This story was republished with permission from Crain’s Detroit and written by Dustin Walsh.
The struggles of Skymint in Lansing, one of the largest marijuana operators in Michigan, aren’t an anomaly. They’re a dank declaration: The state’s cannabis industry is in trouble.
Skymint, the brand name for Green Peak Innovations Inc., owes its investors at least $135 million, owes millions in back taxes, and is woefully behind on its rent obligations, lawsuits filed by its creditors say.
Its financial outlook is so bleak, a judge in Ingham County Circuit Court has installed a receiver to run the company, representing either a lifeline or a liquidation.
Skymint isn’t alone.
“It’s just bad out there right now,” said Doug Mains, principal, and co-leader of the cannabis practice for Detroit law firm Honigman LLP. “Everyone is struggling to pay bills and negotiating lending extensions.”
Marijuana remains a Schedule 1 drug at the federal level, which bars cannabis companies from being able to use the federal bankruptcy courts to settle debts, leaving state circuit courts as the only means for financial protection.
Skymint said in a statement Wednesday that going into receivership was “a difficult decision, but a necessary one.”
“The court-approved agreement will allow us to reorganize our debt obligations to address the financial challenges facing many in Michigan’s cannabis industry, including excess supply, decreasing prices, limited access to capital and the increasing cost of capital,” Skymint said in the statement.
The company did not respond to additional requests for comment Thursday.
A court-appointed receiver is an unbiased third party that effectively takes control over a company’s operations and financial books and then makes a recommendation to the court on what the best path is to satisfy creditors, whether that means a reorganization of the company or a liquidation.
Skymint’s investors allege mismanagement in two lawsuits, but unfavorable market conditions are exacerbating its downfall.
Michigan’s marijuana industry has suffered an epic price collapse due to product oversupply — recreational marijuana retail prices have plummeted from $512.05 per ounce of flower in January 2020 to just $80.16 per ounce in January this year — effectively eliminating profit margins for businesses across the state.
The question remains of how far the market will fall and what happens to these companies operating under a receiver as rising interest rates make capital more expensive, and selling or buying troubled operations is thorny due to a patchwork of local regulations on license transfers to new owners.
A struggle underway
Skymint spent and borrowed big to grow quickly as an early entrant into the legal marijuana market in Michigan. It now employs more than 600 people across 24 retail dispensaries around the state and three indoor grow operations in Dimondale and Lansing.
But a hefty debt load that kept ballooning as the company tried to stay afloat eventually became too much as weed prices kept falling, court filings show.
Tropics LP, a subsidiary of Calgary-based Sundial Growers Inc.’s (NASDAQ: SNDL) investment firm SunStream Bancorp Inc., loaned Green Peak $70 million in September 2021 toward the acquisition of competitor 3Fifteen Cannabis and its 12 dispensaries in Detroit, Grand Rapids, Ann Arbor, Flint and elsewhere. Merida, a majority shareholder in 3Fifteen, also lent $8 million toward the 3Fifteen purchase. Both investors are suing Skymint in circuit court.
With an oversupply of product in the state and finite licenses and communities to sell the product, buying up dispensaries became paramount to Skymint’s growth strategy. It was either develop a higher-priced niche product or play on volume with more sales outlets to move product as margins diminish.
Prices had already fallen 50 percent between September 2020 and September 2021, causing lenders to demand stiffer loan terms.
Under the Tropics’ promissory note, Green Peak agreed to repay the lender in full by September 2025 at a whopping 12.5 percent interest rate, compounding monthly, as well as sell some common shares of the company to Tropics, according to the lawsuit.
Under that agreement, Green Peak agreed to maintain a minimum cash balance of $7.5 million, which Tropics alleges in the lawsuit that it failed to do in March last year. Tropics appears to have concluded it was either lose much of its investment or dump more money into Skymint in hopes its growth plan was successful.
Tropics loaned Green Peak another $5 million in March 2021, raising the loan total with fees to nearly $81.5 million. Green Peak once again did not meet its loan obligation in June 2022 after failing to raise an additional $15 million in new funding, according to the lawsuit. The company also failed to pay additional fees to Tropics, pay back rent on its East Jolly Road facility in Lansing and pay certain taxes, the lawsuit claims.
The two parties entered into another agreement in November, which included Tropics paying more than $5.8 million toward overdue sales and excise taxes for Green Peak.
Tropics alleges in the court filing that Green Peak’s daily sales revenue has dropped from $356,953 in April 2022 to just $184,579 in January of this year, exacerbating an already bad financial picture.
Green Peak owes nearly $4 million in sales and excise taxes by March 25, the suit alleges, and the landlord of its leased cultivation facility in Dimondale is attempting to evict the company for owing roughly $1.1 million in rent.
Tropics is asking the receiver to take possession of Green Peak’s assets.
“A lot of companies are on the edge, desperately trying to find additional capital, but costs are so extraordinarily high,” said Lance Boldrey, partner at Detroit-based law firm Dykema Gossett PLLC and part of the legal team that designed the state’s legalization framework. “Everyone thought the money was so good, they’d do anything to keep the game going. But we’re going to see the market shake out. It’s following the same pattern we saw in Colorado, Washington and Oregon. Anywhere with unlimited licensure.”
The other receivership cases are much smaller in scope, but represent the growing pain in the state’s industry.
“We’re getting lots of client calls about licensees not getting paid for product and monitoring more and more lawsuits over licenses and money owed,” Mains said. “These are the next receivership cases to come.”
The legal marijuana framework in the state, approved by voters in 2018, allows the state to license any entity that meets stringent criteria. But those same entities cannot operate without a local license from the municipality where they would like to operate. For instance, Skymint has local licenses in at least 29 municipalities.
Here lies the heavy lift for Skymint’s receiver, Gene Kohut, a partner at Detroit-based business advisory firm Trust Street Advisors, if he chooses to liquidate the company’s assets to pay back investors.
Under state law, each of those municipalities developed their own licensing framework that often include differing rules and red tape on transferring those licenses to a new owner.
“State licenses have little to no value, it’s all about the local approvals,” Mains said. “Those ordinances are all over the place. Some only allow equity transfers or no license transfers at all or it’s a huge process. The receiver and any potential buyer or buyers is going to have to address each local license at a one-by-one level.”
And even if the receiver could navigate these local hiccups, is there a buyer with enough cash and lending power to gobble up Skymint’s assets in a declining market?
Michael Elias, founder and CEO of Skymint competitor Marshall-based Common Citizen, said he’s examined buying up its assets, but the debt obligations attached are too high.
“Debt is too significant and restructuring too difficult to extract any value,” Elias told Crain’s. “I’m sure someone could do it, but it’s too cumbersome today (under falling prices).”
Andrew Sereno, CEO of Manchester-based niche grower Glacial Farms, said the fall of Skymint would benefit businesses in the market by reducing supply. Glacial Farms sells weed wholesale under the Glacier Cannabis brand and doubled its grow operation by leasing additional space from a defunct grower last year.
Skymint holds five adult-use Class C grow licenses, three adult-use excess grow licenses and eight medical marijuana grow licenses. That translates to the legal ability to grow as many as 28,000 marijuana plants, or about 2 percent of all of the state’s legal marijuana plants being grown as of Jan. 31, according to CRA data. Though it’s unlikely Skymint is growing anywhere near full capacity.
“For those of us who aren’t debtors to (Skymint), this is a great thing as it should mean less (excess cannabis) on the market that’s artificially lowering prices,” Sereno said.