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

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

CAPITAL RAISES

Transactional Activity:

Five capital raise transactions totaling $82.6M closed this week. One more transaction closed than last week, and volume was up by $47.3M. Four fewer transactions closed than the previous year, but volume increased by $18.5M. This week's average deal size was $16.5M compared to $7.1M last year.

Cannabis capital raises are off 63.6% YTD.

• Total Equity issuance is off 74.5%, and total debt issuance is down 46.7%.
• U.S. debt is down only 35.2%, while Canadian debt is down a more significant 79.7%.
• At 57.2% of total capital raised, debt remains the highest in history for comparable periods.
• Public companies accounted for 74.5% of total financing YTD, down from 79.6% in 2021.
• The graph below shows that U.S. activity dominated capital raises for the first forty-six weeks of 2022, with 75.3% of all capital raised.
• International capital raises of $319M represented 7.9% of total capital raises, exceeding the previous record of 6.3% in 2019.

The U.S. Cultivation & Retail sector has experienced a sharper change in capital raise activity

• Total capital raised is down 62.6%, but equity capital raised is down approximately 96.3%.
• Debt financing is down 28.0% YTD but accounts for about 95.0% of all capital raised; private companies raised 27.1% of it.
• 72.1% of total capital raises YTD were completed by public companies compared to 80.5% in 2021.
• In 2022, there have been no equity deals above $25M.

OUTLOOK

Cannabis stock prices (measured by the MSOS ETF) were up 1.65% last week, as much of the cannabis market gathered in Las Vegas for MjBiz.

Our critical takeaways from the conference:

• The people we spoke with that we consider most "in the know" are more bullish than we are that SAFE+ will pass in the lame-duck session. Although this will probably dramatically impact equity prices, the more acute effects are indirect. In particular, SAFE will likely encourage more financial institutions to provide custodial services for cannabis equities, increasing the liquidity of the stocks, promoting more trading volume, and enticing new investors. We believe this virtuous circle will eventually lead the exchanges to allow the uplisting of cannabis equities.
• Conference attendees were less optimistic about near-term industry conditions. Few people believe the price compression experienced across the industry will reverse soon. Nor do they believe inflationary pressures on costs will decrease quickly, resulting in continuing pressure on margins. The time lag between when a new market opens and when wholesale prices begin to drop seems to have shortened, partially because industry participants have become quicker at building new cultivation capacity.
• Companies are paying more attention to cost control and capital budgeting in attempts to become cash flow positive.
• Industry consolidation is likely to accelerate with or without the SAFE+.

Third-quarter earnings releases were a mixed bag, and analysts' estimates for 2023 EBITDA will continue to erode.

YTD Returns by Public Company Category

The most significant change from last week was that psychedelics slid one notch.

Best and Worst Performers of the last week and YTD

Schwazze (SHWZ: CSE) was the week's biggest gainer, up 58% on a combination of positive news items. The company beat 3rd quarter EBITDA expectations by 11.8% while recording the strongest EBITDA margins (37%) for tier-one or two operators. Additionally, Chairman Justin Dye purchased approximately $667,000 of stock.

California companies Unrivaled Brands (UNRV: OTC), Stem Holdings (STMH: OTC), Vibe Growth (VIBE: CSE), and Lowell Farms (LOWL: CSE) repeated their last week's positioning among the biggest losers, accompanied by several Canadian names including Auxly (XLY: CSE), Fire & Flower (FAF: CSE). Aurora (ACB: Nasdaq) and Canopy Growth (WEED: TSX).

EQUITY RAISES

The Week's Largest Closed Equity Transaction:

On November 15, 2022, Clearmind Medicine (CMND: Nasdaq), a pre-clinical psychedelics company focusing on treatments for alcohol use disorders ("AUDs," announced the closing of a $7.5M public offering and uplisting to Nasdaq.

• CMND issued approximately 1.3M shares at $6.50 per share, an increase in shares outstanding of about 87%.
• The transaction values CMND at approximately $16.1M, although the company's shares have traded off by about 30.7% since the issue.
• Psychedelic companies are seeing an influx of equity capital.

Public Company Raises:

Two of the five companies that raised capital this week were public. One trades in Canada on the TSX both trade in the U.S. (one on OTC and one on Nasdaq).

Equity vs. Debt Cap Raises:

Equity accounted for 10.4% of this week's capital raises.

DEBT RAISES

Debt accounted for 80% of trailing 4-week capital raises. We expect this ratio to be volatile because of the limited capital raise activity but average above 50%. Several large MSOs, including TerrAscend (TER: CSE), Jushi (JUSH: CSE), and AYR (AYR.A: CSE), have significant refinancings to do based on their debt maturity schedules. Several smaller tier 2 and tier 3 companies have upcoming financing needs that we believe will spur an increase in debt financing.

The Week's Largest Debt Raise:

On November 15, 2022, Charlotte's Web Holdings (CWEB: TSX)(CWBHF: OTC) announced the closing of a $56.7M Unsecured Convertible Debentures.

• The new convertible debentures have a 5% interest rate that steps down to 1.5% following the date that U.S. federal laws permit the use of CBD as an ingredient in food products or dietary supplements.
• The notes mature on November 14, 2029, and are convertible at approximately $1.51 per share (a premium of 131.6%)
• The notes were purchased by tobacco giant BAT and are convertible into approximately 19.9% of the outstanding common stock.
• The high premium reduces the value of the conversion option embedded in the convertible notes. Accordingly, the effective cost of the notes is only 5.52%. Although CWEB ranks as the top credit among the 12 Hemp companies in our database with market caps between $10M and $100M, its credit quality does not merit such a low effective cost. The implied credit support of BAT and interest in acquiring the company at a future date justifies the rate.

MERGERS & ACQUISITIONS

Transactional Activity:

Three M&A transactions closed this week for disclosed consideration of $74.5M compared to five transactions for $108.8M in the prior year.

Total YTD M&A volume is down 80.0% from 2021, with $4.87B in consideration and 166 deals closed versus $24.30B in transaction value and 291 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 in 2022 would trail 2021 by 61.3% YTD.

We believe the likelihood of relatively sizeable public/public M&A transactions has increased significantly based on the low trading multiples of tier 2 and 3 MSOs and SSOs, particularly those perceived to be cash flow pressured.

U.S. volume is down 67.0% YTD, with 31.8% fewer transactions.

The average transaction size of $30.8M is down 51.% from 2021. Growth in transaction size will probably not be seen until early 2023 at the earliest as significant transactions have either been shelved (Verano/ Goodness Growth) or delayed into 2023 (Cresco/ Columbia).

Major Pending Deals Risk Arb

The Cresco/Columbia deal spread narrowed by 150 bp to 10.6% on 11/18/22. We are surprised that this spread has not narrowed further after the announcement of Diddy's purchase of assets from Cresco and Columbia, substantially reducing the hurdles for the transaction. Management is now guiding towards a Q1 2023 closing.

Valuation Gap

The valuation gap narrowed to 4.17 on 11/18/22, 58 bps higher than its YTD average. The valuation gap is the difference between the EV/NTM EBITDA multiple for the largest MSOs and the multiple for the less than $300M market cap group, which are their primary targets.

This measure has been a significant driver of M&A activity since a larger gap creates an opportunity for more accretive transactions. The gap tends to increase in improving markets while declining in retreating markets.

A gap of over 4 points is conducive to accretive transactions between the largest MSOs and smaller competitors. At the same time, a tighter financing market makes it more challenging for small companies to finance the growth of their business.

We note that the gap is based on trading prices and not on values where a company could raise significant amounts of capital. The difference is crucial because one of the key drivers we see for accelerating M&A activity is the inability of smaller companies to finance themselves in the current cannabis capital markets.

The Most Interesting M&A Deal of the Week:

On November 14, 2022, TPCO Holding (GRAM.F: OTCPK) announced that it had closed its acquisition of Coastal Holding Company (Private) for $41.65M

• The consideration consisted of $8.35 in stock, $31.4M in cash, and an assumption of $1.9M of debt
• Coastal operates six dispensaries in Santa Barbara, Pasadena, West Los Angeles, Stockton, Concord, and Vallejo and two delivery depots.
• Financial statements for Coastal were not available but will be filed within 70 days.

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)

*Copyright © 2021 by Viridian Capital Advisors

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher. No part of this material may be (I) copied, photocopied, or duplicated in any form, by any means, or (II) redistributed without Viridian's prior written consent.

*Disclaimers

The information contained herein is for informational purposes and is not intended as a research report. It should not be construed as Viridian recommending investment in cannabis companies or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in cannabis companies entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.

Viridian Capital Advisors and its affiliates, as well as their respective partners, directors, shareholders, and employees, may have a position in the securities mentioned herein or may make purchases and/or sales from time to time. Viridian Capital Advisors, through broker-dealer services provided by Bradley Woods & Co. Ltd., (Member FINRA/SIPC), may act, or may have acted in the past, as a financial advisor to certain companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies.

The above information whether in part or in its entirety neither constitutes an offer nor makes any recommendation to buy or sell any securities.

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.

Marijuana remains illegal under federal law. The federal government does not recognize marijuana to have any medicinal value. Marijuana cultivation, possession, consumption, sales, and distribution are illegal under federal laws and also certain state laws. Investors in cannabis may be subject to law enforcement actions. Please note that there are differences in marijuana laws from one state, county, or city to another. Furthermore there are substantial risks associated with investing in cannabis companies, including, without limitation, changes in applicable laws, rules, and regulations, risks associated with the economic environment, the financing markets, and risks associated with a company's ability to execute on its business plan.

Contact Us:

Viridian Capital Advisors, LLC
contact@viridianca.com

Disclaimer/Disclosure: Investorideas.com is a digital publisher of third party sourced news, articles and equity research as well as creates original content, including video, interviews and articles. Original content created by investorideas is protected by copyright laws other than syndication rights. Our site does not make recommendations for purchases or sale of stocks, services or products. Nothing on our sites should be construed as an offer or solicitation to buy or sell products or securities. All investing involves risk and possible losses. This site is currently compensated for news publication and distribution, social media and marketing, content creation and more. Disclosure is posted for each compensated news release, content published /created if required but otherwise the news was not compensated for and was published for the sole interest of our readers and followers. Contact management and IR of each company directly regarding specific questions.

More disclaimer info: https://www.investorideas.com/About/Disclaimer.asp Learn more about publishing your news release and our other news services on the Investorideas.com newswire https://www.investorideas.com/News-Upload/ and tickertagstocknews.com

Global investors must adhere to regulations of each country. Please read Investorideas.com privacy policy: https://www.investorideas.com/About/Private_Policy.asp

Buy a cannabis guest post on Investorideas.com