Avant Brands Inc.
Q1 2023 Earnings Call Transcript

Published: 13 Apr 2023

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. First Quarter 2023 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. [Operator Instructions] I would now like to turn the conference over to Stephanie Martins, Investor Relations. Please go ahead.

[Stephanie Martens:]

Thank you, operator, and good afternoon, everyone. Welcome, and thank you for joining Avant Brands Q1 2023 Results Conference Call. My name is Steph Martens, Investor Relations for Avant Brands. Speaking on our call today is Avant's Founder and Chief Executive Officer, Norton Singhavon; and Chief Financial Officer, Matt Whitt. Avant’s Chief Operating Officer, David Lynn is also present and will be participating in our Q&A session. Our Q1 2023 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 on our regulatory filings available on SEDAR. On this call, we will refer to the company as Avant Brands or Avant. We recognize that our fiscal 2022 results conference call took place just over a month ago, and most of you have reviewed our Q1 2023 results issued yesterday. So being mindful of your time, Matt and Norton will keep their comments brief and will then transition to our Q&A session. With that, I will turn the discussion over to our CFO, Matt Whitt to share the company's financial highlights. Norton will then provide a strategy update. Please go ahead, Matt.

[Matt Whitt:]

Thank you, Steph, and good afternoon, everyone. Quarter one 2023 was another record quarter, continuing our momentum from a record 2022 fiscal year, achieving positive cash flow from operations, adjusted EBITDA and adjusted net income for the period ended February 28, 2023. Our news release issued yesterday summarizes key financial and operational highlights for the three months ended February 28, 2023, compared to the same period last year. First of all, let me discuss two significant transactions that occurred in the first quarter of this year. On February 1, 2023, Avant entered into a purchase agreement to acquire the remaining 50% non-controlling interest of 3PL. This provides Avant with full control of what is now our second largest facility and the future cash flows that come from it. On February 2, 2023, through Avant's controlled subsidiary, Avant Brands K1, we acquired 100% of the outstanding shares of the Flowr Group Okanagan. This facility was purchased from the Flowr Corporation through CCAA proceedings as had been previously announced. The Flowr facility is now our largest facility and we are working diligently to successfully integrate that facility into our operations. Subsequent to quarter end, we acquired the remaining 50% non-controlling interests of Avant Brands K1, meaning, we now control 100% of all of our operating facilities. Next, I'll touch on some of the highlights for the first quarter of fiscal 2023. At February 28, 2023, Avant maintained a strong financial position consisting of $2.6 million in cash and $17.4 million in working capital. We maintained our strong trajectory in sales of recreational cannabis, posting $7.9 million gross revenue, representing an increase of 71% over Q1 of last year. This includes the continued success of cannabis exports, completing five export shipments of approximately 732 kilograms of dried cannabis with a value of approximately $2.5 million during the first quarter. Gross margin before fair value adjustments was 42% of net revenue in Q1, a new record for the company and an increase from only 23% in the same period last year. Avant sold a total of 1,424 kilograms of cannabis in the period ended February 28, 2023, generating our gross revenues of $7.9 million. This represents an increase of 539 kilograms or 61% in volume and $3.3 million or 71% in gross revenue compared to the same quarter last year. We continue to ramp up production in an effort to meet unfulfilled demand with 2,635 kilograms of cannabis produced in Q1 compared to only 637 kilograms in the same quarter last year. Our overall weighted average selling price of cannabis sold increased by 6% to $5.08 per gram, up from $4.78 per gram last year. Domestic rec cannabis sales had an average selling price of $6.86 per gram, including excise tax, in the first quarter compared to $7.12 last year. This shift represents the pricing pressures in the domestic recreational cannabis market and our efforts to actively increase the price point of our export contracts. Our net loss from operations in the first quarter was $0.1 million compared to a loss of $1.1 million in the same period last year. And finally, we achieved adjusted EBITDA and positive cash flow from operations before net working capital changes of $1.8 million compared to $0.1 million in the prior year on both metrics. With that, I will turn the call over to Norton Singhavon, our Founder and CEO, to discuss our strategic priorities.

[Norton Singhavon:]

Thank you, Matt, and good afternoon, everyone. We began fiscal 2023 with deliberate execution on many fronts, including capitalizing on growth opportunities that will create value for our shareholders. We also prioritize initiatives to maximize output, increase efficiency and reduce cost across all of our facilities. This resulted in our adjusted EBITDA increasing by $200,000 over last quarter, which is Q4, and our adjusted net income also increasing by $600,000 over Q4, even though our top line revenues were $1 million short of Q4. We continue to see significant demand on the export side with tremendous loyalty from our customers for our high-quality product. This is evolving into a recurring revenue stream that provides compelling sales diversification for Avant. At the same time, the Canadian recreational business remains our largest business segment and a core focus for the company. Since the outset, we have always stayed true to our premium quality and innovation to stay ahead of ever evolving consumer preferences. We continue to operate a lean and efficient team focused on execution to drive shareholder value. We believe that our share price is undervalued and as of the end of Q1, we were the second best performing Canadian cannabis stock over the trailing 12 months. We had a strong first quarter. We had many catalyst for growth including the production output potential at 3PL and Flowr. We have improved our efficiency even further over the prior year. Avant has a strong balance sheet, outstanding product quality, and superior brand recognition. A huge thank you to our employees who assisted in generating our strong financial results and to our investors for their continued trust and confidence in Avant. We are fully committed to continued innovation, growing revenue streams and increasing profitability quarter-over-quarter. With that, I'll open it up for -- pass it back to operator to open up for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instruction] The first questioner comes from [Rahim Rehman] (ph), a private investor. Please go ahead.

[Unidentified Participant:]

Hello, gentlemen. Congratulations on another strong quarter. Just had a few questions, particularly on -- so the revenue came in a bit softer versus Q4 sequentially, but clearly the margins and below the line, there's been some expansion there. So could you possibly shed some light on how much of that is long-term carries over to the future and how much of it was particularly for this quarter?

[Norton Singhavon:]

Yes. As I mentioned, we're constantly striving to increase our production output. Obviously, last year we averaged, I think, it was 52%. We're trying to drive that number up and we're confident, we will drive that number up. But it's not mutually exclusive to just driving up our production output, we're also looking at ways to save on our costing. Acquiring Flowr, we think will help because we'll have some negotiation leverage with our vendors and suppliers. One thing to touch on on the decline in revenues is that, we did have some export shipments that were set to go out in Q3 that ended up going in Q4. So Q4 was actually a bigger quarter than we had originally forecasted, Q3 was a smaller quarter than we had forecasted. We also saw that December and January were quite slow for the provincial buyers on our rec products. We expected that as the buyers do load up prior to the holidays. And December and January in all retail segments is usually quite slow other than the Christmas rush. So hope I – I think I covered your entire questions. But if you have anything you want to add, please let me know.

[Unidentified Participant:]

Fair enough. So would it be prudent to estimate that Q4 would also be seasonally strong considering historical trends?

[Norton Singhavon:]

I would say on the rec side, probably a little bit stronger than the prior quarter, but I wouldn't expect it to be mind blowing or a shock and awe. And as I said, Q4 for us was such a big growth because of some export shipments that didn't go out in Q3.

[Unidentified Participant:]

Perfect. Yes, and on the Flowr integration, if you could -- anything in the synergies, any sort of transition or cost savings? Because the adjusted EBITDA number being positive, the cash flow is being in a much, much better picture, all of that -- how does it flow through with the integrations and acquisitions?

[David Lynn:]

Hi, it's David Lynn. I'll take that question. We're super excited about the Flowr facility. We looked at a lot of different acquisition opportunities and we zeroed in on that one because of the nature of the facility and the location of the facility and it really offers some fantastic synergies as part of the Avant Group. So as we mentioned in our news release, we initially realized about $1 million in annual overhead savings and then subsequently during the month of April, we will realize about another $0.5 million of savings. So if you combine that, there's about $1.5 million in annual savings and, of course, that's over and above the kind of automatic synergies we got by buying Flowr Group Okanagan without the parent company. So very, very excited about that acquisition on so many levels. The cost savings, of course, is just part of it because the facility greatly expands our output and allows us to satisfy some of that customer demand that we weren't able to fulfill in prior quarters.

[Unidentified Participant:]

Fair enough. And lastly, I saw some convertible debentures now on the balance sheet. So if you could again shed some light on that? Who's holding those? And if there are any terms? Attach any high level comment would be great?

[Norton Singhavon:]

Yes. So the convertible debentures is seller financing for the 3PL transaction. So what we did was, we purchased their stake in a mixture of issuing equity in Avant and also a vendor take back seller financing. I think our stock was give or take $0.20 at the time when we closed the transaction and we were able to negotiate a $0.50 convertible debenture. I mean, that's quite a premium. So I'm confident that this is not some predatory hedge fund. It's not a loan to own predatory lender. Like this is our partner and a large shareholder of Avant. And the way we structured it, I think makes the most sense that we are able to acquire this without having to go to do an equity raise or a debt raise with an outside third-party who does not have an invested interest into Avant as a large shareholder. I mean, I believe that there is such a large shareholder that are now reporting insider on [SEDI] (ph). So that gives me a lot of comfort moving forward that they are our debt holder.

[Unidentified Participant:]

Fair enough. Thank you for answering these questions.

[Norton Singhavon:]

You're welcome.

[Operator:]

The next question comes from [Jordan Kay] (ph), private investor. Please go ahead.

[Unidentified Participant:]

Hey, Nor. Hey, Matt. Congratulations on an amazing quarter.

[Norton Singhavon:]

Thank you, Jordan.

[Unidentified Participant:]

So it was definitely an interesting report today, big numbers, right, on EBITDA and cash flow. That to me is really an amazing step in the right direction. Of course, a lot of this, I think, has to do first with acquiring the other 50% of 3PL and now the full ownership of Flowr. And Matt mentioned earlier that there was $17.4 million of working capital. And if I got that number wrong, Matt, definitely correct me. Only 2.5% of that is in cash. And I'm looking at what your next four months looks like in terms of large payments, right? I think you've got $1.6 million to the 3PL in April and then another $1.6 million somewhere around July, August and then $1.45 to MENA, I think it's MENA in August as well. So over the four months or so we are looking at $4.5 million in cash that has to come from somewhere. And if we talk about the stock being undervalued, one of the reasons I think would be just investor trying to figure out how that's all going to work. So any color that you can provide on that and any -- plan A, plan B and then plan Cs that you can kind of tell us. I think it would be super helpful, because a lot of people are just worried that if it run into a cash crunch, we could see a cash raise or bad debt.

[Norton Singhavon:]

Yes. So before we made these transactions, especially with 3PL, we modeled this thing for endless hours in the boardroom. So the easiest and simplest way is that, 3PL should be able to support its payments. So the money that we owe to the 3PL vendors will be paid for by the cash flows coming out of 3PL. So that's how we see that getting taken care of. Keep in mind that 3PL only had 52% capacity utilization last year, right? So we're obviously ramping that up and that has been ramped up. So I see 3PL generating more cash flows than it has previously. And in terms of Flowr, it's the same thing. We expect the cash flows of Flowr to be able to pay out MENA.

[Unidentified Participant:]

By August?

[Norton Singhavon:]

Correct.

[Unidentified Participant:]

Yeah. Nor, that [Multiple Speakers] If that happens, that will be ridiculous, because I think what a lot of investors might not really quite understand is when you get on the other side of that debt, what the company looks like. So in terms of [Multiple Speakers]

[Norton Singhavon:]

Well, here's the thing, Flowr is 80,000 square feet, right? It's our largest facility. The amount of cash flows that can come out of that are quite significant. So we are confident that when the MENA $1.45 million is due that we will have the cash from Flowr sitting in Flowr’s bank account to make that payment.

[Unidentified Participant:]

And so was there zero revenue from Flowr in this Q1?

[Norton Singhavon:]

$300,000, but that's just purging old outdated inventory at like fire sale rock bottom prices. This is not Avant product. One thing to keep in mind, too, Jordan, is that MENA is now an extremely large shareholder of Avant. So let's say hypothetically, if we needed an extra month, not saying that we do, but hypothetically if we did, I think that'd be a very simple conversation to have, that wouldn't require us to go out and take on some predatory debt.

[Unidentified Participant:]

Okay. That's really good to know. And Nor, I've got two more questions, but I'll take 10 seconds of everyone's time to just kind of like put everything into perspective. I remember I was an investor in Tesla back in the day when I got that ginormous loan from JPMorgan at 2%. And when the market realized that they had sort of that cash backing, the market gave them like a super-premium that kind of led to when they skyrocketed. So if MENA want, I mean, not that MENA is going to listen to me on this conference call. But if MENA wanted to provide some financing at some ridiculous term to watch their stock that they own of Avant, appreciate it. I mean, that would be a way to do it. Okay? So [Multiple Speakers]

[Norton Singhavon:]

The issue with that is, we don't want to raise at these levels. We don't need it. So we're comfortable with our forecasting that we'll be able to service all the debt for 3PL and MENA. And same goes for 3PL, right? Like I said, 3PL on the other question. 3PL is now a reporting insider of Avant. So hypothetically, again, if we said we needed an extra month or whatever, I don't see them being unreasonable and forcing us to go take on predatory debt elsewhere.

[Unidentified Participant:]

I love that. Just a couple more things quickly. I have -- I mean, I saw a comment somewhere and I also looked into it, [IMCC] (ph). You think you said in prior calls that ex-work pays quickly, but the outstanding receivables was quite large. Is that rec outstanding receivables or is that IMCC outstanding receivables?

[Norton Singhavon:]

That is majority rec because for Q1, December and January, we basically got no rec peels at all whatsoever, because they were slow. And they loaded up in November, right? So February is where all the rec came and they take 60 days to pay and at 0% upfront.

[Unidentified Participant:]

Okay. All right. That's really good to know.

[Norton Singhavon:]

That's the government paying us, right? So…

[Unidentified Participant:]

Right. Yeah. Canada is good for it.

[Norton Singhavon:]

Yeah, exactly.

[Unidentified Participant:]

But how much of your -- or how much of your export is done by IMCC?

[Norton Singhavon:]

I'm going to hand this over to David Lynn.

[David Lynn:]

Yes, so we don't provide a breakdown by country or by client, but IMC is a major client of ours and we publicly disclosed that in the past. One thing I would point out to just kind of address your concerns there is that, the minimum upfront payment we do on export is 50% and some clients are paying as much as 75% upfront. So Norton mentioned that some of the liquor board take up to 60 days to pay, although that's improved recently in one province. But on the export side, at least 50% and up to 75% is paid upfront and the remainder typically within 30 days.

[Unidentified Participant:]

Is IMC just Israel or do they cover other areas?

[Norton Singhavon:]

Just Israel, I believe.

[David Lynn:]

For us, it's just Israel, but they do have business in other countries as well.

[Unidentified Participant:]

Okay. All right. Sounds good. And have new export contract been landing outside of IMCC over the last quarter? I don't think I asked about it in the previous quarter.

[Norton Singhavon:]

Yes, we're constantly exploring new export deals. There's a lot of opportunities out there. There's only a certain percentage of them that we end up closing on terms that are acceptable to both us and the export client. But the answer to your question is, yes, we've been gradually adding those clients over time.

[Unidentified Participant:]

And do they order every quarter? Do they order once a year? Like what does the case look like when you're adding on new clients?

[Norton Singhavon:]

I think it varies by client, but a lot of them might want to take an order every month or so.

[Unidentified Participant:]

Okay. Wow, that's really good. And I got one last thing, lease liability. Is the Flowr facility on a leased property. Is that what that is?

[Norton Singhavon:]

Correct.

[David Lynn:]

Correct.

[Unidentified Participant:]

Okay. That's it for me. I just thank you all for your open lines of communication and for your outstanding executions. I hope and pray we all get rewarded with the share price one of these days.

[Norton Singhavon:]

Likewise.

[Operator:]

[Operator Instructions] The next question comes from [Joe Rise] (ph) from KW. Please go ahead.

[Unidentified Participant:]

Hey, Nord. How's it going?

[Norton Singhavon:]

Good, Joe. How are you?

[Unidentified Participant:]

I can't complain, I can't complain, especially after this call. But quick question, [indiscernible] took over Flowr, was there any export deals or customers that you were able to kind of work that Flowr previously had before you took over the facility? Or are you still kind of working from scratch to get more export deals?

[Norton Singhavon:]

So the great thing about the CCAA core process is, you get to purge -- you get the cherry pick things that you want to inherit and you get to purge everything else that you don't like. So when we took over Flowr, we got the cherry pick contracts and agreements with clients that we want to take on. So their rec business is still continuing although it's nothing major. But we did inherit a very interesting export client in Israel that is a major player and they're publicly traded. So we'll see how that one goes. But definitely Flowr was predominantly focused on their rec business and selling a lot of domestic B2B. We don't like the domestic B2B market. We've utilized their existing domestic B2B sales pipeline to just wipe out their vault is what I call it, right? Like whatever inventory they had, just purge it, get it out. I don't care at what price, right? And then we start fresh. So that was kind of nice. Another thing that was also nice is that, through the process, we got to inherit whatever receivables they had too. So that was a nice little bonus when we took over, there was some -- a decent amount of money owed. And we've collected a good chunk of that since.

[Unidentified Participant:]

Oh, okay. So you're able to get their money but none of their debts. The money that was owed to them and none of their debts?

[Norton Singhavon:]

Yes, we were able to -- yes, exactly. We don't want any of the debts and even contracts too. If we didn't like a contract we could purge it. If there was this retail pay to play like they're paying for data, we could purge it, we don't want it. So how we actually structured that was that, we don't inherit anything, we don't take out any contract, we don't take out any debt unless we implicitly specify that item in the agreement. So we just cherry picked a few things that we liked. And the beauty is, yes, once we took ownership of it, they have sold product to other provincial markets, to other buyers. There was money out that was coming in. Once we took legal ownership, that money continues to flow in, which is nice.

[Unidentified Participant:]

Oh, awesome. Great, great. But the bottom line is that, you're -- by buying that facility, you were able to take in some export agreements that you wouldn't have got otherwise, pretty much I guess, that's kind of what I was asking or getting at.

[Norton Singhavon:]

Yes, I would say one major one that -- well, one that is the major player in Israel and it is pretty high volume. So we're excited to see where this relationship goes. But yes, we inherited that from Flowr.

[Unidentified Participant:]

Great. Awesome. And also one more question I have. I was noticing on the -- on one of the releases you had today that you mentioned that -- I don't have in front of me, but I think it said something about you were able to increase prices 6% on export. I'm just curious how was that possible?

[Norton Singhavon:]

Yes, listen because we don't have enough products. So the gist of it is that, if you have limited supply, we say -- so what happens is that, we have clients that are originally were paying $4 then we had newcomers [indiscernible] say, hey, we'll pay $25. So we're taking the contracts that have the best terms. That includes payment in terms of timeline. So the more upfront they give us and the higher price it is, we have to -- we prioritize those, right? And then when we go back to our other clients, sorry, you're getting less product because we're fulfilling better terms then they got to match it if they want more products. So we've been able to do that. Hopefully that continues when Flowr comes online and hits full capacity. I think the global export market [indiscernible] internally, I feel like we're in the second inning. There's going to be countries that probably shut down. There's going to be countries that open up, right? We're limited to the globe. So this is going to be a very interesting one. And I think if we can do deals like what we did with IMC where our brand gets the launch in these other markets, that’s when it starts to get interesting when we have the black market brand in other jurisdictions.

[Unidentified Participant:]

Okay. And that's pretty -- I mean, that's pretty good considering it's a high volume. I assume you probably use these exports as cash flow to be able to not have to lower prices on your higher margin good stuff. So to be able to do that on your lower margin high volume products is pretty good. So keep up the good work.

[Norton Singhavon:]

Yes. And we don't have to package it either. Packaging is a lot of late -- it's super labor intensive because, we hand package everything, right. Most producers have machines to package. So this is a good way to alleviate some of the stress and bottlenecks that are in our facilities. And I think I would rather have the rec business grow slow and steady, right? If we go from $5 million in rec to a quarter to $9 million like that's going to be stressful, man. But if we go $5 million to $5.5 million and $6 million, that's a nice steady pace of growth for my operators and my packaging team.

[Unidentified Participant:]

Awesome. Great. Keep up the good work, man. Take care.

[Norton Singhavon:]

Thanks, Joe. Appreciate it.

[Operator:]

[Operator Instructions]

[Norton Singhavon:]

Operator, I think we're good.

[Operator:]

Perfect. There are no more questions on 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. If you have any questions or would like to connect with us, please reach out anytime. Have a great rest of your week, and thank you once again.

[Operator:]

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