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Edited Transcript of NRTH.V earnings conference call or presentation 21-Feb-20 1:30pm GMT

Q2 2020 48North Cannabis Corp Earnings Call

Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of 48North Cannabis Corp earnings conference call or presentation Friday, February 21, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alison Gordon

48North Cannabis Corp. - CEO & Director

* David Hackett

48North Cannabis Corp. - CFO

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Conference Call Participants

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* Jenny Wang

Eight Capital, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the 48North Cannabis Corp. Q2 2020 Financial Results Conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, February 21, 2020, at 8:30 a.m. Eastern Time.

I will now hand the call over to David Hackett, Chief Financial Officer. Please go ahead, Mr. Hackett.

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David Hackett, 48North Cannabis Corp. - CFO [2]

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Good morning. I would like to welcome all call participants to the 48North Cannabis Corp.'s Second Quarter 2020 Conference Call. 48North's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements.

It is important to note that 48North actual results could differ materially from those projected in such forward-looking statements. While these statements reflect the company's beliefs regarding its plans, estimates and projections, they are subject to some uncertainties and risks that could cause actual results to differ materially.

More detailed information about the company and factors that may affect its operations can be obtained from 48North's filings with SEDAR at sedar.com. 48North is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements.

48North, DelShen Therapeutics, Good & Green, Rare Industries, Sackville and Latitude are trade names of 48North Cannabis Corp. All other companies and products mentioned herein may be trademarks or registered trademarks of their respective holders.

Joining me today on today's call is Alison Gordon, Chief Executive Officer of 48North; and Charles Vennat, Chief Corporate Officer of 48North.

First, Alison will highlight the company's achievements in this quarter and events subsequent to the quarter end, and I will then provide a brief review of this quarter's financial results. After the presentations are complete, we will be happy to open up the call to analysts for questions.

Over to you, Alison.

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [3]

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Thanks, David. Good morning, everyone, and welcome again. For the second quarter of 2020, 48North remained focused on its renewed commitment to improving operations, investing in product design and supporting high-quality conscious and guilt-free experiences for Canadian consumers.

On today's call, I will be providing a high-level overview of where 48North is today, an update on our second quarter results. And finally, I will highlight some of the milestones we hit subsequent to the end of the quarter.

In addition, I plan on providing a product launch update on our outdoor flower and next-generation products.

The cannabis industry has faced valid criticism for overpromising and under delivering, for not living up to self-generated expectations and not being transparent with the public, when the industry was failing.

Underlying all of this has been a prevailing sentiment that legal cannabis producers are out of touch with real cannabis consumers, more focused on generating share values and delivering high-quality products.

48North is positioned to be different. Let me tell you why. 48North is a locally branded Canadian-focused licensed producer with popular products and memorable brand and a clear vision for more conscious cannabis consumption.

We have resisted the temptation to embark on global complex in an effort to rapidly scale up and accumulate wealth at least on paper.

We have stayed nimble. We have deliberately stayed focused on our products, brands and operations. In my view, we have an opportunity as a company to emerge as a consumer favorite and a recognizable example of a company whose focus is more in the hearts and minds of consumers than in boardrooms across the country.

It is our belief that a focus on our consumers will create long-term and lasting value for our shareholders.

Simply put, several of our competitors have somewhat bitten off more than they can chew.

At 48North, this is not the case. We have a relatively simplified focus on the Canadian recreational marketplace with our assets in the U.S. and this focus in Canada, from my perspective, presents a clear and competitive advantage. And we're beginning to take advantage of this focus.

Research shows that Canadian recreational consumers are crying for quality and consistency. This is something we can deliver on.

We now have product listings in place in 7 out of 10 provinces, representing access for over 95% of Canadians. Our products are known for being consistent, high quality, well branded and accessible.

Today, the demand for 48North flower and pre-rolls exceed our supply, a challenge we are expeditiously working to remedy.

Just an evidence to make my point. 48North pre-rolls were the best-selling pre-rolls in Ontario for several weeks in 2019 and are now ranked #3 overall for sales in 2020.

Granddaddy Purple is also an industry favorite and was a finalist for top indica-dominant pre-roll at the 2019 Lift & Co. Canadian Cannabis Awards.

This is just the beginning. But we are making strides in the right direction. While this demand and recognition is a differentiator from our immediate competitors and must be matched by reliable supply, brand loyalty will be even more important as consumers shift towards Cannabis 2.0 products.

Where our brand loyalty is likely to comment, I am confident that we are well positioned to take advantage of this loyalty and become a leader in consumer choice.

And finally, something critical to our story that I've discussed many times on these calls. One of the clear market advantages that 48North has consistently communicated about is our Good Farm. 48North outdoor cultivation facility allows us to cultivate high-quality biomass at a fraction of the cost of indoor operations.

The total cash cost per gram of production at Good Farm this year was $0.25 per gram. Our ability to beat competitors on both cost and quality is a key differentiator.

From 30,000 feet that's where we are today, well on our way to accomplishing our goals and creating the company we set out to build back in 2017.

Let me quickly take you through some of the highlights of the second quarter. Q2 2020 marks the last quarter where the company's revenue is expected to be derived exclusively from 48North indoor cultivation facility, DelShen.

In subsequent quarters, 48North expects to begin reporting revenue increases from the sale of cannabis from Good Farm, one of the country's first and largest licensed outdoor production facilities, as well as the sale of recently legalized Cannabis 2.0 products and 48North contract manufacturing business, Fume Labs, created in partnership with humble+fume.

This quarter, 48North showed quarter-over-quarter revenue growth of $1.8 million, representing a 13% increase of our fourth quarter 2019 revenues of $1.6 million.

Further, at the end of the quarter, 48North had $33 million of cash and cash equivalents on hand and remains well funded to execute on its business plan.

In an industry where raising capital has become increasingly challenging, having sufficient working capital is of critical importance.

Today, 48North has nearly completed the full build-out of its cultivation facilities. Currently, we are working diligently to erect and license our state-of-the-art drying facility at Good Farm, and it is our expectation that this facility will be fully built out and licensed in time for the company's 2020 harvest.

In addition, the company is currently further building out the second phase of its manufacturing and packaging facility at the Good House. To date, our extraction capacity is fully built out and licensed.

I would like to spend the next few minutes highlighting a collection of the major accomplishments that we achieved this quarter and milestones hit subsequent to the end of the quarter.

First, the company confirmed that Good Farm's first outdoor harvest at Good Farm yielded high-quality, high-THC and CBD cannabis as confirmed by third-party laboratory testing.

Second, 48North announced that it's starting exclusive curation partnership with Thoughtfull, a creation of Indigo Books & Music Inc. Under the terms of the partnership, 48North will be Thoughtfull's exclusive cannabis partner, holding responsibility for curating and offering of cannabis-related accessories, leveraging 48North trusted consumer brand and relationships within the industry. Thoughtfull will curate an array of premium cannabis accessories.

Partnering with brands is critical to breaking down the sigma around cannabis. 48North applauds Thoughtfull for embracing the Canadian cannabis industry. Robust distribution is of paramount importance to the success of 48North, and this partnership will be responsible for introducing Canadian adults to the 48North brand. Partnering with companies like Thoughtful is critical to our long-term goal of becoming Canada's most beloved and accessible cannabis brand. And third, 48North announced a creation of Fume Labs, a strategic partnership between 48North and humble+fume. Fume Labs is a cannabis-focused manufacturing and extraction entity with significant capacity to contract manufacture vaporizer products.

Fume Labs is fully operational and licensed, located within 48North licensed facility at Good House, located in Brantford, Ontario.

This addition strategically strengthens 48North capacity to be a leader in the development and manufacturing of next-generation cannabis products and contract manufacturing.

As a result of the partnership, both 48North and humble+fume will uniquely benefit from its shared entities. These benefits include, but are not limited to, industry-leading extraction expertise, a consistent input of high-quality and low-cost cannabis biomass, access to nationwide distribution and sales channels, and as a result, we will see significant operational cost savings.

Simultaneously, we announced that the company secured additional product listings for vaporizer products in new Canadian markets, including British Colombia, Saskatchewan, Manitoba and New Brunswick. As a result, 48North-owned products will become available in 7 out of 10 Canadian provinces, representing over 95% of the population.

Before I hand it over to David to provide an overview of our financial performance, I would like to quickly address our product launch schedule. In the next few weeks, 48North expects to begin selling its indoor dried flower facility into the Alberta market under the 48North brand.

With respect to outdoor flower, 48North anticipates beginning sales under its First Harvest and Fleur du Jour brands in Ontario, Alberta and Québec, in February and March.

Looking ahead to our next-generation products, we look to begin selling the licensed tropical brand Apothecanna to consumers in March. And we will be -- and lastly, we will be launching our Avitas by 48North vape product in Ontario. It is the company's expectation that this product will roll out in further provinces in the near term. 48North will continue to sell dried flower into Québec and Alberta and pre-rolls into Ontario and Alberta.

I will now pass it on to David for his analysis of our financial performance.

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David Hackett, 48North Cannabis Corp. - CFO [4]

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Thanks, Alison. Revenues for the 3 months ending December 31, 2019, were $1.8 million, up 13% from Q1 revenues of $1.6 million. The revenue mix for the quarter includes sales to both other licensed producers and sales to provincial regulators in Alberta, Ontario and Québec.

Sales to the OCS and the AGLC were up 102% and 112%, respectively over the last quarter, as our ability to produce more pre-rolls and baggable flower increased. Sales to the SQDC were lower by about 30%, as we transitioned from online sales to in-store sales, which caused a couple of weeks of not having product available in Québec.

We believe that this is a temporary issue, but ultimately beneficial to the company, as the online product sales are treated as consignment sales, whereas in-store products are considered as sales upon receipt.

We expect that provincial sales will continue to become a larger percentage of our cannabis sales. And this is consistent with our transition plans to focus on branded product sales in the adult cannabis marketplace.

We believe that by increasing manufacturing capacity, we will be able to increase the volume of pre-roll and baggable flower to the marketplace.

The company capitalizes production costs related to biological assets and expenses these costs to cost of sales before fair market adjustments as the inventory is sold.

For the 3 months ending December 31, 2019, inventory expense to cost of sales before fair market adjustments was $1.008 million compared to $524,000 in the respective period of 2018.

For the 6 months ending December 31, 2019, inventory expense to cost of sales before fair market adjustments was $1.7 million compared to $524,000 in 2018.

During the second quarter, the company reviewed underlying assumptions for the inventory valuation. And based on current market trends regarding expected selling price per gram, has reduced expected selling price per gram for indoor cannabis plants from $5 to $3.50 per gram and for outdoor cannabis plants from $2.25 to $1 per gram.

Furthermore, at the end of the second quarter, the company started to purchase additional cannabis from other licensed producers. It is expected that with additional manufacturing capacity coming online at the Good & Green facility that the company will be able to increase its provincial sales over the coming quarters.

During Q2, our inventory increased from $6.7 million at September 30 to $17.8 million at December 31. This increase is largely due to the movement of the outdoor plants from the Good Farm, which were reported as biological assets at September 30, into inventory as they were harvested during Q2 2020.

We expect that the outdoor cannabis will be largely used for extraction purposes.

During the current quarter, we have started to process our outdoor cannabis through Fume Labs into extraction oils to be used to produce vape and Cannabis 2.0 products. As announced in the press release, we're looking forward to having vapes in market in March.

Furthermore, in late December, we purchased approximately $3.2 million in cannabis from other licensed producers, with an offsetting increase in accounts payable and accrued liabilities.

As mentioned earlier, we're beginning -- we're bringing additional capability for manufacturing online at the Good & Green facility and believe that this additional quality cannabis will be processed, packaged and sold in the coming quarters.

Investing activities during the 6 months ending December 31, 2019 were $7.5 million and largely reflect the addition of property, plant and equipment. We continue to invest in the Good & Green facility, increasing our extraction expertise with the recently announced strategic partnership with humble+fume and by expanding our manufacturing capability through a build-out of the facility. We're expecting to continue to invest in our Good & Green facilities in the current quarter.

We recorded a net loss of $6.2 million compared to a net income of $2.2 million in the last quarter. This quarter's loss -- net loss equates to a basic and fully diluted earnings of $0.35 per share. Included in the net income were the noncash items, depreciation of $460,000, an additional $250,000 included in depreciation in the cost of sales and $472,000 in stock-based compensation.

Furthermore, we recorded a gain on the change in fair value of contingent consideration relating to the Rare and Sackville acquisitions. This relates to the potential earn-outs based on achieving certain revenue targets and is affected by the company's current share price and assumptions relating to expectations on achieving those revenue targets.

During Q2 2020, our cash usage was approximately $7.8 million. This can be broken into 3 component parts: cash used in ongoing operations was approximately $4.7 million, cash used in working capital balances was approximately $172,000 and cash used in investing activities was $2.9 million.

We expect to have additional property, plant and equipment activities during the current quarter as we build out the Good House facilities to allow for increased production capacity. We continue to monitor our capital resources to assess and manage the liquidity needed to fund our operations. And at the end of Q2 2020, we had $33 million in cash and cash equivalents on hand.

48North remains in the development stage. And while we do generate revenue from the sale of our dried cannabis, we're focusing on reducing the execution risk that comes with growing cannabis and manufacturing products at scale.

I will now turn the call back to Alison for her closing remarks.

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [5]

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Thanks, David. I truly believe that we are well on our way to deliver on our initial vision, creating a cannabis company that can give people the latitude to live well and that good companies can consistently bring a superior experience to consumers when they need it.

From day 1, we wanted to deliver this idea to people, we invested in forward-thinking designs and cutting-edge facilities that could help bring cannabis to life in a way that consumers feel good about.

Without question, it has been a bumpy road, and we still have challenges to overcome, but we have learned our lessons. We have reaffirmed our commitment to our original vision. I believe that high-quality cannabis is a vehicle for well-being and thought-provoking experiences as the plant has incredible potential.

In 2020, we're refocusing our efforts on seeing that idea through improving operations, investing in design and building personalized relationships with consumers through better products and brands.

We have built and operationalized the state-of-the-art manufacturing facility. We're launching consumer-friendly, future-focused cannabis products in markets across the country, and we've entered into a groundbreaking partnership with Thoughtfull, an online platform owned by Indigo, to create accessories with a focus on authenticity, sustainability and education. We know that it's a challenging time for our industry with many players and limited capital, but we have the fundamentals right. We have the idea right. And we have our priorities straight. We're ready to deliver for our employees, our communities, our customers and shareholders.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Jenny Wang with Eight Capital.

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Jenny Wang, Eight Capital, Research Division - Analyst [2]

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The first one is, just on the gross margins this quarter. Can you talk a little bit about why it was a little bit lower? Why it was lower this quarter? And also, what's the level that we should expect going forward?

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David Hackett, 48North Cannabis Corp. - CFO [3]

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Thanks, Jenny. Thanks for your question. The gross margins were -- sort of continue to be affected, I guess, by where we see the pricing of the cannabis and the valuation that we did. So we did write down the ultimate value of our indoor and outdoor growth from $5 to $3.50 and from $2.25 to $1. I think that's reflective of where we see that.

Quite frankly, we still have a lot of product that will come through to inventory, which should help us on a go-forward basis with margins, with obviously the reduced value of inventory on the books as it does sell-through. We do expect to see increased sort of value that we're getting from provincial regulators with regards to our cannabis. So we're cautiously optimistic that there will be some positive upside, once we sell that through the system.

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Jenny Wang, Eight Capital, Research Division - Analyst [4]

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Great. Got it. And just one other question on kind of the cash burn per quarter, is -- net cash been $7 million, is that kind of the level that we're -- that we should expect going forward? Or should it be a little bit lower or higher?

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David Hackett, 48North Cannabis Corp. - CFO [5]

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Yes. So my sort of view on that one is that we still need to demonstrate to the market that we can push more product through our manufacturing environment. And I think if we can increase our revenues, I don't -- obviously, we're trying to continue to manage our cash through reduced expenses, keeping a tight rein on expenses, but we still need to increase our revenue dramatically. And I think that's what we're hoping to do over the coming quarters.

We believe that with the build-out of the Good & Green facility that we'll be able to get more product to market, which will obviously increase revenues accordingly, which -- we believe that our overall infrastructure costs are somewhat sort of stable at this point in time. But if we can get the revenues up, the cash losses will go down.

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Jenny Wang, Eight Capital, Research Division - Analyst [6]

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Got it. And then one more about -- just in terms of the revenue increases going forward, are you -- could you break down approximately where you see that coming from? Is it mostly going to be from vape? Or is it dried flower?

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David Hackett, 48North Cannabis Corp. - CFO [7]

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I think it's a combination of the 2 of them. Up to Q2, which was December, we had only had dried flower sales. So our expectation is that in Q3 and Q4, we will start to see the Fume Labs to do the extraction and get vapes to market. And we expect that, that will obviously drive additional revenues for the company on a go-forward basis.

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [8]

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Jenny, I think what we -- oh, sorry, I was just going to jump in and just add to what David's saying and what we're speaking about here is increasing our ability and capacity to produce and distribute significantly more cannabis and cannabis products than we have in the past, and that will obviously significantly impact our revenue.

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David Hackett, 48North Cannabis Corp. - CFO [9]

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And I think it's fair to say that we've seen a lot of sort of product go quickly into the marketplace and get sold. And it's been our issue of trying to make sure that we can increase that pipeline into the provincial regulators to provide more product to the consumers. And that's what we're working on. That's really what the build-out at the Morton facility is all about. It's also now about taking the outdoor-grow cannabis that we have, extracting that, putting that into vapes, into Cannabis 2.0 products and to get those into the marketplace.

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Operator [10]

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And we have no further questions at this time. I'll now turn the call back to Alison Gordon for closing remarks.

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [11]

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Thank you so much. On behalf of 48North employees, management and Board of Directors, thank you for taking the time to dial into our conference call this morning. If there are any questions we have not answered, please don't hesitate to be in touch. Our Investor Relations contact information is available on our website. Thanks again, and have a great morning.

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Operator [12]

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This concludes today's conference call. You may now disconnect.