SNDL (Nasdaq: SNDL) has deployed capital into a portfolio of six cannabis-related investments of approximately $579.9 million, including $535.9 million for the SunStream joint venture.
Now, two of those properties, Skymint in Michigan and Florida-based Parallel Cannabis, are both experiencing extreme financial stress. Skymint’s court-appointed receiver recently filed a motion to auction off the company. But what does that mean for SNDL’s role?
As of March 31, SNDL reported it had funded $522.3 million out of the total $538 million it originally committed to SunStream. Since the first quarter ended, the company has contributed another $3.4 million.
Despite Skymint being in receivership and Parallel having defaulted on its debt, SNDL does not look like it has written down the value of these properties yet. A source at SNDL said the company has taken impairments of $90 million, but no such accounting appeared in the latest annual report.
“The current investment portfolio of SunStream is comprised of secured debt, hybrid debt and derivative instruments with United States based cannabis businesses. These investments are recorded at fair value each reporting period with any changes in fair value recorded through profit or loss. SunStream actively monitors these investments for changes in credit risk, market risk, and other risks specific to each investment.”
The loss from operations for Sunstream for 2022 was $42 million with a revenue loss of $35 million, which comes to $77 million – assuming that’s the impairment reference. The company did take an impairment in the recent first quarter, but that was related to Valens.
SNDL still lists Sunstream as a net asset valued at over $535 million, but if the company invested a rumored 20% into Skymint, then that would be a little over $100 million that is actually in receivership. Beyond saying Skymint is restructuring, the company has been vague about addressing the devaluation of this asset.
SNDL’s May 15 MD&A includes SunStream in a list of items that had a significant impact on the company’s financial results and refers to note 15 in the interim earnings. However, the balance for SunStream grew from $519 million at the end of 2022 to $535 million at the end of the first quarter of 2023.
While some believe the company is delaying the writedown on the two properties in order to protect the price of the stock, others think SNDL is waiting to see if these two situations get resolved to get a better valuation on the investment. Some have even suggested that SNDL could take over these troubled companies as other lenders in the cannabis industry have done.
SNDL CEO Zach George teased investors in the company’s recent earnings call saying, “We continue to explore opportunities related to this portfolio and see significant optionality in the credit exposures. I look forward to providing further details on our SunStream portfolio in the coming months.”
George was then asked by Matt Bottomley with Canaccord Genuity how the portfolio companies were getting financed in the interim (meaning the restructuring companies). He noted that some of the names in the portfolio would need additional capital, but couldn’t say whether it would be Sunstream, SNDL, or another party that would step in to help.
George did specify that since SNDL was listed on the Nasdaq, it would not be engaging in any direct plant-touching activities. However, he did give the company some wiggle room.
“Any exposure would have to be very well structured, and we would not be exerting control in a strict sense,” said George. “But in cases where there is an over-levered balance sheet and defaults that need to be worked through in restructuring setting that cannot avail itself of federal bankruptcy court in the U.S., you will see either through private negotiations, foreclosures or receiverships, those capital structures get cleaned up and changed. So we’re sort of in the early stages of that in a few situations, and there is no current certainty as to outcome.”
Analysts weren’t satisfied with that answer, pushing back to request “more color” on the potential regulatory structure, which led George to point toward the Toronto Stock Exchange, which currently does not allow American cannabis companies to list because of cannabis’ federally illegal status. He also pointed out that SNDL has a relationship with a TSX-listed company.
“In addition, you’ve seen quite a bit of work done on USA-based structures that take away voting control in a structured manner and can be held on a compliant basis by a New York Stock Exchange or Nasdaq entity. … The trail here has been marked already,” he said.
But, he continued, no decision has been made just yet on that course of action. “We maintain strong and active dialogues with a number of regulators, and we take our compliance obligations very seriously,” he said.
So where do things stand with Parallel and Skymint?
Parallel is being sued by investors for being misled about the company’s financial health. The case is currently on hold as the parties say they are trying to settle their differences. The company quit paying rent on one of the properties leased from Innovative Industrial Properties and defaulted on its debt. However, it is still operating and bringing in income.
Skymint is in receivership and, as Crain’s Detroit reporter Dustin Walsh reported, “Skymint, which primarily operates under the parent company of Green Peak Innovations Inc., owes more than $127 million to Canadian investment firm Tropics LP tied to the acquisition.
Tropics has since come on as the primary funder of operations as Skymint works through receivership. But the minority lender in the acquisition, New York-based cannabis investment firm Merida Capital Holdings and a majority shareholder in 3Fifteen, is challenging whether its stores should be involved in the receivership at all.”
SAF Group is the other side of the 50/50 SunStream joint venture, but SAF Group has not contributed any money to the joint venture. Instead the agreement notes it was brought in for its “expertise.” That agreement between SAF Group and SNDL is not publicly available for shareholders.
Pablo Zuanic, a former analyst at Cantor Fitzgerald, noted the arrangement during a recent call: “I’m just trying to understand what the SAF is bringing to the table here. Why are they taking apparently such a disproportionate cut of the earnings when they are pretty much putting no capital down?”
George responded that SAF Group gives access to analytic and back-office expertise that SNDL would otherwise have to build a pretty substantial team to support, which would involve significant costs. “In terms of your comment around disproportionate share of returns, that’s simply not true,” he added. “We are the other half of the co-management team and so we receive basically a rebate on what is a very market-based management fee.”
Zuanic though, didn’t back down: “I’m just trying to understand, you have all this billion dollars on the balance sheet, you have the $463 million that you put in here, but you still needed the help from someone else, and there’s been a lot of other companies that have been able to do this on their own and apparently with similar or even better results.” George suggested they discuss the answer offline.
A source from SunStream spoke with Green Market Report about SAF Group, saying SAF had previously made investments in Canadian and U.S. cannabis companies and that gave the company its experience in the sector. The company also said that SAF Group stopped deploying capital in credit cannabis since entering into an exclusive agreement with the SunStream joint venture.
While it looks like a nice deal for SAF Group, SAF told the source that the SunStream deal is on the lower range of total return compared with its other ventures.
The SunStream source also noted that with regard to SNDL’s listing on Nasdaq, other companies have already made progress on that front, including Canopy Growth, Tilray, and TerrAscend. SunStream seems content to let those companies blaze that trail.
While all these comments are vague as to eventual outcomes, the tea leaves look like SNDL, through SunStream, might be able to take over Skymint but is closely watching other situations for guidance before doing so.