Lowell Farms Inc

Farm's fourth quarter and year-end 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Bill Matoulas, Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to the conference call to discuss Lowell Farms Incorporated's financial results for the fiscal fourth quarter of 2021. Before we begin, please let me remind you that during the course of this conference call, Lowell Farms Incorporated's 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 CEDAW. 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 George Allen, Chairman of the Board, Mark Ainsworth, Co-Founder and Chief Executive Officer as well as Chief Financial Officer Brian Schur, who will go into details 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 George. George, please go ahead.

Good afternoon. I want to briefly start the call by recapping where we have come over the last 12 months. We started the year with a modest position in California dispensary shelf space in a greenhouse that was struggling to recover from damage caused by the prior summer's wildfires. We pledged to investors that we would fix the greenhouse and offer monthly updates to give transparency into this objective. To compound the importance of that pledge, we acquired the Lowell brand during the first quarter. The acquisition was built around a turnaround strategy for that brand that was entirely based on improving the quality of input material into that branded product. Nine months later, in the fourth quarter, Lowell Farms became the best-selling flower company in all of California, according to Headset. We've doubled sales on our Lowell herb brand and restored it to a top 10 brand in the state from barely being in the top 30 the year prior. What is even more impressive is that our house weed brand has grown even faster. Our cultivation team quickly went from improving harvest yields to serving up new and differentiated genetics. Now, I'm pleased to report that according to Headset, we have extended and even expanded the lead through the first month of the year. Now, there are over 1,000 companies trying to sell cannabis products in California. TPG manufactures outnumber retailers in California, a totally upside-down market structure from traditional TPG. This is why the keystone or markup in California retail is substantially higher than in any other market. Dispensaries have enormous leverage over their vendors. Against this backdrop, over the course of the year, we rose from being the number 16 largest cannabis portfolio to to being the number eight. Unfortunately, our success has been in the face of a stiffening headwind. Canvas sales have contracted for the second sequential quarter in a row in California, and the industry is going through a severe rationalization. With the exception of retail, there is oversupply at nearly all stages of the value chain. Over the past two quarters, we have watched as market share has slowly begun to favor the larger, more stable operators, who can offer consistent supply. Now, this obviously favors Lowell, and we're a growing share in nearly all of our categories, but there is a larger battle at play, which is the overall health of retail in California. As cannabis prices have fallen, the price advantage held by the black market has been compounded, shifting more and more sales away from the legal market. This dynamic is driven by the inherent fixed costs and taxes borne by the legal market in California. Without those cost burdens, the illicit market has been swamped by inexpensive material, specifically in the flour and concentrate categories driven by oversupply and cultivation. Without policy change in Sacramento, it is entirely possible that Lowell and its peers are left fighting forever declining pieces of pie. The incoming increases of cultivation supply promise only to exacerbate the issue. Thankfully, it does appear that policymakers are paying attention, and we are optimistic for some level of relief, although it is too soon to quantify. CBG scale is inherently not about capacity. It's about executions. We have ample flour capacity to double our market share in packaged flour sales, but the constraining factor is demand. We can make millions of gummies to satisfy nearly all the demand in the state, but demand creation takes time in a sales and distribution network. Anyone who presumes to enter California by merely multiplying market price by capacity is going to be disappointed with a lot of unused capacity. Our machinery that we have built only works in tandem with people and the networks that we have to distribute our products. I fully expect us to continue to lead us higher into the lead tables as the year progresses. Now, I'm also proud of our launch at LFS. It was a new business model that we built to service the California cannabis growing community. California cannabis is made great by competition from thousands of growers, and we want to support that diversity. LFS allows growers to more closely compete with the economies of scale of the largest facilities in the country by variabilizing costs that were traditionally fixed, thereby allowing them to compete on quality without a severe disadvantage in price. This has not made us very popular with a small handful of large operators who are hoping to reduce California to a limited licensed marketplace with like 15 really cool strains, and that's it. We agree to disagree. So who is Lowell Farms, and where are we going? Instead of achieving our profitability targets during the year, we were substantially behind, and we consume more liquidity than is sustainable. Our path to profitability cannot solely rely on hoping for a return to normalize bulk flour prices. Our future requires a combination of increased efficiency and greater scale. The infrastructure that we have is expensive, and the linchpin of profitability for us is about capacity utilization. We have launched two new flower brands in the last 12 months, and we'll continue to launch new products on a cost-effective basis. We've also taken substantial steps to reduce expenses, increase automation, and reduce waste. We also need to increase our out-of-state licensing footprint to capitalize on the vitality of our brand. and we expect to have a handful of new markets identified in the first half of this year. The California market is rife with consolidation opportunities, and we believe that Lowell is the right platform for CPG consolidation. The success we had in restoring the Lowell brand provides a template for doing it again. We see several compelling brands struggling to achieve the requisite scale to be independent, and we are actively in discussions with several of them. As to our liquidity, we consumed substantially more cash during the quarter than was anticipated. While some of this cash consumption came in the form of increased receivables generated by our LFS business, the operational burn of the business suffered from continued decline in the price of bulk flour. We ended the quarter with $7.9 million in cash. With a combination of organic growth and CBG, Combined with a very dramatic series of cost action, we have a plan to get to cash flow neutrality by the end of the quarter. We are also pursuing contingency alternatives, including non-dilutive sources of financing, as well as the divestiture of non-core assets. With that, I'm going to turn it over to Mark. Mark?