(June 23, 2023) On May 10, 2023, Canopy Growth Corp. announced that it had discovered material errors with its accounting practices as it related to its BioSteel Sports Nutrition Inc. (“BioSteel”): “material misstatements… sales in the BioSteel business unit… timing of revenue recognition… material weaknesses in internal controls over financial reporting.” In 2023, how does this still happen when alleged independent auditors are involved?
With help from a Certified Public Accountant and Certified Fraud Examiner, Berger Montague (Canada) PC concluded that Canopy Growth Corp. was likely misreporting BioSteel’s profit margins and value since mid-2021.
On June 22, 2023, Canopy Growth Corp. made further disclosures; despite the flower “everything is cool” language, the situation is much worse that reported on May 10, 2023:
- The Company reiterated that the restatement was “material”: “The Company evaluated the materiality of these misstatements both qualitatively and quantitatively in accordance with Staff Accounting Bulletin (‘SAB’) No. 99 . . . and SAB No. 108 . . . and determined the effect of correcting these misstatements was material to the Prior Financial Statements.” See 3/31/23 Fin’l Stmts pg. F-15;
- The Company also wrote off the entire $57 million balance of its BioSteel goodwill. The write-off was booked as of 9/30/22 and reduced net income for that particular quarter by 25%. See 3/31/23 Fin’l Stmts pg. F-15, F-71 ;
- BioSteel’s revenue growth trend from quarter to quarter was reduced as a result of the restatement. This cuts against the Company’s original story to investors that BioSteel’s revenue was consistently growing at a high pace. Although it still grew, it grew at a lower clip than originally portrayed; and
- As a result of the restatement, the “gross margin” (i.e., profit margin) for BioSteel sales decreased by 179% for the year ended 3/31/22. See 3/31/23 Fin’l Stmts pg. F-17.
Canopy Growth Corp. also reported that it is now under investigation by the U.S. SEC and something its identifies as an informal investigation by the Ontario Securities Commission. Based upon our experience, the last time we heard of the Ontario Securities Commission conducting any type of informal investigation on a Cannabis Company, it resulted in the former CEO of Maricann (Wayland Group) running away from Canada to hide in Switzerland and Mark Litwin, Eric Paul, and Peter Aceto from CannTrust Holdings Inc. being charged with hard-core FRAUD against investors.
Andrew Morganti and Albert Pelletier are lead counsel on behalf of the Class of Investors based in British Columbia, Canada. You may reach Berger Montague (Canada) PC at [email protected].
KPMG LLP was its auditor that missed the irregular accounting practices of Canopy Growth Corp. Based upon our research it appears that some of the same auditors were also assigned to the CannTrust Holdings Inc. KPMG LLP’s failure was so bad that it subject to a new shareholder class action in the Ontario Superior Court of Justice!