Cannabis Musings - November 6, 2024
GTI's curious Agrify transactions.
Friends – once again, the universe has taught us that it’s folly to try to make predictions about cannabis policy and politics. It has also once again taught us that cannabis stock prices, which plummeted this morning most likely because of the failure of Florida’s adult-use ballot initiative, are almost entirely uncorrelated to reality. Umglich bindt tsunoif (“misfortune binds together”).
So, we’ve learned our lesson - these Cannabis Musings are going to stick to analysis and gratuitous wordplay. In particular, yesterday’s curious news that U.S. operator Green Thumb Industries has effectively taken over troubled ancillary company, Agrify Corp. Listed on the Nasdaq, Agrify, a cultivation products and services company that has been in distress for some time now, recently disclosed that it was out of money. Enter GTI, which has made a $20 million secured convertible loan to Agrify – one-year term, 10% interest rate (accruing, not cash-pay), first lien on Agrify assets, convertible into Agrify common stock at $3.158 per share (about the price of Agrify’s stock right before the deal was announced – it’s trading at about $4.20 per share this morning on the news). You can read the note in all of its simple glory (often, you have to dig beyond the press release to get the facts).
What makes this really interesting is that, reportedly, GTI bought an undisclosed amount of Agrify stock and warrants from CEO Raymond Chang and Director I-Tseng Jenny Chan (there will likely be a public ownership filing in the next few days offering details), Chang resigned (with a $1 million severance payment), Chan left the board, GTI appointed three board members (including GTI CEO, Ben Kovler, and another GTI employee), and Kovler took over as Interim CEO.
That’s a lot of work for a shtikel of a company. So, why would GTI buy out (or in part) the CEO (who owned about half of the stock) and take over management/board control? Well, most of the chatter in reporting, on social media, and in conversations I’ve had is that GTI is positioning itself for a Nasdaq listing. GTI, like a number of other U.S. operators, uses GAAP accounting and complies with SEC reporting (which it had to start doing in 2020 because, even though its stock is traded on a Canadian exchange, SEC rules require public reporting by a foreign company (the parent is a Canadian entity) that has more than 50% of its voting stock held by U.S. residents), so it’s ready for when the U.S. exchanges are. But they’re not because, well, federal law.
The theory going around is that:
The DEA reschedules cannabis early next year (and maybe Congress passes SAFE® in the lame duck session).
The Nasdaq mellows out about that pesky Controlled Substances Act and allows U.S. operators to list.
GTI reverse merges into Nasdaq-listed Agrify, so now the GTI business is totally within the Agrify “shell”.
Agrify (which now owns GTI) changes its name to Green Thumb Industries.
GTI (née Agrify) now enjoys a U.S. exchange listing.
Closing dinner at Lou Malnati’s.
I don’t buy it, for two reasons. First, I don’t think that rescheduling effectively changes the level of risk as perceived by U.S. exchanges. They’re aware that the practical reality is that the risk of enforcement, particularly for an ancillary business (like an exchange would be) is already quite low (not legal advice, but I know this from firsthand experience), and yet they’re still not willing to take the risk. Rescheduling to III wouldn’t really move the needle on that practical risk (because it’s already so low), nor would it change legality at all. In short, it won’t make a difference.
Second, on the chance I’m wrong about that (always possible!) and the Nasdaq gets cool, why would GTI go through all of this trouble tying up $20 million in cash in a troubled business, incurring all of the business and fiduciary risk of controlling another company, and spend a few million dollars to close a cumbersome reverse merger in order to gain an exchange listing, when GTI could simply ask the Nasdaq to list its own stock? It’s just not necessary. The reverse merger would require Nasdaq approval anyway, so it’s not like that route circumvents the problem. In short, what does GTI need with a public shell? Cf. Star Trek V: The Final Frontier.
Okay, then, why are they doing this? I don’t know for sure, but I’d guess this is a way for GTI to get access to, and control over, some Agrify intellectual property that’s not readily obvious to me, without having to acquire all of Agrify? Maybe this structure allows Agrify to retain net operating losses? (This one is a total guess – I don’t know if they have accrued net operating losses, and if the structure of this deal would allow them to be preserved.) Maybe Ben Kovler just has a thing for the Boston area. I just don’t think this is all for an exchange listing.
Be seeing you.
© 2024 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.
funny line about Lou's