Cannabis Musings - August 5, 2025

There was something in the Ayr that night...

Friends – Ayr Wellness, one of the largest US MSOs has passed on. It is no more. It has ceased to be. It’s expired and gone to meet its maker. It’s a staff. Bereft of life, it rests in peace. Its metabolic processes are now history. It’s off the twig. It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain, and joined the bleedin' choir invisible. It is an ex-MSO.

We’ve been following Ayr Wellness’ financial challenges for some time now (including during Cannabis Musings’ pre-Subtack days), and now, the company is about to be sold off to some of its creditors, leaving the stockholders with nothing. The company began in earnest in mid-2019 by smooshing five US cannabis operators into a SPAC (special purpose acquisition company – remember those?) vehicle (a large pool of cash raised from the public to buy stuff – basically, a private equity-like deal using public money), steered by Wall Street banker, Jonathan Sandelman. It took on a highly-levered (meaning they borrowed a lot) acquisition strategy to fund fast growth, spending a lot of money (the fashion at the time) to enter key markets like Florida, Arizona, New Jersey, Nevada, and Pennsylvania. Things were so rosy that, in mid-2021, they announced a stock buyback program (which we’ve discussed before), spending at least CDN$11 million of its cash pile in the process (aroysgevorfen gelt - “money thrown away”).

The cracks were starting to form a few years ago, which the bond market noticed. Its notes (loans), which traded on the Canadian Securities Exchange like stock, were being sold around 70 in early 2023 and for 45 in late 2023, versus an issuance price of 100. The prescient canary in the coal mine sang that, if the company were liquidated at that time, those loans would be paid back 45 cents for every dollar of principal (assuming an efficient market of price discovery) only about 20 months ago. They then restructured those notes (which resulted in handing a material portion of the company to the debtholders), removed Jonathan Sandelman from the Board, replaced its CEO, and started talking with its noteholders about strategic alternatives. Last week, we got the news that it was all done.

Ayr’s final deal to sell the company to the noteholders is a great example of how you can wind down a public US cannabis operator outside of bankruptcy, since that’s not an option. The company hasn’t filed publicly the transaction documents, so all we have to go on is an outline in the press release, but we can glean a sense of how this will work.

Ayr is going to conduct a court-run public auction of its assets, presumably including its cannabis operating licenses, under a set of laws that deals with secured transactions – situations where a lien is taken on assets. At that auction, the noteholders will “credit bid” the amount that’s owed to them by Ayr under the loans they hold, meaning they don’t need to actually pay cash, they just trade the loan obligations for the bid. It’s not necessarily intuitive, but it’s fairly common (if it sounds familiar, it’s what happened with Eaze last fall). With hundreds of millions of dollars of loans outstanding, chances are high that no one is going to outbid the noteholders for Ayr’s assets at auction, so they’re going to win and buy the company, which will then be rid of a massive debt burden (and the related interest payments).

Why not just trade the debt for equity, which is much simpler and doesn’t require a court process? The downside to that approach is that, even if it results in the noteholders getting 99% of the stock of the company in exchange for cancelling the debt, they’re still left with a mass of Ayr’s existing stockholders to deal with. There’s ways to handle that (basically, you then do a reserve stock split to reduce all those other shareholders to fractional amounts, and then cash them out for pennies), but that’s ugly and likely going to result in a lawsuit. Instead, with Ayr selling off the assets to a new shell company, the noteholders (who will own that shell) don’t have to deal with the legacy owners, whose stock will then just get cancelled out in due course because its worthless.

The new Ayr won’t be totally debt-free – a group of (presumably) noteholders will lend up to $50 million to current Ayr in the interim to fund operations, and that loan will get transferred to new Ayr after the auction closes. Equivalent to what’s referred to as a “debtor-in-possession financing” (or, if you’re cool, “DIP financing”; basically, lending to the company in bankruptcy), all of this looks and smells like a prepackaged bankruptcy sale, but without the bankruptcy part. So, nu, vos iz di chochmeh? (“what’s the trick?”).

First, there’s the pesky problem of the cannabis operating licenses, which require state regulatory approval for transfer. This is the bane of dealmaking in every licensed industry, with cannabis ownership rules being their own special level of hell. Now, I’m highly confident that the professionals working on this deal have been laying the groundwork for some time to process the transfer approvals, but they still take time to work through the various regulators, particularly if the noteholders have complicated ownership structures. Time is an underappreciated risk to all deals. (In case you’re wondering, this kind of foreclosure acquisition is probably exempt from Hart-Scott-Rodino antitrust approval (not legal advice!).)

Second, there’s the pesky problem of lawsuits. One of the geshmak benefits of bankruptcy is that the Federal rules govern the process of who gets paid what, and even though there’s plenty of fighting over how the pie is split, all the parties have to play within the process and the court decides what’s fair. Without that construct and protection, there’s more exposure for Ayr and the noteholders to other creditors (including federal and state taxing authorities, which are owed a substantial amount of money by Ayr (the press release doesn’t discuss how those obligations will be dealt with)) and the current stockholders who would look to challenge the process in court. It’s the same risk that makes receivership a sorry cousin to bankruptcy – it only really works if everyone plays ball. Keep an eye out for that.

Overall, this is a creative, least bad solution to resolve a highly distressed situation where there are few other options. It’s also the sad, but totally foreseeable, capstone to the first wave of US cannabis capital, which created many companies that soared high and failed. Let’s hope that Ayr, under new ownership, will be able to keep people employed and rebuild the company into something sustainable.

On a separate note, following up on our recent discussion of the Glass House raids, their Monday press release on the incidents is offered to you without comment.

Be seeing you.

© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín, B&Y Ventures, or anyone else who employs/hires me.