The BIG Market for Cannabis-Infused Beverages

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Cannabis for adult social use in Canada is expected to be legal on October 17, 2018 (the Cannabis Act received Royal Assent on June 21, 2018). Once legal, it will fulfill the campaign promise of Prime Minister Justin Trudeau to end nearly a century of prohibition on the plant. It will also open the doors to research exploring the plant’s full therapeutic and medicinal potential, including the opportunity to create an entirely new category of adult beverages for use by those seeking an alternative to alcohol.

For Canadian cannabis companies, earnest planning for this new market has been underway for several years. Some companies have focused on the cultivation side of the industry, while others have targeted new markets for cannabis products in areas such as food and beverages, therapeutic and pharmaceutical products and treatments, cosmetics, and even pet food.

One Company entering the beverage sector is Hill Street Beverage Company (TSX: V.BEER, Forum). What makes Hill Street’s entry into the cannabis space interesting is that Hill Street didn’t begin operations as a “cannabis company.” Hill Street has timed its entry into the cannabis space with going public and is in the process of acquiring its listing (via RTO) on the Toronto Venture Exchange.

Hill Street has already established itself as a provider of alcohol-free versions of what are traditionally adult format beverages. Indeed, the Company is an award-winning maker of alcohol-free beers and wines and plans to use its recipes as the foundation for cannabis-infused beer and wine products.

Many people enjoy beer and wine. But alcohol is toxic, addictive, a known carcinogen, and a leading cause of death from liver disease. The warning sticker “DO NOT TAKE WITH ALCOHOL” appears on more than 450 prescription and over-the-counter medications. In addition, alcohol is a significant source of calories. In contrast, cannabis is non-toxic, non-addictive, and (propaganda aside) there is emerging evidence that cannabinoids – the active ingredients in cannabis – could actually treat cancer and liver disease. The FDA just approved its first cannabis-based prescription drug for the treatment of epilepsy and Parkinson’s Disease. Further, there is no evidence as of yet that cannabinoids are contra-indicated in any medications. Last of all, cannabinoids add no calories.

Hill Street’s mission is simple: provide consumers with all of the enjoyment associated with the consumption of beer and/or wine with none of the harms attributed to the consumption of alcohol. Stockhouse recently caught up with Hill Street Beverage Company’s CEO, Terry Donnelly. We wanted more information on this unique angle for penetrating the Canadian recreational cannabis market, and how this business model will fit into an evolving regulatory landscape.

For investors unfamiliar with your Company, please tell us more about your original business model.

Hill Street began its life producing a licensed brand of beverages for Mothers Against Drunk Driving called MADD Virgin Drinks. The original founders of the Company wanted to do something where they could not only build a great business but also do something to benefit society, and that’s where the original idea for the partnership with MADD came from; the goal was to produce beverages that allowed designated drivers to have a great tasting wine or beer without the risk of driving impaired. The Company entered into a development partnership with Niagara College, spending several years and millions in research grants to develop recipes and processes for the fermentation of great-tasting beer, as well as the extraction of alcohol from wine without impacting the taste and complexity of the beverages.

I took over as Hill Street’s CEO because the original business hadn’t met growth expectations, and we needed to look at the market with a fresh set of eyes. On a personal note, I was excited about the challenge because I had recently been diagnosed with a genetic liver disease, and was one of those people whose love affair with single malt scotch and great cabernet sauvignons had suddenly been put on hold. The alcohol-free beer and wine options that were available in the market tasted pretty awful, including those from some high-profile new entrants. Generally speaking, a bad-tasting multinational beer with the alcohol removed becomes an even worse-tasting multinational beer.

We began to explore other areas where the negative impact of alcohol was causing more harm to society than drinking and driving. We also started to look at ways to transform the original concept of the business into something where there were greater opportunities for growth, and when we began researching the negative effects of alcohol on health, it became really apparent that as a society we are literally drinking ourselves to death.

We developed a thesis for our products based on the insight that nearly half (44%) of the adult population in North America takes prescription drugs that are contra-indicated to the consumption of alcohol. Yet consumers continue to drink alcoholic beverages mostly because they enjoy drinking and socializing, and there aren’t any real alternatives that match both the experience and the tastes they love. Consumers appear willing to ignore their doctors’ orders because they love the ability to “join the party” more than the apparent risk to their health.

The development of technologies allowing cannabis to be consumed as a food product have contributed to the creation of an entirely new segment of beverages that we believe will provide consumers with a safer and healthier alternative to alcohol, with all of the tastes and experiences that we are familiar with. We love a full-bodied wine or a crisp cold beer. Our goal is to replicate that without the harmful effects that come from the alcohol.

So we have several factors at work here: bad-tasting competition, a significant group of people whose health has been negatively impacted by alcohol, and a massive opportunity presented by the legalization of cannabis. We see a significant growth opportunity for us. Add a team of amazingly talented people, and the support of a network of partners who are passionately dedicated to our mission, and things start to get really exciting for Hill Street!

Today we have partnerships with major health promotion agencies such as: Prostate Cancer Canada, March of Dimes, The Canadian Liver Foundation, Weight Watchers, and many others who are working with us to promote our brands and build consumer awareness of a safer and healthier alternative to alcohol.

Consumers and investors who are not familiar with alcohol-free beer and wines will have one question foremost in their minds: How do your products compare with conventional (alcoholised) beers and wines in terms of taste?

Well, obviously alcohol plays a big role in the way we experience beer and wine. It’s a very viscous and spicy ingredient, so it coats your palette and heats your insides when you drink it. When you remove alcohol, there is definitely a change in the experience, but that doesn’t mean the beverage is any less enjoyable. I tend to liken it to the difference between a diet soda and one with sugar. Of course, it tastes different. But that doesn’t mean it isn’t providing all of the refreshment you want from a soda, and still tastes great in its own way.

Okay. Fair enough. But alcohol is also a recreational drug, and part of the social experience of alcohol products is their intoxicating effect. How will your cannabis-infused beverages compare in this respect?

We are crafting our beverages to mimic the experience of alcohol in terms of onset and duration, and to match the level of stimulant effect you would expect from a comparable amount of wine or beer. We have licensed a patented set of technologies that allow us to do this without any impact on the aroma and taste of the wine and beer, which we all know are very subtle and nuanced flavours. It’s very exciting to see the process evolve.

What is the potential market that you have identified for these products?

Recent research from Deloitte has shown that nearly 60% of Canadians are curious to try cannabis-infused products. We think if we can deliver products that taste delicious and are in a familiar format to traditional wine and beer, we can acquire a significant share of those markets.

The peril of combining alcohol with medication is clearly an important health issue, but also something that needs to be addressed for the benefit of investors. Will Hill Street’s cannabis-infused beverages present any similar health hazard?

There is a growing body of research into how cannabis use can be therapeutic and beneficial to your bodily functions. Most of our health promotion partners see our upcoming infused beverages as having the potential to be part of a treatment regimen or simply a better lifestyle choice to help manage the various conditions that people are dealing with. So far, we’re not aware of any specific risks, other than those typically associated with abuse of any substance.

Connect the dots for investors. How is moving into cannabis-infused beverages a natural extension of your original business model?

The legal framework prohibits the mixing of alcohol and cannabis into any products. Given that we are the world’s most award-winning company exclusively focused on alcohol-free wine and beer, we believe our expertise in producing great-tasting beverages that are alternatives to alcohol positions us extremely well to be able to produce the same high-quality beverages with an odorless and tasteless infusion of cannabis. This isn’t a science project that we hope to deliver. We have already won three US Open Championships for our beer, which is the world’s largest beer competition. Our Cabernet Sauvignon won a Double Gold Medal at the largest wine competition in the world. Plus, we are already in nearly 4,000 stores across the country. We will likely sell more than a million bottles of alcohol-free wine in the next twelve months before the legalization of cannabis even happens. The addition of infused versions of our existing products just opens us up to a much larger market. There are many investment opportunities in cannabis-related businesses, and investors have made a lot of money on the sector. We believe Hill Street presents investors with a ground-floor opportunity at a reasonable market capitalization. Unlike some of the legacy beer and wine companies out there, we will not have to cannibalize our core business to tackle a new competitive growth opportunity. Our entrance into cannabis infused beverages is entirely incremental to our revenues.

Please provide investors with further information on your new (imminent) public listing.

We anticipate closing our financing and qualifying transaction by the end of July and listing on the Toronto Venture Exchange under the ticker symbol BEER. Right now, we are finalizing the investors in our concurrent financing and completing the final stages of our RTO.

Now let’s get practical. How is the Company going to produce its cannabis-infused beverages? What technology is required?

Our facilities are located in St. Catharines, Ontario, in the heart of the renowned Niagara wine region. It’s also a stone’s throw away from Niagara College, which is one of the world’s best research institutes in wine and beer making. The production facility is a joint venture between Hill Street and VinFirst Innovative Packaging, who have been operating in the wine and spirits industry for thirteen years and have very scalable production capacity. We are investing in and upgrading the existing facility to handle cannabis-infused beverages while also installing leading edge technologies to be able to produce fine vintage wines and craft beer with zero alcohol. By the time we are finished the upgrade, we will have one of the most advanced de-alcoholization facilities in the world.

Our partnership with Lexaria Biosciences (CSE: LXX) enables us to use their patented infusion technologies while continuing to develop our own recipes and processes to continuously improve the quality of our beverages. This will allow us to establish a strong competitive position, not just on taste and branding, but also with respect to the consumer experience of the beverages.

Will Hill Street be able to market these products when Canada’s recreational cannabis market becomes legal/official on October 17, 2018? If not, when do you anticipate launching these products in Canada?

Bill C-45 contemplates the legalization of edible forms of cannabis within one year of coming into effect, so we are planning and preparing to be in the market on October 17, 2019. This gives us time to complete our facilities, establish our distribution channels, accelerate our marketing, and also secure a number of co-packing customers who will be able to create products under their brands in our facilities.

We expect co-packing to be a significant part of our business model. We are already in discussions with a number of renowned Ontario wineries and craft breweries about producing infused versions of their products for the new market when it opens up.

Is there some degree of certainty in terms of precisely what will and will not be allowed in infusing cannabis into consumer products?

At a very high level we believe it makes sense for cannabis-infused products to mimic formats that have been used to direct consumption away from children. This is why we have chosen beer and wine as our preferred delivery method; we think the regulator is more likely to look favourably on this format over that of a brownie or candy treat. Moving away from format speculation and towards cannabis usage, there are definitely some indications about the required differences between therapeutic / medicinal dosages and consumer dosages. At a more granular level, there is still a lot of work to be done, but we know with a fair degree of certainty that alcohol and cannabis cannot be mixed in the same product. What we don’t know is the maximum allowable dosage. We don’t know the format and size of the products such as whether all infused products must be single serve or whether we can sell a traditional 750ml bottle of wine with five servings. We don’t know the packaging rules, and if we will be required to have what I call “medical waste” packaging like the current regime for dried flower and oils. Obviously, we would prefer that our beverages are treated no differently than alcohol, especially as we believe we will be producing a much safer and healthier alternative to alcohol. And from a sales and distribution perspective, our vision is to have our infused wine and beer on the menu at your local restaurant or bar. Whether or not that will become reality is anyone’s guess.

As you wait for legal authorization to market your cannabis-infused beers and wines, what are Hill Street’s current priorities in positioning yourself for this market?

We still have our existing alcohol-free brands, which are currently available in nearly 4,000 stores across Canada and available online across North America. We expect to significantly increase our marketing and distribution as part of the use of proceeds of our capital raise, and to drive the growth of our online sales. We will likely launch an additional 10 to 12 new products over the next twelve months, as well as secure distribution rights for new alcohol-free spirits, wines and beers coming in from the EU and UK.

What is your long-term vision for Hill Street Beverages as a public company?

We believe we are a pure-play investment opportunity in the fastest-growing beverage segment in the world–alcohol-free wine and beer. When cannabis-infused edibles become legal in Canada we will be ready for this once-in-a-century opportunity as the premier producer of alcohol-free and cannabis-infused adult beverages. Our vision is to build billion-dollar brands in our portfolio and we are excited that the public markets give us the access to capital to achieve this vision.