Deal Tracker

Transactional Activity:

• Three capital raise transactions totaling $56.5M closed this week, one more transaction, and a $31.7M higher volume than last week. Eleven fewer transactions closed than the previous year, and volume declined by $393.5M. This week's average deal size was $18.8M compared to $32.1M last year.

Cannabis capital raises are off 66.4% YTD.

• Total Equity issuance is off 75.8%, and total debt issuance is down 49.7%.
• U.S. debt is down only 39.9%, while Canadian debt is down a more significant 78.5%.
• At 53.7% of total capital raised, debt remains the highest in history for comparable periods.
• Public companies accounted for 73.9% of total financing YTD, down from 83.2% in 2021.
• The graph below shows that U.S. activity dominated capital raises for the first forty-one weeks of 2022, with 71.8% of all capital raised.

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

• Total capital raised is down 69.9%, but equity capital raised is down approximately 96%.
• Debt financing is down 39.5% YTD and accounts for about 93% of all capital raised; private companies raised a record 36% of it.
• 64.0% of total capital raises YTD were completed by public companies compared to 78.9% in 2021.
• In 2022, there have been no equity deals above $25M, which has never happened in a comparable period.

‍

‍    
OUTLOOK

• Cannabis stock prices (measured by the MSOS ETF) were down by 19.6% last week, giving back about 2/3 of the "Biden Bump."
• The near-term market importance of Biden's announcement boils down to the impact it might have on SAFE+ legislation, which remains the only actionable piece of legislation, in our opinion. We think the chances for SAFE+ are helped by the federal pardons and Biden's urging the states to follow through on additional expungement measures.  
• We believe that SAFE+ will likely have dramatic, though indirect,  impacts on stock prices.   Giving banks safe harbor to deal with cannabis companies is likely to lead to increased bank custodial services for cannabis stocks, which we think will eventually lead to greater trading liquidity, a broader investor base, and uplisting.
• The failure of modest gains to stick conveys a continued market skepticism about Washington's ability to push through even modest banking reform, let alone full legalization.
• The macro-environment remains perilous, and recent job market strength appears to quash the likelihood of a near-term Fed pivot. We believe there is a high likelihood of a recession in 2023, and most economists now agree with us.
• Meanwhile, the negative industry trends of commodification-driven wholesale price declines, margins weakened by inflation, and pressured consumers, continue unabated.
• These pressures are likely to drive accelerating industry consolidation. Our chart of the week showed two relatively large MSOs, Jushi (JUSHF: CSE) and AYR (AYR.A: CSE), with significant debt maturities that need to be refinanced, potentially hindering their ability to attract growth capital. Ascend's (AAWH: CSE) former CEO is on record stating that the company is not large enough to be competitive long-term and must be considered an acquisition target. Goodness Growth (GDNS: CSE), left at the altar by Verano, and suffering a severe stock pounding, is clearly in the target group, but unfortunately, its crown jewel New York, has become increasingly tarnished. We think industry consolidation is virtually inevitable, with or without SAFE, and the bill's failure might accelerate the pace.

YTD Returns by Public Company Category

• What a difference a week can make! U.S. tier-one MSOs lost four places in our ranking of YTD stock performance in a dramatic demonstration that liquidity can cut both ways. U.S. Biotech and Psychedelics were two of the gainers.

• The market is still strongly differentiating between MSOs, but the record-high gap of 86 points last week has narrowed to only 45 points. The chart below shows the divergence of stock prices since the end of July.

‍      
Best and Worst Performers of the last week and YTD

• Three of the top ten performers this week are California based: StateHouse (STHZ: OTC), Unrivaled (UNRV: OTC), and Glass House (GLASF: OTC), possibly on news that California is becoming more aggressive in fighting the illicit market.

• AYR Wellness (AYR.A: CSE) has now been one of the top ten performers for two weeks. The company had become too cheap for investors to ignore and is also a potential take out candidate.

• Aside from Goodness Growth (GDNS: CSE), down 58.9% after being jilted by Verano (VRNO: CSE), Canadian companies, including Canopy (WEED: TSX), Aurora (ACB: TSX) and Sundial (SNDL: Nasdaq) were prominently featured in the loser list.

‍

‍

Cap Raises by Sector:

‍

EQUITY RAISES

The Week's Largest Closed Equity Transaction:

• On October 11, 2022, Neptune Wellness Solutions (NEPT: Nasdaq) closed a combined offering of commons shares and warrants for gross proceeds of $6M
• NEPT sold 3.2M shares at $1.87 with an accompanying 6.4M warrants with strike prices of $1.62 (a 13% discount) and a 5-year maturity.
• The extended maturity and discount strike of the warrants gave them a value of approximately $.70 per share, reducing the net share value to about 38% below pre-announcement trading levels.
• The offering imputes an enterprise value of $21M and an EV/ 2022 consensus revenue of .43x, below the bottom quartile of .9x of the nine Canadian Infused Products & Extracts companies in the Viridian Capital Value Tracker. Having divested its cannabis operations, Neptune is increasingly focused on Food and nutraceuticals, differentiating it from the majority of entrants in the grouping.
• Proceeds will fund working capital and general corporate purposes.

Public Company Raises:

• Two of the three companies that raised capital this week were public. Both trade in the U.S. (one on Nasdaq and one on OTCQX), and one trades in Canada on the TSX.

Equity vs. Debt Cap Raises:

• Equity accounted for 19.5% of this week's capital raises

DEBT RAISES

• Debt accounted for 43% of trailing 4-week capital raises, below its LTM average of 61%. Sporadic financing has reduced the correlation between the trailing 4-week debt-to-total financing ratio and equity prices. Still, in the absence of significant positive news regarding SAFE, we expect debt to be the majority of capital raised.

The Week's Largest Debt Raise:

• On October 12, 2022, TerrAscend (TER: CSE)(TRSSF: OTCQX), the seventh largest U.S. MSO by market cap, closed a $45.5M loan with Pelorus Equity Group.
• The loan has a five-year maturity and is priced at approximately 970bp over the Secured Overnight Financing Rate (SOFR), given its current stated rate of 12.77% and the SOFR rate of 3.04% on the closing date.
• The collateral package includes the company's real estate assets in New Jersey and Maryland.
• Prepayment provisions include a minimum earned interest period of 36 months, making the loan very expensive to prepay during the first two years.
• The chart below shows the Viridian Capital Advisors Credit Tracker rankings of the ten U.S. MSOs with market caps over $300M. TerrAscend ranks number six based on its median leverage ranking, lower than median liquidity, and low profitability ratings.

‍

Transactional Activity:

• One M&A transaction closed this week with a no disclosed transaction value compared to four transactions for $0.8M in the prior year.

• Total YTD M&A volume is down 80.2% from 2021, with $4.72B in consideration and 145 deals closed versus $23.82B in transaction value and 271 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 61.0% 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. We discuss this in our outlook section above.

‍

• U.S. volume is down 67.3% YTD, with 40.4% fewer transactions.

• The average transaction size of $34.3M is down 45.1% from 2021. Still, 2022's average is expected to grow as large public/public transactions like Cresco/Columbia Care close in the 4th quarter.

‍

Major Pending Deals Risk Arb

• The Cresco/Columbia deal spread narrowed by 370 bp to 13.2% on 10/14/22. Doubtlessly, the collapse of the Verano/Goodness Growth deal was an influence in the spread widening. However, we believe this transaction has a broader basis. Cresco's motivation to purchase Columbia Care is not primarily based on the latter's NY assets, the value of which is no longer clear.

• Verano canceled its acquisition of Goodness Growth in a surprise announcement this week. Perhaps we should have anticipated dramatic news from the severe spread compression we saw last week to only 2.8%. The spread compression appears to have been caused by a major ETF's unrelated large purchase of Goodness shares. We believe the most likely underlying cause is a growing perception that the New York market is less attractive than initially expected. In its overarching pursuit of social equity, the state has stalled its adult rec rollout and allowed the illicit market to obtain what may prove to be an unassailable head start, ironically supplied by the largest legacy cultivation market in the world, California.

Valuation Gap

• The valuation gap narrowed 102bp to 3.85 on 10/14/22, significantly below its 3.96 LTM 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 Largest M&A Deal of the Week:

• On October 10, 2022, Kolaboration Ventures Corp.  (Private)("KVC"), one of the largest vertically integrated California operators, announced the closing of its acquisition of Mission Nurseries Inc.
• The consideration amount and makeup of the transaction were not disclosed.
• Mission adds several popular brands to KVC, including Canna-Lean, MyBlueDove, Buzzies, Don Primo, White Widow, Happy Daze, and Mission Nurseries.
• Mission Nurseries products are among the sales leaders in KVC's retail locations

M&A by Sector: The buyers and sellers in this week's deals were from the following sectors:          

‍