Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry March 7th, 2022 - March 14th, 2022 - March 18th, 2022

March 24, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity: There were two more transactions and an $85.9 million higher volume this week than the prior week. Compared to last year's same week, seventeen fewer transactions closed with a $1.03 billion lower volume. The average deal size was $22.8 million this week vs. $52.1 million in the same week last year.

Cannabis stocks had their best week of the year, and total capital raises of $114.2 were closer to the LTM average of $177M. Still, the $823.5M capital raised YTD was down approximately 82% from last year's figure of $3.7B. Reduced equity issuance (down 88% y/o/y in the U.S. and 97% in Canada) was partially compensated for by solid debt issuance (up 382% y/o/y in the U.S. but down 98% in Canada. As the graph below shows, capital raises for the first eleven weeks of 2022 were dominated by U.S. activity. The $54M raised by European companies YTD is the highest international raise since 2019 and the most significant percentage of total capital raised in history.

We began to track the psychedelics sector this week with our Viridian Chart of the Week titled "High, Dry, or Tripping," showing the market caps of ten of the most frequently covered companies in the sector and how they have performed YTD. Future editions of the tracker will drill into capital markets activity in the sector,

The markets in general and cannabis, in particular, shrugged off the war, inflation, COVID, and increased threats of future recession to score a tremendously up week. The market seemed to take comfort in Jay Powell's aggressive rhetoric signaling the Fed will likely resort to at least one greater than 50bp move during the following year.

• The FED is attempting to quell inflation and engineer a soft landing in the face of increasingly entrenched inflationary expectations, multiple asset bubbles, and challenging macro/political circumstances. We remain convinced that the FED will eventually have to bite the bullet and slam harder on the breaks lest it allows accelerating inflation. And history is pretty clear that the recession risks go up markedly when that happens.
• The graph below shows the two-year vs. ten-year treasury yield spread, the most commonly watched indicator of an upcoming recession. The curve has not yet become inverted, but it is the closest we have seen since early 2020. This indicator is pretty good, and we will be keeping our eye on it.

We still see long odds of Washington pulling off the Safe Act or any other substantive cannabis legislation before the midterms, so we focus on non-legislative catalysts like the New Jersey rollout.

Cap Raises by Sector:

EQUITY

Cannabis equities were up 11.2% for the week, their best performance of 2022. The ETF is now down 19.1% for the year.

The biggest winners and losers: Glass House Brands is the most significant gainer both for the week and YTD (up 24% and 46%, respectively). The company's Phase 1 buildout is on schedule, and the company is well-positioned to be one of the top consolidators of the California industry, particularly as continuing low pricing drives standalone competitors to exit. California also seems to be getting its act together legislatively finally. Several bills are circulating that look to remove the State's cultivation tax and lower excise taxes, two major issues in the State's cannabis program.

The biggest loser for the week is Nova Cannabis, down 18% before releasing its 4th quarter report. The company reported strong sequential sales growth of 23% for the quarter; however, its discount strategy resulted in razor-thin 17.6% gross margins. Not the worst we have seen, but still, a significant challenge to overcome.

Largest Equity Raise: On March 14, 2022, Akanda Corp. (Nasdaq: AKAN), a London-headquartered early-stage cannabis cultivation, manufacturing, and distribution company, raised $16M million in an IPO.

• The 4 million share sale at $4/share implies a market cap for the company of $115.6M.
• The company's business plan is to supply medicinal-grade cannabis, biomass, and concentrates to wholesalers in international markets and import and sell medical cannabis products in the U.K..
• The company's cultivation operations are in the Kingdom of Lesotho, Africa, a good location due to favorable climate and low labor costs. To date, the African operations have produced a total of approximately 1,500 kg of flower in non-commercial harvests undertaken in 2019-2021.
• Proceeds from the issue will fund the expansion of African cultivation operations and the development of sales channels in Europe, the U.K., and Africa.
• Akanda's African properties were purchased from Halo Collective on September 29, 2021, by issuing 13.1M common shares at $1 per share. Halo owned approximately 68% at the closing of the transaction. Halo also advanced a $6.6M convertible debenture to Akanda that is automatically convertible at a liquidity event. The completion of the IPO should result in the issuance of 1.6M shares to Halo at $4 per share.

Public Company Listings: Four of the five companies that raised capital this week were public. Two trade in Canada on the CSE and in the U.S. on OTC. The other two trade in the U.S. on Nasdaq.

Equity vs. Debt Cap Raises: Equity accounted for three of the five capital raises and 20.1% of the proceeds.

DEBT

Debt accounted for 85% of trailing 4-week capital raises. Although equity prices were up firmly this week, they remain well below the beginning of the year levels. We expect debt to continue to be the most significant component of capital raises in the near future.

The Largest Debt Deal: On March 14, 2022, Agrify Corporation (Nasdaq: AGFY), a provider of vertical farming units, LED grow lights, cultivation software, and biosecurity, for up to $135M in a Senior Secured Note Facility with an institutional lender.

• An initial $65 million of funding is available immediately, with two additional tranches of $35M each becoming available subject to certain funding conditions.
• The notes have quarterly interest payments calculated at a 6.75% interest rate if paid in cash or an 8.75% rate if paid in kind and mature on March 1, 2026.
• 6.881M warrants with a 5.5-year maturity and an exercise price of $6.75 (a 71% premium) represent 71% warrant coverage. We calculate this warrant package to be worth approximately 12 points of bond value, bringing the effective rate up to 10.48% (assuming cash payments).
• The notes are callable at any time after the first anniversary of issuance.
• The notes are senior secured obligations of the company and rank senior to all indebtedness of the company.
• Monthly amortization payments of 4% of the original principal amount begin on February 1, 2023.

The Viridian Credit Tracker model ranks Agrify as the 12th strongest credit out of the 18 companies we track, with market caps between $50M and $200M that are not in financial sectors.

Based on that ranking, we judge the 10.48% effective cost to be reasonable. The callability of the debt and short average life is a good trade-off from having to issue equity at less than desirable prices and represents intelligent corporate finance.

Another Interesting Debt Deal: On March 16, 2022, AYR Wellness (CSE: AYR.A)(OTCQX: AYRWF) entered into a $26.2M mortgage loan agreement with a community bank with an annual interest rate of 4.625%. No other details of the financing were provided, but this represents another case of commercial banks beginning to become more active in the space. Typically, these loans are structured conservatively with low loan-to-value ratios, reducing the headline rates' advantage. Importantly, these transactions show what post-Safe Act financing could look like for well-heeled MSOs like AYR. Real estate has always been the cheapest type of financing for cannabis companies, but we will increasingly see banks edge into the business. Compared to their deposit and short-term credit-based funding costs, cannabis spreads look almost too good to be true.

MERGERS & ACQUISITIONS

Transactional Activity: Six M&A transactions closed this week with a total announced transaction value of $19.6M compared to fourteen deals for $355.3M in the prior year. All of this week's deals were completed by public buyers.

One driver of m&a activity has become slightly more favorable this week. We have reasoned that the valuation gap between the largest MSOs and the sub $300M market cap companies that are the primary targets is a key driver for M&A since a bigger gap makes it easier to have an accretive acquisition. The gap narrowed increased this week to about 3.3 multiple points but remains the lowest it has been for about a year.

The chart below shows the percentage of stock used in all M&A deals greater than $25M by U.S. Acquirers. Note that the rate of stock used in m&a transactions is increasing despite lower equity prices. This increase is bullish for m&a activity going forward: more significant public/public deals, more pressure for smaller companies to become affiliated with larger concerns, and the attractiveness of MSO stocks at their current valuation to potential targets.

M&A Deal of the week: On March 15, 2022, IM Cannabis Corp (CSE: IMCC) (Nasdaq: IMCC), a leading medical and adult-use cannabis company with operations in Israel, Germany, and Canada, completed three previously announced acquisitions for consideration totaling $11.79M.

• Vironna - one of the top ten cannabis dispensing points in Israel, serving the rapidly growing Arab segment of the medical cannabis market
  • Consideration of $2.6M consisted of $1.1M in stock and $1.49M in cash.
• Pharm Yarok - a combination of a leading medical cannabis pharmacy and a trade and distribution center.
  • Consideration of $3.59 was all cash.
• Panaxia - a license for the distribution of medical cannabis.
  • Consideration of $5.61M was all cash.

Another interesting M&A deal: On March 17, 2022, Jushi Holdings Inc (CSE: JUSH)(OTCQX: JUSHF) completed its previously announced acquisition of a company operating an adult-use and medical dispensary called the Apothecarium in Las Vegas.

• The dispensary acquisition follows the April 2021 purchase of Franklin Bioscience, a holder of cultivation, processing, and distribution licenses.
• Together, the acquisitions make Nevada Jushi's fourth vertically integrated State (along with Pennsylvania, Virginia, and Massachusetts).
• The transaction value and terms were not disclosed.

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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