During the last year, we have noticed a significant increase the amount of demand for cannabis infused products and are bullish on this vertical of the cannabis industry. Over the next year, we expect this trend to persist and believe that the companies that are levered to this opportunity are poised to report massive growth.
Plus Products (PLUS.CN) (PLPRF) is a company that has been benefiting from the increasing consumer demand for cannabis infused products and this is an opportunity that we have been closely following.
The last two months have been significant for the cannabis infused product company and we are bullish on the growth prospects on a going-forward basis. During this time, Plus Products announced the acquisition of California cannabis concentrate business and reported plans to expand into the Nevada market. We are favorable on the growth prospects associated with these initiatives and will monitor how the team continues to execute on this.
Las Vegas Represents a Massive Market for Plus Products
Las Vegas is one of the most important cannabis markets in the US and we are favorable on the leverage that Plus Products has to this market. On an annual basis, Las Vegas attracts more than 42 million tourists, and this has made Nevada a primetime destination for cannabis businesses. When a company is working to build a national (or global) brand, they need to be focused on several key markets. These markets are similar in the way that they attract tourists and bring the people to the brand.
In late May, Plus Products announced plans to expand into the Nevada market through a definitive agreement to partner with TapRoot Holdings, a vertically integrated cannabis company with cultivation and manufacturing facilities in Las Vegas. When it comes to selection a strategic partner, Plus Products conducts significant due diligence and believes that it can leverage TapRoot’s extraction capabilities as a part of a supply agreement. In addition to TapRoot’s extraction capabilities, it has also received 7 of the 61 newly issued retail licenses in late 2018.
Plus Products believes that TapRoot has the facilities available for the company to easily and quickly deploy its machinery, ingredients, and personnel to ensure that the product remains consistent both in California and Nevada. As the company expands into new markets, it will serve as the manufacturing operations partner to ensure quality and consistency across markets. We find this to be significant when it comes to creating a consistent product and are bullish on the growth prospects associated with this relationship.
We are favorable on the leverage that Plus Products will have to the Las Vegas opportunity and believe that it is a key market when it comes to building an internationally recognized brand. We are of the opinion that the move into Nevada is just the start of something much bigger and this is a something that we are excited about. During the last year, Plus Products has become the top selling edible in the California market (according to BDS Analytics) and we expect its products to perform very well in cannabis markets across the US.
A Company with Massive Growth Potential
Last month, Plus Products announced that it has acquired an option to purchase Emerald Bay Wellness LLC, a California-based cannabis oil manufacturer. The option grants the company the irrevocable right, but not the obligation, to purchase all of the business assets of Emerald Bay Extracts for cash and stock.
There are a number of reasons why we are excited about this transaction and will highlight this one-by-one. First, Emerald Bay Extracts is currently one of Plus’ largest suppliers of cannabis oil and has been a supply partner for over a year. Second, if the option is exercised, the acquisition would give the company in-house cannabis extraction capabilities that would both improve quality control and increase gross margins on the core edibles business, while creating a new revenue stream and new product development capabilities. Finally, this transaction will provide attractive leverage to a burgeoning opportunity in California where the market is rapidly shifting towards manufactured products that require cannabis oil.
Another reason why we are bullish on the implications that this acquisition will have on the business is due to the cost of the transaction. Approximately 70% of the deal consideration would be subject to performance targets including revenue and we find this to be significant when it comes to execution. We are favorable on the vesting schedule associated with the acquisition and believe that it could significant advance Plus Products’ business.
A Company that is in a Class of its Own
One of the reasons we are favorable on Plus Products is due to the type of investors that it has attracted. During the last year, the company has received large investments from some of the most significant hedge funds that are focused on the cannabis industry and this is a testament to the quality of the opportunity.
When it comes to Plus Products, we believe that the company is led by one of the best management teams in the business and are favorable on the additions that have been made to the team. Since inception, the management team has proven its ability to execute and we are bullish on this aspect of the story. We believe that the strength of the management team played a key role in the company’s ability to attract strategic capital and find this to be significant.
Going forward, Plus Products has massive growth prospects and this is an opportunity to be watching. The planned expansion in Nevada will prove to be a major value driver and we expect to see the company enter additional US markets in the coming months.