Lowell Farms Inc

Good day, everyone, and welcome to today's Lowell Farms, Inc. First 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 Matoulas with Investor Relations. Please go ahead.

Welcome to the conference call to discuss the Lowell Farms Incorporated's financial results for the fiscal first quarter of 2024. Before we begin, please let me remind you that during the course of this conference call, Lowell Farms Incorporated's management may make forelooking statements. These four looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results if or 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 CEDAR. Any four 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, as well as chief financial officer Jamie Schneedwind, who 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, provide further insight into the company's performance, operations, and go-forward strategy. For those of you who may happen to leave this call before its conclusion, be advised that this conference call will be recorded and archived on our Investor Relations website page. With that, I turn the call over to Mark. Mark, please go ahead.

Thank you, Bill.

Let's dive into our progress for the first quarter of 2024. Throughout the majority of Q1, we continued to utilize the final remaining biomass harvested from our Zabala cultivation site, which we exited at mid-January of 2024. The Zabala cultivation costs and yields have been negatively impacting margins within our core consumer product goods product lineup. However, as we move toward the end of Q1, we begin to see improvements in margin by procuring biomass on the spot market. This strategic shift has had no supply interruption for our operations and has additionally allowed us to maintain continuous sourcing of genetics across all of our brands within the portfolio. Additionally, this change has enabled us to expand our genetic lineup. From the 12 genetics we previously cultivated at Zabala, we are now incorporating a larger range into our products, offering our dispensary customers an enhanced selection, Looking ahead, we anticipate this trend of improving margins to continue into the second quarter, reflecting our adaptive strategies and ongoing commitment to enhancing our product offerings. With Q1 2024 behind us and our team having successfully transitioned from the model where our cultivation was providing biomass, we see ourselves with more solid footing with margins improving. To provide an update on the current conditions of the California cannabis market from our ground-level perspective, we are observing significant consolidation within the dispensary market. We are experiencing smaller shops frequently closing, only to reopen under the umbrella of larger partners. This trend appears to be driven largely by ownership fatigue due to the complex regulatory landscape and tax burdens, prompting smaller operators to either exit the market or seek stronger and larger partnerships. We are actively monitoring this evolving retail landscape as a strategic opportunity that would allow the company to continue to solidify itself within the California market. Additionally, the ongoing credit crisis in California Canada sector continues to shape our financial strategies, particularly in terms of accounts receivable and setting credit limits for our customers. This environment compels us to manage sales volumes judiciously, limiting exposure to any single customer to maintain financial health and stability. As we delve into our consumer packaged goods strategy, the spotlight shines on Lowell UrbCo, which has demonstrated resilience and strategic growth in Q1. The 35's product line remained stable from Q4 to Q1, maintaining robust sales at just over 900,000. This stability is noteworthy given the typical fluctuations in consumer demand and market dynamics. This consistency in the market solidifies the product line's strong market fit. The low-infused 35 signup showed notable growth, registering an increase of approximately 50,000 to reach sales of 170,000 in the period. This represents a commendable growth rate of about 42%. from the previous quarters, signaling strong consumer acceptance and increasing demand for our infused offerings. Furthermore, our low pre-roll sales have maintained their ground without any contraction, with sales holding steady at around 2.1 million. This consistency from Q4 2023 into Q1 2024 exemplifies the enduring popularity and solid market presence of our pre-rolls. The steady performance in a competitive landscape highlights the effectiveness of our branding and the quality of our products. The low pre-roll is celebrated by consumers as the great American cannabis brand, a testament to its enduring appeal and quality. Anchored by the strong brand identity, we remain committed as partners to innovating within this pre-roll category while continuing to supply our high-quality pack of flour to our partner dispensaries. In the first quarter, sales of the Lowell-Erbco's packaged flour SKUs experienced a decrease totaling approximately $722,919, down from approximately $1 million in Q4 2023. This represents a decline of approximately 28%. Despite this downturn, we are poised to capitalize on new opportunities by embracing a strategic shift, sourcing flour from external farms with which we have established partnerships. This approach not only diversifies our offerings, but also enhances our ability to introduce additional genetics into our product lineup, ensuring that our portfolio remains dynamic and responsive to market demands. The Cypress Cannons brand, which we recently reintegrated back into our consumer packaged goods lineup, offers a jarred 3.5 gram option and has brought in approximately $125,000 in Q1, down from approximately $146,000 in Q4, a decline of about 14%. This brand was a cornerstone in our early years and is beginning to regain momentum amidst the competitive and often unpredictable packaged flower market. The reintroduction aims to leverage its historical strength and familiarity among customers, strategically positioning it on dispensary shelves as a premium mid-shelf option. Houseweed, our value-oriented everyday brand, faced challenges in Q1, achieving sales of approximately $70,000, down from $180,000 in Q4 2023, marking a significant drop of about 60%. This decline was primarily influenced by committed customers were placed on credit holds, which temporarily impacted those placements and sales. Despite these hurdles, our team is dedicated to revitalizing Housewood's market presence, particularly focusing on innovation in the vape category as the year progresses. We believe these initiatives will not only enhance the brand's appeal, but also strengthen its performance in the latter part of the year. Let's not overlook our other own brands within the portfolio, Moon, Original Paco, and Chula. Each of these brands plays a vital role in filling specific niches within menus of several of our dispensary partners, consistently delivering good value to consumers. In the first quarter of 2024, these brands collectively generated approximately $52,000 in revenue compared to around $59,000 in Q4 2023, marking a modest decrease of about 12%. While these brands may not be the largest contributors to our top-line revenue, they play a crucial role in strengthening our relationships with retail partners. These partnerships rely on our diverse offerings to enhance their menu and address gaps that appeal to various consumer preferences. As we move forward, we anticipate growth for these brands, especially as the number of competing brands in the market continues to contract. This contraction provides an opportunity for our well-established and trusted brands to capture a larger market share and deepen their impact within our partner dispensaries. We are committed to supporting their growth through strategic marketing and continuous product development, ensuring they remain competitive and prefer choices among our offerings. In the challenging landscape of California cannabis, brands are increasingly seeking to minimize overhead by downsizing infrastructure and moving away from traditional brick-and-mortar setups. This strategic shift is essential for aligning costs with current market conditions and maintaining competitive positioning. As these brands adapt, there is a growing demand for partnerships that can offer distribution solutions without the added burden of extensive physical infrastructure. Our company continues to feel strong incoming demand for our third-party distribution services. Thanks to our exceptional customer service and consistent product availability, we have earned the trust of both our retail partners and brands seeking access to our distribution network. Our plan includes expanding our portfolio, which currently comprises over 20 brands, which further solidify our position in the California market. For Q1 2024, our third-party consumer packaged goods brands remain stable at approximately 952,000, closely matching the 955,000 from Q4 2023. The flat growth and existing brand revenues can largely be attributed to several key brands undergoing transitions, relocating their facilities to streamline operations and better serve our dispensary partners. These changes are part of a broader effort by brands to adjust to the economic pressures within the California cannabis industry. Our team remains committed to growing this category, focusing on enhancing our distribution capabilities and supporting our partner brands through these transitions. As the market evolves, our adaptability and commitment to service excellence will continue to be crucial in attracting new brands and strengthening existing partnerships. Since we discontinued our cultivation operations, the bulk sales segment of our business is expected to become more seasonal, largely influenced by fluctuations in demand for our low farm services, which I will elaborate on shortly. In the period, bulk sales amount to approximately $681,000. This revenue primarily came from selling off the remaining flower from our symbolic cultivation that did not meet the quality standards for our in-house brands. Looking forward, while we continue to report any of revenue from bulk sales, starting from Q2 2024, we will also begin to disclose revenue from manufacturing services. This new reporting reflects our strategic shift toward maximizing the use of existing infrastructure. The introduction of manufacturing services is designed to enhance our operational efficiency and better capitalize on our assets, aligning our business model with evolving market dynamics and our long-term growth strategy. As previously noted, we concluded operations at our Zavala cultivation site in early January of 2024. We successfully harvested approximately 2,119 pounds of biomass, marking the final yield before we officially cease farming operations at this facility. This final harvest represents a culmination of our cultivation efforts at Zabala and sets the stage for the next phase of our strategic business transformation. Regarding low farm services, Q1 saw us generating approximately 68,000 in revenue. primarily from completing processing for our customers' winter harvests. Following our strategic decision to exit from direct farming operations, we have adjusted our staffing levels at LFS to meet the operational demands of this inherently seasonal business, which typically ramps up from late May through October. Recognizing the opportunity to optimize the use of our facilities, we have decided to explore subleasing options for the space. This decision comes as we aim to efficiently utilize the additional 50% capacity made available by our shift away from cultivation. We look forward to updating you on the progress of these initiatives and ongoing evolution of our business in our Q2 report.

With that, I will turn it over to Jamie. Thank you, Mark, and good afternoon, everyone.

Before I begin, please note that we are reporting our Q1 2024 financial results in U.S. GAAP, and a portion of my commentary will be on a non-GAAP basis. 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 CSE. We are reporting Q1 net revenue of $4.9 million, down 35% sequentially and down 35% year-over-year. CPG revenue decreased 10% sequentially to $4.1 million and declined 11% year-over-year. Despite the decline in CPG revenue, Lowell brand revenues remain strong, finishing the year at $2.9 million, or 70% of CPG sales. while sales of third-party brands generated $1 million in revenue for 24% of CPG sales. Bulk flower revenue decreased 66% sequentially to $0.7 million and decreased 73% year-over-year. Lowell Farm Services revenue during Q1 decreased to $0.1 million compared to $0.9 million in the prior quarter, $0.1 million compared to the prior year. Growth margin, as reported, was negative 17% in the first quarter compared to negative 90.6% sequentially and positive 1.8% year-over-year. In the first quarter, the margin decline was due to 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. Excluding the effect of the adjustments that I just identified, gross margins would have been negative 6.1% for the quarter. Operating expenses were 2.1 million, or 42% of sales for the quarter, compared to 2.8 million, or 38% of sales sequentially, and 2.5 million, or 33% of sales year-over-year. The increase in operating expenses as a percentage of sales during the quarter were impacted by increased legal expenses in conjunction with exiting the cultivation facility. The operating loss in the first quarter was $2.9 million compared to an operating loss of $9.6 million sequentially and an operating loss of $2.4 million year-over-year. Net loss for the first quarter was $2.9 million compared sequentially to a net loss of $13.1 million, which compares to a net loss of $4 million in the first quarter last year. Adjusted EBITDA in the first quarter was negative 1.1 million compared sequentially to adjusted EBITDA of negative 4.1 million and adjusted EBITDA of negative 1.1 million year over year. Adjusted EBITDA reflects adjustments of 0.5 million of expenses related to exiting the cultivation facility that are not expected to occur. Turning to the balance sheet, working capital was 1.1 million at the end of the quarter compared to 3.5 million at the end of 2023. The company had $1.2 million in cash compared to $2.3 million at the end of 2023.

With that, I'll turn the call over to the operator for questions.

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star 2. And once more for your questions, that is star and 1. We'll pause just a moment to allow any questions to queue.

Again, that is star and one.

And there are no questions at this time. I would now like to turn it back to Mark Ainsworth for any additional or closing remarks.

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.

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