Canopy Growth Shifts Strategic Focus: Discontinuing Funding for BioSteel Business Unit to Enhance North American Cannabis Leadership

15 Sep, 2023

Canopy Growth Shifts Strategic Focus: Discontinuing Funding for BioSteel Business Unit to Enhance North American Cannabis Leadership

Canopy Growth Corporation, identified as "Canopy Growth" or the "Company" (TSX: WEED) (NASDAQ: CGC), has recently made a significant announcement regarding its strategic realignment. The company has decided to discontinue its financial support for BioSteel Sports Nutrition Inc., referred to as "BioSteel." In response, BioSteel has initiated proceedings under the Companies Creditors ArrangementInitiate a proceeding under the Companies Creditors Arrangement Act (CCAA) within the jurisdiction of the Ontario Superior Court of Justice, specifically on the Commercial List. Furthermore, it plans to seek recognition of these proceedings under Chapter 15 of the United States Bankruptcy Code, which would enforce the orders issued in the CCAA proceedings Within the United States, which encompasses a stay of ongoing legal actions.

As a part of its ongoing efforts to streamline its operations and reduce cash burn, Canopy Growth had previously revealed its intention to explore strategic options for its BioSteel business unit, including a potential sale of the unit. The BioSteel segment had been a significant financial burden, accounting for approximately 60% of the Company's Q1 FY2024 Adjusted EBITDA loss. This decision to seek creditor protection by BioSteel aligns with Canopy Growth's transformation strategy, which focuses on simplifying its operational model and emphasizing core cannabis-related operations.

The discontinuation of funding for the BioSteel business unit is expected to bolster Canopy Growth's financial position by eliminating immediate cash expenditures associated with it. Additionally, potential cash proceeds from the orderly sale of BioSteel's assets are anticipated to contribute to the Company's financial strength. This move is also expected to remove a previously identified material weakness related to the BioSteel business segment. Furthermore, with the elimination of BioSteel's operating losses and cash burn, Canopy Growth reiterates its goal of achieving positive Adjusted EBITDA across its remaining business units by the end of FY2024.

David Klein, the Chief Executive Officer of Canopy Growth, stated, "Canopy Growth has marked yet another major milestone in our transformation plan. Although BioSteel has demonstrated substantial year-over-year revenue growth in its business, and we still consider the brand to be an appealing asset, it does not align with Canopy Growth's strategic focus on cannabis and its asset-light approach. 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 Growth's recent strategic transformation efforts have yielded notable results, including a substantial reduction of the Company's overall debt since July 1, 2023. The sale of the Hershey Drive facility for CAD $53 million is part of this debt reduction initiative. Moreover, cost-saving measures have been implemented, resulting in a CAD $47 million reduction in Q1 FY2024, bringing the total cost reductions to CAD $172 million since the beginning of FY2023. The management continues to anticipate further cost reductions in Selling, General and administrative Expenses, and Cost of Goods Sold, ranging from CAD $240 million to CAD $310 million by the end of FY2024.

Additionally, Canopy Growth's involvement in the U.S. THC market through Canopy USA, LLC has shown progress, with the company working closely with regulators to advance its unique structure. In the context of BioSteel's financial situation, it has obtained an initial order from the CCAA Court, which includes provisions for a stay of proceedings in favor of BioSteel and its two U.S. affiliates, as well as the appointment of KSV Restructuring Inc. as the monitor of BioSteel.

The CCAA procedure will enable BioSteel to optimize the worth of its assets via a sales process overseen by the court. Canopy Growth, as the largest creditor and shareholder of BioSteel Canada, expects to receive its proportionate share of any recoveries in the CCAA process.

In summary, Canopy Growth's decision to cease funding for BioSteel and BioSteel's pursuit of creditor protection signifies significant steps in Canopy Growth's transformation strategy. The company's focus on streamlining its operations, reducing debt, and emphasizing core cannabis-related activities is expected to strengthen its financial position and drive positive performance across its remaining business units. These strategic moves reflect Canopy Growth's commitment to adapt and thrive in the evolving cannabis industry landscape.

It's important to note that this announcement contains forward-looking statements and information, and actual results may differ from the expressed expectations due to various risks and uncertainties, as detailed in the Company's public filings with Canadian securities regulators and the Securities and Exchange Commission. The Company does not undertake any obligation to publicly update such forward-looking information or forward-looking statements unless required by applicable securities laws.