8-K: Vireo Growth Completes $132.7 Million Acquisition of Nevada-Based Deep Roots Holdings, Amends Merger Terms

Vireo Growth Inc. has successfully closed its acquisition of Deep Roots Holdings, Inc. for $132.7 million, solidifying its presence in the Nevada cannabis market and adjusting key merger agreement terms.

Summary

• Vireo Growth Inc. completed the acquisition of Deep Roots Holdings, Inc. on June 6, 2025, making Deep Roots a wholly-owned subsidiary.
• The total consideration for the acquisition was $132.7 million, paid through the issuance of 255.2 million Subordinate Voting Shares of Vireo at a reference price of $0.52 per share.
• The purchase price represents a multiple of 4.175 times Deep Roots' 2024 Closing EBITDA of $30 million.
• Vireo issued 243,307,696 Parent Shares for the Estimated Closing Merger Consideration, with 10% (24,330,769 shares) placed in escrow.
• An additional 11,932,692 Parent Shares were issued to former Deep Roots incentive common stock holders as a pre-closing compensatory award of $6,205,000, which reduced the Closing Merger Consideration.
• Key amendments to the merger agreement include calculating Closing Indebtedness, Closing Working Capital, and Post-Closing Debt as of December 31, 2024, and setting the 280E Tax Reserve Shortfall to $0.00.
• The Minimum Cash Amount required to be held by Deep Roots at closing was increased from $3,000,000 to $3,590,000.
• Deep Roots stockholders are subject to earn-out payments based on Adjusted EBITDA growth and clawback provisions tied to 2026 EBITDA and market performance.
• Selling shareholders are subject to voluntary share lock-up provisions, with tranches unlocking over a 33-month period.
• Vireo indirectly assumed Deep Roots' outstanding net debt of approximately $19,200,000 with Chicago Atlantic Group, LP, bearing interest at Prime Rate + 6.5% and maturing on August 15, 2027.
• A dividend of $3,211,420, declared on June 4, 2025, will be paid to Deep Roots stockholders within 45 days post-closing and does not impact the merger consideration.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. The completion of a strategic acquisition, especially of a 'solid operator' in a 'mature market,' is a positive step for growth. The share lock-up and performance-based earn-outs/clawbacks suggest alignment and risk management. However, the assumption of significant debt and the related-party interest of the CEO introduce some cautionary elements, preventing a higher score.

Positives

• Completion of the Deep Roots acquisition expands Vireo's footprint into Nevada's mature cannabis market.
• Deep Roots is described as a "consistently solid operator" with a 54,000 sq ft cultivation/manufacturing facility and ten active retail dispensaries.
• Deep Roots maintains "strong relative performance" due to strategically situated stores in Southern Nevada on the Utah border.
• The acquisition includes equity and debt investments in a California retail chain and a vertical operator in Ohio and Massachusetts, diversifying Deep Roots' assets.
• The purchase price multiple of 4.175x 2024 Closing EBITDA of $30 million suggests a reasonable valuation for the acquired entity.
• Voluntary share lock-up provisions for selling shareholders indicate a commitment to long-term alignment and stability.

Negatives

• Vireo indirectly assumed approximately $19,200,000 in Deep Roots' outstanding net debt, adding to the company's financial obligations.
• The debt bears interest at Prime Rate + 6.5%, which could be substantial depending on the Prime Rate.
• Clawback provisions exist, potentially reducing the shares received by Deep Roots stockholders if 2026 Adjusted EBITDA and market share/EBITDA margin targets are not met, indicating performance-based risk for the sellers.
• The CEO, John Mazarakis, has an approximate 29% interest in the Deep Roots debt transactions with Chicago Atlantic Group, LP, raising potential related-party conflict of interest considerations.

Risks

• Integration Risk: Challenges in integrating Deep Roots' operations, culture, and systems into Vireo's existing structure.
• Performance-Based Consideration Risk: Earn-out payments and clawback provisions are tied to Deep Roots' future Adjusted EBITDA growth and market performance, introducing uncertainty regarding the final acquisition cost and seller compensation.
• Debt Obligation Risk: Vireo's indirect assumption of Deep Roots' $19.2 million debt exposes the company to interest rate fluctuations and default risks under the CA Loan Agreement.
• Regulatory and Market Risk: The cannabis industry is subject to evolving regulatory environments and market dynamics, which could impact Deep Roots' future performance and the value of the acquisition.
• Related Party Transaction Risk: The CEO's significant interest in Deep Roots' debt transactions with Chicago Atlantic Group, LP, could present perceived or actual conflicts of interest.
• Tax Reserve Risk: While the 280E Tax Reserve Shortfall was set to $0.00, the handling of 280E Pre-Closing Tax Refunds is complex and subject to audit, review, or examination by governmental authorities, potentially impacting future cash flows to stockholders.

Future Outlook

The document outlines future earn-out payments for Deep Roots stockholders based on Adjusted EBITDA growth and new retail EBITDA, and clawback provisions tied to 2026 performance metrics, indicating a performance-linked future for the acquired entity. It also mentions the filing of Q1 2025 financial statements and pro forma information within 71 days.

Management Comments

• "Vireo was founded as a pioneer in medical cannabis in 2014 and we are fueled by an entrepreneurial drive that sustains our ongoing commitment to serve and delight our key stakeholders, most notably our customers, our employees, our shareholders, our industry collaborators, and the communities in which we live and operate."
• "We work every day to get better and our team prioritizes 1) empowering and supporting strong local market leaders and 2) strategic, prudent capital and human resource allocation."

Industry Context

The acquisition of Deep Roots Holdings, Inc. by Vireo Growth Inc. strengthens Vireo's position in the U.S. cannabis market, specifically in Nevada, which is described as a "mature cannabis market." Deep Roots' strategic location on the Utah border and its investments in California, Ohio, and Massachusetts indicate a focus on expanding reach and diversifying operations within the multi-state operator (MSO) model, a common trend in the fragmented U.S. cannabis industry. The transaction's structure, including earn-outs and clawbacks, reflects the ongoing challenges in valuing and integrating cannabis assets amidst regulatory complexities and varying state-level market conditions.

Comparison to Industry Standards

• The acquisition multiple of 4.175x 2024 Closing EBITDA of $30 million for Deep Roots can be compared to other cannabis M&A transactions. While specific comparable companies are not named, this multiple provides a benchmark for valuation within the cannabis sector, which has seen fluctuating multiples based on market sentiment, regulatory progress, and company-specific growth profiles.
• Deep Roots' "consistently solid operator" status and "strong relative performance" in Nevada suggest it performs well within its regional market, potentially outperforming smaller, less established operators.
• The inclusion of earn-out and clawback provisions is a common mechanism in M&A, particularly in industries with high growth potential but also significant regulatory and market uncertainties like cannabis, allowing for risk sharing and performance alignment between buyer and seller.

Corporate Governance

Related Party Transactions

• Vireo's Chief Executive Officer, John Mazarakis, serves as a partner of Chicago Atlantic Group, LP, an affiliate of Chicago Atlantic Admin, LLC (the Agent), which is the senior secured lender for Deep Roots.
• Mr. Mazarakis has an approximate 29% interest in the Deep Roots debt transactions with the Agent.
• Deep Roots has aggregate outstanding net debt of approximately $19,200,000 with the Agent and/or its affiliates, which debt continues to be held by Deep Roots after the Closing.

Stakeholder Impact

• Shareholders (Vireo): Experience dilution from the issuance of 255.2 million shares for the acquisition. Benefit from expanded market presence and diversified assets through the acquisition of a "solid operator." Subject to potential risks from assumed debt and performance-based earn-outs/clawbacks.
• Shareholders (Deep Roots): Receive Vireo Parent Shares as consideration, subject to lock-up periods. Eligible for potential earn-out payments based on future performance but also subject to clawback provisions. Received a pre-closing compensatory award and a declared dividend.
• Employees (Deep Roots): Those holding incentive common stock received a compensatory award in Vireo shares. The acquisition by a larger entity may bring new opportunities or changes in corporate culture.
• Customers (Deep Roots): Likely to experience continuity of service and product offerings under Vireo's ownership, potentially benefiting from Vireo's broader resources and strategic focus.
• Creditors (Deep Roots): The senior secured lender, Chicago Atlantic Group, LP, continues to hold Deep Roots' debt, now indirectly assumed by Vireo, potentially strengthening the credit profile of the borrower from the lender's perspective.

Next Steps

• Vireo to pay the declared dividend of $3,211,420 to Deep Roots stockholders within 45 days after closing.
• Vireo to file Deep Roots' consolidated financial statements for the quarter ended March 31, 2025, by an amendment to this 8-K within 71 calendar days.
• Vireo to file pro forma financial information by an amendment to this 8-K within 71 calendar days.
• Deep Roots stockholders may receive additional Parent Shares based on earn-out payments tied to future Adjusted EBITDA growth.
• Parent Shares issued to Deep Roots stockholders are subject to a lock-up release schedule over 33 months and an additional 6-month lock-up period ending December 31, 2026.
• Earn-out shares will be subject to lock-up periods following their issuance.

Key Dates

Recommendation

Keywords

Vireo Growth Inc., Deep Roots Holdings Inc., Acquisition, Merger Agreement, Cannabis Industry, Nevada Cannabis Market, SEC Filing, 8-K, Corporate Governance, Financial Reporting, EBITDA, Share Lock-up, Debt Assumption, Compensatory Award, Related Party Transaction, Marijuana, Cultivation, Dispensary, Retail Cannabis