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Edited Transcript of NRTH.V earnings conference call or presentation 26-Nov-19 1:30pm GMT

Q1 2020 48North Cannabis Corp Earnings Call

Dec 8, 2019 (Thomson StreetEvents) -- Edited Transcript of 48North Cannabis Corp earnings conference call or presentation Tuesday, November 26, 2019 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 Q1 2020 Fiscal Results Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, November 26, 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 First 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'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 our 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. First, Alison will highlight the company's achievements this quarter, and then I will provide a brief review of the 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, Allison.

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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 first quarter of 2020, 48North remains focused on delivering on its core foundation of protecting low-cost cultivation, building brands and developing consumer-focused cannabis products. On today's call, I will be providing an update on our first harvest at Good Farm, talking about lessons learned at the farm, our plans for next year and highlighting what this means for the company moving forward. In addition, I will highlight a number of achievements we made in the quarter and milestones subsequent to the quarter end.

First, let's start with Good Farm. Without question, outdoor cultivation is of critical importance to the future of the cannabis industry. At 48North, we know that the cannabis industry is no longer undersupplied. To that end, low-cost, high-quality, consistent and organic cannabis will be a critical ingredient to remaining competitive in an increasingly crowded cultivation marketplace. Further, as Cannabis 2.0 takes hold in Canada and the maturing Canadian cannabis consumer begins to demand next-generation cannabis products like vape, topicals and edibles, outdoor cultivation will be a prerequisite to success. It is just not possible to compete in this industry by using expensive indoor-grown or greenhouse-grown cannabis when developing next-generation cannabis products.

With that in mind, the metric of success when looking at the cultivation of cannabis is not simply supply volume, but rather production costs, quality and the consistency of product. And therefore, I am very pleased to announce today that 48North completed its first outdoor harvest at Good Farm and hit its production cost target. The total cash cost per gram of production at Good Farm was $0.25 a gram, which places 48North among the lowest-cost producers of legal cannabis in Canada.

At our first year at the farm, 48North harvested 12,000 kilos of dried cannabis. While we initially projected a higher final yield from the farm, we remain steadfast in our commitment to outdoor cultivation at Good Farm. In 2019, the company successfully cultivated enough cannabis at Good Farm to meet its initial 2019 projections, but total harvest volume was reduced due to significant delays in the availability of licensed drying space. 48North is committed to playing by the rules and adhering to Health Canada's regulatory framework and, therefore, was limited to drying the cannabis at Good Farm in the limited drying space we have licensed.

Health Canada plays an important role in ensuring that all LPs play by the same rules and operate in a manner that is in line with the regulations set out by the federal government. 48North prides itself on being a good actor that adheres to all regulations. While we were not successful in receiving all of the necessary licenses required by Health Canada in the time frame we needed, we do not blame Health Canada for this. We understand that the regulator is incredibly busy. They are not able to prioritize the needs of one LP over another and work diligently every day to streamline their processes to ensure faster response times. We look forward to continuing to work closely with Health Canada to ensure we are granted all of the necessary licenses that we need moving forward.

Looking ahead to 2020. 48North has been granted the necessary approvals from the local municipality to build a custom-built state-of-the-art drying facility located on the Good Farm, which will be able to dry our entire crop moving forward. The majority of the capital costs required to finish the facility have been spent. We intend on updating our stakeholders as we complete construction of the drying facility and are granted the necessary licenses.

With that in mind, the company remains on track to meet its previously announced supply agreements with provincial wholesalers in Alberta, Ontario and Québec. In addition, 48North is on track to meet its commitment to supply humble+fume with a significant surplus of biomass for the development of next-generation cannabis products such as vapes and topicals.

Today, 48North has commitments for approximately 11,000 kilos of its outdoor-grown cannabis with an average wholesale price of approximately $3.35 a gram. Today's financial results do not include revenue from the sale of cannabis grown at Good Farm as it is currently being processed and prepared for retail sale and extraction. The cannabis from Good Farm is expected to generate significant revenue for the company in upcoming quarters. We look forward to further optimizing our operations at Good Farm in 2020 by applying lessons learnt on the farm in 2019, including adding licensed drying capacity, the onboarding of additional experienced cultivation and operations expertise, prioritizing cultivars that performed well in 2019 and perfecting harvesting techniques.

As just mentioned, 48North has made significant changes to our senior operations team. These changes position the company to preserve the 2019 crop and to optimize 2020 yields. In 2019, the company made inroads in perfecting outdoor cultivation and now looks to the successful processing of its outdoor-grown product.

To that end, 48North is pleased to announce the completion of construction of Fume Labs, our large-scale CO2 and ethanol extraction facility operated in partnership with humble+fume at Good House. With the capacity to process over 30,000 kilos of biomass annually, Fume Labs will allow us to produce package and distribute in excess of 5 million concentrate vaporizers annually. While the company was not able to dry the full capacity at Good Farm due to licensed drying capacity, 48North remains committed to growing cannabis outdoors at scale.

Looking ahead to 2020, the company is well positioned to remain one of Canada's lowest-cost producers of cannabis, with a year head start on many in the industry. This quarter, 48North showed quarter-over-quarter revenue acceleration of $1.6 million, representing a 229% increase over fourth quarter 2019 revenues of $484,000. At the end of the quarter, 48North had $40 million of cash and cash equivalents on hand and remains well funded to execute on its business plans. In an industry where raising capital has become increasingly challenging, having sufficient working capital is of critical importance. Today, 48North has fully built out its cultivation facilities and extraction capacity.

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. Let's start with our U.S. expansion plans. As I mentioned in our last call, in August, 48North announced that it had acquired Quill, a manufacturer and developer of disposable controlled-dosage vape pens that currently has distribution in Oregon and Washington and near-term plans for rollout into other states. The acquisition allows 48North to make its first entrance into the U.S. market, while staying on-site with its TXSE listing. Quill is also launching a full spectrum, additive-free, hemp-based CBD disposable vape pen, which will allow 48North to conduct e-commerce and brick-and-mortar retail sales in all 50 states.

In addition, we have secured 1 billion milligrams of highly active, high-quality active CBD oil from Iverson Family Farms, based in Willamette Valley, Oregon through an industrial and production contract.

Since, the company announced that it acquired Sackville, a leading U.S.-based cannabis brand focused on design, forward cannabis accessories and CBD based products. In addition, the company also announced that it signed an exclusive licensing agreement with U.S.-based APCNA Holdings, Apothecanna, to bring its best-selling premium cannabis top U.S. brands to Canadian consumers. At 48North, we strongly believe that it's imperative to future success when and if the United States becomes a federally legal jurisdiction that the company has a robust, meaningful and strategic U.S. expansion plan.

We also have a number of exciting announcements to make with respect to our Canadian operations. The company recently announced the launch of its outdoor-focused dried flower brands: First Harvest and Trail Mix. First Harvest, 48North's seasonal high-quality outdoor grown cannabis, is expected to be available to retail sales in Winter 2020. Trail Mix, the company's affordable natural cannabis brand, is also expected to be available in Winter 2020. 48North expects that Trail Mix will be the lowest-cost legal cannabis available for Canadian consumers. In addition, I'm happy to announce that 48North products available in Ontario, Québec and Alberta have been consistently best-sellers.

Looking ahead, 48North has received notification from the provincial wholesalers that they will be selling our next-generation cannabis products, including the Avitas vapes, our Apothecanna topical line and Mother & Clone. In a dollar understanding, that 48North vape SKUs will represent over 10% of the Ontario vape market listings, which is projected to be as big as $600 million by 2021.

The 48North brand is beginning to take hold in the Canadian marketplace. Looking ahead, we remain laser-focused on being recognized as the most beloved, trusted and consistent cannabis brand in the country. We are well on our way to achieving this goal. Just last week, 48North was recognized at the Clio Cannabis Awards as the Cannabis Brand of the Year. Keep in mind the Clio Cannabis Awards are international and 48North was in competition with American cannabis brands who operate in a very different regulatory environment. We are well positioned to continue on this upward trajectory. With the product coming off our farms, our extraction lab ready to go, licensing agreements for best-in-class next-generation products and a brand with strong awareness in the Canadian marketplace, 48North is ready to achieve new heights and begin showing significant revenue and near-term profitability.

I will now turn it 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 September 30, 2019, were $1.595 million, up from Q4 revenues of $484,000, a 229% increase, and up from the comparative Q1 of last year of $1.271 million, representing a 25% increase. The revenue mix for the quarter was split evenly between LTE wholesale sales and sales to provincial regulators. This is consistent with our transition plan to focus on branded product sales in the adult cannabis marketplace.

Gross profit, before fair market adjustments, was $735,000 or 50% of net revenue. Q4 gross profit was negative $157,000 on revenues of $484,000. With Cannabis 2.0, we have increased our inventory levels in anticipation of new retail distribution options for 48North-branded cannabis accessories and products in 2020. As such, inventory at the end of Q1 increased from $4.7 million in June to $6.7 million in September, representing a $2 million increase.

Furthermore, our biological increase -- assets increased from $2.1 million in June to $10.7 million in September. At September 30, 2019, we had approximately $9.7 million relating to the outdoor grow at the Good Farm. As of today, the Good Farm has harvested approximately 12,000 kilograms of outdoor cannabis. However, there's still uncertainty as to the THC and the CBD levels of the harvested crop, the allocation between dry flower and extraction-grade cannabis and the selling price per gram as such. And given the lack of historical information for outdoor grow, the company has taken a conservative approach to the assumptions used for biological asset valuations of the outdoor grow at quarter end. Inventory expense, cost of sales and other cost of sales for the quarter was $735,000 and reflects the capitalization of production costs and the expensing of these costs as the cannabis is sold. With the increase in the biological asset values from the outdoor grow at quarter end, we recognized an unrealized fair market adjustment of $9.6 million. As the biological assets have a low-cost basis, we have also recorded a $1.5 million deferred income tax provision relating to the fair market value increase.

With the acquisition of Rare Industries in August 2019, we now have a U.S.-based company that uses the U.S. dollar as its functional currency. As part of the acquisition agreement, Rare has some contingent consideration based on meeting certain future revenue targets. As the number of shares issuable under the contingent consideration is fixed, changes to the underlying 48North share price will cause fluctuations in the balance sheet obligation, which in turn is recorded to the income statement on a quarterly basis. This quarter, we had a gain of $534,000. We recorded a net income of $2.2 million compared to a loss of $1 million in Q1 last year and a loss of $4.8 million for Q4. This quarter's net income equates to a basic and fully diluted earnings per share of $0.013. Included in the net income were noncash items, including depreciation of $340,000 and an additional $108,000 of depreciation that's included in the cost of sales and $806,000 in stock-based compensation totaling $1.255 million compared to $1.617 million in Q1 of last year.

During Q1 of 2020, our cash usage was approximately $12.4 million. This can be broken down into 3 component parts. Cash used in operations was $4.3 million, cash used in working capital balances was $3.8 million, and cash used in investing activities was $4.6 million, which includes the $1.5 million invested in the Friendly Stranger, $833,000 in cash as part of the Rare Industries acquisition and $2.4 million as far as plant, property and equipment acquisitions.

As part of the bought deal and financing in April 2019, we had articulated that we would be using the money to build out the Farm and Morton facility and look to acquisitions to move the business forward. We continue to monitor our capital resources to assess and manage the liquidity needed to fund our operations. And at the end of Q1 2020, we had $40 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 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. - CEO & Director [5]

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Thank you, David. Looking ahead, I'm confident that 48North is better prepared than ever to execute on our plan to become one of the most trusted cannabis brands in Canada, with sales contracts in place in 3 of Canada's largest provinces, low-cost cultivation from our farm, our robust plans for the legalization of next-generation cannabis products and a U.S. expansion plan, the company is well positioned for fiscal 2020. Most importantly, the company is fully funded to deliver on our business plans and expect to begin showing significant revenue largely from the harvest of Good Farm in upcoming quarters. Thank you for listening today. We would be happy to take any questions from analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your 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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In terms of just a question on wholesale pricing, are you expecting the outdoor harvest to sell for around the same price as the greenhouse harvest? Or are you seeing lower prices for outdoor cannabis?

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

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Thanks, Jenny. I appreciate your getting on the call and continuing to follow us as a company. I think we sort of see that the outdoor grow will really be predicated on extraction processes. So we think of that sort of going in. If you look at what we've got for commitments today, our outdoor grow of 11,000 kilograms to the provincial bodies really represents about $3.35 per gram in its form of what we've sort of contracted with them. So that would be, obviously, a little bit below what the indoor grow would be, and we sort of truly believe that the outdoor grow is likely, as we've said all along, better utilized towards the extraction process.

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

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Jenny, I'll just add that each province has different pricing and some are pricing the outdoor to be sold as flower at equivalent prices to greenhouse and indoor.

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Jenny Wang, Eight Capital, Research Division - Analyst [5]

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Got it. And I'm wondering in terms of the distribution agreements, is the Canopy agreement still in question? And kind of building on that, is it reasonable to assume that anything outside of the 11,000 committed kilograms will likely either be sold to other LPs or be extracted?

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David Hackett, 48North Cannabis Corp. - CFO [6]

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Yes. So, Jenny, the Canopy agreement is over. It sort of -- it ran its course till the end of October. We had actually sold some additional amounts to Tweed this quarter as well included in those numbers that were outside of the agreement. So we continue to make, sort of, LP to LP sales where we think it's effective and efficient, but we do believe the majority of the stuff will -- the indoor grow will be included for extraction. Keep in mind that we continue to run DelShen and it is our sort of top-shelf premium cannabis brand that will be used in baggable form and pre-rolls.

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Jenny Wang, Eight Capital, Research Division - Analyst [7]

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Understood. And in terms of -- just wondering in terms of the outdoor yield going forward, how much of an impact will the lack of licensed drying space have on your crop yield this year? And is 40,000 kilograms still a kind of the number that we should be referring to for 2020, or just any changes there?

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

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So there was a large percentage of the farm we did not harvest due to the lack of drying capacity. And also during harvest, we prioritized harvesting the best-quality product off of certain plants. To that end, we approximately -- sorry, the approximate figure is based on what we harvested versus what was left on the field so that we cultivated enough cannabis to meet our initial projections.

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

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Jenny, I think part of it is for us to go and look at our plan for 2020 and likely come back to the market with sort of our thoughts on that and sort of to relook at what that 40,000 kilograms might look like in the future. We don't know at this point in time.

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Jenny Wang, Eight Capital, Research Division - Analyst [10]

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Got it. And just last one for me. In terms of timing for the extraction, when are you expecting to begin extracting cannabis from Fume Lab? And that's it for me.

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

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So we are expecting that to happen pretty soon, actually. We are fully built out there and just waiting for the appropriate licensing.

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Operator [12]

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(Operator Instructions) We do have a question from the line of [Tony Roux] with Mainstream Finance.

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Unidentified Analyst, [13]

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Congratulations on a good, robust quarter and with a lot of cash at hand. That makes us so happy. So what is the quality, David, at the 11,000 outdoor harvest that you have in that is dry? And what kind of quality that you think? Can you utilize everything that you've got?

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David Hackett, 48North Cannabis Corp. - CFO [14]

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Thanks, Tony, and nice to hear you -- from you again. Yes, our expectation is that we will be able to utilize all of that 11,000 towards the provincial obligations that we have.

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Unidentified Analyst, [15]

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Excellent. So that would be slowly being sold off? For next year, the revenue will be kind of -- next year this quarter, you didn't include any of those -- any of that?

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David Hackett, 48North Cannabis Corp. - CFO [16]

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Yes. That's correct. All the sales that we made this quarter were from our indoor grow.

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Unidentified Analyst, [17]

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Great. Okay. That's -- good job. Yes. Okay. One other question is, you have a contract with a U.S. company in Oregon, I believe, that you can get CBD from them. Do you plan to utilize that revenue if you start running out of the production from yourself? Or are you still planning to use them?

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

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Yes. So Tony, that really comes from our acquisition of Rare Industries, and so they're largely focused on CBD products. And so we will utilize the Iverson Farm 1 billion milligrams of CBD to help augment their sales. And with the ability of licensing or selling across the entire U.S., we do believe that, that will be part of our 2020 revenue stream.

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Operator [19]

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

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [20]

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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've 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 [21]

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