Lowell Farms Inc. (PNK:LOWLF) Q4 2023 Earnings Call Transcript

Lowell Farms Inc. (PNK:LOWLF) Q4 2023 Earnings Call Transcript March 28, 2024

Lowell Farms Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day everyone, and welcome to today’s Lowell Farms Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this call is being recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Bill Mitoulas.

Bill Mitoulas: Good morning, and welcome to the conference call to discuss Lowell Farms Incorporated financial results for the fiscal fourth quarter and year ended 2023. Before we begin, please 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 into the future.

The 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, Jamie Schniedwind, 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. With that, I’ll turn the call over to Ann. Ann, please go ahead.

Ann Lawrence: Thank you, Bill, and thank you all for joining Lowell Farms’ earnings call today. The past year has undoubtedly presented us and the California cannabis industry as a whole with numerous challenges and obstacles, testing the resilience and determination of our entire team. I shared throughout last year’s earnings call. 2023 was a year spent focusing on restructuring the company in order to respond to the continued decline in legal cannabis retail sales across the state of California and ongoing tax and regulatory costs impacting the entire industry. We are now at the tail end of the restructuring process and we expect to see the benefits of our strategic decisions in the coming quarters. Now that brings us to who we are as a company today.

As we enter into 2024, Lowell is refocused on our core competencies that have been the foundation of this company since 2014. Manufacturing, distribution and sales for owned and third-party cannabis brands, including best-in-class operations and logistics. Our manufacturing infrastructure is tailored to the demands of the California market and features advanced automation capabilities. This focus on lean manufacturing standards allows us to address market needs with great adaptability, ensuring we maintain the highest standards of quality and innovation. We process raw cannabis materials at every stage of the cannabis plant lifecycle, beginning with our best-in-class drawing and curing rooms with the capacity of processing up to 80,000 pounds of wet weight flour and moving through trimming, processing, packaging and extraction capabilities.

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Q&A Session

Our manufacturing facility allows us to produce packaged flour, pre-rolls, oils, tinctures, edibles, concentrates and other products for our own brand portfolio, as well as third-party brands we distribute. In sales and distribution, we focus our infrastructure not only on relaunching some of our exclusive portfolio of award-winning owned and licensed brands. We also created strategic partnerships with over 15 third-party brands that share our commitment to quality and further diversify our portfolio of products. This allows our in-house sales team to offer one-stop shopping for our dispensary partners with consistent, reliable products and services. During 2023, our sales team had these brands on shelves in over 650 dispensaries state wide.

In 2024, we’re focused on continuing to build strong relationships with our dispensary partners who are critical to our success and the success of our brand partners. As we navigate through these challenges, we are continuously working towards overcoming these obstacles and positioning ourselves for success in the future. And as always, we appreciate your continued support. With that, I turn it over to Mark and Jamie who will go over Q4 and our 2023 year-end operational results. Mark, please go ahead.

Mark Ainsworth: Thank you, Ann. Today, I want to kick off our quarterly earnings call. I’ll note that’s a bit unconventional. Let me share a thought that might seem a bit out of the ordinary at first. Don’t judge a book by its cover. This reflects our journey this past year more than ever. I’d like to extend a heartfelt fist bump to every individual in our circle. This includes every employee, board member, investor, and even our vendors. Those of you who have metaphorically picked up a shovel and stood with us as we undertook this monumental task of restructuring our company. As of this moment, flexible operations allow us to react quickly to the constantly changing California cannabis market. What drives us day in and day out is the profound belief in the value our company adds to this emerging industry.

More importantly, it’s the belief that we not only deserve to survive, but to thrive. This conviction is the lifeblood for every one of our employees, motivating us to push forward even when faced with significant challenges. With all of that being said, we as a company entered into 2024, having decreased our total liabilities by more than $40 million and are now a restructured publicly traded California cannabis company. And as Ann has mentioned previously, we expect to see the benefits of our strategic decisions in the coming quarters. Turning our attention to California cannabis market from our ground level perspective, we’re beginning to see and witness a significant shift. The previously fragmented market is moving towards consolidation and collaboration with license holders now actively seeking to build synergies with other cannabis companies across various platforms.

Trade associations are playing a pivotal role in this transformation, embodying a collective sentiment that emphasizes unity. There’s a shared understanding that without leveraging each other’s strengths, our chances of success are slim. We believe that both California legislators and license holders share a mutual disappointment that the initial regulatory efforts fell short of expectations. However, there’s now a palpable sense of collaboration surrounding this year’s proposed legislation aimed at fortifying the industry. As a board member of two prominent associations, the Cannabis Distributors Association and the California Cannabis Manufacturers Association, I’ve witnessed first-hand the extensive efforts made to educate and inform legislators.

This engagement has been crucial in gaining momentum for this year’s assembly bills, which hold the potential to advance our industry significantly. I’m optimistic that we will continue to build coalitions that strengthen our company and the industry as a whole. With 2023 behind us, our focus has shifted to maintaining lean operation aspects and driving revenue growth. Let’s now delve into the key business metrics for 2023. Let’s examine our consumer-packaged goods strategy, focusing specifically on the Lowell Herb Co. brand. After transitioning the brand from being an own brand to an exclusive licensing model, we’ve been encouraged by the performance of our new hero SKU, the 35s. The advanced automation equipment is operating efficiently and the team’s performance with the technology meets our expectations.

We’ve introduced infused 35s to our line-up and in Q4, the entire line-up, both infused and non-infused, generated approximately $924,000 in revenue, a 4.3% increase from $886,000 in Q3. For the year, 35 sales reached around $3.6 million, marking a significant leap from its launch in Q4 of 2022, which saw around 880,000 sales, translating into a 309% year-over-year increase. In 2024, we are set to heavily focus on the 35s product line, utilizing our ample equipment capacity. The Lowell Herb Co’s packaged flower SKUs position us in the upper mid-shelf segment in California. However, this product line experienced a roughly 50% decline in revenue, dropping to about $4 million in 2023 from approximately $8 million in 2022. This downturn was primarily due to the limited biomass available for [Indiscernible] cultivation, impacting both revenue and margins.

Despite the setback, free rolls remain the cornerstone of Lowell Herb Co. And packaged flower will continue to be a strategic focus for the company. The Cypress Cannabis own brand made a noteworthy return, providing strategic options distinct from the now licensed Lowell Herb Co., launched by the company in 2018. Cypress Cannabis achieved around 600,000 in sales, a significant rebound from zero sales the previous year. Driven by demand from key retailers, we plan to continue offering this product line as it maintains support from the retail channel. House Weed, our value everyday brand, has seen a revival. It generated approximately $1.2 million in revenue from flower and biomass for concentrates acquired from third-party processing service at Lowell Farm Services, compared to $6.4 million in sales in 2022.

This represents an 81% decrease. Despite being previously shelved, its reintroduction into our portfolio of offerings serves as an essential value proposition for our dispensary customers. In late December, 2023, we fired the stoves [ph] back up in our edible kitchen, reintroducing our popular own brands, original Pot Co. Cookies and Moon’s Chocolate Bites. These products had previously generated around 720,000 in sales in 2022, dropping to approximately 40,000 in 2023, marking a significant decrease of 94.5%. We are optimistic about reintroducing edibles into our sales team’s menu, as it will allow for a more robust selection of our owned and third-party distributed brands. Our exceptional customer service and reliable product availability have earned us the trust of our retail partners.

This trust is crucial when introducing new third-party brands to our menu, leading to successful shelf placements. We have strategically brought on brands that align with our already robust portfolio, which allow our dispensary partners to have a distinct and varied offering, all while knowing they will get the same high-quality product through our state-wide distribution services. Sequentially, our consumer-packaged goods revenue grew by 5%, to $4.6 million in Q4 2023, although it saw a 19% decline year-over-year. Our distribution services stand as a pivotal component of our strategy for growth and profitability. Lowell Farms Services recently celebrated its second anniversary, marking a period of significant growth and encouraging development.

The initial year was a challenging one, filled with invaluable learning experiences. These hard knocks lessons have been instrumental in shaping our approach, allowing us to refine our policies and foster fewer, but far more rewarding partnerships. Our processing facility is an additional revenue growth avenue, but also serves as a pivotal resource for licensed farmers. These farmers recognize the advantages of outsourcing their biomass processing to us, especially when faced with the daunting task of achieving F1 construction, compliance, and navigating complex permitting processes. In the financial landscape, the fourth quarter of 2023 saw Lowell Farms Services generate revenue of approximately $0.9 million, a notable increase from $0.5 million in the same quarter of the previous year, bringing the year-to-date revenue for 2023 to $1.6 million.

This revenue includes sales from third-party bulk flour processing. During this period, the Lowell Farms Services processed about 116,762 pounds of wet-weight third-party flour, yielding around 5,720 pounds of finished flour. This represents a significant increase in processing capacity compared to the 70,000 pounds processed in the fourth quarter of 2022. Our commitment to implementing cost-saving measures remains unwavering, a strategy that has already yielded significant results. We’re proud to report a 34% reduction in operating expenses year-over-year. Leadership continues to prioritize this approach with an evolving emphasis now on driving revenue generation. This balanced focus ensures we maintain a lean operation while scaling our business capabilities and exploring new opportunities for growth.

With that, I will turn it over to Jamie.

Jamie Schniedwind: Thank you, Mark, and good morning, everyone. Before I begin, please note that we are reporting our Q4 and fiscal year 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 audited and our annual report, Form 10-K, will be filed presently with the SEC and CSE. We were reporting Q4 revenue of $7.5 million, up 21% sequentially and down 19% year-over-year. Net revenue for 2023 was $28.3 million, down 35% from 2022. CPG revenue increased 5% sequentially to $4.6 million and declined 19% year-over-year.

Despite the decline in CPG revenue, Lowell brand revenues remained strong, finishing the year at $13.8 million, while sales of third-party brands generated $2.5 million in revenue. Bulk flour revenue increased 66% sequentially to $2 million and decreased 28% year-over-year. Lowell Farm Services revenue during Q4 increased to $0.9 million, compared to $0.5 million in the prior quarter. LFS revenue for the year was $1.6 million, compared to $3.7 million in the prior year. Gross margin, as reported, was negative 90.6% in the fourth quarter, compared to negative 7.1% sequentially and negative 32.4% year-over-year. In the fourth quarter, the margin decline was due to inventory write-downs on the cultivation facility, the reclassification of operating lease expenses, and inventory valuation reviews.

On an annual basis, year-to-date gross margin as reported was negative 26.3%, compared to negative 4.2% in the prior year. Excluding the effect of the adjustments that I just identified, gross margin would have been negative 6.3% for the year. Operating expenses were $2.8 million or 38% of sales for the quarter, compared to $2.4 million or 39% of sales sequentially and $3.4 million or 37% of sales year-over-year. Operating expenses were $10.1 million in 2023, a 34% decline compared to 2022, reflecting cost reductions realized during the year. The operating loss in the fourth quarter was $9.6 million compared to an operating loss of $2.9 million sequentially, and an operating loss of $6.4 million year-over-year. Net loss for the fourth quarter was $13.1 million compared sequentially to a net loss of $20.2 million, which compares to a net loss of $11.1 million in the fourth quarter last year.

Adjusted EBITDA in the fourth quarter was negative $4.1 million compared sequentially to adjusted EBITDA of negative $1.3 million, and adjusted EBITDA of negative $4.1 million year-over-year. Adjusted EBITDA for 2023 was negative $7.7 million compared to negative $9.5 million in 2022. Adjusted EBITDA reflects adjustments for impairment expense, including $13.2 million related to the Lowell brand intangible assets, $9.1 million related to long-lived assets of the cultivation facility, and $1.9 million of other intangible assets. Turning to the balance sheet, working capital was $3.5 million at the end of the year, compared to negative $13.1 million at the end of 2022. The company had $2.3 million in cash, compared to $5.5 million at the end of the third quarter.

With that, we’ll turn the call over to the operator for questions.

Operator:

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

Operator: And that concludes today’s teleconference. Thank you for your participation. You may now disconnect. Thank you.