Avant Brands Inc.
Q4 2022 Earnings Call Transcript

Published: 28 Feb 2023

Operator:

Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. Fourth Quarter 2022 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 Avant Brands fiscal 2022 results conference call. My name is Alyssa Barry, Investor Relations for Avant Brands. Speaking on our call today is Avantâs Founder and CEO, Norton Singhavon; and Chief Financial Officer, Matt Whitt; Avonâs Chief Operating Officer, David Lynn, is also present and will be participating in our Q&A session. Our Q4 and fiscal 2022 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 todayâs 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, Matt and Norton will keep their comments brief and we will then transition to our Q&A session. With that, I will turn the discussion over to our CFO, Matt Whitt to share the companyâs financial results. Norton will provide a strategy update. Please go ahead, Matt.
Matt Whitt:

Thank you, Alyssa, and good afternoon, everyone. Fiscal 2022 was all around a record year for Avant. We continued our trend of strong top line growth once again setting new quarterly sales records and achieving record adjusted EBITDA for Q4 and for the full fiscal year. We are proud to report that we have achieved the largest fiscal year-over-year revenue growth amongst publicly traded LPs in Canada. Our press release issued yesterday summarizes key financial and operational highlights for the 12 months ended November 30, 2022, compared to the same period last year as well as a comparison of Q4 to Q3 of 2022 and Q4 of 2021. First, Iâll touch on some of these points for the 12 months ended November 30, 2022. We reported gross revenues of $22.6 million representing a 105% increase over 2021. Net revenue after excise tax was $20.2 million, up 112% over 2021. Of this net revenue, recreational cannabis sales represented $14.4 million and export revenue was $5 million, again both records for both categories. Our overall gross margin of 32% was down slightly over 2021 due to a higher volume of export sales in 2022, which generally do have a lower margin. However, we did sell a total of 3,951 kilograms of cannabis in 2022, up almost 100% over the prior year. Our average selling price for recreational cannabis was $7.13 per gram in fiscal 2022, down only $0.08 from fiscal 021 as we continue to withstand strong pricing pressures in the market. We also beat records with our cash flow from operations of $2.2 million and adjusted EBITDA of $1.9 million. Three of the four quarters in fiscal 2022 were positive adjusted EBITDA and positive cash flow from operations. Our net loss from operations was $8.5 million this year compared to $5.4 million last year and this increased loss is primarily due to non-cash items such as the fair value changes on biological assets, share-based compensation and amortization. The fourth quarter built upon some positive momentum that we had generated in the first three quarters of this year, and some quick highlights for Q4 include selling a total of 1,456 kilos of cannabis in Q4, thatâs an increase of 124% over Q3, which does provide some context for the following. Q4 had record gross revenues of $8.9 million, plus 88% over Q3, had record net revenue of $7.9 million, up 100% over Q3. Record recreational gross revenues of $5.1 million or plus 37% over Q3, record export revenue of $2.7 million, up 22% from Q3. Overall, our gross margin was 39%, up slightly over Q3, and we had record cash flow from operations of $1.9 million or 127% increase over Q3. Record adjusted EBITDA of $1.6 million, again, up 124% over Q3. In the fourth quarter, we also reported adjusted net loss of $0.3 million for the quarter, an improvement of 41% over Q3. Adjusted net loss is something new that weâve started reporting and management has decided that adjusted net income or loss is a relevant industry measure as itâs commonly used in the capital markets to approximate operating earnings. Primarily, this does remove the impact of fair value changes on biological assets when compared to net income. And again, fair value changes is a non-cash item. All told, this was an extremely strong year for Avant, which has set us up to make some significant investments for the future in FY2023. Now I will pass this on to our Founder and CEO, Norton Singhavon.
Norton Singhavon:

Thank you, Matt, and great job on getting our reporting done. Good afternoon, everyone. Fiscal 2022 was a record year for Avant as we continue to demonstrate our ability to scale, innovate and deliver significant growth, while many in the industry are contracting. Yesterdayâs news release outlines many of our corporate and sales and marketing milestones for the year, but to summarize a few. We entered into a debt and possession loan and stocking horse bid to acquire all of the shares of Flower Group through a JV. The acquisition closed earlier this month and is expected to significantly enhance our cultivation capabilities with an increase in facility square footage to approximately 185,000 square feet, resulting in a 60% increase in our annual production capacity for the company. This will also make us one of the largest indoor ultra-premium producers in Canada. We ramped up 3PL Ventures, a 50%-owned JV, which weâve entered into an agreement with to acquire the remaining interest. Subsequent to the year-end, we have closed this transaction. We completed nine export shipments of approximately 1,284 kilograms of cannabis to Israel and Australia, contributing approximately $5 million in sales. Launched direct to retail store sales in BC and complete approximately $100,000 in sales for the first two months of shipments. Our premium position in the market has been reinforced by compelling branding and marketing, most notably with our flagship brand BLK MKT. BLK MKT was one of the number one cannabis brand of the year for 2022 with over 120,000 voters participating. It was the number one best seller for Premium 1G Pre-Rolls in Ontario with over 62% market share. It was also the number one seller of 1G Blunts in Ontario in Ontario with a 31% market share based on units sold. We launched BLK MKT in Israel through a licensing agreement with INC. We stand out based on various financial metrics that ended the year in our strongest position ever. Overall, we are quite pleased with the results from fiscal 2022 and especially Q4 as it shows our path to profitability. Today, we see a unique opportunity to make our business even stronger and grow faster in 2023. Key strategic initiatives for the fiscal year include continue capturing synergies and cost savings of flower, while transitioning to a long cultivars. We have generated over $1 million of annual savings within the first few weeks of closing the transaction. With the addition of flower facility, we anticipate that we will be able to fulfill our domestic rec demand as weâre not able to fulfill all domestic rec deals we received during Q4. Further expand global markets by diversifying our clientele and exploring other countries which allow for the importation of dried cannabis from Canada. Complete the construction of our GT Bio facility, which would be expected to increase our production by approximately 2,000 kilos a year. Increase our capacity utilization rate as during the fiscal 2022 year we had achieved only a 52% utilization rate with 46% at 3PL. Management believes that during the course of the fiscal 2023 year that the utilization rate will increase, especially at its 3PL facility, which is expected to further drive our top line revenue, while keeping our corporate overhead costs relatively flat. I know the Canadian cannabis capital markets hasnât performed as well as we all had hoped. However, itâs worth mentioning that as of end of last week, Friday, Avant was the second best performing in Canadian cannabis stock over the last 12 months, down 5.8% with the average being down 21%. And during our fiscal year, we also ended as Avant being the second best performing Canadian cannabis stock. We hope that as we continue to execute, increase revenues and profitability that the markets will reflect accordingly. Thank you to our shareholders for your support. Our driving commitment for our business will continue for this fiscal year as we hope to deliver you all the returns that you all deserve. With that, weâll now open up for Q&A. Operator, please go ahead.
Operator:

Certainly. We will now begin the question-and-answer session. The first question comes from Jordan Kay from Impossible Stock News Please go ahead.
Unidentified Analyst:

Hey, Norton. How is it going?
Norton Singhavon:

Hey, good, good. How are you?
Unidentified Analyst:

Congratulations on an incredible quarter. So glad to be a shareholder of Avant.
Norton Singhavon:

Thank you. Happy to have you as a shareholder.
Unidentified Analyst:

So Iâve got kind of a slew of questions, and Iâll start with â can you share any visibility into Q1?
Norton Singhavon:

Again, we donât do forecast or guidance. So I canât share anything about that.
Unidentified Analyst:

Okay. All right. I was just checking. Last quarter, we seem to guide that the year was going to be incredible that weâll just have to wait till the quarter ends today, right?
Norton Singhavon:

I can say that for the fiscal year, we do expect growth.
Unidentified Analyst:

For the fiscal year, we expect growth. Thatâs good. So a couple of questions on The Flowr joint venture. Is the joint venture just splitting the profit 50-50 but Avant really does the full lift except for the funding?
Norton Singhavon:

Yes, essentially, but it is our intention that we hope to acquire the remaining 50% stake over the next little bit here.
Unidentified Analyst:

Okay. Awesome. Letâs see. So on the â so Avant is kind of interesting position where the â I think you acquired about 1% of the 3PL joint venture during the quarter, which I think resulted in the revenue of that facility being reflected. But as their financial aspects of the joint venture reflected on Avant report this quarter, like, for instance, the biological assets. Was all of that reported on Avant? I just wanted to be clear. I am not an accountant, so just needed some clarity.
Matt Whitt:

Yes, Jordan, this is Matt here. So just for clarity, yes, it was June 1. So actually, at the beginning of Q3 when we officially started consolidating 3PL. When we do consolidate, yes, it means we bring in â we treated it as if itâs 100% owned and then we basically reserve half of the profits for the non-controlling interest. So all revenue, all fair value changes on biological assets, all inventory, bio assets, full operations are 100% consolidated from basically Q3 and Q4 only.
Unidentified Analyst:

Okay. Thatâs really good to know. What about the GreenTec facility? I saw a couple of numbers on there, $2.5 million in a contingent share payment and then a $4 million cost to complete. Are those two things incorporated in the $4 million? Or is it $4 million and then another $2.5 million?
Norton Singhavon:

So the $4 million would be cash-based, $2.5 million would be share based. That facility, weâre still we slowed down on it a little bit. But I think this year, based on the demand that weâre seeing, we think weâre going to look to finish that facility.
Unidentified Analyst:

So itâs $6.5 million total. Who does that â who does the $2.5 million go to? Is that to the builder?
Norton Singhavon:

The â actually, the milestones are actually for myself and some members of the senior management team. This was the asset that I actually started this entire company. I know Iâm probably going into a bit of a tangent here, which is why our company is called GreenTec. So originally, weâve entered this asset in. And as a result, weâre supposed to get stock out milestone base. We reduced I think over half of those stocks back in 2019. But yes, these are milestones for myself and a couple of the key guys.
Unidentified Analyst:

No. You deserve it. I would just say that. Okay. Iâve got couple of last things here so I donât want to take up the whole time. Can you tell us about the convertible debenture part of the 3PL $9.5 million? If Avant makes full payment of the $9.5 billion, does it â is there no conversion or is there some convertible part like on the choice of the 3PL joint venture?
Norton Singhavon:

So basically, we got to give them just under 1.6 per quarter. As we pay that down, we take those conversion rights back on that amount. So assuming we paid everything back on our time line and assuming the share price did not move significantly above $0.50, therefore, theyâre not â they donât convert, then yes, that would not hit a cap table. I think itâs also worth mentioning, too, like when people see convertible debentures, they think like, oh my god, predatory financing. And for the most part, it usually is. But this is a bit of a unique scenario where weâve taken a partner who now owns 22 million shares in Avant because of the transaction. And theyâre doing a vendor/seller financing, right? So itâs not like some third-party or reparatory hedge fund. These are our partners and large shareholders. And you know what, we feel that the terms are quite reasonable.
Unidentified Analyst:

How many payments? Is it the $1.56 million or whatever it is time six, which gets you to the $9.5 billion? Or is itâ¦
Norton Singhavon:

Exactly.
Unidentified Analyst:

Thatâs it.
Norton Singhavon:

Yes.
Unidentified Analyst:

Okay. Then â so then there must not be any interest on that $9.5 million because I can justâ¦
Norton Singhavon:

No. There is interest. Yes, the interest is 10% per year.
Unidentified Analyst:

Okay. So that â so the payments will actually be more than what was put on the release, it will be like 1.6 plus the interest rate.
Matt Whitt:

Itâs $1.5 million plus interest. So itâs $1,583 million and change, something like that.
Norton Singhavon:

Yes, thatâs how we broke it down. So the payments are inclusive of the interest is what I believe.
Unidentified Analyst:

Okay. Awesome. And just a couple â one thing for Wall Street. Not that anybody from Wall Street is listening today, but maybe in the future.
Norton Singhavon:

I see someone here.
Unidentified Analyst:

Thatâs good. The Wall Street loves recurring revenue, right? Any time you see any of these pipeline companies in terms of their stock price, deliver recurring revenue. I think one of the things that maybe Wall Street might not understand is export and whether or not that is potentially recurring revenue and in terms of like how are you seeing turnover, what are the most to somebody coming in and displacing a lot from those export deals that youâre signing. Can you just talk a little bit about that?
Norton Singhavon:

Yes. So one of the things about export thatâs actually interesting is that when we ship product to our clients, thereâs a lot of prepare behind the scenes on their end. So they have to launch SKUs. They have to get approval, especially in medical markets. They got to work with the pharmacies and the GPs. So it actually works out in our favor where when we sell them product that they like and they have SKUs and medical client base that are established, theyâre somewhat committed to us because itâs a lot of work for them to actually go and terminate those SKUs and start something else. But maybe Iâll let David Lynn touch on that a little bit more as heâs been leading our export division.
David Lynn:

Yes. Thanks, Norton. Yes, I was just building on what Norton said. We have tremendous demand on the export side. We touched on the fact that we couldnât keep up with the purchase orders on the rec side of the business. The same situation existed on the export side, both in Israel and Australia and driven by the quality of our product, we have tremendous loyalty amongst our customer base. Norton also mentioned the trademark licensing agreement for BLK MKT in Israel, which means that our client is building their business around our brand. And of course, they can only sell product produced by us under that brand. So weâre very bullish about export going forward. We know thereâs a lot of competition for those sales, but thereâs not a lot of companies that are putting out the quality of product that we offer to our clients.
Unidentified Analyst:

Do the contracts tend to be multiyear?
David Lynn:

The contracts have typically have no fixed end date.
Unidentified Analyst:

And so theyâre just evergreen and in order to come in. I remember when you originally scheduled the first one, it was like you guys were going to do something like 500 during the year, maybe it was 1,000 during the year. Is that kind of whatâs happening? Are they giving you rough numbers of what you need to produce during the year or hard purchase orders so that you guys can prep?
David Lynn:

We do share projections with our clients. But generally, in the agreements, theyâre open-ended agreements, and we donât get into fix quantity commitments by either side because thatâs problematic when you start to explore kind of take-or-pay type arrangements. So typically, theyâre open-ended contracts, but I can tell you that, generally speaking, our product has been extremely well received, both in Israel and Australia. Weâve struggled to keep up with the demand. And again, thatâs part of the catalyst for the Flowr acquisition is to catch up to demand both on the rec and the export side of the business.
Unidentified Analyst:

Awesome. Really good to know. I guess Iâll leave you with one last question on utilization rate. Utilization rate seems to be low because you guys are working on three additions right now, right? 3PL, Flowr and then the GreenTec facility, all while the utilization rate at some of the facilities is under 50%. So whatâs the value of opening a new facility versus â and by new facility, I mean, acquiring joint venture or adding Flowr or building out a GreenTec rather than ramping up utilization that what youâve got going already. Is there a cost difference? Or is this just a plan for the future?
Norton Singhavon:

No. Thatâs actually a fantastic question. So first of all, theyâre not mutually exclusive, right? We can continue to ramp up utilization at our existing facilities while wrapping up Flowr while completing GT-Bio. The funny thing is GT-Bio down the street from Flowr, literally down the sheet. So what happened? So 3PL got license end of August of 2021. So we spent most of 2022 ramping up production there. Now when I say ramping up, it wasnât like we had to get the rooms fired up. It was that when we brought in genetics, when we brought in our moms, we could only cut so many clones to fill the rooms. So we had rooms that should have been producing, call it 80 kilos, but we only had enough plants to do half of that, right, just because our moms werenât big enough to cut that many clones. So it was a gradual ramp-up process. Our average overall has been brought down significantly by 3PL because obviously 3PLs our largest facility, right? 3PL alone, I think is 2 times larger than the other three facilities combined or give or take, right? So thatâs why itâs brought down. Also, I would say our capacity utilization at our other facilities did decrease slightly from the previous fiscal year. And thatâs more so just the market getting more finicky. So the GenX that weâre producing for last â for 2022 year didnât yield as much as the GenX that we produce in the 2021 year. Again, the market is getting finicky picky. They want gas. They want exotic cultivars. So we have to produce what the rec market wants, right? So I think that sums up your question unless I missed anything there.
Unidentified Analyst:

No. No, thatâs incredible. You spent way too much time with me already. I just want to say, Iâm so happy that youâre healthy and youâre doing okay after your accident and wishing you all the best and thank you so much for all of your hard work.
Norton Singhavon:

Sorry, where am I? Who is this? Iâm kidding, okay.
Operator:

The next question comes from Nicholas Williams, Private Investor. Please go ahead.
Nicholas Williams:

Hey guys, Nicholas here. First off, great call. Thank you so much, and super impressed with the progress you guys are making and the huge congrats on the fourth quarter, strong fourth quarter in your fiscal 2022 results, so amazing work, keep it up. Just have a couple of quick questions. We all know the cannabis industry is rapidly evolving. And what kind of things are you doing or adapting and what kind of new trends or innovations do you see on the horizon? And then the second part of the question really just has to do with competitors. What are the companyâs primary differentiators to really set yourself apart and above your competitors?
Norton Singhavon:

Yes. So our thought on innovation is we like to launch obviously launch new products entering into the concentrates markets, which you saw that we did last year. What weâre finding is dried flower â premium dry flower is still king. No matter what market weâre in, even mature U.S. markets, premium dry flower is always top seller and then pre-rolls and theen vapes. So we donât want to throw a tremendous amount of resources at something that could potentially be a distraction from our core business, right? I think weâre pretty disciplined in that sense. So weâll continue to monitor the market to see what products might be a fit for some of our brands and what might make sense for us to launch. But yes, to sum that up, I would say itâs something weâre always looking at. We want to be innovative with our dried flower and our genetics and our product offering, but also, again, we donât want to distract from our flagship business.
Nicholas Williams:

Perfect.
Norton Singhavon:

And then the second part, remind me your question about the competitors again?
Nicholas Williams:

Yes, has to do with competitors. Are there any primary differentiators that you plan on strategizing about to take yourself apart and above your competitors as well?
Norton Singhavon:

Yes. So itâs interesting because I feel like we donât have a tremendous amount of competition. So we have some competitors who I wonât name, but their price â one is priced very similar to us, but theyâre organic and grown into greenhouse. Thereâs a market and demand for that, but thatâs not the segment weâre after. There are other competitors that â interesting enough, theyâre starting to contract a row. So what we like, especially in the domestic rec market is that we can kind of play off this that we have our own genetics than nobody else in the country has. We draw our own product and we get that to market. So a lot of our competitors, which I wonât name are starting to do contract role because, A, they canât figure out themselves or B, theyâre just finding that their costs are too high or the facilities are located in remote areas that are hard to staff. We are looking at contract roll only for export â Iâm sorry, Iâm not looking. We do have one contract roll in place but it is for export. So I think thatâs what really sets us apart. Again, our genetics from cuttings to , itâs all as, obviously, our unique branding and marketing and thatâs a testament to us winning the ad can award of being the voted the number one cannabis brand in the country. And it wasnât just on the craft brand, right? Itâs all LPs. You are seeing some micros and mom-and-pop produce quality products that are comparable to ours. But again, a micro can produce about 600 kilos a year. So itâs really hard to get scale at that level and really dominate the rec market and filling the POs that youâre going to get from Ontario.
Nicholas Williams:

Thatâs great. Thank you so much. Makes sense.
Norton Singhavon:

Thank you.
Operator:

The next question comes from Joe Rice from KW . Please go ahead.
Unidentified Analyst:

Hey Norton, how are you?
Norton Singhavon:

Hi Joe, Iâm good. How are you?
Unidentified Analyst:

Hanging in there. Loving this call. But yes, a quick question is, I noticed reading the print out that youâre going for â to finish your final â youâre finishing a GTEC facility that says itâs going to raise capacity or production capacity to 18,600 and you produced 5,700 this year. So I mean it looks like thereâs almost a 3.5 times capacity growth youâre going to have by the end of the year. My question is how â like in these particular facilities, and Iâm not much of a consumer of the product, so Iâm a little unsure how the production process goes. But in each of these facilities, letâs say that you noticed a trend that that youâre getting a lot more export deals than you normally would or letâs say, recreation â recreational flower gets really popular BLK MKT does. How easy is it to actually convert the actual facilities are growing itself to meet the level of demand that may change in one segment or the other. Do you understand what Iâm asking?
Norton Singhavon:

Yes. Itâs exactly the same. So export product is shipped and, call it, wholesale on 1 kilo bags. The product that goes into the export is exact same strains in cultivars that goes into our domestic rec market.
Unidentified Analyst:

Okay. If you know itâs a big hiccup and say recreation, you wouldnât have to adjust the manufacturing process, that would just be a smooth transition.
Norton Singhavon:

Exactly. So Iâll give you an example. Letâs say we had 100 kg lot that was destined for Ontario, right? And it finished, the test came in and weâre about the package. And Ontario said, you know what, we change your mind? We donât want it. We hypothetically could pick up the phone that day, call our export client and potentially get a PO for it or vice-versa.
Unidentified Analyst:

Got you. Got you. Okay. Yes, thatâs great. Thanks, Norton. Thatâs amazing. You can â youâre going to increase 3.5% production capacity and you grew 100% this year. Thatâs awesome. Thank you.
Norton Singhavon:

Thank you.
Operator:

There are no more questions in the queue. This concludes the question-and-answer session. I would like to turn the conference back over to Norton Singhavon for any closing remarks.
Norton Singhavon:

Thank you again, everyone, for joining us today, and we appreciate your continued support. Enjoy the rest of your week. Thank you.
Operator:

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

Avant Brands Inc. Q4 2022 Earnings Call Transcript

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Avant Brands Inc.
Q4 2022 Earnings Call Transcript