PART I
— FINANCIAL INFORMATION
Item 1.
Financial Statements
LOWELL FARMS INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(unaudited)
(in thousands)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,113
|
|
|
$
|
25,751
|
|
Accounts Receivable - net of allowance for
doubtful accounts of $1,024 and $1,389 at June 30, 2021 and
December 2020, respectively
|
|
|
6,223
|
|
|
|
4,529
|
|
Inventory
|
|
|
14,736
|
|
|
|
9,933
|
|
Prepaid expenses and other current
assets
|
|
|
4,144
|
|
|
|
6,391
|
|
Total current
assets
|
|
|
34,216
|
|
|
|
46,604
|
|
Property and equipment, net
|
|
|
64,496
|
|
|
|
49,243
|
|
Goodwill
|
|
|
357
|
|
|
|
357
|
|
Other intangibles, net
|
|
|
40,919
|
|
|
|
736
|
|
Other assets
|
|
|
601
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
140,589
|
|
|
$
|
97,416
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,313
|
|
|
$
|
2,137
|
|
Accrued payroll and benefits
|
|
|
1,142
|
|
|
|
1,212
|
|
Notes payable, current portion
|
|
|
369
|
|
|
|
1,213
|
|
Lease obligation, current portion
|
|
|
2,410
|
|
|
|
2,301
|
|
Other current liabilities
|
|
|
5,012
|
|
|
|
8,860
|
|
Total current
liabilities
|
|
|
12,246
|
|
|
|
15,723
|
|
Notes payable
|
|
|
258
|
|
|
|
303
|
|
Lease obligation
|
|
|
35,260
|
|
|
|
36,533
|
|
Convertible debentures
|
|
|
13,646
|
|
|
|
13,701
|
|
Mortgage obligation
|
|
|
8,938
|
|
|
|
-
|
|
Total
liabilities
|
|
|
70,348
|
|
|
|
66,260
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
170,613
|
|
|
|
125,540
|
|
Accumulated deficit
|
|
|
(100,372
|
)
|
|
|
(94,384
|
)
|
Total stockholders'
equity
|
|
|
70,241
|
|
|
|
31,156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
|
$
|
140,589
|
|
|
$
|
97,416
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
LOWELL FARMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
(unaudited)
(in thousands, except per share
amounts)
|
|
Three Months
Ended
|
|
|
Six Months
Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net revenue
|
|
$
|
15,157
|
|
|
$
|
9,894
|
|
|
$
|
26,183
|
|
|
$
|
19,336
|
|
Cost of goods sold
|
|
|
9,413
|
|
|
|
11,157
|
|
|
|
21,915
|
|
|
|
22,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
5,744
|
|
|
|
(1,263
|
)
|
|
|
4,268
|
|
|
|
(2,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,817
|
|
|
|
1,456
|
|
|
|
6,285
|
|
|
|
4,733
|
|
Sales and marketing
|
|
|
2,233
|
|
|
|
1,184
|
|
|
|
3,667
|
|
|
|
2,410
|
|
Depreciation and amortization
|
|
|
167
|
|
|
|
885
|
|
|
|
491
|
|
|
|
1,762
|
|
Total operating expenses
|
|
|
6,217
|
|
|
|
3,525
|
|
|
|
10,443
|
|
|
|
8,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(473
|
)
|
|
|
(4,788
|
)
|
|
|
(6,175
|
)
|
|
|
(11,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
1,858
|
|
|
|
-
|
|
|
|
1,416
|
|
|
|
25
|
|
Loss on termination of investment
|
|
|
-
|
|
|
|
(3,524
|
)
|
|
|
-
|
|
|
|
(3,524
|
)
|
Unrealized gain on change in fair value of
investment
|
|
|
18
|
|
|
|
306
|
|
|
|
124
|
|
|
|
391
|
|
Interest expense
|
|
|
(598
|
)
|
|
|
(726
|
)
|
|
|
(1,215
|
)
|
|
|
(1,576
|
)
|
Total other income (expense)
|
|
|
1,278
|
|
|
|
(3,944
|
)
|
|
|
325
|
|
|
|
(4,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income
taxes
|
|
|
805
|
|
|
|
(8,732
|
)
|
|
|
(5,850
|
)
|
|
|
(16,581
|
)
|
Provision for income taxes
|
|
|
74
|
|
|
|
25
|
|
|
|
138
|
|
|
|
50
|
|
Net income
(loss)
|
|
$
|
731
|
|
|
$
|
(8,757
|
)
|
|
$
|
(5,988
|
)
|
|
$
|
(16,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.50
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.50
|
)
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,021
|
|
|
|
33,307
|
|
|
|
61,956
|
|
|
|
33,025
|
|
Diluted
|
|
|
201,278
|
|
|
|
33,307
|
|
|
|
61,956
|
|
|
|
33,025
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
LOWELL FARMS INC.
CONDENDSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands)
Three Months Ended
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance—March
31, 2021
|
|
|
83,221
|
|
|
|
203
|
|
|
$
|
161,006
|
|
|
$
|
(101,103
|
)
|
|
$
|
59,903
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
731
|
|
|
|
731
|
|
Shares issued in connection with conversion of
convertible debentures
|
|
|
1,003
|
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
200
|
|
Issuance of shares associated with
acquisitions
|
|
|
7,998
|
|
|
|
-
|
|
|
|
9,023
|
|
|
|
-
|
|
|
|
9,023
|
|
Exercise of options
|
|
|
76
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
46
|
|
Share-based compensation expense
|
|
|
125
|
|
|
|
-
|
|
|
|
338
|
|
|
|
-
|
|
|
|
338
|
|
Balance—June 30,
2021
|
|
|
92,423
|
|
|
|
203
|
|
|
$
|
170,613
|
|
|
$
|
(100,372
|
)
|
|
$
|
70,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance—March
31, 2020
|
|
|
32,988
|
|
|
|
203
|
|
|
$
|
97,772
|
|
|
$
|
(80,348
|
)
|
|
$
|
17,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,757
|
)
|
|
|
(8,757
|
)
|
Shares issued in connection with conversion of
convertible debentures
|
|
|
250
|
|
|
|
-
|
|
|
|
62
|
|
|
|
-
|
|
|
|
62
|
|
Issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
1,556
|
|
|
|
-
|
|
|
|
1,556
|
|
Share-based compensation expense
|
|
|
104
|
|
|
|
-
|
|
|
|
213
|
|
|
|
-
|
|
|
|
213
|
|
Balance—June 30,
2020
|
|
|
33,342
|
|
|
|
203
|
|
|
$
|
99,603
|
|
|
$
|
(89,105
|
)
|
|
$
|
10,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance—December
31, 2020
|
|
|
57,617
|
|
|
|
203
|
|
|
$
|
125,540
|
|
|
$
|
(94,384
|
)
|
|
$
|
31,156
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,988
|
)
|
|
|
(5,988
|
)
|
Shares issued in connection with conversion of
convertible debentures
|
|
|
2,393
|
|
|
|
-
|
|
|
|
478
|
|
|
|
-
|
|
|
|
478
|
|
Issuance of shares associated with
acquisitions
|
|
|
30,641
|
|
|
|
-
|
|
|
|
43,259
|
|
|
|
-
|
|
|
|
43,259
|
|
Exercise of warrants
|
|
|
1,325
|
|
|
|
-
|
|
|
|
665
|
|
|
|
-
|
|
|
|
665
|
|
Exercise of options
|
|
|
76
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
46
|
|
Share-based compensation expense
|
|
|
371
|
|
|
|
-
|
|
|
|
625
|
|
|
|
-
|
|
|
|
625
|
|
Balance—June 30,
2021
|
|
|
92,423
|
|
|
|
203
|
|
|
$
|
170,613
|
|
|
$
|
(100,372
|
)
|
|
$
|
70,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance—December
31, 2019
|
|
|
32,844
|
|
|
|
203
|
|
|
$
|
96,160
|
|
|
$
|
(72,474
|
)
|
|
$
|
23,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,631
|
)
|
|
|
(16,631
|
)
|
Shares issued in connection with conversion of
convertible debentures
|
|
|
250
|
|
|
|
-
|
|
|
|
62
|
|
|
|
-
|
|
|
|
62
|
|
Issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
1,556
|
|
|
|
-
|
|
|
|
1,556
|
|
Share-based compensation expense
|
|
|
248
|
|
|
|
-
|
|
|
|
1,825
|
|
|
|
-
|
|
|
|
1,825
|
|
Balance—June 30,
2020
|
|
|
33,342
|
|
|
|
203
|
|
|
$
|
99,603
|
|
|
$
|
(89,105
|
)
|
|
$
|
10,498
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
LOWELL FARMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
(in thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
CASH FLOW FROM
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,988
|
)
|
|
$
|
(16,631
|
)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,858
|
|
|
|
1,762
|
|
Amortization of debt issuance costs
|
|
|
420
|
|
|
|
-
|
|
Share-based compensation expense
|
|
|
625
|
|
|
|
1,825
|
|
Provision for doubtful accounts
|
|
|
173
|
|
|
|
720
|
|
Termination of branding rights
agreement
|
|
|
152
|
|
|
|
-
|
|
Unrealized gain on change in fair value of
investments
|
|
|
(125
|
)
|
|
|
(395
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,526
|
)
|
|
|
1,390
|
|
Inventory
|
|
|
(1,501
|
)
|
|
|
1,980
|
|
Prepaid expenses and other current
assets
|
|
|
(553
|
)
|
|
|
(333
|
)
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
Accounts payable and accrued
expenses
|
|
|
(4,320
|
)
|
|
|
2,307
|
|
Other current and long-term
liabilities
|
|
|
-
|
|
|
|
(98
|
)
|
Net cash used in
operating activities
|
|
$
|
(10,785
|
)
|
|
$
|
(7,473
|
)
|
CASH FLOW FROM
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from asset sales
|
|
$
|
1,979
|
|
|
$
|
-
|
|
Purchases of property and equipment
|
|
|
(608
|
)
|
|
|
(4,110
|
)
|
Disposition of business interest, net of cash
received
|
|
|
-
|
|
|
|
2,743
|
|
Acquisition of business assets, net
|
|
|
(6,642
|
)
|
|
|
-
|
|
Investment in corporate interests
|
|
|
-
|
|
|
|
-
|
|
Net cash used in
investing activities
|
|
$
|
(5,271
|
)
|
|
$
|
(1,367
|
)
|
CASH FLOW FROM
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Principal payments on lease
obligations
|
|
$
|
(1,164
|
)
|
|
$
|
(1,053
|
)
|
Payments on notes payable
|
|
|
(128
|
)
|
|
|
(31
|
)
|
Proceeds from convertible notes, net of
financing costs
|
|
|
-
|
|
|
|
13,663
|
|
Issuance of warrants associated with convertible
notes offering
|
|
|
-
|
|
|
|
1,556
|
|
Proceeds from brokered private
placement
|
|
|
-
|
|
|
|
62
|
|
Proceeds from lease financing
|
|
|
-
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
-
|
|
Proceeds from exercise of warrants and
options
|
|
|
710
|
|
|
|
-
|
|
Issuance of subordinate voting shares for
acquisition
|
|
|
-
|
|
|
|
-
|
|
Payment of debt issuance costs
|
|
|
-
|
|
|
|
-
|
|
Net cash (used)
provided by financing activities
|
|
$
|
(582
|
)
|
|
$
|
14,197
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents and
restricted cash
|
|
$
|
(16,638
|
)
|
|
$
|
5,357
|
|
Cash and cash equivalents—beginning of
year
|
|
|
25,751
|
|
|
|
1,344
|
|
Cash, cash equivalents
and restricted cash—end of period
|
|
$
|
9,113
|
|
|
$
|
6,701
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during the period for
interest
|
|
$
|
605
|
|
|
$
|
1,403
|
|
Cash paid during the period for income
taxes
|
|
$
|
187
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
OTHER NONCASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Property and equipment acquired via capital
lease
|
|
$
|
-
|
|
|
$
|
578
|
|
Disposition of business interests
|
|
$
|
-
|
|
|
$
|
2,743
|
|
Issuance of warrants
|
|
$
|
-
|
|
|
$
|
1,556
|
|
Shares issued for services in connection with
convertible debenture offering
|
|
$
|
-
|
|
|
$
|
62
|
|
Issuance of subordinate voting shares in
exchange for net assets acquired
|
|
$
|
43,259
|
|
|
$
|
-
|
|
Liabilities assumed and receivable forgiveness
in exchange for net assets acquired
|
|
$
|
2,910
|
|
|
$
|
-
|
|
Debt and associated accrued interest converted
to subordinate voting shares
|
|
$
|
478
|
|
|
$
|
-
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The interim
unaudited condensed consolidated financial statements included
herein have been prepared by Lowell Farms Inc. (the
“Company” or “Lowell”) pursuant to the
rules and regulations of the Securities and Exchange Commission
(“SEC”), including the instructions to the Quarterly
Report on Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted. The interim unaudited condensed
consolidated financial statements reflect, in the opinion of
management, all adjustments necessary (consisting only of normal
recurring adjustments), to present a fair statement of results for
the interim periods presented. The operating results for any
interim period are not necessarily indicative of the results that
may be expected for other interim periods or the full fiscal year.
The accompanying interim unaudited condensed consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and notes thereto in the
Company’s Form 10 filed for the year ended December 31, 2020.
There have been no material changes to our significant accounting
policies as of and for the six months ended June 30,
2021.
The condensed
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after the elimination of
all intercompany balances and transactions.
The condensed
consolidated balance sheet at December 31, 2020, has been derived
from the audited consolidated financial statements but does not
include all disclosures required by accounting principles generally
accepted in the United States of America.
Use of
Estimates
The preparation of
financial statements in conformity with generally accepted
accounting principles in the United States (“U.S.
GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates in
these financial statements include allowance for doubtful accounts
and credit losses, carrying value of inventory, revenue
recognition, accounting for stock-based compensation expense, and
income taxes. Actual results could differ from those
estimates.
The global COVID-19
pandemic has impacted the operations and purchasing decisions of
companies worldwide. It also has created and may continue to create
significant uncertainty in the global economy. The Company has
undertaken measures to protect its employees, partners, customers,
and vendors. In addition, the Company’s personnel are subject
to various travel restrictions, which limit the ability of the
Company to provide services to customers and affiliates. This
impacts the Company's normal operations. To date, the Company has
been able to provide uninterrupted access to its products and
services, including certain employees that are working remotely,
and its pre-existing infrastructure that supports secure access to
the Company’s internal systems. If, however, the COVID-19
pandemic has a substantial impact on the productivity of the
Company’s employees or its partners’ or
customers’ decision to use the Company’s products and
services, the results of the Company’s operations and overall
financial performance may be adversely impacted. The duration and
extent of the impact from the COVID-19 pandemic depends on future
developments that cannot be accurately predicted at this time. As
of the date of issuance of the financial statements, the Company is
not aware of any specific event or circumstance that would require
updates to the Company’s estimates and judgments or revisions
to the carrying value of its assets or liabilities. These estimates
may change, as new events occur and additional information is
obtained, and are recognized in the condensed consolidated
financial statements as soon as they become known. Actual results
could differ from those estimates and any such differences may be
material to the financial statements.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Recently
Adopted Accounting Standards
In May 2020, the
SEC adopted the final rule under SEC release No. 33-10786,
Amendments to Financial Disclosures about Acquired and Disposed
Businesses, amending Rule 1-02(w)(2) which includes amendments to
certain of its rules and forms related to the disclosure of
financial information regarding acquired or disposed businesses.
Among other changes, the amendments impact SEC rules relating to
(1) the definition of “significant” subsidiaries, (2)
requirements to provide financial statements for
“significant” acquisitions, and (3) revisions to the
formulation and usage of pro forma financial information. The final
rule became effective on January 1, 2021; however, voluntary early
adoption was permitted. The Company early adopted the provisions of
the final rule in 2020. The guidance did not have a material impact
on the Company’s condensed consolidated financial statements
and disclosures.
In February 2016,
FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires
that a lessee recognize the assets and liabilities that arise from
operating leases. A lessee should recognize in the statement of
financial position a liability to make lease payments (the lease
liability) and a right-of-use (ROU) asset representing its right to
use the underlying asset for the lease term. For leases with a term
of 12 months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize lease
assets and lease liabilities. In transition, lessees and lessors
are required to recognize and measure leases at the beginning of
the earliest period presented using a modified retrospective
approach. In July 2018, the FASB issued ASU 2018-10, Codification
Improvements to Topic 842, Leases and ASU 2018-11, Leases Topic 842
Target improvements, which provides an additional (and optional)
transition method whereby the new lease standard is applied at the
adoption date and recognized as an adjustment to retained earnings.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842)
Codification Improvements, which further clarifies the
determination of fair value of the underlying asset by lessors that
are not manufacturers or dealers and modifies transition disclosure
requirements for changes in accounting principles and other
technical updates. The Company adopted the standard effective
January 1, 2019 using the modified retrospective adoption method
which allowed it to initially apply the new standard at the
adoption date and recognize a cumulative-effect adjustment to the
opening balance of accumulated deficit. In connection with the
adoption of the new lease pronouncement, the Company recorded a
charge to accumulated deficit of $847. Refer to the Summary of
Effects of Lease Accounting Standard Update Adopted in First
Quarter of 2019 in the audited consolidated financial statements
and notes thereto in the Company’s Form 10 filed for the year
ended December 31, 2020.
In June 2016, the
FASB issued ASU No. 2016-13, “Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” and subsequent amendments to the initial
guidance: ASU 2018-19 “Codification Improvements to Topic
326, Financial Instruments-Credit Losses”, ASU 2019-04
“Codification Improvements to Topic 326, Financial
Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and
Topic 825, Financial Instruments”, ASU 2019-05
“Financial Instruments-Credit Losses”, ASU 2019-11
“Codification Improvements to Topic 326, Financial
Instruments - Credit Losses” (collectively, Topic 326),ASU
2020-02 Financial Instruments—Credit Losses (Topic 326) and
Leases (Topic 842) and ASU 2020-03 Codification Improvements to
Financial Instruments. Topic 326 requires measurement and
recognition of expected credit losses for financial assets held.
This guidance is effective for the year ended December 31, 2020.
The Company believes that the most notable impact of this ASU will
relate to its processes around the assessment of the adequacy of
its allowance for doubtful accounts on trade accounts receivable
and the recognition of credit losses. We continue to monitor the
economic impact of the COVID-19 pandemic, however based on current
market conditions, the adoption of the ASU did not have a material
impact on the condensed consolidated financial
statements.
In November 2018,
the FASB issued ASU 2018-18, Collaborative Arrangements (Topic
808), Clarifying the Interaction between Topic 808 and Topic 606.
This guidance amended Topic 808 and Topic 606 to clarify that
transactions in a collaborative arrangement should be accounted for
under Topic 606 when the counterparty is a customer for a distinct
good or service (i.e., unit of account). The amendments preclude an
entity from presenting consideration from a transaction in a
collaborative arrangement as revenue from contracts with customers
if the counterparty is not a customer for that transaction. This
guidance is effective for the year ended December 31, 2020. The
adoption of this guidance did not have a material impact on our
condensed consolidated financial statements.
In December 2019,
the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes. This guidance removes certain
exceptions to the general principles in Topic 740 and enhances and
simplifies various aspects of the income tax accounting guidance,
including requirements such as tax basis step-up in goodwill
obtained in a transaction that is not a business combination,
ownership changes in investments, and interim-period accounting for
enacted changes in tax law. This standard is effective for fiscal
years and interim periods within those fiscal years beginning after
December 15, 2020. This guidance was effective for the Company in
our fiscal year and interim periods beginning on January 1, 2021
and did not have a material impact on our condensed consolidated
financial statements.
In January 2020,
the FASB issued ASU 2020-01 Investments-Equity Securities (Topic
321), Investments-Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815) - Clarifying the Interactions
between Topic 321, Topic 323, and Topic 815. This guidance
addresses accounting for the transition into and out of the equity
method and provides clarification of the interaction of rules for
equity securities, the equity method of accounting, and forward
contracts and purchase options on certain types of securities. This
standard is effective for fiscal years and interim periods within
those fiscal years beginning after December 15, 2020. We are
currently evaluating the impact of ASU 2020-01 on our Consolidated
Financial Statements, which was effective for the Company in our
fiscal year and interim periods beginning on January 1, 2021 and
did not have a material impact on our condensed consolidated
financial statements.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Accounting
standards not yet adopted
In August 2020, the
FASB issued ASU 2020-06, Debt—Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40). This update amends the guidance on convertible instruments
and the derivatives scope exception for contracts in an entity's
own equity and improves and amends the related EPS guidance for
both Subtopics. This standard is effective for fiscal years and
interim periods within those fiscal years beginning after December
15, 2021, which means it will be effective for our fiscal year
beginning January 1, 2022. Early adoption is permitted. We are
currently evaluating the impact of ASU 2020-06 on our condensed
consolidated financial statements.
No other recently
issued accounting pronouncements had or are expected to have a
material impact on our condensed consolidated financial
statements.
2. ACQUISITIONS
Completed
Acquisitions
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
The Humble
|
|
|
The Hacienda
|
|
|
Lowell Farm
|
|
|
|
|
(in
thousands)
|
|
Kaizen Inc.
|
|
|
Flower Co.
|
|
|
Company, LLC
|
|
|
Services
|
|
|
Total
|
|
CONSIDERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
Payment
|
|
$
|
50
|
|
|
$
|
44
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
94
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
4,019
|
|
|
|
-
|
|
|
|
4,019
|
|
Transaction
costs
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
190
|
|
|
|
618
|
|
Note payable and
other obligations
|
|
|
200
|
|
|
|
65
|
|
|
|
3,115
|
|
|
|
9,000
|
|
|
|
12,380
|
|
Fair value of
subordinate voting shares
|
|
|
62
|
|
|
|
55
|
|
|
|
34,358
|
|
|
|
9,610
|
|
|
|
44,085
|
|
Total consideration
|
|
$
|
312
|
|
|
$
|
164
|
|
|
$
|
41,920
|
|
|
$
|
18,800
|
|
|
$
|
61,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PURCHASE PRICE ALLOCATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
3,300
|
|
|
$
|
-
|
|
|
$
|
3,306
|
|
Accounts receivable
- net
|
|
|
-
|
|
|
|
-
|
|
|
|
1,312
|
|
|
|
-
|
|
|
|
1,312
|
|
Other tangible
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
739
|
|
|
|
15,750
|
|
|
|
16,489
|
|
Intangible assets -
brands and tradenames
|
|
|
104
|
|
|
|
80
|
|
|
|
37,299
|
|
|
|
-
|
|
|
|
37,483
|
|
Intangible assets -
technology and know-how and other
|
|
|
208
|
|
|
|
78
|
|
|
|
-
|
|
|
|
3,050
|
|
|
|
3,336
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables and other
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(730
|
)
|
|
|
-
|
|
|
|
(730
|
)
|
Fair value of net assets
acquired
|
|
$
|
312
|
|
|
$
|
164
|
|
|
$
|
41,920
|
|
|
$
|
18,800
|
|
|
$
|
61,196
|
|
The Company
completed the following asset acquisitions, and allocated the
purchase price as follows:
The Kaizen Inc. and
The Humble Flower Co. acquisitions qualified as a business
combination under ASC 805. The Hacienda Company, LLC acquisition
qualified as an asset acquisition under ASU 2017.01. Consideration
has been allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. No
goodwill was recognized. The results of these acquisitions are
included in the Company’s net earnings from the date of
acquisition.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
The fair value of
the assets acquired and the liabilities assumed for Kaizen Inc. and
the Humble Flower Company were finalized in the quarter ended June
30, 2020.
On May 1, 2019, the
Company acquired all of the assets, global rights and business
interests of Kaizen Inc. for a purchase price of $556 that will be
paid as and if financial performance targets are met during the
period beginning on May 1, 2019 and ending on April 30, 2023.
Kaizen is a premium brand offering a full spectrum of cannabis
concentrates. Effective July 15, 2020 the asset purchase agreement
was modified, eliminating payments associated with meeting
financial performance targets in exchange for the issuance of 225
thousand options to purchase Subordinate Voting Shares and a note
payable of $200, with payments over two years. Had the
modifications been reflected as of the date of acquisition, net
assets would have decreased $223 at December 31, 2019 and net loss
in 2019 would have been reduced by $21.
On April 18, 2019,
the Company acquired all of the assets, global rights and business
interests associated with the brand Humble Flower Co. for a
purchase price of $472 that will be paid as and if financial
performance targets are met during the period beginning on April
19, 2019 and ending on April 18, 2023. The acquisition marks the
Company’s expansion into cannabis-infused topical creams,
balms, and oils. Effective June 1, 2020 the asset purchase
agreement was modified, eliminating payments associated with
meeting financial performance targets in exchange for the issuance
of 225 thousand options to purchase Subordinate Voting Shares and a
note payable of $65, with payments commencing on January 1, 2021
for 24 months. Had the modifications been reflected as of the date
of acquisition, net assets would have decreased $308 at December
31, 2019 and net loss in 2019 would have been reduced by
$34.
●
|
The Hacienda Company, LLC.
|
On February 25,
2021, the Company acquired substantially all of the assets of the
Lowell Herb Co. and Lowell Smokes trademark brands, product
portfolio, and production assets from The Hacienda Company, LLC for
a purchase price of $41,920. Lowell Herb Co. is a leading
California cannabis brand that manufactures and distributes
distinctive and highly regarded premium packaged flower, pre-roll,
concentrates, and vape products. The acquisition consideration was
comprised of $4.1 million in cash and the issuance of 22,643,678
subordinate voting shares and obligations assumed. In connection
with this acquisition, the Company completed a change in its
corporate name to Lowell Farms Inc. effective March 1,
2021.
On June 29, 2021,
we acquired real property and related assets of a first-of-its-kind
cannabis drying and midstream processing facility located in
Monterey County for a purchase price of $18,800. The 10-acre,
40,000 square foot processing facility will provide drying,
bucking, trimming, sorting, grading, and packaging operations for
up to 250,000 lbs. of wholesale cannabis flower annually. The new
facility will process nearly all the cannabis that we grow at our
existing cultivation operations. Additionally, we commissioned a
new business unit called Lowell Farm Services (“LFS”),
which will engage in fee-based processing services for regional
growers from the Salinas Valley area. The acquisition consideration
was comprised primarily of a note payable of $9.0 million and the
issuance of 7,997,520 subordinate voting shares and obligations
assumed. LFS operations are expected to become operational during
the third quarter of 2021.
Terminated
Acquisition
On May 14, 2019,
the Company entered into a definitive agreement to acquire the
assets of W The Brand (“W Vapes”), a manufacturer and
distributor in Nevada and Oregon of cannabis concentrates,
cartridges and disposable pens, in a cash and stock transaction.
Under the terms of the agreement, the purchase consideration to W
Vapes shareholders consisted of $10 million in cash and $10 million
in Subordinate Voting Shares (based on a deemed value of CDN$15.65
per share). In November 2019, the definitive agreement was amended
whereby the Company advanced $2 million in non-recourse funds to
the seller in exchange for release of $10 million of cash held in
escrow related to the acquisition and in December 2019, the Company
purchased the Las Vegas, Nevada facility for $4.1
million.
On July 17, 2020,
the Company announced the termination of the definitive agreement
with W Vapes and the obligation to acquire the assets of W Vapes
was terminated. The termination coincided with an asset acquisition
announcement between W Vapes and Planet 13 Holdings Inc.
(“Planet 13”). Additionally, the Company sold the Las
Vegas facility to certain affiliates of Planet 13 for a cash
payment of approximately $500, and an additional cash payment of
approximately $2.8 million upon regulatory approval of the W Vapes
and Planet 13 transaction which was received in January 2021, and
in the third quarter the Company finalized a note payable of $843
to the owners of W Vapes, payable coinciding with the receipt of
the $2.8 million payment from the facility sale, which was paid in
January 2021. As a result, the Company reflected a $4.4 million
loss in loss on termination of investments, net on its consolidated
statement of operations for the year ended December 31,
2020.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
3. PREPAID AND OTHER CURRENT
ASSETS
Prepaid and other
current assets were comprised of the following items:
|
|
June 30,
|
|
|
December 31,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
Deposits
|
|
$
|
533
|
|
|
$
|
572
|
|
Insurance
|
|
|
917
|
|
|
|
593
|
|
Supplier
advances
|
|
|
1,623
|
|
|
|
504
|
|
Nevada building
sale proceeds
|
|
|
-
|
|
|
|
2,800
|
|
Other
|
|
|
1,071
|
|
|
|
1,922
|
|
Total prepaid and other current
assets
|
|
$
|
4,144
|
|
|
$
|
6,391
|
|
4. INVENTORY
Inventory was
comprised of the following items:
|
|
June 30,
|
|
|
December 31,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
Raw
materials
|
|
$
|
11,852
|
|
|
$
|
7,950
|
|
Work in
process
|
|
|
45
|
|
|
|
-
|
|
Finished
goods
|
|
|
2,839
|
|
|
|
1,983
|
|
Total inventory
|
|
$
|
14,736
|
|
|
$
|
9,933
|
|
5. OTHER CURRENT
LIABILITIES
Other current
liabilities were comprised of the following items:
|
|
June 30,
|
|
|
December 31,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
Excise and cannabis
tax
|
|
$
|
3,912
|
|
|
$
|
5,780
|
|
Third party brand
distribution accrual
|
|
|
269
|
|
|
|
584
|
|
Insurance and
professional fee accrual
|
|
|
820
|
|
|
|
746
|
|
Other
|
|
|
11
|
|
|
|
1,750
|
|
Total other current
liabilities
|
|
$
|
5,012
|
|
|
$
|
8,860
|
|
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
6. PROPERTY AND EQUIPMENT
A reconciliation of
the beginning and ending balances of property and equipment and
accumulated depreciation during the six months ended June 30, 2021
and property and equipment, net as of December 31, 2020 are as
follows:
|
|
Land and
|
|
|
Leasehold
|
|
|
Furniture
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Right of
|
|
|
|
|
(in
thousands)
|
|
Buildings
|
|
|
Improvements
|
|
|
and Fixtures
|
|
|
Equipment
|
|
|
Vehicles
|
|
|
in Process
|
|
|
Use Assets
|
|
|
Total
|
|
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 31,
2020
|
|
$
|
-
|
|
|
$
|
10,799
|
|
|
$
|
50
|
|
|
$
|
1,276
|
|
|
$
|
854
|
|
|
$
|
2,528
|
|
|
$
|
41,530
|
|
|
$
|
57,037
|
|
Additions
|
|
|
-
|
|
|
|
73
|
|
|
|
-
|
|
|
|
268
|
|
|
|
-
|
|
|
|
814
|
|
|
|
-
|
|
|
|
1,155
|
|
Business
Acquisitions
|
|
|
14,529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,942
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance—June 30, 2021
|
|
$
|
14,529
|
|
|
$
|
10,872
|
|
|
$
|
50
|
|
|
$
|
2,957
|
|
|
$
|
854
|
|
|
$
|
3,342
|
|
|
$
|
41,530
|
|
|
$
|
74,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 31,
2020
|
|
$
|
-
|
|
|
$
|
(634
|
)
|
|
$
|
(47
|
)
|
|
$
|
(427
|
)
|
|
$
|
(411
|
)
|
|
$
|
-
|
|
|
$
|
(6,275
|
)
|
|
$
|
(7,794
|
)
|
Depreciation
|
|
|
-
|
|
|
|
(167
|
)
|
|
|
(1
|
)
|
|
|
(72
|
)
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
(1,527
|
)
|
|
|
(1,844
|
)
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance—June 30, 2021
|
|
$
|
-
|
|
|
$
|
(801
|
)
|
|
$
|
(48
|
)
|
|
$
|
(499
|
)
|
|
$
|
(488
|
)
|
|
$
|
-
|
|
|
$
|
(7,802
|
)
|
|
$
|
(9,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value-June 30,
2021
|
|
$
|
14,529
|
|
|
$
|
10,071
|
|
|
$
|
2
|
|
|
$
|
2,458
|
|
|
$
|
366
|
|
|
$
|
3,342
|
|
|
$
|
33,728
|
|
|
$
|
64,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value -December 31,
2020
|
|
$
|
-
|
|
|
$
|
10,165
|
|
|
$
|
3
|
|
|
$
|
849
|
|
|
$
|
443
|
|
|
$
|
2,528
|
|
|
$
|
35,255
|
|
|
$
|
49,243
|
|
Construction in
process represent assets under construction related to cultivation,
manufacturing, and distribution facilities not yet completed or
otherwise not placed in service.
Depreciation
expense of $946 and $1,044 were recorded for the three months ended
June 30, 2021 and 2020, respectively, of which $584 and $769
respectively, were included in cost of goods sold. Depreciation
expense of $195 was also recorded in other income (expense) for the
three months ended June 30, 2021.
Depreciation
expense of $1,844 and $1,909 were recorded for the six months ended
June 30, 2021 and 2020, respectively, of which $1,168 and $1,283
respectively, were included in cost of goods sold. Depreciation
expense of $195 was also recorded in other income (expense) for the
six months ended June 30, 2021.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
7. GOODWILL AND INTANGIBLE
ASSETS
Goodwill
A reconciliation of
the beginning and ending balances of goodwill during the six months
ended June 30, 2021 is as follows:
(in
thousands)
|
|
|
|
Costs
|
|
|
|
Balance - December 31, 2020
|
|
$
|
357
|
|
Additions
|
|
|
-
|
|
Business
Acquisitions
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
Balance - June 30, 2021
|
|
$
|
357
|
|
The Company
evaluates goodwill for impairment annually during the fiscal third
quarter and when an event occurs, or circumstances change such that
it is reasonably possible that impairment may exist. The Company
accounts for goodwill and evaluates its goodwill balances and tests
them for impairment in accordance with related accounting
standards. The Company performed its annual impairment assessment
in its third quarter of fiscal 2020, and its analysis indicated
that the Company had no impairment of goodwill.
Other
Intangible Assets
A reconciliation of
the beginning and ending balances of intangible assets and
accumulated amortization during the six months ended June 30, 2021
and intangible assets, net as of December 31, 2020 are as
follows:
|
|
Definite Life Intangibles
|
|
|
Indefinite Life Intangibles
|
|
|
|
|
|
|
Branding
|
|
|
Technology/
|
|
|
Brands &
|
|
|
|
|
(in
thousands)
|
|
Rights
|
|
|
Know How
|
|
|
Tradenames
|
|
|
Total
|
|
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 31,
2020
|
|
$
|
250
|
|
|
$
|
208
|
|
|
$
|
408
|
|
|
$
|
866
|
|
Business
acquisition
|
|
|
-
|
|
|
|
3,050
|
|
|
|
37,299
|
|
|
|
40,349
|
|
Agreement
termination
|
|
|
(250
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(250
|
)
|
Balance—June 30, 2021
|
|
$
|
-
|
|
|
$
|
3,258
|
|
|
$
|
37,707
|
|
|
$
|
40,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 31,
2020
|
|
$
|
(93
|
)
|
|
$
|
(37
|
)
|
|
$
|
-
|
|
|
$
|
(130
|
)
|
Agreement
termination
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
Amortization
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance—June 30, 2021
|
|
$
|
-
|
|
|
$
|
(46
|
)
|
|
$
|
-
|
|
|
$
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
$
|
-
|
|
|
$
|
3,212
|
|
|
$
|
37,707
|
|
|
$
|
40,919
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
157
|
|
|
$
|
171
|
|
|
$
|
408
|
|
|
$
|
736
|
|
Intangible assets
with finite lives are amortized over their estimated useful lives.
Amortization periods of assets with finite lives are based on
management's estimates at the date of acquisition. The Company
recorded amortization expense of $14, and $44 for the six months
ended June 30, 2021, and 2020, respectively.
The Company
estimates that amortization expense for our existing other
intangible assets will be approximately $220 annually for each of
the next five fiscal years. Actual amortization expense to be
reported in future periods could differ from these estimates as a
result of new intangible asset acquisitions, changes in useful
lives or other relevant factors or changes.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
8. SHAREHOLDERS’
EQUITY
Shares
Outstanding
The table below
details the change in Company shares outstanding by class during
the six months ended June 30, 2021:
|
|
Subordinate
|
|
|
Super
|
|
(in
thousands)
|
|
Voting Shares
|
|
|
Voting Shares
|
|
Balance—December 31,
2020
|
|
|
57,617
|
|
|
|
203
|
|
Shares issued in
connection with exercise of warrants
|
|
|
1,325
|
|
|
|
-
|
|
Shares issued in
connection with conversion of convertible debentures
|
|
|
2,393
|
|
|
|
-
|
|
Shares issued in
connection with asset acquisition
|
|
|
30,641
|
|
|
|
-
|
|
Issuance of vested
restricted stock units
|
|
|
371
|
|
|
|
-
|
|
Stock issued in
connection with exercised of stock options
|
|
|
76
|
|
|
|
-
|
|
Balance—June 30, 2021
|
|
|
92,423
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Balance—December 31,
2020
|
|
|
|
|
|
|
93,898
|
|
Warrants issued in
conjunction with broker option exercise (1)
|
|
|
|
|
|
|
163
|
|
Warrants
expired
|
|
|
|
|
|
|
(358
|
)
|
Warrants converted
into subordinate voting shares
|
|
|
|
|
|
|
(1,000
|
)
|
Balance—June 30, 2021
|
|
|
|
|
|
|
92,703
|
|
(1) Excluded 390 warrants issuable should
underwriter options be exercised.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
9. DEBT
Debt at June 30,
2021 and December 31, 2020, was comprised of the
following:
|
|
June 30,
|
|
|
December 31,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
Current portion of long-term
debt
|
|
|
|
|
|
|
Vehicle
loans(1)
|
|
$
|
186
|
|
|
$
|
170
|
|
Note
payable(3)
|
|
|
183
|
|
|
|
1,043
|
|
Total short-term
debt
|
|
|
369
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
|
|
|
|
|
|
Vehicle
loans(1)
|
|
|
162
|
|
|
|
233
|
|
Note
payable(2)
|
|
|
56
|
|
|
|
65
|
|
Note
payable(3)
|
|
|
40
|
|
|
|
5
|
|
Mortgage
payable(4)
|
|
|
8,938
|
|
|
|
-
|
|
Convertible
debenture(5)
|
|
|
13,646
|
|
|
|
13,701
|
|
Total long-term
debt
|
|
|
22,842
|
|
|
|
14,004
|
|
Total Indebtedness
|
|
$
|
23,211
|
|
|
$
|
15,217
|
|
(1) Primarily fixed term loans on
transportation vehicles. Weighted average interest rate at June 30,
2021 was 8.1%.
|
(2) Note payable in connection with Acme
acquisition to be paid as and if financial performance targets are
met over the earnout period.
|
(3) Note payable in connection with Humble
Flower and Kaizen acquisitions and termination of the W Vapes
acquisition.
Weighted average interest rate at June 30,
2021 was 4%.
|
(4) Net of deferred financing costs of
$422.
|
(5) Net of deferred financing costs of
$1,879.
|
Stated maturities
of debt obligations are as follows as of June 30,
2021:
|
|
June 30,
|
|
(in
thousands)
|
|
2021
|
|
2021
|
|
$
|
268
|
|
2022
|
|
|
321
|
|
2023
|
|
|
15,876
|
|
2024
|
|
|
383
|
|
2025
|
|
|
421
|
|
2026 and
thereafter
|
|
|
8,113
|
|
Total debt obligations
|
|
$
|
25,382
|
|
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
10. LEASES
The Company adopted
ASU 2016-02 (Topic 842) effective January 1, 2019 using the
modified retrospective adoption method which allowed it to
initially apply the new standard at the adoption date and recognize
a cumulative-effect adjustment to the opening balance of
accumulated deficit. In connection with the adoption of the new
lease pronouncement, the Company recorded a charge to accumulated
deficit of $847.
A reconciliation of
lease obligations for the six months ended June 30, 2021, is as
follows:
(in
thousands)
|
|
|
|
Lease
Liability:
|
|
|
|
December 31, 2020
|
|
$
|
38,834
|
|
Lease principal
payments
|
|
|
(1,164
|
)
|
June 30, 2021
|
|
$
|
37,670
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2021
|
|
Lease obligation,
current portion
|
|
$
|
2,410
|
|
Lease obligation,
long-term portion
|
|
|
35,260
|
|
Total
|
|
$
|
37,670
|
|
All extension
options that are reasonably certain to be exercised have been
included in the measurement of lease obligations. The Company
reassesses the likelihood of extension option exercise if there is
a significant event or change in circumstances within its
control.
The components of
lease expense for the three and six months ended June 30, 2021 and
2020 are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Amortization of
leased assets (1)
|
|
$
|
785
|
|
|
$
|
839
|
|
|
$
|
1,527
|
|
|
$
|
1,631
|
|
Interest on lease
liabilities (2)
|
|
|
634
|
|
|
|
491
|
|
|
|
1,197
|
|
|
|
964
|
|
Total
|
|
$
|
1,419
|
|
|
$
|
1,330
|
|
|
$
|
2,724
|
|
|
$
|
2,595
|
|
____________
(1) Included in cost of goods sold and general
and administrative in the consolidated statement of
operations.
|
(2) Included in interest expense in the
consolidated statement of operations.
|
The key assumptions
used in accounting for leases as of June 30, 2021 were a weighted
average remaining lease term of 17.6 years and a weighted average
discount rate of 6%. The key assumptions used in accounting for
leases as of December 31, 2020 were a weighted average remaining
lease term of 18.1 years and a weighted average discount rate of
6.0%.
The future lease
payments with initial remaining terms in excess of one year as of
June 30, 2021 were as follows:
|
|
June 30,
|
|
(in
thousands)
|
|
2021
|
|
Balance of
2021
|
|
$
|
1,187
|
|
2022 -
2023
|
|
|
5,137
|
|
2024 -
2025
|
|
|
3,844
|
|
2026 and
beyond
|
|
|
27,502
|
|
Total
|
|
$
|
37,670
|
|
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
11. SHARE-BASED
COMPENSATION
During 2019 the
Company’s Board of Directors adopted the 2019 Stock and
Incentive Plan (the “Plan”), which was amended in April
2020 and March 2021. The Plan permits the issuance of stock
options, stock appreciation rights, stock awards, share units,
performance shares, performance units and other stock-based awards,
and, as of June 30, 2021, 13.2 million shares have been authorized
to be issued under the Plan and 4.6 million are available for
future grant. The Plan provides for the grant of options as either
non-statutory stock options or incentive stock options and
restricted stock units to employees, officers, directors, and
consultants of the Company to attract and retain persons of ability
to perform services for the Company and to reward such individuals
who contribute to the achievement by the Company of its economic
objectives. The awards granted generally vest in 25% increments
over a four-year period and option awards expire 6 years from grant
date.
The Plan is
administered by the Board or a committee appointed by the Board,
which determines the persons to whom the awards will be granted,
the type of awards to be granted, the number of awards to be
granted, and the specific terms of each grant, including the
vesting thereof, subject to the provisions of the
Plan.
During the three
and six months ended June 30, 2021 and 2020, the Company granted
shares to certain employees as compensation for services. These
shares were accounted for in accordance with ASC 718 –
Compensation – Stock Compensation. The Company amortizes
awards over the service period and until awards are fully
vested.
For the three and
six months ended June 30, 2021 and 2020, share-based compensation
expense was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Cost of goods
sold
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
General and
administrative expense
|
|
|
338
|
|
|
|
213
|
|
|
|
625
|
|
|
|
1,825
|
|
Total share-based
compensation
|
|
$
|
338
|
|
|
$
|
213
|
|
|
$
|
625
|
|
|
$
|
1,825
|
|
The following table
summarizes the status of stock option grants and unvested awards at
and for the six months ended June 30, 2021:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Stock
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
(in thousands
except per share amounts)
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding—December 31,
2020
|
|
|
6,260
|
|
|
$
|
0.97
|
|
|
|
4.7
|
|
|
$
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,880
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,153
|
)
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
Outstanding—June 30,
2021
|
|
|
6,987
|
|
|
$
|
0.95
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable—June 30,
2021
|
|
|
1,677
|
|
|
$
|
1.02
|
|
|
|
3
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest—June 30,
2021
|
|
|
6,987
|
|
|
$
|
0.95
|
|
|
|
2.6
|
|
|
$
|
2,254
|
|
The
weighted-average fair value of options granted during the three and
six months ended June 30, 2021, estimated as of the grant date,
were $1.18 and $1.41, respectively. As of June 30, 2021, there was
$1,252 of total unrecognized compensation cost related to
non-vested options, which is expected to be recognized over a
remaining weighted-average vesting period of 2.0
years.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
The following table
summarizes the status of restricted stock unit (“RSU”)
grants and unvested awards at and for the six months ended June 30,
2021:
|
|
|
|
|
Weighted-Average
|
|
(in thousands except per share
amounts)
|
|
RSUs
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Outstanding—December 31,
2020
|
|
|
450
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,395
|
|
|
|
1.15
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(10
|
)
|
|
|
1.11
|
|
Outstanding—June 30,
2021
|
|
|
1,835
|
|
|
$
|
0.95
|
|
As of June 30,
2021, there was $963 of total unrecognized compensation cost
related to non-vested restricted stock units, which is expected to
be recognized over a remaining weighted-average vesting period of
20 months.
The fair value of
the stock options and RSUs granted were determined using the
Black-Scholes option-pricing model with the following weighted
average assumptions at the time of grant.
Stock
Options
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
Three Months Ended
March 31,
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Expected
volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest
rate
|
|
|
1.1
|
%
|
|
|
2.2
|
%
|
|
|
0.9
|
%
|
|
|
2.2
|
%
|
Expected term in
years
|
|
|
4.25
|
|
|
|
4.12
|
|
|
|
4.25
|
|
|
|
4.14
|
|
RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
Three Months Ended
March 31,
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Expected
volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest
rate
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
Expected term in
years
|
|
|
0.74
|
|
|
|
0.60
|
|
|
|
0.74
|
|
|
|
0.60
|
|
12. INCOME TAXES
Coronavirus Aid, Relief and Economic
Security Act
On March 27, 2020,
the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) was enacted and signed into law in
response to the market volatility and instability resulting from
the COVID-19 pandemic. It includes a significant number of tax
provisions and lifts certain deduction limitations originally
imposed by the Tax Cuts and Jobs Act of 2017 (the “2017
Act”). The changes are mainly related to: (1) the business
interest expense disallowance rules for 2019 and 2020; (2) net
operating loss rules; (3) charitable contribution limitations; (4)
employee retention credit; and (5) the realization of corporate
alternative minimum tax credits.
The Company
continues to assess the impact and future implication of these
provisions; however, it does not anticipate any amounts that could
give rise to a material impact to the overall consolidated
financial statements.
The provision for
income tax expense for the three months ended June 30, 2021, was
$74, representing an effective tax rate of 9.20%, compared to an
income tax expense of $25 for the three months ended June 30, 2020,
representing an effective tax rate of 0.29%. The provision for
income tax expense for the six months ended June 30, 2021, was
$138, representing a effective tax rate of 2.36% compared to an
income tax expense of $50 for the six months ended June 30, 2020,
representing an effective tax rate of 0.30%.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
13. NET INCOME (LOSS) PER
SHARE
Net income (loss)
per share represents the net earnings/loss attributable to
shareholders divided by the weighted average number of shares
outstanding during the period on an as converted
basis.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands
except per share amounts)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
731
|
|
|
$
|
(8,757
|
)
|
|
$
|
(5,988
|
)
|
|
$
|
(16,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.50
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.50
|
)
|
Weighted average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,021
|
|
|
|
33,307
|
|
|
|
61,956
|
|
|
|
33,025
|
|
Diluted
|
|
|
201,278
|
|
|
|
33,307
|
|
|
|
61,956
|
|
|
|
33,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
potentially diluted shares (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares
|
|
|
71,021
|
|
|
|
33,307
|
|
|
|
61,956
|
|
|
|
33,025
|
|
Options
|
|
|
2,908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
60,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debentures
|
|
|
64,796
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted stock
units
|
|
|
1,786
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total weighted
average potentially diluted shares:
|
|
|
201,278
|
|
|
|
33,307
|
|
|
|
61,956
|
|
|
|
33,025
|
|
(1) For the above net loss periods, the
inclusion of options, warrants, convertible debentures and
restricted stock units in the calculation of diluted earnings per
share would be anti-dilutive, and accordingly, were excluded from
the diluted loss per share calculation.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
14. FAIR VALUE MEASUREMENTS
Accounting
standards define fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation
techniques used to measure fair value. An asset’s or
liability’s level is based on the lowest level of input that
is significant to the fair value measurement. Assets and
liabilities carried at fair value are valued and disclosed in one
of the following three levels of the valuation
hierarchy:
Level 1: Quoted
market prices in active markets for identical assets or
liabilities.
Level 2: Observable
market-based inputs or unobservable inputs that are corroborated by
market data.
Level 3:
Unobservable inputs reflecting the reporting entity’s own
assumptions.
At June 30, 2021
and 2020, and December 31, 2020 the carrying value of cash and cash
equivalents, accounts receivable, prepaid expense and other current
assets, accounts payable and other current liabilities approximate
fair value due to the short-term nature of such
instruments.
The carrying value
of the Company's debt approximates fair value based on current
market rates (Level 2).
Nonrecurring fair value
measurements
The Company uses
fair value measures when determining assets and liabilities
acquired in an acquisition as described above in the Notes to
Condensed Consolidated Financial Statements, which are considered a
Level 3 measurement.
15. COMMITMENTS AND
CONTINGENCIES
Commitments
In January 2021,
the Company signed a letter of intent to expand its cultivation
footprint. The agreement contemplates a land-lease from a developer
that has prepared the property for cannabis cultivation. Lowell
would be responsible for construction costs of greenhouses using
cash raised in the equity offering in December 2020 and cash
generated from operations. The transaction is subject to final site
due-diligence and negotiation of construction contracts. In the
event the transaction contemplated in the letter of intent is
pursued, the Company anticipates the site will be ready for
operation in 2023.
Contingencies
The Company’s
operations are subject to a variety of local and state regulation.
Failure to comply with one or more of those regulations could
result in fines, restrictions on its operations, or losses of
permits that could result in the Company ceasing operations. While
management of the Company believes that the Company is in
compliance with applicable local and state regulation as of June
30, 2021, cannabis regulations continue to evolve and are subject
to differing interpretations. As a result, the Company may be
subject to regulatory fines, penalties or restrictions in the
future. In 2020, the Company entered into a payment plan offered by
California regulatory authorities to pay certain excise and
cultivation taxes over a 12 month period. If such taxes are not
paid in accordance with the agreed payment plan the Company could
be subject to certain late payment penalties.
Litigation and
Claims
From time to time,
the Company may be involved in litigation relating to claims
arising out of operations in the normal course of business. As of
June 30, 2021, there were no pending or threatened lawsuits that
could reasonably be expected to have a material effect on the
results of the Company’s operations. There are also no
proceedings in which any of the Company’s directors, officers
or affiliates are an adverse party or have a material interest
adverse to the Company’s interest.
Insurance
Claims
In September 2020
the Company experienced a small fire at its manufacturing facility
which resulted in suspending certain operations until the facility
was repaired. As a result, the company filed a business
interruption claim which resulted in a payment of $1.4 million from
the insurance carrier in March 2021. The proceeds from the claim
were reflected in other income on the consolidated statement of
operations for the year ended December 31, 2020.
In August 2020 the
Company experienced adverse air quality conditions that resulted in
the Company closing the air vents in its greenhouse facilities at a
time when extreme temperatures existed. As a result, plant health
suffered due to the situation. The Company filed a business
interruption claim which resulted in a payment of $2.65 million
from the insurance carrier in July 2021, and is included in other
income (expense) in the accompanying condensed consolidated
statements of income (loss).
LOWELL FARMS INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. GENERAL AND ADMINISTRATIVE
EXPENSES
For the three and
six months ended June 30, 2021 and 2020, general and administrative
expenses were comprised of:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Salaries and
benefits
|
|
$
|
1,561
|
|
|
$
|
980
|
|
|
$
|
2,398
|
|
|
$
|
1,976
|
|
Professional
fees
|
|
|
777
|
|
|
|
251
|
|
|
|
1,259
|
|
|
|
850
|
|
Share-based
compensation
|
|
|
336
|
|
|
|
213
|
|
|
|
625
|
|
|
|
1,825
|
|
Administrative
|
|
|
1,143
|
|
|
|
12
|
|
|
|
2,004
|
|
|
|
82
|
|
Total general and administrative
expenses
|
|
$
|
3,817
|
|
|
$
|
1,456
|
|
|
$
|
6,286
|
|
|
$
|
4,733
|
|
17. RELATED-PARTY
TRANSACTIONS
Transactions with
related parties are entered into in the normal course of business
and are measured at the amount established and agreed to by the
parties.
Lowell received
certain administrative, operational and consulting services through
a Management Services Agreement with Edible Management, LLC
(“EM”). EM is a limited liability company owned by the
co-founders of Lowell and was formed to provide Lowell with certain
administrative functions comprising: cultivation, distribution, and
production operations support; general administration; corporate
development; human resources; finance and accounting; marketing;
sales; legal and compliance. The agreement provided for the
dollar-for-dollar reimbursement of expenses incurred by EM in
performance of its services. Amounts paid to EM for the three and
six months ended June 30, 2020 was $2,201 and $5,041, respectively.
The Management Services Agreement with EM was terminated as of
December 31, 2020.
In April 2015,
Lowell entered into a services agreement with Olympic Management
Group (“OMG”), for advisory and technology support
services, including the access and use of software licensed to OMG
to perform certain data processing and enterprise resource planning
(ERP) operational services. OMG is owned by one of the
Company’s co-founders. The agreement provides for the
dollar-for-dollar reimbursement of expenses incurred by OMG in
performance of its services. There were no amounts paid to OMG for
the quarters ended June 30, 2021 and 2020. Amounts paid to OMG for
the six months ended June 30, 2021 and 2020, were $nil and $5,
respectively.
18. SEGMENT INFORMATION
The Company's
operations are comprised of a single reporting operating segment
engaged in the production and sale of cannabis products in the
United States. As the operations comprise a single reporting
segment, amounts disclosed in the financial statements also
represent a single reporting segment.
19. SUBSEQUENT EVENTS
The Company has
evaluated subsequent events through August 16, 2021, the date the
financial statements were available to be issued.
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of
Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Quarterly
Report on Form 10-Q contains forward-looking statements. In some
cases, you can identify these statements by forward-looking words
such as “may”, “will”, “would”,
“could”, “should”, “believes”,
“estimates”, “projects”,
“potential”, “expects”,
“plans”, “intends”,
“anticipates”, “targeted”,
“continues”, “forecasts”,
“designed”, “goal”, or the negative of
those words or other similar or comparable words. Any statements
contained in this Quarterly Report on Form 10-Q that are not
statements of historical facts may be deemed to be forward-looking
statements. We have based these forward-looking statements largely
on our current expectations and projections about future events and
financial trends that we believe may affect our business, financial
condition, results of operations and future growth prospects. The
forward-looking statements contained herein are based on certain
key expectations and assumptions, including, but not limited to,
with respect to expectations and assumptions concerning receipt
and/or maintenance of required licenses and third party consents
and the success of our operations, are based on estimates prepared
by us using data from publicly available governmental sources, as
well as from market research and industry analysis, and on
assumptions based on data and knowledge of this industry that we
believe to be reasonable. These forward-looking statements are not
guarantees of future performance or development and involve known
and unknown risks, uncertainties and other factors that are in some
cases beyond our control. As a result, any or all of our
forward-looking statements in this Quarterly Report on Form 10-Q
may turn out to be inaccurate. Factors that may cause actual
results to differ materially from current expectations include,
among other things, those listed under “Risk Factors”
in our registration statement on Form 10, as amended (the
“Form 10”). Except as required by law, we assume no
obligation to update or revise these forward-looking statements for
any reason, even if new information becomes available after the
date of this Quarterly Report on Form 10-Q. You should, however,
review the factors and risks we describe in the reports we will
file from time to time with the SEC after the date of this
Quarterly Report on Form 10-Q.
OVERVIEW OF THE COMPANY
We are a
California-based cannabis company with vertically integrated
operations including large scale cultivation, extraction,
processing, manufacturing, branding, packaging and wholesale
distribution to retail dispensaries. We manufacture and distribute
proprietary and third-party brands throughout the State of
California, the largest cannabis market in the world. We also
provide manufacturing, extraction and distribution services to
third-party cannabis and cannabis branding companies. We operate a
225,000 square foot greenhouse cultivation facility and a 40,000
square foot processing facility in Monterey County, a 15,000 square
foot manufacturing and laboratory facility in Salinas, California,
a separate 20,000 square foot distribution facility in Salinas,
California and a warehouse depot and distribution vehicles in Los
Angeles, California.
Our present product
offerings include flower, vape pens, oils, extracts, chocolate
edibles, mints, gummies, topicals, tinctures and pre-rolls. We sell
our products under owned and third-party brands. Brands we own
include the following: Lowell Herb Co. and Lowell Smokes (premium
packaged flower, pre-roll, concentrates, and vape products);
Cypress Reserve (a premium flower brand); Flavor Extracts (crumble
and terp sugar products): Kaizen (premium brand cannabis
concentrates); House Weed (a value driven flower and concentrates
offering delivering a flavorful and potent experience); Moon (a
range of high-potency, high-quality and high-value edibles); Altai
(hand-crafted and award-winning edibles); Humble Flower (a premium
brand offering cannabis-infused topical creams, balms and oils);
Original Pot Company (baked edibles); CannaStripe (gummy edibles);
and Acme Elixirs (high quality, lab-tested vaporizing pens). We
also exclusively manufacture and distribute third party brands in
California and provide third party extraction processing and
distribution services and bulk extraction concentrates and flower
to licensed manufacturers and distributors.
We conduct cannabis
cultivation operations located in Monterey County, California. We
currently operate a cultivation facility which includes four
greenhouses totaling approximately 225,000 square feet sited on 10
acres located on Zabala Road. Farming cannabis at this scale
enables us to curate specialized strains and maintain greater
control over the quantity and quality of cannabis available for our
products, preserving the consistency of our flower and cannabis
feedstocks for our extraction laboratory and product manufacturing
operations. We maintain a strict quality control process which
facilitates a predictable output yield of pesticide-free
products.
Our manufacturing
facility is located in Salinas, California and houses our edible
product operations and extraction and distillation operations. The
edible product operations utilize internally produced cannabis oil,
which can also be supplied from multiple external sources. Our
manufacturing operations produce a wide variety of cannabis-infused
products in our 15,000 square foot manufacturing facility in
Salinas. Our products include chocolate confections, tinctures,
baked goods, hard and soft non-chocolate confections, and topical
lotions and balms. Lowell Farms utilizes modern commercial
production equipment and employs food grade manufacturing
protocols, including industry-leading standard operating procedures
designed so that its products meet stringent quality standards. We
have implemented updated compliance, packaging and labeling
standards to meet the requirements of the California Medical and
Adult-Use Cannabis Regulation and Safety Act with the advent of
adult use legalization in California.
We also operate an
automated flower packaging line and a pre-roll assembly line for
making finished goods in those respective categories with feedstock
grown at our cultivation operations.
On June 29, 2021 we
announced that we acquired real property and related assets of a
first-of-its-kind cannabis drying and midstream processing facility
located in Monterey County, nearby our flagship cultivation
operation. The 10-acre, 40,000 square foot processing facility will
provide drying, bucking, trimming, sorting, grading, and packaging
operations for up to 250,000 lbs. of wholesale cannabis flower
annually. The new facility will process nearly all the cannabis
that we grow at our existing cultivation operations. Additionally,
we are commissioning a new business unit called Lowell Farm
Services (“LFS”), which will engage in fee-based
processing services for regional growers from the Salinas Valley
area, one of the largest and fastest growing cannabis cultivation
regions in the country. LFS operations are expected to become
operational during the third quarter of 2021.
Our business is
conducted by the following subsidiaries of the
Company:
|
●
|
Indus Holding Company is the owner of our
principal brand intellectual property (other than the Lowell Herb
Co. and Lowell Smokes brands) and an intermediate holding company
for our operating entities.
|
|
|
|
|
●
|
Cypress Manufacturing Company conducts the
majority of our cannabis operations, including cultivation,
extraction, manufacturing and distribution, and holds all
manufacturing and distribution licenses.
|
|
|
|
|
●
|
Cypress Holding Company owns the majority of our
equipment and is a lessee for facility and equipment
leases.
|
|
|
|
|
●
|
Wellness Innovation Group Incorporated provides
sales, marketing, administrative and managerial services to our
other operating entities.
|
|
|
|
|
●
|
Indus LF LLC is the owner of the brands and
assets acquired in the Lowell Acquisition. Licensed activities
acquired by Indus LF LLC in the Lowell Acquisition have been
transitioned to Cypress Manufacturing Company.
|
|
|
|
|
●
|
Lowell SR LLC is the owner of our drying and
midstream processing facility located in Monterey County, located
at 20800 Spence Road, and is a wholly owned subsidiary of Lowell SR
LLC, which holds certain permits related to the processing
facility. LFS will be operated under Lowell SR LLC.
|
The Company's
corporate office and principal place of business is located at 19
Quail Run Circle, Salinas, California. As of June 30, 2021, we had
212 full-time employees and 4 part-time employees, substantially
all of which are located in California. Additionally, Lowell Farms
utilizes contract employees in security, cultivation, packaging and
warehousing activities. The use of contract employees enables
Lowell Farms to manage variable staffing needs and in the case of
cultivation and security personnel, access to experienced,
qualified and readily available human resources.
Recent
Developments
Acquisitions
On February 25,
2021, we acquired the Lowell Herb Co. and Lowell Smokes trademark
brands, product portfolio and production assets from The Hacienda
Group, a California limited liability company
(“Hacienda”), and its subsidiaries. The acquisition is
referred to in this Form 10-Q as the “Lowell
Acquisition.” The Lowell Acquisition expanded our product
offerings by adding a highly regarded, mature line of premium
branded cannabis pre-rolls, including infused pre-rolls, to our
product portfolio under the Lowell Herb Co. and Lowell Smokes
brands. The Lowell Acquisition also expanded our offerings of
premium packaged flower, concentrates, and vape products. Upon the
completion of the acquisition of certain regulatory assets in the
Lowell Acquisition, we acquired certain non-hydrocarbon extraction
assets used for the production of oils, water hashish, bubble
hashish and rosin. The acquisition was valued at approximately $41
million, comprised of $4.1 million in cash and the issuance of
22,643,678 Subordinate Voting Shares. In connection with this
acquisition, the Company changed its corporate name to Lowell Farms
Inc. effective March 1, 2021.
On June 29, 2021,
we acquired real property and related assets, and commissioned a
first-of-its-kind cannabis drying and midstream processing facility
located in Monterey County. The 10-acre, 40,000 square foot
processing facility will provide drying, bucking, trimming,
sorting, grading, and packaging operations for up to 250,000 lbs.
of wholesale cannabis flower annually. The new facility will
process nearly all the cannabis that we grow at our existing
cultivation operations. Additionally, we will commission a new
business unit called Lowell Farm Services (“LFS”),
which will engage in fee-based processing services for regional
growers from the Salinas Valley area. LFS operations are expected
to become operational during the third quarter of
2021.
Reconciliations of Non-GAAP Financial
and Performance Measures
The Company has
provided certain supplemental non-GAAP financial measures in this
MD&A. Where the Company has provided such non-GAAP financial
measures, we have also provided a reconciliation below to the most
comparable GAAP financial measure, see “Reconciliations of
Non-GAAP Financial and Performance Measures” in this
MD&A. These supplemental non-GAAP financial measures should not
be considered superior to, as a substitute for or as an alternative
to, and should only be considered in conjunction with, the GAAP
financial measures presented herein.
In this MD&A, reference is made to
adjusted EBITDA and working capital which are not measures of
financial performance under GAAP. The Company calculates each as
follows:
|
●
|
EBITDA is net income
(loss), excluding the effects of income taxes (recovery); net
interest expense; depreciation and amortization; and adjusted
EBITDA also includes non-cash fair value adjustments on
investments; unrealized foreign currency gains/losses; share-based
compensation expense; and other transactional and special expenses,
such as out-of-period insurance recoveries and acquisition costs
and expenses related to the markup of acquired finished goods
inventory, which are inconsistent in amount and frequency and are
not what we consider as typical of our continuing operations.
Management believes this measure provides useful information as it
is a commonly used measure in the capital markets and as it is a
close proxy for repeatable cash generated by operations. We use
adjusted EBITDA internally to understand, manage, make operating
decisions related to cash flow generated from operations and
evaluate our business. In addition, we use adjusted EBITDA to help
plan and forecast future periods.
|
|
|
|
|
●
|
Working capital is
current assets less current liabilities. Management believes the
calculation of working capital provides additional information to
investors about the Company’s liquidity. We use working
capital internally to understand, manage, make operating decisions
related to cash flow required to fund operational activity and
evaluate our business cash flow needs. In addition, we use working
capital to help plan and forecast future periods.
|
These measures are not necessarily comparable
to similarly titled measures used by other
companies.
The table below
reconciles Net income (loss) to Adjusted EBITDA for the periods
indicated:
|
|
Three
Months
|
|
|
Six Months
Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income
(loss)
|
|
$
|
731
|
|
|
$
|
(8,757
|
)
|
|
$
|
(5,988
|
)
|
|
$
|
(16,631
|
)
|
Interest expense
|
|
|
598
|
|
|
|
726
|
|
|
|
1,215
|
|
|
|
1,576
|
|
Provision for income taxes
|
|
|
75
|
|
|
|
25
|
|
|
|
138
|
|
|
|
50
|
|
Depreciation in cost of goods sold
|
|
|
584
|
|
|
|
514
|
|
|
|
1,168
|
|
|
|
1,283
|
|
Depreciation and amortization in operating
expenses
|
|
|
167
|
|
|
|
371
|
|
|
|
491
|
|
|
|
479
|
|
Depreciation in other income
(expense)
|
|
|
195
|
|
|
|
-
|
|
|
|
195
|
|
|
|
-
|
|
EBITDA
|
|
|
2,350
|
|
|
|
(7,121
|
)
|
|
|
(2,781
|
)
|
|
|
(13,243
|
)
|
Investment and currency (gains)/
losses
|
|
|
(19
|
)
|
|
|
(306
|
)
|
|
|
(125
|
)
|
|
|
(391
|
)
|
Share-based compensation
|
|
|
336
|
|
|
|
213
|
|
|
|
625
|
|
|
|
1,825
|
|
Net effect of cost of goods on mark-up of
acquired finished goods inventory
|
|
|
497
|
|
|
|
-
|
|
|
|
662
|
|
|
|
-
|
|
Transaction and other special
charges
|
|
|
(2,424
|
)
|
|
|
-
|
|
|
|
(2,424
|
)
|
|
|
-
|
|
Adjusted
EBITDA(1)
|
|
$
|
740
|
|
|
$
|
(7,214
|
)
|
|
$
|
(4,043
|
)
|
|
$
|
(11,809
|
)
|
______________
(1) Non-GAAP measure
RESULTS OF OPERATIONS
Three
and Six Months Ended June 30, 2021 Compared to Three and Six Months
Ended June 30, 2020
Revenue
We derive our
revenue from sales of extracts, distillates, branded and packaged
cannabis flower, pre-rolls, concentrates and edible products to
retail dispensaries in the state of California. In addition, we
distribute proprietary and third-party brands throughout the state
of California. The Company recognizes revenue upon delivery of
goods to customers since at this time performance obligations are
satisfied.
The Company
classifies its revenues into three major categories: Owned, Agency
and Distributed brands.
|
●
|
Owned brands are the proprietary brands of the
Company.
|
|
|
|
|
●
|
Agency brands are third-party brands that the
Company manufactures and/or sells utilizing our in-house sales team
and distributes on behalf of the third-party.
|
|
|
|
|
●
|
Distributed brands are brands in which the
Company provides distribution services to retail
dispensaries.
|
Revenue by
Category
Three Months Ended
June 30, 2021 Compared to Three Months Ended June 30,
2020:
|
|
Three
Months
|
|
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
%
Change
|
|
Owned
|
|
$
|
14,539
|
|
|
$
|
7,231
|
|
|
|
101
|
%
|
Agency
|
|
|
535
|
|
|
|
1,981
|
|
|
|
-73
|
%
|
Distributed
|
|
|
83
|
|
|
|
682
|
|
|
|
-88
|
%
|
Net revenue
|
|
$
|
15,157
|
|
|
$
|
9,894
|
|
|
|
53
|
%
|
|
●
|
Revenue increases compared to the same
quarter in the prior year were driven by expanded cultivation
capacity, resulting in flower and pre-roll brand sales increasing
approximately 98% which included over $5.8 million in Lowell brand
sales, and the reorganization of owned brand product offerings
resulting in edible brand sales increasing 10% and concentrates
brand sales declining 22%. Customer onboarding and targeted
marketing initiatives also favorably impacted owned brand
sales.
|
|
●
|
Revenues in the quarter ended June 30, 2021
were adversely impacted by a strategic decision to focus only on
the agency and distributed brands that realize a higher per order
sales level. As a result, agency and distributed brands revenues
declined $2.1 million or 77% for the quarter ended June 30, 2021
compared to the same period in the prior year, and no new agency or
distributed brands were onboarded in the three months ended June
30, 2021.
|
Six Months Ended
June 30, 2021 Compared to Six Months Ended June 30,
2020:
|
|
Six
Months
|
|
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
%
Change
|
|
Owned
|
|
$
|
24,204
|
|
|
$
|
12,438
|
|
|
|
95
|
%
|
Agency
|
|
|
1,765
|
|
|
|
4,690
|
|
|
|
-62
|
%
|
Distributed
|
|
|
214
|
|
|
|
2,208
|
|
|
|
-90
|
%
|
Net revenue
|
|
$
|
26,183
|
|
|
$
|
19,336
|
|
|
|
35
|
%
|
|
●
|
Revenue increases compared to the same period
in the prior year were driven by expanded cultivation capacity,
resulting in flower and pre-roll brand sales increasing
approximately 107%, which included over $6.7 million in Lowell
brand sales, and the reorganization of owned brand product
offerings resulting in edible brand sales increasing 14% and
concentrates brand sales declining 7%. Customer onboarding and
targeted marketing initiatives also favorably impacted owned brand
sales.
|
|
●
|
Revenues in the six months ended June 30,
2021 were adversely impacted by a strategic decision to focus only
on the agency and distributed brands that realize a higher per
order sales level. As a result, agency and distributed brands
revenues declined $4.9 million or 71% for the six months ended June
30, 2021 compared to the same six months in the prior year, and no
new agency or distributed brands were onboarded in the six months
ended June 30, 2021.
|
Lowell expects to
continue its focus on profitable sales growth in 2021 primarily
through increased cultivation yields as a result of completing
greenhouse renovations in 2020, including installation of
environmental monitoring equipment designed to significantly reduce
plant stress should the Company encounter severe temperature and
atmospheric conditions as occurred at the end of the summer in
2020. Flower capacity in 2021 is expected to increase to
approximately 40,000 pounds harvested, more than twice the harvest
in 2020. The increased output will also increase internally sourced
materials for distillation and concentrate products. Revenues are
also expected to increase, although at a slower pace, through
improved penetration of edible products and selective new product
introductions including pre-rolls, vapes and gummies. Our focus on
agency and distributed brand sales will continue to be on those
brands that realize a higher per order sales level that will enable
profitable growth. As a result, we expect agency and distributed
brand sales to continue to decline from 2020 levels. Lastly, LFS
revenue is expected to be modest in the third quarter and begin to
ramp up in the fourth quarter as new customers are
onboarded.
Cost of Sales,
Gross Profit and Gross Margin
Cost of goods sold
consist of direct and indirect costs of production and
distribution, and includes amounts paid for direct labor, raw
materials, packaging, operating supplies, and allocated overhead,
which includes allocations of right of use asset depreciation,
insurance, managerial salaries, utilities, and other expenses, such
as employee training, cultivation taxes and product testing. The
Company manufactures products for certain brands that do not have
the capability, licensing or capacity to manufacture their own
products. The fees earned for these activities absorbs fixed
overhead in manufacturing. Our focus in 2021 is on flower,
pre-rolls and concentrates from our expanded cultivation
operations, and on increased vertical integration utilizing greater
internally sourced biomass for edible and vape products. We are
focusing on executing smaller, more frequent production runs to
lower inventory working capital, optimize efficiencies and expedite
product getting to the market faster, while continuing to decrease
third party manufacturing activities.
Three Months Ended
June 30, 2021 Compared to Three Months Ended June 30,
2020:
|
|
Three
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Net revenue
|
|
$
|
15,157
|
|
|
$
|
9,894
|
|
Cost of goods sold
|
|
|
9,413
|
|
|
|
11,157
|
|
Gross profit (loss)
|
|
$
|
5,744
|
|
|
$
|
(1,263
|
)
|
Gross margin
|
|
|
37.9
|
%
|
|
|
(12.8
|
)%
|
Gross margin was
37.9% and (12.8)% in the quarters ended June 30, 2021 and 2020,
respectively. The improvement between periods in gross profit and
gross margin is primarily due to efficiencies from the $7.3
million, or 101% increase in owned brand revenue, reflecting
increased cultivation output of flower and biomass which more than
doubled in the second quarter of 2021 compared to the same quarter
in the prior year, on a similar cost base. Additionally, the $2.0
million, or 77% reduction in revenue in the second quarter of 2021
compared to the same quarter in the prior year, from lower margin
agency and distributed brands had an unfavorable impact on gross
profit of approximately $0.2 million in the second quarter of 2021,
while having a favorable impact on gross margin in the current
quarter.
In the quarter
ended June 30, 2021, as a result of the change in brand product mix
and increased cultivation output, cost of goods sold decreased 16%
compared to the 53% increase in revenue resulting in the gross
margin improvement over the same period last year. Cultivation
yields returned to levels realized in the same period in the prior
year as a result of the introduction of new genetics in
2021.
Six Months Ended
June 30, 2021 Compared to Six Months Ended June 30,
2020:
|
|
Six
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Net revenue
|
|
$
|
26,183
|
|
|
$
|
19,336
|
|
Cost of goods sold
|
|
|
21,915
|
|
|
|
22,328
|
|
Gross profit (loss)
|
|
$
|
4,268
|
|
|
$
|
(2,992
|
)
|
Gross margin
|
|
|
16.3
|
%
|
|
|
(15.5
|
)%
|
Gross margin was
16.3% and (15.5)% in the six months ended June 30, 2021 and 2020,
respectively. The improvement between periods in gross profit and
gross margin is primarily due to efficiencies from the $11.8
million, or 95% increase in owned brand revenue, reflecting
increased cultivation output of flower and biomass which more than
doubled in the current quarter compared to the same quarter in the
prior year, on a similar cost base. Additionally, the $4.9 million,
or 71% reduction in revenue in the six months ended June 30, 2021
compared to the same period in the prior year, from lower margin
agency and distributed brands had an unfavorable impact on gross
profit of approximately $0.5 million in the current year to date
period, while having a favorable impact on gross margin in the
current year to date period.
In the six months
ended June 30, 2021, as a result of the change in brand product mix
and increased cultivation output, cost of goods sold decreased 2%
compared to the 35% increase in revenue resulting in the gross
margin improvement over the same period last year. Cultivation
yields returned to levels realized in the same period in the prior
year as a result of the introduction of new genetics in
2021.
Total
Operating Expenses
Total operating
expenses consist primarily of costs incurred at our corporate
offices; personnel costs; selling, marketing, and other
professional service costs including legal and accounting; and
licensing costs. Sales and marketing expenses consist of selling
costs to support our customer relationships, including investments
in marketing and brand activities and corporate infrastructure
required to support our ongoing business. We expect marketing
expenses to increase as we invest in the development of our
proprietary brands while selling costs as a percentage of revenue
decrease as our business continues to grow, due to efficiencies
associated with scaling the business, and reduced focus on non-core
brands. We expect to incur periodic acquisition and transaction
costs related to expansion efforts and to continue to invest where
appropriate in the general and administrative function to support
the increasing complexity of the cannabis business.
Three Months Ended
June 30, 2021 Compared to Three Months Ended June 30,
2020:
|
|
Three
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Total operating expenses
|
|
$
|
6,217
|
|
|
$
|
3,525
|
|
Total operating
expenses increased $2.7 million for the quarter ended June 30,
2021, compared to the same quarter in the prior year. Operating
expenses increased as a percentage of sales from 36% in the quarter
ended June 30, 2020, to 41% in the same quarter this year. While
operating expenses are expected to increase as owned brand
marketing and infrastructure expenditures are incurred in support
of revenue increases, operating expenses as a percentage of sales
are expected to continue to decline.
Six Months Ended
June 30, 2021 Compared to Six Months Ended June 30,
2020:
|
|
Six
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Total operating expenses
|
|
$
|
10,443
|
|
|
$
|
8,905
|
|
Total operating
expenses increased $1.5 million for the six months ended June 30,
2021, compared to the same period in the prior year. Stock based
compensation expense for the six months ended June 30, 2021
decreased compared to the same period in the prior year by $1.2
million as restricted stock unit grants associated with the reverse
takeover fully vested at the end of the first quarter in 2020.
Operating expenses declined as a percentage of sales from 46% in
the year to date period of 2020 to 40% in the same period of 2021.
Operating expenses are expected to increase as owned brand
marketing and infrastructure expenditures are incurred in support
of revenue increases, and operating expenses as a percentage of
sales are expected to be similar to the percentage in the first six
months of the current year.
Other Income
(Expense)
Three Months Ended
June 30, 2021 Compared to Three Months Ended June 30,
2020:
|
|
Three
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Total other income/(expense)
|
|
$
|
1,278
|
|
|
$
|
(3,944
|
)
|
Other income in the
three months ended June 30, 2021 includes a $2.6 million insurance
recovery associated with claims filed as a result of plant stress
incurred in the third quarter of 2020 while other expense in the
three months ended June 30, 2020 included a $3.5 million loss
related to selling the rights to Nevada operations and associated
assets. Interest expense in the three months ended June 30, 2021
decreased $128 from the same period in 2020, reflecting the impact
of the issuance of convertible debentures in the second quarter
last year refinancing the higher interest bridge financing that was
in place previously.
Six Months Ended
June 30, 2021 Compared to Six Months Ended June 30,
2020:
|
|
Six
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Total other income (expense)
|
|
$
|
325
|
|
|
$
|
(4,684
|
)
|
Other income in the
six months ended June 30, 2021 includes the insurance recovery
realized in the second quarter while other income in the six months
ended June 30, 2020 included the loss on disposing the Nevada
operations in the second quarter last year. Interest expense in the
six months ended June 30, 2021 decreased $361 from the same period
in 2020, due to higher interest bridge financing being outstanding
through mid-April until being refinanced by the convertible
debenture offering.
Net Income
(Loss)
Three Months Ended
June 30, 2021 Compared to Three Months Ended June 30,
2020:
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands, except per share
amounts)
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
731
|
|
|
$
|
(8,757
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.26
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.26
|
)
|
Shares used in per share
calculation:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,021
|
|
|
|
33,307
|
|
Diluted
|
|
|
201,278
|
|
|
|
33,307
|
|
We generated net
income of $731 in the quarter ended June 30, 2021, compared to a
net loss of $8,757 for the same period of the prior year, as a
result of the factors noted above.
Six Months Ended
June 30, 2021 Compared to Six Months Ended June 30,
2020:
|
|
Six
Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in thousands, except per share
amounts)
|
|
2021
|
|
|
2020
|
|
Net loss
|
|
$
|
(5,988
|
)
|
|
$
|
(16,631
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
$
|
(0.50
|
)
|
Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.50
|
)
|
Shares used in per share
calculation:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,025
|
|
|
|
28,931
|
|
Diluted
|
|
|
61,956
|
|
|
|
28,931
|
|
We generated net
loss of $5,988 in the six months ended June 30, 2021, compared to a
net loss of $16,631 for the same period of the prior year, as a
result of the factors noted above.
LIQUIDITY AND CAPITAL
RESOURCES
Our primary need
for liquidity is to fund the working capital requirements of our
business, capital expenditures, general corporate purposes, and to
a lesser extent debt service. Our primary source of liquidity is
funds generated by financing activities. Our ability to fund our
operations, to make planned capital expenditures, to make scheduled
debt payments and to repay or refinance indebtedness depends on our
future operating performance and cash flows, and ability to obtain
equity or debt financing, which are subject to prevailing economic
conditions, as well as financial, business and other factors, some
of which are beyond our control. Cash generated from ongoing
operations in 2020 were not sufficient to fund operations and, in
particular, to fund the Company’s cultivation capital
expenditures in the short-term, and growth initiatives in the
long-term. The Company raised additional funds from a $16.1 million
convertible debenture and warrant financing which was initially
funded in April 2020 and finalized in May 2020 and a $25.0 million
unit financing (with each unit consisting of one Subordinate Voting
Share and one-half of one warrant, each whole warrant exercisable
for a Subordinate Voting Share) in December 2020.
As of June 30,
2021, the Company had $9.1 million of cash and cash equivalents and
$22.0 million of working capital, compared to $25.8 million of cash
and cash equivalents and $30.9 million of working capital as of
December 31, 2020.
The Company is
focused on improving its balance sheet by improving accounts
receivable collections, right-sizing inventories and increasing
gross profits. We have taken a number of steps to improve our cash
position and to continue to fund operations and capital
expenditures including:
|
●
|
Accelerated cultivation facility renovations
which are expected to result in an increase in flower and trim
output by approximately two times in 2021, compared to the prior
year,
|
|
|
|
|
●
|
Installation of new automated environmental and
irrigation equipment designed to improve yields and optimize
greenhouse environmental conditions,
|
|
|
|
|
●
|
Developed new cultivation genetics focused on
increasing yields and potency,
|
|
|
|
|
●
|
Scaled back our investment in and support for
non-core brands,
|
|
|
|
|
●
|
Focus marketing and brand development activities
on significantly growing the Lowell brands acquired in the first
quarter of 2021,
|
|
|
|
|
●
|
As a result of the Lowell brand acquisition,
restructured our organization and identified operating, selling and
administrative expense cost efficiencies, and,
|
|
|
|
|
●
|
Developed LFS, which will commence operations in
the second half of 2021 to add revenue and cash flow
generation.
|
The Company
realized margin improvement in the first six months of 2021,
compared to the same period in the prior year, as greenhouse
renovations were substantially completed, low profit agency and
distributed brands were eliminated, and operational efficiencies
improved. The Company anticipates improvement in gross margin for
the balance of the year, due in large part to yield improvements in
cultivation.
Cash Flows
The following table
presents the Company's net cash inflows and outflows from the
condensed interim consolidated financial statements of the Company
for the six months ended June 30, 2021 and 2020:
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
Net cash used in operating
activities
|
|
$
|
(10,785
|
)
|
|
$
|
(7,473
|
)
|
|
$
|
(3,312
|
)
|
|
|
(44
|
)%
|
Net cash used in investing
activities
|
|
|
(5,271
|
)
|
|
|
(1,367
|
)
|
|
|
(3,904
|
)
|
|
|
(286
|
)%
|
Net cash (used) provided by financing
activities
|
|
|
(582
|
)
|
|
|
14,197
|
|
|
|
(14,779
|
)
|
|
|
(104
|
)%
|
Change in cash and cash equivalents and
restricted cash
|
|
$
|
(16,638
|
)
|
|
$
|
5,357
|
|
|
$
|
(21,995
|
)
|
|
|
(411
|
)%
|
Cash used in
operating activities
Net cash used in
operating activities was $10.8 million for the six months ended
June 30, 2021, an increase of $3.3 million or 44%, compared to the
six months ended June 30, 2020. The increase was primarily driven
by inventory increasing $1.5 million in the six months ended June
30, 2021 compared to a reduction of $2.0 million in the first six
months of 2020, and accounts receivable increasing by $1.5 million
in the six months ended June 30, 2021 due to higher sales levels,
compared to a decrease of $1.4 million in the first six months of
2020.
Cash used in
investing activities
Net cash used in
investing activities was $5.3 million for the six months ended June
30, 2021, an increase of $3.9 million compared to the same period
of the prior year. Cash used in the Lowell brand acquisition was
$4.6 million, which was off-set by the termination of the W Vapes
acquisition agreement. See Note 2 in notes to the condensed
consolidated financial statements. Capital expenditures were $0.6
million in the six months ended June 30, 2021, principally
associated with greenhouse renovations, compared to $4.1 million in
capital expenditures in the same period last year. Greenhouse
renovations were substantially completed at the end of the third
quarter in 2020. Remaining construction at the cultivation facility
consists primarily of the construction of a head house for
processing of flower and biomass, which is expected to be completed
around the end of the third quarter in 2021.
Cash (used in)
provided by financing activities
Net cash used in
financing activities was $0.6 million for the six months ended June
30, 2021, compared to net cash provided by financing activities of
$14.2 million in the same period of the prior year, primarily due
to proceeds from the note payable financing in the prior
year.
We expect that our
cash on hand and cash flows from operations will be adequate to
meet our operational needs for the next 12 months. The Company
intends to seek additional external financing to fund new business
initiatives, including the construction or expansion of additional
cultivation sites.
Working
Capital and Cash on Hand
The following table
presents the Company's cash on hand and working capital position as
of June 30, 2021 and December 31, 2020:
|
|
June
30,
|
|
|
December
31,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
Working capital(1)
|
|
$
|
21,970
|
|
|
$
|
30,882
|
|
|
$
|
(8,912
|
)
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,113
|
|
|
$
|
25,751
|
|
|
$
|
(16,638
|
)
|
|
|
(65
|
)%
|
______________
(1) Non-GAAP measure
- see Non-GAAP Financial Measures in this MD&A.
|
At December 31,
2020, we had $25.8 million cash and $30.9 million of working
capital, compared to $9.1 million of cash and $22.0 million of
working capital at June 30, 2021. The decrease in cash was
primarily due to funding operational losses and cash used in the
Lowell brand asset acquisition.
The Company’s
future working capital is expected to be significantly impacted by
the growth in operations, increased cultivation output, and
continuing margin improvement.
CHANGES IN OR ADOPTION OF ACCOUNTING
PRONOUNCEMENTS
This MD&A
should be read in conjunction with the audited financial statements
of the Company for the year ended December 31, 2020. Also see Note
1 to this Form 10-Q for changes of adoption of accounting
pronouncements.
CRITICAL ACCOUNTING
ESTIMATES
The preparation of
the Company’s condensed consolidated financial statements
requires management to make judgments, estimates and assumptions
that affect the application of policies and reported amounts of
assets and liabilities, and revenue and expenses. Actual results
may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period or in
the period of the revision and future periods if the review affects
both current and future periods.
Significant
judgments, estimates and assumptions that have the most significant
effect on the amounts recognized in the consolidated financial
statements are described below.
|
●
|
Estimated Useful Lives and Depreciation of
Property and Equipment – Depreciation of property and
equipment is dependent upon estimates of useful lives which are
determined through the exercise of judgment. The assessment of any
impairment of these assets is dependent upon estimates of
recoverable amounts that take into account factors such as economic
and market conditions and the useful lives of assets.
|
|
●
|
Estimated Useful Lives and Amortization of
Intangible Assets – Amortization of intangible assets is
recorded on a straight-line basis over their estimated useful
lives, which do not exceed the contractual period, if
any.
|
|
●
|
Identifiable assets acquired and liabilities
assumed are recognized at the acquisition date fair values as
defined by accounting standards related to fair value
measurements.
|
|
●
|
Fair Value of Investments in Private Entities
– The Company uses discounted cash flow model to determine
fair value of its investment in private entities. In estimating
fair value, management is required to make certain assumptions and
estimates such as discount rate, long term growth rate and,
estimated free cash flows.
|
|
●
|
Share-Based Compensation – The Company
uses the Black-Scholes option-pricing model to determine the fair
value of stock options and warrants granted. In estimating fair
value, management is required to make certain assumptions and
estimates such as the expected life of units, volatility of the
Company’s future share price, risk free rates, future
dividend yields and estimated forfeitures at the initial grant
date. Changes in assumptions used to estimate fair value could
result in materially different results.
|
|
●
|
Deferred Tax Asset and Valuation Allowance
– Deferred tax assets, including those arising from tax loss
carry-forwards, requires management to assess the likelihood that
the Company will generate sufficient taxable earnings in future
periods in order to utilize recognized deferred tax assets.
Assumptions about the generation of future taxable profits depend
on management’s estimates of future cash flows. In addition,
future changes in tax laws could limit the ability of the Company
to obtain tax deductions in future periods. To the extent that
future cash flows and taxable income differ significantly from
estimates, the ability of the Company to realize the net deferred
tax assets recorded at the reporting date could be
impacted.
|
FINANCIAL INSTRUMENTS AND FINANCIAL
RISK
The Company's
financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities;
current portion of long-term debt; and long-term debt. The carrying
values of these financial instruments approximate their fair
values.
Financial
instruments recorded at fair value are classified using a fair
value hierarchy that reflects the significance of the inputs used
to make the measurements. The hierarchy is summarized as
follows:
|
●
|
Level 1 — Quoted prices (unadjusted)
that are in active markets for identical assets or
liabilities
|
|
●
|
Level 2 — Inputs that are observable
for the asset or liability, either directly (prices) for similar
assets or liabilities in active markets or indirectly (derived from
prices) for identical assets or liabilities in markets with
insufficient volume or infrequent transactions
|
|
●
|
Level 3 — Inputs for assets or
liabilities that are not based upon observable market
data
|
The Company has
exposure to the following risks from its use of financial
instruments and other risks to which it is exposed and assess the
impact and likelihood of those risks. These risks include: market,
credit, liquidity, asset forfeiture, banking and interest rate
risk.
Credit
Risk
|
●
|
Credit risk is the risk of a potential loss
to the Company if a customer or third party to a financial
instrument fails to meet its contractual obligations. The maximum
credit exposure at June 30, 2021 and December 31, 2020 is the
carrying amount of cash and cash equivalents and accounts
receivable. All cash and cash equivalents are placed with U.S. and
Canadian financial institutions.
|
|
●
|
The Company provides credit to its customers
in the normal course of business and has established credit
evaluation and monitoring processes to mitigate credit risk but has
limited risk as a significant portion of its sales are transacted
with cash.
|
Liquidity
Risk
|
●
|
Liquidity risk is the risk that the Company
will not be able to meet its financial obligations associated with
financial liabilities. The Company manages liquidity risk through
the management of its capital structure. The Company’s
approach to managing liquidity is to ensure that it will have
sufficient liquidity to settle obligations and liabilities when
due.
|
|
●
|
In addition to the commitments outlined in
Note 15, the Company has the following contractual obligations at
June 30, 2021:
|
|
|
Maturity: <
1
Year
|
|
|
Maturity: >
1
Year
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Accounts payable and Other accrued
liabilities
|
|
$
|
8,325
|
|
|
$
|
-
|
|
Market
Risk
|
●
|
Strategic and operational risks arise if the
Company fails to carry out business operations and/or to raise
sufficient equity and/or debt financing. These strategic
opportunities or threats arise from a range of factors that might
include changing economic and political circumstances and
regulatory approvals and competitor actions. The risk is mitigated
by consideration of other potential development opportunities and
challenges which management may undertake.
|
Interest Rate
Risk
|
●
|
Interest rate risk is the risk that the fair
value or the future cash flows of a financial instrument will
fluctuate as a result of changes in market interest rates. The
Company’s interest-bearing loans and borrowings are all at
fixed interest rates; therefore, the Company is not exposed to
interest rate risk on these financial liabilities. The Company
considers interest rate risk to be immaterial.
|
Price
Risk
|
●
|
Price risk is the risk of variability in fair
value due to movements in equity or market prices. Cannabis is a
developing market and subject to volatile and possibly declining
prices year over year as a result of increased competition. Because
adult-use cannabis is a newly commercialized and regulated industry
in the State of California, historical price data is either not
available or not predictive of future price levels. There may be
downward pressure on the average price for cannabis. There can be
no assurance that price volatility will be favorable or in line
with expectations. Pricing will depend on general factors
including, but not limited to, the number of licenses granted by
the local and state governments, the supply such licensees are able
to generate, activity by unlicensed producers and sellers and
consumer demand for cannabis. An adverse change in cannabis prices,
or in investors’ beliefs about trends in those prices, could
have a material adverse outcome on the Company and its
valuation.
|
Asset Forfeiture
Risk
|
●
|
Because the cannabis industry remains illegal
under U.S. federal law, any property owned by participants in the
cannabis industry which are either used in the course of conducting
such business, or are the proceeds of such business, could be
subject to seizure by law enforcement and subsequent civil asset
forfeiture. Even if the owner of the property were never charged
with a crime, the property in question could still be seized and
subject to an administrative proceeding by which, with minimal due
process, it could be subject to forfeiture.
|
Banking
Risk
|
●
|
Notwithstanding that a majority of states
have legalized medical marijuana, there has been no change in U.S.
federal banking laws related to the deposit and holding of funds
derived from activities related to the marijuana industry. Given
that U.S. federal law provides that the production and possession
of cannabis is illegal, there are arguments that financial
institutions cannot accept for deposit funds from businesses
involved with the marijuana industry and legislative efforts to
provide greater certainty to financial institutions have not been
successful. Consequently, businesses involved in the marijuana
industry often have difficulty accessing the U.S. banking system
and traditional financing sources. The inability to open bank
accounts with certain institutions may make it difficult to operate
the business of the Company, its subsidiaries and investee
companies, and leaves their cash holdings vulnerable.
|