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spk04: 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. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star 10-0. I would now like to turn the conference over to Alyssa Berry, Investor Relations. Please go ahead.
spk02: 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 Berry, Investor Relations for Avant Brands. Speaking on our call today is Avant's founder and Chief Executive Officer, Norton Singhaven. and Chief Financial Officer Miguel Martinez. Avant's Chief Operating Officer David Lin is also present and will be participating in our Q&A session. We'd like to extend a warm welcome to Miguel as this is his first earnings call as Avant CFO. Miguel, welcome. Our Q2 2023 results were disseminated yesterday and 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 in our regulatory filings available on CDAR. 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.
spk00: 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 at Pure Sun Farms 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 anytime. To summarize Avant's performance, starting with the three 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 Flower 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 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 31 is down from the $6.8 million balance at November 30th due to the strategic acquisitions of 3PL and Flower. During the 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 Singhaven, for an update on strategic initiatives.
spk01: 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 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 Flower, 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 in the original build-out, the experienced cultivation team at Avant, and last but not least, the efforts of the existing dedicated staff at Flower, 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 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 the operator for a Q&A.
spk04: Certainly. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging the request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We'll pause for a moment as callers join the queue. The first question comes from Pablo Zuniak from Zuniak and Associates. Please, go ahead.
spk03: Hello, Norton. Look, just a couple of questions. First of all, I realize, you know, you're not a small company. You're midsize. But can you talk about the dialogue when you go to see the boards, whether it's Ontario, Alberta, or the others? You know, and here you are a band, and they are also talking to a larger piece. How does that conversation go? I mean, we hear 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.
spk01: Yeah, I think it's kind of the opposite. You know, the larger LPs are having a hard time securing listings for the products because, you know, in our opinion, everybody else has the same product. Whereas, you know, when we approach 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 and then I'll let him touch on it a little bit more.
spk08: 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.
spk03: Understood. And then just, I don't know how much color you can provide in terms of formats, but where do you see the opportunities, you know, over the next 12 months? Is it mostly expanding your flower business, or are you targeting other specific formats? Thank you.
spk08: So our core competency would be flour 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 flour, infused pre-rolls, and then the selectively launching concentrate products where we think we can have a point of difference and be successful.
spk03: 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, do you have GMP certification in Canada, or are you having someone GMP in Europe or Germany itself? Are you going to the to a point of sale with your own brand or is it quite label if you can provide more color? Thank you.
spk01: 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 export it 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.
spk03: Understood. Thank you.
spk06: Once again, if you have a question, please press star, then 1.
spk04: The next question comes from Chris Demas from BCMI Research. Please, go ahead.
spk07: Yeah, congratulations on the great quarter. It looks very impressive, and your deal to buy flour. A major competitor on their conference call last week cited THC inflation and basically phony high THC levels in the dried flour and dried flour products market is hurting them. We're talking 28% to 30% THC quoted, but it turns out that's not the true level. Now, do you have any comment on this? This is a serious problem. It's one thing to have the illicit market do this, but a legal LP, that's another thing.
spk01: 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.
spk07: One last one, Norton. Do you sell in Quebec? Do you sell flour in Quebec?
spk01: I'll pass this on to David, Lynn.
spk08: Yes, we are selling into Quebec. That was Flour Group Okanagan, which we acquired, had a business in Quebec through a 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.
spk07: Great. Thanks again.
spk04: Once again, if you have a question, please press star then one. The next question comes from Jacob Brodowski, private investor. Please go ahead.
spk09: Hello, congrats on a great quarter, Kim. So I'm just trying to understand your guys' strategy going forward as far as cast 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 a lot of opportunities trying to acquire still? How are you guys thinking about that?
spk01: I'd say, obviously, accumulating a strong cash balance is great, and that's something that comes top of mind, right? And to also meet our financial obligations for the seller financing that we've done through 3PL and the flower transaction. But I'd say in terms of acquisitions, we are getting pitched 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. Flower 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, but right now I want to be eyes on the prize and that's to get flour off firing on all cylinders.
spk09: Okay. And then as far as, as like continuing to get the free cashflow from operations, I know one of the headwinds is a cannabis price compression. Um, what do you, how, what are you guys seeing as far as like looking forward? Obviously it's, it's impossible to predict with a hundred percent 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 impression or the ability to raise prices going forward?
spk01: 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 sign now are somewhere between $4.25 to $4.50, depending on the volume and terms, et cetera. So we're definitely not facing compression on the export side. In terms of the domestic REC side, 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 – 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 have we're not getting any pressure to reduce our price points uh from the liquor boards or from uh the retail the retail buyers
spk09: 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 preexisting products that existed with you with your acquisition?
spk01: 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 flowers inventory. Some product was sold as low as like 50 cents, 80 cents. 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 sales guys at Flower 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.
spk09: All right, great. Thank you for answering those questions. Very helpful.
spk05: You're welcome.
spk04: Once again, if you have a question, please press star then 1. 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 Zinkhaven for any closing remarks.
spk01: 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 anytime. Hope everyone enjoys your summer, and we'll talk to you again in the fall. Thank you.
spk04: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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