Cannabis Musings - September 2, 2025

GTI keeps doing stuff with Agrify.

Friends, you may recall that, late last year, US-based MSO Green Thumb (GTI) effectively took over, without really taking over, Agrify Corporation, a distressed cannabis services company, by lending it a pile of cash, and swapping out the board and C-Suite with GTI folks. We dug deep into the transaction to understand it, concluding that it was basically a hedged bet on what Congress is going to do with hemp:

So, on the one hand, it seems curious to me to invest money in a business that you know has a real risk of being eliminated within the next 12 months (even when I worked on taking the Tribune Company private in 2007, we didn’t know the financial crisis + the internet would nearly ruin the advertising industry about a year later). On the other hand, perhaps GTI figures that it’s not an expensive ($10mm invested into Agrify, plus a bunch of stock to acquire the hemp assets) 50/50 bet (those aren’t real odds – just more reflective of the fact that there’s so little public information about the direction of the issue in the Farm Bill). If they’re wrong, it’s a writeoff. If they’re right, they have a public vehicle to raise capital to build a hemp drinks business.

Well, last week, GTI doubled down on its bet, but also put an even bigger hedge into place this time. This is another situation where it really pays to not just read the press release, but also to read the actual deal documents, because they provide some really interesting information about what’s happening here.

As GTI’s press release explains, GTI sold a portfolio of its cannabis products’ brands and product recipes to Agrify for $50 million cash, took back a license to use all of that intellectual property, and then loaned Agrify $45 million for two years at 10% interest (which is secured by Agrify’s assets). The note is convertible into common stock of Agrify at a price of $29.475 per share, which ended up being a good bet for GTI, because stock traders loved this deal, bidding up Agrify’s stock price to $44.00 a share right after the announcement (and, if I’m correct, GTI could reflect all/some of that implied gain on its financials, which is nice). Oh, and Agrify is changing its name to RYTHM.

In some respects, it kind of looks like GTI is creating a separate brand company, sheltered from the perils of 280E exposure, that will receive a steady income stream in the form of royalties under the GTI brands license, with a lot of leverage. Sort of a play on the whole business securitization structure to maximize asset value. The brand company (i.e., RYTHM née Agrify) is technically (legally and tax-wise) a separate company from GTI, so it works, but it’s also living in GTI’s basement, eating its snacks, and using its Wi-Fi.

And yet, I don’t think that’s the endgame here. Instead, I think this is still a bet on what Congress does (or doesn’t do) with hemp, because GTI has an escape hatch. The same day that GTI announced the deal and filed its press release, it also filed all of the transaction documents publicly. GTI happens to file publicly not only in Canada on SEDAR+, because its stock trades on the Canadian Securities Exchange, but has also been gratefully filing in the US on EDGAR since 2019.

What we learn when we read the Purchase Agreement between Agrify and GTI is that, for the next five years, GTI has the right to buy back those brand assets from Agrify (a “call option”):

“upon an event outside the Seller’s and Purchaser’s control which (i) could reasonably be expected to have a material and adverse impact on the standing of the Purchaser on its primary exchange or (ii) upon a federal ban of consumable hemp-derived THC products.”

The cost of the call is either the $50 million purchase price plus 10% interest if the option is exercised in the first two years (just like the note!), or, if it’s more than two years from now, an agreed-upon price (or, if they can’t agree, what an appraiser says those brand assets are worth).

In other words, if Congress bans consumable hemp, or the Nasdaq decides that Agrify’s stock may no longer remain listed on its exchange (mostly likely because Agrify is doing business with a plant-touching company), GTI may unwind the deal, change the passwords, and pretend this never happened. They don’t define what “a federal ban of consumable hemp-derived THC products” means, so it’s not totally clear what happens if Congress still allows, say, lower-dose consumables, but I’d guess they’ll just rely on the obscenity test.

If Congress leaves it all intact (or does nothing, which, these days, is highly plausible), then GTI now has an even stronger platform to transform its brands with hemp. If Congress shuts it all down, GTI doesn’t need to leave all of its intellectual property in the hands of the guy who’s “borrowing” its Cinemax password. This is a smart (and necessary) provision and evidence of good corporate planning. It reflects the reality that no one really knows what’s going to happen in Congress on hemp. The state of play changes seemingly daily, so why leave it all up to chance?

The other interesting nosh comes in the Trademark and Recipe License Agreement, also publicly filed. What we learn is that Agrify will be licensing back to GTI the right to use the brand names, product recipes, and other intellectual property that GTI just sold to Agrify, at a cost of 6% of net revenue in the first year (plus two months) from sales of products using all of that IP, 9% in year two, 12% in year three, 15% in year four, and 18% thereafter (GTI may terminate the license after five years). There’s some nuance in there - some brands have lower royalty shares and there’s provision for internal transfer pricing (one of the more obscure tax concepts out there), but you get the idea. GTI will eventually be paying a healthy amount of margin.

(If you’re wondering where they got those numbers, that’s a good question. From a business perspective, GTI (which, again, owns a large amount of Agrify and there’s board similarity) would prefer that the royalty be something like 0.001%, but that’s a shanda for two reasons. First, Agrify’s board has fiduciary duties to its stockholders, so it can’t just license back all of this IP to a company that owns a large chunk of Agrify for nothing – the price has to be legitimate. Second, if it’s not legitimate, there’s then risk that the IRS, the Nasdaq, plaintiff’s lawyers, and others all claim that the two companies are really just one, and the whole structure fails. Agrify has to charge a ‘market’ royalty fee, so I’m guessing Agrify’s board (or, more specifically, an independent committee of the board) hired a financial services firm to research the fees charged for similar brand IP licenses, which then generated a nice, long Powerpoint deck with lots of data to provide Agrify a basis for justifying the royalty rates (they probably also had that firm do a valuation for the IP portfolio, to set the purchase price). This is in the realm of what’s known as the “business judgment rule” – the board can generally rely on that kind of report to protect themselves from scrutiny if/when they’re sued over the decision.)

If this all goes well, Agrify will enjoy a healthy stream of steady income from GTI’s sales of state-licensed cannabis products (supporting the quasi-whole business securitization concept), as well as revenue from its own sales of hemp THC products under those same brand names. In a weird way then, GTI is paying Agrify for the right to compete with Agrify (which hopefully won’t go south like when Gallagher let his brother use his comedy act as “Gallagher Too”).

Az me ken nit vi me vil, tut men vi me ken. “If you can’t do what you want, do what you can.”

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.