Cannabis Producer Signs Supply Agreement with Quebec Alcohol Agency

Under the deal, Hydropothecary will become the preferred supplier of cannabis products for the Quebec market for the first five years post-legislation. As such, Hydropothecary becomes the most recent Canadian cannabis business to associate with an alcohol beverage industry member. We previously reported that last fall Constellation Brands had acquired an approximate 10% stake in Canopy Growth Corp., a Canadian vendor of cannabis products, with the intention of making cannabis infused drinks.

The important synergies that the cannabis industry sees from alcohol beverage industry members include having an existing legally-permitted regional or nation-wide distribution network that could be leveraged for distribution of cannabis products; institutional experience and expertise with marketing highly-regulated products to consumers; and experience interfacing with government regulators on a regular basis. In this case, however, Hydropothecary is a supplier of cannabis, and the alcohol beverage distributor it will supply is a Quebec government entity, which will utilize its own provincial distribution network to facilitate the legal distribution of cannabis products in Quebec.

Under the terms of the agreement, Hydropothecary will supply 20,000 kg (44,000 lbs.) of cannabis products in the first year on the contract, 35,000 kg in the second year, and 45,000 kg in the third, with the sales volume for the final two years to be determined at a later date. The contract also includes an option to extend the term for an additional year. Hydropothecary's product offerings currently include cannabis flowers, powders and oil. Further, the large supply contract will allow Hydropothecary to hire additional workers and scale up production at its facilities. Longer-term, the company hopes to establish its presence as a cannabis supplier in other Canadian markets.

As the cannabis industry continues to grow in both Canada and the US, we expect to see additional cannabis businesses looking to partner with alcohol beverage industry members to take advantage of the above noted synergies to facilitate faster market entry and growth. Conversely, from the perspective of the alcohol beverage industry, the fast growing cannabis industry represents the possibility of expanding product offerings to include cannabis products. In sum, under the right conditions, such strategic partnerships can provide growth benefits to both industries.

Arent Fox's Alcohol Beverage and Cannabis groups will continue to monitor developments in this area. If you have any questions, please contact Michael Kelly or the Arent Fox professional who usually handles your matters.