Canada’s cannabis 2.0 market was still heating up in January when our team touched down in chilly Alberta. We were headed to Nisku, a small hamlet on the outskirts of Edmonton, and the home of Dynaleo’s 27,000 square foot manufacturing facility.
In the preceding months and weeks, Canada’s licensed producers announced a swath of new edible cannabis products including chocolates, beverages, mints, gummies, and other baked goods. But not all products were created equal. While seven of Canada’s largest producers announced plans for chocolates, only three did so for gummies.
There appeared to be a gap in the market, and our team had taken note. Uncertainties around the permissibility of cannabis gummies under the draft regulations, based on the government questioning whether this form factor may, inadvertently, appeal to youth, pushed many producers away, with many opting to invest in other products and take a wait-and-see approach on gummies. But to the teams at Canopy Rivers and Dynaleo, it was obvious that there was a disconnect between production in Canada and the growing consumer demand for cannabis gummies.
In a June 2019 report, Deloitte estimated that the Canadian market for edibles and alternative cannabis products could be worth up to $2.7 billion annually, with edible cannabis products accounting for $1.6 billion. In Deloitte’s survey of 3,000 Canadians, 11% responded that they already consume cannabis edibles and other alternative products, and an additional 13% responded that they expected to buy them. Deloitte’s research also found that among likely cannabis users, there are a multitude of reasons they would prefer edibles over other cannabis formats.
The popularity of cannabis edibles—and particularly gummies—is evident in certain mature U.S. states where edibles have been available for years. In Colorado and California, cannabis analytics firm Headset reports that in 2019 gummies accounted for 55% and 56% of edibles sales respectively. Early indications from Canada’s cannabis 2.0 market suggested that Canadian consumers may replicate these habits. According to Cowen Research, confectionary items (including cannabis gummies) were 90% sold out within an hour of becoming available in the Ontario Cannabis Store (OCS). This momentum has since continued. In April, Cowen reported that the gummies had an 80% stock out rate for March 2020 in the OCS, indicating that producers are struggling to keep up with consumer demand for these products.
The short version is simple: Dynaleo presented us with their vision of building a best-in-class facility that addresses current market needs, with an eye to scale to meet evolving consumer demands in cannabis edibles.
It quickly became clear that Dynaleo wants to be the best at what they do, by sticking to a thesis they believe most licensed producers ignored. They plan to go a mile deep on gummies, with a goal of creating a scale advantage in a single category that they believe hasn’t yet been achieved in Canada’s legal cannabis market. Dynaleo’s laser focus on specialization echoes our belief around the future of the cannabis industry: an integrated network of operations that complement one another, rather than vertical integration among a few key players.
We see the scale of Dynaleo’s 27,000 sq. ft. facility as reflective of its commitment to specialization and indicative of how it intends to achieve the product standardization that we believe will make it a trusted manufacturer of cannabis edibles. The company has sourced fully automated equipment designed for large scale pharmaceutical and nutraceutical gummies. Once it receives a license from Health Canada, Dynaleo expects that their facility will produce enough gummies to take a sizable chunk of the Canadian market. This is expected to be complemented by a proprietary database of formulations and taste profiles that can tailor products by dosage, shape, flavour, colour, texture, and size.
Much like its facility, Dynaleo’s team is built with excellence in mind. With their respective experience at Cronos and Aurora, Michael Krestell (Executive Chairman) and Jeff Salzsauer (COO) know first-hand the challenges facing licensed producers, and the partners they will need as they work to meet consumer demands. They brought in a team with deep experience in food and beverage as they hoped to build a business that looked as much like a traditional white-label manufacturer as it did a cannabis company.
Flying back to Toronto, our team firmly believed that Dynaleo possessed the scale, flexibility, and expertise needed to take a leading role in the Canadian cannabis gummies market.
Canopy Rivers is excited to welcome Dynaleo into its portfolio. Our analyses, derived from Headset data and Deloitte projections, indicates that the gummy category could be a significant component of the growing cannabis edibles segment. We believe that Dynaleo fits right in our portfolio. With several companies already focused on cultivation and branding opportunities, Dynaleo’s focus on scaled gummies production presents a new opportunity for our portfolio companies looking to enter this space.
We believe Dynaleo is uniquely positioned to help close the supply gap created by early concerns about the regulatory permissibility of gummies. And we think that Dynaleo will be able to offer leading white-labelled cannabis gummies to licensed producers from coast to coast. We believe their expertise, automated facility, and potential ability to scale positions them well to achieve operational excellence, foster long-term partnerships with established industry players, and become a collaborative partner in the Canopy Rivers portfolio.
This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, including information regarding the expected size of the Canadian market for edibles, alternative cannabis products and gummies; Dynaleo’s plans, goals and future focus, including its receipt of a license from Health Canada and expected production capacity; Canopy Rivers’ belief that there is a supply gap for cannabis gummies and that Dynaleo has the ability to help close that gap, take a leading role in the Canadian cannabis gummies market, become a trusted manufacturer of cannabis edibles and fit within Canopy Rivers’ portfolio; and expectations for other economic, regulatory, business and/or competitive factors. This forward-looking information is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form which are available on Canopy Rivers’ website and at www.sedar.com. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.
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