Cannabis Beer Is Giving Investors a Fresh Buzz

July 5, 2018

A startup founded by the originator of PUR vodka and a second company co-launched by an ex-video game developer are teaming up to make a cannabis-enhanced beverage aimed at Canada's multi-billion-dollar beer market, as they court investors.

Among the slew of food and beverage products gearing up for the legal cannabis market in Canada, Element GP, a cannabis oil producer, and Province Brands, a developer of cannabis-powered, alcohol-free beverages, will offer a new type of drink.

It's a barley-based Province Brands beverage containing THC, the psychoactive ingredient in pot, from marijuana oil by Element GP.

The drink will also contain Province Brands' proprietary accelerants to speed up the effects as well as decelerants to reduce the duration of the high feeling.

"Your body will be able to absorb and process the extract so the duration in your system will be comparable to that of an alcoholic beer," Element GP CEO Chris Lecky told Real Money. "In addition, you don't suffer from the same adverse health risks or strain on the liver and kidneys like you would with alcohol. It's a fantastic and better alternative."

While Canada legalized cannabis on June 20, the first sales of the marijuana flower won't be permitted until Oct. 17. Under the wording of the country's Cannabis Act, beverages and edibles must be legal by Oct. 17, 2019. Province Brands is targeting its launch for the latter date.

With millions in backing thus far, Element GP and Province Brands are raising capital at a time of increased activity in the cannabis-infused products and extracts market.

Veridian Capital, a New York-based cannabis research firm, on June 29 reported $206 million in capital raising in the infused products and extract category through equity and debt offerings worldwide in the first half of 2018. That's up sharply from only $51 million in the first half of 2017. In terms of mergers and acquisitions, cannabis-infused products and extracts drew 45 transactions in the first half of 2018, up sharply from 24 in the first half of 2017.

Beverage makers are taking a share of the huge mainstream beer market in Canada, with $9.1 billion in sales in 2016, according to Statistics Canada.

Too Big to Miss

Lecky made the move into cannabis after selling high-end PUR vodka and Romeo's Gin to his partners in 2017. The opportunity posed by the emergence of Canada's adult use legal cannabis market was too big to miss, he said.

Thus far, Element GP has raised "several million" dollars internally for seed capital, plus it's looking to raise an additional $4 million in equity from friends and family as it plans construction of its new high-tech cultivation facility in Alberta, Canada.

With the date of Canada's adult use sales now set, it's been getting easier to raise capital with help from big Canadian banks, he said.

The food and beverages space presents huge potential for people who may be curious about cannabis but who do not want to smoke.

"It's a massive market and there's a ton of potential and the possibilities are endless," Lecky said.

There's also plenty of competition from bigger players including Molson-Coors (TAP) , which has reportedly held M&A deal talks with Canadian cannabis companies. Meanwhile, spirits giant and Action Alerts PLUS holding Constellation Brands (STZhas taken a 10% stake in Canopy Growth (CGC) .

Lecky said his goal is not just to build up Element GP for a quick flip to a corporate buyer as soon as possible.

"Our expansion plan is to set up and build similar facilities across the country," he said. "We'd like to multiply our production capabilities without putting the quality of our products at risk. It's very important for us to really maintain our craft and passion for developing the best extracts Canada has to offer"

Province Brands Eyes $100 Million Funding

Province Brands of Canada co-founder and CEO Dooma Wendschuh said the company is working to launch other drinks on its own outside of the barley-based beverage in development with Element GP. It plans to market beers brewed from cannabis instead of just infusing a nonalcoholic beer, soda or other drinks with marijuana oil. The idea is to come up with a healthier replacement for alcohol in beer and other drinks.

"We're building the world's first cannabis brewery," Wendschuh said. "While there's a lot of money and opportunity in cannabis, other people are focused more on speed to market and not as much on craftsmanship.

It's about your process, the quality, paying attention to details and not stopping until it's perfect."

Before he moved into the cannabis business in 2014 as CEO of the startup Ebbu, Wendschuh was formerly known as a successful video game developer. He co-founded Sekretagent Productions in 2001 as a producer and writer of TV commercials, films and video games including Assassin's Creed and Batman: Arkham Origins.

Wendschuh said "there's more overlap than you'd expect" between the video game and beverage businesses.

"They're both about marketing and creating something that people really want," he said. "No matter how much advertising you do, if the game isn't good it won't be successful. The same is true with premium beverages."

Province Brands has been busy raising capital from a variety of sources. Thus far, the company has drawn about $8 million including $4.1 million in equity,

$500,000 from Auxly Cannabis (CBWTF) (TSX.V XLY), and $3 million from a convertible note offering. It inked an agreement to go public under a reverse merger with Colson Capital Corp. on the Toronto Venture Exchange.

It is currently planning to raise about $35 million between now and the public listing, and then raise about $50 million more after it goes public.