and we are under-valuing them by using low volatility of 30%. The company values its warrants in its 10-Q using an 80% discount rate. The table below shows the impact of using higher volatility on the implied net stock price.

The lack of explicit use of proceeds is another issue with the transaction. Enveric showed cash of $21.4 million on its 9/31/21 balance sheet. It has negative cash from operations of $2-3M per quarter, relatively small current liabilities, and no debt. The company should have had around $18M at year-end and "believes that the existing cash on hand at September 30, 2021, is sufficient to fund operations for at least the next twelve months following the filing of these unaudited condensed consolidated financial statements." So why did it need to do this highly dilutive $10M deal?

Other Issues

Business Shift - The company's potential drugs are all in the R&D stage with no clear path to revenue. Historically, the company focused on cannabinoids derived from non-hemp botanical and synthetic materials to treat side effects of cancer and cancer treatments, including anxiety, depression, pain, and skin damage. Since the amalgamation with MagicMed Industries in September 2021, the company has shifted its focus to synthesizing newer versions of classic psychedelics, such as psilocybin D.M.T., mescaline, and MDMA, and the creation of new generation 2 and 3 psychedelics. The shift in business strategy and the distance to the marketability of these products cause significant doubt about the company's future.

The market is ascribing a negative value to Enveric's business and I.P. Proforma for the transaction, shares outstanding total approximately 52.6M. At current prices, this gives a market cap of roughly $14.8M. Subtracting proforma cash of about $18M gives an enterprise value of negative $3.2M.

On February 18, 2022, Enveric received a letter from the Nasdaq notifying it that it did not meet the $1 minimum bid price for continued listing on Nasdaq. To prevent its delisting, the company has until August 17, 2022, to have at least ten consecutive days of trading over $1. Enveric changed its name from AMERI Holding, inc and effected a 1 for 4 reverse stock split on December 30, 2020, to uplist to the Nasdaq.

Enveric Shareholders may want to invest directly in psychedelics and skip the stock

Public Company Listings: Five of the seven companies that raised capital this week, four were public. Two trade in Canada (one on the C.S.E. and one on the TSX), three trade in the U.S. (two on O.T.C., and one on Nasdaq), and one trades on the Euronext exchange in Paris. Equity vs. Debt Cap Raises: Equity accounted for five capital raises and 88.4% of the proceeds.

DEBT

Debt accounted for 69% of trailing 4-week capital raises. We continue to foresee a strong debt issuance climate ahead. Capital providers have actively raised cash and are under pressure to deploy these funds while wide spreads are available.

There were two closed debt deals this week with total gross proceeds of 10.8M.

The Largest Debt Deal: On February 14, 2022, Flower One Holdings Inc. (C.S.E.: FONE)(OTCQX: FLOOF), a leading cannabis cultivator and producer in Nevada, announced the closing of $10.1M term loan financing with an existing shareholder.

• The new term loan financing is a participation of the companies existing $30M term loan secured by its facility in North Las Vegas.
• The purchase of the participation enabled the company to execute a Loan Modification Agreement allowing the company to receive the term loan, capitalize the P.I.K. interest, and reduce monthly interest cash interest payments from 14% to 10% with the remaining 4$ payable at the maturity of June 30, 2023.
• Flower One is cutting expenses, including reductions in compensation for the executive team and board of directors

Despite these moves, Flower One still has significant issues to overcome. The table below shows the company's total debt is 3.22x its market cap and 18.6x its consensus 2022 EBITDA estimates. These figures indicate severe distress and an unsustainable debt load. Significant portions of this debt will need to be equitized, and without access to chapter 11, this isn't easy to complete.

MERGERS & ACQUISITIONS

Transactional Activity: Four M&A transactions closed this week with a total transaction value of $68.5M compared to three deals for $26.3M in the prior year. All of this week's deals were completed by public buyers.

YTD M&A activity is up about 101% from 2021, with $1.34BM in transactions. Four transactions greater than $100M account for 68% of YTD closed deals.

We commented last week about our expectation that Public/Public deals and deals that are not immediately accretive are likely to become more common as the industry's consolidation progresses. At the size of the major M.S.O.s, it is becoming difficult to move the needle with small tuck-in acquisitions, and more significant bolder transactions are in the air.

Despite these emerging themes, we still believe the valuation gap between the largest M.S.O.s and the less than $300M market cap group, which are their primary targets, will continue to be a significant driver of M&A activity since it creates the regular opportunity for accretive transactions.

Largest M&A Deal of the week: On February 15, AYR Wellness (C.S.E.: AYR.A)(OTCQX: AYRWF), the eighth largest U.S. M.S.O. with a market cap of approximately $1.1B, announced the closing of its acquisition of Cultivauna, L.L.C., the owner of Levia branded cannabis-infused seltzers and water-soluble tinctures.

• The total consideration of $38.0M consisted of upfront cash of $10M, stock of $5.6M, and earnouts of $22.4M.
• When the transaction was announced in September, Levia stated that retail sales had hit $1M per month. Assuming 70% retail gross margins on the product, this produces an E.V./ Revenue estimate of approximately 9x.
• The closing of this acquisition in the same week as the $27M Cann financing and partnership agreement with MolsonCoors/HEXO shows that the beverage segment is heating up.

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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