Skymint to Hit Auction Block with Lender as Stalking Horse Bidder

This story was republished with permission from Crain’s Detroit and written by Dustin Walsh. 

The assets of embattled Michigan marijuana cultivator and retailer Skymint will be auctioned off.

After three months under a court-appointed receiver, saving the company under current leadership appears to be not possible, according to a motion filed by Gene Kohut.

“After his appointment, the receiver continued to operate Skymint’s business operations, the receiver has determined that is in the best interest of the receivership estate and its creditors to sell all the receivership property,” lawyers for Kohut, a partner at Detroit-based advisory firm Trust Street Advisors, wrote in the motion filed in Ingham County Circuit Court on May 26.

The company’s assets, which include the leases on 23 dispensaries and two cultivation sites, will be sold to the highest bidder. However, the motion for an auction comes with a stalking horse bid from the Canadian lenders that sent Skymint into receivership in early March.

Tropics LP, under a new entity to be formed later, has offered to acquire the Skymint assets for $109.4 million, setting the bidding floor.

Under the terms of the proposed auction — the judge still must approve the auction — any entity that outbids the stalking horse bid by Tropics’ new entity would have to assume all of Skymint’s liabilities, making a deal to acquire the struggling marijuana company a steep transaction.

Kohut said most creditors are supportive of the auction, so he expects minimal pushback. He told Crain’s he expects the judge to approve the auction process by the end of June.

Currently, Skymint owes Tropics approximately $135 million. That means any new bidder would be on the hook for at least $244.4 million to acquire the company.

David Morrow, CEO of competitor Lume Cannabis Co., said it’s unlikely any other Michigan company would bid on Skymint.

“The simple math is the Skymint assets are worth less than the $127 million senior note (lender) SunStream has,” Morrow said. “The big problem with all these failed and failing cannabis businesses have is their assets are worth less than their total debts; They have significant negative monthly cash burn and they owe the federal government millions of past due taxes. It’s easy to say no to that stupid deal.”

Skymint ended up in receivership after Tropics, a subsidiary of Calgary-based Sundial Growers Inc.’s investment firm SunStream Bancorp Inc., loaned Green Peak $70 million in September 2021 towards the acquisition of competitor 3Fifteen Cannabis and its 12 dispensaries in Detroit, Grand Rapids, Ann Arbor, Flint and elsewhere. Sundial is a publicly traded company on the Nasdaq.

Under the Tropics promissory note, Skymint agreed to repay the lender in full by September 2025 at an interest rate of 12.5 percent, compounding monthly, as well as sell some common shares of the company to Tropics. Under the agreement, Skymint agreed to maintain a minimum cash balance of $7.5 million, which Tropics alleges in the suit that it failed to do in March last year. In response, Tropics loaned Skymint another $5 million, raising the loan total with fees to nearly $81.5 million.

Skymint did not meet its new loan obligation in June 2022 after failing to raise an additional $15 million in new funding. The company also failed to pay additional fees to Tropics, pay back rent on its E. Jolly Road facility in Lansing and pay certain taxes. 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 Skymint.

Tropics sued Skymint in early March to force a receiver. Tropics has also lent Skymint another $5.15 million to continue operations under the receiver.

Tropics alleged in the court filing that Skymint’s daily sales revenue dropped from $356,953 in April 2022 to just $184,579 in January of this year, exacerbating an already bad financial picture. Skymint was allegedly burning through $3 million in cash per month and generated only $110 million in revenue in 2022, $153 million below its forecast of $263 million in sales for the year.

Skymint owed nearly $4 million in sales and excise taxes by March 25, the suit alleged.

Under the receiver, Skymint has faced more and more uncertainty.

Skymint and the receiver have battled in court with the owners of 3Fifteen, New York-based Merida Capital, who also lent Skymint $8 million toward the 3Fifteen acquisition.

Its lawyers have sought on several occasions to disjoin 3Fifteen from the court-ordered receivership, despite the acquisition closing more than a year ago. In the days prior to Skymint entering receivership, 3Fifteen Cannabis retook control of several stores acquired by Skymint, including dispensaries in Hamtramck, Grand Rapids, Camden and two in Battle Creek, according to court records.

But the circuit court judge in Ingham County ordered 3Fifteen to cede control back to Skymint, according to court records, as well as returned control of bank accounts with nearly $500,000 in funds and more than $600,000 spent on rent and bills for those dispensaries back to Skymint.

Merida alleged in its own lawsuit against Skymint in Oakland County Circuit Court that the company was mismanaged and that its co-founder and CEO Jeff Radway used the company as a personal piggybank. Radway took an “indefinite leave of absence” from the company in April.

It’s unclear whether Merida and 3Fifteen could upend the receiver’s motion to put Skymint up for auction.

Max Newman, partner at Butzel Long and attorney for 3Fifteen, told Crain’s the company will “speak through our objection with the court.”

In April, Skymint ceded its lease on the former Summit Sports and Ice Complex near Lansing. The company planned to double its marijuana production capabilities with the facility but never completed the build-out. Skymint surrendered the 176,000-square-foot facility and 21 acres back to developers, the country’s largest cannabis property developer Innovative Industrial Properties Inc.

San Diego-based IIP invested roughly $30 million to acquire and renovate the facility on Skymint’s behalf but sought to retake the property after Skymint failed to pay on its lease.

The auction of Skymint would be the largest marijuana business failure in Michigan — and possibly the U.S. — and highlights the difficult conditions these companies are operating under in Michigan, where prices have declined more than 80 percent since legalization in December 2019.

The price collapse is largely due to product oversupply — recreational marijuana retail prices have plummeted from $512.05 per ounce of flower in January 2020 to just $87.76 per ounce of flower in April — effectively eliminating margins for many businesses.

At least five other marijuana companies are under a court-ordered receiver in Michigan.

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.

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 of financial protection.

So it’s quite possible that while Skymint is the first marijuana company to be auctioned by the court, it may not be the last.