Class-action lawsuit launched against Canopy Cannabis over financial reporting

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Class-action lawsuit launched against Canopy Cannabis over financial reporting

The lawsuit says the company admitted that it overstated revenue for its BioSteel subsidiary, causing investors economic loss.

A B.C. investor has launched a class-action lawsuit against Canopy Growth Corp., one of Canada’s largest cannabis companies.

The filing in B.C. Supreme Court is the first step required to certify a class-action, which could represent several plaintiffs suffering similar losses.

Deyar Asmaro, a psychologist and professor at Langara College and UBC, filed the class-action as the representative plaintiff. He said his shares dropped in value when the company admitted to errors in its financial reporting.

Asmaro “alleges that between Aug. 6, 2021, and Feb. 9, 2023, WEED published … misrepresentation that was publicly corrected on May 10, 2023.” WEED is Canopy’s trading name on the Toronto Stock Exchange.

On Aug. 6, 2021, the company had released statements for the first financial quarter of 2022, including that net revenue was up $136.2 million, compared with $110.4 million in the first quarter of 2021, according to the lawsuit.

It said Canopy had announced its year-over-year increase was “primarily due to the continued strong performance by (U.S. retailer) Storz and Bickel and growth in our BioSteel business.”

BioSteel, one of Canopy’s largest subsidiaries, is a sports nutrition and hydration brand marketed to athletes and active consumers whose products includes beverages, mixes, protein, gum and mints, some infused with hemp-derived isolates. The company has plans to include CBD in future products, the writ said.

The court document said BioSteel products are purchased by 70 per cent of teams in North America’s four major sports leagues, the NHL, NFL, NBA and MLB, and the products are endorsed by a number of high-profile sports figures, including Connor McDavid of the Edmonton Oilers, LPGA golfer Brooke Henderson, tennis player Eugenie Bouchard, Wayne Gretzky, Tyler Seguin of the Dallas Stars, NFL players Ezekiel Elliott and Jalen Ramsey, and New York Yankee Gleyber Torres.

The company released a number of quarterly statements and a fiscal year-end statement on March 31, 2022, that contained errors that overstated revenues for BioSteel, the writ alleged.

According to the lawsuit, on May 10, 2023, Canopy released a “material change report” stating that revenues related to BioSteel “contained material misstatements and would need to be restated.” It said 2022 financial statements needed to “reduce certain revenues” and adjust balance sheet items related to sales in the BioSteel subsidiary and that there were “weaknesses” in internal controls at the company.

Asmaro said in his court filing that after the report was released, stock prices for Canopy were $1.67 on May 9, dropping to $1.62 on May 10 and to $1.39 on May 11, a 17-per-cent loss.

Asmaro said he bought 10,000 shares on Dec. 30, 2022, and held the stock until after the public correction report, after which he “suffered an economic loss.”

The civil claim names as defendants Canopy Growth Corp., CEO David Klein and CFO Judy Hong, because both executives signed a certificate in the fiscal year end stating 2022 filings were “fairly stated” and “did not have any untrue statements of material fact.”

“They had direct responsibility for ensuring the accuracy of the financial statements,” the writ said.

The class-action would be open to anyone who bought Canopy securities between Aug. 6, 2021, and May 10, 2023, the court filing said.

The company on Thursday released fourth-quarter earnings and acknowledged it had found “material misstatements” related to some BioSteel sales and “material weaknesses” in its financial reporting protocols that would lead to personnel changes. Canopy said its fourth-quarter net loss amounted to $648 million, $59 million more than the loss it incurred a year earlier.

The company’s net revenue for the period ended March 31 totalled $88 million, 14 per cent lower than the revenue reported a year before.

The earnings come as Canopy has been consolidating its cultivation across several facilities and after it revealed in February that it will cut 800 staff.

Shares of Canopy Growth are down 82 per cent over the past 12 months, Marketwatch reported.

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