Canadian cannabis company Canopy Growth Corp. has made the decision to file for bankruptcy for its BioSteel sports drink in both Canada and the U.S. This move is aimed at strengthening the company’s financial position.
Funding Ceased for BioSteel
Canopy Growth Corp. has chosen to end its funding for BioSteel, a sports drink that generated about C$32.5 million ($24 million) in sales during the company’s first fiscal quarter.
Impact on Canopy Growth Stock
Following a recommendation from the U.S. Department of Health and Human Services to reclassify cannabis from Schedule I to Schedule III, Canopy Growth’s stock experienced a surge before cooling off in recent sessions. The stock saw a 13% decrease in regular trading on Wednesday. However, it had risen by 181% in the past month and managed to regain value above the $1-per-share level.
Eliminating Cash Burn
The filing for BioSteel bankruptcy will “immediately eliminate significant cash burn” for Canopy Growth. This move allows for an organized sales process to unfold, giving the company a chance to recover from the financial strain.
As the senior secured lender for BioSteel, Canopy Growth intends to recover proceeds from the bankruptcy sale. BioSteel has initiated proceedings under the Companies’ Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice and will also seek protection from creditors under Chapter 15 of the U.S. Bankruptcy Code.
A Major Milestone for Canopy Growth
Canopy Growth’s CEO, David Klein, describes the BioSteel bankruptcy filing as a “major milestone” in the company’s plan to generate adjusted earnings before interest, taxes, depreciation, and amortization by the end of fiscal 2024.
Canopy Growth’s Divestment from BioSteel
The brand BioSteel has experienced tremendous revenue growth year after year, making it an attractive asset in its own right. However, according to Canopy Growth CEO David Klein, the company’s cannabis-focused asset-light strategy does not align with BioSteel. In light of this, Canopy Growth has decided to divest from the consumer-packaged goods brand.
Canopy Growth’s auditor recently expressed concerns about the company’s ability to continue as a going concern following a string of financial losses. Consequently, a strategic review of the BioSteel brand was initiated.
To adapt to an asset-light business model, Canopy Growth made the difficult decision to cut 1,200 jobs in 2022 and 2023. While BioSteel is undeniably a great brand, it requires significant investment to facilitate growth, making it a less suitable fit for a cannabis-focused company.
Adding to its challenges, Canopy Growth is currently being investigated by the Securities and Exchange Commission (SEC) for material sales misstatements regarding BioSteel. This investigation was prompted by revelations that led to a C$10 million decrease in net sales for the year ending March 31, 2022, accounting for approximately 2% of total sales. Notably, BioSteel boasts partnerships with prominent athletes like NFL quarterback Patrick Mahomes and NBA star Luka Doncic.
Despite these obstacles, Canopy Growth is determined to persevere. The company is in the process of securing its Canadian operations while simultaneously pursuing strategies to enter the lucrative U.S. market.
In July, Canopy Growth made an important announcement concerning its financial standing. Agreements have been reached with lenders to reduce the company’s balance sheet by C$437 million ($333.04 million) over the next six months, resulting in annual interest cost reductions of C$20 million to C$30 million.
The challenging journey of Canopy Growth serves as a powerful reminder that the path to success in the cannabis industry is fraught with obstacles such as oversupply and overspending. Nevertheless, the company remains steadfast in its pursuit of a brighter future.