Avant Brands Inc. (AVTBF) Q2 2023 Earnings Call Transcript

Avant Brands Inc. (OTCQX:AVTBF) Q2 2023 Earnings Conference Call July 18, 2023 3:00 PM ET

Company Participants

Alyssa Barry - Investor Relations

Miguel Martinez - Chief Financial Officer

Norton Singhavon - Founder and Chief Executive Officer

David Lynn - Chief Operating Officer

Conference Call Participants

Pablo Zuanic - Zuanic & Associates

Chris Damas - BCMI Research

Jacob Brodsky - Private Investor

Operator

Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. Second Quarter Fiscal 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 Alyssa Barry, Investor Relations. Please go ahead.

Alyssa Barry

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.

Miguel Martinez

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 in May 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 at 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 any time. To summarize Avant's performance, starting with the three months ended May 31st, 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 below 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 non-cash working capital was 2.1 million, an increase of 2.7 million over last year. The cash balance of 800,000 at May 31st is down from 6.8 million -- from the $6.8 million balance at November 30th due to the strategic acquisitions of 3PL and Flowr

During this same six 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.

Norton Singhavon

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 does not seem 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 trailing 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, fulfil 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 at 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 start-up into a world class global leader.

With Miguel's experience, we will 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.

And now we'll pass it on to operator for Q&A.

Question-and-Answer Session

Operator

Certainly. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Pablo Zuanic from Zuanic & Associates. Please go ahead.

Pablo Zuanic

Hello, Norton. Look, just a couple of questions. First of all, I realize, you know, you are not a small company. You are mid-size. 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 are trying to consolidate suppliers. Just trying to understand the angle here when you go to the boards? Thank you.

Norton Singhavon

Yeah, I think, it's kind of the opposite. The larger LPs are having a hard time securing listings for their products because in our opinion everybody else has the same product. Whereas when we approached 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, it sells out at the retail level. I'm going to pass it on to Dave Lynn now. I'll let him touch on it a little bit more.

David Lynn

Yeah, I would just echo Norton's comments and also add that, you know, it's a very dynamic process. 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 call 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.

Pablo Zuanic

Understood 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 flower business or are you targeting other specific formats? Thank you.

Norton Singhavon

So our core competency would be flower and closely related products like pre-rolls. Obviously, in the pre-rolls 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 flower, infused pre-rolls and then selectively launching concentrate products where we think we can have a point of difference and be successful.

Pablo Zuanic

Thank you. 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, you have GMP certification in Canada or are you having someone, GMP in Europe or Germany itself? Are you going to the point of sale with your own brand or is it quite label if you can provide more color? Thank you.

Norton Singhavon

Yeah. 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 black market brand in Israel. It's a licensing deal. So it is our product. We have our brand guidelines. We have our packaging specs.

We exported bulk wholesale to Israel and our partner there then packages and sells it under the black market 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.

Pablo Zuanic

Understood. Thank you.

Operator

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

Chris Damas

Yeah. Congratulations on the great quarter. It looks very impressive and your deal to buy Flowr. A major competitor on their 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. 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? If this is a serious problem and it's one thing to have the illicit market do this, but a legal LP, that's another thing.

Norton Singhavon

Yeah, I would say, cannabis is an industry where CEOs love to blame other factors versus being accountable for themselves. But my thought is this. We know there's a lab shopping game going on. We know our competitors go to the labs that test higher.

At the same token, I think I know exactly which call you're talking about. They're simply just trying to deflect blame in my opinion. I don't really see that being an issue. There's only a certain number of labs in Canada. These labs are regulated.

I think one of the other problems we actually I think the bigger problem is not really lab hopping. It's more so they're sample taking. And I think there's some companies that really, when they select for sampling, are selecting samples that they know are going to test higher than what the lot should be. But that's my personal opinion. I could be right. I could be wrong.

Chris Damas

One last one, Norton. Do you sell in Quebec? Do you sell flower in Quebec?

Norton Singhavon

I'll pass this on to David Lynn.

David Lynn

Yes, we are selling into Quebec. That was Flowr Group Okanagan, which we acquired, had a business in Quebec through partner. So we've inherited that business and we're trying to kind of develop and build that business. But that essentially became our initial foothold in the Quebec market.

Chris Damas

Great. Thanks again.

Operator

[Operator Instructions] The next question comes from Jacob Brodsky from Private Investor. Please go ahead.

Jacob Brodsky

Hello. Congrats on a great quarter team. So I'm just trying to understand your guys' like strategy going forward as far as like cash position and acquisition. Are you guys thinking more about starting to let free cash flow from operations build up on the balance sheet a little bit and give you guys more of a cushion? Or do you just see like a lot of opportunities trying to acquire still? How are you guys thinking about that?

Norton Singhavon

I'd say obviously accumulating a strong cash balance is great and that's something that becomes top of mind, right? And to also meet our financial obligations for the seller financing that we've done through 3PL and the Flowr transaction.

But I'd say in terms of acquisitions, we are getting pitched off on a weekly basis, probably seeing about anywhere from one to three pitches a week. I don't think we're in acquisition mode right now.

Flowr was extremely opportunistic where the timing was right. We had entered into acquisition talks with them before they filed for CCAA. We know that company very well. They are in our own backyard.

So I would say they are the exception. But no we are not going out aggressively looking for assets right now. If something comes to the table and it hits the tick boxes and it makes sense geographically and from a financial standpoint. Then of course we'll consider it. But right now, I want to be eyes on the prize, and that's to get Flowr off firing on all cylinders.

Jacob Brodsky

Okay. And then as far as like continuing to get the free cash flow from operations, I know one of the headwinds is cannabis price compression. What are you guys seeing as far as like looking forward, obviously, it's impossible to predict with 100% certainty. But do you see a bottoming out in cannabis prices in the future, in the next year or two? And what factors are possibly going to play into that and cause continued price compression or the ability to raise prices going forward?

Norton Singhavon

So in terms of the export market, which I'll touch on first, we've actually increased our selling price. We started off exports at $4 a gram. All the deals we signed now are somewhere between $4.25 to $4.50 depending on the volume and terms, etcetera.

So we're definitely not facing compression on the export side. In terms of the domestic rec side, we did -- I think we've done one price drop on black market in its entire life and I think that would have been in 2020.

So I know that it's all doom and gloom, globe and mail, all these other LPs are talking about price compression. But this cannabis market is divided into multiple segments, right? Just because the value producers are facing price compression doesn't necessarily mean the premium producers are.

Now, some premium producers might be. But in the category that we are playing in, black market is not receiving any sort of price compression pressures. We're not getting any pressure to reduce our price points from the liquor boards or from the retail buyers.

Jacob Brodsky

Okay. So then would it be reasonable to assume that in Q3 we might see average selling price a bit higher because you don't have the headwind of trying to get rid of some of the pre-existing products that existed with your acquisition?

Norton Singhavon

Yes, I think, that average selling price was the lowest average selling price we've ever seen in the company's history. And like I said, that was from just blowing out Flowr's inventory. Some product was sold as low as like $0.50, $0.80. It was all just liquidation because to us, that's just money sitting there, right?

We're not going to do anything with that product. So let's just get it out the door and get whatever cash we can. So when we took over, I think, within the first week we gave a mandate to the Flowr, the sales guys at Flowr to just liquidate all the inventory. We don't care about the price. Whatever we think is reasonable, use your best judgment, just get rid of it.

Jacob Brodsky

All right. Great. Thank you for answering those questions. Very helpful.

Norton Singhavon

You're welcome.

Operator

[Operator Instructions] 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 to us any time. Hope everyone enjoys your summer and we'll talk to you again in the fall. Thank you.

Operator

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