Lowell Farms Inc

Good day, everyone, and welcome to today's Lowell Farms, Inc. Third 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 Matulis with Investor Relations.

Good afternoon, and welcome to the conference call to discuss the Lowell Farms Incorporated financial results for the fiscal third 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 four looking statements. These forelooking 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 CDOT. Any forelooking statements should be considered in light of these factors. Please also note that any outlook we presented 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 and interim chief financial officer. 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 insights into the company's performance, operations, and go-forward strategies. 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 hand the call over to Mark. Mark, please go ahead.

Good afternoon, everyone, and thank you for joining us for Lowell Farms, Inc. Q3 earnings call. We are pleased to start the call off by discussing some exciting updates. Earlier last month, we announced our recent strategic initiatives around our entry into the California retail market. This decision was made after an extensive period of due diligence. For those of you familiar with Lowell Farms' story, our approach to brand quality and consistency has always set us apart. With our LOI and subsequent MSA to acquire and manage retail footprints in California, we're able to leverage not only strong brand portfolio presence, but also our fully integrated model, which includes top-notch manufacturing, distribution, and highly effective sales teams. Currently, our products are in over 400 dispensaries across California, and we're seeing the benefits of bringing our own expertise into the retail spaces. The two locations now within our retail ecosystem are strategically located in high-traffic areas. They draw a loyal customer base, including both locals and tourists, and feature easy access with ample parking options and an array of cannabis products across all categories. Through these locations, we're looking forward to addressing several opportunities, providing consistency in product quality and inventory, introducing a wider selection of SKUs, and continuing to tailor the offerings to meet the unique needs of each retail setting. With our current infrastructure, this gives us the flexibility to roll out innovative marketing and sales strategies and deliver an enhanced customer experience. At the same time, we're capturing critical margins that support our financial goals. Our focus on margin improvement is clear. The retail expansion represents meaningful growth for Lowell, and we're committed to a strategic, selective expansion across California. While we're seeing a robust pipeline of potential new locations, our primary goal is to implement the low retail value strategy effectively and efficiently. Now let's dive into the results for Q3. In the third quarter of 2024, we maintained a focused approach to managing our accounts receivable to ensure the financial health of our customer base. We are encouraged by the continued strength and stability of our core dispensary customer relationships and are seeing positive momentum in this area. To mitigate potential AR risks, we have taken proactive measures, including placing accounts on holds where necessary. While the majority of our customers continue to demonstrate strong payment reliability, there remains a small subset of accounts where we will adopt a more assertive collection strategy to ensure timely receivables. Our account management process begins with our sales team, who are incentivized to prioritize collections through a commission structure tied to the final payment of the open receivables. This alignment ensures that the sales and finance departments work collaboratively, maintaining a unified approach to managing our AR exposure and optimizing cash flow. We remain vigilant in our efforts to uphold rigorous credit assessments and collection practices, positioning the company to achieve sustain financial health and stability in the quarters ahead. In the manufacturing division, we strategically leveraged unused capacity by onboarding new partnerships that not only drive margin and volume, but also enhance our brand equity. From a portfolio perspective, we onboarded an additional three new brands in the latter part of Q3, consisting of one brand that we distribute and two brands that we manufacture, sell, and distribute for. As these new partnerships continue to ramp up their operations, we anticipate consistent contributions to our revenue growth. Among the brands on board of this quarter is the Tyson 2.0 35's collaboration, highlighting Mike Tyson's commitment to quality and the California cannabis market. The team behind the Tyson brand were particularly impressed by the scale and precision of our pre-roll automation technology, making this partnership a natural fit for both parties. as well as scratch-baked, handcrafted edibles, which are infused with premium liquid diamond. In addition, we are thrilled to welcome back Marigold Sweets by Vanessa Laburado, the celebrated host of Vice's Bong Appetit and the forthcoming author of How to Eat Weed and Have a Good Time, scheduled for release in April of 2025. The return of Marigold Sweets underscores the trust in our capabilities and the strength of the infrastructure we've built over the years. These partnerships are a testament to the professionalism of our team and our capacity to attract and support high-profile brands, reinforcing our position as a preferred partner in the cannabis industry. Looking forward, our pipeline remains strong, with multiple brands expressing interest in leveraging our robust manufacturing distribution network, paving the way for sustained growth in the quarters ahead. Let's dive into the performance of our consumer packaged goods CPG segment for Q3 2024. In the prior quarter, we addressed some downtime on our automated 35s pre-roll packaging line. It leads to report that in Q3, we achieved significant improvements in efficiency on this line. As a result, sales in the 35s category increased to approximately 844,000, up from 681,000 in Q2, reflecting a 24% quarter-over-quarter increase. With ample capacity remaining on this line, we are actively exploring new partnerships that will be accretive to the business, allowing us to further capitalize on this asset. Turning to our overall brand portfolio, owned and agency brands, brands that we manufacture, sell, and distribute saw a slight dip in revenue with Q3 2024 results at $2.42 million down from approximately $2.62 million in Q2. This reflects a 7.6% decrease quarter-over-quarter. The decline was partially influenced by timing issues with new product rollouts and some delays in promotional activities, which we expect to recover in the coming quarter. The brand partners that we purely distribute for experience a more pronounced impact with revenue declining the $577,000 in Q3, down from $742,000 in Q2, a 22% decrease. The drop in this segment is largely attributed to ongoing supply chain challenges in the legal California market, including several key partner brands facing harvest yield issues or temporary ceasing their farming and manufacturing operations. These disruptions led to reduced inventory availability, limiting our ability to fulfill demand through the distribution channel. We are in active discussions with several distributed brand partners to secure more consistent supply streams, ensuring we are better positioned to meet demand in future quarters. Looking more closely at our product categories. Concentrates. This category showed strong growth, with revenue rising from $224,000 in Q2 to $302,000 in Q3, an increase of $78,000, or 35%. This growth was driven by the successful reintroduction of Kaizen as a distributed brand under a renewed partnership arrangement that has proven mutually beneficial. Edibles. The category saw a modest decline with revenue dropping from $212,000 in Q2 to $177,000 in Q3, a decrease of $35,000 or 16%. The reduction was largely due to lower inventory levels supplied by distributed brands. In response, we are actively collaborating with these partners to improve inventory forecasting to better align supply with market demand. Dates. This category experienced a significant drop in revenue, decreasing from 157,000 in Q2 to 68,000 in Q3, a decline of 89,000 or 57%. The downturn was driven by inventory shortages from third-party brand partners, highlighting the need for improved supply chain resilience. Looking ahead, we remain optimistic about the continued growth of the 35's line and the potential for new strategic collaborations to drive incremental revenue. Additionally, we are working diligently to address the supply chain bottlenecks affecting our distributed brands, with the goal of stabilizing and enhancing performance in the quarters to come. By optimizing our partnerships and refining our inventory management process, we are confident in the ability to drive growth and improve operational efficiency across key categories. As previously mentioned in our last earnings call, we have entered the co-manufacturing space producing CPG products for other brands, which may or may not flow through our distribution channels. In the initial period, our co-manufacturing efforts generated $54,000 in Q3. specifically from our pre-roll automation. This progress comes after allocating additional shifts to rebuild inventory levels following downtime on our secondary step, which is the pre-roll packaging equipment, which was out of service for several weeks in Q2. The catch-up efforts left limited excess capacity to take on additional external projects. Despite these challenges, the co-manufacturing segment contributed significantly to covering the hard costs of our manufacturing facilities. demonstrating the potential of this line of business to support our overall cost structure as we further scale. We see significant potential in this area and remain focused on scaling this segment of the business over the coming period. Overall, we spent considerable time in Q3 focused on pulling costs out of the organization. We reorganized the operations and downsized our staffing in the middle of the quarter considerably by 45%. The savings will equate to approximately 546,000 in Q4 2024. By strategically leveraging our infrastructure and capacity, we are better positioned to drive operational efficiency and strengthen our pathway toward improved margins and profitability. Switching now to our financial section. Before I begin, please note that we are reporting our Q3 2024 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 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 Q3 net revenue at $3.2 million, down 8% sequentially and down 48% 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 million, or 63% of CPG scales, while third-party brands generated $0.8 million in revenue, or 25% of CPG sales. We realized no bulk flower revenue in Q3 compared to $0.1 million in the prior quarter and 1.2 million in the prior year, reflecting the impact of exiting the cultivation facility in January of this year. We realized no low farm services revenue during Q3, similar to Q2, which compares to 0.5 million in the prior year. On a nine-month year-to-date basis, revenue was 11.7 million, down 9.1 million, or 44%. from the nine-month period in the prior year due primarily to reduction of $5.9 million in bulk flower and low farm services revenue primarily due to the exiting of the cultivation facility. TPG revenues declined $2.6 million to $10.9 million with low brand revenues declining $2.9 million between periods while distributed brand revenues increased $0.9 million. No licensing revenues were generated in 2024 compared to $0.7 million in the prior year period, reflecting the sale of the Lowell Smokes brand in October 2023. The gross margin, as reported, was negative 29% in the third quarter compared to negative 15% sequentially and negative 7.1% year over year. In the third quarter, the margin decline was due in part to selling through higher cost inventory, which impacted cost of goods by $0.6 million. or an adverse margin impact of 18.7%. This was the final inventory from our cultivation facility as we are now experiencing flavorable pricing on a biomass spot market purchases from multiple sources. On a current cost basis, we are experiencing improved margins on our core manufactured products in the third quarter, reflecting operational efficiencies realized in lower ongoing overhead costs, which we expect to carry forward for the balance of the year. Gross margin on a nine-month year-to-date basis was negative 19.9% compared to negative 3.1% in the prior year nine-month period. Operating expenses were $1.8 million or 57% of sales for the quarter compared to $1.6 million or 46% of sales sequentially and $2.4 million 39% of sales year over year. Operating expenses in the quarter were impacted by recognizing 0.6 million in bad debt primarily associated with customers settling their accounts with flour. The flour received was concurrently valued at a lower cost commensurate with our independently sourced flour resulting in a bad debt expense. Without this expense, operating expenses as a percentage of sales would have been 38% in the quarter. On a nine-month year-to-date basis, operating expenses decreased by $1.8 million to $5.5 million, reflecting the implementation of cost reduction initiatives. The operating loss for the third quarter was $2.8 million compared to an operating loss of $2.2 million sequentially and an operating loss of $2.9 million year-over-year. Net loss for the second quarter was $3.6 million compared sequentially to a net loss of $0.8 million, which compares to a net loss of $20.2 million in the third quarter last year. We recorded a tax provision of $0.4 million in the second quarter, reflecting taxes due on our 2023 tax return. The tax liability is a result of the taxable gain reflected on the tax return related to the sale of the Lowell Brands last year and tax regulations only allowing net operating loss carry forward to offset 80% of the resulting taxable income. Net loss in the prior quarter was favorably impacted by the reversal of a cultivation rent accrual of 2.3 million as a result of a judicial decision and our ongoing litigation with the cultivation landlord. In the third quarter of the prior year, a 15.7 million charge was reported related to the sale of the Lowell Brands. On a nine-month year-to-date basis, our net loss was $7.3 million compared to $24.3 million in the prior year period, excluding the one-time items noted previously, the net loss declined $3.6 million in the current year period. Adjusted EBITDA in the third quarter was negative $2 million compared sequentially to an adjusted EBITDA of negative $1.9 million. and adjusted EBITDA of negative $1.3 million year-over-year. Adjusted EBITDA excludes the cultivation rent, accrual reversal, and the prior year's loss on the sale of the low brands noted previously. Turning to the balance sheet, our working capital was negative $1.9 million at the end of the quarter compared to $0.9 million at the end of the second quarter. The company had $0.3 million in cash compared to $0.6 million in cash at the end of the second quarter. approximately $800,000, of which $700,000 relating to our unused processing facility LFS and the remainder related to our exit of our cultivation facility in Q1 2024. With that, we look forward to discussing Q4 operational results, which will reflect the impact of our management services agreement related to operating the two dispensaries in Los Angeles. With that, I 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 a moment to allow any questions to queue. And once again, that is star and 1.

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

Thank you again for joining the call and taking the time to get an update on our business. We look forward to talking to 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.