Profitable Cannabis NB outperforming some companies bidding to take it over

The New Brunswick government has restarted a review of proposals by private operators to take over cannabis retailing in the province, even as Cannabis NB has turned its first profit and some of its potential replacements pile up financial losses of their own.

Still, at least one industry analyst believes those developments are not a reason for the province to back down from its plan to unload the Crown corporation.

"The government has made this commitment. I think the smartest thing would be for them to go ahead with it unless of course the proposals are wholly inadequate. We don't have any visibility there," said Brad Poulos, an instructor in the Ted Rogers School of Management at Ryerson University in Toronto.

Last year, New Brunswick Finance Minister Ernie Steeves announced the province was looking to transfer cannabis retailing to the private sector following weak sales and multimillion-dollar losses by Cannabis NB in its first year.

"To say [I'm] disappointed would be an understatement," Steeves said in April 2019, before eventually announcing a plan to privatize retailing.

"I'm looking for a way to try and save some money for taxpayers, trying to make some money for taxpayers, and try and bring in some revenue for taxpayers and this (Cannabis NB) is not turning out to be one of those ways."

Eight takeover bids

Eight potential private operators were identified as being under consideration in January following a Request for Proposals (RFP) issued by the province.

A selection was supposed to be made "this spring" and, although the COVID-19 pandemic has lengthened that timeline, a decision is still being worked on, according to the finance department's Vicky Deschnes.

"The COVID-19 pandemic has had an impact on the RFP evaluation work over the past few weeks," said Deschnes in an email to CBC News. "That being said we can confirm that the work has resumed."

But much has changed since last year, including better than expected sales and net income performances by Cannabis NB and struggles by a number of private retailers, some of which are bidding to take over the market in New Brunswick.

Last week, the publicly traded cannabis retailer Fire & Flower saw its stock price drop after reporting operating losses of $35.7 million in its latest fiscal year ended Feb. 1.

Fire & Flower operates 45 retail stores in Ontario, western Canada and the Yukon territory and is one of the eight operators in the running to take over from Cannabis NB.

On Friday, Fire & Flower's stock price was down to 56 cents, a 12.5 per cent decline since releasing its financial results.

Two weeks ago, YSS Corporation, another western Canadian cannabis retailer under consideration to take over from Cannabis NB, reported a full-year operating loss of $4.8 million in 2019 on sales of $8.5 million.

Its stock price also slumped and closed Friday at 11.5 cents, down 28 per cent since its year end financials were released.

In a regulatory filing accompanying its results, YSS cited many of the same issues that plagued Cannabis NB in 2019 as the reason for the size of its losses, including supply shortages and unfettered illegal sellers.

"Progress was made in 2019, but the year is not representative of the ultimate potential of the cannabis industry in Canada," said the company in a press release.

"Expectations, analyst forecasts and growth were muted by regulatory delays and uncertainty, supply chain issues, and competition from the black market."

In January, YSS President Theo Zunich said he was confident his company could make cannabis retailing profitable in New Brunswick, but in an unexpected plot twist Cannabis NB reports it has already done that.

Unexpected profit

Last Wednesday, the Crown agency issued unaudited financial results for its fourth quarter, showing it made $500,000 on revenue of $14 million over 13 weeks ended March 29.

It's the first quarterly profit for Cannabis NB since it began operation in October 2018 and largely unanticipated.

Cannabis NB had lost $17.3 million over its first five quarters and, according to budget papers tabled in the legislature by the finance minister on March 10, it was expected to lose another $2.2 million by the end of the fiscal year.

Instead it made money.

A year ago, Steeves said he wasn't sure that was even possible.

"It's hard to imagine that it would be sustainable at this point," he said last spring after Cannabis NB projected $12 million in losses over its first five and a half months in business.

Since then, supply problems in the legal cannabis industry have resolved themselves and edible and other products were added to the legalized inventory.

In addition, Cannabis NB slashed its expenses and lowered prices to compete better with the black market, all aiding the turnaround

Cannabis NB sales in the latest quarter were an average of $7,692 per store per day among its 20 locations, 54 per cent better than the fourth quarter last year.

Best offers N.B. will get, suggests expert

According to Poulos, early losses by all cannabis retailers who have been building businesses from the ground up were to be expected and should not be a concern.

He also doubts the New Brunswick government would get any better offers for a profitable Cannabis NB today than it did for its unprofitable version when bids were solicited last fall.

"The companies that are interested in acquiring this asset very much understand the long-term value of it and that's the price that would be put on it not based on today's operational profit. So I don't think timing is really a big issue," said Poulos.

According to Deschnes, the province is prepared to keep Cannabis NB as a Crown corporation if the bids from private operators are found to be inadequate.

"The process is flexible in nature," the finance department spokesperson said. "Should the negotiations fail, government can walk away and continue to seek efficiencies with the current public sector model or look at other alternative models."