May 12, 2023
Accounting errors, overspending lead Canopy Growth to sour on its $50M BioSteel investment
Why Canopy Growth's founder is more optimistic about cannabis in Europe over the U.S.
When Canopy Growth Corp. announced it took a controlling stake in a near-insolvent BioSteel Sports Nutrition Inc. nearly three years ago to help make a line of CBD-infused sports drinks, investors cheered the move, pushing its stock up as much as five per cent that day.
Now, that same investment has suddenly emerged as an albatross for the stumbling cannabis player, forcing Canopy to announce the embarrassing move of restating its financial statements for its 2022 fiscal year while former employees paint a picture of a dysfunctional organization rife with overspending.
Late Wednesday, Canopy released a filing stating a review of BioSteel's sales in 2022 found numerous "material misstatements" and accounting errors in its financial statements for its 2022 first-quarter, second-quarter, and third-quarter results as well as its audited statements for the fiscal year ended 2022, which should no longer be relied upon. It said it will re-file those statements as soon as possible, a company spokesperson said.
In addition to that revelation that sent Canopy's stock plunging by more than 14 per cent on Thursday, the company's once-lauded acquisition has been caught in a sweeping re-organization that's seen its co-founder John Celenza ousted following a testy exchange with Canopy's Chief Executive Officer David Klein in March, two people familiar with the situation told BNN Bloomberg.
Celenza -- who started BioSteel in 2009 with former NHL star Mike Cammalleri to find a nutritional recovery drink that wouldn't fall afoul of new NHL drug testing rules -- was described by one source as a high-energy leader who clashed with Klein. Canopy acquired a 72 per cent stake in BioSteel in Oct. 2019 for $50.7 million.
Celenza declined to comment when reached by BNN Bloomberg. A Canopy spokesperson declined to comment on Klein’s relationship with Celenza.
Sources who worked for BioSteel and its partners described the working environment at the company as chaotic and, at times, disorganized. While the specific nature of the arguments between the executives is not fully known, sources said BioSteel's spending plans often clashed with Canopy's need to rein in costs within its struggling cannabis ventures.
While BioSteel's revenue has purportedly climbed 56 per cent in 2022 to $44.6 million, a rare bright spot in Canopy's floundering Canadian cannabis business, those sales may have come at a steep cost with costly endorsement deals awarded to a slew of NHL, NFL, MLB, and NBA players, the source said. Industry sources suggested endorsement deals with well-known athletes could start at $100,000, while contracts with professional teams could often be at least triple that amount.
A Canopy spokesperson declined to confirm whether Celenza was part of a recent wave of BioSteel departures that saw about 20 staff leave the company, citing a policy where they do not comment on individual departures. Those staff cuts were tied to an announcement Canopy made in February that it would transition to an asset-light model and close its Smiths Falls, Ont. headquarters. That announcement also reaffirmed management's expectations that those recent closures would result in positive adjusted EBITDA in its fiscal 2024, with the noted exception of its BioSteel business.
Canopy's review of its BioSteel business also comes at an inopportune time for the beleaguered cannabis company. Aside from reporting a $2.6 billion loss so far this current fiscal year, Canopy is also looking to secure shareholder support for its plan to ring-fence its U.S. investments and tack them onto its balance sheet.
Due to U.S. and Canadian regulatory restrictions tied to cannabis investing, Canopy hasn't formally acquired the three U.S. cannabis companies to which it has staked claims. It has pushed back a shareholder vote needed to begin the process of converting its stock to exchangeable shares needed to create the new U.S.-domiciled holding company which will control its U.S. cannabis investments.
That plan was seen as a way for Canopy to curry back investor support, specifically from institutional players at a time when U.S. Congress continued to delay any momentum on pro-cannabis legislation. As a result, Canopy's stock now trades at a level not seen since August 2015, a 98 per cent drop from its all-time high.
Correction: The headline originally stated $60 million, when it is $50 million.