Here is 48 North’s Earnings Release. Note: Gross Margin has been the most important element in past two Q’s, yet they do not mention it in presser.

What I said last 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.

This Q:

They restated Q1 F2021 by reducing net sales $690k. So, last Q net sales increased 65% and not 86%.  Here is restatement from presser:

• The Company announces that concurrent with the filing of the second quarter 2021 condensed interim financial statements, the condensed interim financial statements for the three-months ended September 30, 2020 have been re-filed. The Company determined that the gross amount of certain revenues were recognized rather than the net amount. As a result, the Company has reduced net revenues by $690,017 and increased accounts payable and accrued liabilities by the same amount. The Company believes that these changes do not impact the Company’s operations or financial position.

What is odd is that they indicate Gross Amount rather than Net Amount (Gross less Excise) but $275k of the change is from sales to other LP’s that have no excise tax.  So, the explanation does not hold on 24% of the restatement.

MDA is USELESS.  No QoQ.

Overview

Income Statement Drivers and Implied Breakeven – Trend

Sales Table:

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

This Q:

Sales increased $0.07 million +1% to $6.3 million.   Quebec’s Gross Sales grew +54% while Ontario’s grew +20%, this was largely offset by BC decreasing $0.9 million or -67%.

Keep an eye to see if the sell through start constricting next 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 in basement for third straight Q.

GM was -$2.5 million with a $1.6 million impairment to inventory.  With NO impairments GM is -$0.9 million, versus -$2.3 million with no impairments.  Progress??

Someone will have to tell me how a company that grew outdoors in C2019 and C2020 has a negative gross margin net of impairments.   (Said last Q but bears repeating) 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 -42% for those keeping score, a slide from last Q GM of -40%.  Without impairments GM is -16%.

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 -42% margin they still are ahead of 2 LPs.

SGA and SBC- Trend

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

Selling expense was $0.8 million or 13% of sales, increases from $0.2 million and 4% last Q, respectively.

G&A expense was $1.7 million or 27% of sales, increases from $1.4 million and 25% last Q, respectively.

No schedule is provided nor is there QoQ narrative.

SBC is minimal at $0.3 million or 5% of sales. No meaningful change QoQ.

Depreciation of $0.4 million rounds out Opex. No meaningful change QoQ.

Total Opex was $3.1 million up $0.9 million QoQ.   Lean but not so much when you have a negative GM.

SGA and SBC- Peer

Aggregate SGA and SBC is second best behind FIRE in this peer group.

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 $0.7 last Q (impairments of PPE $0.6 million and unrealized gain on investments) and $nil last Q.

Net Income was negative $7 million for the Q, versus negative $4 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:

EBITDA improved to -$3 million from -$3.9 million.  The higher non impaired GM offset by increased cash OPEX is the reason. 

Cash Position vs Debt Service:

Cash used to be North’s strongest metric. Look at that annual decline QoQ.  Down $28 million YoY and up $2 million this Q despite +$6.7 million in equity and secured debt.  They are running out of rope.

“Gas in the Tank”

Inventory is in good balance with sales with 2x sales in inventory.  With outdoor harvest hitting next Q fins it will be interesting to see what they can do with it.  FG increased $0.9 million to $2.0 million.  Might be light to support sales depending on conversion of WIP.

This is from their Q1F2021 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.

If it made it to the shelves in December, it did not help GM. Let’s watch next Q and see if the outdoor can boost GM.

 What I said last 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.

This Q:

AGAIN:  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 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.