Cannabis producer Canopy’s subsidiary BioSteel enters ‘hibernation’ ahead of planned sale

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(This story was updated at 2 p.m. ET with more details and comments.)

Struggling Canadian cannabis producer Canopy Growth Corp. is ceasing funding of its BioSteel Canada subsidiary and plans to conduct a court-supervised sale of the business, the Ontario-based company said Thursday.

BioSteel, which makes sports nutrition beverages, obtained an initial order for creditor protection under the Companies’ Creditors Arrangement Act (CCAA) from a Canadian court, according to a Canopy news release.

“(BioSteel) is insolvent,” a factum filed in the Ontario Superior Court of Justice said. “It does not have adequate liquidity to operate its business in the ordinary course. Canopy and its affiliates are no longer willing to fund (BioSteel’s) operating costs.”

Canopy said the planned sale is part of its ongoing transformation, and the sports-beverage company does not align with its strategy.

“As 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,” Canopy CEO David Klein said in a statement.

“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.”

Canopy, which has not yet recorded a profit, has lost almost 6 billion Canadian dollars ($4.7 billion) since its inception.

As part of the transformation plan, Canopy in August sold its flagship facility in Smiths Falls, Ontario, back to its original owner, chocolate maker Hershey Canada, for CA$53 million.

Entering CCAA proceedings allows BioSteel to conserve cash and effectively puts the business “into hibernation to preserve its assets,” Canopy said.

Canopy – which directly owns 90%-plus of BioSteel’s equity interests – and an affiliate have collectively advanced more than CA$366 million to BioSteel, court documents show.

BioSteel remains “significantly” cash-flow negative and had required continued support from Canopy in the estimated amount of CA$15 million per month, per the court documents.

In the fiscal year 2023, covering April 2022 through March 2023, the entire BioSteel segment generated CA$69.6 million in sales, more than double the previous year’s total of CA$34.6 million.

However, the cost of goods sold outran the brisk sales growth, coming in at CA$110.3 million in the same period, for a deficit of CA$40.6 million.

Court-supervised sale

BioSteel and Canopy started looking for or a buyer or additional investment beginning in late 2022, with the help of Goldman Sachs & Co.

But that process returned no actionable bids, despite Goldman engaging with 24 potential buyers.

Canopy then formed a special committee and hired financial adviser Greenhill & Co. Canada to explore “strategic alternatives,” which included refocusing its sale efforts.

Because of BioSteel’s “rapidly deteriorating liquidity performance and based on feedback from Canopy regarding its diminishing willingness to provide financial and operational support” for the business, the committee set a deadline of Sept. 5, 2023, to receive proposals from interested parties, the court documents outlined.

Multiple parties expressed interest, but none were satisfactory.

So, on Sept. 13, Canopy informed BioSteel it did not intend to bankroll the business any longer and “demanded” repayment under the companies’ secured financing facility.

BioSteel currently owes roughly CA$366 million plus interest under the loan agreement and is unable to meet the obligations, records show.

The company also owes Canopy and its affiliates approximately CA$4.6 million on an unsecured basis.

Other unsecured debts amount to CA$40.4 million.

BioSteel intends to use the CCAA process to find a buyer “as efficiently as possible,” the court documents say.

Canopy said BioSteel will be responsible for the sale process under the supervision of the CCAA court.

“BioSteel intends to use this process to build on the work it undertook prior to the filing to identify a purchaser on an efficient basis,” according to Canopy’s release.

If approved by the CCAA court, the SISP will be administered by BioSteel with the assistance of Greenhill & Co. Canada and under the oversight of the monitor, KSV Restructuring.

Misstated revenue

In May 2023, Canopy said it uncovered “material misstatements” related to sales of its BioSteel business unit that were incorrectly accounted for.

The company said it initiated an internal review, under the oversight of the Audit Committee, and identified misstatements, primarily overstatements, related to the sports-beverage company’s sales.

Canopy restated its financial statements as a result of the review.

“All individuals implicated in the revenue misstatements are no longer involved with BioSteel – other than certain individuals in their capacities as minority shareholders – and an independent director was later added to the board of directors of each of the BioSteel Entities,” the court documents said.

Canopy said in August that BioSteel continued to be the subject of an investigation by the U.S. Securities and Exchange Commission.

The Ontario Securities Commission (OSC), the regulatory agency that administers and enforces securities rules, is conducting an “informal inquiry.”

No updates on those inquiries were shared.

In the court documents, Canopy did disclose that the sales process for BioSteel stalled earlier this year because of concerns identified regarding its financial reporting.

“The decision to seek creditor protection was made after careful evaluation of BioSteel’s financial situation and all available alternatives following consultation with its legal and financial advisors and a determination that a court supervised sale process is in the best interests of BioSteel and its stakeholders,” Canopy said in its release.

The initial order provides for a stay of proceedings in favor of BioSteel and its two American affiliates, BioSteel Sports Nutrition USA and BioSteel Manufacturing.

BioSteel’s board of directors will remain in place, the release noted.

BioSteel plans to fund the CCAA process from cash on hand and does not expect to require additional financing during the sale process.

Shares of Smiths Falls-headquartered Canopy are traded on Toronto Stock Exchange and Nasdaq.

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.