Avant Brands Inc. (AVNT) Earnings Call Transcript & Summary

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

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.

Thank you, Steph, and good afternoon, everyone. Quarter 1, 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 3 months ended February 28, 2023, compared to the same period last year. First of all, let me discuss 2 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% noncontrolling 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 of 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% noncontrolling interest 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 '23. 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 5 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.

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 prioritized initiatives to maximize output, increase efficiency and reduce costs 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 have many catalysts 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 pass it back to operator to open up for Q&A.

[Operator Instructions] The first questioner comes from [ Rahim Reman ], a private investor.

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?

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 out. But 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 holidays and December and January in all retail segments is usually quite slow other than the Christmas rush. So I think I covered that your entire question. But if you have anything you want to add, please let me know.

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

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 in off. And as I said, Q4 for us was such a big growth because of some export shipments that didn't go out in Q3.

And on the Flowr integration, if you could anything in the synergies, any sort of kind of cost savings because the adjusted EBITDA number being positive. The cash flow has been in a much, much better picture, all of that, how does it flow through with the integrations and acquisitions?

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.

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

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. And 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 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's such a large shareholder that now we're reporting insider on [ SEDI ]. So that gives me a lot of comfort moving forward that they are our debt holder.

The next question comes from [ Jordan Key ], Private Investor.

Congratulations on an amazing quarter. So it was definitely an interesting report today, big numbers, right, on EBITDA and cash flow. And 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 million of that is in cash. And I'm looking at what your next 4 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 million to MENA, I think it's MENA in August as well. So over the next 4 months or so, we're 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 investors 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 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 we run into a cash crunch, we could see a cash raise or bad debt.

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 being taken out. 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 flow than it has previously. And in terms of Flowr, it's the same thing. We expect the cash flows for Flowr to be able to pay out MENA.

By August?

Correct.

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...

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 cash from Flowr sitting in Flowr's bank account to make that payment.

And so was there 0 revenue from Flowr in this Q1?

$300,000, but not just urging 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. It wouldn't require us to go out and take on some predatory debt.

Okay. That's really good to know. And Nort, I've got 2 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. Not that MENA is going to listen to me on this conference call, but if MENA wanted to provide some financing at some ridiculous terms to watch their stock that they own if Avant appreciate, I mean that would be a way to do it.

So 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 thing with the 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.

I love that. Just a couple more things quickly. I mean, I saw a comment somewhere and I also looked into it. INCC. I think you said in prior calls that export pays quickly, but the outstanding receivables is quite large. Is that rec outstanding receivables? Or is that INCC outstanding receivable?

That is majority rec because for Q1, December and January, we basically got no rec PLs 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 it's 0% upfront.

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

That's the government paying us, right?

Right. Yes. Canada is good for it.