Avant Brands Inc.
Q4 2021 Earnings Call Transcript

Published: 25 Feb 2022

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Avant Brands, Inc. Fourth Quarter and Year-End 2021 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Alyssa Barry, Investor Relations. Please go ahead.

[Alyssa Barry:]

Thank you, operator, and good afternoon everyone. Welcome and thank you for joining us Avant Brands fourth quarter and fiscal 2021 results conference call. My name is Alyssa Barry, Investor Relations for Avant Brands. Speaking on our call today is Avant's Founder and Chief Executive, Norton Singhavon; and Chief Financial Officer, Matthew Whitt; Avant's Chief Operating Officer, David Lynn is also present and will be participating in our Q&A session. Our fourth quarter and fiscal 2021 results were disseminated yesterday and are available on SEDAR and on our website at www.avantbrands.ca. Before we get started, I wish to remind everyone that some statements made on today's call are forward-looking in nature and therefore are subject to certain risks and uncertainties, which are all outlined in detail in our regulatory filings available on SEDAR. On this call, we will refer to the Company as Avant Brands or Avant. We recognize that most of you have already reviewed our results issued yesterday. So being mindful of your time, Norton and Matt will keep their comments brief and we will then transition to our Q&A session. As we enter in the year, we take a brief opportunity to list that on our accomplishment this past year and provide the basis for our strategy and direction for 2022 and beyond. With that, I will turn the discussion over to our CFO, Matthew Whitt, who recently joined us in January to share the Company's financial highlights. Norton will then provide a strategy update. Please go ahead, Matt.

[Matthew Whitt:]

Thank you, Alyssa, and good afternoon, everybody. A special thank you to those of you on Eastern Time for sticking with us late on a Friday afternoon, it's a pleasure to meet everyone. This is my first quarter as CFO and I want to let you know that I am available to discuss our year-end results. And I look forward to connecting with our shareholders and the broader investment community. Please feel free to reach me directly through email for a chat. Touching on the key highlights for the fiscal year ended November 30, 2021. We achieved growth record gross margins of $11 million, up 25% from the prior year -- gross revenue, sorry, record gross revenue of $11 million, up 25% from prior year. Of this, recreational cannabis sales were up 29% to 7.8 million, demonstrating the significant demand for our premium cannabis brands. Cash outflow from operating activities before working capital was $1 million compared to cash inflow of 1.4 million last year. The decrease was a result of our investment in new product development packaging and other initiatives that we expect will generate positive operating cash flows going forward. Gross margin before fair value adjustments was $3.7 million or 39%, compared to 4 million or 50%, the decrease being partially a result of launching concentrate products through third-party manufacturers. We do expect to receive the necessary licensing soon to increase that gross margin on those products. Operating expenses from continuing operations increased by 1.8 million or 46%. The increase in operating expenses in the current year is due to various one-time non-recurring expenses such as fees related to the TSX graduation, multiple financings during the year, and associated professional fees. Net loss from operations was 5.4 million compared to net income from operations of 0.3 million last year. Comprehensive loss was $11.2 million compared to $10.2 million. The comprehensive loss for the current year includes the one-time nonrecurring fees related to TSX graduation financings and associated legal fees, a $5.8 million write down on intangibles and goodwill and a $1 million loss on extinguishment related to the repayment of debt. Despite the net loss we have maintains a strong capital position with approximately $14.3 million of cash, $23.8 million of working capital and no debt as at November 30, 2021. And we had an adjusted EBITDA loss of $1.6 million compared to $0.1 million last year. Overall, we are pleased with the results that we have achieved and our strong capital position with cash on hand, ample working capital and no debt. This provides the flexibility to be both strategic and opportunistic as we continue to grow our business. On top of that, the base shelf prospectus that we filed last year for an aggregate offering of up to $50 million provides us with flexibility to capitalize on financing opportunities during the 25-month period that it remains active. I'm just under 60 days into my role as CFO and I have been impressed by the caliber and the dedication of the Avant team. Under Norton and David's leadership, we run very efficiently and we are extremely tactical in our approach to opportunities, which I believe has contributed to Avant's success to-date and will further propel our business. And finally, big thank you to Norton and the team here as well as the Board for their support during my transition. I will now pass it over to Norton for his remarks.

[Norton Singhavon:]

Thank you, Matt, and good afternoon, everyone. Further to Matt's comments, we believe we are well positioned to continue growing our market share while building upon our strategy to be an industry leader within the premium category of cannabis. 2021 was a transformational year for us. We graduated from the TSX Venture to Canada's most premier exchange of Toronto Stock Exchange. We graduated from the OTCQB onto the OTCQX completed a full corporate rebrand of Gtech Holdings to Avant Brands to better align with our objective of being an innovative leader in the premium cannabis category. We strengthen our Board of Directors with three new appointments including appointing an independent director. I'm sorry independent chairman Jurgen Schreiber. Our 3PL facility, which is a 60,000 square foot JV facility, it was licensed, which is expected to deliver revenue growth over this current year. We conducted one of the largest block deal financings within our peer group by raising $23 million at a unit price of $0.80. And we eliminated all of our debt which is approximately $8 million. On the sale side, our production was up by 13%, which doesn't include any product harvested from our 3PL facility, which commenced post year-end. We sold a total of just over 2,000 kilos of cannabis, which is a 58% increase in volume compared to last year. Black Market continued to be a top selling premium brand in all Canadian provinces that we are in and our one gram pre-rolls rapidly emerged as a top selling pre-roll in BC and Ontario. Our core channel strategy of rec cannabis sales accounted for 80% of all sales compared to 79%, which demonstrates significant demand for our rec products. We expanded our sales team to increase engagement with provincial liquor boards, wholesale distributors, national chains and retail stores to enhance our sales relationships. We entered into the global cannabis export market with shipments overseas that totaled over 200 kilos, and we've signed three more export agreements with customers in Israel and Australia. New product innovations with a theme for 2021 and will continue to be a focus for us. Looking ahead, we anticipate that fiscal 2022 will be a pivotal year for us as we begin to realize the benefits of our investments in our facilities, licensing, innovation and marketing. We anticipate that these benefits will directly result in unprecedented growth for 2022. Some other key initiatives that will drive the business forward for the current fiscal year include 3PL going into full production which is expected to significantly increase our revenues. Further develop innovation to expand our product offerings within the concentrate segment. Secure Health Canada license amendments to facilitate direct sales of concentrate products to provincial liquor boards with the aim to enhance gross margins on these products. Continue to operate in a fiscally responsible and disciplined manner, while exploring opportunities to deploy our capital internally, which may include expansion, operational efficiencies, or new product innovation, or externally, which may include partnerships, investments and acquisitions. We'll continue evaluating all operational costs and budgets with a goal to be profitable in the near future. We also seek to expand our global expert client base in our existing markets and enter into new markets as well. And also finally further build on the initial success of Treehugger and Cognoscente brand activations. With the recent licensing of our new 3PL facility, our new cultivars multiple global export deal sign, we believe we are well positioned for growth over the coming quarters. With that now we'll open up for Q&A.

[Operator:]

Certainly, we will now begin the question-and-answer session. The first question comes from Frederico Gomes with ATB Capital Markets.

[Frederico Gomes:]

Could you talk about what you're seeing in terms of pricing in the premium rec market here in Canada? How do you think that will evolve in 2022? Will we see any margin compression or inflation, any trends that you could point out to there?

[Norton Singhavon:]

I think historically over the last few years, we've definitely seen margin compression. I think the premium category we're seeing it a little bit less versus I would call it the middle ground or the value products. Do I think that prices will continue to drop? I think the industry is getting competitive. There's more and more smaller producers coming online, but at the same token, I think, I'm very confident in us being able to maintain still a very competitive selling price. We always priced in line with our peers and in terms of inflation, I don't really know if that's going to affect us too much. But I don't have a crystal ball either, so we'll have to see.

[Frederico Gomes:]

And then maybe some color on what's your current capacity here in Canada right now? How much of that, are you currently using? And then you mentioned you're maybe pursuing some acquisitions, acquiring other facilities. So what's the target size that you're looking for in terms of those facilities?

[Norton Singhavon:]

So prior to 3PL we're about 4,000 kilos a year of capacity with 3PL now that number is expected to be closer to 10,000. We see significant demand. We're turning away expert clients every day. I don't really know what the magic number would be. But I think for us, we have the ability to probably increase our capacity up to anywhere from 14,000 to 16,000. And I think that'd be a comfortable short-term goal based on what we're seeing in today's market. And in terms of strategic acquisitions, we're looking at everything. There's a lot of companies out there that are struggling. I think there's also a lot of companies out there that are lean and mean and nicely profitable businesses. So, we're a growth company, and we're always evaluating opportunities.

[Frederico Gomes:]

And then maybe just one last question. So it seems like you're seeing demand coming from Israel and Australia. But we also have a limited supply of products relative to your capacity right now or so team. So how do you decide between your exporting product or shipping it to producing it in Canada and for the domestic market, or exporting product to other international markets?

[Norton Singhavon:]

I'm going to hand that one over to David Lynn.

[David Lynn:]

I think the short answer to that is that the Canadian business is our first priority. That's primarily the rec business in Canada, so supplying the liquor boards. We also have a medical business, which is growing, but that's relatively small. So, we supply our rec customers first and to the extent that we've got additional product that's available for sale. We offer that to the export clients.

[Operator:]

Our next question comes from . Please go ahead.

[Unidentified Analyst:]

I was curious with nearly 1,000 kilograms of cannabis produced but not sold this year. Is overproduction at all a concern?

[Norton Singhavon:]

Not at all. I'm going to let David Lynn take this Alyssa because very simple answer.

[David Lynn:]

Yes, I think what you see as sometimes, there's product that takes a little longer to work through the supply chain. So, there's various examples of that. There's product that ends up making its way into pre-rolls, for example. So, smaller flour might sit in inventory for a period of time and then be converted to pre-rolls. We have similar issues with export, there's a lot of work that goes into each export shipment, often, many weeks, and even months of consolidating different lots to create some critical mass for export. Most importantly, we have robust demand for our products. So any inventory that you see is short-term in nature.

[Unidentified Analyst:]

Okay, wonderful. Thank you for the color on that. I was also curious how seriously you guys are looking at these acquisitions? And what's driving this need for the 16,000 square feet?

[Norton Singhavon:]

You mean 16,000 kilos?

[Unidentified Analyst:]

Yes, I apologize.

[Norton Singhavon:]

Yes, I'm sorry. What was the first part your question again?

[Unidentified Analyst:]

How seriously, are you guys looking at these acquisitions? Are there, do you have any particularly in mind, or is this just the beginning phase?

[Norton Singhavon:]

We've been looking at acquisitions, I think, since probably about a year now since we've finished our bought deal. Because originally, people started approaching us. Are we actively and aggressively seeking? I wouldn't say aggressively, but we're always keeping our minds open because we see tremendous opportunity and putting our genetics into another facility and putting that product into our rec brands or export clients. There are a lot of facilities out there a lot of facilities. There are a lot of producers who don't have the operational excellence that we do or the Gen X that we knew. So, it's something that we're constantly evaluating being a public company with the strong balance sheet like us. We get approached and sometimes we're approaching others too, but nothing that I can really disclose or nothing that I guess.

[Unidentified Analyst:]

Absolutely. Understandable. You guys certainly have eh balance sheet to do so. Thank you for taking question. I appreciate.

[Norton Singhavon:]

You're welcome.

[Operator:]

As there are no further questions from the phone lines, this concludes the question-and-answer session. I would like to turn the conference back over to Norton for any closing remarks.

[Norton Singhavon:]

Thank you again everyone for joining us. As things begin to open up again, we're hoping to host an in-person Investor Day here in Kelowna with an opportunity to our 3PL facility and meet our team. We'll share more details of this as things come up and hopefully many of you will be there. Thank you everyone once again and have a great weekend.

[Operator:]

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