If the fast-rise of sports drink upstart BioSteel has caught you by surprise, you’re not the only one.
Last week, BioSteel’s parent company, troubled Canadian cannabis conglomerate Canopy Growth, revealed that it is under investigation by the U.S. Securities & Exchange Commission for “material misstatements” in its financial reporting — in other words, overstating net sales by around $10 million (2% of total sales) for the fiscal year 2022, and by around $14 million (4% of total sales) for the nine-month period ended on December 31. The revelation comes after an internal company review in collaboration with independent external counsel and forensic accountants.
Speaking during the company’s earning call, CEO David Klein said that Canopy has already “exited several members of the BioSteel leadership team,” though they were not identified, and “are considering all legal remedies available to us, including litigation to recover damages and costs associated with and resulting from the findings of the BioSteel review.”
The news marks another chapter in BioSteel’s circuitous journey: created by a pair of former NHL players in 2009, it had been a middling brand until its acquisition by Canopy in 2019. Under the cannabis company, which was at the time backed by spirits giant Constellation Brands, BioSteel went on a sponsorship spree, scoring the likes of U.S. Soccer, NFL MVP Patrick Mahomes and the Los Angeles Lakers as official sponsors.
However, instead of serving as a way to diversify Canopy’s interests outside of cannabis, BioSteel’s performance has actively damaged the company. Thanks to inventory write-offs for the sports drink, adjusted gross margins were -18% in Q4; excluding BioSteel, they were up +11%. Canopy chalked up a net loss of $648 million in Q4, a $59 million increase from the same period last year.
What does that mean for the brand? According to a transcript of the earnings call, CFO Judy Hong said tactics will be adjusted within the U.S. to cut costs: gross margin improvement initiatives are well underway, including “exiting unprofitable customer programs and reducing the depth and frequency of certain promotions.” Having closed a $19.5 million deal to fully acquire a production facility in Verona, Virginia from Flow Beverage Corp. in November, Hong noted that a new warehouse model “will eliminate significant fixed-cost obligations and reduce shipping costs.” She also pointed towards new contracts with “more favorable product costs across our powder and ready-to-drink products.”
On the plus side, BioSteel’s U.S. ACV is up, and the brand has made gains in gas and convenience stores north of the border. Even so, Klein said Canopy has “great confidence” in the BioSteel brand, which saw a 101% revenue increase in fiscal ’23.
Hong added: “For BioSteel, the focus in fiscal ’24 is further building on its strong momentum in Canada, refining its U.S. strategy, and improving gross margins while rightsizing its marketing spend.