License Advantage: Canada’s B2B Wholesale Cannabis Marketplace

The billion-dollar Canadian cannabis market is the right environment for building shareholder value in a B2B wholesale cannabis marketplace. 

The now legal recreational segment of the Canadian cannabis market is expected to add a 35-percent boost to the Canadian cannabis market in 2019, according to research firm Deloitte, for a projected C$7 billion in total annual sales.

While much of the investor focus in the emerging Canadian cannabis industry has been on business-to-consumer sales, a combination of new federal licensing schemes and differences in provincial distribution regulations alongside a nation-wide supply shortage and shifting consumer preferences is creating an ideal landscape for a lucrative business-to-business (B2B) wholesale cannabis marketplace.

Cannabis Act licensing allows B2B cannabis sales

Under Health Canada’s new Cannabis Act and Cannabis Regulations, holders of Standard Cultivator and Processor Licenses can sell their products wholesale to either a provincial distributor or to other licensed cannabis companies. This includes seeds, plants, dried flower and oil, and will extend to edibles and concentrates once the federal government gives the greenlight to these products in late 2019. These updates to the previous licensing scheme effectively give cannabis companies the ability to establish B2B wholesale cannabis models — from cannabis products to accessory products — and build strategic partnerships with other qualified license holders.

Varied provincial landscape and nationwide supply shortage good for B2B cannabis sales

The landscape for wholesale cannabis distribution in Canada is a patchwork of differing provincial rules and regulations with some governments such as British Columbia and Ontario controlling the wholesale of recreational cannabis to jurisdictions like Saskatchewan and Alberta allowing for private company distribution. Government control of wholesaling and distribution can create a high barrier environment for emerging cannabis companies to establish a market foothold. But the B2B wholesale cannabis marketplace opened up by the new licensing regulations offers an excellent entry point — made all the more profitable given the problematic supply crunch.

Canada’s legal cannabis supply may only meet 30 percent of demand after the first year of recreational legalization, according to a recent study by researchers at the University of Waterloo and the CD Howe Institute. Legal cannabis supply is projected to be about 210,000 kilograms in the first year while demand will be about 610,000 tonnes. The supply/demand imbalance is placing upward pressure on B2B cannabis spot prices, bringing them on par with pricing put forth by provincial wholesalers — meaning licensed companies with B2B cannabis sales models have multiple channels for accelerated market penetration and revenue generation. In this environment, first-mover cannabis companies also have significant opportunities to establish their brand coast-to-coast and create strategic relationships across verticals.

Companies in B2B wholesale cannabis marketplace

In anticipation of Canada’s new cannabis legal framework, in February 2018 Aurora Cannabis (NYSE:ACB,TSX:ACB) launched a B2B platform for licensed cannabis companies to facilitate “win-win” wholesale transactions and overcome distribution barriers to key provincial markets.

An Aurora cannabis supply partner, The Supreme Cannabis Company (TSXV:FIRE,OTCQX:SPRWF,FWB:53S1) was the first Canadian cannabis company to adopt a B2B wholesale model, producing cannabis at its 7ACRES hybrid greenhouse facility. Supreme has secured recreational cannabis supply agreements with the provincial governments of Manitoba, Alberta, BC, Ontario, Nova Scotia and PEI for both provincially and privately-run stores. The company also has B2B supply agreements with Namaste (TSXV:N), BlissCo (CSE:BLIS), Pure Global Cannabis (TSXV:PURE) and Tilray (NASDAQ:TLRY).

The B2B wholesale cannabis marketplace also includes cannabis-related accessories such as packaging materials, agricultural supplies, vape pens, water pipes and grinders. Alberta-based High Tide’s subsidiary RGR Canada is manufacturing a customized line of smoking accessories for Aurora Cannabis, representing the subsidiary’s largest ever wholesale purchase order. High Tide is also making headway into the cannabis wholesaling market with an application to become a licensed wholesaler in Saskatchewan. The company has already secured wholesale partners through a series of MOUs with FSD Pharma (CSE:HUGE), Maple Leaf Green World (NEO:MGW), Sundial Growers and the Supreme Cannabis Company Inc.

Canopy Growth (TSX:WEED) has its own wholesale cannabis distribution platform, CraftGrow Network, which launched in 2017 and includes the online marketplace Tweed Main Street. CraftGrow serves as a reliable sales channel and a secure stream of revenue for Canopy Growth’s select group of preferred partners. In addition to supplying immediate sales volume with a reduced logistics spend, the platform also provides cannabis producers an excellent opportunity to build brand recognition and fulfill their expansion goals. For Canopy, it’s an opportunity to expand the variety of its product offerings to consumers.

One of Canopy Growth’s select partners is Valens GroWorks (CSE:VGW) which has a wholesale cannabis agreement with Canopy to distribute, market and sell Valens-branded whole-flower or premium oil products through the extensive CraftGrow network. Valens GroWorks was one of the first cannabis companies licensed under Health Canada to be granted an amendment allowing for the manufacturing and packaging of cannabis oil products for sale to other licensed cannabis producers as well as clinical researchers.

Valens recently announced that Health Canada has updated its standard cultivation and standard processing license to allow for B2B sales. The company’s wholly owned subsidiary, Valens Agritech Ltd, is now authorized to sell cannabis and cannabis products to its strategic partners and other license holders, allowing Valens to execute on the extraction agreements it had entered into prior to the new cannabis regulations.

“This is an extremely important milestone for the company as we continue to strategically execute on our business plan to be the leading extraction service provider in the industry,” said Tyler Robson, CEO of Valens GroWorks. “Having this new license in hand, combined with our proprietary extraction capabilities will allow us to create further value for our shareholders and strategic business partners.” The license also allows Valens to deepen its vertical integration and diversification across both the Canadian medical and adult-use markets as well as the emerging global medical cannabis market. Through its subsidiary Valens Farms and its partnership with Kosha Projects, the company is building a 400,000 square foot, EU Good Manufacturing Practice compliant greenhouse in BC’s Okanagan Valley.

B2B cannabis extracts sales and services

In addition to wholesaling cannabis products and cannabis accessories, the B2B cannabis marketplace also encompasses cannabis-related services, including the extraction, processing and manufacturing of cannabis value-added products. Cannabis oils and cannabis-infused products have begun to overtake the dried flower market in many legal cannabis jurisdictions in the United States, and the same market shift is expected in Canada once value-added products like edibles and concentrates become legal in 2019. The ability to transact value-added services under Health Canada regulations gives this class of licensees added value for their shareholders as they are able to taking advantage of a lucrative sector of the cannabis market.

“In mature cannabis markets, derivative products such as vape pens, edibles and infused beverages account for over half of all products sold at the consumer level. Over the coming years, we anticipate that the Canadian market will evolve to reflect a similar product mix,” said GTEC Holdings (TSXV:GTEC,OTCMKTS:GGTTF) CEO Singhavon.

Valens GroWorks, which specializes in proprietary extraction methodologies and services, recently signed multi-year cannabis extraction and value-added service agreements with GTEC and Harvest One (TSXV:HVT). Under the agreements, the client companies will ship bulk quantities of dried cannabis to Valens for processing on a fee-for-service basis into cannabis value-added products, such as cannabis oil derivatives which are used in the development of numerous health and wellness products, nutraceuticals, beverages and vape pens.

“This partnership provides GTEC with the ability to utilize Valens’ IP, technology and expertise to immediately develop value added products as it builds out Spectre Labs,” said Singhavon. GTEC may soon merge with Invictus MD Strategies (TSXV:GENE,OTCMKTS:IVITF,FWB:8IS1) to form Western Canada’s largest indoor vertically integrated cannabis company.

Takeaway

In a market environment characterized by supply shortages and varying provincial distribution regulations, the new B2B cannabis sales provisions under the Cannabis Act are opening up more opportunities for licensed Canadian cannabis companies to gain market share, a quicker path to revenue and the strategic partnerships necessary to succeed in a nascent industry.

This INNspired article is sponsored by The Valens Company (TSXV:VLNS, OTCQX:VGWCF). This article was written according to INN editorial standards to educate investors.