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spk03: 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 lesson-only mode. and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Stephanie Martin, Ambassador Relations. Please go ahead.
spk01: Thank you, operator, and good afternoon, everyone. Welcome and thank you for joining Avant Brand's Q1 2023 results conference call. My name is Steph Martins, investor relations for Avant Brands. Speaking on our call today is Avant's founder and chief executive officer, Norton Stinghaven, and chief financial officer, Matt Witt. Avant's chief operating officer, David Lin, is also present and will be participating in our Q&A session. Our Q1 2023 results were disseminated yesterday and are available on CDAR 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 CDAR. 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 who 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 Witt, to share the company's financial highlights. Norton will then provide a strategy update. Please go ahead, Matt.
spk00: 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 three months ended February 28, 2023, compared to the same period last year. First, 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 flower group Okanagan. This facility was purchased from the flower corporation through CCAA proceedings, as had been previously announced. The flower 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 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 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 28th, 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% 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 networking 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 Singhaven, our founder and CEO, to discuss our strategic priorities.
spk04: Thank you Matt and good afternoon everyone. We began fiscal 2023 with deliberate execution on many fronts, including capitalizing on growth opportunities that would create value for our shareholders. We also prioritize 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 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 a 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 Flower. 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.
spk03: Thank you. The first questioner comes from Rahim Rehman, a private investor. Please go ahead.
spk05: 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, you know, there's been some expansion there. So, you know, could you possibly shed some light on how much of that is, you know, long-term carries over to the future and how much of it was, you know, particularly for this quarter?
spk04: Yeah, 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 flour 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 your entire question, but if you have anything you want to add, please let me know.
spk05: Fair enough. So would it be prudent to estimate that Q4 would also be seasonally strong considering historical trends?
spk04: I would say on the RAC 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. Perfect.
spk05: Yeah, and on the flower integration, if you could, you know, anything in the synergies, any sort of transition or cost savings? You know, because the adjusted EBITDA number being positive, you know, the cash flow being in a much, much better picture, you know, all of that, how does it flow through with the integrations and acquisitions?
spk02: Hi, it's David Lin. I'll take that question. You know, we're super excited about a flower 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 a million dollars in annual overhead savings. And then subsequently during the month of April, we will realize about another half million dollars of savings. So if you combine that, there's about a million and a half in annual savings. And of course, that's over and above the kind of automatic synergies we got by buying Flower 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.
spk05: 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 attached, any high-level comments would be great.
spk04: Yeah, 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, you know, vendor take back seller financing. I think our stock was give it give or take 20 cents at the time we closed the transaction and we were able to negotiate a 50 cent convertible to venture. I mean, that's, you know, quite a premium. So I'm confident that, listen, this is not some predatory hedge fund. It's not a loan to own predatory lender. This is our partner and a large shareholder of Avant. And the way we structured it, I think, makes the most sense that we were 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 they're such a large shareholder that now we're reporting insider on SETI. That gives me a lot of comfort moving forward that they are our debt holder.
spk05: Fair enough. Thank you for answering these questions.
spk02: You're welcome.
spk03: The next question comes from Jordan K., private investor. Please go ahead.
spk06: Hey, North. Hey, Matt. Congratulations on an amazing quarter. Thank you, Jordan. 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, you know, a lot of this, I think, has to do first with acquiring the other 50% of 3PL and now, you know, the full ownership of Flower. 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 two and a half 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 a 1.6 to the 3PL in April, and then another 1.6 somewhere around July, August, and then 1.45 to MENA. I think it's MENA. in August as well. So over the next four months or so, we're looking at four and a half million in cash that has to come from somewhere. And, you know, if we talk about the stock being undervalued, one of the reasons I think would be just, you know, investor trying to figure out how that's all going to work. So any color that you can provide on that and any, you know, plan A, plan B and plan C 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.
spk04: Yeah, 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. 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 flower, it's the same thing. We expect the cash flows flower to be able to pay out Mina. By, by August.
spk06: Correct. Yeah. If that, 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, um, Well, here's the thing.
spk04: Flower 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 Flower sitting in Flower's bank account to make that payment.
spk06: And so was there zero revenue from Flower in this Q1?
spk04: $300,000, but that's just purging old outdated inventory at like fire sale rock bottom prices. This is not a Vaant product. One thing to keep in mind too, Jordan, is that Mina is now an extremely large shareholder of a Vaant. 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.
spk06: Okay, that's really good to know. And, Nort, 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 JP Morgan at 2%. And when the market realized that they had sort of that cash backing, the market gave them like a super premium. It kind of led to when they skyrocketed. So if Mina, if Mina wanted, I mean, not that, not that Mina is going to listen to me on this conference call, but if Mina wanted to provide, you know, some financing at some ridiculous terms to watch their stock that they own and live on appreciate, I mean, that would be a way to do it. Okay.
spk04: 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 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.
spk06: Awesome.
spk04: I love that.
spk06: Just a couple more things quickly. I have, I mean, I saw a comment somewhere, and I also looked into it. IMCC, you think you said in prior calls that export pays quickly, but the outstanding receivables was quite large. Is that REC outstanding receivables, or is that IMCC outstanding receivables?
spk04: 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.
spk06: All right. That's really good to know. That's the government paying us, right? Right. Yeah. Canada is good for it. Yeah, exactly. How much of your export is done by IMCC? I'm going to hand this over to David Lynn.
spk02: Yeah, so we don't provide a breakdown by country or by client, but IMCC is a major client of ours, and we've publicly disclosed that in the past. One thing I would point out to kind of address your concerns there is that the minimum amount 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 boards 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.
spk06: Is IMCC just Israel, or do they cover other areas?
spk02: Just Israel, I believe. For us, it's just Israel, but they do have business in other countries as well. Okay.
spk06: All right. Sounds good. And have new export contracts been landing outside of IMCC over the last quarter? I don't think I asked about it in the previous quarter.
spk02: 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.
spk06: And do they order every quarter? Do they order once a year? What does the case look like when you're adding on new clients?
spk02: Um, I think it, it, it varies by client, but, um, you know, a lot of them might want to take an order every month or so.
spk05: Okay.
spk06: Wow. That's, that's, that's really good. Um, and I got one last thing, uh, lease liability. Um, it's a fire facility on a lease property. Is that what that is? Correct.
spk02: Correct.
spk06: Okay. Um, That's it for me. I just, you know, thank you all for your open lines of communication and for your outstanding execution. I hope and pray we all get rewarded with a share price one of these days. Likewise.
spk03: Once again, if you have a question, please press star then one on your telephone keypad. The next question comes from Joe Rice from KW. Please go ahead. Hey, Norton. How's it going?
spk04: Good, Joe. How are you?
spk07: Oh, can't complain. Can't complain, especially after this call. But quick question. When y'all took over Flower, was there any export deals or customers that you were able to kind of work with? that Flower previously had before you took over the facility? Or are you still kind of working from scratch to get more export deals?
spk04: So the great thing about the CCAA core process is you get to purge, you get to 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 Flower, we got to cherry pick contracts and agreements with clients that we want to take on. 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, Flower was predominantly focused on their REC business and selling a lot of domestic B2B. We don't like a 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 that when we took over, there was a decent amount of money owed. And we've collected a good chunk of that since.
spk07: Oh, okay. So you were able to get their money but none of their debts. The money that was owed to them but none of their debts.
spk04: Yeah, we were able to... Yeah, 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, purge it. We don't want it. So how we actually structured that was that we don't inherit anything. We don't take on any contract. We don't take on any debt unless we... implicitly specify that item in the agreement. So we just cherry-picked a few things that we liked. And, you know, the beauty is, yeah, once we took ownership of it, they had sold product to other provincial markets, to other buyers. There was money owed that was coming in. Once we took legal ownership, that money continued to flow in, which was nice.
spk07: Oh, awesome. Great, great, great. But the bottom line is that 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.
spk04: Yeah, I would say one major one. Well, one that is a major player in Israel, and it is pretty high volume. So we're excited to see where this relationship goes. But, yes, we inherit that from Flower.
spk07: Great. Awesome. And also one more question I have. I was noticing 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?
spk04: Yeah, listen, because, you know, we don't have enough products. So the gist of it is that if you have limited supply, we say, you know, so what happens is that we have, you know, clients that are originally were paying $4. Then we had, you know, newcomers come and say, hey, we'll pay $4.25. So we're taking the contracts that have the best terms. That includes, you know, payment in terms of timeline. So, you know, the more upfront they give us and the higher price it is, we prioritize those, right? And then when we go back to our other clients, sorry, you know, you're getting less product because we're fulfilling, you know, better terms. Then they got to match it if they want more product. So we've been able to do that. Hopefully that continues when Flower comes online and hits full capacity. I think the global export market, you know, I always 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? And, you know, 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 a launch in these other markets, that's when it starts to get interesting when we have the black market brand in other jurisdictions.
spk07: Okay, that's pretty, I mean... that's pretty good considering, you know, it's a high volume. I assume, you know, you probably use these exports as cashflow 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.
spk04: Yeah. And we don't have to package it either. Right. Packaging is a lot of late. It's super labor intensive because we hand package everything. Right. Uh, 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, you know, I think I would rather have the rec business grow, you know, slow and steady, right? You know, if we go from 5 million in rec in a quarter to 9 million, like that's going to be stressful, man. But if we go 5 to 5.5 and 6, you know, that's a nice steady pace of growth for my operators and my packaging team. Awesome.
spk07: Great. Keep up the good work, man. Take care.
spk04: Thanks, Joe. Appreciate it.
spk03: Once again, if you have a question, please press star, then 1 on your telephone keypad.
spk04: Operator, I think we're good.
spk03: 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 Sinkhaven for any closing remarks.
spk04: 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.
spk03: This concludes today's conference call.
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