Lowell Farms Inc. (PNK:LOWLF) Q2 2024 Earnings Call Transcript

Lowell Farms Inc. (PNK:LOWLF) Q2 2024 Earnings Call Transcript August 13, 2024

Operator: Good day, everyone, and welcome to today’s Lowell Farms Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, today’s call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to, Bill Mitoulas with Investor Relations. Please go ahead.

Bill Mitoulas: Good afternoon, and welcome to the conference call to discuss Lowell Farms Incorporated financial results for the second quarter of 2024. 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 and 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 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 Mark Ainsworth, Co-Founder and Chief Executive Officer of Lowell Farms, who will go into detail about the Company’s operations and financial results for the quarter. There will also be a Q&A portion for analyst questions to provide further insight to the Company’s performance 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 Mark. Mark, please go ahead.

Mark Ainsworth: Thank you for joining us this afternoon for Lowell Farms’ second quarter results for 2024. I want to begin by expressing our deep gratitude to our Board of Directors. Their unwavering support, commitment and amount of time given has been invaluable as our management team continues to explore strategic alternatives that will propel our business in a positive direction. Let’s dive straight into the results. As we discussed in our last earnings call, the Company has undergone significant restructuring. Approximately $470,000 in cash in Q2 was allocated to cover restructuring efforts related to expenses from the prior period. The good news is that the majority of these expenses are now behind us, allowing us to focus our efforts on revenue generation and account rehabilitation.

It’s no secret that executing a robust game plan in the California CPG market requires a keen focus on accounts receivable and credit health. Deciding when to stop selling to a customer is a critical part of this process. Our strategy of prioritizing sales to customers who consistently pay their bills may not seem groundbreaking, but it is essential to the financial health of our organization. As we exit this period, I’m pleased to report that we’ve successfully rehabilitated several accounts and two key accounts that were significant volume drivers for us in previous years. We’ve taken a firm but flexible approach to our retail partners to ensure our portfolio of brands and their products remain on shelves, while still holding our partners accountable to the agreed upon commercial terms.

Q&A Session

Since exiting our farm in early Q1 2024, this creative approach has, for example, involved accepting both flower from retailers who have cultivation operations as currency for our CPG goods. This strategic approach allows us to maintain the supply chain while supporting our partners, striking a balance that is vital to maintaining healthy relationships and in securing our future growth as well as the future growth of the California market. We have also expanded our sales force by adding additional support in various territories throughout California. This allows our team to focus on opening new doors and expanding our market presence. This increased focus on reaching new customers and entering new retail spaces is a key part of our strategy to drive revenue growth in the coming quarters.

From a portfolio perspective, we have on-boarded three new distributed brands during the latter part of Q2 and look forward to their contributions to generating revenue for distribution operations. We have several other brands on-boarding and continue to field calls about our statewide distribution capabilities as we look forward to leveraging that in the coming quarters. Let’s dive into the breakdown of CPG sales, focusing on the key categories that drive our business, three roles. Revenue decreased from approximately $2.1 million in Q1 to $1.8 million in Q2, a decline of about $289,000 or 13.3%. We attribute this decline to a critical machine failure that kept the low-35s out of market for approximately three weeks. While we maintain a robust wear parts, spare parts program for all of our key manufacturing machinery, this was something that could only be repaired on-site by the OEM factory from England.

We will continue to focus on the 35s format in the periods to come as we believe this strategy is a key to our route to profitability. Packaged flower, this category saw a more significant decrease with revenue dropping from $1.3 million in Q1 to $1 million in Q2. This represents a decline of approximately $300,000 or 22%. Since exiting our farm in early Q1, we have relied heavily on our distributed brands to fill that gap in our menu. In an effort to regain that traction, the team is working on supply chain agreements that would help reestablish our House Weed brand as one of our core SKUs. We continue to add third-party distributed brands in this category. Concentrates, we have experienced a small decline in the category with revenue decreasing from $272,000 in Q1 to $224,000 in Q2, a decline of 47% or negative [17.6%] (ph).

Edibles in the category saw substantial growth with revenue rising from $174,000 in Q1 to $212,000 in Q2, an increase of $37,000 or 21.8%. Vapes, revenue in this category increased from approximately $85,000 in Q1 to $150,000 in Q2, an increase of approximately $71,000 or 83%. These increases are mostly driven by third-party brand partners revenue. As we navigate these challenges, we look forward to continuing the expansion of our distribution footprint over the coming months. The addition of distributed brands will continue to play a crucial role in this effort. These partnerships will help us utilize our underutilized assets more effectively, which in turn will contribute to reduce our OpEx spend. By strategically aligning with these partners, we aim to enhance our overall operational efficiency.

Additionally, Lowell Farm Services, LFS was seasonally closed during the off-season following our exit from cultivation operations. With the reduced need to utilize the LFS facility on a daily basis, we took significant measures to cut expenses. However, despite these efforts, LFS still consumed approximately $600,000 during the period. Looking ahead, Q3 and Q4 are considered high season, and we expect to see increased utilization by third-party clients. We have been actively engaging with several farms to make use of the facility during these peak seasons. This strategy not only aids in covering certain hard costs, but also limits our exposure to working capital, allowing us to better manage our resources as we approach the more active periods of the year.

As previously discussed, we exited our cultivation operations in early Q1 and strategically utilized all the biomass produced in our CPG products. As we are no longer in the cultivation business, we have ceased selling bulk biomass, which was often done at cost or even a loss. This pivot aligns with our strategy to focus on higher margin opportunities within our CPG product lines, where we can maximize value and profitability. By channeling our resources into CPG, we are prioritizing areas that offer better returns rather than engaging in efforts that do not significantly contribute positively to our bottom line. This shift enables us to concentrate on driving growth and sustainability in the segments where we have the strongest potential for success.

As we mentioned in our last earnings call, we have entered into co-manufacturing, producing CPG products for other brands. These products may or may not be sold through our distribution channels. In the first period, our co-manufacturing efforts generated approximately $100,000 in revenue, which has covered the lion’s share of the hard costs associated with our manufacturing facility during this period. We see significant potential in this area and will continue to grow this segment of our business in the coming periods. Our goal is to fully utilize the unused capacity in our facilities, which will play a crucial role on our path to profitability. By expanding our services, we can better leverage our existing assets, reduce operational overhead and strengthen our financial position.

Switching now to our financial section. Before I begin, please note that we are reporting our Q2 2024 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 Form 10-Q will be filed presently with the SEC and CSE. We are reporting Q2 net revenue of $3.5 million down 27% sequentially and down 35% year-over-year. CPG revenue decreased 15% sequentially to $3.5 million and declined 21% year-over-year. Despite the decline in CPG revenue, low brand revenues remained strong finishing the second quarter at $2.4 million or 68% of CPG sales, while third-party brands generated $0.8 million in revenue or 23% of CPG sales.

Bulk flower revenue decreased 93% sequentially to $0.1 million and decreased 98% year-over-year, reflecting the impact of exiting the cultivation facility in January of this year. We realized no Lowell Farm Services revenue during Q2 compared to $0.1 million in the prior quarter and $0.1 million compared to the prior year. On a six month year-to-date basis, revenue was $8.4 million down $6.1 million or 42% from the six month period in the prior year, due primarily to a reduction of $4.2 million in bulk flower and Lowell Farm Services revenue primarily due to exiting of the cultivation facility. CPG revenues declined $1.5 million to $7.6 million and the Lowell brand revenues declining $1.9 million between periods, while distributed brand revenues increased $1 million.

No licensing revenues were generated in 2024 compared to $0.5 million in the prior year period, reflecting the sale of the Lowell Smokes brand in October 2023. Gross margin as reported was negative 15.7% in the second quarter compared to a negative 17% sequentially and negative 4.8% year-over-year. In the first quarter, the margin decline was due to residual expenses related to exiting the cultivation facility, reduced volume at our processing facility and the reclassification of operating lease expenses, which unfavorably impacted year-over-year margin comparisons. Unabsorbed overhead declined $0.3 million sequentially in the second quarter as we focus on operational efficiencies. We experienced improving margins on our core manufacturing products in the second quarter reflecting operational efficiencies and downsizing overhead costs, which we expect to carry forward in the second half of the year.

Gross margin on a six month year-to-date basis was negative 16.4% compared to negative 1.4% in the prior six month period. Operating expenses were $1.6 million or 46% of sales for the quarter compared to $2.1 million or 42% of sales sequentially and $2.4 million or 33% of sales year-over-year. The increase in the operating expenses as a percentage of sales during the quarter was due to the nominal bulk sales in the quarter, as operating expenses declined $0.5 million in the quarter. On a six month year-to-date basis, operating expenses decreased $1.2 million to $3.7 million reflecting the implementation of cost reduction initiatives. The operating loss for the second quarter was $2.2 million compared to an operating loss of $2.9 million sequentially and an operating loss of $2.7 million year-over-year.

Net loss for the second quarter was $0.8 million compared sequentially to a net loss of $2.9 million which compares to a net loss of $0.1 million in the second quarter last year. Net loss in the second quarter was favorably impacted by the reversal of a cultivation rent accrual of $2.3 million as a result of a judicial decision in our ongoing litigation with a cultivation landlord. In the second quarter of the prior year, a $3 million gain was recorded from the sale leaseback transaction associated with the processing facility. On a six month year-to-date basis, net loss was $3.7 million compared to $4.1 million in the prior year’s period. Excluding the one-time items noted previously, the net loss declined $1.1 million in the current year period.

Adjusted EBITDA in the second quarter was negative $1.9 million compared sequentially to adjusted EBITDA of negative $1.1 million and adjusted EBITDA of negative $1.2 million year-over-year. Adjusted EBITDA excludes the cultivation rent accrual reversal and prior year gain on the sale and leaseback transaction noted previously. Turning to the balance sheet. Working capital was $0.9 million at the end of the quarter compared to one $1.1 million at the end of the first quarter. The Company had $0.6 million in cash compared to $1.2 million at the end of the first quarter. With that, I turn the call over to the operators for questions.

Operator: [Operator Instructions]

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Operator: And, it does appear that there are no questions at this time. I’d now like to turn it back to management for any closing remarks.

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: This does conclude today’s program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.