Capital market transactions report fireside chat

Julie: Hello, everyone, and welcome. My name is Julie. Before turning things over to our speakers, I'd quickly like to review some of the features available to you through this WebEx platform. First, please take a look at the bottom of your screen - you can see the three dot additional controls icon that allows easy access to your sphere controls to ensure you can hear our presenters clearly. You'll also find the red X icon which will allow you to leave the webcast at any time without disruption. To change your WebEx screen options, you can click on the View button located in the upper right corner of the meeting window and select the desired option, such as grid view or speaker view. Next, at the bottom of the right-hand corner, you will find the Q and A icons. You can click on the participant icon to see the names of our presenters and the Q and A icon to ask anonymous questions. We will be addressing questions at the end of the session. We encourage you to ask questions throughout the webcast and will be answering as many questions as possible. However, please be sure to direct any questions to all panelists to ensure that all questions are captured and you can direct any technical issues you may be experiencing to me, the host. Finally, this session will be one hour and is being recorded and will be shared with you after the event and with that, I'll pass it over to Gennaro to start today's session.

Gennaro Santoro: Thank you very much. Hi, everyone, and welcome to the EY and Viridian Capital Fireside Chat, where we are discussing capital flows in the cannabis sector across both Canada and the US. Firs to introduce myself, my name is Gennaro Santoro. I am a Senior Director at EY Parthenon Strategy Group based in Toronto, Canada. I've been working in the cannabis sector since 2015 and am also a co-leader of EY's Americas Cannabis Centre of Excellence, with a primary focus on Canada, Europe Australia. I will be the moderator for today's webinar. Also joining me from EY is my colleague Sarah Dalton, who will participate in the panel discussion at the end of the webinar. As a quick introduction, Sarah is also a Senior Director at EY and is also a co-lead for the EY Americas Cannabis Centre of Excellence. For the past six years, Sarah has been a leading EY go to market efforts around hemp and cannabis in the US and is working closely with other EY member firms to provide strategy and transaction services to companies operating in legal cannabis markets. Beyond cannabis, Sarah has also worked closely with private equity clients and adjacent industries like alcohol and tobacco on consumer product innovations, new markets and supporting technologies.

This webinar is meant to provide a deep dive into the 2022 Cannabis Capital Flow Report, which is published and available on the EY website so we've noted the link here on the screen. The report connects market leading Viridian data, which comes from the Cannabis Deal Tracker, which again is noted on the screen here, which is with Rich EY insights to highlight cannabis industry trends, current capital market transactions and what's ahead in 2023. Before we get to the presentation, I will provide a quick background on the contributing organizations with Viridian and EY. So, Viridian Capital Advisors was established in 2014 as one of the first and now leading corporate finance, M&A and research practices in illegal cannabis and CBD industries, and now covering psychedelics sector. They represent companies, investors, lenders, sellers and acquirers and through their broker dealer, Bradley Woods and CO, their investment banking practice raises capital, executes M&A transactions and provides corporate restructuring services for their clients. Their strategic advisory practice prepares clients to access capital markets by building a proper board of directors, financial models, sophisticated valuation analysis, M&A strategies and business development opportunities. Viridian is widely recognized as an industry leader in research, capital markets, data and financial market intelligence on cannabis, CBD and psychedelics companies. For EY, it is one of the largest professional services firm in the world, leveraging a network of professionals and collaborators across countries to provide consulting, assurance, tax and transaction services that help resolve our clients toughest challenges and build a better working world for all. EY Americas Cannabis Centre of Excellence, which I mentioned before, Sarah and I are part of, is designed to assist cannabis clients with their greatest business challenges. The COE serves cannabis operators within federally permissible jurisdictions, regulatory bodies, and adjacent industry players such as; CPG, beverage, alcohol and tobacco and pharma, and provides focused knowledge across the cannabis value chain. And the COE aims to be a sector the sector's preeminent thought leader, further professionalizing the industry in helping clients grow and become global leaders. As part of today's webinar, we will begin with a 20-minute presentation from Scott Greiper, the President of Viridian, and Frank Colombo, the Director of Data Analytics at Viridian. Scott and Frank will dive into key insights and outputs of the report focusing on 2022. Following the presentation, we will have a 20-minute panel discussion to highlight predictions and expectations for 2023, including tailwinds and headwinds for 2023, accelerating pace of restructuring activity and opportunities, and generally opportunities to capitalize on what's happening in the sector for this upcoming year. We'll close the webinar with a Q&A session, as we mentioned previously, and which we'll be able to submit the questions directly through the app.

I will now pass it off to Scott and Frank for quick introductions and the presentation for 2022 Capital Flows. Scott, over to you.

Scott Greiper: Thank you so much, Gennaro. Good morning. Good afternoon, everybody. Wherever you are in the world today, couldn’t be more thrilled, honestly, to have aligned and partnered with EY on this webinar, on this report and other capital markets intelligence that will be releasing throughout the year. We founded Viridian nine years ago and it's been a long and wild ride and we've always thought that data was important to investors, acquirers, lenders, companies in an industry as interesting and dynamic as this one and that's why we started the Viridian Cannabis Deal Tracker in January of 15. We've become the leading source of capital markets, intelligence in the world and our research and our data is used by companies and by side players to make smart capital allocation decisions. And in an industry as unusual and dynamic as this, I've always thought that bringing together thought leaders was a real benefit to all the constituents in the industry, and we've been fortunate to have aligned with leading players, law firms, accounting firms, industry trade associations. But the cherry on the cake for us is quite honestly, this relationship with EY, you know, the largest firm, one of the largest firms of its kind in the world, and now creating the Americas Cannabis Centre of excellence, really quite a joy for us to partner with you guys and Rami and Sarah and Gennaro and Brian and Julie, I'm sure I'm leaving out names but just want to thank you for partnering with us on this. Frank Colombo, who is joining us today, is our Head of Data and Data Analytics at Viridian. He does all of the financial modeling for our clients, all of the valuation work for our clients, and is the man behind the Viridian Cannabis deal tracker. So, Frank, why don't you introduce yourself and then we'll jump in.

Frank Colombo: Those of you who subscribe you’ll see our tracker deal of the week, weekly deal tracker and our chart of the week. And I write those products and we are continually trying to improve and extend those products but we've come a long way in the last year, and I think you're going to see some of those changes very soon.

Scott Greiper: Thank you, Frank. I'll let in by the way, guys, that Frank was the head of the credit group at UBS for many years and brings all of that kind of approach to analytics and modeling and valuation from a credit perspective, which in an industry that debt has become the primary source of financing. We have the only credit rating system in the world. We'll get into that.

Okay, guys, let's jump in. So, you're looking at a slide that really shows a discontinuity, a dichotomy between an industry that is growing as one of the fastest growing consumer products industries in the world. You could see that. Gennaro, if you can do your cursor up to the Canadian industry grew 18% in 2022 versus 2021. The US industry reached 30 billion in legal sales last year. Grown by a licensed, state licensed legal grower, sold by a state licensed dispensary. $30 Billion in Legal sales. There's another $50 Billion that's still in the black market. So, this industry of $80 Billion in size is bigger than beer today and is growing faster than other commensurate industries. When Viridian started in 2014, to give you some sense of scale, the industry did about 2.3 billion in legal sales. $30 Billion last year. So, all of the headwinds, and all of the challenges, and all of the lack of regulatory progress, the industry has grown by 15X in the nine years that we've been in the space.

However, last year in 2022 was certainly the most challenging year from a capital markets perspective. The amount of capital raised down 68%. As you can see, the total value of M&A activity down 73%. Equity is almost impossible. It's punitive, It's dilutive even for the biggest public companies. Debt has come in, thank God, and saved the day. California and New York remain the leaders for capital raises to give you another sense of scale. When we started in the industry in 2014, there was no East Coast market. There was no Massachusetts, New York, Florida, New Jersey, Vermont. It was the Rockies and West. So, we've come a long way in creating a truly national market. Can you flip a slide, please? So, we thought it relevant and interesting to compare the cannabis market as a CPG sector against the two most tangential CPG sectors, which are tobacco and alcohol. I don't have to read the slide. You can see it. For all the reasons many of us know, tobacco has been in a year’s long decline and over the course of the next 10 to 15 years is going to be legislated out by states and countries. Alcohol, similarly, has been on a year’s long decline, and yet here's cannabis completely bucking the trend. What's very interesting is typically three years after a state decides to launch a medicinal cannabis program, which is how all state programs start. It starts medicinally and when the governors and legislators see that anarchy is not breaking out and they like the tax revenue juice, they add on recreational. But typically, three years after a state launches medical cannabis, we see a decline in tobacco use, we see a decline in opiate use, we see a decline in alcohol use and we see an increase in cannabis use. You can come to your own conclusions as to why that is, but that's the way it is. So, cannabis on its own on the part of consumer choices. When states legalize medicinal and rec, outpace the use of pharmaceuticals, tobacco, and alcohol. This is one of the largest CPG sectors in the world, despite all the headwinds that the industry faces.

Next slide, please. The first research report that Viridian ever put out in November of 14 was a report that landscaped what is the business of cannabis? What are the business sectors that underlie every state that launches a medicinal or adult use program, and every country that institutes a medicinal adult use program? Here they are. We identified these, whatever it is, eight years ago. The only change we've made in the interim has been the addition of CBD and psychedelics. CBD came in after the US Farm Bill was passed in December of 18, and psychedelics has been a mad rage in the last couple of years. But this is the business of cannabis in every legal state and every legal country. And what's interesting to me, when we put out the report is, cannabis is not so far afield as an asset class as I thought, and probably most buyside players think. You have agricultural technology, Agtech. These are lights, these are nutrients, these are racking systems, these are dehumidification systems, that by the way, exist in every indoor vertical farm in the world that's growing lettuce and tomatoes. So Agtech, an institutionally owned asset class, is at the origin of cannabis. You have biotech and pharma. Probably one of the top two most institutionally owned asset classes in the world. GW Pharma received the first FDA approved cannabis derived drug, Epidiolex, to help treat childhood autism, acquired by Jazz Pharma for 7.2 billion. And now, the DEA has been giving out licenses after 50 years of only giving one to the University of Mississippi. To be able to grow cannabis for R&D. Now, there's been several dozen more licenses issued. So the whole biotech pharma side of the industry is starting to grow. You have cultivation and retail, which is all about finding a permitted piece of land or a warehouse in which you can grow. Its cultivation, no different from indoor farms that are growing leafy green vegetables. You have real estate. Real estate is at the core of the cannabis industry because when you apply for a license in a state, you also have to identify a outdoor grow, an indoor grow, a greenhouse in a place within that city that has been permitted in zones for cannabis. Very restrictive. It tends to be why cannabis operations have a higher value than non-cannabis operations. But it all starts with real estate at its core. And the last one that I'll throw in is software - you know, the industry started from using ledgers and QuickBooks to now you have Oracle and Microsoft based systems that underlie ERP cannabis systems, inventory management, accounting. So, the point here is this is not an industry of a federally illegal drug. It's an industry of Agtech and Biotech Pharma and cultivation and brands and real estate and software. Very traditional institutionally owned sectors. And when we put out the deal tracker every week, every deal, every equity raise, every debt raise, every acquisition, every sale side, every going public event, is categorized into one of these sectors. And over time, we see trend analysis, actionable trend analysis and capital and acquisitions moving into Agtech and out moving into cultivation. We start to see trends and that's how we advise our companies and our buy side clients as to how to best allocate capital where and when.

Next slide, please. Try to pick the pace up here, guys, a little bit. Here is a four year look back on every transaction that we've tracked in the Viridian Cannabis deal tracker from M&A, and then capital raises broken down into equity and debt. And it's pretty clear, just by the way, this is all in the report, every one of these slides is taken from the Cannabis Capital Flow Report that EY and Viridian produced. It's available on the EY site, so please go and download that. But you can see that the industry in 2022 had a very, very difficult year. 2019 was the prior high watermark for a number of deals, value of deals. But in the second half of 19, if you guys recall, the cannabis market broke. It was the first downturn from valuations. Not as severe as last year, but the first significant downturn. And it was because when the Canadian LPs and the US MSOS started to report - Q1/19 Q2/19 results, the public companies, they were poor. There was over forecasting on the part of the analysts. There was too aggressive estimates on the part of the analysts, and there were a lot of misses. So, the second half of the 19, we started to see money pulling out of the cannabis market, both the public side, the private side and M&A. Who would have thought? And that downturn happened through. Q1/20. You could see the real down year that 20 had. Who would have thought that in March of 20, April 20th, the solve, the rescue for the cannabis industry was COVID? Because proverbially speaking, people were hoarding Clorox and toilet paper and their edibles and their vapes and that's really what happened. In fact, through the back half of 20, US cannabis companies reported record sales and it was all COVID-driven. So, not only hoarding, but all of the PPP dollars that were being stuck in people's pockets. You know, they were a more aggressive consumer.

Coming into 21, we had our biggest year ever in 21, in terms of number of transactions across M&A and capital, in terms of the dollar value of those transactions. That was in large part due to two factors. I'll take one, Frank, you take the other. The Dems won the White House, the Dems won the Senate, the Dems won the Congress. And everybody thought we were racing towards progress in regulatory regimes. Whether that's the passage of the SAFE Act, which didn't happen, whether it was that a rescheduling of cannabis from 1 to 2 or 3 hasn't yet happened, or whether it was full federal legality, which hasn't happened. There was so much hope that on the back of a strong macro environment for the growth of the legal cannabis industry, we would remove this regulatory hurdle that imposes draconian tax rates and other challenges in front of companies. It didn't happen. Frank, do you want to go through also what happened in 21 to pump up these.

Frank Colombo: Just to add in some colour behind these numbers, we can really think of 21 as the year of the mega deal. And particularly in M&A, you look at that $17 billion number, about almost 9 billion of that were from deals that were bigger than 500 million. Contrast that with 2022, there were zero deals, over 500 million. So, the fall in those large deals is really a main driving factor that took the M&A market down. Kind of the same thing in 2021 to 2022. In equity, you know, there was only one out of the ten biggest equity deals that we've seen in cannabis that happened in 21. But there was a lot of cultivation and retail deals, equity deals in 21, over $2 billion worth. Whereas if you go back to 2022, that 2 billion in 21 went down to 100 million in 22. So, from 2 billion to 100 million, partly because of what Scott was saying about the regulatory environment. So, there's some kind of special features that differentiate between 2022 and 2021. And that's some of the highlights.

Scott Greiper: Thanks, Frank. I'll add one more thing on this slide and then we'll move forward. So, if you see an M&A, 158 deals, 4.6 billion in deal value, down about 29% from the prior year. Equity was down 58%. Debt down only 7%. Why did M&A hold itself on a relative basis when equity offerings were down almost 60%? The public company has been the acquirer in almost eight and a half out of all ten M&A deals since we started tracking this nine years ago. The public company has been the acquirer in 85% of all M&A deals, and that's principally the US multistate operator because that's what they do. But when their stock prices are down and their balance sheet reflects less cash and less ability to raise equity, it weakens their position as a buyer. And yet M&A didn't fall off the cliff. Why? Well, in our opinion, M&A shifted. You know, prior to 21, it was a land grab. Let's buy everything that's not nailed down. Private MSOS, single state MSOS, a lab testing company in Portugal, everything you can imagine, it was a land grab. And when the market broke in 1920, those public companies were being told very clearly by the markets, we're not funding a land grab. If you have strategic accretive acquisitions that add value to the core business of your company, we'll fund that. But otherwise, we're not funding this. Let's buy everything. That's what changed in 22, from an M&A perspective. Deals are still getting done. Asset values are down. It's a buyer's market. But if you look at the transactions that are happening, they tend to be very strategic and very accretive to the buyer adding brands, adding IP, adding revs, adding EBITDA, adding regional presence. That's what's changed philosophically in M&A from the buyer's perspective in 22. Next slide, please.

Frank Colombo: So, this is chronicling the rise of debt as a percentage of total capital raises. And you can see the trends been going for a while. And what's behind this? I mean, the clear reason that's behind this is the maturation of the industry. You know, companies are becoming increasingly EBITDA positive. Some are even cash flow positive and so that has been happening. There's also a bit of a mix shift here in terms of geography that plays into this maturation thing. You know, if you go back to 2019, the US only accounted for about 45% of the total financing done in that year, whereas in 2022 it was almost 75%. So, there's been a shift from Canada to the US and the US MSOS tended to be more cash flow and EBITDA positive and they're able to take on more debt. So, that's part of it. Another part of it that we follow very closely is the cost of debt. We look at this very carefully to try and value all of the embedded options that are in a debt structure like the convertibility option, the value of the warrants, the prepayment penalties, all of those options we take into account and we try and put all these debt structures on an even playing field. So, for example, you know, canopy Growth just did a 5% convertible. Well, that 5% turns out to be something like a third of the true cost of that debt issue because they have a discount conversion option.

So, we're careful to look at that. And we try and also look at the credit quality of these companies via our proprietary credit model and try and match up the costs against the credit quality to see where there's mispricing’s. Another thing that you see in this is there's been a rise of a whole new sector of business, which is the cannabis lenders and I think of it as regulatory arbitrage. You know, investors that were not willing to take the legal risk of lending to cannabis companies either went to these lenders and sale leaseback companies or invested in equity, and they were able to kind of in a second-hand way, invest or lend to the industry. So now when we get to 2022, we've got two things going on that kind of turbocharge this move into debt and one, of course, is the drop in equity prices, but the drop in equity prices, you know if you think no CFO wants to be the guy that raises equity at the lowest level his stock has ever been at, but then when you throw in the regulatory freeze, it gets even worse because, you know, as much as you don't want to raise money at the bottom you don't want to be the guy that raises money at the bottom and then say the Safe Act passes and your price of your stock just doubled. Now you look doubly stupid. So, that really put a freeze on equity issuance at the end of 2022 and it's ongoing. So, you know, we're starting to see the cost of debt creep up. You know, we're starting to see, you know, obviously interest rates are up thank you to the Fed. But we're also starting to see an increase in these equity linked structures after years of decline. One of the reasons why cost of debt went down is in 2019, 80% of all the all the debt issues were linked to equity through conversion or warrants or something. By the time we got to 2022, it was down to 5%. So, equity linkages really dropped off, but they're starting to pick up again. And that's because, you know, with rates being so high, companies can't afford to pay those high cash coupons. We're having to start to throw in equity kickers. Nonetheless, we still think this trend is going to keep going because frankly, you know, debt is still the best option for most companies out there to do financing, particularly if you have any kind of hard collateral to use. But even for companies that don't, equity is hard to come by and it's really expensive. Debt is the best game in town.

Scott Greiper: Thank you, Frank. Okay, guys, can you flip slide, please? Okay. So, I spoke about before that in the Viridian Cannabis Deal Tracker, we track every deal by sector so we can track the rotation of capital and M&A by industry sector because we're not equal here - very discreet. We also as you'll see on the next slide, track it by the region in which the company that got the money or was acquired exists. California, New York, Colombia, because there's also a rotation by where companies exist. Let's look at it by industry sector. We'll go through this quickly.

Let’s look at Agtech that first row there. So, you'll see that in 2021, it represented 5.1% of all capital in 2021. In 2022, it went down to 3%. Why is this? Well, it's pretty linear answer. Companies are spending less money on building very large growths, they're spending less money on acquiring another lot or another warehouse to increase size of production. There's less CapEx spending because there's less capital availability and if there's less CapEx spending and less greenhouses or grows being built, there's less  lights being acquired. So, this is a linear relationship between the demand side of more grows, bigger grows and people buying Agtech. Let's jump to Biotech Pharma. So. Biotech Pharma represented 1.8% of capital in 21. It went up to 3.7% last year. I think this is a direct result of finally the US getting its head out of the you-know-what and recognizing that we have the largest biotech drug development apparatus in the world and in a schedule one environment all of that went up to Israel, which is great because they have a great ecosystem as well. But with the DEA finally handing out more than one license for a university or an entity to grow cannabis for R&D, that's why we're seeing an increase in capital coming into the sector, because we need clinical trials, we need empirical evidence of how to use cannabis, of how to use CBD for an eating disorder or sleep disorder. That can only come through clinical trials. The US ceded its position for years in this because of the Controlled Substance Act, schedule one. The DEA licensing is starting to bring back attention and money into the biotech side of the cannabis industry.

Let's look at cultivation and retail. Represented 60.6% of capital in 21, went down a little to 56% last year. Cultivation and retail has been the principal recipient of capital because it's all development of infrastructure, right? You've got to grow. You've got to manufacture a process to get the oils into an infused product and you've got to open up a store. So, it's all about after you win licenses, setting up your infrastructure and then scaling. So, cultivation and retail, our first full years of the tracker. Cultivation and retail was capturing 85% of every dollar of investment. That's trailed down over time but still the majority of capital goes into the sector. I'll finish up with two more. Psychedelics, which was relatively invisible last year. 0.3% of raises went up to 5% last year. One of the strange things we've witnessed in our nine years of existence of Viridian was people thought that cannabis was going to be a salve and a replacement for opiates in a medical environment to treat eating disorder and anxiety and chronic pain and sleep. And by the way, it is. But without clinical trials, there's a lack of information. People are figuring out on their own. Psychedelics have usurped medical cannabis as a medical salve because you have ketamine, which has been FDA approved since 1976 or 78. You have states like Colorado, Oregon, Washington that are legalizing psilocybin. There are clinical trials undergoing because of science, because of psychedelics, other than LSD not being schedule one. The medical community, the biotech community, the clinical trials community has been racing forward with psychedelics and it's been capturing a lot of attention from institutional investors. I'll end with real estate on this slide. It went up from 8.9% of all capital in 21 to 14.9% last year. This is all sale leasebacks. This is all sale leasebacks, one of the least dilutive ways that companies can create capital or access capital is by getting their owns unencumbered real estate, typically a big grow a warehouse or a manufacturing facility off the balance sheet, do a sale leaseback. They sell the land, they lease it back. That's why real estate has increased so much as a percentage of capital. Next slide, please.

Gennaro Santoro: We just have two minutes. Maybe just wrap up the last three pages here.

Scott Greiper: Okay. I'm going to talk really fast. I'm from New York, so this is not going to be hard. So, you're looking at capital raises by state and I'm just going to point out three states, Illinois, 22.2% of all capital is here. Illinois is the hottest market in the country and I don't believe there's a close second. The industry Illinois is a sector or is a state grew by 16% last year. By far the largest growth out of any state. New York capturing a lot of attention. Why? They're handing out new licenses. It's not just the original ten. We finance number seven and sold it. And now you have all of these social equity licenses, thank God, being handed out. Those license owners need to capitalize to build out their facilities. I'll end with California. California had a bit of an uptick. 25.7% of all capital raises last year went to the state. California is in a bit of a depressed state because they were the first to get hurt by commoditization of flower. But they are the state with brands and the legacy brands and we're starting to see a roll up activity there. That's why capital is coming in. Alright, Gennaro, let's go to the next one. This is M&A by sector. I'm going to spend 30 seconds here. You've seen an uptick in Agtech. 3.7% of all M&A activity in 21 7.8% last year. There's a roll up activity going on there because the companies are underperforming because there's less gross. There's a need to bring together to build efficiency, to build scale, to have better access to capital. I'll go down to psychedelics. We're starting to see M&A in psychedelics because most of these companies are public, there's a lot of cost to being public and as usual, there's advantages to combining operations. Last slide here, and I think I'll hit my two-minute mark. Gennaro, is M&A activity by state. Again, New York is almost out of control. Now, a lot of this last year for the 2022 number was the acquisition of Etain by RIV Capital. I think that was about a $240 Million deal. So, you had a one very large deal that that really accounted for a lot of the increase. The other states that you see some increase in M&A. This is roll up consolidation activity. A major portion of Viridian's business today is representing companies, buy side players, family offices, private equity that view the industry as having strong macro growth visibility because it does and yet, asset values are down 85-90%, it's a buyer's market. And so, they're looking for us to advise them as to what state, what license type, what business can be acquired or can be majority controlled because the asset values are in such distress. I think I hit it, Gennaro.

Gennaro Santoro: I think you did. Thank you. Perfect. So, I'll just stop sharing the presentation here. Perfect. Thank you, Scott and Frank for obviously going through the presentation and sharing the insights from 2022. We'll now move on to the panel discussion where we'll join also by my colleague Sarah Dalton, which I introduced at the beginning. So hi Sarah, welcome. As we go through the panel discussion, I'll raise some questions to kick start the discussion but the conversation will build on from there. And so, we'll obviously give the panelists included and we'll have a bit more of a deep dive as we go through. So to get into it, I thought we could first dive a bit deeper on the M&A trends. I know we talked a little bit about this in the transition over time to 2022, but maybe, Frank, this is maybe a question we can start with you. You know, Scott provided the overview of 2022, but what do you see as the trends for M&A in 2023?

Frank Colombo: So anyway I'm off mute now, right? So, I see there being three trends in M&A in 23 and one is kind of obvious, which is continued consolidation. You know, we have an industry with 10,000 really small companies, $2 million revenue companies and in the context of a capital-intensive agricultural commodity-based CPG industry, that just is not going to last. There's going to be a lot of consolidation. The biggest MSOS out there are still very tiny companies in the context of global CPG. So, we're going to see a lot of that, and we're seeing a lot of interest in that In California in particular. We are actually talking with several groups that are looking to roll up the California business and it's very fragmented as the rest of the business is. But California and Colorado and the other areas that were really impacted by price compression are prime spots for consolidation. The next segment or the next theme that I see is what I call up partnering, and that is, you know, companies such as tier two, tier three, smaller private companies are starting to realize that it's just too tough to go at it alone, that they need a bigger partner to broaden their access to capital, to broaden their distribution channels possibly to give them lower costs on the production side do we're seeing a lot of that. And, you know, an example of that might be the, you know, the recently announced parent company, Gold Flora acquisition. Even the larger deals like Cresco, Colombia, you could think of as this idea of creating bigger scale to position yourself better for eventual legalization. So the final trend that I see that I think is going to be very powerful in 23 is distress. You know, there's going to be a slew of distressed M&A, a lot of it happening in those markets that we already spoke about Colorado, California, Michigan, even Massachusetts, where there have been impacted by price compression. So we think that you know, there are challenges in this trend and one of them is that you have to deal with the intricacies of state regulations. Another thing that I would throw out is distressed M&A fights against the lack of, you know, 363 bankruptcy sale capability. That is the way a lot of this asset sale, distressed asset sales would happen in non-plant touching businesses. But those are the three big areas. You know, consolidation, up partnering and distress, that I see will really be the hallmarks of 23 M&A.

Sarah Dalton: If I could just add to what Frank said, I completely agree with those three points. Our EY Cannabis Centre of Excellence just completed a series of survey interviews with CEOs in North America on their 2022 results and 2023 expectations, which we're currently compiling and will be releasing soon. But, you know, a number of those respondents mentioned that they saw that partnering with select competitors was going to be necessary in order to survive, especially as they're expecting others to be acquired or exit the industry altogether. I think, you know, one other thing that we may also see is some go private transactions as well. Probably not going to be any of the large MSOS, but most likely, you know, mid-tier, the ancillary companies. You know, being a public company is expensive and time consuming and when there's little added benefit to being a public company, with stock prices being so low, zero changes at the federal level that would allow for up listings, you know, an opportunistic buyer could decide to take one of these private either as a leveraged buyout or even a management buyout. Obviously, that presumes that they can find the capital or the financing needed to take it private. Cash is certainly at a premium these days.

Gennaro Santoro: Frank, you brought up a great point around distressed assets and some insolvencies that we're seeing in the sector. Maybe, Sarah, do you want to share some of your thoughts on that side?

Sarah Dalton: I don't think that this should come as too much a surprise to those that are paying attention to the industry but, you know, 2023 is going to be an extremely challenging year for most, both in the states and in Canada and I do think that we're going to see most deals in 2023 have a distressed element to it. You know, many of these deals are probably going to be used to pay down existing debt obligations, which we've seen a lot of that coming due soon and, you know, as Frank mentioned, we're already seeing some additional capital flow into some distressed funds because there are going to be some of these opportunistic buyers in the market, either financial sponsors or strategics with stronger balance sheets that will take advantage of some of these distressed assets. But, you know, frankly, I think that this cycle was kind of bound to happen. I mean, if we just look back to the tech bubble, you know, we see a lot of these ebbs and flows that we have before us today in the cannabis industry and in the end, you know, this is still an emerging industry. Even if we were to look to Canada as a future predictor, we knew that this was going to happen. Oddly enough, it now seems that it happens to be happening at the same time between the two countries. But, you know, you coupled this expected inevitability with, you know, an entirely unexpected growth explosion during COVID and subsequent leveling off, especially in mature markets, you know, the slower regulatory rollout and new adult use markets like New York and then couple that with this uncertain macroeconomic landscape and we have this perfect storm that we find ourselves in. But that being said, you know, consumer demand for cannabis continues to grow and unit sales or volume of cannabis products continues to expand as new states come online and we see more consumers move from the legacy or unregulated market to the regulated market. So, this is not all doom and gloom. This is an unfortunate, but I think, expected part of growing up in an industry where we've got strong players that will survive and those that are undercapitalized and without a clear value proposition and strategy, will not. But I do think that those that make it through to 2024 are likely able to make it for the long term because they'll be battle tested and most likely more efficient and certainly more successful. But those that are struggling, unfortunately, have fewer options than other businesses outside the cannabis industry, as many of us know. Plant touching cannabis companies can't seek bankruptcy protection in the US, but there are still some options. We've got, you know, out of court workouts. So, the assignment for the benefit of creditors state receivership. This receivership element is particularly helpful in states like California where they have sophisticated receivers with cannabis experience. But again, you know, each one of these options has its benefits and drawbacks. The state receivers in particular are pretty expensive, and that process is often initiated by, you know, the creditors or the shareholders or even, you know, dispute amongst the interest holders. But that can pave the way for a turnaround of the business to continue operating. You know, if we use an out-of-court workouts, those are certainly less expensive, but lenders and creditors have to be on board and work together with the owners of the business to come to an amicable solution. And if anybody's been involved in bankruptcy, oftentimes that is never the case. And then, of course, we've got ABCs, which is just a strictly liquidation process so there's no provision for restructuring or continuing operations in that case. There's also restructuring options in Canada as well with the CCAA. For those with Canadian operations. We've seen a number of Canadian LPs access this, as well as US cannabis companies that are listed in Canada. So, you know, I would expect that the trend of insolvencies and distressed M&A to really continue through 2023 and probably 2024 as well and just like we saw in the tech industry in the early days, we're going to see some of this choppiness. But, you know, companies that can resist the urge to sell and weather the storm for the next 12 to 18 months are going to be well positioned to succeed. It's just, you know, wherever investors decide to place their bets this year, those are probably going to be the deciding factors on who continues on because this is going to be the year of survival.

Gennaro Santoro: A great point, Sarah and I think just to touch on more on the Canadian side and you spoke about the EY CEO survey that we had conducted with the report coming out. We heard a lot of those same messages, specifically to Canada where, you know, again, distressed, you know, there will be a lot more distressed companies and insolvencies in the sector, especially this year and potentially next. But again, there's a flip side to that from an opportunity standpoint. We also heard from a lot of even the middle-tiered LPs that are looking at opportunities, you know, that build sustainable businesses that are looking at the next step and identifying some really great facilities that are available for lower fees and better cost basis. So, I'll just move on quickly to another question here. Just more so tied to capital raises and maybe this one can direct to you, Scott, to talk through what do we see as trends in raising capital in 2023 and any kind of impacts from raising interest rates as well?

Scott Greiper: You know, I think it's going to be what Sarah said. It's going to be a very difficult year from a capital availability perspective. Debt is going to continue to be the for majority of capital that's available. But, you know, as Frank was saying, any lender is attracted to the same thing. I don't care what the business is. If you've got hard assets in the form of real estate, which a good number of cannabis companies do because they've got to build to grow and that's unencumbered. There's that availability to that, even to the manufacturing processing facility, there's debt that's able to be brought in on top of that. The sale leaseback had one of its biggest years last year because it's probably the least dilutive financing, or maybe non-dilutive financing you could attract. Some of the sale leaseback providers the public companies, as you guys all know, are running into some issues with some of the tenants that they have and breaking covenants or being behind on paying rent. But nonetheless, the sale leaseback was a predominant transaction last year and again, a non-dilutive way to raise capital. We're seeing more and more equipment lease financing, factoring companies coming into the market, purchase order financing companies coming into the market. This exists in every other industry, and it exists here. The problem with some of those structures is they are, in some cases usurious. You can come up with other adjectives that I call them that I won't site on this phone, on this call. But there are legitimate providers out there that have been in the market for some time that understand how companies pay, that understand receivables and how they could be converted into cash. There are factoring and equipment lease options in the marketplace and we've brought some to our clients. So, the overall answer, Gennaro is, as Sara was saying, it's another year of challenge and accessing capital. Size matters, assets matter, cash flow matters and so you tend to see a lot of capital availability going to larger companies, going to public companies, and that's shrinking the availability to the private companies and in many cases, in some cases, those private companies are looking to exit long before they had in their original plans. That's where the pain is really being most acutely felt, is on the private companies.

Gennaro Santoro: I think we're seeing that all as well on the Canadian side. A lot of the private companies that probably expected to see better profitability numbers as they kind of build sustainable businesses, they just may not see the upside as what they once did and may be looking to exit. Just to wrap up maybe on the panel side, just to make sure we have enough time at the end for some of the questions, and thank you everybody, for submitting questions. Excited to see the amount that came through as well as some of the depth on these. But just quickly want to round it off on last little topic here on opportunities for 2023. You know, again, we hear a lot about the negatives. We talked about some of the activity in 2022. But you know, going into next year, obviously there's going to be much more. There's still a lot of pressure on solvency and distressed assets and businesses trying to build something that's sustainable. You know, where do we see opportunities in the sector? What are potential investment opportunities? And maybe, Sarah, we can start with you and then kind of go around to other panelists around the table. But go ahead, Sarah.

Sarah Dalton: I think we've said that this is going to be a challenging year several times. But, you know, I do think that this is a good time to get in and pick some winners. You know, I'm still long on the ancillary market. I really like the tech industry in particular. You know, right now I'm looking a lot at payment processing and FinTech, especially with the cashless ATM shut down last year. I also think that there's going to be a long tail before banks and merchant payment processors get on board post save for post rescheduling or post legalization, whatever that form looks like. I also, like any customer facing tech like bud tenders, anything around the consumer experience and gathering data. So Adtech, Martech, how you're reaching those consumers. So, I love that kind of piece of consumer data collection and analytics and bringing this back to the consumer. You know, when I think about plant touching opportunities, again, you know, I think the MSOS are going to be the winners. We know how this story plays out with alcohol and tobacco, where you have, you know, these 3 to 5 large companies and a slew of small and craft companies. But, you know, to Frank's point earlier, I think that there's some real big opportunities for the tier twos, particularly in a sale environment like this. But, any of these really need to have a bold and clear strategy for both today and when interstate commerce occurs, when that occurs and I don't think that every big company these days has what they need right now to be successful for that long period of time. I also like smaller brands with kind of these strong perspectives and community cult followings that can scale in an asset like manner. And I also like cannabis companies with this health and wellness bent. You know, there are these broader health and wellness CPG trends out there and I'd like to see kind of this convergence of industries, particularly when it comes to formulations. So, cannabis products that are using other functional ingredients like adaptogens or nootropics or functional mushrooms. And then for anybody who knows me and the work that I do more broadly at EY, I'm very bullish on beverages and I think that the low dose beverage space has the big potential to really disrupt the alcohol industry, especially when consumers are given a choice whether to purchase a cannabinoid beverage or an alcohol beverage on premise. So, when there's kind of this co-located bar and dispensary like we saw one being announced in Illinois recently or in convenience and grocery store channels like we've seen in Minnesota and even Texas with some of the hemp derived Delta nine products. So, I think that there's a lot of opportunities here today.

Gennaro Santoro: How about yourself, Scott and Frank? What are your views on opportunities for for 2023?

Frank Colombo: Well, I think we still believe that there's some nice tier two and tier three, you know, single state operators and multi-state operators even, that are kind of flying below the radar. They’re cash flow self-sufficient so they're able to to Sarah's point, last through this environment and their logical bite size acquisitions for the larger players. So, we think there's some positive event potential there, some takeout potential in some of those companies and I think within the plant touching, that's where we see their significant upside.

Scott Greiper: I'll add in two quick things, Gennaro. You know, to me the liquor industry survives because of a person's emotional attachment to a brand and because they know they can walk into the store and buy it down the street, or get it delivered. Why should it be any different in cannabis? You know, brands are mainly in California. The biggest, De-SPAC Subversive bought Caliva bought Jay-z, so I still believe that this is a CPG industry, brands matter. Consumers develop a personal attachment to the brands, a loyalty to the brands and they know it's going to affect them the same way every time. We like retail. Retail does not suffer from the 280E calamity that the IRS and the US government have imposed on us. You tend to see retail where there is more than 40% of their sales from their own brands. They're driving 30-35% EBITDA margins even after the high tax rates. So again, analogous to the liquor industry, nobody walks into a liquor store and buying their Grey Goose and asked the counter person, where does Grey Goose grow their potatoes? Is it indoor or outdoor? And do they use those lights? Nobody really cares, there's an attachment to the brand. So, we think there is great value in brands today and we think there's great value in retailers, dispensaries, hat have a little bit of a moat in the states in which they operate. Meaning counties around them have opted out. They have a loyal customer base, they have a high repeat customer base, and they sell more than 30-40% of their own brands in the store. There's good sustainable cash flow there.

Gennaro Santoro: Sounds great. I'll close it off for me from a Canadian side as well. I think what we're, you know, I've always been a big proponent, if I put my strategy hat on is to say, you know, owning a particular segment in the value chain, especially even a product segment and being the winner in that piece, will really build value in and create some optionality for you moving forward. So, I'd say from an opportunity for 2023 and beyond, it's the more you can focus your business on owning a particular segment and making yourself valuable to a roll up strategy for an acquirer or potentially as a merger for others, it allows you to have leverage in the conversation and again, strategically allows you to build a business that's more sustainable and grounded on your how to win and right to win choices.

That kind of ends the panel conversation. We had a lot of questions pop through, so we'll try to go through as many as we can. I know we're running in here to the end of the hour, but again, we'll do our best to answer as many as possible. As another quick reminder, you'll be able to download the report off of the EY website and also as part of the share back email that will be sent to everybody that registered, there'll be the recording as part of that as well. So, you'll be able to get the recording of this presentation as well as the link to where to download the report. Okay. So, I'll go through the first few questions here. One question here and maybe this is more directed to you, Scott and others, Frank and Sarah can jump in – “What improvements in management of the industry do you believe will most impact investors desire to reengage?” And so, we're talking about again, investors have been a bit maybe skittish to get back into the space. There's been a lack of capital available. So maybe you can speak to some of this. You know, what could we see from a management standpoint to get Investors desire to reengage?

Scott Greiper: You know, the biggest challenge we had as a firm in 14, 15 and 16 was finding companies that we believed what they were saying, e believed in their strategy, we believe in their ability to model and forecast and most importantly, believe in their ability to shepherd the investment we brought in according to a business plan and driving IRR. There just wasn't a lot of experience management in the industry at all. Biggest problem we had. I think the biggest problem with the industry. That's changed materially as we all know. So, we're representing a company right now where the senior management comes from the big brand world. I'm talking Disney, HP, Coca-Cola and from the big FinTech world. What perfect experience to bring into this industry. So, there is better management situated in the C-suite today than there was years ago. The other point I'll add real quickly is boards. You know, one of the things that I've done in my prior business and in Viridian, we've done is help clients build Boards of Directors And particularly bring on independent members of board. So, there's true governance. No independence or no governance. So, we have been successful over the last number of years in taking board members from Viridian and getting them nominated as the first independent members of our client boards and that's led to closings of deals because there's belief in governance and operations and strategy. So, that's my answer Gennaro. There is, you've got to pick through and look very sincerely at the management team. Not Cannabis experience, but do they have tangential experience in CPG, in the brand world, in FinTech, in cultivation that they're bringing here and does that company have an independent board because that leads to real confidence in their ability to execute a strategy?

Frank Colombo: I would throw in a more tactical concept, which is just kind of basically do what you said you were going to do and, you know, earlier this year, every single management group was basically saying the same thing. We're going to cut off X, we’ve seen a lot of headcount cuts, but a lot of that happening already. We're going to tighten up our working capital requirements, be more careful with our receivables, with inventory management, still in play. We're going to cut back on CapEx and M&A activity to try and husband cash. And we're going to fundamentally through all these things, we're going to become cash flow positive. Well, jury's out. We haven't really seen it yet. The analysts are projecting it but actually seeing these managements do that main job of showing cash flow positive is what's going to get people some comfort that this industry can sustain itself through tough times and that's fundamental to me.

Gennaro Santoro: That's great, thank you. I had another quick question here that was tailored more, maybe, Frank, you can take this one around valuation model. So, one question was around what trends are you seeing in valuation models in the different sectors and how do we expect those to kind of, you know, evolve in the next 2 to 5 years, let's say? And I had a second question here, also asking about the trend around EBITDA adjusted EBITDA multiples in the valuation space. So, maybe you can touch On how the modeling has evolved.

Frank Colombo: One kind of refreshing thing that I'm seeing in models, and we've had to push this for years, and now we're not having to push so much is, there's a lot less hockey stick kind of projections coming at us. People are getting a lot more realistic. In fact, I've had a couple companies come to me and said, do you think these projections are too aggressive? And like looking at them like they have two heads, like you're asking me, I thought that was my job to ask you that. But so, we're seeing more conservatism in projections, which is good. With regard to the multiples, obviously industry multiples are down across the board. We look at these 12 sectors and every week in our tracker, we publish a valuation by sector report. So, I encourage people to look at that where we have the revenue multiples, EBITDA multiples, the market to book ratios, all these different ratios by sector. So, if you're interested in in seeing what the multiples are by the individual 12 sectors, we publish it every week. So, go to the tracker and you'll see that. Clearly the multiples are too low. Let's put it that way. I mean, on a fundamental basis, we all kind of can agree that we're looking at valuations that are below intrinsic values right now. So, your DCFs versus your multiples. There's a disconnect in valuations and, you know, what it will take to get those back in line? Probably some more positive cash flow and in the end some regulatory relief.

Gennaro Santoro: That's great - thank you, Frank. I was too excited with the questions, and I asked one more than I probably should have, and now we're five minutes over. So, I appreciate everybody staying on and participating, obviously, and sending your questions in. Obviously, we wish we could have answered more, but just time constraints. So, this concludes the end of the webinar - on behalf of both EY and Virdian, thank you very much for joining. I really do appreciate it. It's obviously an industry that we're all passionate about and so we love to always speak about it and chat through some of the different trends in the industry. We hope that you all found the insights and discussions valuable. I'd like to specifically thank you, Scott, Sarah, and Frank for participating and presenting in today's panel discussion. Reminder that the full report is available to download on the EY website and please do reach out if you would like to connect further on the insights and discuss some of the report findings, to chat with Scott, myself, Sarah or Frank or other members of our teams. I'll leave you with that. Thank you very much for joining.