Plus Products Inc. (OTCQX:PLPRF) Q2 2020 Earnings Conference Call August 20, 2020 5:00 PM ET
Cole Stewart – IR
Jake Heimark – Co-Founder and CEO
Nate Pearson – CFO
Conference Call Participants
Bobby Burleson – Canaccord
Ladies and gentlemen, thank you for standing by, and welcome to the PLUS Products Second Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today’s conference maybe recorded [Operator Instructions].
I would now like to hand the conference over to your speaker for today, Cole Stewart. You may begin.
Thank you, operator. Good afternoon, and welcome to the PLUS Products second quarter 2020 financial results conference call. A replay of this call will be archived on the PLUS Investor Relations Web site at plusproductsinc.com.
Before we begin, please let me remind you that during the course of this conference call, PLUS’ management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. For more information on the company’s risks and uncertainties related to these forward-looking statements, please consult the company’s MD&A and other regulatory filings available at sedar.com. Any forward-looking statements should be considered in light of these factors.
Please also note any outlook we presented as of today and management does not undertake any obligation to revise any forward-looking statements in the future. Any references to market share or market growth from third parties during the prepared remarks have been cited in our news release disseminated this afternoon. In addition to the financial information presented in this call, please review the company’s second quarter 2020 financial statements and associated notes filed on the company’s SEDAR profile at www.sedar.com.
With me on the call today are Mr. Jake Heimark, Co-Founder and Chief Executive Officer and Nate Pearson, Chief Financial Officer.
With that, I would like to hand the call over to Jake.
Thank you, Cole. Our highest priority at PLUS continues to be protecting the health and safety of our employees, our customers and our partners. I continue to be exceptionally proud of how our team has responded to operating in such a trying time and I truly appreciate the care and passion that they bring to work with them every single day.
In February, we paused operations at PLUS in our California facility for two weeks without disrupting our supply. We made adjustments to our factory in order to ensure working conditions were as safe as possible. For more detailed information on the steps we have taken in response to COVID-19, please visit plusproductsinc.com/coronavirus.
Now, to recap the second quarter of what continues to be an exciting year for PLUS. We set out at the start of this year to accelerate the company’s path toward cash generation and solidify our position as a market leader in California, a market that we believe is the most important in the world for building a cannabis-branded products company. While we have not yet achieved positive cash flow, the progress we have made in just a few quarters is substantial.
We reduced our total cash burn by 89% compared to the second half of 2019, with just $2.1 million consumed in the first half of 2020. Excluding a $0.7 million semi-annual interest payment in June, we consumed just $0.4 million from normal operating, investing and financing activities in the second quarter of this year. Critically important is that we were able to make these improvements without undermining the core of our business, which delivered $9 million in net revenue during the first half of 2020, up 29% compared to $7 million in the second half of last year.
Over these same periods, we nearly doubled our gross margin, growing the metric from 19% to 36%. Sales in Nevada were negatively impacted by COVID-19 during the second quarter due to a market-wide reduction in demand and temporary disruption in supply caused in part by the pandemic. Despite the difficulties we experienced during this period, we have successfully restarted our production in Nevada with our manufacturing partner, and we look forward to revitalizing our presence in the Nevada market.
Beyond improving our fundamentals, we have been busy refining our innovation process, gearing it towards quickly and effectively bringing new brands, products and product developments to market in California. The result of this organizational investment are already apparent. In the first half of this year, we launched our wellness-focused PLUS CBDRelief brand, our HI-CUBES brand targeted at more experienced cannabis consumers and two limited edition products.
Moving forward, we are doubling down on our hyper-focus California centric strategy that has paid off for us thus far in 2020. In the second half of this year, we expect to launch at least two more product lines with a steady innovation pipeline, continuing beyond the next six months. Along with the growth of our core PLUS brand, we believe these new launches are a key part of achieving our goal of becoming the dominant edibles brand in California.
Our focus in the California market is driven not only by the fact that it is already the largest cannabis market in the world but by the fact that it retains more upside than any other market in the U.S. It is difficult to overstate this point. The adult use market in California is expected to grow by more than $4 billion in the next four years. With a projected market size of $7.2 billion in 2024, California is expected to be larger than the next four largest projected U.S. markets, Colorado, Florida, New York and Michigan combined.
We will continue to deploy resources into the businesses we have built in the Nevada adult use and national hemp CBD markets, and we remain bullish on their impact to PLUS’s long-term success. However, the lion share of our efforts in the near future will be focused on capturing as much of the California market as possible. When comparing the cost and upside of new market entry against the same metrics for a new product launch or new brand launch in California, we are confident that focusing on the latter is the most efficient and effective way to pursue growth for the company.
We firmly believe that this strategy, while potentially creating a little less excitement in the short-term, will create substantially more value in the long-term. We are in a new area of the cannabis industry, in which disciplined thoughtful deployment of capital will define the winners. Make no mistake, it is our intention to develop PLUS into a national cannabis branded products company. We plan to expand beyond California and Nevada but timing is critical, and we believe that today the best opportunities for the company exist in these markets.
I’d like to now hand the call over to Nate Pearson and wish him luck on his first earnings call as our CFO. Nate has been with the company since well before his appointment, and has played a crucial role in the progress we have already made this year. Take it away, Nate.
Thanks, Jake. Net revenues reached $4.3 million in Q2 2020, representing 21% year-over-year growth as compared to Q2 2019 with net revenues of $3.6 million. While shipments from PLUS to its third party distributor in California dropped from Q1 to Q2 2020, which contributed a quarter-over-quarter reduction in net revenues from $4.7 million in Q1 to $4.3 million in Q2. Market demand remains strong ass ales of the company’s product from its third party distributor to licensed retailers in California, what we call the wholesale depletions, grew by 13% quarter-over-quarter. Wholesale depletions, a quick note, do not represent income for the company but are an indicator of market demand for products sold by PLUS.
Gross profits climbed to $1.6 million in Q2 2020 compared to $0.7 million in Q2 2019. Gross profit margin in Q2 2020 was 36%, up from 20% in Q2 ‘19. Reduced cost per unit derived from both operating at scale, as well as strategic cost reductions on inputs, along with increased average selling price per unit, drove most of our improvement in profitability.
Operating losses were negative $1.4 million in Q2 2020, representing 71% improvement year-over-year from negative $4.6 million in Q2 ‘19. The company reported $13 million in cash and cash equivalents at June 30, 2020. Cash and cash equivalents fell $1.1 million during the second quarter with $0.7 million semiannual interest payment occurring at the end of the period, the company assumed just $0.4 million in normal operating investing activities.
The fundamentals of the business remain as strong as ever, while our costs trend in, gross margin continuing to improve and steady growth on the horizon, we expect to be cash flow positive early in 2021. While achieving cash flow sooner would be possible, it’s important that we responsibly balance the need to continue supporting our long term growth and the pressure for short term profitability. We believe our current trajectory does just that.
With that, we conclude our financials.
Operator, we’re ready to take questions.
Thank you [Operator Instructions]. Our first question comes from the line of Bobby Burleson with Canaccord. Your line is open.
Just a quick question about the distributor seasonality. What does normal selling look like for you guys in Q2?
Bobby, I think you’re referring to what is sort of our seasonal cycle look like in terms of building up inventory at the distributor. Cannabis is still pretty immature and PLUS has been growing quickly, as has the market in some respect. And so it’s a little bit tough to judge consistent seasonality here. I don’t think we have a great baseline to call it at the moment. We intend this out in Q1, if you recall, but we actually did load into our current distributor HERBL, more than we normally would have in Q1 due to our transitions that occurred at the beginning of the quarter.
That load in contributed to our quarter-over-quarter revenue declines Q2 over Q1, which is why we mentioned the depletion is increasing. Depletions has been a steady increasing signal, which is much more representative of market demand. But so long way of saying but I don’t think we have a super clean view of seasonality for distributor load in. But we don’t appear to have had — there’s no sort of a consistent cycle there.
And then in terms of looking at the second half and trying to get to cash flow positive at the beginning of next year. What’s the new product mix that you guys are expecting of the overall revenue? I know you guys have a lot of stuff that you’re rolling out.
I don’t want to guide you to a precise number here, because it could fluctuate and yeah, we’ve launched a couple of new products here in Q2 and have a couple of really interesting ones on the near term horizon. It’s something on the order of 15% or so. So we’re expecting a lift from it. If not — it’s not night and day on the new products, our core product so has legs and we’re seeing a lot of growth from it, but something in that range.
And then maybe just touching on the opportunities outside of California and Nevada, and how you guys are gauging timing there. I know you guys are trying to be conservative with your cash. But is there an opportunity to capitalize on some of the consumption trends that you’re seeing in California et cetera, in some of these other markets, window that you don’t want to miss?
We’re seeing a lot of opportunity now toward the end of this year, beginning of next year for us to take what’s worked in California and take it to other places. In many states, especially those where there’s no oligopolistic model, where there are few players, it was hard to have a conversation about the importance of brands and the competition in California, because it was very complicated market with a lot going on.
In the quiet of the pandemic that become an easier conversation to have and ultimately, we think the value of PLUS’ brand, both in California and what we’ve been able to do in Nevada and that story resonates in a way with partners if they will work with us, in order to make sure that we can get the right products in the hands of people. I think that opportunity is large. But as we talked about in this call, ultimately California and growth in California is going to eclipse every other state in the US in terms of size, it is a more competitive market. But if you’re able to perform here we believe it’s important to do so.
Thank you [Operator Instructions]. I’m showing no further questions in the queue. I would now like to hand the call back over to Mr. Jake Heimark for closing remarks.
Thank you. Thank you, operator. I want to thank you all for joining our call today, and for your ongoing support of the company. With that, I will now turn the call back to the operator to close the lines.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.