Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry May 23rd, 2022 - May 27th, 2022

June 1, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity: There was one additional transaction and a $117.9 million higher volume than last week. Compared to the previous year's same week, an equal number of transactions closed, and volume was down by $171.9 million. The average deal size was $31.8 million this week vs. $66.4 million in the same week last year. This week's deal volume was dominated by the $150M bought deal equity financing by Aurora Cannabis (NASDAQ: ACB)(TSX: ACB).

Cannabis capital raises are off 66% YTD. Equity issuance was off 74.8% y/o/y in the U.S. and 81.1% in Canada. U.S. Debt issuance, which was up YTD as of last week, is now down 9.2%, and total debt issuance is down 41.7%. The graph below shows that U.S. activity dominated capital raises for the first twenty-one weeks of 2022. Public companies accounted for 83.5% of total financing YTD, down from 89.0% in 2021.

Below is a slightly different view of the same data, emphasizing the significant 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 75.5% YTD vs. 2021. The chart below shows the 90.8% decline in YTD equity financing, which is understated. This week's Aurora deal accounts for over 56% of YTD worldwide cultivation equity issuance. Debt as a percent of capital raised is 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 five capital raises totaling $158.8M this Week, dominated by the upsized $150M Aurora bought deal equity financing.

Cannabis stock prices (measured by the MSOS ETF) declined by 6.2% last week after a brief respite in the previous week. 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 two significant changes in this week's YTD sector performance chart are the US Tier 1 MSOs which drifted lower to resume their position as the second-worst performing sector YTD. They are victims of their relative liquidity and tend to move quicker in both directions than the less traded tier 2 and 3 stocks. Large Canadian LPs also moved from 7th worst to 5th worst on the poor results from Canopy and the pressure of a new equity deal from Aurora.

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.

Earnings releases: The last significant earnings releases dribbled in this week, and the chart below shows the results. Note that eight of the seventeen companies missed their 1st quarter EBITDA estimates, a positive change from the 4th quarter when twelve missed estimates. The graph shows a weak correlation between EBITDA surprises and stock performance after netting out the MSOS index performance.

In this week's Viridian Chart of the Week, we expanded the time horizon to cover earnings releases YTD, looked at the relative stock movements, and discovered much stronger evidence that earnings releases influence investors.

Best and Worst Performers of the Week and YTD Body and Mind Inc. (CSE: BAMM)(OTCQB: BMMJ), the week's top gainer, was up 30% on relatively light volume. We saw no news to account for the increase. Aurora Cannabis (NASDAQ: ACB)(TSX: ACB) was the week's biggest loser after pricing a dilutive $150M raise.

EQUITY

Largest Equity Transactions: On May 27, 2022, Aurora Cannabis. (NASDAQ: ACB)(TSX: ACB), the fifth-largest Canadian LP by market cap, announced an upsizing of its bought equity deal to $150M.

• Each unit was priced at approximately US$ 2.45 and included one common share and one three-year warrant with a strike price of US$3.20 (30.6% premium).
• The warrant package is valued at $.32 per unit using a 30% volatility. Aurora's stock arguably argues for a higher volatility, increasing the value per unit of the warrants. The implied net share price of $2.13 is a 20% discount to pre-announcement prices, which is not unexpected given the 26.7% increase in share count from the issue.
• The transaction-implied market cap of $620M and EV of $350 value the Company at approximately 2.0x projected 2022 revenues, a discount to the 2.59x median for the six Canadian LPs we track with market caps over $300M. 
• The graph below shows that Aurora's shares significantly underperformed both the U.S. Tier 1 MSOs and the large Canadian LPs before the transaction announcement and have fallen an additional 37% since then. ACB is now down about 69% YTD.
• Part of the steep decline is arguably the signaling impact that the Company felt the need to raise equity capital in such a highly challenging market. Aurora had $387M of cash on its March 2022 balance sheet and a negative free cash flow averaging about $100M per quarter. Aurora's cash, proforma for one quarter of cash burn and the proceeds of this issue, should give it approximately four quarters of liquidity. With potential catalysts like the SAFE Act lurking in the background, it feels a bit ominous that the Company would proceed to push a large equity issue into the market now.
• Consensus estimates show Aurora becoming marginally EBITDA positive in the March 2023 quarter, but significant doubt exists. Aurora's LTM Cost of Sales of $329M is 183% of sales, and the Company has registered negative gross profits in nine of the last ten quarters. Y/O/Y and sequential quarter sales are down by 8.5% and 19.1%, respectively. SG&A expense is running at an additional 85-90% of revenues. All of this makes it challenging to structure a break-even analysis.
• Aurora will most likely need to pursue additional dilutive share issuance before it becomes positive cash flow, if it ever does. Meanwhile, the Company has $328M of Senior Convertible Notes that mature on February 28, 2024. The conversion price of $86.73 makes it unlikely that the issue will convert into equity.
• Although we may question the logic of doing a large equity deal now, Aurora may find it difficult to issue debt. The upcoming maturity of the 2024 issue makes floating a longer maturity issue difficult. The chart below shows that Aurora ranks at the bottom of the Viridian Credit Tracker scoring system.
• EV/2022 revenues of 2.0x seems enticingly cheap, especially given that Aurora was trading at over 5x at the beginning of the year. We are bothered by cash burn that will require further dilution. The market didn't balk at this deal, but the price action after the announcement gives us further pause. We think we might want to miss a bit of return and catch this one on the upside, assuming there is one. Meanwhile, we will be looking closely for signs of an operational turnaround.

Public Company Listings: Four of the five companies that raised capital this week were public. They all trade in Canada (one on the TSX, three on the CSE) and the U.S. (one on NASDAQ and three on OTC).

Equity vs. Debt Cap Raises: Equity accounted for four of the week's capital raises and 98.7% of the funds raised.

DEBT

Debt accounted for 40% of trailing 4-week capital raises. We expect debt to bounce back to its trendline of around 70% of cannabis capital raises.

The Week's Largest Debt Raise: On May 24, 2022, lonic Brands (CSE: IONC)(OTC: IONKF), a multi-state cannabis concentrate brand operating in Washington and Oregon, closed a $2M unsecured demand promissory note with YourWay Cannabis Brands.

• YourWay and Ionic have entered into an agreement under which YourWay has the right to acquire 100% of the outstanding stock of Ionic. The debt transaction is therefore considered a "related party transaction."
• The 7% interest and principal become due upon demand.
• Ionic is one of the top three vaporizers and concentrate brands in Washington and also sells a high-quality portfolio of edibles under the Zoots brand.
• Ionic is relatively small and still has negative gross profit. The 7% rate on the transaction is not indicative of the terms the Company could achieve in the broader market.

MERGERS & ACQUISITIONS

Transactional Activity: Two M&A transactions closed this week with a total disclosed transaction value of $27M compared to nine transactions for $297.2 in the prior year.

Total YTD M&A volume is down 74.0% from 2021, with $4.1B in consideration and 92 deals closed versus $15.8B in transaction value and 141 closings in 2021. Last year's total included two of the largest M&A transactions ever done in 4.0cannabis, 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 in 2022 would exceed 2021 by .3% YTD.

U.S. volume is down 13.6%, with 46% fewer transactions. The average transaction size of $48.5M is up 60.0% from 2021 and is expected to grow considerably as large public/public transactions such as Verano / Goodness Growth and Cresco/ Columbia Care close.

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 6.6% as of 5/27/22. 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 to 9.8% as of 5/27/22 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 narrowed about 40 basis points to a more normal range of 3.6 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 25, 2022, AYR Wellness (CSE: AYR.A)(OTCQX: AYRWF), the ninth-largest MSO by market cap, closed its acquisition of Herbal Remedies, an operator of two licensed dispensaries in Illinois.

• The transaction consideration of $22.28M was paid through $4M in cash, $2.29M in stock, and $16M in seller notes.
• AYR now has four adult-use dispensaries in Chicago and Quincy.
• AYR has no cultivation or production assets in Illinois.

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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