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Edited Transcript of NRTH.V earnings conference call or presentation 2-Nov-20 9:30pm GMT

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Full Year 2020 48North Cannabis Corp Earnings Call Nov 3, 2020 (Thomson StreetEvents) -- Edited Transcript of 48North Cannabis Corp earnings conference call or presentation Monday, November 2, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Charles Vennat 48North Cannabis Corp. - CEO & Director * David Hackett 48North Cannabis Corp. - CFO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the 48North Cannabis Corp. 2020 Year-end Financial Results Conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, November 2, 2020, at 4:30 p.m. Eastern Time. I will now turn the call over to David Hackett, Chief Financial Officer. Please go ahead, Mr. Hackett. -------------------------------------------------------------------------------- David Hackett, 48North Cannabis Corp. - CFO [2] -------------------------------------------------------------------------------- Thank you. Good afternoon. I would like to welcome all call participants to the 48North Cannabis Corp.'s Fiscal 2020 Year-end 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 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 Charles Vennat, Chief Executive Officer of 48North. First, Charles will highlight the company's quarterly achievements, and then I will provide a brief review of the financial results. Over to you, Charles. -------------------------------------------------------------------------------- Charles Vennat, 48North Cannabis Corp. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, David. Good afternoon, everyone, and welcome again. I've been looking forward to sharing 48North's 2020 fiscal results. Back in March, when I took over as 48North's CEO, I penned an open letter to shareholders promising how we would lead the company. I committed to refocusing on improving operations and investing in product development, committed to building our brand and launching best-selling next-generation cannabis products and committed to confronting both the health risks and the threats to business continuity posed by the spread of COVID-19. To date, I am pleased to report that we have successfully delivered on these 3 promises. In short, 48North has made significant strides in fiscal 2020. First, in the pursuit of building a consumer-centric brand-focused company, I'm proud to report that we have laid the operational foundation necessary to our success. 48North's facilities are now built out and fully licensed. At DelShen, the company's premium indoor cannabis facility located in Kirkland Lake, Ontario, 48North consistently cultivates best-selling cannabis. At Good House, 48North successfully completed the build-out of phase 2 and received all of the necessary licenses from Health Canada. And finally, at Good Farm, the company successfully built out and received licensing for its state-of-the-art drying barn, giving the company the required space to process the cannabis planted at the farm. At Good Farm, 48North illustrated the importance of outdoor cultivation with one of the first and largest outdoor cannabis facilities in Canada. The company's 2019 Good Farm harvest contributed to the low-cost, high-quality inputs for the development of many of 48North's next-generation cannabis products, including vaporizers and topicals. In preparation for its second season, the company transformed the farm into a regenerative organic farm, implemented lessons learned from its first season; and early indicators point to a very successful second crop. Production costs at the farm following our first year of production were at $0.25 a gram. Since, the quality of product has significantly increased. Last year, a great majority of Good Farm cannabis was extracted into distillate. This year, I expect that harvested cannabis will have more varied uses, including dried flower; full-spectrum oils; concentrate products; and of course, distillate. Good Farm's low-cost advantage allows 48North to compete on price without jeopardizing quality. Second, since June 2019, 48North has -- sorry, since June 2020, 48North has launched 26 SKUs in the Canadian adult-use recreational cannabis market. 48North launch products ranging in form from vaporizers, topicals, pre-rolls and intimacy goods. In fact, 48North launched the first topical and bath product in Canada, cannabinoid-based, demonstrating a commitment to developing innovative, thought-provoking products and brands. Building on this momentum, 48North looks forward to launching its "first of its kind" products into the Canadian recreational cannabis market. 48North pre-rolls are consistently in the top 10 best-selling SKUs in the country. Our dried flower is regularly the best selling in Ontario, and the same is true for our Pax-branded products. This is not specific to our -- to Ontario. Our products across the country are selling well. Anecdotally, retailers, both independent and behemoth, continue to reorder 48North-branded products, as they can rely on the steady sell-through of our brands. To date, using Ontario as an example, 48North products are available at over 3/4 of dispensaries across the province. To put it into perspective: At this time last year, the company had 4 SKUs in market, 3 in Québec and 1 in Ontario. Since, our products are available to 100% of legal cannabis users in Canada through both recreational and medical channels. Further, 48North signed a number of supply agreements and strategic partnerships with cannabis brands and provincial boards, including BC Cannabis Stores, Liquor, Gaming and Cannabis Authority of Manitoba, Saskatchewan Liquor and Gaming Authority, Medical Cannabis by Shoppers Drug Mart Inc., Apothecanna, Pax and Indigo Books & Music. Building on this momentum, 48North launched 2 additional recreational cannabis brands in fiscal 2020. The first is Trail Mix. Trail Mix builds on the company's belief that high-quality cannabis experiences should be available to all. 48North's low-cost production advantage makes this possible leveraging Good Farm product, allowing the company to produce this brand at very competitive pricing. Looking ahead, Trail Mix would include additional Pax products, all-in-one disposable pens, dried flower, pre-rolls and more. The second brand is Latitude. Latitude builds on the successful 2018 launch of LAT, an interactive omnichannel platform that empowers women to connect, engage and share their personal stories with cannabis. This brand responds to a market need for the industry to support customers seeking new ways to reset, rejuvenate and live well. Launching products in a variety of different categories ranging from sexual wellness to beauty and beyond, this brand is particularly important to me, as it heralds back to 48North's original vision to develop innovative next-generation cannabis products. And finally, COVID-19. 48North has thus far successfully managed the global health crisis of a generation. Led by a commitment to the health and safety of our employees; and a successful combination of procedures and protocols, increased sanitation and quick response, 48North to date has had no confirmed cases of the novel coronavirus at any of our facilities. Further, 48North has increased revenue, output and capacity at all of its facilities during the coronavirus. The health and safety of 48North staff remains our company's top priority. From 48North's origin, we have set out to be an employer who is committed to treating people the right way, but we also know that many of our employees are dependent on us to make ends meet. And we have worked diligently, informed by best practices in agriculture and manufacturing, to continue operating in a responsible way, particularly as demand for our products increases and as the pandemic continues. Since I drafted that letter in March, 48North has grown up significantly, and our financials are only just beginning to echo the improvements made on the ground floor. For example, this year, we did $10.5 million in revenue, marking a 117% increase from fiscal 2019. In Q4, our revenue totaled $4.5 million, a 65% increase from the quarter previous. Finally, looking ahead to Q1 2020 (sic) [2021], 48North expects revenues to surpass $7 million, approximately 67% of fiscal 2019 yearly totals and marking a 58% increase from Q4 2020. The team has built this momentum after responding to last year's licensing hurdles, transitioning leadership and facing the public health crisis of a generation. Our products, brands and commercialization platform positions us well to respond to the industry's continued evolution; and I am optimistic about our progress towards profitability. And while revenues increase, our focus as an organization and mine as CEO shifts towards our pathway to profitability. We will reach this business imperative, and the way to do it is threefold. First, we must continue to increase revenue and capacity and drive down operational bottlenecks; second and with the help of our newly installed and commissioned automation lines, increase gross margins. Third, we must accelerate our cash conversion cycle and inventory turns, ensuring that inventory is commercialized as reliably, rapidly and predictably as possible. 48North is growing at a staggering pace. To wit, we expect that nearly 70% of fiscal 2019 revenue will be booked in Q1 2021 -- pardon me. Fiscal 2020 revenue will be booked in Q1 2021. This type of rapid growth undoubtedly places pressure on the company's working capital resources. And therefore, last month, the company announced a best efforts private placement for $3 million. The completion of this funding agreement, alongside with our current cash position which at the end of the quarter was $9.3 million, is expected to provide the company with working capital to help 48North become one of the premier consumer-centric cannabis companies. We are incredibly focused on this goal, and our cash position lays the foundation for ongoing and accelerated growth and laying a clear pathway to profitability. I will now turn over this call to David Hackett, 48North's Chief Financial Officer, to review the financial results. -------------------------------------------------------------------------------- David Hackett, 48North Cannabis Corp. - CFO [4] -------------------------------------------------------------------------------- Thanks, Charles. Revenues from continuing operations for the year ending June 30, 2020, were $10.5 million, up 117% from 2019 revenues at $4.8 million. Revenues from continuing operations for Q4 fiscal 2020 were [$4.3 million], representing a [52%] increase over Q3 revenues. The revenue mix for the quarter includes both sales to other licensed producers; and sales to 6 provincial regulators, including our traditional markets of Alberta, Québec and Ontario, with shipments starting in Q4 to Saskatchewan, Manitoba and BC. Sales to the AGLC, SQDC and OCS represented 30%, 33% and 13%, respectively, of all of total sales for the year. Sales by product categories were as follows: flower 47%; pre-rolls 24%; and LP-to-LP sales of 19%, representing full year sales. Topicals represented 4%, vapes 2%, both started in the second half of fiscal 2020; and hash with 3%, which started in Q4 of 2020. The company ended Q4 revenues strongly with flower increasing 76% quarter-over-quarter; and topicals and vapes up 960% and 150%, respectfully. We continue to see provincial sales becoming a larger percentage of our cannabis sales, representing 81% of 2020 revenues compared to 2% in 2019. 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. This quarter also saw the introduction of Cannabis 2.0 products with traditional pressed hash. As we move from LP-to-LP sales to provincial sales, the excise duties as a percentage of revenues increases, causing our excise duties to be 16% of our revenues and 25% of our net revenues, consistent with 19% and 24%, respectfully, in Q3 2020. With regards to the cost of sales and gross margins, inventory expense-to-cost of sales was $9.3 million, and gross profit before fair market adjustments was negative $3.5 million. Removing the impact of the $3 million inventory impairment and the $700,000 depreciation in COGS, the cash margin was $200,000. In Q4 2020, the company started the cannabis derivative production and packaging at its Morton facility. The company increased its labor force and invested in the extraction infrastructure during the year in preparation of provincial orders. Essentially there was a steep ramp-up in a short period of time to ensure that -- the timely fulfillment of provincial orders. The variable costs were front loaded, and there was -- learning curves in the first quarter of production. Unfortunately, IFRS requires the company to absorb all variable costs into the products produced. This has steeply driven up the per-unit costs in fiscal 2020, and the production costs were high. Essentially our actual output in units was lower than our expected output. For example, our planned cost for packaged flower was on target with the actual cost. However, our actual cost for hash was 8x the planned cost, and our vapes were 11x the planned cost. The bright side is that, with production efficiencies, we expect to get to the place where the actual equals planned. Regarding the impairments, the company is required to compare the capitalized costs of its inventory to the net realizable values for the inventory on hand as of June 30. Due to factors such as decreases in market prices, increased production costs, combined with the impact of opening inventory and harvested plants which were valued previously at a much more optimistic view, the capitalized cost has exceeded the net realizable values. These adjustments decreased the inventory costs for fiscal 2020 and will contribute to a projected higher fiscal [2020] gross profit when the products are ultimately sold. In July 2020, Michael Highdale was hired as COO, and we are starting to see improvements in production efficiencies. During the year, the company had purchased 2 U.S.-focused companies, Rare and Sackville. During Q4 2020, we announced their divestitures. Specifically, 48North returned Rare and Sackville to their previous ownership groups. As such, the company has recorded both of these operations as discontinued operations in the financial statements and has taken a $4.7 million loss on the disposal of the 2 companies and a $1.3 million loss from discontinued operations totaling $6 million in the year. Investing activities during the year ended June 30, 2020, were $13.2 million, up slightly from the 9 months of $11.5 million; and largely reflect the addition of property, plant and equipment. We continued to invest in the Good House facility, increasing our extraction expertise, and by enhancing our automation manufacturing capability. We recorded a net loss of $40 million compared to a net loss of $8 million last year. This year's net loss equates to a basic and fully diluted earnings per share of 23% compared to 7 -- sorry, $0.23 compared to $0.07 last year. At year-end, the company reviewed its assumptions regarding the carrying values of its goodwill and license arising from the acquisition of Good & Green; and took an impairment charge of $3.1 million and $2.4 million, respectfully, totaling $5.6 million in impairment charges. Including in the net income were other noncash items, including depreciation of $1.4 million and $1.6 million in stock-based compensation. During 2020, our cash usage was approximately $43.5 million, with approximately $41.4 million coming from continued operations and $2 million coming from discontinued operations. This can be broken down into 3 component parts. Cash used in ongoing operations was approximately $18.3 million. Cash used in continuing operations working capital balances was $12 million, and cash used in investing activities was $13.3 million. With the completion of our Morton facility build-out, we expect to have reduced property, plant and equipment investments as we operationalize 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 fiscal 2020, we had $9.3 million in cash and cash equivalents on hand. Subsequent to year-end, we announced a best efforts at $3 million private placement with Cormark Securities, and we intend to close that shortly. 48North remains in the development stage. And while we do generate revenue from the sale of our dried cannabis and related products, we are focusing on reducing the execution risk that comes with growing cannabis and manufacturing products at scale. I will now turn the call back to Charles for his closing remarks. -------------------------------------------------------------------------------- Charles Vennat, 48North Cannabis Corp. - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, David. If 2020 was about correcting mistakes from the past and building a springboard for the future, then 2021 will be about positioning 48North as the most beloved brand in the Canadian cannabis space. A beloved brand has outspoken fans. Their consumers act like brand ambassadors, and we are almost there. A beloved brand has consumers that will remain loyal. We must put ourselves in a position where we become the foundation of people's routines, and we are almost there. A beloved brand is woven into memory structures. When one connects our products with the good times, like cannabis does for so many, we can amplify these experiences by bringing people products that successfully forge these moments; and we are almost there. And finally, a beloved brand is built into people's lives. We must always be there when people want us, never out of stock, with a varied product portfolio and a consistent product quality. We need to be reliable, accessible and purchased often. Having the right price means we can literally always be in our consumer's corner, and we are almost there. Allow me to explain how we will finally get there. First, we must know our customers intimately. This is at the heart of building brands, and creating unique and targeted value propositions is a focus of what we do. Second, a commitment to building a world-class team. Attracting, motivating and retaining key talent is at the forefront of what we do. Number three, mastering our business fundamentals. We continue to work towards operational excellence, and we must shorten the company's cash conversion cycle and carefully monitor its working capital balances. This is essential to any company's success but particularly one that is growing as rapidly as 48North. Number four, we need to continue building a predictable manufacturing environment that can deliver on time and in full to support our growth and innovation plans. Fifth and perhaps most importantly, a sustained organic revenue growth plan that demonstrates a clear and achievable near-term pathway to profitability. This year, we will achieve these goals. And we will continue to update you on those 5 goals, which will be barometers as we continue to march towards profitability. 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 afternoon. Thank you for joining us, and have a great evening. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect.