Tired of its sports drink business weighing on its books, Canopy Growth Corp. is making moves to shed the division.
The Smiths Falls, Ont., cannabis company announced Thursday that it had obtained creditor protection from the Ontario Superior Court of Justice for BioSteel Sports Nutrition Inc. and intends to seek permission to sell the business.
Canopy sought creditor protection because it said it no longer has access to funding. It described BioSteel as a "significant drag" on its profitability and cash flow, saying about 60 per cent of the company's adjusted EBITDA loss was attributable to BioSteel.
Canopy chief executive David Klein said the moves were a "major milestone."
"While BioSteel’s business has shown significant year-over-year revenue growth, and we believe the brand remains an attractive asset, it does not align with Canopy Growth's cannabis focused asset-light strategy," he said in a news release.
"We have repeatedly demonstrated that we will take decisive action to enhance our profitability and ensure we are focused and positioned to be a leader in the North American cannabis sector."
BioSteel's creditor protection status marks another blow for the beverage company Canopy scooped up a 72 per cent stake in back in October 2019 in a bid to diversify. The deal came with a pathway to 100 per cent ownership.
BioSteel was started by entrepreneur John Celenza and hockey star Michael Cammalleri in Toronto in 2009 and quickly became ubiquitous on arena and sports field benches through partnerships with the Toronto Raptors, the Toronto Blue Jays, the National Hockey League and the U.S. Soccer Federation.
But those relationships were costly.
Canopy reported that advertising and promotional investments in BioSteel, including costs related to its NHL sponsorship, had increased by about $12 million in its most recent quarter.
And in recent months, Canopy and one of its subsidiaries advanced about $15 million per month and more than $366 million to date to BioSteel to keep the company going, BioSteel said in court documents.
BioSteel also encountered accounting problems.
Canopy promised in May to refile three of its past quarterly financial statements because of misstatements linked to BioSteel it warned "should no longer be relied upon." It parted ways with some BioSteel staff and made management changes by June.
But by September, Canopy concluded it had had enough of BioSteel’s financial situation and told BioSteel it would no longer make cash advancements. Court documents say a “broad marketing process” led by Goldman Sachs & Co. in late 2022 to find additional investors or sell BioSteel did not result in any bids.
“Goldman engaged with 24 potential buyers, however, the feedback from potential buyers noted, among other concerns, that significant investment would be required and that the timeline for a return on the investment in BioSteel’s current form was too long,” BioSteel lawyer Sarah Eskandari said in an affidavit.
A special committee then tried to solicit interest and six parties came forward, but they sought “lengthy due diligence periods and/or financing conditions, and no party offered committed financing to fund the operations of the BioSteel business during its diligence period.”
One of BioSteel's co-founders left all director and officer positions they held with the business on Aug. 18 to form “part of a potential bidding consortium," court filings say. That person was the last employee of BioSteel Canada, though 190 were still in the U.S. with 90 at a Verona, Va., facility and the remaining in sales, marketing and other corporate roles.
The company laid off 68 employees Thursday, Canopy's chief communications officer Brenna Eller said.
Canopy's Canadian creditor protection in conjunction with a Chapter 15 case it intends to launch to address its American assets will limit Canopy's further funding obligations from BioSteel.
"Canopy Growth’s financial position is expected to be further strengthened through the immediate removal of the cash expenditures associated with funding the BioSteel business unit and the potential cash proceeds from the orderly sale of BioSteel’s assets," Canopy said in a news release announcing the changes.
Investors appeared pleased with the news, pushing the company's share price up by 26 cents, or almost 17 per cent, to $1.82 in mid-morning trading, but by the market's close, it was up 14 cents, or 8.97 per cent, to $1.70.
Canopy hopes its move away from BioSteel will complement the parent company's efforts over the last few years to streamline its business through layoffs, facility closures and a more detailed look at expenses.
When it sells the historic Hershey Drive in Smiths Falls for $53 million back to the chocolate company that once owned the building, Canopy will have sold seven properties for an aggregate gross amount of about $155 million since April 1.
Canopy has also reduced its overall debt by $349 million since the start of July and expects another $95 million in reductions over the next two quarters.
This report by The Canadian Press was first published Sept. 14, 2023.
Companies in this story: (TSX:WEED)
Tara Deschamps, The Canadian Press
