Canopy Growth spent $366M on BioSteel, then cut it off into creditor protection

CBC reported on 14 September 2023 that Canopy Growth, North America's largest cannabis company, had ceased funding its sports drink arm BioSteel, which filed for creditor protection under Canada's CCAA and the US Chapter 15 while seeking a buyer. BioSteel was founded in Toronto in 2009 by John Celenza and ex-NHL player Mike Cammalleri, and grew through marketing deals with dozens of NHL, NBA and NFL teams and athletes such as Connor McDavid. Canopy took it over in 2019 as part of a plan to diversify into beverages, which CBC said 'hasn't quite panned out'.

Court filings showed Canopy had spent about $366M on BioSteel since the takeover and the business burned about $15M a month. Canopy said BioSteel caused about 60% of its financial losses that fiscal year. BioSteel said it 'no longer has access to funding for the brand, which continued to generate negative operating cash flow'. Sales were growing, with $24M in the first three months of 2023, more than twice the year before, but advertising and promotion costs rose by about $12M in that quarter on its NHL sponsorship.

Canopy also disclosed that an internal review found 'overstatements, related to the recognition of revenue', mainly in business-to-business sales outside Canada and the US, and that it had self-reported to the SEC, which opened an investigation. BioSteel did not make a 1 September NHL payment and said it did not intend to make about $12M of further sponsorship payments. Canopy said about 181 BioSteel employees would be laid off.

About $366M spent since the takeover, about $15M burned a month, and about 181 BioSteel employees laid off.

Canopy bought BioSteel in 2019 to diversify into beverages, but the unit kept generating negative operating cash flow.

The business burned about $15M a month while its costs, including NHL sponsorship spending, outran its sales.

Canopy's internal review found revenue overstatements in non-North American business-to-business sales.

With the parent stopping funding, the company said it had no access to funding for the brand.

Buying a fast-growing brand to diversify only works if it can fund itself; when cash burn exceeds sales for years, the parent must cut it off.

BioSteel sought a court-supervised sale and, as of July, had engaged 24 potential buyers, with six preliminary non-binding proposals by 5 September. A Bloomberg Intelligence analyst called cutting off the money-losing unit a positive step for Canopy's finances. Canopy was under an SEC investigation and an informal Canadian inquiry.