Here is 48 North’s Earnings Release.

What I said last Q:

MDA has no QoQ comparison other than Sales $4.2 million (which is different than the $4.5 million in presser) and Net Income negative $18 million for the Q.

48 North did not provide any QoQ and they had Discontinued Operations, which moves sales, GM and Opex around, as such I am not going to be able to do too much analysis on this Q given lack of MDA disclosure. 

But the Q can be summed up in a quick statement: Gross Margin without Impairments was -$2.5 million.  With impairments it is -$5.5 million.

And …. Material Uncertainty Related to Going Concern:

• We draw attention to Note 2 in the consolidated financial statements, which indicates that the Company incurred a comprehensive loss of $40,273,758 and negative cash flows from operations of $30,367,470 during the year ended June 30, 2019 and, as of that date, the Company had a deficit in the amount of $74,625,813. As stated in Note 2, these events or conditions, along with other matters as set forth in Note 2, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

This Q:

MDA is USELESS.  No QoQ.

• A good sales increase of +86% or $2.9 million
• Eeek… GM negative with no impairment at -25%
• Cash down by $7 million QoQ (-$38 million YoY) to $2.2 million.  They raised post Q $6.7 million, of which $3.45 million was equity and $3.25 was secured debt.

Overview

Income Statement Drivers and Implied Breakeven – Trend

Sales Table:

Sales increased $2.9 million +85% to $6.3 million.  No indication if it 1.0 or 2.0 products drove the increase.

NRTH started providing a per province breakdown, inclusive of excise tax, in their Q4 F2020 notes to financials.  This is the first stand alone Q of same. QoQ will prove interesting moving forward.  But it is quite striking that they sold more in Q1 F2021 in Ontario than all of last year.  I am not sure when they were listed with OCS.  The Q1 bump in Ontario versus full year is $1.4 million, a good chunk of this Q’s increases no doubt.

BUT beware of large sales increase.  Need to see sell through.  Good news is they had a +49% increase last Q.

Income Statement Drivers and Implied Breakeven – Peers

North is second to last in this peer base, with Aleafia pulling up the rear.

Gross Margin: Trend and Peers

GM with NO impairments is -$1.6 million, versus -$5.5 million with impairments of $3 million last Q.  Someone will have to tell me how a company that grew outdoors in C2019 and has no impairments has a negative gross margin.   They provide no color. In fact, they do not mention “Gross Margin” in their presser at all. They must have missed it… /s

GM is -25% for those keeping score, an improvement from last Q GM of -162% which had impairments of $3 million.  Even without impairments last Q GM was negative $2.5 million or -73%.

IFRS voodoo is minimal.  And by looking at their notes they have really reduced any FVI, which IMO is a good strategy.

Gross Margin: Peers – larger group

Hard to believe with a-25% margin they still are ahead of 3 LPs.

SGA and SBC- Trend

NOTE: I have moved Impairments to Other Income/Expenses to maintain peer comparability.

What I said last Q:

As noted in preamble, with no disclosure of SGA for the Q and the Discontinued Operations I could not calculate a true Q of SGA.  On aggregate for the Q using a 9-month YTD back out SGA is negative for the Q, which is not helpful since last Q it was $6.6 million or 3x sales. 

This Q:

Selling expense was $0.2 million or 3% of sales.  Not much in here.

G&A expense was $1.4 million or 23% of sales.  G&A is not really comparable to last year as they discontinued and divested operations.

SBC is minimal at $0.3 million or 4% of sales.

Depreciation of $0.2 million rounds out Opex.

Total Opex was $2.2 million.  Which is pretty lean, but with a negative GM.  Opex was running $5 million a Q in F2020 with the discontinued ops.

SGA and SBC- Peer

Aggregate SGA and SBC is peer leading.

Implied Breakeven Net Operating Profit divided by Current Q Sales

Given the negative GM and the lack of a standalone disclosure for the Q, I could not calculate this breakeven.

Other expenses were negative $8.9 million last Q (impairments of discontinued ops) and $nil this Q.

Net Income was negative $3 million for the Q, versus negative $18 million last Q.   

Implied Breakeven Adj EBITDA divided by Current Q Sales

Given the negative GM and the lack of a standalone disclosure for the Q, I could not calculate this breakeven.

EBITDA Trend and Peer:

What I said last Q:

EBITDA for the Q is likely incorrect at -$2.4 million as I have not included any SGA cash expenses in the calculation. So, it should be a higher negative figure. My guess is EBITDA is worse this Q than last Q at -$6 million.

This Q:

If you could trust last Q (don’t) Adj EBITDA improved to -$3.2 million.  If they could achieve a GM of 25% they would need to double sales to get to +EBITDA at current cash Opex.

Cash Position vs Debt Service:

Cash used to be North’s strongest metric. Look at that annual decline QoQ.  Down $30 million YoY and -$7 million this Q. 

They have rasied $6.5 million after Q end.  That won’t mean much unless they can generate GM. 

They also now have secured debt.  That will leave them with less flexibility going forward.

“Gas in the Tank”

Inventory is in good balance with sales.  With outdoor harvest hitting next Q fins it will be interesting to see what they can do with it.

They do have the selling price estimated at $0.33/gram a far cry from last years $2.50/gram.  This is from their presser:

• Last year, a majority of Good:Farm cannabis was extracted into distillate. This year’s crop will serve a broader range of uses, including dried flower, full-spectrum oils, and concentrate products. The Company expects products from this year’s harvest to begin showing up on shelves beginning in December 2020.

Think of it this way last year to generate $2.5 million in revenue they needed to sell 1,000 KGs at $2.50/gram to achieve it.  This year at $0.33/gram  they need to sell 7,576 KGs to achieve the same revenue.  The Canadian market has doubled YOY but not seven times.

 What I said last Q:

Good and Green gets impaired, Inventory gets impaired.

C-Suite does not care enough about shareholders to provide any meaningful disclosure about the Q but does trumpet a guidance of +70% QoQ sales increase for the next Q.   Maybe next Q they can show more than $1 million in GM, which they have not accomplished since Dec 31, 2018 Q when they wholesaled to CGC to help CGC stock the shelves for legalization.

As I said last Q that SGA was grotesque at $6.6 million, it would have been nice for some narrative around this metric. 

With the lack of disclosure, I would consider 48 North not investable.

This Q:

PLEASE TELL ME ABOUT YOUR GROSS MARGIN!  ANYTHING!

Sales mean nothing without GM.   The Opex is nice and low and mean nothing without GM.

They have enough cash for 6-9 months. 

With the lack of disclosure, I would consider 48 North not investable.

GoBlue

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in NRTH and will not start one in the next five days.