Mounting debt and folding businesses are shaking the foundation of Michigan cannabis’ financial future.
Michigan’s marijuana market has two growers for every retailer, fueling a price plummet in flower and distillate, found in edibles, vapes and concentrates. Add in a stubborn black market and out-of-state products illegally seeping into the supply, and profit margins are sinking with every “buy one, get one” deal.
The multi-billion-dollar industry is reckoning with how to stabilize a supply chain leaning on credit by introducing new rules. On the heels of court filings exposing millions in debt from major names in the industry, the Cannabis Regulatory Agency has proposed denying a license or license renewal based on civil judgments or court orders resulting from unpaid debt.
The debt rule is popular among processors and growers, said Scott Roberts, a Detroit-based cannabis attorney and broker.
“For them, this is a godsend,” he said. “To go through the district court process takes a lot of time, and to have this kind of extra bite to the collections process, it’s great for them. If you’re a dispensary owner that’s robbing Peter to pay Paul. Not so great for you.”
Price volatility on flower has slowly leveled – in May the recreational price per ounce was $90.64, inching up month-over-month but far from the $221.21 price point just two years ago. Even so, it’s the growers and processors who consistently get caught in the red as they sell their product on a line of credit to retailers who are slow to fulfill their end of the deal.
Roberts has seen clients tallying up seven figures of debt as unpaid invoices ranging from $20,000 to $50,000 pile on top of each other from multiple retailers not paying within a 30-day period.
Brian Hanna, executive director of the regulatory agency, has been hearing complaints of businesses shorting each other since he took the helm in fall 2022. The 13 pages of proposed rules are the agency’s way of having a dialogue with stakeholders. There is no deadline for receiving feedback.
As it pertains to the debt rule, Hanna said he’s open to attaching a dollar amount threshold or other criteria to rein in petty squabbles.
“We’re creating the playbook and running the playbook at the same exact time,” he said. “I don’t want to get our agency in a position where we’re calling balls and strikes per se, but there should be some form of judgment.”
Relying on credit has created a house of cards within an industry that already had a weak financial backbone. Without federal recognition, cannabis businesses are often backed into a corner of high-interest lenders and small credit unions because national banks see the industry as a financial risk.
This is the root argument for those in favor of the Safe Banking Act. The eighth iteration of the bill is currently being considered in Congress. Michigan Attorney General Dana Nessel voiced her support after a string of more than 20 dispensary break-ins across the state targeting safes. Nessel said the cannabis business “is left as a ripe target for criminals” without access to traditional banking institutions.
Operating in an industry that remains federally illegal also puts the cannabis industry in a precarious position when it comes to debt. Cannabis businesses cannot claim bankruptcy and receive relief from the courts. In the eyes of the federal government, a cannabis business is operating as a “criminal enterprise,” a charge mainly associated with drug trafficking.
In turn, these businesses fall into receivership with their lenders, meaning the creditors gains management of the companies’ finances to recoup debt.
Since 2019, eight licensees have fallen into receivership, according to the Cannabis Regulatory Agency.
The most high-profile among them is Green Peak Industries, parent company to Skymint.
Skymint’s $127 million debt was aired out in March in court. Despite being one of Michigan’s largest cannabis brands with 24 retail locations and more than 600 employees, there were financial concerns dating back to March 2022, court documents state.
During MLive interviews, cannabis insiders in all sectors named Skymint as the example that spooked them about the financial fragility of the industry. When asked to comment on the regulatory agency’s proposed rule tying debt to licenses Skymint offered the following statement:
“It would be inappropriate for us to comment on or speculate about the CRA’s rulemaking process. Our focus is on continuing to provide high-quality products and service to our customers throughout Michigan.”
Narmin Jarrous, chief development officer at Exclusive Brands, was relieved to see the CRA stepping in on financial regulation. Exclusive Brands serves as a grower, processor and retailer statewide.
“We do have a lot of people who owe us money and unpaid bills, and it gets frustrating because then we can’t pay our bills on time if we’re not being paid,” she said. “It turns into this domino effect that’s very dangerous for the industry, because we don’t want one person going down to affect dozens of companies across the state.”
Watching businesses fold has shifted her perspective in the last six months, Jarrous said. Because of the interconnected nature of the cannabis ecosystem it has made her team “rethink how you do business,” Jarrous said.
Reputations and relationships are on the line, said Jevin Weyenberg, owner of Lake Effect and Doja dispensaries in Southwest Michigan. Weyenberg’s businesses are primarily retail.
Word gets around quick on who isn’t paying their bills, Weyenberg said. However, as larger companies buy out smaller operations, it is harder to cut off business with bad actors.
“We can’t have people monopolizing the industry, and we can’t have people not paying their bills,” he said. “It’s always the smaller companies that get hurt the most. As those start disappearing, it gives the larger companies more and more pricing power.”
Weyenberg is most concerned the independent, racial minority-owned and veteran-owned shops will become collateral damage.
“Those aren’t the companies that have big private equity firms behind [them] that’ll write checks whenever they go in the negative,” he said. “Those are companies that if they go into negative, their doors are getting closed.”
Looking at the long view, Roberts, the attorney and broker, thinks tying debt to a license will accelerate the fall of businesses “on the brink” or push more mergers. But overall it could clean house for the industry to progress.
“To have any shot of some of these Michigan companies doing well enough here in Michigan to expand and actually having national cannabis companies that started in Michigan, we got to find a way to strengthen the industry financially,” he said. “I think this does that long term. But in the short term, it’s going to cause a lot of pain.”
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Black market battles, plummeting prices: a look at Michigan marijuana in 2022
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