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

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

Thank you, operator, and good afternoon, everyone. Welcome, and thank you for joining Avant Brands Q2 Fiscal 2023 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 Officer, Norton Singhavon; and Chief Financial Officer, Miguel Martinez. Avant's Chief Operating Officer, David Lynn, is also present and will be participating in our Q&A session. I'd like to extend a warm welcome to Miguel as this is his first earnings call as Avant's CFO. Miguel, welcome. Our Q2 2023 results were disseminated yesterday and 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. I will now turn the discussion over to Miguel to share the company's financial highlights. Norton will then provide a strategy update. Please go ahead, Miguel.

Thank you to our Board and the Avant team for their warm welcome and support during this quarter. I was excited to join the Avant team for several reasons, including the company's reputation for outstanding product quality, compelling brands, rapid sales growth and positive cash flows. I previously worked as the VP of Finance of Pure Sunfarms and believe my background in this industry dovetails very well with the competencies and culture within the Avant senior management team. I'm also looking forward to connecting with our investors and industry analysts. Please feel free to reach out to me directly at any time. To summarize Avant's performance, starting with the 3 months ended May 31, 2023, we continue to achieve strong year-over-year revenue growth on both a quarterly and year-to-date basis, driven by a strong domestic and international demand for our premium products. Quarterly gross revenue was a record $9 million for the company, which represents a 101% increase over last year's Q2 and brings our year-to-date gross revenue to $16.8 million, which is an 86% increase over last year. Our overall gross margin this quarter was a healthy 34%. We're doing an excellent job withstanding price compression in the Canadian rec market, while being able to implement a price increase in early 2023 for our international sales. However, the liquidation of Flowr Group Okanagan old inventories at the low cost did lower our average gross margin. Adjusted EBITDA for Q2 was $1.7 million, which is an increase of $2.7 million over the Q2 in the prior year. Avant continues to generate significant positive quarterly cash flows from operations, making it somewhat unique in the Canadian cannabis industry. Cash flow from operations before changes in noncash working capital was $2.1 million, an increase of $2.7 million over last year. The cash balance of $800,000 at May 31, is down from $6.8 million -- from the $6.8 million balance at November 30 due to the strategic acquisitions of 3PL and Flowr. During the same 6-month period, the company produced strong cash inflows from operating activities before working capital adjustments of $3.8 million. This is an outstanding improvement over the cash outflow of $500,000 in the comparative period of the prior year. I will turn the call over to our CEO and Founder, Norton Singhavon, for an update on strategic initiatives.

Thank you, Miguel. Good afternoon, everyone. Miguel, it's great to have you on the team, and we're already seeing the value you bring to Avant through your operational expertise and drive to elevate our finance and accounting team as we enter into this next phase of growth. Avant is in a very strong position today as we continue to outpace prior quarters. Unlike many other cannabis companies, we have no immediate need to raise capital. Our strong revenue growth is a testament to the high demand for our products and the brand recognition we have established in the market. Additionally, unlike larger industry players, we are not facing the challenges that they are with retail pay-to-play, price and margin compression and vast amounts of inventory, which cannot be sold. Although the share price hasn't reflected our efforts, we believe that this is not agnostic to Avant and is an industry-wide issue as the supposed leaders of Canadian cannabis are simply not delivering results that investors want to see. As a result, there's not going to be much excitement about Canadian cannabis companies in general. However, we believe that we are one of the few outliers and the financial performance speaks for itself. As of the end of last week, over the past filling 12 months, Avant has been the fifth best performing stock amongst Canadian LPs. I know this doesn't help our average investor looking at the current share price, but I'm confident that if we continue to execute on our strategy, fulfill our seller financing payment obligations, that we will start to separate ourselves from the pack. The last quarter was relatively quiet on our news flow, and I know many of you supporters were wondering why there hasn't been much news. The truth is that we have been head deep driving out our strategy with the integration of Flowr, which in my opinion, has performed beyond my expectations in the short term. This is primarily to do with the sophistication of the facility itself and the original build-out, the experienced cultivation team at Avant and last but not least, the efforts of the existing dedicated staff of Flowr who have done a tremendous job in working with the team at Avant to make this integration perform beyond my expectations. I want to thank all of you. We have established a reputation for producing some of the best product in the country and globally. As a result of our efforts, we believe that Q3 will be another strong quarter for Avant as we have already booked $2.8 million in PLs from one single export client. Assuming no delays in logistics, these PLs should ship out in Q3 and will likely result in another stellar quarter. As we move forward, our focus remains on driving continued revenue growth while keeping our costs relatively flat, continuing to operate with our entrepreneurial drive, competitive mindset and financial discipline while also evolving and maturing from a Canadian West Coast startup into a world-class global leader. With Miguel's experience, we'll be able to gather financial information on segments, products and cultivar performance in areas we haven't historically done so. Achieving further efficiency and output on top of our already strong sales will continue to set us apart. Once again, we truly appreciate everyone's support and patience as we continue on our mission to be a leader of top-shelf cannabis products in Canada and globally. Now we'll pass it on, operator, for Q&A.

[Operator Instructions] The first question comes from Pablo Zuanic from Zuanic & Associates.

Norton, look, just a couple of questions. First of all, I realize you're not a small company, you're midsized, but can you talk about the dialogue when you go to see the boards, whether it's Ontario, Alberta or the others. And here you are Avant and they are also talking to a larger piece. How does that conversation go? I mean we hear that they are cutting SKUs, that they're just trying to consolidate suppliers. Just trying to understand the angle here when you go to the boards.

Yes. I think it's kind of the opposite. The larger LPs are having a hard time securing listings for the products because, in our opinion, everybody else has the same product. Whereas when we approach the liquor boards, we have a product that consumers want. We have a product that when it launches into the OCS platform, it gets pulled out through into retail stores and furthermore, sells out at the retail level. I'm going to pass it on to David Lynn, then I'll let him touch on it a little bit more.

Yes. I would just echo Norton's comments and also add that it's a very dynamic process. The -- there's a lot of competition in Canada amongst LPs and consumers have a lot of choice. But we've built a reputation for very, very high-quality products that turn over. Our branding and marketing is very strong. So we have a really good reputation with the liquor boards. We go through the product called processes, which vary by liquor board but we tend to have a lot of success because they believe in the company, they believe in our brands and they believe in our products.

Understood on that. And then just I don't know how much color you can provide in terms of formats, but where do you see the opportunities over the next 12 months? Is it mostly expanding your Flowr business? Or are you targeting other specific formats?

So our core competency would be Flowr and closely related products like pre-rolls. Obviously, in the pre-roll segment, infused pre-rolls, is growing very quickly. So we're taking advantage of that. We also have some concentrates business, vapes business, although that's relatively small as a percentage of the total. So I think the biggest opportunities would be Flowr-infused pre-rolls and then selectively launching concentrate products where we think we can have a point of difference and be successful.

And one last one if I can ask. In terms of the export business, you talked about, I think, shipments that have been scheduled for the third quarter. I think it's Germany. Can you -- again, in terms of what you can share, do you have GMP certification in Canada? Or are you having some on GMP in Europe or Germany itself? Are you going to a point of sale with your own brand? Or is it white label? If you can provide more color.

Yes. So that particular shipment that we're talking about is going to Australia to a single client. We do sell in our brand under the BLKMKT brand in Israel. It's a licensing deal. So it is our product. We have our brand guidelines. We have our packaging specs. We export it bulk wholesale to Israel and our partner there then packages and sells it under the BLKMKT brand. In terms of EU GMP, this is something that we are exploring internally. We haven't made any decisions yet, whether this is something we want to pursue. It is going to be a cost-benefit basis. And as a company that we do have limited production capabilities at this moment, we just have to assess the information to see if it makes sense to proceed with EU GMP.

[Operator Instructions] The next question comes from Chris Damas from BCMI Research.

Yes. Congratulations on the great quarter. Looks very impressive, and your deal to buy Flowr. A major competitor on the conference call last week, cited THC inflation and basically phony high THC levels in the dried flower and dried flower products market is hurting them. But we're talking 28% to 30% THC quoted, but that turns out that's not the true level. Now do you have any comment on this because this is a serious problem? It's one thing to have the illicit market do this, but a legal LP, that's another thing.