skip to Main Content
Tools to Keep Cannabis Companies From Crashing in Oversaturated Markets

By Steven Schain

Facing rising interest rates making capital even pricier, coupled with a highly saturated market competing for a limited customer base beset by plummeting prices and diminishing profit margins, it’s unclear whether Skymint will be liquidated or reorganized or how other cannabis companies will avoid suffocation during history’s most lucrative marijuana market.

After defaulting on $135 million of unpaid loans, rent and taxes, Michigan’s largest cannabis company Green Peak Innovations Inc. d/b/a Skymint (Skymint) was just thrown into a court-appointed receivership amid a landmark $2.3 billion statewide marijuana market.

While deprived of fundamental debtor tools like bankruptcy protection, cannabis companies may obtain financial distress relief via “workouts” or state law receiverships or assignments for the benefit of creditors (creditors’ assignment).

However, facing rising interest rates making capital even pricier, coupled with a highly saturated market competing for a limited customer base beset by plummeting prices and diminishing profit margins, it’s unclear whether Skymint will be liquidated or reorganized or how other cannabis companies will avoid suffocation during history’s most lucrative marijuana market.

Michigan’s Cannabis Woes

Whether deemed “medical” (purchasable only with a state-issued card to treat residents’ statutorily defined “covered medical condition”) or “adult-use” (purchasable by anyone over 21 years old from any state with a valid identification), those cultivating, processing, infusing, transporting or dispensing cannabis are deemed to be “plant-touching” marijuana-related businesses (MRBs) and, despite being legal in 38 U.S. states, cannabis remains federally illegal.

The Controlled Substance Act, 21 U.S.C. Sections 801, Et. Seq (1970) (CSA) currently lists marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision”. See 21 U.S.C. Section 812(b)(1). The CSA prohibits marijuana’s cultivation, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s supremacy clause, state laws conflicting with federal law are generally preempted and void. See U.S. Const., Art. VI, cl. 2; Wickard v. Filburn, 317 U.S. 111, 124 (1942) (”No form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress.”).

Because the CSA prevents cannabis from being sold outside of each respective legalized-marijuana state and, thus, no “interstate cannabis commerce” can occur, state regulators like Michigan’s Cannabis Regulatory Agency, and not federal agencies like the Food and Drug Administration, issue licenses and regulate MRBs.

To service its 10.05 million population, Michigan established respective Medical and Adult Use Cannabis programs in 2008 and 2018 licensing 1,250 businesses generating $2.3 billion in 2022 (a 28% increase over the prior year’s sales). Averaging $2,750 a pound in January 2021, oversupply caused Michigan’s “wholesale flower price” to drop 66% to $925 per pound in October 2022, exceeding marijuana’s “40% national price-per-pound decline” according to spot-market-index tracker Cannabis Benchmarks.

Because an MRB’s business model hinges on receiving a set price-per-pound, plummeting wholesale prices eliminates margins derailing cannabis’ entire supply chain. For example, envision a 2018 licensee raising funds and constructing a $23 million indoor grow facility using a 2018 price-per-pound market price as the foundation for its projections. Regardless of the markup, when the wholesale price-per-pound plunges, a grower’s ability to sell its product, subsidize operations, service debt and remunerate investors, and raise capital becomes crippled.

Since growers are either “vertically integrated” (i.e., simultaneously manufacturing and dispensing) or sell to independently owned dispensaries, these losses are either magnified across the enterprise or passed on to retailers. For example, after oversupply caused Oregon’s wholesale price-per-pound to drop to $550 in February 2023, the marijuana flower retail price reached a $4 per gram record low eviscerating dispensaries’ profit margin.

Skymint’s Fall From Grace

Operating 24 retail dispensaries and three grow operations employing 600 people, Skymint is Michigan’s largest medical and adult-use license holder. According to Tropics LP (Tropics) on March 3 filed a lawsuit (Tropics lawsuit), in September 2021 it loaned Skymint $70 million to acquire a competitor, the majority shareholder of which, Merida Capital Holdings (Merida), also lent Skymint $8 million toward the purchase.

According to the Tropics lawsuit, after defaulting on promissory note and receiving another $5 million from Tropics, Skymint failed to raise $15 million, meet existing loan obligations or pay back rent and taxes resulting in a November 2022 agreement in which Tropics paid $5.8 million of Skymint’s delinquent sales and excise taxes. Pursuant to its lawsuit, Tropics alleges that despite its $263 million sales forecast, Skymint generated only $110 million of revenue in 2022, burned through $3 million in cash per month, owed $4 million in sales and excise taxes, and was being evicted from its cultivation facility for $1.1 million of unpaid rent.

In addition to the $127 million and receiver appointment sought in the Tropics proceeding, Merida file a second lawsuit against Skymint and its executives alleging misrepresentation of financials and mismanagement.

Skymint’s problems are not unique. According to Crain’s Detroit Business, four other of Michigan’s cannabis companies were recently placed in receivership and track-and-trace software provider Metrc (monitoring cannabis products’ movement through the supply chain) may close 138 cannabis companies’ accounts over delinquent $40 monthly service fees and “tag fees” on products sold.

Financial Distress Solutions

Governed by the federal Bankruptcy Code, the bankruptcy system allows debtors to either dismiss or partially satisfy debts they are incapable of fully paying, and, upon filing, creates an “automatic stay” period during which creditors are prohibited from attempting to collect. Bankruptcy petitions are filed in a federal bankruptcy court governed by federal law, although state laws may determine how debtors’ property rights are affected (e.g., validity of liens or exempting property from creditors).

Bankruptcy’s most common form is a Chapter 7 liquidation in which the court appoints a trustee to collect and sell the debtors’ nonexempt property and distribute proceeds to creditors. Because most states allow debtors to keep essential property, Chapter 7s are usually “no asset” in which there are zero saleable assets to fund a distribution to creditors.

Bankruptcies allowing debtors to keep some or all of their property, reorganize and use future earnings to pay off creditors fall under Code Chapters 11, 12 or 13. Individual debtors usually file Chapter 13s, business entities file Chapter 11s, and Chapter 12 filings mirror Chapter 13 but are only available to “family farmers” and “family fisherman” and provide more debtor favorable terms.

Because of marijuana’s 100% federal illegality, and because bankruptcy can’t be used to facilitate a federally illegal activity or administer assets that can’t be possessed or sold under federal law, bankruptcy protection is denied to both “plant-touching” MRBs. See April 26, 2017, Letter from Clifford J. White, director, Executive Office for the United States Trustee to Chapter 7 and Chapter 13; In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015) (denial of marijuana grower/seller and legal dispensary landlord’s motion to convert to Chapter 13 and Chapter 7 dismissal because the debtor is unable to propose a feasible plan without violating federal law and the trustee’s estate administration duties by selling debtors’ assets); In re Medpoint Management, 528 B.R. 178 (Bankr. Az. 2015) (dismissing “owner of intellectual property leased to marijuana products seller” due to “dual risk” of assets’ potential forfeiture and the trustee’s CSA violation in administering the estate).

Although federal bankruptcy protection is presently unavailable, MRBs may obtain financial distress relief via “workouts” or state law receiverships or creditors’ assignment.

Workouts

A nonjudicial process through which a financially distressed business negotiates with creditors individually or en masse to restructure a debt’s amount and establish repayment terms, workouts are the first and most powerful line of defense. Similar to a Chapter 11 bankruptcy, workouts allow a debtor to propose terms in a “composition agreement” defining exactly what is owed, proposing a restructuring of debtor’s “universe of debt,” providing a pro rata payment schedule of both arrearage and to-be-incurred debt payments, and listing defined source of funds from which payment will be made. Beyond reassuring creditors of debtor’s universe of debt, financial viability and commitment to repay, workouts cost effectively and swiftly resolve a dispute, enable a debtor to confidently resume or fortify operations and trigger repayment streams into creditors’ hands.

Receiverships

Often initiated by disgruntled owners or concerned creditors, “receiverships” mirror Chapter 11 bankruptcy in being a nonliquidating judicial process and require a state court filing following which a court-appointed receiver guides a financially troubled MRB through its insolvency. The receiver’s efforts span from operating troubled company “as is,” restructuring entity’s operations (hiring/firing, debt payment hierarchy and workouts, winding-down or eliminating operational components), and selling the business either in whole or in pieces. Unlike a workout, which usually leaves leadership intact and presumes “pre-workout operations resumption” at its conclusion, a company in receivership’s stakeholders generally are unable to either select the receiver or run the company following the proceeding’s close.

Creditors’ Assignment

Mirroring a Chapter 7 bankruptcy liquidation proceeding, 38 states have creditors’ assignment statutes in which the debtor MRB transfers its assets to a trust administered by an “assignee” selected by the MRB, which, in turn, liquidates the assets and distributes the proceeds to the MRB’s creditors. Because the MRB has divested itself all of its assets and is, essentially, judgement proof, barring rights to collect against third parties like guarantors, unsecured creditor claims against the asset-less MRB are rendered worthless. Parties’ rights that are secured by the MRB’s assets travel with the assets and any secured party like a mortgage or Uniform Commercial Code lien holder can proceed directly against the transferred asset.

Impact of Skymint’s Receivership

Despite appointing an independent third party to oversee governance, Skymint’s future remains uncertain.

Although a receivership can preserve assets and raise capital, restore confidence in management and assist creditors in reclaiming defaulted funds, Michigan’s marijuana industry mirrors the rest of the nation in suffering from an oversaturation of cannabis businesses, a lack of affordable investment capital and a massive price collapse.

While “acquiring sales outlets to move product amid diminishing margins” may have hastened its demise, Skymint’s aggressive growth strategy may prove to be its saving grace. Holding sufficient licenses to both grow 28,000 marijuana plants and swiftly sell that volume of product may make Skymint Michigan’s most attractive investment or acquisition target.

In its recent statement, Skymint apprised, “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.”

Although time will tell, a market shakeout is well underway and, when the music stops, no receiver can guarantee a chair will be available for Skymint or any other MRB.

Reprinted with permission from the March 16, 2022 edition of the Legal Intelligencer© 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].

Steven Schain

Steven Schain

Winner of National Law Journal’s “2019 Finance, Banking, & Capital Markets Trailblazer” award, Steve Schain is Counsel to national Cannabis, Hemp and Hallucinogens law firm Smart-Counsel, LLC, is admitted to practice in PA and New Jersey and represents entities, governments and individuals in litigation, regulation and compliance, license applications, and entity formation.  Reach Steve at [email protected]

This Post Has 0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Recent Stories

CDTFA Cannabis Creditor: Myths and Truths

By Hilary Bricken, Attorney at Husch Blackwell Dealing with creditors is never a fun experience. However, some creditors are more severe than others, especially in the cannabis industry. One of…

If FL Supreme Court approves cannabis ballot language, will voters go for recreational weed or not?

The long wait on whether Floridians will get a chance to vote to legalize recreational cannabis for adults 21 and older is almost over, as the Florida Supreme Court is…

Missouri strips marijuana licenses connected to company accused of predatory behavior

Missouri’s health department on Wednesday stripped two coveted marijuana micro-licenses tied to an out-of-state company that had been accused of predatory practices and had listed the licenses for resale. The…

Dug In: Big Island Grown’s Deep Cannabis Roots

Big Island Grown (BIG) is a vertically integrated cannabis company based in Kailua-Kona, Hawaii County, on the Big Island of Hawaii, whose reach now extends to several islands in the…

More Categories

Back To Top
×Close search
Search