Thank you for standing by. This is the conference operator. Welcome to the Avant Brands Inc. first quarter 2023 results conference call. As a reminder, all participants are in 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 then zero. I would now like to turn the conference over to Stephanie Martens, Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Welcome and thank you for joining Avant Brands Q1 2023 results conference call. My name is Stephanie Martens, Investor Relations for Avant Brands. Speaking on our call today is Avant's Founder and Chief Executive Officer, Norton Singhavon, and Chief Financial Officer, Matt Whitt. Avant's Chief Operating Officer, David Lynn, is also present and will be participating in our Q&A session. Our Q1 2023 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 on our regulatory filings available on SEDAR. On this call, we will refer to the company as Avant Brands or Avant.
We recognize that our fiscal 2022 results conference call took place just over a month ago, Most of you have reviewed our Q1 2023 results issued yesterday. Being mindful of your time, Matt and Norton will keep their comments brief, We'll then 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.
Thank you, Steph, and good afternoon, everyone. Quarter one, 2023 was another record quarter, continuing our momentum from a record 2022 fiscal year, achieving positive cash flow from operations, adjusted EBITDA and adjusted net income for the period ended February 28, 2023. Our news release issued yesterday summarizes key financial and operational highlights for the three months ended February 28, 2023, compared to the same period last year. First of all, let me discuss two significant transactions that occurred in the first quarter of this year. On February first, 2023, Avant entered into a purchase agreement to acquire the remaining 50% non-controlling interest of 3PL. This provides Avant with full control of what is now our second-largest facility and the future cash flows that come from it.
On February 2, 2023, through Avant's controlled subsidiary, Avant Brands K1, we acquired 100% of the outstanding shares of the Flowr Group Okanagan. This facility was purchased from the Flowr Corporation through CCAA proceedings, as had been previously announced. The Flowr facility is now our largest facility, and we are working diligently to successfully integrate that facility into our operations. Subsequent to quarter end, we acquired the remaining 50% non-controlling interest of Avant Brands K1, meaning we now control 100% of all of our operating facilities. I'll touch on some of the highlights for the first quarter of fiscal 2023. At February 28, 2023, Avant maintained a strong financial position consisting of CAD 2.6 million in cash and CAD 17.4 million in working capital.
We maintained our strong trajectory in sales of recreational cannabis, posting CAD 7.9 million gross revenue, representing an increase of 71% over Q1 of last year. This includes the continued success of cannabis exports, completing five export shipments of approximately 732 kg of dry cannabis with a value of approximately CAD 2.5 million during the first quarter. Gross margin before fair value adjustments was 42% of net revenue in Q1, a new record for the company, an increase from only 23% in the same period last year. Avant sold a total of 1,424 kg of cannabis in the period ended February 28, 2023, generating our gross revenues of CAD 7.9 million.
This represents an increase of 539 kg or 61% in volume and CAD 3.3 million or 71% in gross revenue compared to the same quarter last year. We continue to ramp up production in an effort to meet unfulfilled demand with 2,635 kg of cannabis produced in Q1, compared to only 637 kg in the same quarter last year. Our overall weighted average selling price of cannabis sold increased by 6% to CAD 5.08 per gram, up from CAD 4.78 per gram last year. Domestic REC cannabis sales had an average selling price of CAD 6.86 per gram, including excise tax in the first quarter, compared to CAD 7.12 last year.
This shift represents the pricing pressures in the domestic recreational cannabis market and our efforts to actively increase the price point of our export contracts. Our net loss from operations in the first quarter was CAD 0.1 million, compared to a loss of CAD 1.1 million in the same period last year. Finally, we achieved adjusted EBITDA and positive cash flow from operations before net working capital changes of CAD 1.8 million compared to CAD 0.1 million in the prior year on both metrics. With that, I will turn the call over to Norton Singhavon, our Founder and CEO, to discuss our strategic priorities.
Thank you, Matt, and good afternoon, everyone. We began fiscal 2023 with deliberate execution on many fronts, including capitalizing on growth opportunities that will create value for our shareholders. We also prioritized initiatives to maximize output, increase efficiency, and reduce costs across all of our facilities.
This resulted in our adjusted EBITDA increasing by CAD 200,000 over last quarter, which was Q4, and our adjusted net income also increasing by CAD 600,000 over Q4, even though our top line revenues were CAD 1 million short of Q4. We continue to see significant demand on the export side, with tremendous loyalty from our customers for our high-quality product. This is evolving into a recurring revenue stream that provides compelling sales diversification for Avant. At the same time, the Canadian recreational business remains our largest business segment and a core focus for the company. Since the outset, we have always stayed true to our premium quality and innovation to stay ahead of ever-evolving consumer preferences. We continue to operate a lean and efficient team focused on execution to drive shareholder value.
We believe that our share price is undervalued. As of the end of Q1, we were the second-best performing Canadian cannabis stock over the trailing 12 months. We had a strong first quarter. We have many catalysts for growth, including the production output potential at 3PL and Flowr. We have improved our efficiency even further over the prior year. Avant has a strong balance sheet, outstanding product quality, and superior brand recognition. A huge thank you to our employees who assisted in generating our strong financial results and to our investors for their continued trust and confidence in Avant. We are fully committed to continued innovation, growing revenue streams, and increasing profitability quarter- over- quarter. I'll pass it back to operator to open up for Q&A.
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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. The first questioner comes from Rahim Rehman, a private investor. Please go ahead.
Hello, gentlemen. Congratulations on another strong quarter. Just had a few questions. The revenue came in a bit softer versus Q4 sequentially. Clearly the margins and below the line, you know, there's been some expansion there. You know, could you possibly shed some light on how much of that is, you know, long term, carries over to the future? How much of it was, you know, particularly for this quarter?
Yeah. As I mentioned, we're constantly striving to increase our production output. Obviously last year, we averaged, I think it was 52%. We're trying to drive that number up, we're confident we will drive that number up. It's not mutually exclusive to just driving up our production output. We're also looking at ways to save on our costing. Acquiring Flowr, we think, will help because we'll have some negotiation leverage with our vendors and suppliers. One thing to touch on the decline in revenues is that we did have some export shipments that were set to go out in Q3 that ended up going in Q4. Q4 was actually a bigger quarter than we had originally forecasted. Q3 was a smaller quarter than we had forecasted.
We also saw that December and January were quite slow for the provincial buyers on our REC products. We expected that as the buyers do load up prior to the holidays. December and January in all retail segments is usually quite slow other than the Christmas rush. I think I covered that, your entire question, but if you have anything you wanna add, please let me know.
Sure. Would it be prudent to, you know, estimate that Q4 would also be seasonally strong, considering historical trends?
I would say on the REC side, probably a little bit stronger than the prior quarter, but I wouldn't expect it to be mind-blowing or a shock and awe. As I said, Q4 for us was such a big growth because of some export shipments that didn't go out in Q3.
Yeah, on the Flowr integration, if you could, you know, anything in the synergies, any sort of transition or cost savings, you know, because the adjusted EBITDA number being positive, you know, the cash flow is being in a much, much better picture. You know, all of that, how does it flow through with the integrations and acquisitions?
Hi, it's David Lynn. I'll take that question. You know, we're super excited about the Flowr facility. We looked at a lot of different acquisition opportunities, and we zeroed in on that one because of the nature of the facility and the location of the facility, and it really offers some fantastic synergies as part of the Avant group. As we mentioned in our news release, we initially realized about CAD 1 million in annual overhead savings, and then subsequently, during the month of April, we will realize about another CAD 0.5 million of savings. If you combine that, there's about CAD 1.5 million in annual savings, and of course, that's over and above the kind of automatic synergies we got by buying Flowr Group Okanagan without the parent company.
you know, very, very excited about that acquisition on so many levels. the cost savings, of course, is just part of it because the facility
Greatly expands our output and allows us to satisfy some of that customer demand that we weren't able to fulfill in prior quarters.
Fair enough. Lastly, I saw some convertible debentures, now on the balance sheet. If you could again shed some light on that, who's holding those, and if there are any terms, attached, any high-level comment would be good.
Yeah. Yeah. The convertible debentures is seller financing for the 3PL transaction. What we did was we purchased their stake in a mixture of issuing equity in Avant and also a, you know, vendor take back seller financing. I think our stock was give or take CAD 0.20 at the time we closed the transaction, and we were able to negotiate a CAD 0.50 convertible debenture. I mean, that's, you know, quite a premium. So I'm confident that. Listen, like, this is not some predatory hedge fund. It's not a loan to own, you know, predatory lender. Like, this is our partner and a large shareholder of Avant.
The way we structured it, I think, makes the most sense that we're able to acquire this without having to do an equity raise or a debt raise with an outside third party who does not have a vested interest into Avant as a large shareholder. I mean, I believe that they're such a large shareholder that now we're reporting insider on SEDI. That gives me a lot of comfort moving forward that they are our debt holder.
Fair enough. Thank you for answering these questions.
You're welcome.
The next question comes from Jordan Kay, private investor. Please go ahead.
Hey, Norm. Hey, Matt. Congratulations on an amazing quarter.
Thank you, Jordan.
It was definitely an interesting report today on big numbers, right, on EBITDA and cash flow. That to me is really an amazing step in the right direction. Of course, you know, a lot of this, I think, has to do first with acquiring the other 50% of 3PL and now, you know, the full ownership of Flowr. Matt mentioned earlier that there was CAD 17.4 million of working capital, and if I got that number wrong, Matt, definitely correct me. Only CAD two and a half of that is in cash. I'm looking at what your next four months looks like in terms of large payments, right?
I think you've got CAD 1.6 to the 3PL in April and then another CAD 1.6 in somewhere around July, August, and then CAD 1.45 to MENA, I think it's MENA, in August as well. Over the next four months or so, we're looking at CAD 4.5 million in cash that has to come from somewhere. You know, if we talk about the stock being undervalued, one of the reasons I think would be just, you know, investors trying to figure out how that's all gonna work.
Any color that you can provide on that and any, you know, plan A, plan B, and plan Cs that you can kind of tell us, I think it would be super helpful because a lot of people are just worried that, you know, if we run into a cash crunch, we could see a cash raise or bad debt.
Yeah. Before we made these transactions, especially with 3PL, we modeled this thing for endless hours in the boardroom. The easiest and simplest way is that 3PL should be able to support its payments. The money that we owe to the 3PL vendors will be paid for by the cash flows coming out of 3PL. That's how we see that getting taken care of. Keep in mind that 3PL only had 52% capacity utilization last year, right? We're obviously ramping that up, and that has been ramped up. I see 3PL generating more cash flows than it has previously. And in terms of Flowr, it's the same thing. We expect the cash flows from Flowr to be able to pay out MENA.
By August?
Correct.
Yeah. No.
we would have never-
If that happens, that would be ridiculous because I think what a lot of investors might not really quite understand is when you get on the other side of that debt, what the company looks like.
Well, here's the thing. Flowr is 80,000 sq ft, right? It's our largest facility. you know, the amount of cash flows that can come out of that are quite significant. We are confident that, you know, when the MENA CAD 1.545 million is due, that we will have the cash from Flowr sitting in Flowr's bank account to make that payment.
Wow. Was there zero revenue from Flowr in this Q1?
CAD 300,000, but that's just purging old, outdated inventory at, like, fire sale rock bottom prices. This is not Avant product.
Okay. Got it.
One thing to keep in mind too, Jordan, is that MENA is now an extremely large shareholder of Avant. Let's say hypothetically, if we needed an extra month, not saying that we do, but hypothetically, if we did, I think that'd be a very simple conversation to have. It wouldn't require us to go out and take on some predatory debt.
Okay, that's really good to know. Norton, I, you know, I've got two more questions, but I'll take 10 seconds of everyone's time to just kind of, like, put everything into perspective. I remember I was an investor in Tesla back in the day when they got that ginormous loan from J.P. Morgan at 2%. When the market realized that they had sort of that cash backing, the market gave them a, like, a super premium that kind of led to when they skyrocketed. If MENA want...
I mean, not that MENA's gonna listen to me on this conference call, but if MENA wanted to provide, you know, some financing at some ridiculous terms to watch their stock that they own of Avant appreciate, I mean, that would be a way to do it. Okay?
The issue with that is we don't wanna raise at these levels. We don't need it. You know, we're comfortable with our forecasting that we'll be able to service all the debt for 3PL and MENA. Same goes for 3PL, right? Like I said, 3PL on the other question. 3PL is now a reporting insider of Avant. Hypothetically, again, if we said we needed an extra month or whatever, I don't see them being unreasonable and forcing us to go take on predatory debt elsewhere.
Awesome. I love that. Just a couple more things quickly. I have... I mean, I saw a comment somewhere, and I also looked into it, IMCC. I... Do you think you've said in prior calls that export paid quickly, but the outstanding receivables is quite large. Is that REC outstanding receivables, or is that IMCC outstanding receivables?
That is majority REC because for Q1, December and January, we basically got no REC POs at all whatsoever because they were slow, and they loaded up in November, right? February is where all the REC came, and they take 60 days to pay, and it's 0% upfront.
Okay. All right. That's really good to know.
That's the government paying us, right?
Right. Yeah. Canada's good for it.
Yeah, exactly.
How much of your export is done by IMCC?
I'm gonna hand this over to David Lynn.
We don't provide a breakdown by country or by a client, but IMC is a major client of ours, and we've publicly disclosed that in the past. One thing I would point out that to kind of address your concerns there is that the minimum upfront payment we do on export is 50%, and some clients are paying as much as 75% upfront. Norton mentioned that some of the liquor boards take up to 60 days to pay, although that's improved recently in one province. On the export side, at least 50% and up to 75% is paid upfront, and the remainder typically within 30 days.
Is IMCC just Israel, or do they cover other areas?
Just Israel, I believe. For us, it's just Israel, but they do have business in other countries as well.
Okay. All right. Sound good. Have new export contracts been landing outside of IMCC over the last quarter? I don't think I asked about it in the previous quarter.
Yes. We're constantly exploring new export deals. There's a lot of opportunities out there. There's only a certain percentage of them that we end up closing on terms that are acceptable to both us and the export client. The answer to your question is yes. We've been gradually adding those clients over time.
Do they order, you know, every quarter? Do they order once a year? Like, what does the pace look like when you're adding on new clients?
I think it varies by client, but, you know, a lot of them might wanna take an order every month or so.
Okay. Got it. That's really good. I got one last thing, lease liability. Just is the Flowr facility on a leased property? Is that what that is?
Correct.
Okay. That's it for me. I just, you know. Thank you all for your open lines of communication and for your outstanding execution. I hope and pray we all get rewarded, with a share price one of these days.
Likewise.
Once again, if you have a question, please press star then one on your telephone keypad. The next question comes from Joe Rice from KAB. Please go ahead.
Hey, Norton. How's it going?
Good, Joe. How are you?
Can't complain. Can't complain, especially after this call. Quick question. When you all took over Flowr, was there any export deals or customers that you were able to kind of work that Flowr previously had before you took over the facility, or are you still kind of working from scratch to get more export deals?
The great thing about the CCAA core process is you get to purge. You get to cherry-pick things that you want to inherit, and you get to purge everything else that you don't like. When we took over Flowr, we got to cherry-pick contracts and agreements with clients that we want to take on. The REC business is still continuing, although it's nothing major. We did inherit a very interesting export client in Israel that is a major player, and they're publicly traded. We'll see how that one goes. Definitely, Flowr was predominantly focused on their REC business and selling a lot of domestic B2B. We don't like-
Right.
-the domestic B2B market. We've utilized, you know, their existing domestic B2B sales pipeline to just wipe out their vault, is what I call it, right? Like, whatever inventory they had, just purge it, get it out. I don't care at what price, right? Then we start fresh.
Right.
That was kind of nice. Another thing that was also nice is that we through the process, we got to inherit whatever receivables they had too. That was a nice little bonus that when we took over, there was, you know, some, a decent amount of money owed, and, you know, we've collected a good chunk of that since.
Okay. You were able to get their money, but none of their debts. The money that was owed to them, but none of the debts.
Yeah, exactly. We don't want any of the debts. Even contracts too. If we didn't like a contract, we could purge it, you know? If there was this retail pay-to-play, like they're paying for data, we could purge it, we don't want it. How we actually structured that was that we don't inherit anything, we don't take on any contract, we don't take on any debt, unless we implicitly specify that item in the agreement. We just cherry-picked a few things that we liked. You know, the beauty is, yeah, once we took ownership of it, they had sold product to other provincial markets, to other buyers. There was money owed that was coming in. Once we took legal ownership, that money continued to flow in, which was nice.
Oh, awesome. Great, great. The bottom line is that by buying that facility, you were able to take in some export agreements that you wouldn't have got otherwise, pretty much. I guess that's kinda what I was asking or getting at.
Yeah. I would say one major one. Well, one that is a major player in Israel, and it is pretty high volume. We're excited to see where this relationship goes. Yes, we inherited that from Flowr.
Great. Awesome. Also, one more question I have. I was noticing on one of the releases you had today that I don't have in front of me, but I think it said something about you were able to increase prices 6% on export. I'm just curious, how is that possible?
Yeah. Listen, because, you know, we don't have enough product. The gist of it is that if you have limited supply, we say, you know. What happens is that we have, you know, clients that are originally were paying CAD 4, then we had, you know, newcomers come and say, "Hey, we'll pay for CAD 25." We're taking the contracts that have the best terms, that includes, you know, paying in terms.
Right.
In terms of timeline. You know, the more upfront they give us and the higher price it is, we prioritize those, right? When we go back to our other clients, "Sorry, you know, you're getting less product because we're fulfilling, you know, better terms." They gotta match it if they want more product. We've been able to do that. Hopefully, that continues when Flowr comes online and hits full capacity. I think the global export market, you know, I look at this internally, I feel like we're in the second inning. There's gonna be countries that probably shut down, there's gonna be countries that open up, right? You know.
Right.
we're limited to the globe. this is gonna be.
Right.
-a very interesting one, and I think if we can do deals like what we did with IMC, where our brand gets a launch in these other markets, that's when it starts to get interesting, when we have the BLK MKT brand in other jurisdictions.
Okay. that's pretty... I mean, that's pretty good considering, you know, it's a high volume. I mean, like. Now, I assume, you know, you probably use these exports as cash flow to be able to not have to lower prices on your higher margin good stuff. to be able to do that on your lower margin, high volume products is pretty good. keep up the good work.
Yeah. We don't have to package it either, right? Packaging is a lot of It's super labor intensive because we hand package everything, right? Most producers.
Right.
have machines to package. This is a good way to alleviate some of the stress and bottlenecks that are in our facilities. You know, I think I would rather have the REC business grow, you know, slow and steady, right? You know, if we go from CAD 5 million in REC in a quarter to CAD 9 million, like, that's gonna be stressful, man. If we go CAD 5 million to CAD 5.5 million then CAD 6 million, you know, that's a nice steady pace of growth for my operators and my packaging team.
Awesome. Great. Keep up the good work, man. Take care.
Thanks, Joe. Appreciate it.
Once again, if you have a question, please press star then one on your telephone keypad.
Operator, I think we're good.
Perfect. There are no more questions on the queue. This concludes the question- and- answer session. I would like to turn the conference back over to Norton Singhavon for any closing remarks.
Thank you again, everyone, for joining us today. If you have any questions or would like to connect with us, please reach out anytime. Have a great rest of your week, and thank you once again.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.