Canadian sports drink company BioSteel filing for creditor protection, seeking new buyer

The owner of sports drink company BioSteel says it has filed for creditor protection in the U.S. and Canadaand is trying to find a buyer for the business.

Ontario-based Canopy Growth, the largest cannabis company in North America, said in a news statementThursday that ithas ceased funding BioSteel Sports Nutrition Inc., and that BioSteel has commenced proceedings under theCompaniesCreditors Arrangement Act (CCAA).

Companies undergoCCAA when they seeka court's help to protect them from their creditorstoensure orderly proceedings while they either restructure or wind down operations. Alongside the Canadian CCAA proceedings, the company will also undergo creditor protection under Chapter 15 of the U.S. bankruptcy code.

BioSteelwas founded in Toronto in 2009 by entrepreneurJohn Celenza and then-NHLer Mike Cammalleri. It grew quickly in large part thanks to marketing deals withseveral dozen NHL, NBA and NFL teams, as well as notable athletes including Connor McDavid, Nathan MacKinnon, John Tavares and recent No. 1 overall pick Connor Bedard all of whom attended a recent Biosteel-branded training camp together.

The company was eventually taken over by Canopy Growth in 2019, as part of a plan by the cannabis company to diversify its products into more beverages. That hasn't quite panned out as planned.

The CCAA filing was undertaken because the company "no longer has access to funding for the brand, which continued to generate negative operating cash flow," BioSteel said.

"BioSteel made the decision toconserve cash and put the business into hibernation to preserve its assets. BioSteel sought creditor protection under the CCAA to conduct a court-supervised sale process for its business and property for the benefit of its stakeholders."

Since the takeover, Canopy has spent about $366 million on BioSteel,and the company currently burns through about $15 million in cash every month, court filings show.

Canopy says BioSteel was responsible for about 60 per cent of its financial losses this fiscal year.Kenneth Shea, an analyst who covers the cannabis sector for Bloomberg Intelligence, says the move to cut off the money-losing business was a "positive step toward shoring up its finances, given the unit's operating losses."

As of August, the company had 190 employees in the U.S. and Canada. Canopy says the insolvency filing will result in the layoff of about 181 employees at the BioSteel division. It's not immediately clear what will happen to the rest.

Sales are at least growing, as BioSteelbooked $24million worth of sales revenue in the first three months of 2023 more than twice as much as the same period the year before.

But its cost for those sales eclipsed $90 million, and other expenses topped $114 million, including an increase of about$12 millionin advertising and promotionalcosts in the last quarter alone related to its NHL sponsorship; in 2022, the company was named the league's "official hydration partner."

The most recent payment on that NHL deal due on Sept.1was not made, according to a court filing. Between October and March of next year, the company owes another $12 million for its various sponsorship agreements.

Following the insolvency proceedings, the company "does not intend to make any of these upcoming payments," filings show.

The company also has regulatory headaches. In court filings, Canopyrevealed that it recently launched an investigation into BioSteel's books, an investigation that identified "overstatements, related to the recognition of revenue, primarily related to the Applicant's business-to-business sales in markets outside of Canada and the United States."

"As a result of self-reporting the BioSteel Review, the Company is the subject of an investigation by theSECand an ongoing informal inquiry by regulatory authorities in Canada," the company said in its most recent quarterly results.

Trying to find a buyer

While companiesoftendo shut down completely as a result of CCAA proceedings, that's not always the case.For BioSteel,the plan is to find a buyer who wants to run it as an independent company.

As of July, BioSteel has engaged with 24 different potential buyers, including one involving unnamedcurrent and former members of the company's management team. By Sept. 5, six preliminary, non-binding proposals were received.

"Unfortunately, all of the proposals were highly conditional and required significant time to complete, among other things, due diligence before the parties could make a determination about whether to submit a binding bid," the company said, adding that"none of the parties that submitted proposals fully committed financing necessary to meet BioSteel's immediate operating needs."

So the CCAA filing is designed to buy time to sort out any details that would be required for those deals to come to fruition.