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Edited Transcript of NRTH.V earnings conference call or presentation 1-Oct-19 12:30pm GMT

Q4 2019 48North Cannabis Corp Earnings Call

Oct 2, 2019 (Thomson StreetEvents) -- Edited Transcript of 48North Cannabis Corp earnings conference call or presentation Tuesday, October 1, 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. - 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. Fiscal Year End 2019 Financial Results Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, October 1, 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 48North Cannabis Corp.'s Fiscal 2019 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 tradenames of 48North Cannabis Corp. All other companies and products mentioned herein may be trademarks or registered trademarks of their respective holders.

Joining me on today's call is Alison Gordon, Chief Executive Officer of 48North.

First, Alison will highlight the company's achievements this year, and then I will provide a brief overview of the year's financial results.

After the presentations are complete, we will be happy to open up the call for -- to analysts for questions. Over to you, Alison.

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

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Good morning, everyone, and welcome again. Fiscal 2019 was a foundational year for 48North, beginning with receiving our sales license from Health Canada in June 2019. The year has been focused on establishing 48North as a vertically integrated licensed producer focused on low-cost cultivation, brand and next-generation cannabis products.

Since June 2018, the company has made significant inroads in accomplishing this task. I can say with confidence that while fiscal 2019 was intended on preparing the organization for future success, fiscal 2020 will be when our company starts to deliver on this promise.

I would like to spend a few minutes this morning highlighting a collection of the major accomplishments that the company has achieved this year. Following, I will provide an overview of 48North's plans for the year ahead. We started the year with only one licensed facility, DelShen, our 40,000 square-foot, state-of-the-art indoor cultivation facility in Kirkland Lake. Licensed to cultivate and sell cannabis as well as produce and extract cannabis oil.

However, in early 2018, we knew at the company that DelShen alone could not yield enough cannabis to fulfill the company's commitment to be a leading recreational cannabis brand for the Canadian market.

Therefore, 48North acquired Good & Green, a second licensed producer with a 2019 production footprint expected to make 48North one of the largest and lowest cost producers of dry cannabis and cannabis oil as well as a leader in next-generation cannabis products.

With the acquisition of Good & Green, 48North acquired an unlicensed 100-acre outdoor organic farm, which when licensed in May 2019, would become one of the largest cultivation facilities in the country, where the company could expect to cultivate cannabis at the lowest cost per gram in the country. With our laser-focus on the development of next-generation cannabis products, the 100-acre farm was to be 48North's ticket for the production low-cost, high-quality next-generation cannabis products as the industry prepares for Cannabis 2.0.

Moreover, the acquisition provided 48North with the Good House, a 46,000 square-foot state-of-the-art indoor processing and propagation facility located on 5 acres, 10 minutes away from the 100-acre farm.

Since the acquisition closed, Good House has been retrofitted to both process, manufacture and package cannabis products. This includes conducting CO2 extraction, producing full spectrum oil, distillates and isolates, all critical ingredients in the development of next-generation cannabis products.

Prior to licensing of the Good Farm, 48North showed quarter-over-quarter revenue acceleration and profitability largely as a result of the company's wholesale supply agreement with Canopy Growth Corporation among others.

In addition, our company closed a $3 million non-brokered private placement with Canopy Growth Corp. and a $7 million non-brokered private placement from a leading U.S.-based private investment fund.

Building on this momentum, the company raised an additional $28 million in a bought deal. As a result, the company is well capitalized to execute on our business plan.

In May, the company received one of cannabis first outdoor cultivation licenses from Health Canada, catapulting us into an expected yield significantly.

48North remains one of the few licensed producers with an outdoor cultivation facility. Since June, the company successfully planted over 0.25 million cannabis plants at the Good Farm and is currently in the process of harvesting our first outdoor crop at what is expected to be the lowest cost per gram of any cannabis in the country. While 90% of what is harvested at Good Farm is earmarked for extraction, the rest will be sold as dry flower into the recreational Canadian cannabis market. 48North has presold approximately 5,000 kilos of this flower to the provinces of Ontario, Québec and Alberta. The company expects to show the significant revenue from the sale in subsequent quarters.

As alluded to, 48North has supply agreements with the 3 largest provincial wholesalers in the country and has been successfully selling our dry flower [production] into these markets since summer 2019.

48North's products have been well received by consumers and the company SKUs are frequently the best-selling products at the Ontario cannabis store and SQDC.

Looking ahead, the company is 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.

This year, O’Cannabiz recognized 48North as the cannabis brand of the year. We are well positioned to continue on this upward trajectory, with the product coming off the farm, 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 nearer-term profitability.

Before I hand the microphone to David, I would like to quickly highlight 48North U.S. expansion plan. In August, 48North announced that it has acquired Quill, a manufacturer and developer of disposable, controlled-dosage vape pens that currently has distribution in Oregon and Washington and near-term plans to roll out its products in Nevada and California. The acquisition allows 48North to make its first entrance into the U.S. market, while staying onsite with its TSXV 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, the company has secured 1 billion milligrams of highly active -- of high-quality active CBD oil from Iverson Family Farms Inc. based in Willamette Valley, Oregon, through an industrial hemp production contract. As a company, we strongly believe that it is imperative to future success when and if the United States becomes a federally legal jurisdiction that the company have a robust, meaningful and strategic U.S. expansion plan. The Quill acquisition is just the start of this journey. Looking ahead to 2020, the company will continue to further establish its presence and brand in the United States.

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 year ending June 30, 2019, were $4,832,150, marking 48North's first full year of revenue. During the first 2 quarters of fiscal 2019, we had focused on deriving revenues from the wholesale of dried cannabis to other licensed producers. We believe that for the short term, that sales to other licensed producers provided an important stream of revenue at good margins. With Cannabis 2.0 fast approaching, we have started to increase our inventory in anticipation of new retail distribution options for 48North branded cannabis, accessories and products.

As such, inventory increased from $2.4 million at March 31, 2019, to $4.7 million at June 30, 2019.

Furthermore, our biological assets increased from $1.869 million in March to $2.125 million in June, representing a $250,000 increase. During the first week -- sorry, during the week of June 21, we were able to get the seeds into 1 inch by 1 inch cardboard cups for germination. During the week of July 12, the germinated seed links were planted into the ground at the Good Farm. From an accounting point of view, we recognized increasing value of the cannabis plants at various stages of growth. At June 30, our year-end, the seed links were just over a week old and thus of modest value. With indoor growth, we can control the lighting, moisture levels, CO2 levels and other inputs to grow top-shelf cannabis. While legally growing outdoors at scale is new in Canada, we rely on mother nature to provide the growing conditions for the cannabis plants.

As this is the first year of outdoor growth, we have no historical data to rely on with regards to yields, harvest rates, et cetera. As such, our assumptions for in valuing the biological assets at June 30 for the outdoor grow are conservative. We are cautiously optimistic that the farm harvest will achieve sufficient yield to satisfy our commitments to the provincial stores and to revive quality inputs for extraction purposes.

We look forward to providing updates as to how the outdoor harvest is progressing over the coming weeks and months. But at this point in time, we are not providing market guidance as to the yield rates and production levels.

We recorded a net comprehensive loss of $8.1 million, an improvement over the same period last year, which recorded a net loss of $12.4 million. This year's loss equates to a basic and fully dilutive loss per share of $0.072, down from $0.21 in fiscal -- per share in fiscal 2018. Included in the loss were some noncash items: Depreciation of $1.4 million, with $1.1 million on the face of the income statement and another $252,000 included in inventory expense to cost of sales before market -- fair market adjustment, and $5.7 million in stock-based compensation, totaling $7.1 million compared to $2.3 million in fiscal 2018.

We continue to monitor our capital resources to assess and manage the liquidity needs to fund our operations. And at the end of fiscal 2019, we had $52.7 million of cash on hand.

During the year, we completed a total of $52 million in financing, starting with a $10 million equity investment with Canopy and a U.S.-based investment fund. In April, we completed a $28.7 million bought deal. And in May, we accelerated certain awards to bring in an additional $13.6 million. With this additional cash, we believe that we are well positioned to execute our business plan over the coming 12 months. We continue to make substantial investments in the Good Farm with respect to the outdoor grow, and the Good House as we move towards building out extraction facilities and getting ready for us to manufacturing processes that will be needed for Cannabis 2.0.

48North remains in the development stage and while we do generate revenue from the sale of our dry 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 am 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 plan 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 its business plan and expects to begin showing significant revenue, largely from the harvest of the Good Farm in upcoming quarters.

Thank you for listening today, and 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) And your first question comes from the line of Jenny Wang with Eight Capital.

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

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Congratulations on the quarter, Alison, David. Just first question in terms of your outdoor harvest -- in terms of timing and maybe the size of the plants, are there any color that you can give in terms of -- is it consistent with your previous expectations so far? I know you mentioned you can't give a whole lot of detail there, but anything you can give us will be helpful.

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

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Yes. So we can't give you a ton of color right now. In the coming weeks, we will be able -- we will be press releasing as we take down the harvest. But we are quite confident that we will meet all of our supply agreements that we have signed with the provinces as well as above and beyond that.

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

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And I'm wondering in terms of the quarter, you built up a lot of inventory, $4.7 million. Are you intending to -- is the strategy for future quarters continuously develop inventory? Or are you intending to wholesale to other LPs in future quarters now that you have enough capacity with your outdoor grow?

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

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Thanks, Jenny. I think there's a transition that's sort of going on. We had spent the first 2 quarters really selling to other LPs as we hadn't entered the retail market. I think you saw that as we ended June, we had started to ship product to the SQDC and then in sort of August, September, we have also layered in the OSC and the Alberta provincial regimes. So I think we're starting to see that come in and you'll start to see that in Q1 of 2020 increased sales to those regulatory bodies as we wait for Cannabis 2.0. So I think there's going to be a sort of a little bit of an increase in inventory as we go towards getting prepared for Cannabis 2.0, moderated by increased sales to the retail as we sell packaged cannabis, prerolled cannabis, et cetera.

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

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Got it. And just last one for me. Could you talk a little bit about your U.S. strategy, any other assets you're potentially looking there? And I guess the second question would be in terms of Quill, with the vaping kind of a topical conversation so far in the U.S. and Canada, are there any impacts to your U.S. strategy or could you elaborate a little bit on that, please?

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [7]

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Yes. So as we said in our -- in the call, we are quite interested in U.S. expansion. So I think that answers your question as the best of our ability to answer it. As you know, I have worked in the U.S. cannabis industry over the year. So we have a nice advantage there with relationships and an understanding of the market that maybe other licensed producers in Canada don't have. With regards to the vape situation, I mean, we are very confident. Quill is an all-natural, additive-free, no fillers, 100% hemp or 100% cannabis, however, you want to articulate it, vape pen. It's actually to our knowledge one of the first or the first to our knowledge pen -- CBD-based pens because it's actually quite hard to make a vape pen Farm Bill compliant in the U.S. without using additives. So we are really excited about that product and we are confident that the U.S. and Canadian governments will understand that some of these challenges with vape are happening because of unregulated black market vape products. And we're confident that legal, regulated, additive-free, all-natural vape will continue to be able to be sold in these markets.

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Operator [8]

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(Operator Instructions) And there are no further question at this time. I turn the call back over to our presenters.

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Alison Gordon, 48North Cannabis Corp. - CEO & Director [9]

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Well, thank you all for joining us today, and we look forward to speaking to you next time. Have a great day, everybody.

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Operator [10]

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