Avant Brands Inc.
Q2 2021 Earnings Call Transcript

Published: 14 Jul 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. Second Quarter 2021 Results Conference Call. . I would now like to turn the conference over to Mr. Norton Singhavon, CEO of Avant Brands Inc. Please go ahead, Mr. Singhavon.

[Norton Singhavon:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today. I wish to remind everyone that some statements made on today's call are forward-looking in nature and, therefore, subject to certain risks and uncertainties, which are all outlined in detail in our regulatory filings, which may be found on SEDAR. For the remainder of this call and going forward, we will refer to the company as Avant Brands or Avant. You can find our new website at www.avantbrands.ca.

[Kendra Blackford:]

Thank you, Norton, and thank you to everyone who has joined our first earnings call for the second quarter ended May 31, 2021. As a reminder, I may refer to certain financial performance measures that are not defined by and do not have a standardized meaning under International Financial Reporting Standards, known as IFRS. These non-IFRS financial performance measures are defined within the company's MD&A, which can be found on sedar.com. The company posted gross revenue of $2.9 million in Q2 2021 compared to $2.2 million in the previous Q1 2021, representing an increase of 30%. For the prior year Q2 2020, revenue increased 93% from $1.5 million. Sales by volume in Q2 2021 was 394 kilograms compared to 342 kilograms in the previous Q1 of 2021, representing a 15% increase; and for the prior year Q2 2020, 183 kilograms, representing an increase of 115%. The year-over-year increase in revenues is due to the company accessing additional provincial markets as well as increasing the number of SKUs available. Additionally, 92% of total sales during Q2 2021 were from recreational cannabis sales into the provincial supply chain and through the GreenTec Medical Cannabis e-commerce website, which was launched earlier this year. In the previous Q1 2021 and recreational cannabis sales represented 82% of total sales and 83% of total sales in the prior year Q2 2020. Cost of sales increased to $1.5 million in Q2 2021 compared to $1.2 million in Q1 2021 and $373,000 in Q2 2020. This increase is due to a greater percentage of sales into the recreational supply chain, which incurred increased packaging and labor costs. Additionally, during Q2 2021, an impairment expense of $213,000 was recorded in relation to stale dated inventory. Gross margin, before fair value adjustments, was $961,000 or 39% of net revenue in Q2 2021 compared to $811,000 or 41% of net revenue in Q1 2021 and $873,000 or 70% of net revenue in Q2 2020. The decrease in gross margin over the prior year comparative quarter relates to product mixture as Q2 2020 sales were heavily weighted on BLK MKT, which has a higher average selling price than Tenzo. Additionally, there were minor price reductions on our SKUs in Q1 2021. As we look ahead, we plan to maximize our annualized gross margin per square foot as we believe this metric is crucial for us to internally measure our performance. We can expect our costs to decrease as we continue to maximize our annualized gross margin per square foot and streamline operations.

[Norton Singhavon:]

Thank you, Kendra. Before opening up for questions, I'll spend a moment reviewing our outlook and leaving you guys with a few takeaways. The growth trajectories we saw in Q2 2021 are continuing into Q3. We are in a position where we cannot keep up with demand and are eagerly waiting for a license at 3PL. We have now entered into a steady state of provincial listings and orders where we know what we will sell, in what formats, how quickly it will sell and what price point. Furthermore, we have our cultivars optimized now, so our harvest will be just as consistent as our forecasted demand. So in closing, I want to leave you with 3 key takeaways about our company. First, our strategy of focusing on the premium cannabis category is proving to be a winning strategy as we focus on consumers first. Our market share numbers continue to grow. Our unit pricing is higher, although you may see periodic and likely temporary price trimming to defend our leading market share position or clearing stale dated inventory from nonperforming test crops. And our brands and cultivars are broadly recognized as some of the best in this industry. Secondly, our international export strategy is taking shape, in fact, accelerating, with Israel, our first export market. We believe that export will become more of a significant component of our overall revenue share. We will continue to select international markets where we believe our products will attain superior short-term to medium-term returns. What I like about the Israel deal the most is that they have certain THC requirements. For example, they have a max THC threshold, which actually forms a perfect synergy with BLK MKT. For those of you that aren't aware, BLK MKT, we have a minimum THC threshold, and the Israel deal actually requires we follow from that threshold. So what this means is that for harvests that do not meet the threshold for BLK MKT, we would export to Israel versus selling the product bulk wholesale to a competitor that will put it right back in the provincial supply chains. Finally, our graduation to the TSX main board is a great testament to the development of our company. We may be maturing, but we believe that our best growth remains in front of us as we continue to innovate and develop additional markets, both domestic and international, while we await 3PL to get licensed. You may also have noticed we recently filed a base shelf prospectus for up to $50 million. I want to quickly touch on this. Our intention was to have this filed in the event that market conditions became favorable, concurrent with any potential M&A or investment opportunities. At this point, we currently do not have an immediate need to raise capital. We reported a cash balance of $17.6 million with no debt. But as you all know, this industry moves very quickly, so we want to be in a position and ready to capitalize should an opportunity arise.

[Operator:]

. The first question comes from Graeme Kreindler from Eight Capital.

[Graeme Kreindler:]

Congratulations on the quarter and the first call here. Norton, I wanted to follow up on comments you made prior about the positioning of the brand and product portfolio that you're not the most expensive product on the market right now and you don't necessarily have to be. I was just wondering, have you considered the potential to possibly increase the price and see some benefits there on the gross margin? Could you take us through what that decision looks like and how that relates to the overall brand proposition and the gross margin element as well?

[Norton Singhavon:]

Yes. So I think BLK MKT, where it's currently priced, is very competitive. We don't want to be out there like, I'd say, Decibel or Qwest. But keep in mind that we do have a brand that we're about to launch called Cognoscente. That is going to be our -- I guess we call it ultra-premium brand. So when that brand launches, it will likely be priced higher than BLK MKT.

[Graeme Kreindler:]

Okay. Understood. Then just a bit of a follow-up there. There's been a lot of discussion in terms of the growth at retail, number of retail locations, and that's had a positive effect in growing the overall adult-use market in Canada. I'm wondering, given you have a differentiated brand or end product portfolio and delivering on the premium side of things and the quality side of things, can you give us a bit more detail about what the core consumers like for the company's products? Are you getting newer aspirational customers? There's a lot of heavier illicit market users that are bridging into the legal market through your products. What's that look like across the various offerings?

[Norton Singhavon:]

Yes. So from the information that we have, BLK MKT is really a transitional brand for a lot of consumers that are currently consuming from the illicit or unregulated market. And BLK MKT seems to be the most commonly, I guess, first legal purchase in for them. That's not to say that that's our only consumer. But I would say the bulk of the BLK MKT consumers are the ones that have consumed in legacy. They want the high THC. They want gas. They want nose. They're very particular, the connoisseurs. Whereas Tenzo's a little bit more -- I don't want to say generic. But Tenzo, THC limits are lower than BLK MKT. Clearly, the marketing and branding is targeting a different consumer. Tenzo might be a little bit more of a kind of for the masses whereas BLK MKT's for the refined connoisseur.

[Graeme Kreindler:]

Okay. Understood. Then my last question here. Just in terms of the capital position as of today, can you walk us through the sources and uses of capital over the next 12 months. You've got a good cash balance there, just wondering how much that gets reinvested back into the business here and how much is retained for optionality, for other initiatives.

[Norton Singhavon:]

Yes. So from our perspective, we've allocated, I think, $1.5 million or so for the operations with 3PL. Other than that, I mean we're debt-free. We're not -- we don't have any sort of CapEx needs. One of the things we might consider is increasing -- sorry, upgrading our pre-roll machine. Our pre-roll machine cannot keep up with the demand. Actually, we have to outsource some of our pre-rolls now. So I think that's something that we want to look at. And one thing you'll find about us is that we do things in a very methodical approach. With pre-rolls, we actually first outsource it. In the meantime -- before that was complete, we realized how much demand there was. So we bought our own machine. And once we set that machine, we realized that wasn't enough for the demand. Now one might argue that you should have just went big from the get-go. But I don't agree with that approach. So I think we'll be operating with fewer machines. But other than that, if the demand is there, we might look at expansion. If opportunities arise, we might look at M&A. But I think, for the meantime, there's no immediate need to go and spend that capital and really just focus on operating 3PL and getting back to licensing.

[Operator:]

. The next question comes from John Chu of Desjardins Capital Markets.

[John Chu:]

So my first question is -- maybe I'm nitpicking a little bit here. I mean I view your products, the BLK MKT ones, superpremium. I kind of view anything over $14 a gram as superpremium. And so -- but high-end premium nonetheless, I guess, however you want to define that. So I guess with your products, the BLK MKT ones specifically, being in that category, how has the pandemic affected your sales? Because from my understanding, generally, for the higher-end products, consumers generally want to talk to budtenders -- especially in a new market that is cannabis, they want to talk to a budtender to really get a better understanding of these higher-end products. And so about the store closures and the store restrictions and whatnot, curbside pickup, that we've had in Ontario especially, can you kind of guesstimate the impact that it may have had to the BLK MKT sales in particular?

[Norton Singhavon:]

Yes. So I think a little bit of an interesting scenario that's happened to us is when the pandemic first hit, stores were forced to close in Ontario but not B.C. And we were actually predominantly in B.C. at that time. So we weren't really affected, call it, last year when the shutdowns first happened. Moving into Ontario, obviously, it's hard for us to gauge because we weren't in Ontario, I guess, in a meaningful way before the pandemic hit. So all we can have to compare to is basically the entire pandemic. But Ontario is our biggest market by far. We're actually really impressed and really happy with the success we're getting in Ontario. So yes, it hasn't really affected us in any way, shape or form.

[John Chu:]

Okay. And so then I wanted to get a better handle on just -- you talked a little bit on pricing pressure you had and maybe just talking overall about the competitive landscape, really more on the premium side. You've heard several LPs looking to kind of make a pivot, Aurora being one, but we're also seeing some doing it more from an M&A perspective like a Canopy and Hexo. So I'm kind of curious in how you're finding competition in that kind of upper end premium just because it's hard for players to get into and that's probably why we're seeing some M&A. But are you seeing more competition? And how do you think that's going to play out with some of the bigger players getting involved? And how does that impact the pricing side?

[Norton Singhavon:]

Yes. So a few months ago, actually, maybe about 6 months ago, we started noticing more players popping up. I won't name the brands, but they were highly searched for in Ontario, highly reviewed on social media. And we started looking at some of these companies as potentially competition or threat. Then all of a sudden, it's -- I feel like it's easy to launch into the market. It's nice -- it's easy to get a new brand and some new strains. But like, a lot of these competitors that are popping up aren't really around still. Like, they're still not making a meaningful splash. So there's still a few core competitors that I see, and they're usually the publicly traded ones. And some of the private ones that are popping up, I'm not really seeing them sticking around or making a meaningful impact. And in terms of the M&A side or competition from the big LPs, I find a big LP acquiring a small crop producer almost becomes redundant. Like, I think crop producers are successful with the consumers because they're not "corporate cannabis". And I feel that when they acquire a small crop producer, you lose that. But again, that's my opinion. And obviously, we saw competition. We did drop our prices in Q1 of this year by a little bit on BLK MKT and again on Tenzo. But other than that, I think that was really for us to increase our volume.

[John Chu:]

Okay. Yes. And actually, we had heard that for some of these players or brands you were talking about were just struggling to maintain the consistency beyond the initial launch. So I totally understand where you're coming from there.

[Norton Singhavon:]

Exactly.

[John Chu:]

Yes. And so then maybe a third question on the international opportunity in Israel. Maybe just talk about the pricing and margin dynamics you'll be getting there relative to Canada. And then maybe talk about some potential other international opportunities. Obviously, you might need EU GMP for Europe, but anything else more in Israel or somewhere else, if you can just talk about that as well.

[Norton Singhavon:]

Yes. So I can't disclose exactly the pricing. But for us, it's actually better than selling bulk to another LP. And furthermore, like, if we're selling products to another LP, they're just going to rebrand it. I call it cannabis musical chairs. It goes into another brand. It's the same provinces we're selling into, essentially competing against our own product. And then people find out, "Oh, this is a BLK MKT Cherry Punch in a different brand that's a little bit lower THC but much cheaper." So we're focusing on any nonperforming crops to exit the country, if possible. As I said, the pricing is a bit more competitive than selling products to another LP. In terms of other markets, we're not looking at EU GMP. Like, that is going to cost way too much time and money, and it's not something that is within our core competency. But we have been approached by other, I guess, companies in Israel and other companies in Australia. And we're exploring these discussions but nothing to be announced yet.

[John Chu:]

Okay. And then maybe one last question then. We had heard about Ontario SKU rationalizations, wholesaler destocking. I'm just kind of curious if you're starting to see some of that restocking taking place. I mean if you were never one, if you were impacted by that, but if you're starting to see some of that restocking taking place.

[Norton Singhavon:]

Yes. So OCS did a big product call. I think it was around -- was it February or March? Actually, we were one of the few companies that did not get any sort of delistings. In fact, we're running into the opposite problem. So on certain SKUs, we're finding we don't have enough volume to keep up with demand. And OCS has said, "We would like for you to increase your demand on certain SKUs in order for you to maintain a long-term listing." So we're having likely the opposite problem than most LPs are having.

[Operator:]

. The next question comes from Robert Babcock , a Private Investor.

[Unidentified Analyst:]

The question I have is that you had to get a certain certification from -- or did you have to get any kind of certification in order for Israel to purchase your product?

[Norton Singhavon:]

Yes, we did. I forget the exact acronym. It's like IQA or IQC. Yes, they came out to our Grey Bruce facility and had to certify it.

[Unidentified Analyst:]

With that information, would that not be something that would make your product even that much more suitable for not only Canada but other European countries because of that certification that they gave you?

[Norton Singhavon:]

Yes, I would agree with you. The thing about that is Israel is going to be a medical market. We're predominantly in the rec market in Canada. I don't know how much benefit there is to putting that. Let's say, on BLK MKT, it's IQC-certified. That's one thought. But the other thing, too, is that that's only 1 of 3 facilities, right? So we don't want to open up Pandora's box where a product that comes from Grey Bruce has a certification label on it, let's say, on BLK MKT or Tenzo, potentially basically devaluing our other facilities and the other products there. We don't want consumers to be in a position where, "We only want to buy products from Grey Bruce because it has a certification." So we elected not to put that on any of our rec packaging.

[Operator:]

The next question comes from John Chu of Desjardins Capital Markets.

[John Chu:]

Just a quick follow-up question on Israel. So the new government that was put in place last month, it looks like they pushed forward a bill to effectively decriminalize cannabis. And so that could happen as early as September, which would allow for some small recreational usage. And then, presumably, a framework for a broader legalized rec market would follow thereafter, time frame unknown. So I'm just curious, is your product for Israel strictly for medical at this time? Or is it kind of -- can it be used for rec? And then, obviously, I'm just kind of curious whether or not that opens more doors in Israel as well.

[Norton Singhavon:]

Yes. So right now, we're medical only. I don't know enough about the regs if we'll be able to sell into the rec supply chain. But I would kind of defer to our partner on that. And if our partner wants us to export product in Israel and we need the qualifications for whatever the recreational requirements are at that time, I think definitely that's something we'd want to participate in. So again, I defer to our partner, Focus Medical, which is a subsidiary or affiliate of IMCC.

[Operator:]

. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Singhavon for any closing remarks.

[Norton Singhavon:]

Thank you very much, operator. Thank you, everyone, for joining us today. We wish you a safe and healthy times. And thank you very much for your continued support.

[Operator:]

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.