Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Fiscal Year 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star. I would now like to turn the conference over to Cole Lacour, Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. Welcome, and thank you for joining Avant Brands fiscal year 2023 results conference call. My name is Cole Lacour, 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. Our 2023 annual results were disseMENAted yesterday and are now 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 over the discussion to Miguel to share the company's financial highlights. Norton will then provide a strategic update. Please go ahead, Miguel.
Thank you, Cole. Good afternoon, everyone. Thank you for joining us today. We are pleased to report another strong year for Avant Brands. Our press release issued this morning summarized key financial and operational highlights for the 2023 fiscal year. In the latest fiscal year, our company achieved milestones across all financial metrics indicative of our growth trajectory and operational efficiency. Gross revenue achieved a record high of CAD 30.2 million from the sale of 7,105 kilos, marking a 33% and 93% increase compared to the previous fiscal year. Net revenue, similarly, reached a record high of CAD 26.3 million, reflecting a notable 31% increase compared to the previous fiscal year. The Canadian recreational net revenue was CAD 15.8 million, showing a 10% increase versus the previous fiscal year. Our B2B and export revenues experienced exponential growth, reaching a record CAD 10.2 million, indicating a 96% increase compared to the previous fiscal year.
Our overall gross margin slightly increased to 34%, an improvement from the 32% reported in previous fiscal years. This is a reflection of recreational gross revenue margins of 48% and export sales with a margin of 35%. The overall average is slightly reduced from the sale of aged and out-of-spec product, which is sold in the Canadian B2B market. The weighted average selling price for Flowr decreased to CAD 4.23 per gram from CAD 6.07 per gram in the previous fiscal year. It's important to note that despite this overall decline, our export selling price actually increased during the year, and we have maintained price and integrity with our flagship recreational brand, BLK MKT , without implementing any price reductions. The decrease in average selling price can be attributed to several factors.
Firstly, there was an increase in bulk export sales, which have a lower average selling price due to the absence of packaging costs and excise taxes. Additionally, the relaunch of the Flowr brand, which was priced lower than Tenzo and BLK MKT, contributed to this decline. Furthermore, a strategic decision was made to divest Flowr's existing stale-dated and off-spec inventory at discounted prices upon assuming ownership during the fiscal year. We continue to remain confident in our current pricing strategy among all channels. Selling general and administrative expenses on the cash basis, so net of depreciation and stock-based compensation, totaled CAD 8.8 million, which was an increase of CAD 1.8 million over the prior year. This is primarily due to increases in professional fees, salaries and wages, and Health Canada regulatory fees.
While the increase year-over-year is 26%, SG&A, as a percentage of net sales, has slightly decreased from 35% to 33%. Adjusted EBITDA attained a new pinnacle at CAD 4.4 million, reflecting a 132% increase compared to the previous fiscal year and an adjusted EBITDA margin at 17% of net revenue, indicating solid operational efficiency and profitability. Net loss from operations significantly narrowed to CAD 1.5 million, a notable improvement from the CAD 8.5 million loss reported in the previous year. We are confident that the company will continue to drive revenue growth while reducing its losses and reaching net profitability in the near future. Cash flow from operations achieved a record positive inflow of CAD 5.4 million, which is an CAD 8.9 million improvement over the CAD 3.5 million outflow in the previous fiscal year.
This also marks our sixth consecutive quarter of positive cash flow from operations and underscores our commitment to sustained financial health and operational stability. These results reflect our company's dedication to driving growth, enhancing profitability, and delivering value to our stakeholders amidst a dynamic market landscape. Earlier this week, the company announced the restructuring of two of our seller financings. With F20, our largest obligation, which was a quarterly payment of approximately CAD 1.8 million, is now significantly reduced to CAD 450,000 per quarter. MENA, which was also due in full in December, is now extended another six months with approximately CAD 60,000 in monthly payments. These amendments enable Avant to reinvest our strong cash flow from operations into near-term strategic objectives so the company can remain committed to growing the business in a sustainable manner. For more information about our debt restructuring agreements, please visit our website.
With that, I will turn the call over to our CEO and founder, Norton Singhavon, to expand on our operations and provide an update on strategic initiatives.
Thank you, Miguel. Avant Brands achieved record-breaking results in 2023, with momentum expected to continue into 2024 thanks to ongoing efforts to optimize cultivation efficiencies, reduce expenses, and most importantly, drive revenue. Our recent product launches have been well-received, reinforcing our leadership in the premium cannabis space. Dedication to quality and consistency across operations has enabled us to expand market share even amidst competition. This quarter, we executed four new export agreements, driving growth in the international cannabis distribution market. Export sales is our fastest-growing channel, supported by partnerships in Israel, Australia, and Germany. Export is a category that I am most excited about as it gives us a chance in building the most iconic cannabis brand in the world, BLK MKT, through trademark licensing agreements.
In Q4 fiscal 2023, Avant saw a temporary sales dip due to product accumulation for large export shipments, which were later fulfilled in Q1 of 2024. Decreased orders from the Ontario Cannabis Store were also a factor, influenced by inflation, changing dried flower consumption trends, and demand for larger-format products. Avant's performance with OCS was further affected by limited product visibility and support in major Ontario retail chains, mainly those with 10 or more stores. This stems from Avant's decision to avoid pay-to-play data programs, preserving adult gross margins, and ensuring compliance with the Alcohol and Gaming Commission of Ontario's policies. Avant maintains its dedication to the Canadian adult use market and global expansion. Anticipated gross revenues for Q1 2024 fall within the range of CAD 8.2 million-CAD 8.7 million, further solidifying BLK MKT as a leading global cannabis brand.
While Q4 presented a temporary setback, we have restored our previous run rate from earlier quarters in fiscal 2023. With confidence, we project continued growth as we offset declining Canadian adult use revenues with lucrative, high-volume export deals. In conclusion, Avant Brands is dedicated to leading the premium cannabis industry through innovation and excellence. We appreciate the ongoing support of our shareholders as we continue on this path of growth and success. Together, we are poised for a future filled with growth, opportunities, and success. Thank you for your support and interest in Avant Brands. Now, we will open the floor to questions.
Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause a moment as callers join the queue. The first question comes from Jordan Kay, private investor. Please go ahead.
Hey, Norton. Hey, Miguel. Hey, David.
Hey, Jordan.
Hey, I've got a bunch of questions. I think I'm going to split it up in half. I'll do the first half and then get back in the queue and let others ask some questions, if that's all right.
Honestly, if you have questions, you can just go through them. You don't have to jump out and jump back in.
All right. Well, here we go. Question for you. The first one is, if you guys produce let's just say this quarter you had produced 3,000 kilograms of cannabis. What does that look like in revenue if you could turn around the next day and sell all of it?
Yeah. I mean, a quick and dirty math is you use your average selling price of I think it was, what, CAD $4.40 a gram, CAD $4.50 a gram. So one thing you got to consider, though, is that 3,000 kg isn't all fully monetizable at that price point, right? Some of it's going to be popcorn. Some of it's going to be trim. So out of 3,000 kg, our sort of quick and dirty math is 50%-60% of that is what we call our ultra-premium flower. Then there's another, call it, 20%-30% of popcorn and small buds, and then the balance is trim. So popcorn and small buds, we use for pre-rolls. Trim goes to extraction. But yeah, that gives you an idea of sort of how that breaks down. So it wouldn't be 3,000 kg times CAD $4.30 a gram.
It's more like 1,600 kg x CAD 4.30 a gram, and then you would probably take another 20%-30%, assuming we have that velocity and demand for pre-rolls, and move that at, call it, a lower price point somewhere between CAD 2-CAD 3, depending on whether we sell it bulk or whether it goes into our products.
Okay. Yeah. And I can do some rough math on that, and that puts you a little bit higher in terms of revenue than it looks like Q1 is going to come in. But that's good to know. My next question is about the current financing payments that you have. So by my calculations, it's somewhere around CAD 1 million just in the financing from the GreenTec loan, the F20, and the MENA. Is that right that this quarter will be about CAD 1 million?
Are you speaking, Miguel? Do you want to take this one?
Sure. Sorry. Go ahead, Jordan. I didn't think your question was quite finished.
Yeah. That's okay. So the amount of money that you're going to have to pay MENA, F20, and whoever the lender is on GreenTec here in well, I don't know if it would be Q2 or Q1 based on those refinancings. But let's just call it the next quarter, so Q1. Well, I guess it depends on when those agreements are effective. Anyway, the more of my point here is, based on your 8-point whatever it is in Q1, if that carries into future quarters, does that create enough cash flow for Avant to cover all of its operating costs, all of its SG&A, all of its financing payments in terms of cash flow, or does Avant currently need more money since there is very few dollars in cash on the balance sheet right now to pay its obligations?
Miguel, actually, let me take this one. Jordan, so yeah, I understand your question. So yeah, I've done the math. We're about, yeah, just under CAD 1 million a quarter for debt obligations. To touch on that, obviously, Q4 was a little tight. But if you look at sort of the run rate that we had throughout Q3, our EBITDA and cash flow ranged from anywhere around CAD 1.6 million-CAD 1.9 million. So assuming that our revenues can sort of remain flat at worst at that CAD 8 million mark, there should be enough cash flow to service these debt payments, which is why we structured them the way we did, to give ourselves comfort and cushion that we wouldn't have to restructure these again at some point in the near future.
Totally. And Norton, that's what I was hoping that you'd say. My concern is that I took a look at the current liability section, and the accounts payable went from CAD 5 million to CAD 13 million in two quarters, which, to me, what that means is that you may have been paying off some other debts, but other debts are recing up. And let me rephrase that another way. Should we expect that number to go higher given the cash flow, meaning those debts might get paid, but is there other stuff that's not going to get paid?
No. So I would say having a slow November and December definitely put a hindrance on our ability to sort of get caught up with everything. And especially, we wrote a big check in November for CAD 1.8 million to the guys at F20. Then we had a slow November and a slow December. So we felt that cash crunch in January. We felt that in early February. But the products that we were pushing out the door in December and January, those cash flows started rolling in over the last few weeks. So we're in a position now where it was tight in the early part of the year, but we're starting to get caught back up slowly and surely. So I don't see that number increasing. I see it hopefully decreasing.
Okay. I mean, that's good. Norton, and you talked about this in previous calls, but the holiday quarter where all the local governments order from you guys, isn't that Q4, or am I missing something?
Yeah. That's Q4. Yeah. But you'd have to remember that most of these orders, they're planning out a reasonable time in advance, right? I don't see cannabis as a hugely seasonal product, in my opinion. But this is my personal opinion.
But you also have to remember, Jordan, what we noted in our and what I had read out and also in the earnings report is that our rec sales are declining. And I'm not going to sit here and sugarcoat it. Our rec sales are declining, and that is a major factor in why Q4 was where it was.
Is this a value buds problem?
This is a whole it's a plethora problem. So number one, obviously, inflation. Who's going to go buy BLK MKT, which is one of the most expensive cannabis brands in the country, right? Number one. Number two, we're seeing a lot of optic in higher velocity, higher format SKUs, right? And honestly, the biggest thing, in my opinion, is just retail pay-to-play data programs. We don't participate in it. They are pricey. I have nothing against those producers who participate in that. But in my opinion, especially BLK MKT being sort of the premier brand that it is, we shouldn't have to "grease" to get our product supported, right? So we're losing market share primarily in Ontario for all those reasons that I just stated. Now, what's interesting is BC has actually if I'm correct, David, has sort of picked up for us over the last fiscal year.
So Ontario is going to be a bloodbath. I mean, I don't like to name-drop, but when we recently went through this analysis on should we participate in the data programs, BZAM was one of the ones that was brought to us, right? We said, "BZAM does it. They're killing it. They're moving lots of product. They're dominating in all categories. But look at what happened this morning. They filed for CCAA." So our thought is that our rec business is going to decline in Ontario probably for the next couple of quarters.
I don't see it being overly concerning, but I see as if we weather it out, we don't give up 15%-20% of our gross margins on these data programs, that eventually these companies will pay to play themselves out of business and will survive, and our rec sales and market share should eventually turn back around and start growing. But it's hard for us to grow the rec business aggressively without doing what I call stupid things.
Yeah. Totally. And again, I would never recommend that you do anything that would put the business at risk. I just wonder, if you're not in, let's just say, a chain that's got 100+ stores and there was a way to work on something creatively, that might be interesting. But we can talk about that.
The problem is that it's not a one-or-done, right? You open up Pandora's box. You get in chain number one, then chain number two that's been supporting you, it's like, "Hey, buddy, what's going on? How come we're not getting this deal, right?" And you're saying, "Well, they have more stores than you." So it's not a one-store thing. It's if you start it, you have to continue it, and other stores are going to expect it. So even stores that have been supporting you, that have been moving your product maybe CAD hundreds of thousands every few months, that weren't getting this sort of kickback are going to ask for it. And it's something that is, I think, a very slippery slope. It's a lot of work for us to try and grow our rec revenues by, call it, CAD 1 million a quarter.
We have to do a lot of things. But we look at how hard it is to grow our revenue by CAD 1 million in export. I'm not to say that it's extremely easy, but it is a lot easier than trying to push water uphill on rec when you have companies with some companies with unlimited bankrolls almost that are giving up a good chunk of their margin for that shelf space.
Right. But Norton, I assume that export picked up here in Q1, and the revenue is still around CAD 8.5 million on average of the numbers you gave. And Avant did CAD 8.9 million. And again, I don't know how this happened, but Avant did CAD 8.9 million in Q4 of 2020, whatever the prior year was, so Q4 of 2022. And so the promise here and I'm not saying that there was anything nefarious here, but the promise was, "Hey, we were able to do CAD 8.9 million with 3PL and our other assets. We're going to buy Flowr, right, which is going to grow our space by 30%-40%. And so you should expect 30%-40% additional on top of that." And so the promise of CAD 8 million quarters seems to be a little bit light. So can you talk a little bit about that?
Yeah. So Q4 of last year, in my opinion, was completely sort of sandbagged. And what I mean by that was that there were export shipments that should have gone out in Q3 that went out in Q4. So realistically, last year, Q3 probably should have been CAD 6 million, and Q4 should have been, call it, CAD 7 million, right, instead of CAD 8.8 million and CAD 5 million, if that makes sense. So that sort of touches on that. But on your point, yeah, no, I completely agree with you. Our thesis this whole time has been, "We're going to buy flower because we have excess unmet demand." And we still stand by that. We have tremendous unmet demand. So the challenge is that we didn't forecast our rec business to sort of decline at the rate that it has declined over this fiscal year, right?
But looking into the future quarters, what I see is I see us getting close to being able to sell all of our product. I think we're already getting visibility into that. It's going to be a mix of export. It's going to be a mix of rec. And it's going to be a mix of Canadian wholesale. Once we're in a position where we can stabilize selling the vast majority of our product, then we look at slowly upgrading these sales channels, right? We might take some bulk wholesale sales that we're getting, I don't know, CAD 2.50-CAD 3 for domestically and look to upgrade that into export channels. But again, there's significant demand that we're seeing in export. We've signed 11 agreements to date, and zero of them were cold calls. They were all inbound to us.
These are other groups in other countries that know who we are, that know our product, and they reach out to us, and they want to do business. We're excited about future markets or even expanding our current agreements in export.
Of the four that you issued that press release about, are any of those in Q1?
I'll let David Lynn touch on that one.
No, we mentioned that in that news release. We've started to ship on one of those four deals. Should be kind of early Q2, most likely, end of Q1, early Q2. So it can be a long sales cycle, and then it can take a while to activate those deals. But by the same token, some of the deals that we did several months ago or late last year, those are starting to monetize. And the ones that we did even further in the past, those have been building over time. So sorry, I would share Norton's optimism about the export market and also highlight the point about domestic B2B. That's a segment we've been in and out of over the years, depending on whether we had excess inventory or not. But we reactivated that channel in Q1, and we've had very good early success.
There's good upside there too. It's certainly, at a minimum, an outlet for our excess inventory.
Okay. Let me see. I've got a few more here. Can we talk about GreenTec Bio?
Sure.
So that property is now mortgaged, right?
Correct. Sorry, not mortgaged, borrowed against yeah, yeah. Slightly different, but.
Yeah, slightly different. So it's borrowed against I think the number is CAD 3.5 million?
Yep. Yep.
How much value is left in that property?
I mean, the value is in the eyes of the beholder, right? If somebody wanted that.
If you don't know if you went to the market, you don't know how much that would be worth?
I would say the government assessment, which I would say in where we are, British Columbia, that the tax assessment is usually fairly accurate to what the property is worth. And furthermore, we did run an appraisal also before we borrowed against it. And it's come in basically around the appraisal. I believe it was, I want to say, CAD 3.8-3.9 million, and the government assessment was around CAD 3.3 million. And the reason why we borrowed against that was I don't know if I told you in the previous call, but we were thinking about selling it and leasing it back, right? But now we're at the mercy of a landlord, right? Who knows who the future landlord would be, whether they'd be collaborative or difficult, right, number one? Number two, Kelowna industrial real estate has been one of the hottest sectors in all of Canada, right?
So we lose the appreciation on that. And as I said, we're not in control. We're not in the driver's seat. So we thought of, "Well, why don't we just borrow against it, pull money against it? That way, we're still in control of our destiny. We don't have to deal with a landlord." And when we sort of broke down the numbers between paying interest versus paying a cap rate on a lease and assuming a very modest 2% growth per year on the real estate value, we were way better off borrowing against it and paying the juice on the interest versus losing control and paying a lease.
Yeah. That makes sense to me, Norton. The reason I was asking was because if that was a source of further capital, the question is, was it worth selling and ultimately trying to pay down some of the debt that you guys currently have if you're not able to sell all your current capacity? But I know you all have worked very hard on that facility for a while now. Norton, there is the I brought this up before. There are some pretty sizable management bonuses associated with that. I did see and this will be two questions. I did see there was CAD 1.5 million worth of share-based payments. But the total market cap, I think, the company had today of it was like CAD 27 million or CAD 28 million.
I think the bonuses on the GreenTec Bio are north of CAD 2.5 million. You can tell me if I'm wrong there. All these shares that are being issued and again, I'm not saying it's a lot of comps, but I'm saying the companies, the market cap, the numbers, can you shed some light on because your common average investors like me are sitting here thinking, "We're getting diluted fairly substantially, and we don't know when the corner is going to turn so that our stock and the worth of the company ends up being more, not less.
Those milestones have a floor price of $1. I'm not sure if you're aware of that. So the lowest price those shares get.
Yeah, I wasn't aware of that. So 2.5 million shares of options are issued?
2.5 I don't remember the dollar value. If it's CAD 2.5 million, then it's CAD 2.5 million at a minimum price of CAD 1. So if the stock's at CAD 2, we get it at CAD 2. But if the stock's at CAD 0.10, we still get it at CAD 1. And it is staggered over time. I think really what actually is more realistic to hit on that is about CAD 1 million. And then the rest is a future 80,000 sq ft expansion and getting that built out, getting that licensed, getting that operational. Who knows if we're ever even going to get that far?
Right. That makes sense. Okay. So yeah, I think maybe if you guys wanted to put out something about that in one of your spreadsheets about that because I think and do you know what the CAD 1.5 million worth of share-based payment was on the balance sheet for this quarter?
Sorry, say that one more time.
There was CAD 1.5 million worth of share-based payments on the balance sheet?
Yeah, I don't exactly recall what that went to. Some of it might have been compensation that we issued in shares. Sometimes we have the occasional consultant, whatnot, that wants to take compensation in shares also. But there isn't one particular thing. There isn't like, "Hey, we gave this guy CAD 1.3 million in stock," for example.
Yeah. I think we're all just there's a lot of tension when revenue comes in pretty light, right?
Yeah, no, I agree.
So people are looking at things, yeah. You wouldn't look at things normally if the cash was flowing. But we're looking at everything now, and so that's some of the stuff that we're thinking about.
Yeah, and mind you, we're looking three months behind on everything too, which also sort of sucks, right? Because I'm excited about things that are happening Q1, which ends today, and we're talking about stuff that happened three months ago. Yeah, it's the downside of public reporting, right?
It is. I mean, I think it's also probably good that you had that insight for some of your other negotiations. But Norton, are the finances, in your mind, at a place where you'd consider selling the company? Has that crossed your mind?
Are you okay?
Okay. Are you asking me my personal opinion or my CEO opinion?
Well, you can give me both and let me know what you're thinking.
I mean, my personal opinion would be a firm no. My CEO opinion is that I have to consider sort of my fiduciary duty, right? I'm not interested in selling the company at CAD 0.10. If somebody came in at or CAD 0.12. If somebody came in at 100% premium at CAD 0.24, that doesn't interest me today. Now, if we're on the verge of bankruptcy, that might be a different story. But I see the sales that are coming in from Q1. I see the cash flow that's coming from all of our initiatives to make up for that shitty quarter that we had. So I'm confident, but I'm also a bullish guy. So no, I personally am not interested. But at the end of the day, I have a fiduciary to bring things to the board, right?
If somebody came along and said, "Hey, we're going to give you CAD 0.35 per share for the whole company," I have a duty where I had to bring that to the board and say, "Hey, XYZ LP is offering CAD 0.35 per share. What do you guys think?" Right? And it would be a discussion among management. And obviously, they would partially consider the CEO's recommendation. And maybe they would say, "We follow management's recommendation, not to pursue the sale." Or they may say, "We disagree with management, and we would like to proceed engaging in a transaction here.
Yeah. I know you love people to come to you and stuff. It's just if things are tight, that might be something that you'd want in your back pocket. I know it's unthinkable considering where we thought we'd be at this time, but just.
I feel like the tight is behind us, though. With the debt restructuring and sort of this non-performing quarter behind us, this is all in the past, right? We're not sitting here at December 1st. At December 1st, if you ask me, it might be a different story, right? I'm like, "Wow, we just had a terrible quarter. Our cash flows are going to suffer in January and February. What the heck do we do, guys?" And imagine we didn't restructure that debt. I'd be like, "Yeah, we've got to do something." But what did we do? We pushed more product out the door. We signed four new export agreements. We relentlessly negotiated the terms of all that debt financing. We reduced our payments with F20 alone by CAD 1.2 million, right? So today, we're at stands.
I'm a lot more optimistic about our future and our cash flows and our ability to survive and service all of our obligations simply because of all these initiatives that we've done.
Okay. That sounds good, Norton. And I know you probably don't have this, and I know other people probably ask the same question. Do you have any visibility into whether or not Q2 will be a good quarter?
I would say my thoughts for whether it's Q2, Q3, or Q4, I think somewhere in those quarters, we can expect a record quarter. I wouldn't put your hopes up on a CAD 20 million quarter if that's what you're asking. I think this company is going to have sort of slow and steady growth. That's the only way it's going to be sticky revenue. But what we're seeing is that the company's on a growth trajectory and will continue to be. Yes, we had a slight blip in Q4, but we're sort of back on trec, in my opinion, to, I think, even better than what we've previously done.
Hey, Norton, those are excellent answers to my questions. I appreciate all your time.
No worries.
The next question comes from Jeremy Le, self-employed. Please go ahead.
Okay. Hi, guys.
Hi.
Hi. So based on what you said 60% premium of CAD 4.5 per gram and 60% popcorn trim, CAD 2-CAD 3 per gram, I get a weighted average of about CAD 3.3 per gram. So well, actually, to start off, can you talk about the discrepancy between the kilograms produced and kilograms sold?
Yeah. So part of that is going to be, like I said, popcorn and trim. So that's going to go into inventory, right? So that doesn't really move at the velocity that our regular ultra-premium flower moves. As highlighted in the press release, part of it is that we had to accumulate lots for export shipments. So how export works is that we're not shipping out a bunch of orders every day for CAD 25,000 or CAD 50,000, right? We get a purchase order. It could be anywhere from a couple hundred grand upwards to even close to CAD 1 million, right? We don't have all that product sitting in stock when we get that purchase order. So we have to accumulate it. Sometimes it could take two months, three months, and we got to do all the import permitting from the receiving end.
Then we have to apply for the export permit on the Canadian side. So that takes time. That's why there's a discrepancy there. And also, as I mentioned to Jordan and on this call, we had a weak Q4 in terms of rec sales.
Okay. So full capacity right now is about 16,000 kilograms. Divided by four per quarter, it's about 4,000 kilograms. So using the 40, 60 weighted average number, 3.3, that's about like CAD 12 million per quarter in revenue. How far are we getting from full capacity?
I would say we are pretty close to full capacity. It's fully selling that product. So our output, so that number of 16,000, it's. I actually how we do it is we don't operate at 100% capacity. And what I mean by that is that to operate at 100% capacity means you're probably running eight-week strains, which we don't. Part of that also means that you don't have a room shut down for more than a day, right? The room comes down to harvest, and you sanitize and clean and got new plants, and they're right away. So typically, we try and target a sort of 78% production capacity as an output versus actual capacity.
That 16,000 number is also slightly skewed because I think the more accurate number might be taking sort of a 17,300 approach and timesing that by sort of 70% for the actual output, if that makes sense. I know it's a little confusing.
Okay. Could you talk about the international market and how it's different from domestic, as in revenue per gram and margin per gram? I know you have some notes about that in your statement, but.
Yeah. So in the Canadian market, we have to put in, we put our flower in jars, and we sell it. It can be labor-intensive at times because we hand-package for the most part. And we're reliant on the government, and they're reliant on the stores, and the stores are reliant on consumer trends. So there's a lot of variables that come into play, right? You get a couple Reddit reviews where people say, "I don't like this product." It affects sales, right? BLK MKT , our rec brands, for the most part, sort of have a our consumers like change, right? Whereas if we were a value brand, I feel like consumers might say, "Hey, this is a cheap and cheerful ounce, and I like what I've been previously getting." So it's keeping up to date with rotating trends. It's dealing with the consumer trends.
It's also at the mercy of, as I mentioned, the stores and the budtenders. What I like about export is that we ship it in one-kilo bags. So pricing ends up being less on a sort of gross revenue amount, but we don't have to pay excise tax, okay? We don't have to spend money on packaging, and it's high volume. We're relying on sort of our export client, and they buy enough product to sort of maybe get them through the next month or two, right? Whereas these provincial buyers are very conservative because they don't want to sit on inventory. And more so, we have less competition in these other markets, right? We're not fighting other groups that are doing data programs in the retail stores, right? It's a lot less competitive, I think, in my opinion. And our gross margin percentage is relatively equal, I believe.
They're both sitting sort of in that 40-ish to almost 50.
Okay.
And oh, sorry, to add one more thing on top, licensing our BLK MKT brand is interesting too because in Israel, on top of our selling price, we get an additional it's just under 10%, like 7 sorry, 2.5% on their gross selling price, which ends up being, I would say, 8% of sort of our selling price, give or take.
Okay. I'm not quite caught up on the Germany and Israel markets and Australia. Can you talk about how it's different from the Canadian market, the size of it, things like that?
Yeah, I don't really know, honestly, the details of the size. But I can tell you from our perspective, sort of our sales pipeline, Israel and Australia are our two biggest export markets. I would say they're fairly close in line in terms of dollar volume, dollar value sold. I would say also, previously, sort of our average run rate for export was about CAD 1 million a month. However you divide that amongst the countries, I would say it started off, obviously, more weighted in Israel, and that's sort of tipped over now where it's fairly even. But I see visibility into sort of CAD 1.5 million to potentially even upwards of CAD 2 million a month in export sales for this company moving forward. And that's what we're working to achieve.
The other thing I would just add is when you look longer term, just to echo Norton's comments, we started in Israel. That's where we shipped the most. Then we went into Australia. We've done really good volumes there, and we have the highest client count in Australia. Germany's our newest market. The markets are all in different stages of their evolution. But if you look at the population of those countries, Israel's 9 million people, Australia's 27 million people, and Germany, which we're just entering, is 84 million people. So when you look at these markets long-term and you assume that the cannabis sales kind of normalize more in line with the population, it's pretty exciting to be entering new markets in Germany, the third-largest economy in the world, right?
So we're doing quite a healthy business right now, but we're most excited about the future because we're getting into more and more markets. As we sign new deals, we have a word-of-mouth effect where we get calls from new clients. So there's enormous upside there. And obviously, there's other countries that are accepting exports as well, whether it's UK or Ukraine or Poland. So we're going to explore those markets as well.
Okay. Yeah. This quarter was pretty scary. Could you talk about break-even? If we're looking at break-even looking at breaking even this quarter and if we're profitable this quarter, what are the margins going to look like?
Miguel? Do you want to take this one?
Yeah, happy to. So if I understood your question correctly, you're looking at that average, that CAD 8.2 million-CAD 8.7 million gross revenue guidance that was provided, and curious about break-even. This quarter, from a cash flow perspective, we're looking to be very strong and very healthy. And as Norton alluded to earlier, a lot of these sales, it wasn't just Q4 that was struggled. It was Q4 and the beginning of our Q1. So a lot of this ramp that we're talking about, a lot of this kind of coming back to our previous growth rates came in the second half of the first quarter. And that's putting us in a strong position to pay down some of our liabilities, and we will be better than break-even on this quarter. And that trend is looking to continue into Q2.
Okay. And I know when you were talking to Jordan, you had a question where you wanted to ask about it as answer it as a CEO or as you personally. Can you talk about the debt refinancing, how you thought about that personally, and yeah, just in terms of thoughts and feelings on it?
I didn't like the dilution that we took on that. I didn't think our share price would be at CAD 0.10 by the time the five-day VWAP rolled around because when we started renegotiating with them right after we made that payment in November. So we were in meetings. I don't remember what our share price was around that time, but I want to say it was probably 20-something cents. So yeah, listen, as a shareholder, it hurts me every time we have to dilute. But we also had a dismal Q4, which I think it would hurt more if we had to kind of pick up the ball and go home. And what I mean by that is some sort of insolvency proceeding, right? That is something that scares me more than anything.
So to take a little hit on this dilution, at the same time, we had a dismal quarter, I feel like it's ripping the Band-Aid off. Guys, let's just get it done, get this behind us, restructure it, take the dilution, clean up the debt, push things out further, make up for the shitty quarter, and let's look into next year. Have a basis for a strong 2024.
Okay. Then the fact that demand or it's hard to whatever pay to play, whatever, the fact that demand was weak is pretty surprising, considering all the good recommendations and hype you get on Reddit. Can you talk about if you saw that coming?
I would say that no, we were a little bit surprised too that it sort of happened as quickly as it did. I mean, we were seeing the trends throughout the fiscal year. Our strongest rec quarter to date, I believe, was still in fiscal 2022. I forget which quarter it was. But 2022, rec was extremely strong. 2023, we started seeing some changes quarter-over-quarter. And there were not major changes, but you start to see a steady decline. And I agree with you. I mean, we have, in my opinion, some of the most consistent and high-end cannabis in this world. And it actually drives me insane when I see that I'm not going to name names. We have some of the biggest chains in Ontario where we have a penetration of 1%.
That means we have 1 SKU in three of their stores, three of 30 of their stores. That's extremely frustrating. We can't get it. We can't get the support that we need in those stores, again, without doing these data programs. We've run some initial analysis. We don't think it makes sense. I think we're better off letting these guys continue fighting themselves and probably fighting themselves in the CCAA by paying for these fees. I think it'll turn around. There's also many amazing independent retailers that we love working with that support our products, that carry a plethora of our SKUs, that have their budtenders strongly support and recommend our products that don't require data programs, right? We're trying to support them the best we can.
At the end of the day, Ontario, the system, in my opinion, is flawed because BC, you have eight stores maximum, right? So you're sort of away from these Goliaths that control everything. Ontario is very what I call Goliath-driven. That sucks for a niche premium brand. That's one of the highest price points in the country that, in my opinion, is one of the best products in the country that we don't get the love that we should.
Okay. No, I think you're.
Sorry. The final point to that is that if you're not getting love in that market, what do you do, right? You look elsewhere. You build BC. You build exports.
Yeah. Frankly, from my point of view, it seems a little bit strange. It seems unfair. But if you focus on quality, focus on cost, you'll come out better for it, I think.
Exactly.
Yeah. Just an out-there question. Can you talk do you think there's would you ever do a value brand? I guess you're doing that with your mid-tier brand, but.
Yeah. So.
Do you think pricing is a concern?
Pricing's not a concern on value. I want to say value is extremely exciting for us. But what is sort of exciting is an avenue to move our smaller buds, right, popcorn, because our pre-roll velocity is not enough to move all of our popcorn. So looking at sort of a discounted smalls brand and also a value brand under flower, which isn't really to value. It's more so what I call middle-of-the-ground value. We're definitely looking at that because it moves a lot of velocity. Now, do I want to play there forever? Probably not. And if you were to ask me if I could move 1,000 kilos in a recreational high-format brand that had velocity or if I would move it in export, I think I would probably pick export because, again, it's the infrastructure, the logistics, the not fighting for the shelf space.
But with export, I get to build my BLK MKT brand, right? I'm building the BLK MKT brand overseas. So instead of trying to fight here in Ontario with BLK MKT , pushing water up a hill, while they're focused on Ontario, I say, "Hey, guys, you guys have fun in Ontario. We're looking at the rest of the world.
Okay. Okay. Last question. So there was a poll at the end of the year on Reddit where they had a Sweet 16 brecet voted on which product they liked the best. You guys didn't win at all, but you guys came pretty close. What do you guys have to do to win at all, in your opinion, get on top?
I'm not familiar with that program, but my answer to all of these contests and stuff is really get all your friends and family to go vote or whatever it is. Was that a voting poll, right?
Yeah.
Yeah. That's like the AR Cannabis Cup a couple of years ago, right, where you go on Instagram and you vote. And I mean, in my opinion, it's sort of like it's not a matter of quality. It's a matter of how many people you can blast to get onto those things and vote. I mean, the numbers and products speak for itself, right? Even though BLK MKT is declining in Ontario, I would say we're still arguably the undisputed champ of sort of the ultra-premium cannabis, right? There are other comparable brands that might sell higher volume in dollars than us, but that's because they do the data program. There may also be some smaller niche craft brands that might even have product just as nice as ours and maybe a little bit cheaper.
We've sort of found a sweet spot where BLK MKT is a reasonable velocity brand at its price point and I would say arguably one of the most iconic premium brands in the country and in the world.
Okay. All right. That's all I got. Thank you so much.
No worries.
The next question comes from Jacob Polwatsky, private investor. Please go ahead.
Hello, Norton team. Hope you guys are doing well. Can you hear me?
Yep. Loud and clear, Jacob.
All right, sweet. So obviously, this quarter, this last quarter, didn't look that great, but the year overall was pretty solid. I know you guys are trying to find your footing now with higher production. I just have a couple of questions here. I want to start with cost because obviously, there's no question about the quality of your guys' products. People love it. It's super great. But as far as competing in the market, and especially in recreational, having lower cost inputs is very, very powerful. I mean, we saw this with Tesla. Obviously, completely different market, but their cost of production is just so low that they were able to just cut costs, cut costs, cut costs, and pretty much put everyone else who was trying to make EVs pretty much made them give up in many ways.
We just saw Apple say they're not even going to do it. So what are the biggest cost inputs? I know you mentioned that you're focused on reducing costs, but what would you say are the three biggest cost inputs? And what are the specific strategies that you guys are pursuing to reduce costs in those areas? Because I know you don't want to lower costs, lower prices, like sale prices, but if you did get costs down a lot and could lower prices, I feel like it'd be very hard for people to compete with BLK MKT .
Yeah. I mean, so labor, obviously, right? We grow indoors. Labor-intensive. Energy is another one, electricity, packaging, and nutrients to support producing our product, right? We're always looking at shaving costs. I like your Tesla example because I'm a massive car guy. But my rebuttal to that is, and I don't mean to sound pretentious and arrogant, but does Porsche 911 Turbo care what Tesla is doing, right? And that's sort of where we're at because your Tesla example would be like Pure Sunf arms, right? They are a high-volume greenhouse producer. They call it the Budweiser, the Tesla, whatever, right? We are our flagship brand BLK MKT is what I would call the Porsche 911 Turbo. But one of the smartest things that Porsche had ever done in their lifespan was create the Macan, right? The Macan is one of their best-selling vehicles.
So I would say our Macan is sort of Tenzo and Flowr. We're eyeing these categories. It doesn't mean we can't have both. We can manufacture 911 Turbo and have the Macan, right? So that's where I'm looking at in terms of your question. And listen, we're always looking at saving costs, right? One of the things when we bought Flowr was we went in there and found massive savings right away, right? We even were able to leverage sort of some of Flowr's existing suppliers for certain things, and I don't want to name names, but sort of play them off of our suppliers and play them back and forth, right, and eventually get sort of a contract that made sense. We're constantly fighting with our vendors and trying to slash costs. We're facing inflationary pressures all across. We're facing buyers wanting to pay less and less.
We're facing employees wanting to pay more and more, and vendors wanting to charge more and more. So I mean, I would say fighting increases is the challenge of its own. Looking for significant decreases is something that comes top of mind. But I think if we sort of hone in and focus on continuing driving sales in our brands, that sort of holds more true to our business model than racing to the bottom, right, than Porsche all of a sudden saying, "Wow, we should compete with Tesla and make cheap electric vehicles.
Yeah. No, for sure. And then part of that premium, highest-quality thing is making it almost a little bit scarce, right? Part of the reason that super expensive car models sell for that price is because the manufacturer artificially produces less than what the demand is to ensure that they can get that premium price. So looking more long-term as you guys, I think, stabilize, find these new markets, is that part of your strategy to make sure that your production is almost lower than what the demand is to ensure that when retailers do get the product, it sells because people are waiting for it to come rather than retailers having a hard time pushing out everything that they have? Does that make sense?
Yes, completely. I think you nailed that with BLK MKT, right? BLK MKT needs to be it doesn't need to be a 90% penetration, right? BLK MKT should be sort of in select limited stores that have the velocity and demand and the demographic to support that product. And it should be deep in those stores, right, versus being scattered in small little towns that might not have demand. So I think for BLK MKT, yes, you've nailed it. In terms of our other brands, I would say maybe not as much. I think our other brands can be sort of more common, more commercial, more accessible and available. But listen, BLK MKT is built on sort of a lower exclusivity, unique cultivars that nobody else in Canada has. And we continue to do what we can from a marketing standpoint to protect that brand positioning, right?
Yes, I agree. Instead of flooding the Canadian market with a whole bunch of BLK MKT SKUs, I would rather do limited drops, which you'll see with BLK MKT exclusive. This is sort of a new line that we've done under that brand where it's limited drops with unique cultivars. And I would rather sell that flower overseas and hopefully get it licensed in one of our brands. That way, I'm not saturating myself, right?
Yeah, that makes sense. Okay. Just one more question on cost, and I'm actually going to kind of squeeze into this last cost question. Where are you guys currently as far do you know where you stand as far as competitive costs of growing each gram compared to your competitors? Where you kind of fit? Are you middle of the road? Is your cost of production a lot lower than many of your competitors? And then also, this is a lot longer term, but is solar a possibility in Canada? Because I know on my own properties, I was able to install solar, and the loan on the solar was the same as I was paying for the energy. So then in 15 years, once the loan's paid off, there's no immediate change for me in monthly cost of energy now.
I'm just paying a loan instead of paying for the energy. And then in 15 years, my energy cost goes pretty much to zero. So yeah, those two things related to cost.
So, solar, no, we haven't looked at it. I don't want to lie and make up something that is something we've dived into. So no, we haven't looked at it, but that's an interesting idea. I don't think there's enough power, though, that it produces because we need a plethora of power. So in terms of indoor costing, some of the guys that we've spoke with that are comparable indoor growers, I'd say we are in line with what we see sort of as we're middle ground. I spoke with some guys that are slightly cheaper than us. Usually, they're very vertical-focused, right? And I won't name names, but there are some producers that are indoor vertical growers. They seem to have a little bit of a lower cost than us, but I would say their product won't be as nice.
Then there are some indoor producers that are a little bit more than us. When I sort of compare looking at some of these indoor facilities that have shut down, I don't think it's so much the cost, right? Just to be honest, I think indoor production is somewhere between CAD 0.95 and CAD 1.25. That's sort of what I estimate. A little bit higher might be CAD 1.40, CAD 1.50. In my opinion, it doesn't make or break anything. It's how nice that product is that you produce and what you get for it, right?
So if you're sort of at the high end of indoor production at CAD 1.40, CAD 1.50, which I think some of the bigger LPs were, and you're selling it for CAD 1.75-CAD 2 a gram, or even call it CAD 3, but you got to pay CAD 1 a gram excise tax, and you got to give up your data programs, that significantly eats into your margin. So it's really about driving a high selling price while trying to get a hold of your cost of production. But it's not like you can make your indoor cost CAD 0.40. That's just impossible. There's no way to do it, right? If we're sitting at CAD 1.10 or CAD 1.20, would I like to see it to CAD 1.05? Of course, I would, right? But as I said, quality and quality of.
Yeah. Okay. Just one last question about this next quarter and looking to this next year. I know you gave the CAD 8.2 million kind of minimum guide for Q1, which you guys have good visibility in because it's pretty much over now. What is the breakdown of the sales channels for this quarter, and how will that breakdown affect margin per gram? And what should we be looking at for expected margins on this CAD 8.2 million-CAD 8.7 million in revenue for this quarter?
Yeah. It's David Lynn here. It's a good question. I'd say the mix is in flux. We were previously saying that we might be 60% rec and 40% export, but we've noticed a lot of movement between the segments. And as we indicated earlier, we're back into the domestic B2B market. So I think what you're going to see is that rec, export, and domestic B2B are all significant double-digit percentages of the total. That mix can vary a lot quarter to quarter. Something that Norton touched on earlier is the fact that export shipments can shift a couple of days and end up in subsequent quarter, right? And those shipments at times are CAD 1 million, right? So you think how your mix can change.
That's why I wouldn't want to give a really definitive answer in terms of specific percentages, but rather say that all three of those channels will be significant in our mix. All three, frankly, have pretty good upside for us.
Yeah. Is some of the movement I know you mentioned in the letter that because of some of the weakness in rec, you're going to be moving a bit more to B2B as well. I'm guessing there's lower margins on that. How big of a difference is B2B compared to rec as far as margins are concerned?
So yeah. So B2B, number one, doesn't have that $1/gram excise tax. So listen, in our order of ranking of gross margin dollar contribution towards your profitability, there's no doubt about it that BLK MKT is likely the highest contributor, right? Then from there, I would say between export and our Tenzo brand, they're pretty tied neck and neck. And then obviously, the lowest is Canadian B2B. Now, Canadian B2B, why we've entered into that market, I would say on a temporary basis, was because we sort of hit a cash crunch, and we were looking at all of this sort of out-of-date, out-of-spec inventory that we had. We had so much inventory at the year-end on our balance sheet. It's easy to sort of get caught up in everyone wants to move the high-end product, right?
You want to get on the calls and pitch BLK MKT to the export clients, right? That's glamorous. Everyone wants to do that, right? It's moving the lot tested 18% 2.5 years ago that we forgot about that's sitting in the vault at Tumbleweed Farms, right? It's monetizing that. So we tackle B2B mainly to get cash in the door from just out-of-date, off-spec product, odds and sods. So you have 3 kg leftover from one lot, 3 from another. And you're talking 4 years of this stuff, right? So just a lot of odds and sods that we said, "Smash it out the door. Who cares about the pricing?" Sort of how we looked at it when we took over Flowr, right? Flowr had the same thing. Lots of odds and sods, and we just smashed it all out, whatever pricing. We don't care.
So we did that. But what's come from that was that obviously, these contacts that are what I call vault sweeping and buying low-end product is that, "Hey, we want some of the better stuff, right? What do you got, and do you have anything for sale, right?" So we entertain, I would say, a limited number of sales on that for sort of newer product, what I would call stuff that would probably be good enough to go out to export at a slight discount into the B2B market. But I don't see this as being long-term. We want to upgrade the sales channels and to provide contacts that we're not all of a sudden, "Hey, we're a B2B company, and we're going to sell product at discount prices to other producers," right? It's a short-term thing of a vault sweeping.
Yeah. Okay. That makes a lot of sense. I appreciate all the answers. Just one last question since there's going to be more reliance on exports.
You've got 1 last question of the last 6 questions, man. Come on. I'm kidding.
I know. How many of the exports that have gone out so far have been first-time customers versus repeat customers? I guess what I'm asking is, what so far has been the health of those that have ordered from you as an export client reordering? Have they proven already, some of these customers, that they're able to sell your product and that they're going to be ordering pretty consistently? Or is most of the volume so far first-time exports?
No, export is very sticky, in my opinion. One example will always resonate with me that we got a call from sort of a startup maybe a year and a half ago, and the guy wanted to buy 3 kg as his first order. You know what? Sure, we're not too big and proud. These guys are now one of our biggest export buyers out there. So it's very sticky. We grow sort of as they grow. One thing that we all agree on internally is that we sort of like dealing with the scrappy entrepreneurial, maybe even startups, on export because as we support them, they support us, right? So there's a little bit of camaraderie partnership there.
And it's a lot easier to get a deal across the finish line versus when we're dealing with sort of the established players, the equivalent of a Canopy in Germany. It's bureaucratic. They have six lawyers on the email chain, five QA people, and they have their entire DBC, which I call the deal-blocking crew, on all these calls. And they're very difficult to deal with at times, right? Not to say all of them are like that. But yeah, export, I would say, is very recurring and very sticky. I don't know if there's anything you want to add to that, David.
No, I would just echo Norton's comments. A lot of these are not in the public domain, and they're protected under NDAs. A few of them are in the public domain. One that we announced in 2021, our first export client is IMC in Israel. And that relationship's been really phenomenal for both parties. We've shipped them many millions of dollars of cannabis. They continue to order. We have an order going out as we speak. Our first client in Australia, and Norton was telling that story just previously, that first shipment was 8 kg at the end of 2021. They've also bought millions of dollars of cannabis from us. So we are really willing to sort of invest the time in building the relationship. We see that payoff in terms of increasing dollar values over time. We've never lost an export client.
The foundation of that success is the quality of our product, for sure. It really resonates and works. But at the same time, we put a lot of time and energy into building the relationships and providing a high degree of service. Lots of upside on existing export clients whose businesses are building using our flower.
Okay. That's really great to hear. And just thank you guys so much for the time letting me ask the questions. I just want to say, make sure you guys keep your heads up. I think obviously, us retail investors see a bad quarter, and we're like, "no, what happened?" But I think that especially for a company as new as Avant, this is expected, especially you guys just unlocked a lot of new capacity trying to figure out all the sales channels for this new growth. And it's kind of par for the course here. And I look forward to seeing the company progress as you're selling all of your flower that you're growing and then are able to slowly upgrade those export channels over time. I think things are looking good. So keep your heads up and keep doing good work.
Appreciate it, Jacob. Yeah, one thing I want to add on is that sort of sorry. I feel like this Q4, honestly, was a bit of a blessing in the skies. We've been a little bit sort of on our high horse that we can sell everything we produce. We're the greatest. We're the baddest. We're BLK MKT . Nobody can touch us. I think this humbled us. But what happens is that we're sort of back in that fire in the belly of like, "Oh, what do we do?" That hustle mentality. "Okay, guys, we need to get creative, right? We can't be complacent." So this quarter, in my opinion, it happening actually drove a lot of innovation, thoughts, and creativity within our team.
I think it lays the foundation for a future going forward that we had to get scrappy through this quarter and make up for it in Q1 and hopefully never look back.
That's great to hear. Thank you, guys.
The next question comes from Rahim Rahman, private investor. Please go ahead.
Hey. Hi. Just had a high-level question, and you can conclude on this, Norton. But mostly, you've been quite inquisitive over the last year, smashed down the cash balance. And we can see with the debt restructuring, and there's some additional debt as well. And Q4 sales, obviously, suffered. Could you provide some context on the future looks for Avant and if those acquisitions, they were still the right move for the company and shareholders? Thank you.
Yeah. So everyone probably remembers in 2023, we did that world-famous debt deal for CAD 23 million that was sort of the talk of the industry. Now, we slowly chipped away at that cash balance. And sort of what we saw was that with our corporate overheads and sort of the size and scale of the company, having these smaller facilities and having half of 3PL, there was no chance that this company would be profitable in the long term. So it was either we sit on our cash and have it slowly chip away, or we fire a bunch of people and get rid of our corporate office, or we deploy that capital to drive cash flows for us in the future, right? So we made the decision. It was aggressive, buying the other half of 3PL while buying flower at the same time.
I'm the first to say that was extremely ballsy. And the Q4 being dismal, I've touched on so many times throughout this Q&A, so I won't touch on that again. But there was a speed bump in our path forward. I'm still confident that we're going to be able to sell all that product that we produce. I'm confident that probably a year from today, shareholders are going to probably look back and say that management did the right thing by making those 2 acquisitions. Otherwise, we're just kind of floundering in no man's land. We're this small microcap that's not really big enough to be profitable and not really big enough to make an impact sort of at the global scale.
But with the flower acquisition, with the acquisition of the other half of 3PL, I think we have a great shot at being a contender on the global scale and in Canada.
Awesome. Thank you very much. Looking forward to viewing that.
Thank you.
The next question comes from Joe Rice with KW. Please go ahead.
Hey, Norton. How's it going?
Good, good. How are you?
Good, good, good. Yeah, I have two or three questions. My first question is, when you did the debt restructuring, how much of it was anticipatory in the sense that, "Okay, if this trend of rec keeps going like this, we're going to be bankrupt"? Or how much of it was the immediate need for cash right away to be able to restructure and pay it more consistently every time it was due? Because from the shareholders' perspective, I mean, I was doing the math on what you were paying before, I think the CAD 1.25 million quarterly, which averages out to CAD 400,000 a month. And then if you add the CAD 150,000 that you got it restructured to now, I mean, that's a savings of CAD 265,000.
So I'm thinking from the shareholder perspective, "Okay, we gave up 8% of the company to save only CAD 250,000 a month in cost." I'm kind of curious if you were looking more ahead of being more prepared if the trend continued or if it was something you had to do right away, immediately.
No, so your math is wrong. So F20 was CAD 1.7 million plus interest, so called CAD 1.8 million, right, per quarter. Now they're CAD 150 a month, so it's CAD 450 a quarter. So that's a reduction of CAD 1.35 million. That's a significant reduction. In terms of our business, without debt servicing, is sustainable and cash flow positive and EBITDA positive, even with that temporary dip in rec. So I would say, no, when we went out and restructured this, it wasn't that we were anticipating a decrease in rec. It was that this is not sustainable. We thought that we could use the cash flows from 3PL to sort of finance the acquisition that we did on their behalf. Doesn't ever end up working out that way. So we agreed to an aggressive payment plan. And we made some aggressive payments.
We paid them down from CAD 9 million to CAD 9.5 million to CAD 4.75 million. And it just reached a point where, "Guys, we need to bring this down to sort of planet Earth where it's more realistic and manageable," right?
Right. Also, I mean, you kind of answered this on the last question, but I was just curious, what percentage of the projection you gave for Q1 was just simply export? Because I know the only reason why I'm asking is because you're saying that export is going to be bad the next couple of quarters. So obviously, you're banking a huge amount on export. So I'm curious, what was the amount that you were roughly expecting if you could give a range, a general range?
Yeah, I'd say maybe 35%-40% is export.
Okay. All right. Cool.
Yeah. Yeah. And sorry, I just had to touch on it. I think my choice of words sometimes can be sort of overly aggressive. When I say things like, "Our rec business is dying," or, "Our rec business is declining," it's not on a death spiral, right? We're talking about going from CAD 5 million a quarter in rec to CAD 4.2 million or something like that, right? So we're not talking about going from 5 to 2. This is a decrease of 20%-25%.
Oh, sorry.
Yeah. Yeah. But it's still a decline no matter how you put it, right? It could be 2%. But yeah, we're kind of declining.
You guys are pretty strong, Norton.
Your actions are pretty strong, but no.
So considering that export's going to be a big part of the business moving forward, how many actually export clients do you have altogether? And out of those export clients, how much percentage of that export revenue is covered by a small group of clients? Do you have four clients that make up 80% of the export business with a bunch of small ones? How spread out are the export clients? You know what I mean? Is there a lot of them, or are you dependent on just a few of them to get by?
So we have 11 deal signed, right? And Israel and Australia, I would say, are we have one big buyer in each of those.
But it's sort of an interesting concept because, well, first of all, I want to add, we signed on another Israeli client in sort of those last deals that we announced, and they are a major player. So they're not a small startup, right? So I'm very excited about them. But I think what you will find is that hypothetically - and I'm just making this up - let's say our big buyer in Australia goes under for whatever reason, right? I think that gets supplemented by the other smaller groups because I think the demand for our product is there. And what we have done is that certain groups get access to certain cultivars exclusively. So I think if one or two of these drop off the face of the earth, it's picked up by these other clients that their volume will increase because the demand is there.
It's really who's importing and who's distributing it. That's really all it is. They're sort of the middleman conduit, if you think about it.
Gotcha. Gotcha. Gotcha. Okay. And also, too, because I live in the United States, and so I'm not quite totally familiar with Canadian laws, but you've mentioned you don't want to get involved in pay-to-play as the reason why export is or not export, but recreational is down. Could you explain to us, maybe you aren't familiar with how that works in Canada, what exactly you mean by pay-to-play?
Yeah. So it happens in groceries. So grocery stores charge listing fees, right? If you're Heinz ketchup and you want prime time eye level, you've got to pay listing fees, right? Now, what's happening in Canadian cannabis is that you're not allowed to charge listing fees. You're not allowed to ask for kickbacks. But a way that these retail chains have circumvented this is they charge you to buy their data. So you have to buy our data for CAD X thousands of dollars per SKU per store or X% of sales. And it's a blatant way to circumvent listing fees. And I'm not saying I'm not sitting here being all high and mighty and saying it's completely illegal. I don't know how. I don't have the answer to that question. But I'm saying for us to be fully compliant means I don't want to dabble in that.
Maybe it's allowed. Maybe it's not. Maybe it's gray area. I don't know. I don't have the answer. But it also eats into your margin, and I feel like it cheapens BLK MKT . I've spoke with other CEOs of publicly traded cannabis companies that partake in pay-to-play. And they have flat out said, "Pay-to-play is keeping our business alive." But everyone basically that I've spoken to has said, "BLK MKT should not do that. It cheapens your brand. It sort of reeks of desperation. It eats into your margin. You guys have sort of been, 'We are BLK MKT . We are ultra premium. We are the Porsche 911 Turbo.' You don't have to engage in these sort of low-end activities that other producers like us are doing.
Right. Gotcha. Gotcha. No, no, no. That makes sense. I mean, I'm in real estate, and they tell us never to discount your commission because it cheapens your ability to negotiate and your services and your value. So I totally get that point. My last question I have is, with the new export becoming a new facet of your business, how much of the lead generation to get more export clients is built around I mean, I know you said you've had a lot of word of mouth, but not exactly how much, but how much do you, in the future, plan on maybe going maybe hardcore cold calling, doing the typical salesman stuff to get more clients versus waiting for the word of mouth?
Are y'all waiting for people just to call you, or is it an active strategy to hit the phones, pound the pavement, and so forth?
So we're pretty loaded up on Israel and Australia. And the reason is because we have cultivar exclusivity per client there, right? So we don't have enough cultivars to sort of service more clients. So that tackles that question. In terms of new markets, our approach is sort of look at who the major players are, right? In Germany, we've sort of identified some of the major players. Either within our network, we get introductions, or we reach out to them, right? But we haven't aggressively pursued export, if that's what you're saying. It's sort of a sit-and-wait approach right now simply because, again, Israel and Australia are fully loaded. We are eyeing Germany, and we are eyeing other markets. But as of right now, it's sort of old school through our friends, through our network.
There isn't some sort of thing where I'm at some Berlin conference with a booth saying, "Hey, come do business with me," right?
It just seems like, I mean, I'm sure you made a name for yourself enough in the business where they know who you are, that if you were on the phone talking to, actually reaching out, it seems like it may have some fruit. Not that I know how that business works in terms of how to get more clients, but it just seems like your name recognition alone would carry a lot of weight if y'all had more of an outbound marketing campaign. You know what I mean?
Yeah. No, I definitely agree.
Anyway, all right. That's all. Thanks, guys. Thanks for the clarity on some of these issues we have. Look forward to the next quarter.
Thank you.
The next question comes from Evan Nirek, private investor. Please go ahead.
Hey, guys. How are you?
Hey, Evan. Good, good.
Good. Hey, question for you about kind of just getting back on trec with the rec sales. Are there ever going to be any plans to participate in pay-to-play, or it's really just off the table and see what happens? And it sounds like kind of the hope is that eventually, it's going to go away, and we can still get some shelf space in these places.
As of right now, it's something that we constantly sort of debate and continue to monitor. I'd say right now, there isn't a decision to do anything. But I also don't want to sit here and be all high and mighty and say we're too good for that and then go bankrupt without ever having to do pay-to-play. So we have to be open. We have to be nimble. We have to be flexible, right? As of today, no pay-to-play plans. Does that change in a week? Does that change in a year? Time will tell, right?
Got it. And the last question, you said that the pay-to-play is potentially an impact to brand image. When you say that, are you talking about with the end user, the consumer, or are you talking about with the OCS or someone else, or basically people who are the distributors who are buying your product?
I think it's sort of in general because you end up being a partner product in some of these stores. And the cannabis community is a very finicky community. They see and smell that. They're like, "Oh, BLK MKT is a partner product at XYZ store. They're a partner product now." And it's very unique. I really can't explain it, but it's a very connoisseur, sort of cliquey, sometimes can be extremely opinionated clientele. And I think protecting the brand integrity, especially on BLK MKT , is very important. And as of right now, we don't know if pay-to-play.
Yeah. Sorry to interrupt. If the user went into a store to go pick up something, would they know Pay-to-Play versus normal product? Is there a specific difference there, or you're just thinking they might get it leaked to them somehow?
It depends on the consumer, right? Some consumers are more savvy to what's going on than others. But I don't know the answer to that question. But I would say it has potential ramifications to the brand. But that alone wouldn't be a single enough reason not to do it, right? I think the bigger reason not to do it is the financial implications and the potential compliance implications. Protecting the brand integrity is low on the pecking order, if that makes sense.
Yep. Are there other avenues or other stores that you can sell through that you can grow with to basically start getting your product back on the shelves and improving the rec business, or really the big opportunities you have to do the pay-to-play?
No, I think the big opportunity is doubling down on the stores that don't charge the pay-to-play. So there's a whole coalition of independent retail stores. And collectively, they are a strong group and a big group. They are very anti-pay-to-play. They want the Ontario government to affect change so big change can stop that. Our thought is to double down and support them. "Hey, how can we support you? Do you guys need some displays? Do you need some swag? Do you need a product knowledge session, right? How can we support you guys so you guys can support us?" So that's one way to go about it, right? The other thing is, obviously, some of these trade shows and events and activations have a little bit of a presence there without blowing the bank. And number three is look at new markets.
Quebec is a massive market, and we just dipped our toe in that market. So we're excited about that market. We'll see how it goes. But again, fighting in Ontario while everyone else is fighting, it doesn't seem to make sense.
Yep. One last question on the pay-to-play stuff. In terms of how much product and from the general market sense, not just BLK MKT , how much of the market share do these stores that use these pay-to-play models have versus stores that do not use these pay-to-play models?
I'd say the big conglomerates in Ontario make up a vast percentage of the market and the stores, majority in Ontario. Yeah.
Okay. Got it. Two other really quick questions. How much of the inventory that we see on the balance sheet is made up by what you're calling popcorn trim?
Ooh, I don't have that on the top of my head. At the year-end, Miguel, do you have the answer to that in front of you?
No, I don't have the answer to that directly in front of me. There is a significant, I think we touched on earlier, how orders are fulfilled to the market. And so there is a certain amount of inventory required to be held on hand. And depending on what's happening with your sales mix, that can fluctuate. Let's say it fluctuates anywhere from 2,000-3,000 kilos just of product that you need to have as you're awaiting results from labs to understand your potency so you can fulfill orders so you can schedule packaging runs. So it's a working capital-intensive business for a lot of reasons. And that inventory stock is a big reason for that. How much of this inventory is in the.
Sorry. Miguel, I'm going to cut you off. Sorry. Because I sort of remember an exercise that we did. I want to say this was in December. And it hasn't really came to mind that we broke down the product. And what we sort of came to the conclusion to that aside from trim, popcorn, odds and sods, off-spec, old inventory, and inventory that's spoken for a future buyer, whether it's to be exported to the province, we really only had CAD 2 million of product that was like, "Hey, this is unspoken for, and this is sort of our prime and fresh sellable product." I have a vague memory of that number being CAD 2 million. So correct me if I'm wrong, though.
CAD 2 million dollars of cost-based inventory?
I don't remember. I think more so CAD 2 million in terms of that we can monetize, I feel like, at the time, at year-end. Now we're speaking three months ago, right?
Yeah. I guess the punchline is we don't have a perfect answer to your question in terms of those kilos. It's a bit of a moving target, but a moving volume.
Yeah. I think your question and concern might be, if I'm understanding correctly, "Hey, guys, please clarify if you had CAD 15 million of sellable product that you couldn't move." I think that's sort of, if I'm correct, that's where you're going. Yeah. And my answer is absolutely not. No, that's we had a bunch of hot dog meat sitting there, if that makes sense.
Okay. So it's not a lot. And basically, you're just taking opportunities as they come up to get rid of it. And I'm guessing the majority of that is either putting that in pre-rolls or B2B, where someone else will put it into their pre-rolls?
Exactly. Vault sweeps. Just get rid of all that stuff, right? But yeah, there wasn't, from what I remember, there was only a few million CAD of product that was sort of fresh and sellable. And we went and moved that right away.
Yep. Got it. Okay. Last question. I think this one will be a quick one. Just looking at some reviews online and stuff, I'm seeing some people who have this one complaint where, "Hey, we're buying premium product, and we're getting seeds in our flower." Is that a legitimate concern, or are these uninformed consumers about that? Do a lot of other premium brands have seed in their flower, and it's just something that happens?
Very, very rare. Yeah, this is, it's a very, very rare occurrence that makes a loud noise, if that makes sense.
Yep. Fair enough. Thank you guys very much, and good luck in the future. Hope everything goes well.
You're welcome. Thank you.
Once again, if you have a question, please press star, then one. The next question comes from Jordan Kay., private investor. Please go ahead.
Hey, Norton. It came back around to me again. I thought of something that was important. When it comes to your ability to manufacture at a particular facility, you say something is a particular amount of square feet, and you can grow about however much estimate per square feet, that would make the business pretty capital-intensive because every time you needed to generate more revenue, you'd have to build more facilities. Have you considered ways to drive further efficiencies at your existing locations so that you could grow more per square foot? And if so, what would be the capital for doing that and compared to building entirely new facilities? Thank you.
Not enough that moves the needle for you, Jordan. We can optimize things, right? We can drive our production output versus production capacity from 70% to maybe 80%-85%, even if that's a stretch. But that doesn't move the needle. And there isn't a way to all of a sudden magically double your canopy square footage by going vertical, right? One piece of advice I could give or say, which is my thesis, is that it creates a tough barrier to entry. So for it being capital-intensive means not every LP can jump into it, right? Only those who are confident that they can put out good product can do this, right? There's sort of a hybrid approach to this, which is contract growing, right?
So if there's a facility near us that we know them, we like them, we trust them, and they grow pretty good product, there could be an opportunity to get them to grow for us. And we sort of come in every other day and manage and oversee, and especially are there every day during harvesting, drying, curing, packaging. That's an option too. But the pricing on that's not that great. We give up a decent chunk of our margin by doing that, right? We sort of go from maybe a CAD 1.25 cash cost of production to we're at CAD 2.25, right? But that is a good short-term solution, in my opinion, if we have export demand and we want to say, "Hey, let's see if this demand is sticky." So we have excess demand. We fill it through contract growth.
Then we maybe use the money that we've made from that and the rest of our business to reinvest into its growth. But I like the fact that it's capital-intensive because it just means you can't just snap your fingers and break into the R market.
Yeah. How many kgs do you think you're going to max out at your current facilities without greenT ec?
I think that 15,000-16,000 kilos number is a fair and safe number to max out at.
I mean, and I think you did 32 in the prior quarter, not this one, but the prior one. So you're multiplying, and there's not a lot of excess that we're going to be seeing there. So revenue numbers, we're talking CAD 10-11 million kind of maxing out there.
I think a little bit more than that. Yeah, you got to consider that there's concentrates. You got to consider it's monetizing sort of that biomass. And you also have to consider that elevating your sales channels, right? Like I said, if you're doing some B2B, that's a little bit cheaper, slowly getting into export or rec. But the numbers that we have sort of internally is and don't quote me on this, but if everything went well in this company, if we sold every single product, if we had no non-performing harvests and everything tested positive, I would say sort of the maximum number you could expect on a quarterly basis would be, I think, that CAD 15 million range would sort of be the highest that we could see if all the stars align without reasonable. And prices stay where they are without expansion.
Now, there's a whole bunch of things that could happen, right? Prices could increase as companies go bankrupt, right? Prices could decrease as more competition comes online. But if you were asking that question today, max pack, max loaded, it would be 15. But as conservative, this is no way in shape forward guidance. It is just sort of putting what the potential would be in this company if stars aligned.
Yeah. And that's without GreenTec part?
Without GreenTec Bio.
Without GreenTec. Did you say that GreenTec has the ability, has the land to build 80,000 sq ft?
It does. Yep.
Okay. But yeah, obviously, that would be a long time away in terms of construction.
Correct.
All right. Yeah. Well, I think that's it for me. I'll be watching you guys and praying that things keep coming along and keep in touch.
Thanks, Jordan. Appreciate you having on the call as usual, man. Great questions.
All right. Take care, Norton.
Thanks.
See you, David.
Thank you.
The next question comes from Phil D., private investor. Please go ahead.
Hey there. I was going to Jordan K. Can you hear me?
Yep.
Okay. Really appreciate the time that everyone's taking here and really, really appreciate the insight into the business. But I just wanted to ask if you could expand on or give any guidance on your core product, which is the cannabis. And can you share any insight onto maybe some of the genetics, some of the cultivars that are kind of being worked on now with regards to is there any growth or any insight into any future genetics or in-house genetics cultivation, any work over there? Because it's clear that you make phenomenal product, and it grows the brand. So what's being done on the front in regards to that? And if you can talk on it.
Yeah. So I want to say first and foremost, love the comment about genetics. Not enough people understand and appreciate the importance of genetics. With that said, my next comment is that we're fairly secretive about what we have in the works for genetics. I would say there are some genetics that we've purchased recently that I'm extremely excited about. I think they have the ability to maybe kickstart our rec revenues again a little bit. So I'm extremely excited about that. But this is something that is top of mind. We are constantly innovating. We are looking at ways to sort of keep consumers excited about the upcoming genetics and finding genetics that it's not only that consumers like, it's that we like growing them too, right? What good is something that sells extremely well, but you pull 1.5 pounds per light, right?
It's a complete nightmare to hand trim. You don't want that either, right? Or if it's a 12-week strain. So we're looking at optimizing that. We're looking at optimizing sort of our annual Gross Margin per sq ft. But genetics is top of mind. I would argue that we probably have one of the best genetic libraries in this country for ultra-premium indoor, right? Some guys will have better genetics for greenhouses that grow great in greenhouses. But for us indoor, I'd argue we've got one of the best in the country.
Fantastic. I think you kind of spurred my line of questioning off the last one, which was increasing yield. Are you finding that with the current genetics and the phenos that you're seeing a steady increase in or I guess a steady line with current per-plant production, or are you seeing an increase in THC or other type of phenols or cannabinoids in the current genetics?
Yeah. So let's say in 2022, sort of early 2023, we were really trying to hone in on the genetics, right? So I would say what we've done is sort of honed in on what produces well and also what sells well. And we have to have a happy medium and trying to stay away from the ones that are non-performers, right? Because it happens, right? You commercialize something, and you realize, "Wow, this one's not that great to grow." So we're now at a point where for sort of our phase one genetics, which is what we've been growing for the last little while, we're pretty dialed in on what we like to grow and what we'll sell. Phase two, which is the new genetics that have started to come in, we're going to be testing them over the coming months and seeing what is a fit for commercialization.
That's great. That's great to hear. Thank you.
You're welcome.
That's it for me.
Once again, if you have a question, please press star, then one. Since 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 Singhavon for any closing remarks. Please go ahead.
Thank you again, everyone, for joining us today. If you have any questions or would like to contact us, please reach out anytime. Thank you once again for your continued support.