Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry May 16th, 2022 - May 20th, 2022

May 25, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity: An equal number of transactions produced a $9.9 million lower volume than last week. Compared to the previous year's same week, six fewer transactions closed, and volume was down by $53.3 million. The average deal size was $10.0 million this week vs. $9.4 million in the same week last year.

Cannabis capital raises are off 68% YTD. Reduced equity issuance (down 74.8% y/o/y in the U.S. and 91.9% in Canada) was partially compensated for in the U.S. by debt issuance (up 33.8% y/o/y). However, Canada's debt decline of 82.9% brought total debt issuance down by 29.9%. As the graph below shows, capital raises for the first twenty weeks of 2022 were dominated by U.S. activity. Public companies continue to account for over 76% of total financing YTD, but this is down significantly from 88.6% in 2021. Private company capital raises are down only 31.3% YTD relative to the 71.4% decline for public companies.

Below is a slightly different view of the same data, emphasizing the significant percentage decline in public company equity raises and the record high percentage of debt in the financing mix. Private equity issuance has held up better because its pricing mechanism (caps and discounts) allows the pricing to be delayed until a presumably more favorable market environment.

The Cultivation & Retail sector has had an even steeper drop in capital raises, down 80% YTD vs. 2021. The chart below shows the virtual absence of U.S. equity financing YTD and the dominance of U.S. debt over all other categories. U.S. debt raises are at an all-time high YTD, but issuance has been quite concentrated. The top three issues by size account for over 60% of total volume.

There were four closed capital raises totaling $40.9M this week, and most of it was Ascend Wellness' increase in its existing term loan facility for $36.5M.

Cannabis stock prices (measured by the MSOS ETF) rebounded by 2.8% last week on increased market chatter regarding the prospects of the SAFE Act. Prices weakened again early this week and are now 5.9% below last week's close and 46.5% below year-end values. Our updated regression analysis shows a strong (.6) correlation between the returns on the MSOS ETF and the S&P 500 over the last 89 weeks. The cannabis index has a Beta of approximately 1.8, indicating that it is 1.8 times as volatile as the S&P index.

The U.S. tier-one sector is the most significant change from last week, primarily due to up moves in Columbia Care (CSE: CCHW), GTI (CSE: GTII), and Trulieve (CSE: TRUL) after each announced 1st Quarter EBITDA results generally in line with analyst estimates. The graph represents the YTD returns of 108 cannabis companies arranged into 11 equally weighted baskets.

The Tier 2 and Tier 3 MSOs have been two of the best-performing sectors YTD. We ascribe part of this outperformance to their attractiveness as acquisition candidates.

1ST Quarter 2022 Earnings releases: The chart below summarizes the EBITDA surprises from the earnings releases we have seen so far. The green line shows the EBITDA miss or outperformance percentage relative to consensus estimates. Four of the eleven companies beat EBITDA estimates, and seven missed them. The orange line shows the net return of the stock from the day before the earnings release to the day after, subtracting the corresponding return of the MSOS ETF. Eight of the eleven companies outperformed the MSOS ETF.

The slightly negative but statistically insignificant correlation between earnings surprises and net returns indicates that investors paid little attention to Q1 EBITDA misses. We expect investors will be looking more closely in quarters to come as revenue comparisons become easier, but the impacts of ongoing inflation and economic weakness begin to impact margins.

Below is an expanded version of this week's Viridian Chart of the Week. We have expanded the time horizon back to 2017 and have included worldwide equity issuance rather than just U.S. issuance.

• We have never previously observed two quarters during which Cultivation & Retail equity issuance was as low as 2022 YTD. We note several positive mitigants to the decline: 1) Tier one MSOs still have good liquidity and are expected to be free cash flow positive in late 2022 & 2023, so they don't have the demands for capital they had last year. 2) Debt and sale-leaseback options are more attractive than equity issuance, so these companies are turning to the debt market, and 3) MSOs are still finding willing takers for their stock in acquisitions, freeing them from the need to separately finance these deals.
• Software and Real estate sectors are accounting for a much larger share of equity financings than we have seen historically, and we believe this trend will continue.
• We foresee a rebound in raises from agriculture technology companies as the MSOs build out newly opened rec states like New York and New Jersey.

Best and Worst Performers of the Week and YTD

AYR (CSE: AYR.A) was one of the week's top performers, anticipating that it will be awarded New Jersey licenses in the upcoming round.

EQUITY

The Week's Only Closed Equity Deal: On May 18, 2022, Mydecine Innovations Group Inc. (NEO: MYCO)(OTC: MYCOF), a Denver-based psychedelics company, raised gross proceeds of approximately $3.12M In an overnight marketed public offering of units.

• Each unit was priced at approximately US$ .90 and included one common share and one five-year warrant with a strike price of US$1.09 (22% premium).
• The implied net share price of $.6959 is a 33.6% discount to pre-announcement prices, a fairly steep discount considering the issue only increased the share count by 7.3%. 
• The issue implies a Mydecine market cap and enterprise value of $35.8M and $34.6M, respectively. Mydecine's implied market to book ratio of 5.9x is a significant premium to the 1.54x median and 1.84x third quartile of the 18 psychedelics companies we track in the Viridian Capital Value Tracker.
• The pricing discount reflects the difficult equity market, and the psychedelics sector has been the worst-performing of any submarkets that we reviewed in our sector graph. Mydecine, in turn,  has been the worst performer of any of the stocks in the evenly weighted basket of 15 psychedelics companies we used to create the graph below. 
• Mydecine was down to $265K of cash on its 3/31/22 statements. Its cash flow adjusted current ratio (one of the two liquidity ratios used in the Viridian Capital Credit Tracker scoring model) was -3.30x, indicating severe liquidity stress. Based on the company's cash burn of $3.5M per quarter, we expect to see the company back in the market for more financing within the next few quarters.
• Proceeds will primarily fund the company's IP portfolio and for general working capital.

Public Company Listings: Two of the four companies that raised capital this week were public. Both trade in Canada (one on the NEO, one on the CSE) and the U.S. (one on OTC and one on OTCQX).

Equity vs. Debt Cap Raises: Equity accounted for one of the week's capital raises and 7.6% of the funds raised.

DEBT

Debt accounted for 71% of trailing 4-week capital raises. U.S. debt issuance is up about 34% YTD vs. 2021. Private company debt is the fastest-growing segment of the U.S. cannabis capital market, increasing 83.9% compared to the same period in 2021. We expect debt to continue to be a high percentage of cannabis capital raises.

The Week's Largest Debt Raise: On May 18, 2022, Ascend Wellness Holdings (CSE: AAWH.U)(OTCQX: AAWH), the eighth largest MSO by market cap, closed on $36.5M of additional funding under the increase option in its August 2021 senior secured term loan facility.

• The credit facility has a 9.5% fixed interest rate and matures on August 27, 2025.
• The credit facility may be expanded up to $65M subject to certain conditions, leaving an additional $28.5M to be accessed.
• The increased facility will fund the expansion of Ascend's Pennsylvania assets and the acquisition of MedMen NY.
• Seaport Global Securities LLC was the sole manager for the offering.
• The Viridian Credit Tracker scoring model ranks Ascend as the seventh-best credit among the 12 MSOs with over $300M market cap. Our system utilizes 11 financial and market-based variables measuring four aspects of credit quality: Liquidity, Leverage, Profitability, and Size. Our rankings are below.

MERGERS & ACQUISITIONS

Transactional Activity: Four M&A transactions closed this week with a total disclosed transaction value of $42.3M compared to five transactions for $55.2M in the prior year.

Total YTD M&A volume is down 73.8% from 2021, with $4.0B in consideration and 86 deals closed versus $15.4B in transaction value and 127 closings in 2021. Last year's total included two of the largest M&A transactions ever done in cannabis, the $4.5B Tilray acquisition of Aphria and the $7.2B Jazz Pharma acquisition of GW Pharma. Without the two megadeals mentioned above, the volume would be up by approximately 8% YTD.

U.S. volume is down 4.8%, with 47% fewer transactions. The average transaction size of $52.5M is up 73.2% from 2021 and is expected to grow considerably as large public/public transactions such as Verano / Goodness Growth and Cresco/ Columbia Care close.

Public buyers have accounted for 80.0% of the transactions and 84.6% of total consideration compared to 83.3% and 99.5%, respectively, in 2021.

Major Pending Deals Risk Arb

Cresco/Columbia - a deal with a long time horizon and significant challenges to completion.

• Significant overlaps require asset/license sales.
• Significant integration challenges.
• Relatively low initial premium to market paid.

The Cresco/Columbia deal spread narrowed to 9.3% as of 5/20/22. The key driver of this spread is the time to close. To play this spread, one would have to short Cresco and buy Columbia Care, but it is expensive and difficult to maintain that short position over an extended period. The material tightening of this spread shows growing confidence that the deal will close.

Verano/ Goodness Growth – a transaction we initially believed would close in the 2nd quarter of 2022 is now a 4th quarter event according to Goodness Growth management. The spread on this deal has widened out to 10.0% as of 5/20/22 after briefly spiking to 18%. The fact that this spread is now higher than the Cresco/Columbia spread is surprising. We believe the lack of clarity on why the closing will take so long influences the spread.

The valuation gap between the largest MSOs and the less than $300M market cap group, which are their primary targets, has been a significant driver of M&A activity since it creates the regular opportunity for accretive transactions. This week, this gap widened about 80 basis points to a more normal range of 3.5 points. Interestingly, we can observe that the value gap tends to widen when stocks gap upward and decline when they have significant downdrafts (like this week and last). We believe this gap will widen to more normal levels as the cannabis stock market finds its feet. The current gap restores the ability to gain valuation through "bulk up" acquisitions.

The Largest M&A Deal of the Week: On May 16, 2022, Tilt Holdings (CSE: TILT), which operates through three segments: technology/distribution, cannabis, and accessories, closed on a $40M sales and leaseback with Innovative Industrial Properties (NYSE: IIPR)

• Tilt sold the 104,000 sq ft industrial building for approximately $384 per sq ft.
• Tilt originally leased the 12-acre site from a prior owner and executed a purchase agreement to purchase the property for $13M ($125/ sq ft). Tilt subsequently invested more than $27M to build out the facility ($260/ sq ft).
• The property now includes approximately $60K sq ft of cultivation space, 8k sq ft of production space, including a full kitchen, and about 2,400 sq feet of retail space.
• In addition to the Taunton facility, Tilt operates a dispensary in Brockton, MA, and is awaiting regulatory approval for its third (maximum in MA) dispensary in Cambridge.

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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