Avant Brands Inc. (OTCQX:AVTBF) Q3 2022 Earnings Conference Call October 13, 2022 4:00 PM ET
Company Participants
Alyssa Barry – IR
Matthew Whitt – CFO
Norton Singhavon – Founder and CEO
Conference Call Participants
Operator
Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. Third Quarter 2022 Results Conference Call. [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 third quarter 2022 results conference call. My name is Alyssa Barry, Investor Relations for Avant Brands. Speaking on our call today is our Founder and CEO, Norton Singhavon, and CFO, Matt Whitt. Avant’s COO, David Lynn, is also present and will be participating in our Q&A session.
Our third quarter 2022 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.
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 fairly 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. Our third quarter results continued our trend of strong top line growth, once again setting a new quarterly sales record generated across all areas of our business including recreational, medical and export sales. Our press release yesterday summarizes key financial and operational highlights for the nine months ended August 31 2022, compared to the same period last year, as well as compared to Q3 to Q2 for fiscal 2022. Rather than summarizing everything noted on the press release, I’ll just touch on a few of the key points.
For the nine months ended August 31 2022, we’ve sold a total of 2,495 kilograms of cannabis, generating gross revenues of $13.8 million, an increase of 67% over the same period last year. Recreational cannabis revenue per gram including excise tax has declined only 2% from $7.27 to $7.14. As we continue to withstand significant price compression occurring in the market.
We have exported over 600 kilograms of dried flower to international customers, with additional shipments expected in Q4. Avant has generated positive adjusted EBITDA of $0.2 million compared to negative adjusted EBITDA of $0.1 million in the prior year. We’ve also generated positive cash flow from operations before changes in net working capital of 0.3 million.
For the three months ended August 31 2022, compared with the three months ended May 31 2022, total gross revenues increased 5% to $4.7 million, establishing a new quarterly record. Export shipments in Q3 were modest due to regulatory delays that are inherent in the export channel. This means that our record revenue was achieved primarily on recreational cannabis sales, which goes to net revenue of $3.7 million in Q3, an increase of 20% over the prior quarter.
Net loss from operations was reduced from $4.4 million to $0.4 million for the quarter and adjusted EBITDA increased by $1.3 million to $700,000. We have achieved record gross revenues, positive adjusted EBITDA and positive cash flow from operations before changes in net working capital for the three and nine months ended August 31 2022. As of August 31 2022, Avant had $8.5 million in cash, $27 million in working capital and no interest bearing debt. I do have two other significant developments to note before I pass it over to Norton.
First, as noted in our financial statements and MD&A, we executed an amended Shareholders Agreement regarding 3PL ventures, that increased our ownership stake from 49% to 50%. And formalized recognition of Avant as General Manager of the 3PL business. Because of this and pursuant to the relevant IFRS guidance, Avant exercises control over 3PL and we commence consolidating the financial results of 3PL into our consolidated financial statements effective June 1 2022.
This includes the recording of $12 million of non-interest bearing debt, reflecting a shareholder loan owed by 3PL to the other 50% shareholder. This amount will be paid down according to the Shareholders Agreement using free cash flows from 3PL.
Second, as noted a few minutes ago, export revenues for Q3 were modest due to changes in import requirements in Israel. But this is only meant a slight delay in our export shipments. Our Q4 revenues are on track to be a record quarter based on actual shipments and POs received plus additional shipments that are scheduled to ship in Q4.
Just this week, we announced an exclusive international trademark licensing agreement for the Israeli medical cannabis market. We believe that this is a major milestone in expanding our products and brands in international markets.
I will now pass it over to Norton for his comments.
Norton Singhavon
Thank you, Matt, and good afternoon, everyone. Fiscal 2022 has been a record breaking year for Avant, thanks to execution on all fronts. Despite the significant macroeconomic issues challenging various aspects of the global economy, our business has proven resilient and in demand. As a result of our superior quality flower, we continue to experience total customer demand that far exceeds the aggregate output of our four facilities.
This year, we launched many new products, many of which have — all of which have received exceptional reviews. A testament of Avant staying ahead of consumer trends and never being complacent in a hyper growth and hyper competitive industry. By pushing the envelope, we set ourselves up for continued success. This includes strong relationships with our select partners, provincial liquor boards, key buyers at retail stores, bud tenders, and most importantly, our consumers.
We’re confident in the strength of our business and expect to finish the year strong. Revenue for the first three quarters have already exceeded all of last year by $2.8 million. As Matt mentioned earlier, we expect Q4 to be a strong record quarter based on what we have already shipped, and POs we have received at our pending shipment.
We understand the state of the global capital markets further exacerbated by large Canadian LPs posting significant losses has affected the investor sentiment of Canadian cannabis companies. Despite all of this during the last 12 months and year-to-date, Avant has been the number four performing Canadian cannabis stock.
We believe that the current status and position of our company is in the best position that has ever been in the history of the company. As a leader in the ultra-premium cannabis sector, we are well positioned to deliver continued growth, operate in a fiscally disciplined manner with a goal to achieve profitability in the near future.
With that now we’ll open up for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Jordan Kay [ph] with [indiscernible]. Please go ahead.
Unidentified Analyst
Hey, Norton, Jordan here. How’s it going?
Norton Singhavon
Hey, Jordan, good. Good to see you here.
Unidentified Analyst
Congrats on an amazing quarter. It was absolutely superb. One of the things that we did talk about on the last call was potentially getting a breakdown of the different categories and the average selling price for each of those categories. So that we could better understand how Avant is utilizing that demand to grow that average selling price. Do you guys have that data today to share?
Norton Singhavon
So not on the concentrate side, but we do have a for recreational which I think it was a $7.14 for the quarter for rec. And for export, for this quarter, we didn’t do much export, so it would have still been in that 4 to 4.25 range. But now with the like black market licensing deal, our export price should be I believe north of 4.65 to 4.70.
As for the concentrates, it gets a little bit complicated because of the inputs and the fact that we have to go through a toll processor. So I don’t have an average price for you on the concentrates. But I’ve given you what I have for the flower side.
Unidentified Analyst
If at some point you guys were able to put that information in the chart together, it would be super helpful because I was trying to pick information out of the previous financial reports and trying to figure out what percentage of sales that was to figure out how you all ended up at the average price, and I just couldn’t get the numbers to work. And that would really be helpful, I think, for tracking in the future. So that would definitely be appreciated. And if you’ve got time for a couple of other questions, I’ve got a little bit more.
Norton Singhavon
Sounds good noted on the breakdown of the pricing. I think that’s good for management to understand also. And yes, I got more time for questions for you.
Unidentified Analyst
Awesome. So with respect to the 3PL and I think that’s something that maybe a lot of people don’t have a lot of visibility to. So with respect to profit from that center, is there profit sharing? Or is it just the loan has to be paid back first? Like what is the process of ultimately driving profit from 3PL for Avant?
Norton Singhavon
Yes, so to understand that, I’ll give you a little bit of the background. So the way that the 3PL deal was structured was that there was a third party who an investment, primarily the bulk of the initial capital, so how it worked was the, for the first $9 million they committed that, we committed, then the final $1 million of a $10 million initial budget, anything above 10 million gets split 50-50 between us and the other partner.
When it comes time to repay the cash flows, how it works is that, 20% becomes a dividend based on our equity. So split down the middle 50-50, at least as of now it is, and 80% goes to repay the shareholders loan/investment, based pro rata on who put in what. So, quick and dirty, I think we’re about $3.5 million, and they’re about 12, which is what’s on the financial statements. So pro rata, that is how it gets distributed. And then once a shareholder loan has been repaid, then it just goes based on equity, which is 50-50. The loan is not secured, there’s no interest, it is simply a shareholders loan contribution through the joint venture.
Unidentified Analyst
That is incredible information. Thank you so much for providing that. And you mentioned when you were discussing export that it was going to increase average cost maybe to 4.65, based on the licensing. So that, I’m assuming that this is an expansion of that relationship. I can’t remember the name of the company IMS and expansion in that release.
Norton Singhavon
IMC.
Unidentified Analyst
IMC. How does it expand IMCs relationship, that were they not using your brand in selling overseas or, and now they will be?
Norton Singhavon
Correct. So originally, we shipped them product bulk, which we still will but it was packaged under their brand. And apparently, I guess a lot of people in Israel actually are very familiar with the black market brands. So they explored — we explored the idea of licensing our brand to them, we did the necessary background work on the legal side. And we’re able to come up with a partnership that basically gets them black market in Israel, but it has to be from us. And we get a higher selling price as a result of that. So we still don’t have to package it, we still ship it to them bulk. We don’t take on any further costs here in Canada, and we get the benefit of a higher selling price.
Unidentified Analyst
Nice. And what jurisdictions is that does that cover?
Norton Singhavon
That one is just Israel.
Unidentified Analyst
That’s just Israel. So theoretically, you could have these deals in other countries and further drive export revenue?
Norton Singhavon
Correct. We’ve actually begun the process of looking at other countries and what the trade marking there looks like. So I think this is definitely something that’s on our radar that we’d love to replicate in other countries.
Unidentified Analyst
That’s absolutely phenomenal. And I’ve just got one other thing, probably something that a lot of your shareholders want to know. A lot of us have average prices on our Avant stock that’s a bit above where it’s trading at now, obviously, the markets been getting crushed. So one of the things that we always worry about when we’re dealing with market caps of Avant sizes, how long is the money going to last before additional capital needs to be raised? As part of why we’ve discussed in the past about profitability?
Do you see yourself either raising capital or engaging in any M&A that would be done — that would be diluted to shareholders, like at these levels or prices of Avant? Or is the goal to ultimately try to see Avant at more reasonable valuations before you engage in that kind of activity?
Norton Singhavon
Yes, so right now, we don’t have any thoughts or plans for an immediate raise. I don’t think we need the capital. Q3 should have had probably an extra $2 million of export, which got delayed based on what Matt explained. Had that have been in the quarter, I mean, that’s a sunk cost, that straight cash to our cash balance or cash balance would have been $10 million, right, and we likely would have been profitable this quarter.
So the fact that it’s got pushed into Q4, gives me a lot of confidence that I think Q4 is really going to be the breaking point for this company. And I think what everyone has been waiting for, hopefully we’ll have that Q4, but if not, it at least show a path that is coming in the near future.
In terms of M&A, everything I look at is relative. If I looked at an acquisition last year, when my stock was $0.60, and these guys were at $20 million $30 million market cap, today, they’re probably a lot less. So, anything that we look at it, we’re going to break it down into earnings per share.
So I’ll just make up an example. But if we have to dilute ourselves by 20%, and the target acquisition is accretive to our earnings per share by 40%. Well, there’s a net benefit to shareholders there. But as of right now, there’s no acquisition. This is just all hypothetical analysis that I’m telling you about.
Unidentified Analyst
Norton you answered all my questions, amazingly, I really appreciate it very much, and looking forward to be a longtime shareholder of Avant.
Norton Singhavon
Thanks, Jordan. Appreciate it.
Operator
[Operator Instructions] The next question is from Rahim Rehman [ph] with High Point. Please go ahead.
Unidentified Analyst
Yes, hi, management team, Matt and Norton, thank you very much, you came on with some very punchy numbers versus the industry. Where does management see, like, considering the rest of the industry is rather, soft in terms of at least their outlook? What is management see their competitive positioning coming into play versus the industry?
Norton Singhavon
Yes, so my view is that, I don’t think we’re in the same category as most of these other producers, simply just based on business model, right? You look at the big LPs, they’re in edibles, they’re in beverages, they’re cultivating greenhouses, they’re focused on building a huge presence in international markets. That’s not really us, I think the core of our business really comes down to I would say, there’s probably four or five other competitors that are doing what we do, that are about our size, that are at selling at a similar price point, that ultra-premium category.
But what we’re starting to see is, these companies are starting to at least the public ones are starting to lose a little bit of their market share. And I think that’s to do with, they’re not playing the long game, a lot of these other companies have been built as a promotion or as a short term thing, hoping that they’d get bought out for a billion dollars. And now that this is starting to become a marathon, not a sprint, a lot of these companies are starting to fail.
And I won’t name names, but if you look up some of our peers, there’s been a lot of turnover at the board level at their senior management team level, they’re starting to get D-listings, the reviews of their products on Reddit are starting to deteriorate and their quality senator drop. Whereas we’re kind of the opposite, our new cultivars are getting big success. And we’re actually getting purchase orders that we can’t even keep up with. So my thought based on the four or five peers that I would see are my competitors, I think we’re going to outperform them in the next little bit here.
Unidentified Analyst
Great. So basically, what I surmise from the responses, again, a strong competitive positioning versus the rest of the landscape. Also, just a quick note on where does the quality proposition come in. I mean, are you seeing that in terms of the new channel strategy, looking at recreational medical export, if you could just emphasize where quality protections factor into all of those two are recreational only?
Norton Singhavon
Yes, I think it actually really benefits. So recreational cannabis is our core business, that is our flagship core sales channel. But as what I mentioned to Jordan, on the previous question, a lot of consumers in Israel were actually aware of black market. So although Israel’s a medical market for now, there’s a lot of cross I guess, call it cross promotion, and the name that black market carries in Canada.
So we’re seeing, Israeli consumers going onto Reddit and looking at Canadian premium cannabis and the product essentially sells itself because it is cultivated by the same producers that produce black market. So when we enter into call it export, I think this really helps our product sell through and sell through quickly. Our partners are happy, our consumers over they’re happy and we’re happy.
In terms of domestic medical as in our E commerce medical site, I think we got a lot of cross synergies there from consumers that are very familiar with a black market brand. They’re able to buy the product from us directly, they’re able to save a few bucks to and it shipped to their door. So, without throwing any sort of aggressive advertising behind our export and medical, really the black marketing team is helping carry this.
Unidentified Analyst
Perfect. So there’s a lot of positive spillovers, that’s great to know. Also if you have time, I just have another question regarding the 3PL facility. I mean, if there’s a ramp up, what’s the timeline for that? What can we expect from that acquisition?
Norton Singhavon
Yes, so 3PL got license, August of last year, we’ve been ramping up that facility, since then we’re still not at full capacity yet. A part of that is to do with the GenX that we brought in. We just weren’t able to make enough cuts to fill the rooms to hit 100% capacity of those production rooms. We’re getting to that position, I think fairly soon. Matt, if you can refresh me Q3, what a 3PL do for production? I think it was 51%.
Matthew Whitt
Correct.
Norton Singhavon
Yes, so we have a target of 75% or higher. So I think there’s significant upside there, 3PL being our largest facility, for every 10% we can increase capacity is its millions of dollars to our top line. I think that’s going to come soon, our other facilities operate somewhere between anywhere from 70% to 80% of the stated capacity. And we expect that 3PL to be no different.
Unidentified Analyst
Perfect. And then lastly, you mentioned some of the excess exports that I guess were realized in the quarter purely because of regulatory hurdles or whatnot, just wanting to see what the guidance is in terms of overall any of these — any overhangs from the previous quarter in terms of what we can expect going forward?
Norton Singhavon
Yes, so I don’t really want to put a number and get financial guidance. But I mean, what I could say is that if you expect our rec business to stay stale with no growth. And we talked about we had a north of $2 million of export that didn’t get sent out in Q3, I think you could probably figure out, where we might be in Q4, if everything aligns.
But I do expect that over Q4, and even in the coming quarters for our revenue to keep growing. And even if we hit full capacity at 3PL, there’s still a lot of upside to go from there. Because number one, we have a contract row with another LP for export only, that’s going to give us an extra 700 kilos a year with the potential to increase that. That’s 700 kilos a year, we’ve already started the contractor on that, they have rigid attics, they are in flower, so we’ll likely we’ll be able to monetize that in Q1. If our export demand continues the way it is, we likely can expand that 700 kg to 1000 or even more.
Furthermore, then that if that partner maxes out, we do have other partners that we’re looking at that we’re currently doing diligence on that could fill this gap to. The contract rolling is actually quite lucrative for us, we’re able to not put up any CapEx or OpEx and fulfill our export demand without taking away from a domestic rec demand.
And it’s still going to have somewhere I think close to a 50% margin anywhere from 40% to 50% margin. So I really liked that it’s our genetics our guys come in and help them manage a little bit help them with the cultivation, how to further gate the plant and how to do the post the harvesting. So I think there’s going to be a lot of upside over I think for the foreseeable future here.
Unidentified Analyst
Great thank you so much for laying out all of that encouraging commentary. Thank you.
Operator
[Operator Instructions].
Norton Singhavon
Operator I think we’re good. I don’t think there’s any more questions.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Norton for any closing remarks.
Norton Singhavon
Thank you again everyone for joining us. I hope everyone has a great fall on winter and thank you for your continued support. Goodbye.
Operator
This conclude today’s conference call, you may disconnect your lines. Thank you for participating and have a pleasant day.
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