Lowell Farms Inc. (PNK:LOWLF) Q2 2023 Earnings Call Transcript August 10, 2023
Operator: Welcome to the Lowell Farms Incorporated Second Quarter 2023 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host, Bill Mitoulas, Investor Relations. Mr. Mitoulas, you may begin.
Bill Mitoulas: Good afternoon, and welcome to the conference call to discuss Lowell Farms Incorporated financial results for the second quarter of 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 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 will include Mark Ainsworth, Co-Founder and Chief Executive Officer; as well as Interim Chief Financial Officer, Tessa O’Dowd. We’ll both go into detail about the company’s financial results for the quarter. 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. And for those of you who may 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’d like to hand the call over to Mark. Mark, please go ahead.
Mark Ainsworth: Good afternoon, everyone, and thank you for joining the Lowell Farms earnings call. I would like to jump into our Q2 earnings call and share the results the company has made. In the consumer packaged goods, CPG sector, there are several noteworthy updates from Lowell Herb Co. The team soft launched a new product line, the Infused 35’s in late May at the BottleRock Music Festival in Napa. By the end of the quarter, this SKU was on the shelves of 43 retailers throughout the state. Initially introduced in the Sativa variety, we have expanded our offering to include Indica and we’re excited to announce that a hybrid option will be available by the end of Q3 2023. The journey to make this product has been a labor of love and ambition fueled by our operations team’s goals to achieve high-speed automation and infusion.
This aspiration became a reality with our acquisition of automated cigarette machines. As we look to the horizon, we’re optimistic about the growth potential of the SKU as there is clear demand in the market. However, it is important to note that both our infused and non-infused 35’s experienced a 9% quarter-on-quarter decline, bringing in revenue of approximately $863,000. Despite this, our commitment to innovation remains unwavering, especially as we continue to understand and master the intricacies of the technology. In Q1 2023, we unveiled a new product, the Black Pack. Under the Lowell brand, this infused pre-roll is a fresh addition to our Lowell’s Classic pack lineup. During Q2, the Black Pack generated around $93,000 in sales. Our Lowell Classic smokes witnessed a 10% quarter-over-quarter decline, leading to an overall decrease of 7.7% in the Lowell pre-roll category.
With that being said, Lowell Herb Co. remains the third highest pre-roll sales generating brand in California per Headset data. Turning our gaze to the broader California cannabis market, the market continues to navigate declining revenues for the eighth straight quarter. This downturn creates hurdles for brands to gain shelf prominence. Reflecting this trend, our CPG portfolio majorly comprised of our own brands recorded a 5% dip this quarter, translating to revenues of about $4.43 million. A significant part of this reduction, approximately $237,000 can be attributed to the downturn in packaged flower sales from owned brands. This decrease was the repercussion of the unfavorable growing conditions we faced in Q1 and continued to see into Q2.
And the strategic move during Q1 2023, we expanded our distribution infrastructure to include a select group of distribution partner brands. Following a rigorous selection process, we onboarded several cannabis brands that aligned with our ethos and objectives. These alliances with strategic brands bolstered the company’s CPG sales by approximately $400,000. This increase in revenue is a testament to the strong sales alliances the company has built with California dispensaries. Moreover, our agency brands, brands that are manufactured by Lowell Farms witnessed an uptick of 9.9% in the same period, reaching revenue of about $165,000. As we move forward, we will maintain clarity on how we report our CPG revenues, ensuring differentiation between owned, agency and distributed third-party brands.
In Q2 2023, the company sold approximately 2,900 pounds of bulk flower priced at approximately $696 a pound, bringing our sales to roughly $2.26 million. In contrast, during Q1 2023, we had a higher volume of flower sales, but it was priced lower at $485 per pound. This meant that while our sales volume decreased in Q2, but price per pound significantly increased by 44% from the previous quarter. The reason behind the reduced volume in Q2 was our biomass availability. Our cultivation team has implemented various protocols to optimize the farm in order to continually supply biomass. Due to the limited biomass in the quarter, the company chose to prioritize the packaged goods segment a major revenue stream. As we move forward, the company will maintain a balanced approach distributing biomass to both our packaged goods and bulk programs, optimizing benefits for the company.
From an out-of-state perspective, it’s evident by recent financial performance, that Lowell Herb Co’s brand footprint beyond California is steadily growing. Out-of-state revenues in Q2 2023 rose by 7%, moving from $220,000 in the previous quarter to $237,000. This growth parallels an uplift in our royalties, which marked a 10% increase from the last quarter, reaching $230,000 in Q2 2023. Lowell Herb Co’s brand trajectory continues to be promising as of Q2 2023. While has not only solidified its presence, but also expanded its market share across all out-of-state markets will consistently rank amongst the top 15 non-infused pre-roll brands. A testament to this brand strength, which has secured the position of the top selling pre-roll both in terms of unit sales and revenue to Arizona.
Such achievements underscore our brands enduring appeal and its ability to deliver high-quality products even when faced with fierce competition. To offer some more granularity, during Q2 2023, we sold approximately 57,000 Classic Lowell smokes packs across all state markets, excluding California. This number signifies a 4.3% growth from the roughly 54,000 units we sold in the previous period. In Q2 2023, the company’s focus at the farm was squarely on improving plant health and amplify yields. However, environmental conditions presented in early Q1 persisted into the middle of Q2. Challenging the team as temperatures and light levels dip below the usual averages putting strain on plant vitality. The company took proactive measures starting mid Q1 when the team began incorporating fresh genetics and [indiscernible] stock.
These plants began replacing [indiscernible] began to show signs of fatigue or hop latent viroid due to the harsh winter. Aiming to keep our cultivation standards we’re now partnered for the third-party agricultural lab. They undertake routine root sampling tests for all of our plants and propagation. This new measure dovetails with our in-house testing equipment, which focuses on foliage. Such comprehensive testing allows us to take swift remedial action when needed. We have implemented a periodic refresh of our plant genetics each quarter of subset of new plant genetics from licensed nurseries are brought into the cultivation. Admittedly, the season didn’t fully match our expectations. We were 24% shy of our target, harvesting 6,737 pounds of finished flower in the quarter.
This was a decline from the 4,933 pounds in Q1 2023. Our cultivation team driven and spirited is unwavering in their determination. They’re geared up focused with all their energy and expertise towards achieving our envisioned yield figures. Revenue generated, $94,000 in the period, down 18% from the period prior of $115,000. We feel the attrition of cultivators in the county has hit its low and are excited to see several operations with new operators — down 18% from the prior period of $115,000 a ton. We feel the attrition of cultivators in the county has hit its low and we are excited to see several operations with new operators. 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 anticipated an earlier close, we are working with the noteholders to finalize the transaction. Tessa 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. With that, I will turn it over to Tessa.
Tessa O’Dowd: Thank you, Mark, and good afternoon, everyone. Before I begin, please note that we are reporting our Q2 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 CFE. We are reporting Q2 net revenue of $7 million, down 7% sequentially and down 47% year-over-year. CPG revenue declined 5% sequentially to $4.4 million and declined 40% year-over-year. Lowell brand revenues for Q2 were $3.5 million, representing 79% of CPG revenues.
Revenue from agency and distributed brands was $0.6 million, representing 13% of CPG revenues. The decline in revenue was hindered by our efforts to manage credit and accounts receivable risk. Internally, we have established a process that holds retailers to their credit limits and terms, minimizing our exposure to these accounts while focusing on selling to creditworthy customers. This includes a process, which includes sales account managers may include placing customers unfold, which has limited our sales capabilities. Bulk flower revenue decreased 11% sequentially to $2.3 million and decreased 34% year-over-year. The decrease from Q1 is due to a 37% reduction in pounds sold, but offset by a 44% increase in price per pound. Lowell Farm Services revenue was $0.1 million, which was consistent with the prior quarter.
Out of state licensing revenue increased 7% sequentially to $0.2 million and decreased 14% year-over-year. Gross margin as reported was negative 4.8% in the second quarter compared to a positive 1.8% in the prior quarter, largely driven by the decline in CPG and bulk volume. Operating expenses were $2.3 million or 33% of sales for the quarter compared to $2.5 million or 33% of sales in Q1 2023 and $4.5 million or 34% of sales in the second quarter last year. This reflects cost reductions realized during the current quarter. The operating loss in the second quarter was $2.6 million compared to an operating loss of $2.3 million sequentially and an operating loss of $3 million year-over-year. Net loss for the second quarter was $0.1 million compared to a sequential net loss of $4 million, which compares to a net loss of $4.6 million year-over-year.
Adjusted EBITDA in the second quarter was negative $1.2 million compared sequentially to adjusted EBITDA of negative $1.1 million and adjusted EBITDA of negative $1.1 million year-over-year. Turning to the balance sheet. Working capital was negative $9.2 million at the end of the quarter compared to negative $16.4 million at the end of the first quarter. Included in working capital is $21.8 million of net convertible debentures at the end of the current quarter and $21.6 million net in the first quarter. Excluding these from working capital, there is $12.6 million of working capital at the end of the current quarter. The company had $8.4 million in cash at the end of the current quarter compared to $1.3 million at the end of the first quarter.
In May, we completed a sale leaseback of our processing facility that generated $9 million in cash. Now I will turn the call over to the operator for questions.
Operator: Q – A –
Mark Ainsworth: Thank you 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: And this concludes today’s conference call. Thank you for attending.
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