Lowell Farms Inc. (PNK:LOWLF) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good day, and welcome to the Lowell Farms First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Bill Mitoulas, Investor Relations with Lowell Farms. Please go ahead.

Bill Mitoulas: Good afternoon, and welcome to the conference call to discuss Lowell Farms Inc.’s financial results for the first quarter of 2023. Before we begin, please let me remind you that during the course of this conference call, Lowell Farms Inc. management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors section of our Form 10 filed on EDGAR and our listing statement filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future.

This call includes Ann Lawrence, Chairperson of the Board for Lowell Farms; Mark Ainsworth, Co-Founder and Chief Executive Officer; as well as Chief Financial Officer, Brian Shure. We will go into detail about the company’s financial results for the quarter later in the call. The Q&A portion of this call will be open to analyst questions to provide further insight into the company’s performance, operations and go-forward strategy. For those of you who may happen to leave our call before its conclusion, please be advised that this conference call will be recorded and archived on our Investor Relations website page. And now, I’ll hand the call over to Ann. Ann, go ahead.

Ann Lawrence: Thank you, Bill, and thank you for joining the Lowell Farms earnings call. First, I’d like to thank the entire Lowell team for their hard work and efforts as we continue to drive operational efficiencies through cost-cutting measures and our ongoing restructuring efforts. We continued to see the results of these efforts in the first quarter of this year and expect to continue the trend of driving streamlined operations and sustainable growth efforts through the second quarter. We continue to move forward with a number of strategic alternatives, including our intent to sell the Lowell intellectual property assets we announced in March of this year. While we had anticipated an earlier calls, we are working with the noteholders to finalize the transaction as well as with our out-of-state brand partners and anticipate the closing to occur during this quarter.

As we continue to navigate a challenging industry environment, the company believes our platform will allow us to take advantage of market opportunities in California and drive measured growth across all aspects of our business. With that, I’ll turn it over to Mark, who will go over Q1 operational results. Mark, please go ahead.

Mark Ainsworth: Good afternoon, everyone, and thank you, Ann. I would like to jump into our Q1 earnings call and share the progress the company has made. In CPG, Lowell Herb Co.’s 35’s pre-roll product launched in Q4 and ended the quarter by being in 215 retail stores, and has maintained the same store presence by the end of Q1 2023. In Q4 2022, 35’s reached revenue approximately 800,000, while in Q1 2023 saw an increase to approximately 950,000, an 18% growth over the previous quarter. We had sales milestones in March where the company achieved the highest sales in one month-to-date at approximately 350,000. During the quarter, the company introduced the black packs [ph] under Lowell, which is an infused pre-roll. The black pack product generated approximately 173,000 in sales in Q1.

The Lowell Classic Smokes, however, experienced a 15% decline quarter-over-quarter. Overall, the Lowell pre-roll category was down 4% quarter-over-quarter but remained flat year-over-year. The team remains committed to innovation in providing new product offerings for dispensary partners and plans to launch additional SKUs in the coming quarters to increase sales offerings to provide incremental revenue. Regarding the company’s CPG portfolio, primarily consisting of owned brands, revenues dropped by approximately 18%. Q4 2022 revenue was around $5.7 million, while Q1 2023 revenue decreased to roughly $4.7 million. A 700,000 decline in packaged flower sales primarily contributed to the reduced CPG revenue, resulting from the lower winter harvest yields at cultivation and a continued strategy to move biomass through both channels.

Revenue for the distributed brand increased by approximately 77,000, with approximately 235,000 in the revenue for Q1, a 48% growth quarter-over-quarter. As for bulk sales, the company’s strategy for the quarter involves redirecting a portion of biomass from CPG sales to the bulk sales team. This strategy allowed for the sale of around 4,600 pounds of finished flower from the cultivation, generating revenues of approximately $2.5 million. This represents a decline of approximately 9% in revenue quarter-over-quarter and 31% in total pounds sold. The average price per pound for the total biomass sold during the period increased by 24%, reaching $485 per pound compared to the previous quarter’s $391 per pound. The bulk sales team continues to optimize the price per pound based on current market conditions, ensuring the best possible returns.

Out-of-state licensing revenues experienced a decline of 23% from approximately 289,000 in Q4 2022 to around approximately 222,000 in Q1 2023. This decrease can be attributed to various factors, including market fluctuations and adjustments in our out-of-state expansion strategies. In Q1 2023, royalties also saw a drop of 26%, amounting to about 206,000 compared to the previous quarter. Despite these challenges, our brand continued to make strides in new markets. Our launch in Arizona was a notable success as Lowell’s pre-rolls quickly became the top-selling product in our flagship account, Sunday Goods. This accomplishment demonstrates the strength of our brand and the appeal of our high-quality products even in competitive markets. During the same period, the total number of Classic Lowell Smokes packs sold across all of the state markets, excluding California, reached approximately 54,000 units, while this figure represents a slight decrease from our roughly 63,000 units sold in the prior period and highlights the continued demand for our core product offerings outside of California market.

Regarding the cultivation operations, Q1 2023 brought unprecedented weather conditions to Monterey County, California. Beginning on New Year’s Eve, the region faced the first of several atmospheric river events, with an epicenter located in the northern part of the Central Coast. Consequently, widespread flooding occurred throughout Monterey County, causing significant disruption and making national headlines. These extreme weather conditions posed challenges to agricultural operations in the area, including Lowell Farms’ cultivation efforts. The heavy rainfall and flooding likely had impact on crop yields, transportation and overall productivity within the region, as an agricultural product that is influenced heavily by the weather, it is important to consider these factors when evaluating the company’s flower output and quality during the quarter.

While we were one of the lucky ones that had an infrastructure that remained intact, we did experience lower yields during the quarter, primarily due to the lack of sunshine in several instances where power was lost for a few days. In this period, we cultivated and delivered 4,933 pounds of flower, down from 8,355 pounds in the previous year, resulting in a 41% decrease year-over-year. Despite our cultivation team demonstrated exceptional resilience, hard work and dedication to ensure the safety and integrity of our operations. Regarding Lowell Farm Services, the facility processed approximately 22,500 pounds of wet weight third-party biomass during the period compared to 70,000 pounds in Q4 2022. The decrease is attributed to seasonality as well as attrition within the Monterey County.

The company’s continued focus on efficiencies and processing functions have resulted in reduced labor costs in the quarter. In Q4 2022, we initiated cost saving measures that continue into Q1 2023 in response to the consecutive decline in revenue. As part of this effort, we implemented an additional reduction in force that impacted employees at varying levels, resulting in an annual savings of approximately $2.9 million. Brian will soon discuss the results of numerous cost saving measures, which are a testament to the incredible efforts put forth by the entire Lowell team. We are deeply grateful for our dedicated staff who have demonstrated unwavering commitment not only to our company, but also to our valued shareholders. Their collective hard work and collaboration have played a pivotal role in achieving these significant results, allowing us to optimize our operations and maximize value for everyone involved.

With that, I’ll turn it over to Brian.

Brian Shure: Thank you, Mark, and good afternoon, everyone. Before I begin, please note that we are reporting our Q1 2023 financial results in U.S. GAAP, and a portion of my commentary will be on a non-GAAP basis. So please refer to today’s earnings release for a full reconciliation of GAAP to non-GAAP results. We report all figures in U.S. dollars, unless otherwise indicated. I would also note that these results are unaudited, and our quarterly report Form 10-Q will be filed presently with the SEC and the CSE. We are reporting Q1 net revenue of $7.5 million, down 19% sequentially and down 39% year-over-year. CPG revenue declined 18% sequentially to $4.7 million and declined 49% year-over-year. Lowell brand revenues for Q1 were $3.9 million, representing 84% of CPG revenues.

Bulk flower revenue decreased 9% sequentially to $2.5 million, and increased 44% year-over-year. The decrease from Q4 is due to a 31% reduction in pounds sold, but offset by a 24% increase in price per pound. Lowell Farm Services revenue decreased to $0.1 million compared to $0.5 million in the prior quarter. Out-of-state licensing revenue decreased 23% sequentially to $0.2 million, and decreased 69% comparing year-over-year. Gross margin as reported was 1.8% in the first quarter compared to 12.7% year-over-year, driven by the decline in CPG revenues. Operating expenses were $2.5 million or 33% of sales for the quarter compared to $3.4 million or 37% of sales in Q4 2022, and $4 million or 33% of sales in the first quarter last year. This reflects cost reductions realized during the current quarter.

The operating loss in the first quarter was $2.3 million compared to an operating loss of $6.4 million sequentially, and an operating loss of $2.5 million year-over-year. Net loss for the first quarter was $4 million compared sequentially to a net loss of $11.1 million, which compares to a net loss of $4.1 million in the first quarter last year. Adjusted EBITDA in the first quarter was negative $1.1 million compared sequentially to adjusted EBITDA of negative $4.1 million and adjusted EBITDA of negative $0.9 million year-over-year. Turning to the balance sheet. Working capital was negative $16.4 million at the end of the quarter compared to negative $13.1 million at the end of 2022. Included in working capital is $21.6 million of net convertible debentures at the end of the current quarter and $21.4 million net at the end of 2022.

Excluding these from working capital, there is $5.3 million of working capital at the end of the current quarter. The company had $1.3 million in cash at the end of the third quarter compared to $1.1 million at the end of 2022. I would like to take a moment to thank the team at Lowell Farms. I have enjoyed working with all of you, and I look forward to continuing to serve on the Board of Directors. Now I will turn the call over to the operator for questions.

Q&A Session

Operator:

Mark Ainsworth: Thank you all again for joining the call and for taking the time to get an update on our business. We look forward to talking with you on our next earnings call.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may all now disconnect.