Here is 48 North’s Earnings Release.

What I said last 2 Q:

• An 11 page MDA! A new record.  No QoQ comparisons. They can do better.  MUCH better.

• Same, but 13 pages in MDA. 

Many concerning things in the Q.  But it would have been nice to see if there was any wholesale in the revenue numbers from Outdoor grow. 

This 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.

Overview

Income Statement Drivers and Implied Breakeven – Trend

Sales increased $1.1 million +49% to $3.3 million.  No indication if that was wholesale or Adult Rec.  No indication if it 1.0 or 2.0 products drove the increase.  Excise tax as % of Gross Sales increased which would suggest more Adult Rec in the Q.

Income Statement Drivers and Implied Breakeven – Peers

North is second to last in this peer base, inching past Harvest One.

Gross Margin: Trend and Peers

GM without impairments is -$2.5 million and with inventory impairments of $3 million it drops to -$5.5 million. Impairments are sprinkled throughout inventory segments.  In the notes to financials under Inventory they show $642K in impairments for the year, whereas Income Statement shows $3 million. Odd.

GM is -162% for those keeping score.

FVI on inventory sold for the Q (via a 9 month back out) shows a positive FVI figure, meaning they didn’t sell the inventory for as much as they booked it for.  They seem to have sold inventory this past Q for $4.9 million less than booked inventory value. Either that or they had errors in first few Q’s and they are truing it up.

Unrealized Gain on Bios (via a 9 month back out) was positive $10 million.  This is usually a negative number.  I would guess they revalued their inventory and marked down the GoB.

Gross Margin: Peers – larger group

And they move into the basement with the others in the peer group.

SGA and SBC- Trend

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

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. 

SBC is minimal.

SGA and SBC- Peer

As per Note in the chart…. I could not calculate SGA for the Q.

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.

After $4.1 million was kissed goodbye to Rare and Sackville G/I last Q (the Discontinued Operations), this Q saw Good and Green written down by $5.5 million.   Another $1.4 million in G/I was also impaired, as was $0.6 million in construction in process.

Net Income was negative $18 million for the Q, versus negative $17 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 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.

Cash Position vs Debt Service:

Cash used to be North’s strongest metric.   It has bled down each Q this fiscal and decreased $8.5 million for the Q to $9.2 million.  They have no material debt to service.  They should get some funds incoming if they cash out on Friendly Stranger with the announcemnet today of Fire and Flower purchasing them in an all share transaction.

“Gas in the Tank”

FG decreased a touch.  Inventory is more than ample to support sales level with 2.8 Q’s on hand. 

 What I said last Q:

Two acquisitions do not last the year. Outdoor grow written down and it is becoming doubtful they can capitalize in any meaningful way on the outdoor harvest.  Cash surplus dwindling.   They might not make it to the next outdoor harvest if they do not shore this thing up.

The SGA expense is grotesque. 

This 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.

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.