Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis, CBD and Psychedelics Industry January 2nd, 2022 - January 6th, 2022

January 11, 2023 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity:

Two capital raise transactions totaling $2.7M closed this week. One more transaction closed than last week, and the volume was up by $1.7M. Three fewer transactions closed than the previous year, and volume decreased by $7M. 6.5. This week's average deal size was $1.3M compared to $15.8M last year.

Cannabis capital raises for the first week of 2023 were down 95.7% from W1 2022.

• No debt issues were closed this week.
• Private companies dominated financing in the first week of the year, raising 95.3% of the funds.
• No U.S. Issues were closed in W1 2023.
• Israel represented 95.3% of total capital raises.

OUTLOOK

Significant Trends for 2023

Commodification-based wholesale pricing declines will continue. We have seen some firming in California in the last month, but prices are still at levels where most producers cannot make money. We expect this to continue until significant capacity is wrung out of the system, which could take most of 2023. The dynamic has become clear: when new markets turn rec, there is a period of strong wholesale pricing as cultivation lags the rollout of dispensaries. This premium pricing entices new cultivation capacity to enter the market until capacity exceeds demand and pricing begins to fall. Sadly, the period of solid pricing appears to be getting shorter in each new market. We attribute this to the fact that most established MSOs have now built new capacity in many markets; they are getting better and faster at standing up new facilities.

The wholesale pricing collapse lays bare the fallacy that branding will support pricing, which is unlikely to be the case until brands can be marketed seamlessly across state lines and advertised. And this is unlikely to happen in 2023 or even 2024.

Inflation will prove challenging to eliminate, and cost increases that cannot be passed on via higher prices will continue to pressure cannabis margins.

We expect little progress in 2023 on federal legalization, descheduling/rescheduling, 280e, or banking reform. The key takeaway from the 2022 midterms is that cannabis is not a powerful enough issue to sway votes. No legislator fears losing his seat because of inaction on cannabis; accordingly, attention will turn to other matters. Another lesson learned, however, is how poor our ability to anticipate action or inaction in Washington is; we stand ready to be surprised – this time on the upside.

The lack of legislative action probably means that the pace of new investors entering the cannabis market will slow. The carnage of 2022 is painfully fresh. Investors are (and should be) willing to miss a bit of the upside to avoid more pain. This reduction in inflows will keep a tight lid on cannabis capital raises. One exception seems to be the continued influx of banks willing to make well-collateralized loans like the recent Trulieve deals.

The pain in 2023 will revolve around business failures, which we expect to set new records. Zombie Canadian LPs will finally collapse as they exhaust the liquidity from their initial sugar-daddy investors. U.S. companies that have not been able to achieve positive EBITDA will find financing more difficult and liquidity hard to maintain. Companies within spitting distance of cash positive will push every button to get there, including tight cost controls, stringent working capital management, and reduced CAPEX. One of the little-appreciated issues of federal illegality is the lack of cannabis company access to the bankruptcy courts, which will make the upcoming period of restructuring messy and more unpredictable than it should be.

We expect the capital market slowdown and capital budgeting rigor to result in an upswing in M&A activity. MSOs will find buying distressed companies to be a more cost-efficient method of expanding capacity or entering new markets than internal builds. The negotiating power is shifting to larger, better-capitalized companies relative to their hamstrung smaller competitors.

The good news is that this period of belt-tightening and consolidation will result in a healthier industry better positioned to face the challenges of legalization when and if it arrives. Fundamentally, cannabis stocks are incredibly cheap, but investors need to sharpen their credit analysis as many companies will not survive the upcoming period.

YTD Returns by Public Company Category

It's a new year, and returns are positive across most categories of cannabis-related companies.

Best and Worst Performers of the last week and YTD

Unrivaled Brands (UNRV: OTC) was up 62.5% for the week on news that it entered a security placement agreement to sell $2M of convertible preferred stock units to investors, including the company's CEO, CFO, and CLO.

Tilt Holdings (TILT: NEO) was up 60.8% on news that the company has retired $33.7M of its $35.8M principal amount of senior secured notes and extended the maturities of the remaining $2.1M to February 2023. Tilt also obtained a fifth amendment to its agreement with Innovative Industrial Properties (IIPR: NYSE), extending the investigational period on the transaction to February 2023.

Top losers included Lowell Farms (LOWL: CSE) and Nova Cannabis (NOVC: CSE), both on the top gainers list in the previous week.

EQUITY RAISES

The Week's Largest Closed Equity Transaction:

On January 4, 2023, Atlas Global Brands (expected symbol ATL: CSE) completed a 100,000 share issuance of stock in its Cambrosia subsidiary for approximately US$2.55M.

• Concurrent with the capital raise, Atlas completed an RTO and business combination of Atlas Biotech (a licensed cultivator and processor in Canada), AgMedica (an EU-GMP certified processor and exporter of cannabis flower and oil), and Cambrosia (an Israel-based group with owned pharmaceutical distribution).
• The combined companies formed a vertically integrated unit that serves eight countries.
• According to filed Form 2A, the combined companies had a proforma EBITDA for the nine months ended 9/30/22 of approximately negative C$7.4M. However, this gives no effect to synergies from internal sourcing of biomass or the potential to significantly increase exports to Israel.
• We believe reasonable valuation analysis needs to be deferred until the combined company begins trading on the CSE next week.

Public Company Raises:

One of this week's two capital-raising companies will begin trading on the CSE on January 15, 2023.

Equity vs. Debt Cap Raises:

Equity accounted for all of this week's capital raises.

DEBT RAISES

Debt accounted for 71% 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:

There were no closed debt raises this week.

MERGERS & ACQUISITIONS

Transactional Activity:

Five M&A transactions closed this week for $11.0M, compared to eight transactions for $256.9M in the prior year.

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.

No U.S. targeted M&A transactions closed in the week ended January 6, 2023.

Major Pending Deals Risk Arb

The Cresco/Columbia deal spread narrowed by 110bp to 38.4% on 1/6/23. This spread signals considerable market doubt about closing this transaction despite both companies continuing to say that they are committed to the deal. The Diddy deal closing is the most significant concern as it promises to fund $180M of cash for debt paydown post-closing. The crash of equity prices has also reduced the likely proceeds from other planned asset sales in Ohio, Maryland, and Florida. Still, the deal has made significant progress towards closing, and an unannualized rate of return of 38% for a 3-month investment seems like an attractive speculation. The market is clearly saying it's too good to be true.

Valuation Gap

No U.S. targeted M&A transactions closed in the week ended January 6, 2023.

Major Pending Deals Risk Arb

The Cresco/Columbia deal spread narrowed by 110bp to 38.4% on 1/6/23. This spread signals considerable market doubt about closing this transaction despite both companies continuing to say that they are committed to the deal. The Diddy deal closing is the most significant concern as it promises to fund $180M of cash for debt paydown post-closing. The crash of equity prices has also reduced the likely proceeds from other planned asset sales in Ohio, Maryland, and Florida. Still, the deal has made significant progress towards closing, and an unannualized rate of return of 38% for a 3-month investment seems like an attractive speculation. The market is clearly saying it's too good to be true.

The Largest Closed and Disclosed M&A Deal of the Week:

On January 4, 2023, Aurora Cannabis (ACB: Nasdaq)(ACB: TSX), the sixth largest Canadian LP by market cap, announced the closing of the sale of its Aurora Polaris facility for approximately US$11.0M.

• Aurora recently repurchased $76M of its senior convertible notes for approximately $74M in a transaction we criticized because we believed it represented an inadequate discount to reflect the company's credit risk. The company now has proforma cash of approximately $320M and roughly $114M of debt.
• Aurora has maintained that it will achieve a positive EBITDA run rate by December 31, 2022. We are a bit skeptical, having heard this from Aurora before. Still, a breakeven EBITDA would leave the company with an estimated negative $10-15M free cash flow per quarter, giving them less than a year of a cushion given their net cash position. The risk in this scenario is that the aggressive cost-cutting program may accelerate the continued erosion of the company's sales. It isn't easy to project a path to significant profitability. The best hope for ACB is it can capitalize on growing medical markets in Europe. However, competition from other Canadian producers and new competition from South America makes this far from a sure bet.
• The Viridian Capital Credit model ranks Aurora # 6 out of the 8 Canadian LPs with market caps over $100M. The company has relatively strong liquidity but high market value leverage and poor profitability.

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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