Avant Brands Inc

TSX:AVNT

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Third 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.

[Alyssa Barry, executive]

Thank you, operator, and good afternoon, everyone. Welcome, and thank you for joining Avant Brands Q3 Fiscal 2023 Results Conference Call. My name is Alyssa Barry, Investor Relations for Avant. Speaking on our call today is Avant's Founder and CEO, 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.

Our Q3 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 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.

[Miguel Martinez, executive]

Thank you, Alyssa, and good afternoon, everyone. Thank you for joining us today. We are pleased to report another strong quarter for Avant Brands. In Q3 2023, we continued our trend of delivering positive year-over-year sales growth and achieved several significant milestones. Diving into some of our key financial metrics for the third quarter ended August 31, 2023. We reported gross revenues of $7.5 million, representing a 61% increase compared to Q3 last year. This also represents our fifth consecutive quarter of positive cash flow from operations, reinforcing our commitment to sustainable growth. Our overall weighted average net selling price of $4.17 reflects changes in the recreational sales product mix and some out-of-spec sales in the export business-to-business market. While we continue to hold pricing for the company's flagship black market brands as well as high-margin Flowr sales internationally.

Our cash flow from operations after changes in noncash working capital was $1.8 million, demonstrating our ability to generate positive cash flow consistently. The successful integration of flower into our cultivation framework in February 2023 contributed significantly to the growth of our gross revenue, margin, adjusted EBITDA and cash flow from operations. This is a significant achievement with only 6 months of completing the acquisition and we anticipate that over the coming quarters, Flowr will generate meaningful cash flows to the Avant group of companies.

Corporate overhead net of depreciation and share-based compensation, was $2.9 million for the quarter and $6.9 million year-to-date, which is a 75% and 40% increase over the prior year comparative period, respectively. This increase is primarily due to growth initiatives, increased regulatory fees performance bonuses and estimated professional and audit fees. We continue to look at all aspects of our business to stay lean and efficient.

And finally, we achieved an adjusted EBITDA of $900,000 for the quarter with an adjusted EBITDA margin of 14%. During the quarter, the company also secured a $3.5 million credit facility to ensure that Avant remained capitalized as we bridge to stronger future cash flows. As of August 31, we had drawn down $2 million on the facility, and we currently have $1.5 million remaining.

With that, I will turn the call over to our CEO and Founder, Norton Singhavon, to expand on our operations and provide an update on strategic initiatives.

[Norton Singhavon, executive]

Thank you, Miguel. We produced a record-breaking 3,268 kilograms of cannabis in Q3 of 2023, representing a significantly increased run rate, which will help enable us to achieve higher levels of quarterly sales in the near future. Our efforts to optimize output and quality while concurrently reducing costs is starting to have a positive impact on our cash flows. This quarter, we experienced production increase as a result of a successful integration of flower and increasing our capacity utilization company-wide to 65% versus 46% in the previous quarter. This resulted in an unprecedented surge in production for us. The inventory buildup is essentially a timing issue and is not indicative of demand. Rather, we are preparing our products to be delivered into Ontario, Quebec and internationally. We expect to see this reflected in our results next quarter.

It is also important to note that a significant portion of our inventory buildup consists of popcorn and trim, which is what we use for concentrates and pre-rolls. Currently, our velocity and demand for pre-rolls and concentrates doesn't match the rate where we accumulate our popcorn and trim. We are currently working on initiatives to launch new products and potentially export some of our smaller by Flowr.

Avant has achieved 65% capacity utilization while dramatically lowering operating costs at the facility level and maintaining high-quality standards. We embrace a philosophy of continuous improvement Thus, we expect to make additional improvements in future quarters. Our cost-saving initiatives have played a pivotal role enhancing our gross margins even in the face of price compression and inflation in the Canadian recreational market.

This quarter, our overall gross margin stood at 31%, a testament to our commitment to financial discipline. Direct gross margin was an impressive 39% while our export gross margin was 16%. The export margin was driven down as we continue to liquidate Flowr's inventory we inherited from the acquisition that closed earlier this year. I'm also happy to announce that we recently expanded our international client portfolio with a focus on Israel, Australia and Germany. We executed agreements with new clients in such markets with a view to increasing the company's total export revenue while achieving geographic and customer diversification.

Lastly, we have commenced our first shipments to Quebec for black market flowers and pre-roll SKUs. This marks a great milestone for Avant as we are confident that Quebec will be a successful market for our products and brands. Our solid financial results coincide with the continued high demand for our products, both domestically and globally. Building and maintaining our strong brand recognition continues to drive our growth. We are proud to highlight that Avant currently ranks as the 10th largest publicly-traded LP in Canada by market cap.

Avant was also ranked 49th out of 425 on the Global Mail's list Canada's top growing companies for 2023, which is sector-agnostic. At 849% growth over the last 3 years, the list does not include any public or private license producers placing Avant as the fastest-growing license producer in the country on this list.

In the face of a difficult market landscape, Avant has determined to create long-term value for its shareholders and established itself as a leading premium cannabis company. As we continue to tell our story to the investment community, our key differentiators remain the same, including our ability to produce premium cannabis flower at scale, which based on what we see, no other LPs have replicated what we have accomplished at the level of quality and scale that we have. We will continue to have a strong focus on cost savings, operational efficiency, aggressive pursuit of new markets and, of course, our strong brand position.

Avant stands on a sector that has seen its fair share of challenges not to mention the state of overall equity markets. We have diligently navigated this, demonstrating resilience and adaptability will set us apart. For the strong commitment to excellence, we are confident in our long-term success and solid positioning within our sector. As of the end of last week's trading, along currently sit as the second best performing Canadian stock year-to-date, at a 12% gain, while the average the 26% loss.

We understand this is still nothing for shareholders to be excited about as we experience the bear market further exacerbated with the vast majority of the Canadian cannabis companies shortly. We remain extremely dedicated to generating long-term shareholder value and are confident as we continue to execute, generate positive cash flow, fulfill our vendor take-back obligations that eventually, we will deliver substantial value to our loyal and dedicated shareholders.

In closing, I'm proud that we are the 49th fastest-growing company in this country. We're the 10th largest publicly-traded LP. We're the largest indoor producer in this country and the second best performing Canadian cannabis stock in this country.

Thank you for your continued support and interest in Avant Brands. Now we'll open up the floor to questions.

[Operator]

[Operator Instructions] The first question comes from Jordan Key, a Private Investor.

[Unknown Attendee]

Norton, crazy times out there. I was glad to hear that everyone is doing okay after all those fires there in Kelowna.

[Norton Singhavon, executive]

Definitely.

[Unknown Attendee]

Interesting quarter. Some numbers kind of want to run by you. The credit facility is drawn down $2 million now, so there's $1.5 million left. Do you think that you're going to need to draw down the other $1.5 million. And this kind of jumps into my next question, which is going to be how are you looking at Q4?

[Norton Singhavon, executive]

I'll let Miguel take the credit facility one.

[Miguel Martinez, executive]

Yes, we will -- we plan to draw down on the remaining $1.5 million during Q4.

[Unknown Attendee]

Okay. And Nor, does that mean you've got visibility into Q4 and it's not going to be one where the company generates enough cash flow to pay its obligations.

[Norton Singhavon, executive]

I'll let Miguel take that one also.

[Miguel Martinez, executive]

To give you a little bit more context around the drawdown. We have our convertible debenture and a promissory note with MENA. And those 2 instruments will -- those 2 facilities will be paid down with the drawdown of this loan.

[Norton Singhavon, executive]

So Jordan, we have a payment due to the vendors of F-20 November 1 for, call it, was a $1.6 million and some change. Then we have $720,000 due to MENA for the Flowr buyout due December 12. So it's going to be obviously draining out significant portion of our cash between November and December. That's why we intend to drawdown the credit facility. The good news is after that, MENA is completely repaid. So that obligation is off the books. And we have it over 3 months until our next payment is due to the vendors of F-20.

[Unknown Attendee]

Okay. Yes. And the credit facility just -- and Miguel, sorry, I didn't introduce myself. I missed your last call, and that's my fault. But we've talked about in the past that with modeling that you guys had done originally, you didn't think that you need a credit facility. But now the credit facility is essentially being used to pay down these obligations, and I would assume, kick back payments. So when does the credit facility has to be paid back? And is there a balloon at the end?

[Norton Singhavon, executive]

The credit facility, if I'm correct, is amortized over 3 years.

[Unknown Attendee]

So do payments start immediately on it? Or is it ballooned.

[Miguel Martinez, executive]

We're currently making payments on the $2 million that's been drawn.

[Norton Singhavon, executive]

Yes. It basically operates like a term loan as long as -- as soon as you draw down on it, it starts amortizing.

[Unknown Attendee]

It starts amortizing. Okay. Yes. So that makes sense. It essentially makes a short-term obligation into a longer-term obligation over the 3 years.

[Norton Singhavon, executive]

Correct. And there's no balloon at the end and it's nice that we're just chipping away at it monthly.

[Unknown Attendee]

Okay. That sounds good. And can I ask one more thing about the balance sheet. So for the last few quarters, we've been seeing some numbers, let's just call it, $14 million, $15 million in inventory. And then when earnings come out, we're seeing numbers that are far less than inventory. And like I know the 60 days and everything like that, but how is that translating? Is that because things are getting kicked back? Is that because of the way that reporting is required that it's not really the amount of actual inventory you're going to sell? Any context on that could be -- would be super helpful.

[Miguel Martinez, executive]

Absolutely. So some context I can provide you with inventory in general is because we're an agriculture company. We have an agriculture product, the biological asset does make our inventory balance higher than our cost base. And so while we are expanding our production, and we are developing new brands and new products and facilitating new customers, meeting new customers, signing new agreements and expanding internationally, we also -- the value on the balance sheet in inventory, roughly speaking, is about -- 40% of it is biological asset, fair value amounts, not really to do with the hard cost of our production.

[Unknown Attendee]

Okay. But that's broken out into a separate line item on the balance sheet. So you're saying there's biological assets that represented twice both as biological assets and as inventory.

[Miguel Martinez, executive]

No, not twice, there's the biological asset of the plant that's growing, which is a separate line item. So that's the living plant in the facility and measured at fair value less cost to sell. But the inventory on the balance sheet at the time of harvest, the fair value less cost to sell becomes your inventory cost base. And so there's the 2 line items, the biologic asset is the living plant and then in inventory is our production, and that production has a cost base of fair value less cost to sell. And so it is in 2 places on our financial statement, I guess, the easiest way to answer that question. They transfer from the living plant into inventory at the new cost base.

[Unknown Attendee]

Okay. So you're saying, if I'm looking at an inventory number, let's just call it, $20 million, right, in inventory. You're saying that actually only 60% of that is going to be sold and will result in money.

[Miguel Martinez, executive]

No. The same 60% of it's going to be sold. I'm saying 60% of that is our cash cost of inventory with depreciation. The other 40% is -- these are approximate numbers, but the other 40% approximately is fair value amounts from the biological asset standard under IFRS.

On the P&L, you can see the impact of these because our margin is separated out into 2 different components. And so the margin on the P&L, you can see revenue less cost of sales and that cost of sales line is reflective of what you would traditionally expect to see in cost of sales, the cost of our production plus depreciation. And then it says gross margin before fair value changes and it talks about the -- it notes 2 line items there. The realized gain on changes in fair value of biological assets, which is reflective of the change in value of biological asset line on the balance sheet as well as a change in fair value of biological assets realized through inventory sold.

And so we've separated out within inventory, there's the cost and the fair value component, the cost when inventory sold, the cost goes to cost of sales, and the fair value component goes to change in fair value of biological assets realized through inventory sold. I appreciate it's a somewhat confusing topic, but it's the...

[Unknown Attendee]

Yes. Maybe that's not the piece to hang my hat on. I guess maybe if we look just at the production now, right? So I think -- and using rough numbers here, so nobody quote me, about 3,600 kgs produced in Q3, it was about 2,000 produced in Q2 with an average selling price, right, per gram. And I think that includes trim of what, $4.50, something along those lines, then wouldn't you -- theoretically you'd expect the production of those 2 quarters to produce somewhere like $20 million in revenue?

[Norton Singhavon, executive]

Not necessarily because part of that makes up for popcorn and trim and part of that is just because something is classified in inventory doesn't mean it's ready for sale, right? You've got to do your testing, you've got to package it and you've got to ship it out the door. And some of the product is slated aside for a delivery date, call it in October or November. So a simplest way to put it is out of 100 kg, and I think I told you this before, probably about 60 kg of that is going to be what we call our high-grade ultra-premium flower. We're left with another 40% that's going to be popcorn and trim. So as I mentioned -- as we mentioned in the press release and as I mentioned in kind of my summary, we are accumulating popcorn and trim at a rate that we -- at a rate higher than what our velocity is to move it, right?

But that's not our core business. Our core business isn't to make concentrates with popcorn and trim. It just so happens at our size of scale that we're starting to accumulate that. So a lot of that inventory, I don't know what the exact number is, if you broke it down, it's going to be in progress a lot of, call it, the 60% Grade A product, top-shelf product. That's destined for a consumer. And then the balance is essentially accumulating popcorn and trim. There isn't a glut of, call it, what I call top-grade flower that's sitting there, accumulating that we don't have a home for. And that's where you're getting at, which I think is what you're at.

[Unknown Attendee]

Well, what I'm really getting at and probably it's challenging to answer on the phone, which is when are we going to see the real ramp with Flowr in revenue, right? Because we saw fairly substantial quarters prior to Flowr being acquired, right, and that is either upwards of $8 million, $9 million. And so when you're thinking about Flowr being acquired and Flowr being such a large facility, you're thinking, "Oh, okay, well, maybe we're talking about $13 million, $14 million quarters here at some point, and we're just not seeing it yet. So that's what I was really trying to get at.

[David Lynn, executive]

It's David here. I think your basic point is valid though. We don't want to make a forward-looking statement about specific quarters in the future. But if you're asking whether that higher level of production enables us to achieve higher levels of sales going forward, the answer is absolutely yes. That's what we're working towards. And with Flowr not only coming on stream, but producing at a very significant rate, the largest facility in our family, it will enable us to achieve higher levels of sales in future quarters. Just that we don't want to make a specific statement as to which quarter will be the first one when you see that happen.

[Unknown Attendee]

Okay. I got you. And did Desjardins claim, did that go away? I didn't get anywhere in the reporting.

[Norton Singhavon, executive]

Desjardins claim, no, it is still in progress, and there hasn't been any update since. This will be drawn out. It will be something for a couple of years, along with the McArthur claim that we're dealing with.

[Unknown Attendee]

Did they file a lawsuit or is it just a letter?

[Norton Singhavon, executive]

They filed the Statement of Claim.

[Unknown Attendee]

Okay. I don't know what that is in Canada, but that I was just curious if it was resolved though it doesn't sound like it is. Let me drop for now. If it comes back around in mind, I'll ask more questions. But I appreciate you guys so much answering my questions. And good luck on the future quarters. Hopefully, things ramp up here soon.

[Operator]

[Operator Instructions] The next question comes from Rahim Rehman, a Private Investor.

[Unknown Attendee]

Norton, Miguel and the team. Thanks for another successful quarter. I just had a question regarding -- so just to compare before the Flowr acquisition took place some industry pundits made disparaging remarks. It was -- whether that was a strategic decision to begin with. I remember, maybe it was Rob McPherson, who categorized it quite colorfully as a bag of poopy pops while acknowledging that McPherson has never actually worked in the industry. Could you guys just reconcile that perspective, considering a really good quarter in terms of the acquisition?

[Norton Singhavon, executive]

Yes. First of all, somebody on LinkedIn type in a way who's never worked a single second in cannabis, his opinion, I don't really hold in high regard, but I do respect the fact that he has a CPG background. But I think cannabis is fast moving. It's a startup. There's no precedent and it's very entrepreneurial-driven and consumer-focused where as Mr. bag of poopy lollypops or whatever it comes from large global corporate CPG.

So -- but I agree with a lot of his point, to be honest. And I followed him on LinkedIn extensively until he decide to block me, and I agree with most of his opinions, especially on the industry. But yes. When he said that the Flowr acquisition was a bag of poopy pops, I think this quarter, what did we close on this on February 1 and call it by August 31, we would say Flowr is on track to be extremely successful.

We worked very closely with the management team and operations seen that Flowr even before we took full legal ownership to have a quick turnaround in the business. We increased our output dramatically. We eliminated millions of dollars in operating costs, even though when we took over, they said this thing has been stripped to the bones, you're not going to find much savings. We just want to set the stage so you guys have reasonable expectations, don't go in there thinking you're going to find $6 million within weeks, right? But we found a single-digit million, close to $2 million, I believe, within weeks. And you know what, we're staying focused on producing high-quality flower out of there.

So now come today that bag of poopy pops is generating positive cash flow for our company. It's accounted for 46% of our total harvest in Q3, and we're extremely happy with the integration. And I think long-term shareholders are going to see the contribution of Flowr is -- contributes to our company, and it's a massive milestone, in my opinion, for our company. Flowr has made us, if I'm correct, the largest indoor producer in the country now.

[Unknown Attendee]

That's amazing. And just on the specific timing issue that led to the production outpacing sales. Again, could you shed some light on that, whether that's normal, yes, about cyclical or yes.

[Norton Singhavon, executive]

Yes. I think it's completely normal. I think in any sort of manufacturing or production, and I really like Miguel's example when he uses this. But I mean, if you were producing cows, I mean you're not selling your stakes right away, right? And furthermore, the other example that I really respect is that we're producing the high-end porter houses when we still have the other byproduct, which is our popcorn and trim that we need to move, right?

So as I said multiple times, it's in our press release. It's in my initial thoughts and summaries of this call that we're not experiencing any sort of significant demand challenges for our products. Everything still has a home. Lots are identified and lots have an identified customer for them months in advance through our production planning and sales planning. So as it stands, it's simply delays or deliveries for October or November, right? We harvest something in July or August, and that is meant to be delivered for a customer in the following quarter, and that's as part of business.

[Unknown Attendee]

I hope guys continue being the awesome machine that you guys are.

[Operator]

The next question comes from Jordan Key, a Private Investor.

[Unknown Attendee]

I thought there'd be a few more people on the line because last quarter was so busy. So quickly, Nor, are you guys thinking about the potential rescheduling in the United States and how that impacts those sales in Canada, the United States and around the world. And if you do have anything you're able to share about that, anything worthwhile to talk about there?

[Norton Singhavon, executive]

To be honest, we mainly focus on just what's going on in the market we compete in it. And we don't even pay much attention to some of the other Canadian companies that aren't relevant to us, right? We keep tabs on the guys that are playing in the categories that we play in.

Now answering this question personally, I do like the U.S. market. I think it's going to be a huge opportunity for companies that I think have their s*** together, right? Does Avant want to go and aggressively tackle U.S. if this were to happen in the next 6 months, I don't think so. But long term, listen, like we're tackling markets way further than the U.S. We're going aggressively after Germany, Israel, Australia, we're eyeing the U.K. So I think if the opportunity presented itself and depending where we were with our priorities, I don't think the U.S. is out of the question. So I think any geographical country is a possibility for us.

[Operator]

[Operator Instructions] There are currently no more questions in queue. And 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, executive]

Thank you again, everyone, for joining us today. If you have any questions or would like to connect with us, please reach out to us any time. Have a great day.

[Operator]

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