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spk01: Good morning and welcome to the Lowell Farms Inc. third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Bill Mitoulas, Investor Relations Manager. Please go ahead.
spk00: Good morning, and welcome to the conference call to discuss Lowell Farm Incorporated financial results, the fiscal third quarter of 2023. Before we begin, let me remind you that during the course of this conference call, Lowell Farm 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 factors section of our Form 10 filed on EDGAR and our listing statement filed on CDAR. 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. 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. We'll 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 in our investor relations website page. And now I'll turn the call over to Anne. Anne, please go ahead.
spk05: 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've successfully cleared one more of the major hurdles with the completion of the previously announced brand code 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 to the Lowell Erpo 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 brand co-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 conditions with the goal of building a strong coalition to weather the storm. Overall, the sentiment within our organization is one of optimism. 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 into Q3 operational results. Mark?
spk02: Thank you, Anne. Good morning, everyone. And thank you for joining the Lowell Farms Earnings 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 through 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 illegal 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 low 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 CPT 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 month 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 TPG sales to about $4.4 million in Q3 2023, primarily due to credit holds on some larger accounts, 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 strategies. In product highlights, despite a general decline in pre-roll sales, but 35's line within moles showed a 3% increase, driven by significant uptick in infused 35 sales. Packaged flour and concentrates also experienced growth attributed to our expanded product range. Bates, a 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 Potco's Cookies and Moon's Blasters. We anticipate this will stimulate growth in the 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 cultivations. 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 past crops affected by hot lead and viroids and have introduced new healthy genetics from 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 in 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 about 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 gas generation, particularly when there's an excess of total weight or specific genetics. Although the quantity of biomass available for bulk sales was reduced this quarter, our team adeptly 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 volume, 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 a 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 toward producing more revenue while continuing to remain focused on our go-forward strategy. With that, I'll turn it over to Tessa.
spk04: Thank you, Mark, and good morning, everyone. Before I begin, please note that we are reporting our Q3 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 of U.S. dollars unless otherwise indicated. I would also note that these results are unaudited and our quarterly report form 10Q 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. Revenue from third-party brands was $0.9 million, representing 20% of CPG revenues. The decline in revenue was adversely impacted by reduced flour yields resulting in strategic allocation of flour between CPG and bulk revenue channels and our continued efforts to manage credit and accounts receivable risk. Both our revenue decreased 47% sequentially to 1.2 million and decreased 39% year over year. The 49% decrease in pounds sold from Q2 is primarily due to the 47% reduction in flower production from the farm year over year, but offset by a 3% increase in price per pound in the current quarter. Lowell Farm Services revenue increased 384% sequentially to 0.5 million and increased 79% year over year. Out-of-state licensing revenue decreased 19% sequentially to $0.2 million and decreased 38% year-over-year. As related to the brand code transactions, the company will no longer be reporting on out-of-state revenue for the Lowell brand. Gross margin, as reported, was negative 7.1% in the third quarter compared to negative 4.8% in the prior quarter, largely driven by the decline in CPG and bulk volume. Operating expenses were $2.4 million or 38% of sales for the quarter compared to $2.3 million or 33% of sales in Q2 2023 and $3.3 million or 38% of sales in the third quarter last year. This reflects cost reductions realized during the current year. The operating loss in the third quarter was 2.8 million compared to an operating loss of 2.6 million sequentially and an operating loss of 5.2 million year over year. Other expenses in the third quarter were 17.3 million compared to other income of 2.6 million sequentially and other income of 0.5 million annually. The current period expense includes $13.8 million of debt repurchase charges as a result of the Brandco deal and $1.7 million of non-recurring yield and processing variances at the cultivation and processing facilities due to low harvest levels impacted by weather conditions and HPLV in prior quarters. Net loss for the third quarter was $20.2 million compared to a sequential net loss of $0.1 million. which compares to a net loss of 4.8 million year over year. Adjusted EBITDA in the third quarter was negative 1.3 million compared sequentially to adjusted EBITDA of negative 1.2 million and adjusted EBITDA of negative 3.5 million year over year. Turning to the balance sheet, working capital was negative 4.4 million at the end of the quarter compared to negative 9.2 million at the end of the second quarter. Included in working capital is $22.1 million of net convertible debentures at the end of the current quarter and $21.8 million net in the second quarter. The convertible debentures were repurchased during October. Excluding these from working capital, there is $7.7 million of working capital at the end of the quarter. The company had $5.5 million in cash at the end of the current quarter compared to $8.4 million at the end of the second quarter. Now I will turn the call over to the operator for questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. At this time, we have no questions. So this concludes our question and answer session, and I'd like to turn the conference back over to Mark Ainsworth for any closing remarks.
spk03: 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. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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