Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis, CBD and Psychedelics Industry December 12th, 2022 - December 16th, 2022

December 21, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity:

Three capital raise transactions totaling $8.6M closed this week. Two fewer transactions closed than last week, and the volume was down by $74.3M. Four fewer transactions closed than the previous year, and volume decreased by $638.8M. This week's average deal size was $2.9M compared to $92.5M last year. Last year's totals were skewed by a $425M Curaleaf Senior Secured Note issue.

Cannabis capital raises are off 66.4% YTD.

• Total Equity issuance is off 75.6%, and total debt issuance is down 53.9%.
• U.S. debt is down only 48.9%, while Canadian debt is down a more significant 76.0%.
• At 58.3% 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 fifty weeks of 2022, with 73.9% of all capital raised.
• International capital raises of $319.8M represented 7.7% of total capital raises, exceeding the previous record of 6.3% in 2019.

The U.S. Cultivation & Retail sector has experienced a similar change in capital raise activity, although the components have changed significantly.

• Total capital raised is down 67.1%, but equity capital raised is down approximately 96.3%.
• Debt financing is down 44.4% YTD but accounts for about 95.1% of all capital raised; private companies raised 25.1% of it.
• 72.8% of total capital raises YTD were completed by public companies compared to 83.2% in 2021.
• In 2022, there have been no equity deals above $25M.

OUTLOOK

Cannabis stock prices (measured by the MSOS ETF) were down 20.6% last week and 40.4% month-to-date and are now at their lows since the ETF commenced trading in September 2020.

The failure of the SAFE Act points out the differences of opinion that still exist regarding the path for cannabis legalization/descheduling. If SAFE+ ever had 60+ votes, we think it would have been presented as a standalone bill. The reason to package a bill inside some other "must pass" legislation is precisely because you don't think you can get it passed on a standalone basis. So why not, in the face of polling numbers that suggest widespread public support? We see two reasons: One issue is that no legislator feels that his political career rests on his cannabis vote. It is simply not a strong enough issue yet to sway votes. As such, cannabis has become just another bargaining chip in the logrolling process rather than an essential standalone issue. It may be as simple as the Republicans did not want to give the Democrats a "win" in the lame-duck session and felt no particular political pressure to do so. Another critical reason is the "+" in SAFE+. Republicans seem willing to pass a banking reform bill along the lines of the original SAFE but are less inclined to go along with the various social equity issues that have been added to the bill. Threading the needle between having enough social equity to please the progressive wing of the Democratic party while keeping the Republicans onboard continues to be a stumbling block.

The failure of SAFE will not be felt uniformly. SAFE never benefitted the Tier one MSOs much, at least in the short run. They already have well-established banking relationships and access to capital. SAFE did nothing to cure their biggest problem, 280e, nor did it immediately enable uplisting. We think it would have eventually led to uplisting by encouraging the custody of cannabis stocks, increasing liquidity, and fostering the process of bringing in more institutional money. In the short run, we believe the lack of SAFE may be advantageous to the Tier ones as it increases the pressure on smaller companies to merge with larger, better-funded competitors. It allows Tier ones to continue to grow at the expense of smaller competitors. We frankly feel that this process will continue with or without SAFE. Cannabis is a capital-intensive commodity business that will inevitably have fewer and larger competitors.

Tier 2 and 3 MSOs/SSOs and smaller entities like the social equity entrants would have benefited much more from broader access to banking services, especially credit. Capital markets are currently inhospitable to these companies, especially those without hard collateral like real estate to borrow against. It reminds us of the old credit saying, "never lend money to someone who needs it." Meanwhile, the equity markets are nearly closed for U.S. cultivation & retail sector companies. Many face significant upcoming liquidity pressures, especially in the states that have already seen commodification-savaged wholesale pricing. We think of this as primarily a short-term liquidity issue rather than a long-term solvency issue. Many startups and smaller companies have solid business plans and good potential but may fail due to a lack of funding. In an environment like we are facing, with a recession of unknown proportions approaching, credit analysis trumps valuation. And the main thing investors need to be concerned with is Liquidity. Does your investee have the capability to weather the storm?

YTD Returns by Public Company Category

Tier 3s, the category that stood most to gain from SAFE, lost two notches of ranking in terms of YTD returns. Investors are rightfully concerned about the liquidity of smaller companies in the No SAFE capital crunch environment.

Best and Worst Performers of the last week and YTD

Top gainers this week are from three categories: 1) out-of-the-money option equities trading on pure volatility, a category which includes Stem Holdings (STMF: OTC), Unrivaled Brands (UNRV: OTC), MedMen (MMEN: CSE), and Auxly (XLY: CSE); 2) Capital providers AFC Gamma (AFCG: Nasdaq), New Lake Capital (NLCP: OTCQX), and Innovative Industrial Properties (IIPR: NYSE), all of which stand to gain from the failure of SAFE; and Nova Cannabis (NOVC: CSE), which was up strongly on record volume. We saw no news to account for the gain.

Top losers included AYR (AYR.A: CSE), Jushi (JUSHF: OTC), and Trulieve (TRUL: CSE).

EQUITY RAISES

The Week's Largest Closed Equity Transaction:

On December 16, 2022, Hemptown Organics (Private), an Oregon producer of premium full-spectrum hemp-derived CBD and CBG products, sold $617,500 of equity in a private Reg D sale.

• Hemptown owns the Kirkman, an established nutraceutical brand in business for over 70 years.
• The company operates a 40,000 sq ft harvest processing facility.

Public Company Raises:

Two of the three companies that raised capital this week were public. Both trade in Canada on the CSE and in the U.S. on OTC.

Equity vs. Debt Cap Raises:

Equity accounted for 7.2% of this week's capital raises.

DEBT RAISES

Debt accounted for 91% of trailing 4-week capital raises. We expect this ratio to be volatile because of the limited capital raise activity. Still, we expect it to average well over 50%, especially since many companies are trading at or close to their 52-week lows.

The Week's Largest Debt Raise:

On December 15, 2022, BioHarvest Sciences (BHSC: CSE)(CNVCFL: OTC), the owner and developer of a patent-protected BioFarming technology capable of producing active plant ingredients without the necessity of growing the plant itself, closed the third and final tranche of convertible notes. The total of the three tranches was $7.4M.

• The notes bear interest at 9.0% and mature on 12/15/2024.
• The notes are convertible at conversion prices which start at C$0.32 and escalate to C$0.44 if the Notes have not been converted before 180 days after issuance.
• The notes are convertible at 75% of the stock price with a floor of C$0.26 if not converted prior to a year after issuance.
• The effective cost of the transaction is quite sensitive to the exercise price. At the floor price of C$.26, the effective cost is 35.4%, whereas using the current conversion price of C$.32 gives an effective cost of 21.3%. This range strikes us as appropriate for a small, fast-growing (expected 3x revenue growth in 2023) but still cash flow negative company with promising new technology.

MERGERS & ACQUISITIONS

Transactional Activity:

Three M&A transactions closed this week for $52.6M, compared to five transactions for $94.7M in the prior year.

Total YTD M&A volume is down 80.3% from 2021, with $4.92B in consideration and 171 deals closed versus $24.96B in transaction value and 310 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 62.8% 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 69.1% YTD, with 50.5% fewer transactions.

The average transaction size of $30.5M is down 51.3% 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 450 bp to 16.7% on 12/16/22. Management's guidance of a late Q1 2023 closing seems credible, as several of the most significant obstacles have been cleared. We believe the continuing wide spread is primarily attributable to turbulent market conditions following the failure of the SAFE ACT.

Valuation Gap

The valuation gap narrowed to 2.87 on 12/16/22, 79 bps lower than its 52-week 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 to the greater trading liquidity of the larger companies. The failure of the SAFE act is more detrimental to the smaller companies, and we would expect the gap to widen to 4.0 as the valuation of the less liquid tiers normalizes.

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 Largest M&A Deal of the Week:

On December 15, 2022, RIV Capital (RIV: CSE)(CNPOF: OTC), an acquisition firm focused on building a leading multistate platform, announced the final closing of its transaction of Etain, LLC for approximately US$4M.

• The $48M consideration for the final closing was paid through approximately $42M in cash and the issuance of 5.27M Class A common shares in RIV Capital.
• RIV, in March, agreed to pay approximately $243M to acquire Etain, the NY cannabis market's only women's owned and operated business and of the ten approved vertically integrated operators in the state.
• RIV took a $138.9M writedown for Etain in its third-quarter financial statements representing a 42% reduction in the value of the investment.
• On December 20, 2022, RIV's largest shareholder, JW Asset Management (with approximately 20% of outstanding shares), requisitioned a special meeting of the Board. JWA alleges that "an immediate overhaul of the Board with independent and experienced directors is necessary to prevent further value destruction and to construct an effective strategy for growth moving forward." RIV completed the Etain acquisition without a shareholder vote and without obtaining a fairness opinion.
• RIV's shares are down 83.4% YTD compared to 73.7% for the MSOS ETF.
• Two large transactions geared towards entering the New York market have been canceled this year: Ascend's (AAWH: OTC) purchase of MedMen's NY operations and Verano's (VRNOF: OTC) acquisition of Goodness Growth (GDNSF: OTC). These two cancellations evidence the decline in the valuation of NY licenses.

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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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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