Deal Tracker

Transactional Activity:

• Four capital raise transactions totaling $383.3M closed this week. One less transaction closed than last week, but volume was up by $356.5M. Five fewer transactions closed than the previous year, but volume increased by $144.7M. This week's average deal size was $95.8M compared to $26.5M last year.

Cannabis capital raises are off 64.0% YTD.

• Total Equity issuance is off 75.5%, and total debt issuance is down 44.9%.
• U.S. debt is down only 30.9%, while Canadian debt is down a more significant 80.2%.
• At 61.0% 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-three weeks of 2022, with 74.5% of all capital raised.

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Total capital raised is down 66.7%, but equity capital raised is down approximately 96.3%.

• Debt financing is down 47.3% YTD and accounts for about 95.6% of all capital raised; private companies raised 23.0% of it.
• 76.5% of total capital raises YTD were completed by public companies compared to 84.7% in 2021
• In 2022, there have been no equity deals above $25M.

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OUTLOOK

• Cannabis stock prices (measured by the MSOS ETF) were down 6.36%% last week before screaming upward 7.27% Monday after Senator Schumer's remarks that the Senate is "getting very close" to passing the SAFE + Act. Skepticism and profit-taking eliminated about half of Monday's gains in Tuesday trading. Investors were left to wonder whether it was just another political ploy or real behind-the-scenes progress.

• We believe that the passage of SAFE+ in the lame-duck session is quite likely. SAFE+ will likely have dramatic, though indirect,  impacts on stock prices. Giving banks safe harbor to deal with cannabis companies is expected 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. We doubt multiples will expand back to their highs of early 2021, but a 75-100% gain seems quite possible.

• The equity market seems to be trading in a different universe than we know. Impending global recession, stubborn inflation, Intensifying Ukraine conflict but stocks have their best month in decades?

• 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.

• Since last week's major Canopy announcement, Nasdaq has voiced doubts about the propriety of Canopy consolidating the earnings of its U.S. properties while professing not to control its operations. It is difficult to believe that the transaction wasn't cleared ahead of time. The loss of the Nasdaq listing is a big enough deal that we wonder if the transaction will be completed if Nasdaq doesn't relent.

‍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 (4Front (FFNT: CSE) down 32.2%) has widened to 68 points. But since August, it's been Green Thumb and everyone else. GTI has been the lone gainer over the last three months.

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Best and Worst Performers of the last week and YTD

• Canopy Growth (CGC: Nasdaq) was the week's biggest gainer, up 33% on the surprise announcement that it was completing its acquisition of Acreage and pooling its U.S. assets into a newly formed U.S. holding company. The news shocked the market because everyone believed such a move would jeopardize Canopy's Nasdaq listing. Canopy has shown incredible legal creativity before, though. Hence, its announcement immediately set dozens of lawyers to work analyzing the potential for a U.S. MSO to use a similar workaround to gain a Nasdaq listing. By the end of this week, the enthusiasm for that possibility had died down, and Nasdaq's announcement that it disagreed with consolidating the results of the U.S. operations into the Canadian entity erased some of the gains.

• Aurora Cannabis (ACB: Nasdaq) was the second largest gainer, up 16% on the Canopy news.

• Greenlane (GNLN: Nasdaq) was the worst performer of the week, down 70.6% on the news that it had priced a "best efforts" unit deal for gross proceeds of $7.5M. Each unit included two seven-year warrants struck with a 0% premium. Each of these terms is unusual. We are used to seeing ½  or one warrant per unit, usually priced at a premium of 20-30%, expiring in 2 -4 years. The Black Scholes value of the warrant package is $.735 reducing the net share price to about $.16 per share. Greenlane shares closed the week at $.49 per share, down from $1.68 the previous week. Greenlane leads the list of YTD decliners, down 97%.

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Cap Raises by Sector:

EQUITY RAISES

The Week's Largest Closed Equity Transaction:

• On October 27, 2022, PSYLO PTY (Private) closed a Seed Funding round for $5M.
• Psylo is an Australian-based startup founded in 2021 that attempts to use AI and computational chemistry to create therapies with the mental health benefits of psychedelics without the hallucinogens.
• The company plans to work with its first clinical candidates in 2023.
• Main Sequence led the investment in the round, joined by Lionheart Ventures, Negev Capital, and Empath Ventures.

Public Company Raises:

• Three of the four companies that raised capital this week were public. All trade in Canada on the CSE and in the U.S. (two on OTCQX and one on OTC.)

Equity vs. Debt Cap Raises:

• Equity accounted for 2.2% of this week's capital raises.

DEBT RAISES

• Debt accounted for 86% of trailing 4-week capital raises, primarily due to Verano's $350M refinancing debt deal. We expect to see a wave of these refinancing transactions and have already seen deals from TerrAscend (TER: CSE) and Verano (VRNO: CSE). One of our recent Charts of the Week highlighted the significant upcoming maturities facing Verano), TerrAscend, Jushi (JUSH: CSE), and AYR (AYR.A: CSE). Two of the four have already completed significant refinancings, and we would not be surprised to see the other two follow similar paths. Several smaller tier 2 and tier 3 companies have similar liquidity crunches coming up that we believe will spur an increase in debt financing.

The Week's Largest Debt Raise:

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On October 27, 2022, Verano Holdings (VRNO: CSE), the fourth largest U.S. MSO by market cap, completed a $350M refinancing of its existing credit line.

• The new four-year facility has initial availability of $350M but envisions $270M of additional debt: $100M of Real Estate backed debt, $100M accordion, and a $50M revolving credit facility conditioned on the passage of the SAFE Act.
• The facility has an initial interest rate of 12.75% (Prime plus 6.5% with a prime floor of 6.25.)
• Monthly amortization payments of $350,000 beginning on October 31, 2023.
• A reasonable covenant package includes the following:
• Minimum Liquidity of $35M
• Minimum EBITDA of $30M per quarter. Note that consensus estimates for the third and 4th quarters of 2022 are $77.4M and $86.5M, respectively. It isn't easy to match the analyst projections to the definition of EBITDA in the credit agreement, but we generally believe this covenant has adequate room for moderate underperformance.
• Debt Service Ratio of over 1.5x
• The terms of this transaction are favorable: covenants are fair, amortization is modest, and baskets for additional debt are reasonable.
• Interestingly, Verano is paying approximately the same rate as TerrAscend and about 150bps more than Acreage. The chart below shows our credit scoring of each MSO with more than 100M market cap and the interest rates for the most recent three financings.

• According to the Viridian Credit Tracker credit score,  Verano is a significantly stronger credit than TerrAscend or Acreage, yet it is paying the same interest rate or higher. The difference is accounted for by two factors: prepayment terms and guarantees.

• We have been arguing for the last several months that, in the current environment,  the prepayment terms of a loan are more important than the interest rate. Verano and its lenders, Chicago Atlantic and ATB, have crafted an agreement that embodies that idea.

• Verano can prepay up to $100M of the facility at any time, subject to a $1M fee payment. Prepayments beyond the $100M in the first two years require payment of all interest that would have been earned to maturity. At the end of year two, prepayment penalties drop to a modest 5.75%, which drops to 1% after three years. This ability to prepay at reasonable penalties is key to this transaction. In the event of federal legalization or rescheduling, companies should be positioning themselves to issue equity to take out expensive debt.

• TerrAscend's loan, in contrast, is structured with a minimum interest payment term of 3 years. A prepayment at the end of year one would require the remaining two years of interest as a penalty which would amount to over 25% at current rates.

Another Interesting Debt Deal:

• On October 25, 2022, Acreage Holdings (ACRD: OTCQX) completed an amendment to its $150M credit facility with AFC Gamma and Viridescent Realty Trust to provide access to an additional $50M.
• $25M is available currently, and the other $25M will be available in future periods under a committed accordion, subject to meeting predetermined milestones.
• The interest rate is prime plus 5.75% with a Prime floor of 5.5%, and the initial maturity is January 1, 2026. Acreage can extend the maturity by one year by paying 1% of availability under the facility.

• Acreage can get a favorable rate because of an interesting credit support/prepayment fee built into the credit agreement. Concurrent with entering into the amended credit facility, a subsidiary of Canopy agreed to acquire an option to purchase all of the outstanding principal and interest owed under the facility for an option payment of $28.5M. If Acreage repays the facility on its agreed terms, the Option Premium will be returned to Canopy. If Acreage defaults under the agreement, the lenders will keep the Option Premium. Conversely, if Canopy wants to acquire the debt, it can do so at the face amount subject to paying the option premium. The prepayment fee is approximately 14.25% if the full potential $200M is outstanding.

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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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