BioSteel was once a highly prized asset for cannabis producer Canopy Growth (CGC 3.28%). These days, however, it has become a source of frustration for the business. While the sports nutrition company has been generating revenue for Canopy Growth, it has also been saddling it with plenty of expenses and headaches. The situation has gotten so problematic that the company will no longer fund BioSteel as it looks to ditch the business entirely. Does this make Canopy Growth a better buy?
Canopy Growth says its cash burn will improve
On Sept. 14, Canopy Growth issued a press release on its website saying that it would no longer fund BioSteel. It also intends to sell the brand. The cannabis producer said that BioSteel's operations were "a significant drag" on both its bottom line and its cash flow, noting that 60% of the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss it reported in the first quarter was due to BioSteel.
In the first quarter, Canopy Growth reported an adjusted EBITDA loss of 58 million Canadian dollars for the period ending June 30, which was better than the CA$79 million loss it incurred a year ago. The company also stated in its most recent earnings release that it expects to generate positive adjusted EBITDA by the end of the current fiscal year in all of its businesses except BioSteel.
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A bittersweet end for a once-promising business
Ridding itself of BioSteel isn't a small move for Canopy Growth; this was a big part of its long-term strategy. When the company released its year-end results for fiscal 2022 in May of last year, Canopy Growth still had a glowingly positive view of the business. Chief Financial Officer Judy Hong referred to it as one of the company's "high potential opportunities" along with the hopes of expansion into the U.S. The sports drink company just finished a year when its sales were up 56% year over year. Canopy Growth was optimistic it might be a "top-four player in the North American sports drink market."
The boom-to-bust cycle didn't take long at all. There were signs the wheels were coming off earlier this year when Canopy Growth said it found "material misstatements" in its previous financials with respect to the BioSteel business. The company said it was looking into legal options as a result of overpaying for bonuses to minority shareholders as BioSteel's revenue was overstated. As a result of the review, Canopy Growth had to shave off CA$10 million of its net revenue for fiscal 2022, representing 2% of its top line. At the time, Canopy Growth was looking at exiting BioSteel's international operations, but it was still focused on improving profitability; by no means did it suggest shutting it down entirely. That news and earnings report came out just a few months ago, in June.
In the midst of its review of BioSteel's business, Canopy Growth likely found more issues that led to its decision to pull the plug on the company entirely.
Is Canopy Growth in better shape as a result of this move?
Canopy Growth says this will help improve its cash burn, but this is a big blow to its growth prospects. In Q1, the company's net revenue totaled CA$108.7 million and was up just 3%. BioSteel was a big part of that, bringing in CA$32.5 million and growing at a rate of 137% year over year -- the fastest of all the company's segments. That leaves a big void for the business moving forward.
The company has pulled out of the retail pot market in Canada. The medical market isn't anything to get excited about, either. Canopy Growth now becomes a company that's even more desperate for the U.S. marijuana market to open up. Without that, there may not be a growth catalyst in sight that helps prevent the company's top line from sinking in future quarters.
Investors should continue to steer clear of Canopy Growth stock
It's hard to spin this as a positive for the company. While Canopy Growth will say this helps with cash burn, the bigger question mark is how it makes up for the growth opportunities. This, unfortunately, is just the latest disappointment from the company, and it's something investors should be used to by now.
Canopy Growth wasn't a good stock to buy before this news, and it's certainly not a better one after it. All this confirmed is that the company doesn't have a good grasp on its acquisitions (why did it take so long to discover BioSteel was such a bad, cash-burning business?) and that shares of this pot stock could and should go lower.
