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PLUS Products Following Playbook to Successful CPG Cannabis Company

“I do one thing at a time. I do it very well. And then, I move on.” That may have been the mantra of Dr. Charles Emerson Winchester III on the iconic television show M*A*S*H, but it can also be viewed as the framework for building a profitable company in the burgeoning global cannabis industry.

Oversimplified for effect, the point is that there is a whirlwind of activity in the legal cannabis market that makes it very easy for upstart companies to falter simply because they get swept up in going too many directions at once. For consumer packaged goods (CPG) company PLUS Products, Inc. (CSE: PLUS),(OTCQX: PLPRF) following the straight-forward model of CPG industry juggernauts like Coca-Cola (NYSE: KO), Mondelez International (NASDAQ: MDLZ) and Anheuser-Busch InBev’s (NYSE: BUD) Budweiser is the road map to success.

The common thread for these CPG companies is brand-building underscored by becoming the best at one thing first and then expanding the product bag. Adding some nuances specific to the addressable market, PLUS Products is bringing this same formula to cannabis to build long-term value for investors.

Fastest Growing Market Segment

The cannabis industry could reach $130 billion by 2029, according to analyst Owen Bennett at the investment bank Jeffries, with a base case forecast conservatively set at $50 billion. With that in mind, there is no shortfall of opportunities. Some companies, like Canopy Growth (NYSE: CGC)(TSX: WEED), have elected to take a commodity approach as a cultivator. Others, such as MediPharm Labs (TSX: LABS)(OTCQX: MEDIF), have focused on the ancillary space.

For the seasoned management team at PLUS Products, manufactured edible cannabis products is the most lucrative opportunity. For starters, the CPG space is known to command higher EBITDA-to-sales margins and price-to-sales ratios than other traditional U.S. industries, like distribution and retail.

Furthermore, cannabis-infused edibles are one of the hottest trends in cannabis today, as consumers are starting to better understand cannabis options. Sales of cannabis edibles reached over $1 billion in 2018 and are forecast to be worth $4.1 billion by 2022.

The trend towards edibles is not expected to slow going forward. Mysterious deaths allegedly attributed to cannabis vaping have the industry abuzz and consumers concerned. Realistically, it shouldn’t come as a huge surprise, as there has been backlash about vaping products since their inception and warnings from pundits and users about dangerous chemicals ingested with vaping. Obviously, smoking cannabis comes with risks associated with combustion, which will always deter many consumers away from pre-rolls and flower.

“It’s still early, but consumers are starting to become educated on what edibles really are,” commented Jake Heimark, co-founder and CEO of Plus Products, in a phone conversation with Baystreet.ca. “Historically, people associated edibles with ‘magic brownies’ concocted in someone’s kitchen that left you sitting in the corner stoned for hours. That stigma is disappearing and people are learning that today’s consumer products are closely regulated for safety and built on technology that provides effects targeted to the individual’s needs, albeit pain management, anxiety or something else,” he added.

Heimark is referring to the fact that PLUS product feature a unique combination of cannabis cannabinoids with tasty flavor profiles to provide users with a specific experience. In the words of Heimark, the consistency “will keep them coming back.”

Further evidence of the competitiveness across flower, concentrates and edibles/tinctures is clearly provided in the following image, showing edibles are the way to go.

As the dogfight for customers continues amongst flowers and concentrates causing prices to sink over the past three years, pricing for edibles and tinctures has appreciated.

No Better Home Market Than California

California is hands down the largest market in the U.S., coming in about $2.5 billion in 2018, according to data from BDS Analytics GreenEdge Platform. To put that in perspective, Colorado was number 2 at approximately $1.5 billion, followed by Washington State at roughly $1.0 billion. Sales in California may have been ever greater had it not been for a wash-out period last year where sales actually dipped as new legislation was implemented that required re-stocking inventories with product compliant to the new laws.

Edibles and sublinguals (products that dissolve under the tongue) are making up more and more of the market, as shown by the GreenEdge Platform. In California, the percentage of market share has risen from about 13% in January 2017 to approximately 18% in January 2019.

Step one in building a successful consumer brand for PLUS Products was developing a product and penetrating the biggest market in America, California. Check. Not only has Plus penetrated the market with its PLUS Gummies, they are dominating the market with them. Maybe it should be somewhat expected considering PLUS brought in a former Michelin Star sous chef and Tcho chocholatier to spearhead its R&D activity.

According to GreeEdge Platform data, PLUS Unwind gummies is the #1 best-selling CBD inclusive product in California and the #2 best-selling cannabis product in California over the last 12 months by dollars of retail sales.

The only product that PLUS Unwind trails is…PLUS Uplift gummies. PLUS Uplift gummies are not only the best-selling cannabis gummies in California, they are the best-selling consumable cannabis product across all markets tracked by BDS in 2018 by dollars of retail sales.

BDS data shines a bright light on the dominant sales of PLUS gummies in 2018, revealing that unit sales of PLUS Uplift gummies more than doubled the unit sales of the next closest non-PLUS gummy product in the state. Overall, PLUS is commanding a stellar 21% of the total gummy market share in California.

In fact, PLUS gummy sales have held the top spot for unit sales for four straight quarters through June 30, 2019, with unit sales approaching 600,000 in the June quarter.

Next Objective: New Markets, Products and Consumers

With the roots set in California, PLUS is now moving into other markets. First up is neighbor Nevada, with its 45 million annual visitors and a cannabis market forecast to top $1.2 billion by 2022. To enter this market, PLUS partnered with TapRoot Holdings Inc., a vertically integrated cannabis company operating licensed cultivation and manufacturing facilities in Las Vegas.

Per the agreement, PLUS will leverage TapRoot’s extraction capabilities as part of a supply deal while providing the operational expertise to ensure product consistency from state-to-state. For its part, TapRoot will share in the economics of the sale of PLUS products via a revenue sharing model.

The savvy move to partner with an established operator avoids long lead times and reduces capex necessary to construct independent licensed facilities. Next quarter should deliver the milestone of the first PLUS edibles hitting shelves at stores in Nevada. Going forward, management is targeting other key cannabis states, including Michigan, Arizona, Massachusetts, New York and Illinois, plus internationally, starting with Canada.

Given the success PLUS Unwind and PLUS Uplift, investors would be wise to be on the lookout for similar success with new products from the company. Remember the strategy of doing one thing very well and then moving on. Last quarter featured the launch of PLUS Mints as well as retiring the legacy CBD Relief product in favor of the new Mango CBD Relief brand.

To that point, a look at PlusProducts.com suggests that there is something big in the works. The homepage prominently shows that there is a PLUS Products exclusive launch event happening in New York City on September 17th.

In the future, the strategy involves expansion of the Unwind and Uplift (each with their own blend of THC and CBD) across product categories, including novel flavors of mints and gummies. These new products will leverage the familiarity of the existing brand while utilizing mint technology that delivers a quicker effect onset as a sublingual product.

Also in the pipeline is a line of cannabis-infused chocolates. This all dovetails with the playbook to do something well first and then expand, not to mention bringing a Tcho chocolatier in the head up product development.

The Proof is in the Pudding

For investors, the measure of success is in the numbers and PLUS has proved that its hyper-focused business model is working. During the quarter ended June 30, 2019, revenues surged 125% year-over-year to $3.6 million. Improved operating efficiencies grew gross margins to $0.7 million from $0.2 million.

The growth was purely organic to date, but should accelerate considering PLUS recently launched its first ever advertising campaign with billboards in prominent locations throughout San Francisco and Los Angeles.

As the upstart continues to invest heavily in business development, it is having no trouble finding investors passionate about the model, raising $23.68 million to bring its cash balance to $34.1 million.

The bottom line here is that PLUS is executing with precision to build a strong cannabis brand utilizing a successful formula and thoughtful growth. Interested parties would do well to look forward to the event on September 17 and see what management is doing next to continue to build and differentiate the brand.

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Fed rate cut is coming, but corporate insiders still doubt it is necessary

The Federal Reserve is expected to cut its benchmark lending rate at the conclusion of its Federal Open Market Committee meeting, which will take place on Tuesday and Wednesday of this week.

The market expects it, and so do chief financial officers of major corporations surveyed by CNBC. But the CFOs are late to the rate-cutting party, and they still are not entirely sure more cuts are the right monetary policy.

The Fed is expected to lower its benchmark overnight lending rate by a quarter point at this week’s FOMC meeting. Traders in the fed funds futures market were hedging some bets ahead of the Fed announcement, but market expectations for a 25-basis-point rate cut were at 63.5%, according to the CME Group’s FedWatch tool.

A majority of chief financial officers responding to the CNBC Global CFO Council third-quarter 2019 survey think the Fed will cut rates. However, CFOs believe there will be only one more rate cut by the Fed this year, and a majority of CFOs told CNBC that the current federal funds rate is “about right.”

The CNBC Global CFO Council represents some of the largest public and private companies in the world, collectively managing more than $5 trillion in market value across a wide variety of sectors. The Q3 2019 survey was conducted between Aug. 21 and Sept. 3 among 62 global members of the council, including 23 from North America.

How many rate cuts do you think there will be in 2019?

(Note on chart: Each quarter CNBC asks CFOs how many rate cuts they expect in the calendar year. A response of “one cut” indicates that CFOs do not expect another rate cut in 2019.)

The CFOs’ view that if the Fed cuts, it will be the final cut of 2019, puts the C-suite at odds with the prevailing view in the market (tracked by the CME Fedwatch tool) that the Fed will cut multiple times over the remainder of this year. But it does not necessarily put them at odds with the Fed, which may signal it is in no hurry to keep cutting rates.

Seventy percent of U.S. CFOs say the Fed will cut one more time in 2019, but one-fifth of CFOs surveyed would not even go that far, saying the cut made last quarter will be the only one this year. Less than 10% of CFOs in the U.S., as well as in the Europe and Asia-Pacific regions surveyed, believe there will be two more cuts in 2019.

More than 50% of traders expect another cut in December, and a smaller percentage (30%) forecast a cut in October.

“The drama is centered on just how strongly the Fed will signal that it’s going to cut rates again by the end of 2019,” Tom Essaye, founder of The Sevens Report, said in a note. “It’ll be the ‘dots’ and statement that determine whether the Fed meets market expectations (and spurs a short-term rally) or if we see another ‘hawkish’ cut and uptick in volatility.”

Among chief financial officers, reluctance to forecast cuts may partially be explained by the fact that they are not paid to think like short-term market traders.

Before the Fed’s second-quarter cut, which was the first since the end of the Great Recession, CFOs in the previous CNBC survey did not expect any cuts this year. In fact, not a single U.S. CFO surveyed by CNBC in Q2 2019 thought a rate cut was necessary.

Chief financial officers are more likely to play it safe than would a bond trader polled by CME.

“CFOs are certainly bigger risk takers than ever before, but when it comes to preservation of capital, they remain cautious, as they should,” said Jack McCullough, president and founder of North Andover, Massachusetts-based CFO Leadership Council. “They are aggressive when it comes to growth strategies, but with this sort of thing, a conservative approach is still viewed as best. They are finance chiefs, not riverboat gamblers.”

Even though CFO conservativeness has led them to be behind the curve on Fed policy, their reluctance to match trader forecasting of rate cuts is consistent with a view from the financial officers that cuts are not necessary. For three consecutive quarters, when asked by CNBC if current rates are too high, too low or appropriate, the majority of CFOs said current rates are “about right.”

“They have to run a business to the best of their ability, and certain aspects are within their control, such as a strategic plan, a hiring plan … but interest rates they are powerless to effect. So they probably are taking the approach of running the business the best they can,” McCullough said.

He added that personal conversations he has had with CFOs have showed less focus on rates than has been common among traders and investors. “They are happy with interest rates where they are, and they don’t feel any need for it to change. They can run the business fine. Why rock the boat for one half of 1%?”

CFOs surveyed by CNBC do not expect a recession in 2020, though the U.S.-China trade war is taking a toll on their overall confidence. U.S. CFOs expressed fears about vulnerability in the stock market as it nears another record, and a reluctance to increase capital spending or hiring plans.

Negative rates vs. low rates

President Donald Trump last week attacked the Fed, referring to the central bank as “boneheaded” for not cutting rates to zero “or less,” a reference to negative interest rates around the world. Some high-profile figures, such as former Fed Chairman Alan Greenspan and former Texas Congressman Ron Paul, have said negative rates will spread to the U.S.

Corporate treasury departments have been taking advantage of low rates, especially after a massive decline in yields in August, to issue new bonds, with a frenzied pace of investment-grade corporate bonds issued the first week after Labor Day.

Action in the bond market in the past week has remained volatile. September has witnessed some swift reversals from last month’s yield swoon. Mortgage rates jumped last week, though off multi-year lows. Meanwhile, on Monday a key lending rate known as the repo rate, the rate on overnight repurchase agreements, increased by as much as 248 basis points, or more than 2% in a single day, a move that caused jitters in the market about financial stability and the Fed’s ability to control short-term rates.

The repo rate is correlated to the short-term interest rates set by the Fed. The Fed’s target interest rate is 2% to 2.25% and is expected to be cut by the central bank to 1.75% to 2% at the end of its two-day FOMC meeting on Wednesday.

Bond yields will stay lower for longer

CFOs do expect the overall rate environment to remain low through the end of 2019. When asked where the 10-year Treasury yield will end the year, the majority of CFOs forecast the 10-year government bond to be below 2%. It was trading at 1.82% on Tuesday. More than 60% of the U.S. CFOs now say the 10-year Treasury will be 1.74% or lower at the end of December. In the Q2 survey, none of the CFOs thought the 10-year would be below 2% at the end of the year.

There had been talk in the market about a 50-basis-point cut for weeks leading up to the FOMC meeting, but now traders expect a 25-basis-point reduction.

“The geopolitical tensions have contributed to the risk-off tone supporting Treasuries, even if the Saudi oilfield attacks are not the reason 10-year yields are at 1.83%; for that there are the global growth uncertainties linked with the trade war, the Fed’s preemptive easing efforts and the lingering sense that durable demand-side inflation will be far more difficult to rekindle than policymakers initially assumed,” BMO Capital Markets wrote in a note to clients on Tuesday before the market open.

But the firm sees the Fed in a position where messaging the extent to which it will further cut rates will be key after Wednesday’s decision.

“The domestic data offers no justification for dropping policy rates to the floor, and this is precisely why we’re anticipating the Chair will make efforts to walk back any investor ambition for an additional 50 bps by year-end on top of Wednesday’s move. As it stands, the January 2020 futures contract is trading with an implied rate of 1.64%, or a 25 bps cut tomorrow and another at either the October or December meeting.”

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U.S. manufacturing production rebounds strongly in August

U.S. manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production, but the outlook for factories remains weak against the backdrop of trade tensions and slowing global economies.

The Federal Reserve said on Tuesday manufacturing production rose 0.6% last month after an unrevised 0.4% drop in July.

Economists polled by Reuters had forecast manufacturing output rising 0.2% in August. Production at factories fell 0.4% in August on a year-on-year basis.

Manufacturing, which accounts for about 11% of the U.S. economy, is being hobbled by a year-old trade war between the United States and China and slowing global economic growth. The trade war has eroded business confidence, leading to a slump in the sector, which ironically the Trump administration has sought to protect against what it called unfair foreign competition.

A survey early this month showed a measure of national manufacturing activity contracted in August for the first time since August 2016. Manufacturing has also been hurt by an inventory overhang, especially in the automotive industry.

Fears that the effects of the trade impasse could spill over to the broader economy are expected to compel the Fed to cut interest rates again on Wednesday to keep the longest expansion in history, now in its 11th year, on track.

Officials from the U.S. central bank were due to gather for a two-day meeting on Tuesday. The Fed lowered borrowing costs in July for the first time since 2008.

Motor vehicles and parts production fell 1.0% last month after increasing 0.5% in July. Excluding motor vehicles and parts, manufacturing output increased 0.6% in August after declining 0.5% in the prior month. Machinery output rebounded 1.6% after dropping 1.7% in July.

The jump in manufacturing output in August together with a 1.4% rebound in mining, lead to a 0.6% increase in industrial production last month. That was the largest gain in industrial output since August 2018 and followed a 0.1% dip July. Industrial production rose 0.4% on year-on-year basis in August.

Oil and gas well drilling fell 2.5% last month, declining for a second straight month. Utilities output increased 0.6% last month.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, increased to 75.7% in August from 75.4% in July. Overall capacity use for the industrial sector rose to 77.9% from 77.5% in July.

It is 1.9 percentage points below its 1972-2018 average. Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy how far growth has room to run before it becomes inflationary.

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EU lawmakers pick Christine Lagarde to head ECB

Former IMF chief Christine Lagarde is set to become the first female president of the European Central Bank. The European Parliament chose her with no other contender for the job.

Lagarde won a comfortable majority of 394 votes, while 206 European legislators voted against her and 49 abstained during the parliament’s plenary meeting in Strasbourg on Tuesday.

However, not everyone was happy with her nomination. Some MEPs sarcastically pointed out that the outcome was not surprising as there were no other contenders to vote for. Others noted that Lagarde did not even bother going to the meeting.

Notably, the European Parliament gives only a non-binding opinion on whether or not a person is suitable to fill the role. However, her appointment looks set to be formalized by EU leaders at October’s European Council summit, shortly before the current ECB chair Mario Draghi resigns.

If approved, her eight-year term as the head of one of the world’s most powerful financial institutions will start on November 1.

Lagarde, a former lawyer, was the first woman to serve as a finance minister from G7 countries and then the first to head the International Monetary Fund (IMF) in 2011. She resigned from the IMF earlier this year to get nominated for the top job at the ECB.

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Chilean lithium producer SQM bullish on white gold demand

Chilean lithium producer SQM expects to invest about $2.1 billion in the next five years to strengthen its production amid an expected increase in demand for the ultralight battery metal, the company told investors in New York on Tuesday.

About $1.332 billion of this investment would be in lithium operations, with further amounts going towards growing its nitrates and iodine capacity and maintenance between 2019 to 2023, Chief Executive Ricardo Ramos said in a presentation.

Demand and prices of lithium have been stifled in recent months by global trade tensions, the scaling back of electric vehicle subsidies in China and new output.

But Pablo Altimiras, senior vice president for SQM´s lithium and iodine division, said he expects solid demand in the coming years.

“The fundamentals support a vision of significant growth in the coming years,” he said.

Ramos said he expected lithium sales volume to reach 173,000 tonnes by 2025 through operations in Chile and Australia.

“The opportunities for growth in the lithium business could result in a gross profit contribution of about $1 billion by 2025,” the company´s presentation said.

The average lithium price is expected to be between $10 and $15 per kilo by 2025, compared to the current $14.50, the company predicted, with demand set to grow between 16% and 20% by 2025.

“Considering both demand fundamentals and supply cost structure, equilibrium price could be higher than historic average, even in double digits,” the company presentation said.

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