Avant Brands, Inc. (OTCQX:AVTBF) Q2 2022 Earnings Conference Call July 14, 2022 4:00 PM ET
Company Participants
Matthew Whitt – CFO
Norton Singhavon – Founder, CEO & Director
David Lynn – COO
Conference Call Participants
Operator
Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. Second Quarter 2022 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Alyssa Barry [ph], Investor Relations. Please go ahead.
Unidentified Company Representative
Thank you, operator, and good afternoon, everyone. Welcome and thank you for joining Avant Brands Second Quarter 2022 Results Conference Call. My name is Alyssa Barry, Investor Relations for Avant Brands. Speaking on our call today is Avant’s Founder and CEO, Norton Singhavon, and CFO, Matt Whitt. Avant’s COO, David Lynn, is also present and all will be participating in our Q&A session.
Our second quarter 2020 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.
We recognize that most of you have already reviewed our results issued yesterday. So being mindful of your time, Matt and Norton will keep their comments brief, and then we’ll transition to our Q&A session. With that, I will turn the discussion over to our CFO, Matt Whitt, to share the company’s financial highlights. Norton will then provide a strategy update. Please go ahead, Matt.
Matthew Whitt
Thank you, Alyssa, and good afternoon, everyone. Following a very strong start to fiscal 2022, we are pleased to report another quarter of solid performance. Revenues for Q2 were just shy of our record revenue set in Q1 at $4.5 million as our export sales were for Q2 were $700,000 lower than Q1. This means that our Canadian recreational market made up for this decrease coming in at a record $3.1 million in Q2, an increase of 23% over Q1.
Accordingly, we continue to break our sales records on a year-to-date basis, reflecting the positive trends across our business, including recreational, medical and export sales. Our press release yesterday summarizes the key financial and operational highlights for the 6 months ended May 31, 2022, compared to the same period last year as well as comparison with Q2 to Q1 2022. I’ll first touch on some of these points for the 6 months ended May 31, 2022.
We sold 1,846 kilograms of cannabis, generating gross revenue of $9 million. This represents a 151% increase in volume and a 77% increase in gross revenues over the last year. Recreational cannabis revenue per gram has declined by only 4% from $7.43 to $7.13, demonstrating the ability of our premium products to withstand significant price compression that is occurring in the market. Our total production across all 4 facilities increased by 58% to 2,556 kilos.
As of May 31, 2022, we had 1,930 kilos of dried cannabis in inventory, and we continue to experience significant demand for our products, which exceeds our current production. Therefore, we have not experienced a steady accumulation of inventory. Net loss from operations was $5.5 million compared to net income from operations of $0.2 million in the prior year. The decrease in the current period was primarily due to noncash items such as depreciation and share-based compensation, which I would like to briefly hand over to Norton to comment on.
Norton Singhavon
Thanks, Matt. Our company was incorporated in 2017. And we’ve had a lot of employees that have been working with us since day 1. The company has not paid out any bonuses to date up until recently. Furthermore, we had many employees that we believe were paid under market salaries. Therefore, we’ve decided to utilize our RSU plan from the first — for the first time since it was adopted in 2020.
Back to you, Matt.
Matthew Whitt
Thanks, Norton. Adjusted EBITDA loss was $0.5 million as compared to an adjusted EBITDA loss of $0.2 million in the prior year for the first 6 months. A few highlights for the Q2 to Q1 comparison. As noted in my opening remarks, we did achieve record recreational cannabis revenue of $3.1 million compared to $2.5 million in Q1, representing a 23% increase. Total production across our 4 facilities increased by 66% to 1,595 kilograms. The company sold a total of 961 kilograms of cannabis, generating gross revenue of $4.5 million in the quarter. This represents a revenue decrease of 3% relative to Q1.
To touch on our gross margin before fair value adjustments was 23% for the quarter. Our gross margin is negatively impacted by our accounting treatment for 3PL as an equity investment as opposed to consolidating 3PL’s financial statements. For further clarity, certain harvest that 3PL are purchased by ACC at $3.50 per gram then sold into the provinces, while other lots are simply distributed to the provinces through ACC with Avant only capturing 5% distribution margin. As a result, this lowers our overall gross margin at the Avant level.
However, if you account for the margins that would be captured within 3PL, our overall margins from production to buyer remained relatively in line with our recent quarters. Our net loss from operations for the quarter was $4.5 million compared to a net loss of operations of $1 million in Q1. And again, this changes in the current period is primarily due to noncash items, including share-based compensation, as Norton just addressed.
Adjusted EBITDA loss of $0.6 million compared to adjusted EBITDA gain of $0.1 million in Q1. Overall, we do continue to focus on maintaining a strong balance sheet with approximately $9 million in cash and no debt. We expect continued improvement to our financial results throughout the second half of the year as we further realize the production at our 3PL facility, new product launches and export sales. I will now pass it over to Norton for his comments.
Norton Singhavon
Thank you, Matt, and good afternoon, everyone. Avant has performed extremely well for the first half of the year with many catalysts for continued growth. Despite the overall challenging market conditions for investors, particularly in cannabis, the Avant stock has been performing well relative to the Canadian cannabis sector. As of the end of Q2, Avant was the #1 performing in Canada stock during the trailing 6 months being down 5%, while the average Canadian cannabis stock was down 50% and some down as much as 80%.
We continue to remain in one of the strongest financial positions amongst our peer group. We have been executing a series of contract grow agreements, which will effectively increase the quantity of cannabis available for sale, therefore, increasing our top and bottom-line numbers. We launched a series of new premium cannabis under the BLK MKT and Tenzo brands, which have generated significant positive feedback.
We signed supply agreements with the provinces of Newfoundland and PEI. Due to significant demand for our products and our inability to fulfill all of this demand, we have been able to execute export deals, which will increase our average export selling price immediately. ACC received a license amendment from Health Canada to facilitate the sales of edibles and concentrates to the provincial liquor boards. This will ultimately increase our margin on these products.
3PL received a license amendment from Health Canada to facilitate sales to the provincial liquor boards and has ICANN-GAP certification via IQC to facilitate exports to Israel. Subsequent to the quarter end, we executed a revised shareholders’ agreement with 3PL, which increased our ownership stake from 49% to 50%. As a result of this, we will revisit the accounting treatment regarding consolidating 3PL’s financial statements with Avants, which would positively impact our bottom-line results.
We are confident in the strength of our business and are excited about what lies ahead. While many players in our sector are burning cash at an excessive rate while losing market share, we continue to be a nimble company that is continuing to gain market share in Canada and globally. Some of the key initiatives for the current fiscal year include driving 3PL into full production. It’s naturally scaling up to fulfill capacity and is anticipated to deliver significant revenue growth, realizing third-party contract grow agreements with other LPs to fulfill the excess demand that we cannot.
This does not require any CapEx or OpEx from Avant, and we’ve room for very little downside that has the ability to generate significant upside, further developing innovation to expand our product offerings within the increasingly segment, continue to grow our market share, fulfilling and entering into new export agreements. And finally, continue exploring acquisitions, internal expansion or outsource contract growing opportunities.
As the leading and top Canadian cannabis company, we have a unique value creation opportunity and continue to focus our efforts on meeting the needs of our consumers while expanding our market share. We believe that Avant continues to be extremely well positioned for the future. With that, we’ll now open up for Q&A.
Question-and-Answer Session
Operator
The first question is from Scott Finley, a Private Investor. Please go ahead. Scott, your line is open.
Unidentified Analyst
Yes, I just got a couple of quick questions, if that’s okay. First of all, congrats on another great quarter. So that’s fabulous. Can you expand on the ramp-up of 3PL? And how much of this quarter’s revenue is generated from that? Can we expect normalized run rate? Second question is kind of what you were just talking about on the M&A side because you mentioned a potential for acquisitions. And as soon as right now, company is in the same space, a lot of capital constrained and more compressed. So, what’s your appetite would you say, for M&A in the current conditions? And if I can just follow up with one more question. On the export side, can you provide details around how you see shipments trending for the rest of the year because it’s certainly great to see the demand and that you’re looking to more orders. So, what can you expect moving forward?
Norton Singhavon
Thanks, Scott. So, our revenue for this quarter was approximately 28% from 3PL. 3PL is still in the ramp-up phases. The rooms are fully planted, fully at capacity, but we’re going to start to realize these harvests and start to realize the revenues from this. We expect that over the coming months that we will hit full capacity and hopefully full revenue potential from 3PL.
And your second part was M&A, correct? Yes. So, in terms of M&A right now, we’re being extremely disciplined. We’ve been approached by many other peers, some private, some public, some small or some potentially similar size. The issue is that we have a very strict pick block that a lot of these companies have to hit. The facility needs to be built fairly close to our standards. They need to be located geographically where it makes sense, which is where we are based out of.
They need to have a pretty reasonable financial performance, either even a positive, neutral or slightly negative. We’ve explored many opportunities. And right now, there hasn’t been anything that we’ve decided we want to proceed with. But we’re going to continue to keep looking. And hopefully, if things go our way, we may be able to find something. But we’re happy just to continue on our own path if we don’t find anything. And what was your third one again?
Unidentified Company Representative
Export.
Norton Singhavon
I’ll turn it over to David Lynn for export.
David Lynn
Okay. So, the export side of our business has a lot of growth potential, and there’s certainly more demand than we have the ability to supply, but we do prioritize our rec shipments over the export shipments. So, it’s primarily, surplus product that we export. So really, the volumes that we export over the balance of the year are kind of a function of what’s available after fulfilling all of the rec demand. And overall, the demand is really robust on both the domestic and international side. Some of the new cultivars that we launched into the market have received a phenomenal response that’s triggering a lot of purchase orders from our major rec customers, which are liquor boards. So, we can’t really give you an exact number in terms of the split, but I can tell you that the demand from both Israel and Australia is very strong.
Operator
[Operator Instructions]. The next question is from Ben Lehman, an Investor.
Unidentified Analyst
Congratulations on another great quarter, excellent first half of the year. I was just curious if there is a significant gross profit percentage difference between the flower, live rosin and the vapes.
Norton Singhavon
Yes, I’m going to hand that one over to Matt.
Matthew Whitt
Yes. The live rosin and the vapes are — I guess, they’re starting at a smaller denominator is the best way to put it. So, we recently launched into that category, it’s got fairly robust growth percentages, but the flower and pre-roll clearly is still our first priority in our largest share of what we sell. Again, jumping into, having their sales amendment, that will allow us to make that a more profitable channel and something that we can focus on going forward. But like I say, growth percentage is pretty high, but it’s a fairly small starting point.
Unidentified Analyst
Absolutely. That makes sense. Do you expect run rate for this to improve revenue or anything like that for the concentrates?
Matthew Whitt
Yes. Again, I think the revenue will go up on that or the margins will go up on that as we start selling it ourselves to our own license because we won’t be — we won’t have that third-party manufacturer in between. So, we should see an improvement in margins there. And again, we’re hoping that as we dive deeper into that category, we can generate additional incremental revenue out of it.
Norton Singhavon
I believe that previously, we had to pay a 15% distribution margin to our partner to sell into the provinces. So instantly, we’ll get to capture that. And also, operational efficiencies, realizing which cultivars may extract a higher yield than others. This is still a bit of a learning process for us as we which cultivars make the best concentrates, right? So, we’re starting on a small scale. It’s kind of a crawl-walk-run approach, if you know, it’s kind of how we have always operated.
Unidentified Analyst
Okay, awesome. Thank you, guys for the information. I market is responding really well to this.
Norton Singhavon
Appreciate it.
Operator
The next question is from Jordan Kay, a Private Investor.
Unidentified Analyst
Norton, it’s Jordan from how is it going?
Norton Singhavon
Good, man.
Unidentified Analyst
Question for you. I think a lot of people were pretty shocked at the per gram price of bulk. But what you said during the call that because of demand, you could be seeing incremental additional per gram price. In percentage terms, are you thinking this is going to be something like 5% to 10%? Or is it something even more that we can really get excited about?
Norton Singhavon
Yes. so right now, our average selling price for export is — obviously, it’s about $4 a gram. We think this is going to increase to about $4.55 to $4.65 if I’m correct, David. Is that — yes. And Australia, Australia export prices are north of $4 currently also. So, we’re looking at — because we can’t sell the demand, we’re in a position where whatever product we have, we’ve been able to execute agreements at a slightly higher price point.
Unidentified Analyst
Yes. Norton, that is absolutely incredible, and you are absolutely crushing it. Do you know when that might translate into positive cash flow, positive EBITDA? I think we could see the assets on the balance sheet start to increase.
Norton Singhavon
I like to be very, very careful about forward guidance, and I don’t want to promise anything. But I would say I think in the near future, we are looking, trending in that right direction. One thing that’s also worth noting is that — which we didn’t touch on is, our revenues have gone from about $3 million a quarter to about $4.5 million, and it’s a huge jump, 50% jump from $3 million.
But I understand that a lot of that revenue is considered what I call low margin revenue, right? Like the distribution deals at Habitat, which isn’t growing their own product, right? It’s still a decent margin, it still put something to our bottom line. But our core business still has a lot of upside, and that is where all of the, I guess, call gross margins will come from, which we’ll then — you’ll see on the bottom line. So, as you ramp up production at 3PL and also improve efficiencies at our existing facilities, that’s what’s going to come to our bottom line the most.
Unidentified Analyst
Amazing. And Norton, congratulations on an amazing quarter. And I wish you guys very best in the coming quarters.
Norton Singhavon
Thank you so much. Appreciate it.
Operator
[Operator Instructions]
Norton Singhavon
All right. So, no more questions. I’d like to thank everyone for joining us. We shared on our last call that we’re looking to host an in-person Investor Day at some point here in Kelowna with opportunities to potentially towards 3PL and meet our team. It’s still something that is on our list. We’ll keep everybody posted on this. I just want to say thank you for everyone that came and thank you for everyone that asked the questions. Hope everyone has a fun and safe summer. And thank you all once again. Have a good day.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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