According to the song, “New York, New York”, if you can make it in the Big Apple, you can make it anywhere.
But, for the cannabis industry, a better test of success is in California, the largest and arguably the most discriminating cannabis market in the world.
Evolving over several decades from a ‘grass-roots’ underground economy into a state-wide industry, California was a sophisticated marketplace long before recreational use was legalized at the start of 2018.
In this highly competitive and tightly regulated landscape,
PLUS Products Inc. (CSE:PLUS) (OTCQB:PLPRF) is firmly established as the best-selling brand of retail cannabis products in the state, with a strategically focused selection of cannabis-infused gourmet gummies.
Independent retail data from BDS Analytics shows that PLUS maintained top spot and increased its lead in market share in the combined medical and recreational markets, from Q3 to Q4 2018.
In fact, PLUS has three of the top five best-selling retail products, including first and second place overall, surpassing products from all categories including flower, concentrates, vaporizers, edibles, and topicals. And PLUS has the best-selling CBD-only product, at number five overall.
With the company’s rapid rise to the top of the California market, it looks like the business vision, strategy, and track record are poised to deliver more of the same kind of outperformance across new product categories and new jurisdictions.
And, yes, part of that vision and strategy includes ‘making it’ in New York -- and in other states and countries, when and where legislation allows.
PLUS Extends Value-Added Cannabis Edibles Product Offerings
While these cross-border expansion plans develop behind the scenes, PLUS is strategically consolidating its leadership position in California. Headquartered in San Mateo, with a 12,000 sq. ft. production facility in Adelanto, PLUS continues phase one of a fully funded expansion to increase production capacity to 40,000 sq. ft.
Once completed, the expanded facility is projected to generate around $150M in annual production from PLUS’s core gummy products alone. Up to 120,000 sq. ft. of manufacturing capacity can be brought online at this location, leading to a maximum output of as much as $450M of product.
This aggressive growth strategy is designed to capitalize on the increasing popularity of the gummy products, and the high margins and pricing power associated with such value-added consumer packaged goods.
The popularity of the edibles category as a whole is projected to continue growing as the market matures, with ‘second wave’ cannabis users shaping major market trends going forward.
On top of this organic revenue growth, PLUS recently added a bolt-on acquisition of another popular infused edibles brand, GOOD Co-op Inc. baked goods. This gives PLUS an additional 4,800 square feet of manufacturing space and associated equipment in Northern California, along with an experienced management team including GOOD’s founding partners.
The baked goods category accounted for 13% of the overall edibles market in 2018, excluding tinctures, according to BDS Analytics. With the GOOD acquisition, PLUS is targeting additional revenues of almost US$6M in 2019 and $20M in 2020.
New Funding for PLUS Creates Opportunity for Investors
A recent capital raise speaks volumes about the confidence of institutional investors in the ability of PLUS management to accelerate production growth and expand into new markets.
Venture capital -- including the likes of Gotham Green Partners and Stable Road Capital -- in February 2019 raised C$25M for PLUS through an oversubscribed issue of debenture note units. Each note is convertible into PLUS shares at a price of $6.50 each. Each unit also carries warrants with an exercise price of $8.00 per share.
As Gotham Green Managing Member, Jason Adler, said of the firm’s investment in PLUS, “PLUS has built a tremendous brand and the management team is second to none. We look forward to working closely with the company to help them achieve their goals.”
Jake Heimark, CEO of PLUS, described this round of funding as the next step toward the goal “...of becoming the strongest cannabis brand in the world by delivering on our mission to make cannabis safe and approachable.”
Retail investors looking for an entry point that compares favourably with the ‘smart money’ should consider that the market, for now, appears to be discounting the projected dilution in share structure resulting from the new issue.
The result is a share price currently trading at about a 10% discount to the convertible debenture price. While PLUS shares have consistently outperformed the benchmark cannabis ETF, Horizon’s HMMJ, the stock has fallen back into line since the financing.
However, that discount may not be available for long. PLUS will report fiscal 2018 year-end results in the next few weeks. BDS Analytics will release its Q1 2019 cannabis retail report within the same time frame.
If, as expected, both of these reports show PLUS continuing its well-established growth trend, the market focus should shift to the increased revenue and earnings potential created by the leverage of the new capital.
PLUS is gearing up for expansion beyond California, with a global vision and a strategy filled with long-term implications. But even in the near term, the current dilution-effect discount on the shares could be erased in very short order by the forthcoming reports.
Brand Power Based on Total Customer Experience
The PLUS brand is a proven consumer favourite. And, on close examination, the company has the hallmarks of an early-stage Starbucks, with some compelling similarities.
For example, consider this description of Starbucks (from Wikipedia):
[Starbucks is] ...considered the main representative of "second wave coffee", initially distinguishing itself from other coffee-serving venues in the US by taste, quality, and customer experience…
Branding for PLUS revolves around exactly those same parameters: taste, quality, and customer experience. Focused on making products safe and approachable for ‘second wave cannabis’, PLUS products are designed to appeal to non-traditional consumers in the context of a total user experience.
Evidence of this can be seen in the periodic introduction of limited edition flavours to engage with specific seasonal and event-related marketing opportunities, like the gummy product shown below. A tin of these looks like an ideal stocking-stuffer.
(PLUS Products seasonal limited edition Holiday Bliss. Image courtesy of PLUS Products.)
In building the brand, PLUS is focused on methods and standards that can be replicated at scale, so consumers will have the same experience in any jurisdiction where PLUS manufactured products are introduced.
The result is a consistent cannabis experience, with consumer comfort and safety provided by micro-dosing 5 mg of THC or CBD in each gummy. Products are made from scratch using only carefully sourced high-quality extracts and kosher ingredients in recipes created by a team of “Michelin-star chefs, Ivy League chemists, food manufacturing experts, engineers, machinists, visionaries, creatives and strategists.”
Investment Summary
PLUS has demonstrated a winning combination of culinary art, cannabis-infused food science (including patent-pending technology), and a community-based approach to market and product development.
In a recent interview with Midas Letter host James West, Jake Heimark outlined the long-term trajectory of the growth profile for PLUS Products.
“There’s an opportunity here to create an infused product manufacturer that really can span the entire infused product manufacturing spectrum. So that’s everything in edibles, but also tinctures, oils, vapor cartridges, anything where manufacturing is adding something to it, that’s where we see the value of the brand…”
This recipe for success has the potential to serve early investors very well indeed. Short-term catalysts should support a positive outlook as expansion continues in California and begins to roll out in other markets.
Longer-term, however, PLUS could turn out to be a brand story with parallels to iconic brands we take for granted now -- brands that started small and local but hit all the right notes and eventually made it big, becoming a household name on the largest possible scale.
By Daniel Brooks, with editorial contributions from Marc Davis