Lowell Farms Inc. (PNK:LOWLF) Q3 2023 Earnings Call Transcript November 14, 2023
Operator: Good morning, and welcome to the Lowell Farms Inc. third-quarter 2023 earnings conference call. [Operator Instructions]. I would now like to turn the conference over to Bill Mitoulas, Investor Relations Manager, please go ahead.
Bill Mitoulas: Good morning, and welcome to the conference call to discuss Lowell Farms Incorporated financial results for the fiscal third quarter of 2023. Before we begin, let me remind you that during the course of this conference call, Lowell Farms Incorporated 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 Factor 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 in the outlook we presented as of today, and management does not undertake any obligation to revise any forward-looking statements in the future.
The call includes Ann Lawrence, Chairperson of the Board; Mark Ainsworth, Co-Founder and Chief Executive Officer; as well as interim Chief Financial Officer, Tessa O’Dowd, 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 turn the call over to Ann. Ann, please go ahead.
Ann Lawrence: Thank you, Bill, and thank you all for joining us for this Lowell Farms’ earnings call. A year ago, we embarked on an ambitious restructuring strategy, and I’m pleased to announce that we successfully cleared one more of the major hurdles with the completion of the previously announced Brandco deal in connection with the elimination of our outstanding subordinated debt and alleviating the company’s expenses associated with the brand. We are very excited about the opportunities this deal brings and as exclusive manufacturing and distribution partner for the Lowell Herb Co. brand in California. We look forward to extending our unwavering support as it maintains its leading position in a highly competitive, highly regulated California cannabis market.
The completion of this Brandco transaction allows the company to refocus on expanding our portfolio and building strong partnerships with other cannabis companies to rebuild the California marketplace. Currently, our portfolio includes several own brands as well as a well-rounded lineup of distributed brand partners throughout California. It is our goal as always, to further gain on our market position, focusing on brand awareness, and our commitment to an exceptional product to help us achieve that goal. While the challenges in this industry persist, we are along with the entire cannabis community, pushing forward every day to survive the current market condition with the goal of building a strong coalition to weather the storm. Overall, the sentiment within our organization is one of optimism.
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Q&A Session
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Even though we recognize the continued industry challenges, we are energized by our progress to date and looking forward to completing the remainder of our restructuring strategy. With that being said, this is a tough industry. And our goal is to do right by our investors, our team, this industry, and the community at large. We believe cannabis will continue to be a significant part of the global economy. And our goal is to play an integral part in shaping a sustainable cannabis community and industry. Now I’d like to turn it over to Mark, who will take you further in [Technical Difficulty] Q3 operation results. Mark?
Mark Ainsworth: Thank you, Ann. Good morning, everyone, and thank you for joining the Lowell Farms’ earning call. I would like to jump into our Q3 earnings and share the results the company has made. I’d like to start by saying thank you to our special committee for their support in resolving our senior secured debt for the strategic sale of the Lowell brand IP. This significant move not only relieved approximately $22 million in debt from our balance sheet, but also allowed us to maintain the significantly decreased marketing and labor expenses that were associated with the management of the brand. This shift has empowered our management team to optimize our infrastructure to enhance margins by leveraging multiple owned brands.
The legal California market presents unique challenges in its ninth straight quarter of declining revenues. And our focus has been on forging strong partnerships for mutual growth and sustainability. By divesting from the burdensome maintenance and cost of maintaining the Lowell brand, we foresee positive impacts on our operations and profit and loss statements in future periods. We’re adopting a more distribution forward approach, focusing on ensuring the offerings of owned and third-party brands available to our dispensary customers are vast and all encompassing. Excitingly, in Q3 ’23, we expanded our CPG brand portfolio to include 15 distinct brands. This selective expansion allows us to provide a diverse range of products at various price points catering to a broader customer base.
Further on that point, our on menu last CPG segment saw an 89% growth quarter over quarter increase from approximately $400,000 in sales to $758,000 in sales. This growth underscores the effectiveness of our strategy to support a diverse range of brands. Despite a slight 2% dip in CPG sales to about $4.4 million in Q3 2023, primarily due to credit holes on some larger account, we observed a marginal increase in our average drop value. Our proactive credit risk management policies have strengthened our relationships with retail customers, enhancing communication and aligning our mutual success strategy. In product highlights. Despite a general decline in pre-roll sales, the 35 line within Lowell’s showed a 3% increase, driven by significant uptick in Infused 35 sales.
Packaged flower and concentrates also experienced growth attributed to our expanded product range. Based on the category we had almost exited, showed a remarkable 439% overall growth in Q3 2023, indicating continued growth potential. Although the edibles category experienced a dip, we’re reigniting our program with our two award winning brands, Original Pot Co.’s cookies and MOON’s blasters. We anticipate this will stimulate growth in this category. In conclusion with our CPG strategy, our leadership team is committed to leveraging our robust distribution and sales infrastructure nurtured over nine years to maximize shareholder value. We’re poised for continued growth and look forward to sharing success in the future. Moving to cultivation.
While this past quarter we experienced challenges, there are signs of stabilization. Although our Q3 2023 harvest yielded approximately 5,727 pounds, making a 14% decrease from Q2 2023 and representing a 48% decrease from Q3 2022, we have begun to move in a positive direction to increase harvest volume and will remain focused on this in Q4. We have significantly navigated pass crops affected by hop latent viroid and have introduced new healthy genetics from a reputable tissue, culture, and nursery vendors across all production groups. Since early Q2 2023, our focus has been on tailoring the growing environment for these new genetics. This includes determining optimal flowering schedules on our houses, each with its unique microclimate. Additionally, we’ve invested in capital expenditures to upgrade critical infrastructure.
A significant portion of this investment went towards replacing outdated and malfunctioning lighting throughout the nursery. With healthier crop groups, updated lighting, and a robust plan for inclement weather, we are optimistic of our progress in Q4. In this period, our bulk sales strategy faced some unique challenges due to limited availability of biomass from our cultivation operations. The scarcity was primarily because our limited cultivation biomass was prioritized for higher margin CPG sales and to preserve our shelf-space with our retail customers. Our bulk sales approach is designed to optimize cash generation, particularly when there’s an excess of total weight or a specific genetics. Although the quantity of biomass available for bulk sales was reduced this quarter, our team adapting, maintained a 3% increase in the price per pound sold.
This achievement is significant, considering the overall decrease in pounds sold was around 49%. Despite the reduced volumes, our bulk team was successful in generating approximately $1.2 million in sales. Our bulk strategy opened the company up to expanding our bulk capabilities in the third-party sector. This performance under the circumstances, underscores the team’s effectiveness in navigating market dynamics and optimizing our sales strategy. Regarding Lowell Farm Services, this quarter we saw an increase in our third-party processing customers. The facility processed approximately 114,200 pounds of wet weight third-party biomass during the period, compared to 23,000 pounds in Q2 2023. We continue to move forward with a number of cost-saving initiatives to secure Lowell Farm’s future success in the California cannabis space.
The team is focused with all their energy and expertise towards producing more revenue while continuing to remain focused on our go forward strategy. With that, I’ll turn it over to Tessa.
Tessa O’Dowd: Thank you, Mark, and good morning, everyone. Before I begin, please note that we are reporting our Q3 2023 financial results in US 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 US 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 Q3 net revenue of $6.2 million, down 12% sequentially and down 28% year-over-year. CPG revenue declined 2% sequentially to $4.4 million and declined 29% year-over-year. Lowell brand revenues for Q3 were $3.1 million, representing 72% of CPG revenues.
