Why was the Ontario Cannabis Store sitting on a CA$500 million cash stockpile?

December 11, 2023 · MJ Biz Daily

Ontario’s government-owned marijuana wholesaler was sitting on more than 500 million Canadian dollars ($367 million) in cash earlier this year, but officials have declined to spell out why the Ontario Cannabis Store held on to that much money rather than remit some of it back to the provincial government earlier.

According to recently disclosed Ontario Cannabis Store (OCS) financial statements, the wholesaler had CA$536 million ($394 million) in cash as of March 31, 2023 – the end of its fiscal year – including millions of dollars in interest revenue.

That cash stockpile has fallen since then, after the OCS only recently began paying a dividend to the Ontario government.

But the monopoly wholesaler – the most profitable cannabis operation in Canada – is still holding hundreds of millions of dollars in cash.

Both the Ontario Ministry of Finance and the OCS have declined to get into specifics about the cash holdings.

Michael Armstrong, an associate business professor at Brock University in St. Catharines, Ontario, who studies Canada’s regulated cannabis market, said the lack of answers raises transparency questions.

“On the transparency side, what are you going to do with the (cash), and why aren’t you telling us about this stuff?” he said in a phone interview.

Armstrong noted that the OCS cash position is much higher than other provincial cannabis wholesalers, relative to daily expenses, and other provinces are more forthright when it comes to where their profits are going.

The issue first came to light in a recent paper written by Armstrong for the publication Policy Options.

He wrote in the paper that the OCS is the most lucrative provincial cannabis agency in Canada, “thanks to four consecutive profitable years selling recreational cannabis. Yet throughout that time, it puzzlingly paid no dividends to Ontario’s government.”

After Armstrong’s paper was published, the cannabis wholesaler unilaterally reached out to MJBizDaily to explain that it started making dividend payments to the Ontario government only in late September 2023 – and a subsequent quarterly payment was made Nov. 30.

The dividend payments began nearly five years after recreational cannabis was legalized across Canada.

The profits

The OCS said in its 2020-21 annual report that it was “proud of its financial contributions that support important public services.”

Yet the OCS didn’t start making dividend payments until three months ago. (Ontario’s portion of the cannabis excise tax is paid by the federal government.)

In an email to MJBizDaily, an OCS spokesperson wrote that, “as a business enterprise of the Government of Ontario, the OCS generates net profits that, over time, may be remitted to the province to help fund its fiscal priorities, including public services and infrastructure that Ontario’s communities depend on.

“The OCS started making dividend payments in late September 2023, and will do so on a quarterly basis going forward. The OCS is committed to enabling a vibrant cannabis marketplace and is pleased to have formally initiated the process of returning its profits to the province.”

The OCS profits, by fiscal year, were:

The OCS has been accumulating interest income for years.

In 2022-23, its interest income on bank balances amounted to CA$16.8 million.

The legal instrument needed to transfer the dividends appears to have been created only this past September: On Sept. 29, 2023, Order in Council 1376/2023 was published, setting out the wholesaler’s payment schedule.

According to the Order in Council, “On or before September 29, 2023, the Ontario Cannabis Retail Corporation (OCRC) shall pay into the Consolidated Revenue Fund (CRF) its net profits in the amount of $150 million, from its cash balance as (of) March 31, 2023.”

It also said that the Ontario Cannabis Retail Corp., which is the legal name of the OCS, “shall pay into the CRF its net profits by quarterly payments each fiscal year equal to the OCRC’s annual budgeted net income less finance income reported in the OCRC’s audited financial statements for that year and shall be adjusted based on actual net income realized.”

“It’s not wrong. It’s not exactly scandalous,” Armstrong said.

“If the Ministry of Finance doesn’t ask for the money, that’s the Ministry of Finance’s fault.

“So why did the Ministry of Finance want the money sitting around? I have no idea.”

Cash stockpile

The OCS cash stockpile rivals or exceeds the cash balances held by some of Canada’s largest cannabis companies. For example:

  • Toronto-based licensed producer Cronos Group, which had cash and cash equivalents of $413.7 million (CA$561 million), as of March 31, 2023.
  • Ontario-headquartered Tilray Brands, for the three months ended Feb. 28, 2023, had cash and cash equivalents of $165 million (CA$224.1 million).
  • Edmonton, Alberta-based Aurora Cannabis had CA$234.9 million as of March 31, 2023.

Unlike Quebec’s provincial cannabis entity, the Société québécoise du cannabis (SQDC), which owns and operates dozens of physical cannabis stores, the OCS is mainly a wholesaler with an outsourced central warehouse, plus a small e-commerce operation.

After MJBizDaily asked the Ontario Cannabis Store why it needed so much money, compared to other government-run wholesalers, a spokesperson said via email, “As a new government agency operating in a budding industry while navigating the unique challenges of the COVID-19 pandemic, the OCS required financial flexibility to scale its operations to support a growing network of Licensed Retailers and deliver on its mandate during the initial years of operation.”

Brock’s Armstrong compared the cash holdings of other provincial organizations using their ratios of total cash to daily expenses to answer the question: How many days would its cash last if it had to keep running without any sales?

The calculations as of March 2023 indicate the other agencies, such as the SQDC and the Liquor Control Board of Ontario, kept enough cash for about one month of operations, he said.

By contrast, the OCS had enough cash for 158 days – or about five times as many days as the others.

“If we use the projected CA$425 million cash for OCS at the end of November, after the dividend payment, and conservatively subtract its remaining CA$60 million loan balance, then the OCS still has enough cash to cover 107 days of expenses, roughly four times what the other agencies have,” Armstrong said.

“So, the current policy is roughly like the government giving OCS a CA$300 million interest-free loan.

“It is not ‘wrong,’ but it is highly inefficient, unless the OCS is planning major expenditures this year – for example, to buy a warehouse or give away CA$100 million – rather than (CA$500,000) in social impact grants.” (Full Story)

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