Deal Tracker

Transactional Activity:

• Five capital raise transactions totaling $26.8M closed this week. Two more transactions closed than last week, but volume was down by $29.7M. Four fewer transactions closed than the previous year, and volume declined by $169.8M. This week's average deal size was $5.4M compared to $21.8M last year.

Cannabis capital raises are off 66.8% YTD.

• Total Equity issuance is off 75.6%, and total debt issuance is down 51.4%.
• U.S. debt is down only 42.9%, while Canadian debt is down a more significant 78.7%.
• At 53.4% of total capital raised, debt remains the highest in history for comparable periods.
• Public companies accounted for 73.6% of total financing YTD, down from 78.9% in 2021.
• The graph below shows that U.S. activity dominated capital raises for the first forty-two weeks of 2022, with 55.1% of all capital raised.

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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.

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OUTLOOK

• Cannabis stock prices (measured by the MSOS ETF) were up 16.02% last week, closing to 7% of their recent highs while still 57% down for the year.

• 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 merest hint that the Fed might moderate the pace of rate increases has set equity markets on fire. We think the market's focus on the fed funds rate is misplaced. Ongoing quantitative tightening is where the real work of the Fed is happening, draining the massive pool of excess money supply that has been washing through the financial system for years. And make no mistake, QT is not good for asset prices. Meanwhile, the news cycle borders on bizarre: chaos in British politics and economics, threats of dirty bombs in Ukraine, a crackdown in Chinese politics, and back-to-back multi-hundred-point runs in the major indexes.

• Meanwhile, negative industry trends and a tight capital market are pressuring middle and lower-tier cannabis companies. Restructuring news is front and center like we haven't seen since 2020. These pressures are likely to drive accelerating industry consolidation.

• Today's announcement of forming a US holding company for Canopy Growth's US assets gives us that "what do they know that we don't know" feeling. Hiding behind the veil of ownership without voting control seems like a thin reed to maintaining primary exchange listing. Still, Canopy evidently ran this idea past the exchanges and got it pre-approved. It raises the question of whether US MSOs could use the same maneuver as a path to up-listing.   In the end, we have to give credit to Canopy for its legal inventiveness. How different the cannabis world might be if Canopy's business strategists were as sharp as its lawyers!

‍ YTD Returns by Public Company Category

• U.S. tier-one MSOs gained six places in our ranking of YTD stock performance, swapping places with a deteriorating Psychedelics sector.

• The market is still strongly differentiating between MSOs, and the gap in the last twelve-week stock performance between the best performer (GTI (GTII: CSE) up 26.9%) and the worst (TerrAscend (TER: CSE) down 32.2%) has widened to 59 points.

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Best and Worst Performers of the last week and YTD

• California-based Unrivaled (UNRV: OTC) and Glass House (GLASF: OTC) repeated their performance among the week's top cannabis stocks.

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

• Two companies on the loser list this week, Tilt (TILT: CSE) and StateHouse (STHZ: CSE), also appeared on our Chart of the Week screening for companies with low liquidity and high market leverage ratios.

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Cap Raises by Sector:

EQUITY RAISES

• The Week's Largest Closed Equity Transaction:
• On October 191, 2022, Empyrean Neuroscience (Privat) closed a Series A funding round for $22M.
• Empyrean is attempting to use genetic engineering techniques to modify the genomes of fungi and plants to change the amount and kind of neuroactive molecules they produce, intending to develop treatments for CNS disorders.
• The company's initial focus is on Major Depressive Disorder, but it plans extensions to PTSD, substance abuse, and chronic pain.
• Proceeds will fund the development of therapeutics.

• Public Company Raises:
• Four of the five companies that raised capital this week were public. All four trade in Canada (two on the CSE, one on TSX, and one on NEO) and in the U.S. (one on OTCQX, one on OTCQB, and two on OTC.)

• Equity vs. Debt Cap Raises:
• Equity accounted for 99.1% of this week's capital raises.

DEBT RAISES

• Debt accounted for 28% of trailing 4-week capital raises, below its LTM average of 61%. Intriguingly, debt has only accounted for about 29% of capital raises over the last twelve weeks. Everything would seem to point in the other direction. Raising equity has become a heavy lift, and most companies would prefer not to sell at prices hovering around 52-week lows. The talk of banking reform and rescheduling/descheduling would also seem to rule out doing an equity issue. After all, which finance officer wants to raise equity at the lows only to see the market scream upward after the passage of SAFE? The answer, we believe, is that lenders have become more cautious, taking a harder look at business plans and collateral valuation. Perhaps we see equity raises because reasonable debt terms are no longer available to many companies. Does that also explain the recent preponderance of PIPEs?

The Week's Largest Debt Raise:

• On October 21, 2022, Trees Corporation Canada (TREES: NEO), a $1.4M market cap Canadian company with 13 Trees branded storefronts in Canada, closed a non-brokered private placement of 200 units for gross proceeds of approximately US$145,700.
• Each unit consists of a $1000 face amount 3-year convertible note with a 12% coupon, a conversion price of US$.0109 (50% premium), and 66,667 warrants with the same exercise price.
• The warrants and conversion features combine to produce total coverage of 200%. However, the relatively high premium of 50% limits the value of the embedded options. The effective cost of the package is 16.88%, which strikes us as excellent execution for a small retail-oriented Canadian company with $7M of LTM revenues, nearly $6.7M of negative EBITDA, and $9M of Debt and Leases.    

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Transactional Activity:

• One M&A transaction closed this week with a no disclosed transaction value compared to two transactions for $72.48M in the prior year.

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Total YTD M&A volume is down 80.5% from 2021, with $4.72B in consideration and 14 deals closed versus $23.89B in transaction value and 273 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.

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• U.S. volume is down 67.5% YTD, with 40.8% 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.

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Major Pending Deals Risk Arb

• The Cresco/Columbia deal spread widened by 260 bp to 15.8% on 10/21/22. 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.

Valuation Gap

• The valuation gap widened 72bp to 3.62 on 10/21/22, still 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 17, 2022, The Healing Company Inc. (HLCO: OTC), an emerging health and wellness company, acquired Your Super, a leading plant-based superfoods brand.
• The acquisition was financed through cash and Healing Company common stock.
• The exact consideration amount and makeup of the transaction were not disclosed.

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

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