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More Michigan marijuana companies expected to come under receivership control

Michigan cannabis companies have faced a challenging environment in the past year, with the price of marijuana flower rapidly declining, causing margins to narrow at a time when competition is increasing.

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As a result, some cannabis companies have struggled to pay their bills and some are now under the control of a court-appointed receiver, which is one of the few options available for lenders to recover their investments in the cannabis industry.

While using a court-appointed receiver is common in many industries, it's relatively new to Michigan's cannabis industry, which is still growing but is becoming an increasingly challenging environment to operate in because of a number of factors in addition to declining marijuana flower prices, like more competition and limited access to traditional funding sources, among others.

Michigan Gov. Gretchen Whitmer signed into law in 2020 a bill that extended the court-ordered receivership process to Michigan’s marijuana industry, providing a state-level remedy for those in the marijuana industry that are unable to take advantage of federal bankruptcy courts.

A receivership is a remedy available for creditors to obtain funds that are owed to them. A court-appointed receiver answers to the court and manages all aspects of the company's business in order to repay lenders and stabilize the company. Cannabis companies can't file for bankruptcy because marijuana is still illegal under federal law and federal bankruptcy protection is not available to these companies or their lenders.

Receiverships are not a simple process, though, and that's especially true in the cannabis industry, Ben Sobczak, a partner at the law firm Dickinson Wright, argues. That's because cannabis “is the only industry that has this kind of incredible, one-of-a-kind regulatory overlay," Sobczak said, making it difficult to transfer a marijuana license between companies, for example.

"It's unclear if receiverships are going to be a reasonable way to unwind these problems," he said.

Since using a court-appointed receiver is one of the only available options for distressed marijuana companies, industry insiders expect more companies will come under the control of a court-appointed receiver in the future. There are seven companies in Michigan that are under the control of a court-appointed receiver, according to data obtained from the state's Cannabis Regulatory Agency in May.

Sobczak said there are more companies in default that could be put into receivership at any point but the reason they're not is "because those lenders are already kind of realizing it's going to be a messy, long and expensive affair."

He said the worst-case scenario is that lenders will shy away from investing in the cannabis space, worried they won't be able to recover their investment if the company struggles financially, and people working in Michigan's cannabis industry will lose their jobs and buildings will sit empty.

However, it's likely more cannabis companies will enter into receivership as it's one of the only options available for lenders looking to recover funds. Others around the country have figured out how to make it work. For example, a creditor petitioned the Massachusetts Superior Court to appoint a receiver to take control of a Massachusetts-based medical cannabis operator's assets after it defaulted on a $22 million loan. The operating assets of that company, Ermont Inc., were acquired by MariMed Inc., a multistate cannabis company, in March.

One large Michigan cannabis company is in the midst of a receivership. Mid-Michigan-based cannabis company Green Peak Industries, which operates under the brand name Skymint, went into receivership in March after a lender sued the company claiming it is owed more than $127 million. Gene Kohut, the receiver in this case, has worked for three decades across nearly every industry as an independent fiduciary, leading companies through a restructuring process or a liquidation.

Much of the work he's done at Skymint thus far has been similar to what he's seen in other industries. Kohut's first step after being appointed receiver has been to go into a fact-gathering mode, communicating with company employees, stakeholders, the licensing bureau and suppliers, among others.

Now, he's at the stage where he's trying to restructure the company, looking at "every particular part of the company, service line, employee role, location and product ... to determine what is necessary to continue the operations going forward in a profitable way."

So far, he's had Skymint vacate certain locations, terminated Skymint leases — Kohut surrendered the former Summit Sports and Ice Complex near Lansing, which the company had planned to turn into a massive marijuana cultivation and processing facility in March — trimmed employee headcount and ended relationships with certain vendors and suppliers.

"We're hoping that we can — on the other side of this — have a much more streamlined company that's profitable," Kohut said.

Looking forward, Kohut said he does anticipate needing a little longer timeframe to complete the receivership process compared with receiverships he's done in other industries because of the regulatory layers involved with cannabis and working on a court's timeline, although he added that he's had a good working relationship with the CRA, the Michigan attorney general and the municipalities in which Skymint operates, among others.

That longer timeframe was something Frank Segall and Scott Moskol, chairman and co-chair of the Boston-based law firm Burns & Levinson's cannabis business and law advisory group, experienced in steering the resolution of the receivership of Ermont. Segall and Moskol represented Teneo Funds, the lender.

For example, Segall and Moskol said they got approval for the sale in October 2022 but it wasn't until March 2023 that state regulators approved the buyers. It can also be a challenge in the first place, they said, to find qualified candidates to act as the receiver and who understand the cannabis business.

"This is a highly regulated industry at the state level and you need to know how to navigate those regulations," Segall said. "Receivership is also a complex process in and of itself."

Still, they said the fact that the receivership process is available to the cannabis industry and the fact that financial problems can be resolved should provide comfort to those involved in the industry.

In Sobczak's worst-case scenario for the cannabis industry, he fears lenders would be less likely to invest or loan in cannabis companies because he has yet to see a quick way to recover funds or seize collateral, such as real estate, marijuana products or licenses, for example.

Adam Stettner, founder and CEO of FundCanna, a cannabis-specialized lender, understands this risk.

"One of the biggest mistakes that any lender can make is to just assume it's business as usual," Stettner said. "It is not."

Stettner, who began lending to cannabis companies in 2021 and is funding companies with operations in 27 states, including Michigan, said it's important for the lender to be a good partner in all industries but especially in cannabis. That means understanding how the money is going to be used.

FundCanna offers capital for purchasing or smoothing out revenue cycles, paying invoices and bridging a gap, as opposed to long-term financing, meaning Stettner and his team have a good understanding of what exactly the money is going toward.

"If they're gradually and steadily growing their business, it's surprisingly predictable, even with price compression, the competition and the taxation issues," he said.

Detroit Free Press


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