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Edited Transcript of NRTH.V earnings conference call or presentation 21-May-19 12:30pm GMT

Q3 2019 48North Cannabis Corp Earnings Call

Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of 48North Cannabis Corp earnings conference call or presentation Tuesday, May 21, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alison Gordon

48North Cannabis Corp. - Co-CEO & Director

* David Hackett

48North Cannabis Corp. - CFO

* Jeannette VanderMarel

48North Cannabis Corp. - Co-CEO & Director

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Conference Call Participants

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* Andrew Semple

Echelon Wealth Partners Inc., Research Division - Special Situations Associate

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Presentation

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Operator [1]

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Welcome to 48North Cannabis Corp.'s Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, May 21, 2019, at 8:30 a.m. Eastern Time.

I will now turn 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 Third Quarter 2019 Conference Call.

48North's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that 48North's 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, F8 and Latitude are tradenames of 48North Cannabis Corp. All other companies and products mentioned herein may be trademarks or registered trademarks of the respective holders. Joining me today on today's call is Alison Gordon and Jeannette VanderMarel, our co-CEOs of 48North. First, Alison will highlight the company's quarterly achievements and I will then provide a brief review of the third quarter financial results. After the presentations are complete, we will open the call up to analysts for questions.

Over to you, Alison.

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

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Good morning, everyone, and welcome again. We have successfully built momentum throughout the quarter and achieved significant milestones over the past 3 months with some notable accomplishments post quarter as well.

To start, the third quarter marked a transition for 48North strategically. The company used the quarter to pivot away from wholesaling cannabis to other licensed producers to position itself for the sale of next-generation cannabis products targeted to be available for consumers in fall of 2019. To accomplish this objective, the company made a number of strategic decisions such as ensuring that we have sufficient inventory of cannabis to develop and manufacture next-generation cannabis products.

In addition, 48North received its standard processing license from Health Canada for its Good & Green facility in Brantford, Ontario. This is 48North's second processing license from Health Canada. The company's first processing license was granted for its DelShen Therapeutics facility in Kirkland Lake, Ontario. The processing license at Good & Green located 10 minutes away from our 100-acre outdoor farm successfully guarantees 48North's ability to extract and process its sun-grown organic cannabis for cannabis products. As a result of this approval, the company is now fully licensed to bring next-generation, market-leading cannabis products to Canadian consumers in time for the next phase of legalization.

Furthermore, 48North announced that it signed an exclusive licensing agreement with U.S.-based Arbor Pacific Inc. to bring its premium cannabis brand Avitas to Canadian consumers. Avitas has developed 100% additive free, single strain, ultra-refined and purified vaporizer cartridges. Single strain vaporizer cartridges represent the fastest-growing cannabis product category in the United States. 48North looks forward to bringing Avitas' market-leading vaporizer technology and brand to Canada. Partnering with respected well-established and well-recognized U.S. brands like Avitas will be critical to 48North's success and the development of next-generation cannabis products for the adult use recreational market.

Finally, 48North is pleased to announce that it signed a supply agreement with the SQDC, Quebec's sole legal retailer, for recreational cannabis. This historic agreement includes 1,200 kilos of organic sun-grown cannabis from 48North's outdoor cultivation facility located in Brant County, Ontario and 180 kilograms of indoor-grown cannabis from the company's DelShen Therapeutics facility in Kirkland Lake, Ontario. This marks the first supply agreement in Canada between a provincial distributor and a licensed producer with the proposed outdoor cultivation facility.

Subsequent to the end of the quarter, the company hit a number of significant milestones worth addressing this morning. First, 48North received its outdoor cultivation license from Health Canada for its 100-acre organic farm located in Brant County. Good Farm will become one of the largest-ever licensed cannabis operations in the world. It is expected that 48North will be able to harvest cannabis at the Good Farm at the lowest cost per gram in the country. The company estimates that it will be able to produce dry cannabis for approximately $0.25 per gram.

Health Canada's licensing of Good Farm will allow 48North to harvest in excess of 45,000 kilograms of dry cannabis annually. In turn, 48North is well positioned to become a global leader in the production of low cost, high quality, next-generation products in the lead up to Canada's legalization of these products later this year.

Second, 48North closed a bought deal for a total gross proceeds of $28.75 million. The proceeds are earmarked for the successful operation of the Good Farm and the development and distribution of next-generation cannabis products to consumers for Canadian retail sales.

Third, the company announced that it entered into a formal partnership with humble+fume to build a state-of-the-art cannabis extraction facility and packaging line at the Good House. Upon completion of the extraction facility, 48North is expected to be able to process more than 30,000 kilograms of cannabis annually. The build-out of the extraction facility and packaging line is expected to be completed in summer 2019 and is being funded by humble+fume.

As a result, 48North's Good House will be fully equipped to both manufacture and conduct CO2 extraction, producing full-spectrum oil, distillates and isolates, all critical ingredients in the development of next-generation, value-added cannabis products. We will be using this equipment to execute on their previously announced licensing agreements with Mother & Clone and Avitas in the manufacturing of their 100% natural, additive free, single strain and ultra-refined and purified products.

Lastly, 48North was recognized by its peers at the Annual O’Cannabiz Industry Awards Gala as Brand of the Year. The entire team at 48North is very proud of this accomplishment, which points to our superior brand recognition in the industry.

I will now turn this call over to David Hackett, 48North's Chief Financial Officer, to review the financial results.

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

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Thank you, Alison. Revenues for the 3 months ending March 31, 2019, were $689,000, down from Q2 revenues of $2.4 million and totaling $4.3 million for the 9 months ended March 31, 2019. During the first 2 quarters of fiscal '19, we focused on deriving the revenues from wholesale and dried cannabis to other licensed producers. We believe that for the short term, sales to other licensed producers provided an important stream of revenue at good margins.

With October 2019 fast approaching, we have started to increase our inventory levels in anticipation of new retail distribution options for 48North-branded cannabis, accessories and products. As such, inventory at the end of Q3 increased from $928,000 in December to $2.48 million in March, representing a $1.55 million increase. Furthermore, our biological assets increased from $890,000 in December to $1.869 million in March, representing a $979,000 increase.

With the acquisition of Good & Green in November, we are starting to put best-in-class growing techniques into the DelShen facility. While Good & Green is still in the early stages of cultivation, we expect it will be some time before it obtains profitability. With the granting of the license for the Good Farm, we are currently evaluating the Good House's space allocation and how we can best use the space, assuming we will be delivering 40,000 kilograms of outdoor grown and looking to extraction for next-generation products.

Inventory expense to cost of sales for the quarter was $199,000, consistent with the reduced revenues, with Q2 being $524,000, and reflects a change in accounting policy to capitalize production costs and expense these costs as cannabis is sold.

Gross profit for the quarter was $2.6 million and $6.5 million for the 9 months ending March 31, 2019. We recorded a net comprehensive loss of $1.472 million and an improvement over the same period of last year, which represents a net loss of $3.4 million. This quarter's net loss equates to a basic and fully diluted loss per share of $0.12 per share and consistent with the $0.096 in Q2 and $0.13 per share in Q1. Included in this loss were some noncash items: depreciation of $404,000 and $1.146 million in stock-based compensation totaling $1.549 for -- compared to $884,000 in Q2.

Our continued positive momentum throughout the quarter resulted in a 9-month earnings before interest, taxes, depreciation, amortization and stock-based compensation of $696,000, up from Q2 of $618,000. This is EBITDA with adjustments made for stock-based compensation. We view EBITDA, and in this case, EBITDAO, as a more accurate reflection of performance, and we have seen significant improvements to what we continue -- as we continue to execute our strategy.

We continue to monitor our capital resources to assess and manage the liquidity needed to fund our operations. And at the end of Q3 2019, we had $18 million in cash on hand. In February, we repaid $2.3 million for a mortgage on the Good House, providing us with a debt-free balance sheet.

During the quarter, we completed a $7 million equity investment with a U.S.-based investment fund. Subsequent to quarter end, in April, we completed a $28.75 million bought deal. And in May, we accelerated certain warrants to bring in an additional $13.6 million. With this additional $43 million, we believe that we are well positioned to execute our business plan over the coming year.

During the quarter, we continued construction on the outdoor farm and we are now ready to grow on 3.7 million square feet of land at the Good Farm. 48North remains in the development stage. And while we do generate revenue from the sale of our dried cannabis, we are focusing on reducing the execution risk that comes with growing cannabis at scale.

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

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

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48North remains focused on positioning the company to compete and capitalize on opportunities that drive growth. Lastly, the company had a major milestone. The granting of the outdoor cultivation license for Good Farm is a game changer for the company. Overnight, the company expands its annual expected capacity from 5,000 kilos to over 45,000 kilos. As a result, I'm confident that 48North will deliver on its promise to produce high quality, low cost organic cannabis for the next generation of cannabis products and the dry flower market.

We are now better positioned than ever to deliver on our commitment to deliver high quality cannabis products to the Canadian and international cannabis markets. 48North knows that consumer packaged goods companies entering the cannabis space will need a low cost, consistent and organic cannabis input. 48North's Good Farm, without question, fulfills this need.

Furthermore, 48North successfully achieved all of the milestones it targeted in its third quarter. Our strong business performance throughout the quarter drove positive EBITDA. The organization has sufficient cash on hand and is now better prepared than ever to deliver on its business plan. In addition, the company remains focused on looking for opportunities south of the border and in Europe as it recognizes that expanded distribution channels, and therefore, access the larger markets will be critical to the success of all cannabis companies.

Furthermore, the company is committed to building up the second phase of its Good House facility in Brantford, Ontario. Our team remains focused on building a state-of-the-art manufacturing facility with robust extraction capabilities to satisfy a multitude of possible verticals. With the existing cash on hand, 48North will be able to build out this facility in the near term. I have said this before and it is still true, 48North has a proven track record of hitting the milestones it sets out for itself, including being approved to open the largest cannabis facility in the country. As a company, we are concentrated on continuing this trend. This includes looking for its best-in-class partners, building up the second phase of the Good House, growing and harvesting an estimated 40,000 kilos of dried cannabis from our outdoor farm and launching a suite of next-generation cannabis products in the fall of 2019. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of [Tony Wu] from Mainstream Capital.

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Unidentified Analyst, [2]

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Alison, just real good news that you guys got the license now. I'm looking at the revenue there -- you produced here since is $689,000. But you mentioned that you've kept $2.481 million worth of inventory. And in fact, if I add those figures together, you come out with -- revenues should be $3.17 million and you should have 215% increase in revenue rather than a loss, it looks like. And can you explain, Alison, why are you putting so much -- $2.4 million of your inventory and not selling it and just store it? And what is your reason for doing that?

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

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Thank you for your question. So the thought process really is we had told the market when we first got our DelShen license -- sales license that we would be selling wholesale to other licensed producers. We thought that, that was a good short-term methodology of bringing in revenue to the company without having to enter the retail market, incur all the costs with shipping, with packaging and all of that sort of thing. And so we sat back and really just supplied the wholesale market. We now see October 2019 coming at as quickly and we want to be in a position where we are able to enter that market with both feet firmly planted and being able to move forward. That's why we took the step of saying, hey, listen, we want to be in a position to be able to have product for that market. Also note that until Friday, we actually didn't have the farm license. So we didn't know that we were actually going to get license for that and we would have the ability of having additional stuff coming off the farm. We are also going to be using that inventory that we have in there to start to do dry flower, prepackaged, pre-rolls and packaging of dry flower, which you'll start to see in Quebec, in Ontario and Alberta. So during the last time we had this conversation, we've gone and done 3 provincial deals. We are now in a position to start to provide products in those marketplaces. And that's really why we started to hold back some of that inventory. Does that answer your question?

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Alison Gordon, 48North Cannabis Corp. - Co-CEO & Director [4]

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I'll just add. We're actually...

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Unidentified Analyst, [5]

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Yes. That's very -- sorry, go ahead.

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Alison Gordon, 48North Cannabis Corp. - Co-CEO & Director [6]

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Sorry. I was just going to add that we are actually currently packaging some of that dried flower, the dried flower for pre-rolls. So you will be seeing those on shelf soon.

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Unidentified Analyst, [7]

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Yes. Yes. I really truly believe you can deliver everything you say. You have been doing that. You have a proven track record of doing that. And I think it's a very wise business decision on your part and I'm really satisfied.

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

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Thank you.

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

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Thank you.

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Operator [10]

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(Operator Instructions) Your next question comes from the line of Andrew Semple from Echelon Wealth Partners.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [11]

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My first question this morning is just -- well, first of all, I want to congratulate you on the licensing that you acquired at your farm. I just want to ask you a question about the current state of the farm. Is that ready to be planted today? And is there any additional licensing needed for that farm, such as a processing license or a sales license down the road?

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Jeannette VanderMarel, 48North Cannabis Corp. - Co-CEO & Director [12]

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This is Jeannette VanderMarel speaking, and thank you for your question. Unfortunately, in the Southern Ontario, this spring has been unduly wet and cold. All farming activities are about 2.5 to 3 weeks behind and we are consistent with that. There is no further licensing required because we already hold a processing license at the Good House, which is approximately 10 minutes away. The farm is just a cultivation license. We will be growing and harvesting there and transferring products to the Good House for processing and packaging and manufacturing.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [13]

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Great. Do you have any, I guess, guidance on when we could expect first products on the farm to be available for the market?

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Jeannette VanderMarel, 48North Cannabis Corp. - Co-CEO & Director [14]

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So with some of our cultivation, we do expect that we'll have a small harvest sometime in July and this will ensure our systems and our processes, but the bulk of the harvest will be in Q4 of this year. And those products, obviously, are destined with our state-of-the-art supply agreement with the SQDC and the ALGC as well as other consumers, of course.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [15]

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Great. Can you comment on any further discussions with any additional provinces regarding outdoor supply commitments or agreements or if not for the outdoor supply for extract products?

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Jeannette VanderMarel, 48North Cannabis Corp. - Co-CEO & Director [16]

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Yes. We are actually in talks with all distributors, all provincial distributors at this time. Until we sign those deals, we'll not disclose that, but we're certainly in talks with all of them.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [17]

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Great. And just the final question. Your pro forma cash balance is above $58 million. I know in your earlier remarks, you commented on some of those proceeds being used for the Good Farm and for extraction capabilities. Is there any other uses for that capital or any other places you'd like to deploy some of that cash?

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David Hackett, 48North Cannabis Corp. - CFO [18]

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Andrew, it's David Hackett. So we -- when we raised the money, we had provided in our prospectus an overview of where we are planning on using that money. So I'd turn you back to the SEDAR filings on that. With regards to the actual uses of cash, I think it gives us pretty good war chest at this point in time to see what's coming in the market. And I think as Alison mentioned earlier, the U.S. marketplace is starting to open up, the European marketplace is starting to open up. I think this gives us the ability of being able to see the opportunities that are out there that we can act upon. I think if you had gone back 6 months ago, we didn't have that availability to sort of look at those kinds of deals. I think we now do.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [19]

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Congrats on another quarter, and congrats on your new licensing.

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David Hackett, 48North Cannabis Corp. - CFO [20]

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Thank you.

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Alison Gordon, 48North Cannabis Corp. - Co-CEO & Director [21]

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Thank you.

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Operator [22]

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There are no further questions at this time. Ms. Gordon, I turn the call back over to you.

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Alison Gordon, 48North Cannabis Corp. - Co-CEO & Director [23]

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On behalf of 48North's employees, management and Board of Directors, thank you for taking the time to dial in to 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. Thank you again for joining us, and have a great morning.

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Operator [24]

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