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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period ended September 30,
2022
or
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ________
to ________
Commission File Number 000-56254
LOWELL FARMS
INC.
|
(Exact name of Registrant as Specified in its Charter)
|
British Columbia, Canada
|
|
N/A
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
19 Quail Run Circle - Suite B, Salinas,
California.
|
|
93907
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(831)
998-8214
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class registered
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
NONE
|
NONE
|
NONE
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
Non-accelerated Filer
|
☒
|
Smaller reporting company
|
☒
|
|
|
Emerging growth company
|
☒
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
There were 100,613,094 shares of the Registrant’s Subordinate
Voting Shares outstanding as of November 14, 2022.
PART I - FINANCIAL
INFORMATION
|
Item 1. Financial Statements
LOWELL FARMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3,292 |
|
|
$ |
7,887 |
|
Accounts Receivable - net of allowance for doubtful accounts of
$1,053 and $1,139 at September 30, 2022 and December 31, 2021,
respectively.
|
|
|
5,824 |
|
|
|
8,222 |
|
Inventory
|
|
|
14,243 |
|
|
|
13,343 |
|
Prepaid expenses and other current assets
|
|
|
2,108 |
|
|
|
1,976 |
|
Total current assets
|
|
|
25,467 |
|
|
|
31,428 |
|
Property and equipment, net
|
|
|
62,722 |
|
|
|
64,779 |
|
Other intangibles, net
|
|
|
40,512 |
|
|
|
40,756 |
|
Other assets
|
|
|
915 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
129,616 |
|
|
$ |
137,379 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2,346 |
|
|
$ |
3,102 |
|
Accrued payroll and benefits
|
|
|
500 |
|
|
|
650 |
|
Notes payable, current portion
|
|
|
301 |
|
|
|
221 |
|
Lease obligation, current portion
|
|
|
2,625 |
|
|
|
2,444 |
|
Other current liabilities
|
|
|
4,564 |
|
|
|
3,706 |
|
Total current liabilities
|
|
|
10,336 |
|
|
|
10,123 |
|
Notes payable
|
|
|
6 |
|
|
|
28 |
|
Lease obligation
|
|
|
32,053 |
|
|
|
34,052 |
|
Convertible debentures
|
|
|
21,177 |
|
|
|
14,012 |
|
Mortgage obligation
|
|
|
8,760 |
|
|
|
8,857 |
|
Total liabilities
|
|
|
72,332 |
|
|
|
67,072 |
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
189,795 |
|
|
|
189,368 |
|
Accumulated deficit
|
|
|
(132,511 |
) |
|
|
(119,061 |
) |
Total stockholders’ equity
|
|
|
57,284 |
|
|
|
70,307 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
129,616 |
|
|
$ |
137,379 |
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Net revenue
|
|
$ |
8,657 |
|
|
$ |
12,467 |
|
|
$ |
34,247 |
|
|
$ |
38,653 |
|
Cost of goods sold
|
|
|
10,553 |
|
|
|
12,403 |
|
|
|
33,075 |
|
|
|
34,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(1,896 |
) |
|
|
64 |
|
|
|
1,172 |
|
|
|
4,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,620 |
|
|
|
4,211 |
|
|
|
7,433 |
|
|
|
10,496 |
|
Sales and marketing
|
|
|
601 |
|
|
|
2,544 |
|
|
|
4,109 |
|
|
|
6,210 |
|
Depreciation and amortization
|
|
|
109 |
|
|
|
260 |
|
|
|
340 |
|
|
|
751 |
|
Total operating expenses
|
|
|
3,330 |
|
|
|
7,015 |
|
|
|
11,882 |
|
|
|
17,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,226 |
) |
|
|
(6,951 |
) |
|
|
(10,710 |
) |
|
|
(13,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
2,771 |
|
|
|
(219 |
) |
|
|
2,472 |
|
|
|
1,633 |
|
Unrealized change in fair value of investment
|
|
|
(16 |
) |
|
|
(90 |
) |
|
|
(122 |
) |
|
|
35 |
|
Interest expense
|
|
|
(2,218 |
) |
|
|
(1,365 |
) |
|
|
(4,865 |
) |
|
|
(3,019 |
) |
Total other income (expense)
|
|
|
537 |
|
|
|
(1,674 |
) |
|
|
(2,515 |
) |
|
|
(1,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(4,689 |
) |
|
|
(8,625 |
) |
|
|
(13,225 |
) |
|
|
(14,472 |
) |
Provision for income taxes
|
|
|
90 |
|
|
|
75 |
|
|
|
225 |
|
|
|
213 |
|
Net loss
|
|
$ |
(4,779 |
) |
|
$ |
(8,700 |
) |
|
$ |
(13,450 |
) |
|
$ |
(14,685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.15 |
) |
Diluted
|
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.15 |
) |
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
112,026 |
|
|
|
84,922 |
|
|
|
111,995 |
|
|
|
98,949 |
|
Diluted
|
|
|
112,026 |
|
|
|
84,922 |
|
|
|
111,995 |
|
|
|
98,949 |
|
See Accompanying Notes to Condensed Consolidated
Financial Statements (unaudited)
LOWELL FARMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
(unaudited) (in thousands)
(in thousands)
|
|
Three Months Ended September 30, 2022
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance-June 30, 2022
|
|
|
112,026 |
|
|
|
203 |
|
|
$ |
189,686 |
|
|
$ |
(127,732 |
) |
|
$ |
61,954 |
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,779 |
) |
|
|
(4,779 |
) |
Share-based compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
109 |
|
|
|
- |
|
|
|
109 |
|
Balance-September 30, 2022
|
|
|
112,026 |
|
|
|
203 |
|
|
$ |
189,795 |
|
|
$ |
(132,511 |
) |
|
$ |
57,284 |
|
|
|
Three Months Ended September 30, 2021
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance-June 30, 2021
|
|
|
92,423 |
|
|
|
203 |
|
|
$ |
170,613 |
|
|
$ |
(100,369 |
) |
|
$ |
70,244 |
|
Net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,700 |
) |
|
|
(8,700 |
) |
Shares issued in connection with conversion of convertible
debentures
|
|
|
187 |
|
|
|
- |
|
|
|
37 |
|
|
|
- |
|
|
|
37 |
|
Issuance of shares associated with subordinate voting share
offering
|
|
|
18,000 |
|
|
|
- |
|
|
|
17,970 |
|
|
|
- |
|
|
|
17,970 |
|
Exercise of options
|
|
|
186 |
|
|
|
- |
|
|
|
52 |
|
|
|
- |
|
|
|
52 |
|
Exercise of warrants
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Share-based compensation expense
|
|
|
89 |
|
|
|
- |
|
|
|
361 |
|
|
|
- |
|
|
|
361 |
|
Balance-September 30, 2021
|
|
|
110,887 |
|
|
|
203 |
|
|
$ |
189,035 |
|
|
$ |
(109,069 |
) |
|
$ |
79,966 |
|
|
|
Nine Months Ended September 30, 2022
|
|
|
|
Subordinate
|
|
|
Super
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Share
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance-December 31, 2021
|
|
|
111,806 |
|
|
|
203 |
|
|
$ |
189,368 |
|
|
$ |
(119,061 |
) |
|
$ |
70,307 |
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,450 |
) |
|
|
(13,450 |
) |
Share-based compensation expense
|
|
|
220 |
|
|
|
- |
|
|
|
427 |
|
|
|
- |
|
|
|
427 |
|
Balance-September 30, 2022
|
|
|
112,026 |
|
|
|
203 |
|
|
$ |
189,795 |
|
|
$ |
(132,511 |
) |
|
$ |
57,284 |
|
|
|
Nine Months Ended September 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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,685 |
) |
|
|
(14,685 |
) |
Shares issued in connection with conversion of convertible
debentures
|
|
|
2,580 |
|
|
|
- |
|
|
|
514 |
|
|
|
- |
|
|
|
514 |
|
Issuance of shares associated with acquisitions
|
|
|
30,641 |
|
|
|
- |
|
|
|
43,259 |
|
|
|
- |
|
|
|
43,259 |
|
Issuance of shares associated with subordinate voting share
offering
|
|
|
18,000 |
|
|
|
- |
|
|
|
17,970 |
|
|
|
- |
|
|
|
17,970 |
|
Exercise of warrants
|
|
|
1,511 |
|
|
|
- |
|
|
|
718 |
|
|
|
- |
|
|
|
718 |
|
Exercise of options
|
|
|
78 |
|
|
|
- |
|
|
|
48 |
|
|
|
- |
|
|
|
48 |
|
Share-based compensation expense
|
|
|
460 |
|
|
|
- |
|
|
|
986 |
|
|
|
- |
|
|
|
986 |
|
Balance-September 30, 2021
|
|
|
110,887 |
|
|
|
203 |
|
|
$ |
189,035 |
|
|
$ |
(109,069 |
) |
|
$ |
79,966 |
|
See Accompanying Notes to Condensed Consolidated
Financial Statements (unaudited)
LOWELL FARMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited) (in thousands)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2022
|
|
|
2021
|
|
CASH FLOW FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$ |
(13,450 |
) |
|
$ |
(14,685 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,161 |
|
|
|
2,894 |
|
Amortization of debt issuance costs
|
|
|
688 |
|
|
|
643 |
|
Share-based compensation expense
|
|
|
427 |
|
|
|
986 |
|
Provision for doubtful accounts
|
|
|
551 |
|
|
|
657 |
|
Goodwill impairment
|
|
|
- |
|
|
|
357 |
|
Loss on sale of assets
|
|
|
41 |
|
|
|
- |
|
Termination of branding rights agreement
|
|
|
- |
|
|
|
152 |
|
Unrealized loss (gain) on change in fair value of investments
|
|
|
122 |
|
|
|
(125 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,847 |
|
|
|
(2,418 |
) |
Inventory
|
|
|
(900 |
) |
|
|
(2,307 |
) |
Prepaid expenses and other current assets
|
|
|
(132 |
) |
|
|
(149 |
) |
Other Assets
|
|
|
(621 |
) |
|
|
57 |
|
Accounts payable and accrued expenses
|
|
|
(48 |
) |
|
|
(4,525 |
) |
Net cash used in operating activities
|
|
$ |
(6,314 |
) |
|
$ |
(18,463 |
) |
CASH FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from asset sales
|
|
$ |
19 |
|
|
$ |
1,979 |
|
Purchases of property and equipment
|
|
|
(2,920 |
) |
|
|
(2,057 |
) |
Acquisition of business assets, net
|
|
|
- |
|
|
|
(6,643 |
) |
Net cash used in investing activities
|
|
$ |
(2,901 |
) |
|
$ |
(6,721 |
) |
CASH FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes, net of financing costs
|
|
|
6,558 |
|
|
|
- |
|
Principal payments on lease obligations
|
|
|
(1,818 |
) |
|
|
(1,744 |
) |
Payments on notes payable
|
|
|
(120 |
) |
|
|
(563 |
) |
Proceeds from subordinate voting share offering
|
|
|
- |
|
|
|
18,000 |
|
Issuance costs related to subordinate voting share offering
|
|
|
- |
|
|
|
(30 |
) |
Proceeds from exercise of warrants and options
|
|
|
- |
|
|
|
765 |
|
Net cash provided by financing activities
|
|
$ |
4,620 |
|
|
$ |
16,428 |
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(4,595 |
) |
|
|
(8,756 |
) |
Cash and cash equivalents-beginning of year
|
|
|
7,887 |
|
|
|
25,751 |
|
Cash, cash equivalents -end of period
|
|
$ |
3,292 |
|
|
$ |
16,995 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$ |
3,276 |
|
|
$ |
2,995 |
|
Cash paid during the period for income taxes
|
|
$ |
182 |
|
|
$ |
227 |
|
|
|
|
|
|
|
|
|
|
OTHER NONCASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment not yet paid for
|
|
$ |
47 |
|
|
$ |
- |
|
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 (the “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 ("U.S. GAAP") 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-K filed for the year ended
December 31, 2021. There have been no material changes to our
significant accounting policies as of and for the three and nine
months ended September 30, 2022.
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, 2021, has
been derived from the audited consolidated financial statements but
does not include all disclosures required by U.S. GAAP.
All dollar amounts in the notes to condensed consolidated financial
statements are expressed in thousands of United States dollars (“$”
or “US$”), unless otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with 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. 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
consolidated financial statements and disclosures.
In December 2019, the Financial Accounting Standards Board (the
"FASB") issued Accounting Standards Update ("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 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 evaluated the impact of ASU 2020-01, which
was effective for the Company in our fiscal year and interim
periods beginning on January 1, 2021 and it did not have a material
impact on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, 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. We evaluated the impact of ASU 2020-06, which was effective
for the Company in our fiscal year and interim periods beginning on
January 1, 2022 and it did not have a material impact on our
consolidated financial statements.
No other recently issued accounting pronouncements had or are
expected to have a material impact on our condensed consolidated
financial statements.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. ACQUISITIONS
Recently Completed Acquisitions
The Company recently completed the following asset acquisitions,
and allocated the purchase price as follows:
|
|
The Hacienda
|
|
|
Lowell Farm
|
|
|
|
|
(in thousands)
|
|
Company, LLC
|
|
|
Services
|
|
|
Total
|
|
CONSIDERATION
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,019 |
|
|
$ |
- |
|
|
$ |
4,019 |
|
Transaction costs
|
|
|
428 |
|
|
|
190 |
|
|
|
618 |
|
Note payable and other obligations
|
|
|
3,115 |
|
|
|
9,000 |
|
|
|
12,115 |
|
Fair value of subordinate voting shares
|
|
|
34,358 |
|
|
|
9,610 |
|
|
|
43,968 |
|
Total consideration
|
|
$ |
41,920 |
|
|
$ |
18,800 |
|
|
$ |
60,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PURCHASE PRICE ALLOCATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
3,300 |
|
|
$ |
- |
|
|
$ |
3,300 |
|
Accounts receivable - net
|
|
|
1,312 |
|
|
|
- |
|
|
|
1,312 |
|
Land
|
|
|
- |
|
|
|
8,261 |
|
|
|
8,261 |
|
Buildings
|
|
|
- |
|
|
|
6,268 |
|
|
|
6,268 |
|
Equipment
|
|
|
- |
|
|
|
1,221 |
|
|
|
1,221 |
|
Other tangible assets
|
|
|
739 |
|
|
|
- |
|
|
|
739 |
|
Intangible assets - brands and tradenames
|
|
|
37,299 |
|
|
|
- |
|
|
|
37,299 |
|
Intangible assets - technology and know-how and other
|
|
|
- |
|
|
|
3,050 |
|
|
|
3,050 |
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables and other liabilities
|
|
|
(730 |
) |
|
|
- |
|
|
|
(730 |
) |
Fair value of net assets acquired
|
|
$ |
41,920 |
|
|
$ |
18,800 |
|
|
$ |
60,720 |
|
|
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, the Company 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
provides drying, bucking, trimming, sorting, grading, and packaging
operations for up to 250,000 lbs. of wholesale cannabis flower
annually. The new facility processes 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 engages 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 became operational during the
third quarter of 2021.
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:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
Deposits
|
|
$ |
58 |
|
|
$ |
548 |
|
Insurance
|
|
|
233 |
|
|
|
624 |
|
Supplier advances
|
|
|
396 |
|
|
|
575 |
|
Interest and taxes
|
|
|
748 |
|
|
|
147 |
|
Licenses and permits
|
|
|
310 |
|
|
|
78 |
|
Other
|
|
|
363 |
|
|
|
4 |
|
Total prepaid and other current assets
|
|
$ |
2,108 |
|
|
$ |
1,976 |
|
4. INVENTORY
Inventory was comprised of the following items:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
Raw materials
|
|
$ |
10,539 |
|
|
$ |
8,558 |
|
Work in process
|
|
|
12 |
|
|
|
292 |
|
Finished goods
|
|
|
3,692 |
|
|
|
4,493 |
|
Total inventory
|
|
$ |
14,243 |
|
|
$ |
13,343 |
|
5. Other current liabilities
Other current liabilities were comprised of the following
items:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
Excise and cannabis tax
|
|
$ |
3,201 |
|
|
$ |
2,830 |
|
Third party brand distribution accrual
|
|
|
- |
|
|
|
78 |
|
Insurance and professional fee accrual
|
|
|
118 |
|
|
|
651 |
|
Interest and tax accrual
|
|
|
590 |
|
|
|
57 |
|
Other
|
|
|
655 |
|
|
|
90 |
|
Total other current liabilities
|
|
$ |
4,564 |
|
|
$ |
3,706 |
|
On July 26, 2022, subsidiaries of the Company entered into an
agreement with an institutional investor pursuant to which the
investor purchased a participation ("Transferred
Interests") in all rights to payment from the United States
Internal Revenue Service in respect of the Company’s employee
retention credits for the first and second quarters of 2021 (the
“ERC Claim”). The purchase price paid for the derivative payment
rights was $2.45 million, which was paid in immediately available
funds. For the three and nine months ended September 30, 2022, the
Company recorded net other income of $2,014 and an accrued other
liability of $431 to be paid to facilitate the sale of the ERC
Claim. Included in interest expense is $863 of financing related
charges.
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 nine months
ended September 30, 2022 and property and equipment, net as of
December 31, 2021, 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, 2021
|
|
$ |
15,907 |
|
|
$
|
13,950 |
|
|
$ |
50 |
|
|
$ |
2,992 |
|
|
$ |
921 |
|
|
$ |
703 |
|
|
$ |
41,530 |
|
|
$ |
76,053 |
|
Additions
|
|
|
- |
|
|
|
215 |
|
|
|
- |
|
|
|
2,142 |
|
|
|
- |
|
|
|
563 |
|
|
|
- |
|
|
|
2,920 |
|
Disposals
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(62 |
) |
|
|
(24 |
) |
|
|
- |
|
|
|
(86 |
) |
Transfers
|
|
|
(188 |
) |
|
|
1,135 |
|
|
|
- |
|
|
|
69 |
|
|
|
- |
|
|
|
(1,016 |
) |
|
|
- |
|
|
|
- |
|
Balance - September 30, 2022
|
|
$
|
15,719 |
|
|
$
|
15,300 |
|
|
$
|
50 |
|
|
$
|
5,203 |
|
|
$
|
859 |
|
|
$
|
226 |
|
|
$
|
41,530 |
|
|
$
|
78,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2021
|
|
$
|
(132 |
) |
|
$
|
(980 |
) |
|
$
|
(48 |
) |
|
$
|
(618 |
) |
|
$
|
(566 |
) |
|
$
|
- |
|
|
$
|
(8,930 |
) |
|
$
|
(11,274 |
) |
Depreciation
|
|
|
(130 |
) |
|
|
(1,714 |
) |
|
|
(1 |
) |
|
|
(472 |
) |
|
|
(125 |
) |
|
|
- |
|
|
|
(2,475 |
) |
|
|
(4,917 |
) |
Disposals and other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26 |
|
|
|
- |
|
|
|
- |
|
|
|
26 |
|
Balance - September 30, 2022
|
|
$
|
(262 |
) |
|
$
|
(2,694 |
) |
|
$
|
(49 |
) |
|
$
|
(1,090 |
) |
|
$
|
(665 |
) |
|
$
|
- |
|
|
$
|
(11,405 |
) |
|
$
|
(16,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value - September 30, 2022
|
|
$
|
15,457 |
|
|
$
|
12,606 |
|
|
$
|
1 |
|
|
$
|
4,113 |
|
|
$
|
194 |
|
|
$
|
226 |
|
|
$
|
30,125 |
|
|
$
|
62,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value - December 31, 2021
|
|
$ |
15,775 |
|
|
$ |
12,970 |
|
|
$ |
2 |
|
|
$ |
2,374 |
|
|
$ |
355 |
|
|
$ |
703 |
|
|
$ |
32,600 |
|
|
$ |
64,779 |
|
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 $1,647 and $1,040 were recorded for the
three months ended September 30, 2022 and 2021, respectively, of
which $1,527 and $584 respectively, were included in cost of goods
sold. Depreciation expense of $104 and $196 was also recorded in
other income (expense) for the three months ended September 30,
2022 and 2021, respectively.
Depreciation expense of $4,917 and $2,798 were recorded for the
nine months ended September 30, 2022 and 2021, respectively, of
which $4,416 and $1,752 respectively, were included in cost of
goods sold. Depreciation expense of $419 and $391 was also recorded
in other income (expense) for the nine months ended September 30,
2022 and 2021, respectively.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Other Intangible Assets
A reconciliation of the beginning and ending balances of intangible
assets and accumulated amortization during the nine months ended
September 30, 2022 and intangible assets, net as of December 31,
2021, are as follows:
|
|
Definite Life Intangibles
|
|
|
Indefinite Life Intangibles
|
|
|
|
|
|
|
Technology/
|
|
|
Brands &
|
|
|
|
|
(in thousands)
|
|
Know How
|
|
|
Tradenames
|
|
|
Total
|
|
Costs
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2021
|
|
$ |
3,258 |
|
|
$ |
37,707 |
|
|
$ |
40,965 |
|
Business acquisition
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Agreement termination
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance-September 30, 2022
|
|
$
|
3,258 |
|
|
$
|
37,707 |
|
|
$
|
40,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2021
|
|
$
|
(209 |
) |
|
$
|
- |
|
|
$
|
(209 |
) |
Amortization
|
|
|
(244 |
) |
|
|
- |
|
|
|
(244 |
) |
Balance-September 30, 2022
|
|
$
|
(453 |
) |
|
$
|
- |
|
|
$
|
(453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022
|
|
$
|
2,805 |
|
|
$
|
37,707 |
|
|
$
|
40,512 |
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
|
$ |
3,049 |
|
|
$ |
37,707 |
|
|
$ |
40,756 |
|
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 $244 and
$96 for the nine months ended September 30, 2022, and 2021,
respectively.
The Company estimates that amortization expense for our existing
other intangible assets will be approximately $326 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 nine months ended September 30, 2022:
|
|
Subordinate
|
|
|
Super
|
|
(in thousands)
|
|
Voting Shares
|
|
|
Voting Shares
|
|
Balance-December 31, 2021
|
|
|
111,806 |
|
|
|
203 |
|
Issuance of vested restricted stock units
|
|
|
220 |
|
|
|
- |
|
Balance-September 30, 2022
|
|
|
112,026 |
|
|
|
203 |
|
Warrants
A reconciliation of the beginning and ending balances of warrants
outstanding is as follows:
(in thousands)
|
|
|
|
Balance-December 31, 2021
|
|
|
101,906 |
|
Warrants issued in conjunction with convertible debenture
offering
|
|
|
72,081 |
|
Balance-September 30, 2022
|
|
|
173,987 |
|
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. DEBT
Debt at September 30, 2022 and December 31, 2021, was comprised of
the following:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
Vehicle loans(1)
|
|
$
|
27
|
|
|
$
|
50
|
|
Mortgage payable(2)
|
|
|
249
|
|
|
|
105
|
|
Note payable
|
|
|
25
|
|
|
|
66
|
|
Total short-term debt
|
|
|
301
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
|
|
|
|
|
|
Vehicle loans(1)
|
|
|
6
|
|
|
|
28
|
|
Mortgage payable(2)
|
|
|
8,760
|
|
|
|
8,857
|
|
Convertible debenture(3)
|
|
|
21,177
|
|
|
|
14,012
|
|
Total long-term debt
|
|
|
29,943
|
|
|
|
22,897
|
|
Total Indebtedness
|
|
$
|
30,244
|
|
|
$
|
23,118
|
|
______________________
|
|
|
|
|
|
|
|
|
(1) Primarily fixed term loans on transportation vehicles.
Weighted average interest rate at September 30, 2022 and December
31, 2021 was 6.7% and 7.8%, respectively.
|
(2) Mortgage payable associated with the acquired processing
facility. Weighted average interest rate at September 30, 2022 and
December 31, 2021 was 12.5%. Net of deferred financing costs as
September 30, 2022 and December 31, 2021 of $317 and $398,
respectively.
|
(3) Net of deferred financing costs at September 30, 2022 and
December 31, 2021 of $980 and $1,477, respectively.
|
Stated maturities of debt obligations are as follows as of
September 30, 2022:
|
|
September 30,
|
|
(in thousands)
|
|
2022
|
|
Balance of 2022
|
|
$ |
112 |
|
2023
|
|
|
22,421 |
|
2024
|
|
|
288 |
|
2025
|
|
|
330 |
|
2026 and thereafter
|
|
|
8,390 |
|
Total debt obligations
|
|
$ |
31,541 |
|
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 nine months ended
September 30, 2022, is as follows:
(in thousands)
|
|
|
|
Lease
obligation
|
|
|
|
December 31, 2021
|
|
$ |
36,496 |
|
Lease principal payments
|
|
|
(1,818 |
) |
September 30, 2022
|
|
$ |
34,678 |
|
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.
Current and long-term portions of lease obligations at September
30, 2022 and December 31, 2021, are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
Lease obligation, current portion
|
|
$ |
2,625 |
|
|
$ |
2,444 |
|
Lease obligation, long-term portion
|
|
|
32,053 |
|
|
|
34,052 |
|
Total
|
|
$ |
34,678 |
|
|
$ |
36,496 |
|
The key assumptions used in accounting for leases as of September
30, 2022 were a weighted average remaining lease term of 14.75
years and a weighted average discount rate of 6.0%.
The key assumptions used in accounting for leases as of December
31, 2021 were a weighted average remaining lease term of 17.2 years
and a weighted average discount rate of 6.0%.
The components of lease expense for the three and nine months ended
September 30, 2022 and 2021, are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Amortization of leased assets (1)
|
|
$ |
818 |
|
|
$ |
741 |
|
|
$ |
2,475 |
|
|
$ |
2,268 |
|
Interest on lease liabilities (2)
|
|
|
549 |
|
|
|
531 |
|
|
|
1,683 |
|
|
|
1,728 |
|
Total
|
|
$ |
1,367 |
|
|
$ |
1,272 |
|
|
$ |
4,158 |
|
|
$ |
3,996 |
|
1) Included in cost of goods sold, general and administrative
and other income/expense in the Condensed Consolidated Statements
of Income (Loss).
2) Included in interest expense in the Condensed Consolidated
Statements of Income (Loss).
The future lease payments with initial remaining terms in excess of
one year as of September 30, 2022 were as follows:
(in thousands)
|
|
September 30,
2022
|
|
Balance of 2022
|
|
$ |
1,163 |
|
2023
|
|
|
4,706 |
|
2024
|
|
|
4,096 |
|
2025
|
|
|
3,267 |
|
2026 and beyond
|
|
|
40,469 |
|
Total lease payments
|
|
|
53,701 |
|
Less imputed interest
|
|
|
(19,023 |
) |
Total
|
|
$ |
34,678 |
|
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
September 30, 2022, 13.2 million shares have been authorized to be
issued under the Plan and 3.4 million are available for future
grants. 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 nine months ended September 30, 2022 and 2021,
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 nine months ended September 30, 2022 and 2021,
share-based compensation expense was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Cost of goods sold
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
General and administrative expense
|
|
|
109 |
|
|
|
361 |
|
|
|
427 |
|
|
|
986 |
|
Total share-based compensation
|
|
$ |
109 |
|
|
$ |
361 |
|
|
$ |
427 |
|
|
$ |
986 |
|
The following table summarizes the status of stock option grants
and unvested awards at and for the nine months ended September 30,
2022:
|
|
Stock
|
|
|
Weighted-Average
|
|
|
Weighted
Average Remaining
|
|
|
Aggregate
|
|
(in thousands except per share amounts)
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding-December 31, 2021
|
|
|
6,598 |
|
|
$ |
0.99 |
|
|
|
4.3 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,770 |
|
|
|
0.30 |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
(1,906 |
) |
|
|
1.02 |
|
|
|
- |
|
|
|
- |
|
Outstanding-September 30, 2022
|
|
|
8,462 |
|
|
$ |
0.64 |
|
|
|
4.2 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable-September 30, 2022
|
|
|
3,862 |
|
|
$ |
0.82 |
|
|
|
3.6 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest-September 30, 2022
|
|
|
8,462 |
|
|
$ |
0.64 |
|
|
|
4.2 |
|
|
$ |
- |
|
The weighted-average fair value of options granted during the three
and nine months ended September 30, 2022, estimated as of the grant
date were $0.23 and $0.30, respectively. As of September 30, 2022,
there was $734 of total unrecognized compensation cost related to
non-vested options, which is expected to be recognized over a
remaining weighted-average vesting period of 1.32 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 nine months ended
September 30, 2022:
|
|
|
|
|
Weighted-Average
|
|
(in thousands)
|
|
RSUs
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Outstanding-December 31, 2021
|
|
|
642 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
(125 |
) |
|
|
1.49 |
|
Cancelled
|
|
|
(43 |
) |
|
|
1.11 |
|
Outstanding-September 30, 2022
|
|
|
474 |
|
|
$ |
1.11 |
|
As of September 30, 2022, there was $214 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 9 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Expected volatility
|
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
Dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate
|
|
|
3.2 |
% |
|
|
1.0 |
% |
|
|
1.3 |
% |
|
|
0.9 |
% |
Expected term in years
|
|
|
4.50 |
|
|
|
4.25 |
|
|
|
4.5 |
|
|
|
4.25 |
|
RSUs
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Expected volatility
|
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
Dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate
|
|
|
0.7 |
% |
|
|
0.9 |
% |
|
|
0.7 |
% |
|
|
0.9 |
% |
Expected term in years
|
|
|
1.00 |
|
|
|
0.74 |
|
|
|
1.00 |
|
|
|
0.74 |
|
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
September 30, 2022, was $90, representing an effective tax rate of
-1.92%, compared to an income tax expense of $75 for the three
months ended September 30, 2021, representing an effective tax rate
of -0.87%. The provision for income tax expense for the nine months
ended September 30, 2022, was $225, representing an effective tax
rate of -1.70%, compared to an income tax expense of $213 for the
nine months ended September 30, 2021, representing an effective tax
rate of -1.47%.
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
was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands except per share amounts)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Net income (loss)
|
|
$ |
(4,779 |
) |
|
$ |
(8,700 |
) |
|
$ |
(13,450 |
) |
|
$ |
(14,685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.15 |
) |
Diluted
|
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.15 |
) |
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
112,026 |
|
|
|
84,922 |
|
|
|
111,995 |
|
|
|
98,949 |
|
Diluted
|
|
|
112,026 |
|
|
|
84,922 |
|
|
|
111,995 |
|
|
|
98,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average potentially diluted shares (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
112,026 |
|
|
|
84,922 |
|
|
|
111,995 |
|
|
|
98,949 |
|
Total weighted average potentially diluted shares:
|
|
|
112,026 |
|
|
|
84,922 |
|
|
|
111,981 |
|
|
|
98,949 |
|
(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 September 30, 2022 and December 31, 2021 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
As of September 30, 2022, the Company has entered into purchase
commitments for additional manufacturing equipment. The remaining
purchase commitment of $2.9 million is due in 2023 as the equipment
is manufactured and delivered.
Contingencies
The Company’s operations are subject to a variety of local and
state regulations. 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
regulations as of September 30, 2022, 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 2022, 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
and tax authorities do not grant relief from penalties, 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 September 30, 2022, 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 being recorded
in the quarter ended June 30, 2021.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. GENERAL AND ADMINISTRATIVE EXPENSES
For the three and nine months ended September 30, 2022 and 2021,
general and administrative expenses were comprised of:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Salaries and benefits
|
|
$ |
1,338 |
|
|
$ |
2,142 |
|
|
$ |
3,984 |
|
|
$ |
4,540 |
|
Professional fees
|
|
|
212 |
|
|
|
413 |
|
|
|
734 |
|
|
|
1,672 |
|
Share-based compensation
|
|
|
109 |
|
|
|
361 |
|
|
|
427 |
|
|
|
986 |
|
Insurance
|
|
|
338 |
|
|
|
348 |
|
|
|
1,043 |
|
|
|
1,147 |
|
Administrative
|
|
|
623 |
|
|
|
947 |
|
|
|
1,245 |
|
|
|
2151 |
|
Total general and administrative expenses
|
|
$ |
2,620 |
|
|
$ |
4,211 |
|
|
$ |
7,433 |
|
|
$ |
10,496 |
|
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.
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. Amounts paid to OMG for the three and
nine months ended September 30, 2022 and 2021, were $36 and $nil,
respectively.
18. SEGMENT INFORMATION
The Company’s operations are comprised of a single reporting
segment engaged in the production and sale of cannabis products in
the United States. As the operations comprise a single reporting
segment, amounts disclosed in the financial statements also
represent a single reporting segment.
19. SUBSEQUENT EVENTS
Subsequent to September 30, 2022 the Company created a strategic
alternatives committee of the Board to evaluate acquisition related
inquiries of the Company.
The Company has evaluated other potential subsequent events through
November 14, 2022, the date the financial statements were available
to be issued. No further material subsequent events were
identified.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2022 AND 2021
This management’s discussion and analysis (“MD&A”) of the
financial condition and results of operations of the Company is for
the three and nine months ended September 30, 2022 and 2021. It is
supplemental to, and should be read in conjunction with, the
Company’s consolidated financial statements and the accompanying
notes for the year ended December 31, 2021. All dollar amounts in
this MD&A are expressed in thousands of United States dollars
(“$” or “US$”), unless otherwise indicated.
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 Form 10-K for the
year ended December 31, 2021, (the “Form 10-K”). 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 select third-party brands throughout the
State of California, the largest cannabis market in the world. We
also provide manufacturing, extraction and distribution services to
select third-party cannabis and cannabis branding companies and
sell proprietary bulk flower and broker third-party bulk flower to
licensed distribution and manufacturing companies in
California.
On February 25, 2021, we acquired the Lowell Herb Co. and Lowell
Smokes trademark brands, product portfolio and production assets
from The Hacienda Company and its subsidiaries (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. We
believe our pre-existing strengths in cultivation and sourcing will
enhance the value of the brands and products acquired in the Lowell
Acquisition. Additionally, we presently license the Lowell Herb Co.
and Lowell Smokes brands to Ascend Wellness Holdings, LLC at their
retail locations in Illinois and Massachusetts.
The Lowell Acquisition also substantially broadened our customer
base by adding highly developed direct-to-consumer channels to
complement our pre-existing network of retail dispensary customers.
This addition to our customer base has resulted in broader
geographic coverage in California by the combined business.
On June 29, 2021, we announced the C Quadrant Acquisition, pursuant
to which we acquired real property and related assets of a cannabis
drying and midstream processing facility located in Monterey
County, nearby our flagship cultivation operation. The 10-acre,
40,000 square foot processing facility provides drying, bucking,
trimming, sorting, grading, and packaging operations for up to
250,000 pounds of wholesale cannabis flower annually. The new
facility processes nearly all the cannabis that we grow at our
existing cultivation operations. Additionally, we have commissioned
the Lowell Farm Services (“LFS”) business unit, which engages in
fee-based processing services for regional growers throughout
California.
In addition to the processing facility acquired in the C Quadrant
Acquisition, we operate a 225,000 square foot greenhouse
cultivation 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.
Product Offerings
Our product offerings include flower, vape pens, oils, extracts,
chocolate edibles, mints, gummies, tinctures and pre-rolls,
including our automated pre-roll line called 35’s. We sell our
products under owned and third-party brands.
Brands we own include the following:
|
o
|
Lowell Herb Co. and Lowell Smokes – premium packaged flower,
pre-roll, concentrates, and vape products.
|
|
o
|
House Weed – a value driven flower, vape and concentrates offering,
delivering a flavorful and potent experience with dependable
quality.
|
|
|
|
|
o
|
Kaizen – a premium brand offering a full spectrum of cannabis
concentrates.
|
|
|
|
|
o
|
Moon – offers a range of cannabis bars, bites and fruit chews
in a variety of flavors, focusing on high- potency, high-quality
and high-value.
|
|
o
|
Original Pot Company – infuses its baked edibles with high quality
cannabis.
|
|
|
o
|
Cypress Reserve – a premium flower brand reserved for the Company’s
highest potency harvests from its greenhouses.
|
|
o
|
Flavor Extracts – provides crumble and terp sugar (which is an
edible cannabis product with isolated and enhanced flavor and
aromas) products that are hand-selected for optimum flavor and
premium color.
|
The Lowell Herb Co. and Lowell Smokes brands were acquired in the
Lowell Acquisition. Our remaining brands were developed prior to
such acquisition.
We exclusively manufacture and distribute Dr. May tinctures and
topicals in California. We also provide third party extraction
processing and third-party distribution services, and bulk
extraction concentrates and flower to licensed manufacturers and
distributors. Our focus is on our owned brands and limiting the
number of third-party brands manufactured and distributed. The
Lowell Acquisition is a significant expansion of this strategy.
Cultivation
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.
The first harvest was in the third quarter of calendar
year 2017. In 2021 we completed a series of facility upgrades
to our greenhouses and supporting infrastructure, which increases
facility output approximately four times from that generated in
2019. These facility improvements include separate grow rooms
configured with drop-shades, supplemental lighting, upgraded
electrical capability with environmental controls and automated
fertigation, and raised gutter height in two of the greenhouses. We
harvested approximately 9,000, 17,000 and 32,000 pounds of flower
in 2019, 2020 and 2021, respectively, and are currently projecting
to harvest between 40,000 and 42,000 pounds in 2022 as a result of
these facility upgrades and improvements. We have invested
approximately $7.4 million in our greenhouse renovations to date.
The completion and commissioning of the renovated greenhouses is
expected to further reduce unit costs of cultivation and make
available additional cannabis flower and feedstocks for our
extraction and processing, packaging and distribution
operations.
We maintain a strict quality control process which facilitates a
predictable output yield of pesticide-free products.
Extraction
Extraction operations were first launched by us in the third
quarter of 2017 with the commissioning of our 5,000 square foot
licensed laboratory within our Salinas manufacturing facility. The
lab contains six separate rooms that can each house one independent
closed loop volatile extraction machine (meaning that the machine
does not expose the products to open air), which are designed to
process the cannabis through the application of hydrocarbon or
ethanol solvents, to extract certain concentrated resins and oils
from the dried cannabis. This process is known as volatile
extraction, which is an efficient and rapid method of extracting
cannabis. These resins, oils and concentrates are sold as
ingestible products known as “shatter,” rosin, wax, sugar,
diamonds, “caviar,” and “crumble”.
We currently own and operate five closed loop volatile extraction
machines, each housed in a separate room, and each having the
capacity to process approximately 100 pounds of dry product per day
yielding approximately 5 kilograms of cannabis concentrates. We
also currently own and operate 14 purge ovens to work in
conjunction with the 5 extraction units in the laboratory.
Purge ovens, also known as vacuum ovens, are used after the
processing by the extraction units to remove the solvents from the
end-product in a low pressure and high heat environment.
In 2021 we commenced solventless extraction activities with the
capacity to process approximately 120 pounds of biomass daily
yielding approximately 4 kilograms of cannabis concentrates. We
currently own and operate one extraction unit which works in
conjunction with 5 freeze dryers, 2 ice machines, 3 water
filtration systems, 1 UV sterilizer, 2 rosin presses and an 80
square foot walk-in freezer. The solventless process yields a
superior product to the volatile extraction process and is the
fastest growing category in concentrates.
The extraction operations utilize cannabis feedstocks from our
cultivation site, supplemented with feedstock acquired from
multiple third-party cultivations. Concentrate production is
packaged as branded extracts, such as crumble, shatter, wax and
sugar for distribution, incorporated into its manufactured edible
products and sold in bulk to other licensed enterprises. In
addition, extraction is provided on a fee-based service on
third-party material.
Manufacturing
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 and sourced cannabis oil, which can be supplied
from multiple external sources. Our manufacturing operations
produce a wide variety of cannabis-infused products and occupies
10,000 square feet in our 15,000 square foot manufacturing facility
in Salinas. Our products include chocolate confections, 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 all
regulatory requirements, including the California Medicinal and
Adult-Use Cannabis Regulation and Safety Act.
We also operate an automated flower filling and packaging line and
an automated pre-roll assembly line for making finished goods in
those respective categories with feedstock grown by the Lowell
Farms cultivation operations.
Processing
On June 29, 2021 we announced that we acquired real property and
related assets of a cannabis drying and midstream processing
facility located in Monterey County, nearby our flagship
cultivation operation. The 10-acre, 40,000 square foot processing
facility provides drying, bucking, trimming, sorting, grading, and
packaging operations for up to 250,000 pounds of wholesale cannabis
flower annually. The new facility processes nearly all the cannabis
that we grow at our existing cultivation operations. Additionally,
we commissioned the new business unit LFS, which engages in
fee-based processing services for regional growers from primarily
the Salinas Valley area, one of the largest and fastest growing
cannabis cultivation regions in the country, as well as throughout
California. LFS operations became operational during the third
quarter of 2021.
Distribution and Distribution Services
We have a primary distribution center, warehouse and packing
facility located in Salinas, California and a service center and
distribution depot in Los Angeles, California. We provide physical
warehousing and delivery to retail dispensary customers throughout
the State of California for our manufactured products as well as
third party branded products distributed on behalf of other
licensed product manufacturers. Deliveries are made daily to over
80% of the licensed dispensaries in California utilizing a fleet of
20 owned and leased vehicles. We provide warehousing, delivery,
customer service and collection services for select third-party
brands. We will increase our fleet of vehicles as necessary to meet
delivery requirements from increased proprietary and third-party
brand sales.
Technology Platform
We maintain an automated, on-demand supply chain logistics
platform, utilizing e-commerce, enterprise resource planning and
other technology to manage product movement, order taking and
logistics needs.
Inventory Management
We have comprehensive inventory management procedures, which are
compliant with the rules set forth by the California Department of
Cannabis Control (formerly the California Department of
Consumer Affairs’ Bureau of Cannabis Control) and all other
applicable state and local laws, regulations, ordinances, and other
requirements. These procedures ensure strict control over Lowell
Farms’ cannabis and cannabis product inventory from cultivation or
manufacture to sale and delivery to a licensed dispensary,
distributor or manufacturer, or disposal as cannabis waste. Such
inventory management procedures also include measures to prevent
contamination and maintain the quality of the products cultivated,
manufactured or distributed.
Sources, Pricing and Availability of Raw Materials,
Component Parts or Finished Products
We presently source flower feedstock for sale primarily from our
cultivation facility. We have developed relationships with local
cannabis growers whereby flower quantities are readily available at
competitive prices should the sourcing need arise. We source our
biomass needs in extraction from our cultivation facility and from
third-party suppliers. Remaining biomass material is readily
available from multiple sources at competitive prices. Lowell Farms
presently manufactures a substantial portion of cannabis oil and
distillate needs from its internal extraction operations. A small
amount of specialized cannabis oil is procured from multiple
external sources at competitive prices. Lowell Farms manufactures
all finished goods for its proprietary brands. Third party
distributed brand product is sourced directly from third party
partners.
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
and tax 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 Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,779
|
)
|
|
$
|
(8,700
|
)
|
|
$
|
(13,450
|
)
|
|
$
|
(14,685
|
)
|
Interest expense
|
|
|
1,355
|
|
|
|
1,365
|
|
|
|
4,002
|
|
|
|
3,019
|
|
Provision for income taxes
|
|
|
90
|
|
|
|
75
|
|
|
|
225
|
|
|
|
213
|
|
Depreciation and amortization in cost of goods sold
|
|
|
1,528
|
|
|
|
584
|
|
|
|
4,416
|
|
|
|
1,752
|
|
Depreciation and amortization in operating expenses
|
|
|
110
|
|
|
|
260
|
|
|
|
340
|
|
|
|
751
|
|
Depreciation and amortization in other income (expense)
|
|
|
104
|
|
|
|
196
|
|
|
|
419
|
|
|
|
391
|
|
EBITDA(1)
|
|
|
(1,592
|
)
|
|
|
(6,220
|
)
|
|
|
(4,048
|
)
|
|
|
(8,559
|
)
|
Investment and currency (gains)/ losses
|
|
|
16
|
|
|
|
90
|
|
|
|
122
|
|
|
|
(35
|
)
|
Goodwill impairment
|
|
|
-
|
|
|
|
357
|
|
|
|
-
|
|
|
|
357
|
|
Share-based compensation
|
|
|
109
|
|
|
|
361
|
|
|
|
427
|
|
|
|
986
|
|
Net effect of cost of goods on mark-up of acquired finished goods
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
662
|
|
Transaction and other special charges(2)
|
|
|
(2,014
|
)
|
|
|
225
|
|
|
|
(1,984
|
)
|
|
|
(2,424
|
)
|
Adjusted EBITDA(1)
|
|
$
|
(3,481
|
)
|
|
$
|
(5,187
|
)
|
|
$
|
(5,483
|
)
|
|
$
|
(9,013
|
)
|
__________________
(1)Non-GAAP measure
(2) For the three and nine months ended September 30,
2022, net of $863 of financing charges related to the ERC claim,
included in interest expense on the Condensed Consolidated
Statements of Income (Loss).
RESULTS OF OPERATIONS
Three Months Ended
September 30, 2022, Compared to Three Months Ended September 30,
2021
Revenue
We derive our revenue from sales of extracts, distillates, branded
and packaged cannabis flower, pre-rolls, concentrates and edible
products to retail licensed dispensaries and bulk flower, biomass
and concentrates to licensed manufacturers and distributors in the
state of California. In addition, we distribute proprietary and
several third-party brands throughout the state of California, and
commencing in the quarter ended September 30, 2021, we began
providing fee services for drying and processing third-party
product for licensed cultivators in the State of California and as
well as licensing the Lowell Smokes brand in Illinois and
Massachusetts. The Company recognizes revenue upon delivery of
goods to customers since at this time performance obligations are
satisfied.
The Company classifies its revenues into the following major
categories: Consumer Packaged Goods (“CPG”) revenue, Bulk revenue,
Lowell Farm Services (“LFS”) revenue, and Licensing revenue.
|
·
|
CPG products are primarily sales of proprietary brands of the
Company.
|
|
|
|
|
·
|
Bulk product includes revenue from flower, biomass and distillates
sales.
|
|
|
|
|
·
|
LFS revenue is related to our processing facility that provides
drying, bucking, trimming, sorting, grading, and packaging
services.
|
|
|
|
|
·
|
Licensing revenue includes fees from licensing the Lowell Smokes
brand and sales of packaging and support services associated with
non-California based activities.
|
Previously the Company categorized its revenues as owned, agency
and distributed brands and has reclassified the prior period
categorization to conform with current period presentation.
Revenue by Category
Three Months Ended September 30, 2022, Compared to Three Months
Ended September 30, 2021:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$ Change
|
|
|
% Change
|
|
CPG
|
|
$ |
6,137 |
|
|
$ |
8,937 |
|
|
$ |
(2,800 |
) |
|
|
-31 |
% |
Bulk
|
|
|
1,956 |
|
|
|
1,915 |
|
|
|
41 |
|
|
|
2 |
% |
Lowell Farm Services
|
|
|
254 |
|
|
|
924 |
|
|
|
(670 |
) |
|
|
-73 |
% |
Licensing
|
|
|
310 |
|
|
|
691 |
|
|
|
(381 |
) |
|
|
-55 |
% |
Net revenue
|
|
$ |
8,657 |
|
|
$ |
12,467 |
|
|
$ |
(3,810 |
) |
|
|
-31 |
% |
CPG revenues decreased for the three months ended September 30,
2022, compared to the same period of the prior year, primarily as a
result of lower packaged flower, concentrates and edible sales.
Lowell brand revenues for the three months ended September 30, 2022
were $5.0 million and represented 82% of CPG revenues compared to
$5.7 million in revenue and 64% of CPG sales in the same quarter in
the prior year. The decline in CPG revenues from the prior year was
primarily driven by declines in the House Weed brand and a $406k
impact of an accounting change of recording slotting fees as a
reduction in revenue in the current period, as opposed to operating
expenses in the same period of the prior year. House Weed brand
sales decreased $1.0 million in the three months ended September
30, 2022 compared to the same period last year. Third-party agency
and distributed brand revenue declined from $0.4 million in the
third quarter of 2021 to $0.2 million in the third quarter of 2022
reflecting the strategic decision made in 2021 to focus only on
agency and distributed brands that realize a higher per order sales
level. Edible and concentrates branded sales declined $0.7 million
in the current quarter compared to the same period last year as we
focus on other product offerings.
Bulk sales increased $0.04 million in the third quarter of 2022
compared to the same period in the prior year. Overall, sales
remained consistent between periods, despite changes in bulk
pricing.
LFS and licensing revenues were new activities initiated in the
second half of 2021 generating $0.3 million and $0.3 million in the
current quarter, respectively, compared to generating $0.9 million
and $0.7 million in the same period of the prior year,
respectively. The Company continues to pursue new customers
with quality flower to generate continued growth with LFS
processing fees and is planning additional licensing in Colorado
and New Mexico.
Cost of Sales, Gross Profit and Gross
Margin
Cost of goods sold consist of direct and indirect costs of
production processing 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 for a few brands and
processes for cultivators that do not have the capability,
licensing or capacity to process their own products. The fees
earned for these activities absorbs fixed overhead in manufacturing
and generates service revenue. Our focus in 2022 is expected to be
on flower, pre-rolls and concentrates, on processing owned and
third party product at our recently acquired processing facility,
and on increased vertical integration utilizing greater internally
sourced biomass for concentrates, 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 September 30, 2022, compared to Three Months
Ended September 30, 2021:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Net revenue
|
|
$
|
8,657
|
|
|
$
|
12,467
|
|
|
$
|
(3,810
|
)
|
|
|
-31
|
%
|
Cost of goods sold
|
|
|
10,553
|
|
|
|
12,403
|
|
|
$
|
(1,850
|
)
|
|
|
-15
|
%
|
Gross profit (loss)
|
|
$
|
(1,896
|
)
|
|
$
|
64
|
|
|
$
|
(1,960
|
)
|
|
|
-3,063
|
%
|
Gross margin
|
|
|
-21.9
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
Gross margin was -21.9% and 0.5% in the three months ended
September 30, 2022 and 2021, respectively. The change between
periods in gross profit and gross margin is primarily due to one
time inventory related adjustments, manufacturing variances and
sales related discounts recognized during the third quarter of the
current year.
We expect to realize improved gross margin throughout the remainder
of 2022 and into 2023 as a result of the launch of Lowell 35
pre-rolls at the end of the current quarter and with improved
operating leverage at production facilities. With new customers and
an anticipated increase in LFS revenues, as well as an increase in
licensing fees, we expect that performance will improve over future
periods.
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 decline from 2021 levels while we continue to invest in
the development of our proprietary brands. Selling costs as a
percentage of retail revenue are expected to decrease as our
business continues to grow, due to efficiencies associated with
scaling the business, and reduced focus on non-core brands.
Three Months Ended September 30, 2022, Compared to Three Months
Ended September 30, 2021:
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Total operating expenses
|
|
$
|
3,330
|
|
|
$
|
7,015
|
|
|
$
|
(3,685)
|
|
|
|
-53
|
%
|
% of net revenue
|
|
|
38
|
%
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
Total operating expenses decreased $3.7 million for the three
months ended September 30, 2022 compared to the same period of the
prior year, primarily reflecting headcount reductions between
years, operating efficiencies and fewer professional fees incurred
in the third quarter of the current year as more services are
performed by employees. Operating expenses decreased as a
percentage of sales from 56% for the three months ended September
30, 2021, to 38% for the three months ended September 30, 2022.
Other Income (Expense)
Three Months Ended September 30, 2022, Compared to Three Months
Ended September 30, 2021:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Total other income (expense)
|
|
$
|
537
|
|
|
$
|
(1,674)
|
|
|
$
|
2,211
|
|
|
|
132
|
%
|
%
of net revenue
|
|
|
-6
|
%
|
|
|
-13
|
%
|
|
|
|
|
|
|
|
|
Other income (expense) changed $2.2 million for the three months
ended September 30, 2022 compared to the same period of the prior
year, primarily due to a sale of an Employee Retention Credit of
$2,800 that was earned during the period, net of financing costs of
$862 to facilitate the sale of the credit.
Net Income (Loss)
Three Months Ended September 30, 2022, Compared to Three Months
Ended September 30, 2021:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Net income (loss)
|
|
$
|
(4,779)
|
|
|
$
|
(8,700)
|
|
|
$
|
3,921
|
|
|
|
45
|
%
|
Net loss was $4.8 million in the quarter ended September 30, 2022,
compared to net loss of $8.7 million for the same period of the
prior year as a result of the factors noted above.
Nine Months Ended
September 30, 2022, Compared to Nine Months Ended September 30,
2021
Revenue by Category
Nine Months Ended September 30, 2022, Compared to Nine Months Ended
September 30, 2021:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$ Change
|
|
|
% Change
|
|
CPG
|
|
$ |
22,658 |
|
|
$ |
24,891 |
|
|
$ |
(2,233 |
) |
|
|
-9 |
% |
Bulk
|
|
|
7,130 |
|
|
|
12,130 |
|
|
|
(5,000 |
) |
|
|
-41 |
% |
Lowell Farm Services
|
|
|
3,151 |
|
|
|
927 |
|
|
|
2,224 |
|
|
|
239 |
% |
Licensing
|
|
|
1,308 |
|
|
|
705 |
|
|
|
603 |
|
|
|
86 |
% |
Net revenue
|
|
$ |
34,247 |
|
|
$ |
38,653 |
|
|
$ |
(4,406 |
) |
|
|
-11 |
% |
CPG revenues decreased to $22.7 million for the nine months ended
September 30, 2022, a decline of $2.2 million compared to the same
period in the prior year. Despite the overall decline in CPG
revenue, Lowell brand revenues for the nine months ended September
30, 2022 increased to $14.9 million and represented 66% of CPG
revenues compared to $12.4 million and 51% of CPG revenues in the
same period in 2021. House Weed brand sales increased to $5.8
million in the nine months ended September 30, 2022 compared to
$3.6 million in the same period last year, reflecting increased
packaged flower sales and introducing new vape and concentrates
offerings in the House Weed brand. Offsetting the increase in
Lowell brands and House Weed sales was a decline in third-party
agency and distributed brand revenue from $2.4 million in the first
nine months of 2021 to $0.8 million in the first nine months of
2022 and a decline in edible and concentrates branded sales of $4.7
million in the first nine months of 2022 compared to the same
period last year as we focus efforts on packaged flower and
pre-rolls. Included in CPG revenues for the current period is a
$406k impact of an accounting change of recording slotting fees as
a reduction in revenue in the current year, as opposed to operating
expenses.
Bulk sales decreased by $5.0 million in the first nine
months of 2022 compared to the same period in the prior year,
primarily reflecting lower sales of third party flower and a
decline in average bulk sales prices for Lowell - cultivated flower
between periods. Bulk flower prices in the first nine months ended
September 30, 2022, declined approximately 45% from the same period
in the prior year.
LFS and licensing revenues were new activities initiated in the
second half of 2021 generating $3.1 million and $1.3 million in the
nine months ended September 30, 2022 and 2021, respectively,
compared to generating $0.9 million and $0.7 million in the same
period of the prior year, respectively. LFS
revenues are inclusive of $1.8 million of revenue
generated from sales of third-party bulk flower processed.
A strategic decision was made in 2021 to focus only on agency and
distributed brands that realize a higher per order sales level.
Cost of Sales, Gross Profit and Gross
Margin
Nine Months Ended September 30, 2022, Compared to Nine Months Ended
September 30, 2021:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Net revenue
|
|
$
|
34,247
|
|
|
$
|
38,653
|
|
|
$
|
(4,406)
|
|
|
|
-11
|
%
|
Cost of goods sold
|
|
|
33,075
|
|
|
|
34,317
|
|
|
$
|
(1,242)
|
|
|
|
-4
|
%
|
Gross profit
|
|
$
|
1,172
|
|
|
$
|
4,336
|
|
|
$
|
(3,164)
|
|
|
|
-73
|
%
|
Gross margin
|
|
|
3.4
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
Gross margin was 3.4% and 11.2% in the nine months ended September
30, 2022 and 2021, respectively. The change between periods in
gross profit and gross margin is primarily due to lower bulk
selling prices in 2022 and due to one time inventory related
adjustments, manufacturing variances and sales related discounts
recognized during the third quarter of the current year.
We expect to realize improved gross margin throughout the remainder
of 2022 and in 2023 as a result of the continuing growth of retail
flower , the launch of new pre-roll products, an anticipated
increase in LFS revenues as we pursue new customers, and an
increase in licensing fees from out of state partners. We expect
that pricing will remain soft in the remainder of 2022 and into the
first quarter of 2023 and will maintain relatively stable
throughout the remainder of the harvests during the year.
Total Operating Expenses
Nine Months Ended September 30, 2022, Compared to Nine Months Ended
September 30, 2021:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Total operating expenses
|
|
$
|
11,882
|
|
|
$
|
17,457
|
|
|
$
|
(5,575)
|
|
|
|
-32
|
%
|
% of net revenue
|
|
|
35
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
Total operating expenses decreased $5.6 million for the nine months
ended September 30, 2022 compared to the same period of the prior
year, primarily reflecting increased sales and marketing activity
supporting the introduction of Lowell brands in 2021 and lower
headcount and cost efficiencies experienced in 2022. Operating
expenses decreased as a percentage of sales from 45% for the nine
months ended September 30, 2021 to 35% for the nine months ended
September 30, 2022. Operating expenses in the remainder of 2022 are
expected to be relatively flat or decline slightly year over year
despite continuing investment in owned brand marketing and
infrastructure expenditures in support of revenue increases, and
operating expenses as a percentage of retail sales are expected to
continue to decline.
Other Income (Expense)
Nine Months Ended September 30, 2022, Compared to Nine Months Ended
September 30, 2021:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Total other income (expense)
|
|
$
|
(2,515)
|
|
|
$
|
(1,351)
|
|
|
$
|
(1,164)
|
|
|
|
86
|
%
|
% of net revenue
|
|
|
-7
|
%
|
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
Other income (expense) changed $1.2 million for the nine months
ended September 30, 2022 compared to the same period of the prior
year. The results in the current year include recognition of a sale
of an Employee Retention Credit of $2.8 million that was earned
during the period, net of financing costs of $862 to facilitate the
sale of the credit, and the prior year results included a $2.6
million insurance recovery.
Net Income (Loss)
Nine Months Ended September 30, 2022, Compared to Nine Months Ended
September 30, 2021:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Net income (loss)
|
|
$
|
(13,450)
|
|
|
$
|
(14,685)
|
|
|
$
|
1,235
|
|
|
|
8
|
%
|
Net loss was $13.4 million in the nine months ended September 30,
2022 compared to a net loss of $14.7 million 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 debt service. Historically our primary
source of liquidity has been 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 operations, for the first
nine months of 2022, were not sufficient to fund operations,
capital expenditures and debt service. For the balance of 2022, we
expect our primary source of liquidity will be funds generated by
operations, supported in part by financing should it be available
and economically feasible.
At September 30, 2022, we had $3.2 million in cash and cash
equivalents and $15.1 million of working capital, compared to $7.9
million of cash and cash equivalents and $21.3 million of working
capital at December 31, 2021. Cash and cash equivalents and
proceeds from convertible debenture financing in the first nine
months of 2022 funded operations, capital expenditures and debt
service.
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 ability to fund operations and capital expenditures
including:
|
·
|
Accelerated cultivation facility and operating assets renovations
to increase flower and trim output;
|
|
|
|
|
·
|
Developed new cultivation genetics focused on increasing yields and
potency;
|
|
|
|
|
·
|
Scaled back our investment in and support for non-core brands;
|
|
|
|
|
·
|
Focused marketing and brand development activities on significantly
growing the Lowell brands acquired in the first quarter of
2021;
|
|
|
|
|
·
|
Restructured our organization and identified operating, selling and
administrative expense cost efficiencies;
|
|
|
|
|
·
|
Developed LFS, which commenced operations in the third quarter of
2021 to add revenue and cash flow generation, and;
|
|
|
|
|
·
|
Licensed the Lowell Smokes brand in Illinois
and Massachusetts, with Colorado and New Mexico expected
to be added in the remainder of 2022.
|
The Company anticipates continued improvement in the remainder of
2022 and in 2023 due in large part to yield improvements in
cultivation, greater revenues from licensing operations and
improved operational efficiency.
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 nine months ended September 30,
2022 and 2021:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Net cash used in operating activities
|
|
$
|
(6,314)
|
|
|
$
|
(18,463)
|
|
|
$
|
12,149
|
|
|
|
-66
|
%
|
Net cash used in investing activities
|
|
|
(2,901)
|
|
|
|
(6,721)
|
|
|
|
3,820
|
|
|
|
-57
|
%
|
Net cash provided by financing activities
|
|
|
4,620
|
|
|
|
16,428
|
|
|
|
(11,808)
|
|
|
|
-72
|
%
|
Change in cash and cash equivalents
|
|
$
|
(4,595)
|
|
|
$
|
(8,756)
|
|
|
$
|
4,161
|
|
|
|
48
|
%
|
Cash used in operating activities
Net cash used in operating activities was $6.3 million for the nine
months ended September 30, 2022, a decrease in cash used of $12.1
million or 66%, compared to the nine months ended September 30,
2021. The decrease for the nine months ended September 30, 2022,
compared to the same period in 2021, was primarily driven by
accounts receivable decreasing by $1.8 million in the nine months
ended September 30, 2022, reflecting increased collection efforts,
compared to an increase of $2.4 million in the same period in 2021,
accounts payable and accrued expenses decreasing $48k in the nine
months ended September 30, 2022, compared to a reduction of $4.5
million in the same period of 2021, net loss decreasing $1.2
million for the nine months ended September 30, 2022, compared to
the same period in 2021 and depreciation and amortization expense
increasing $2.3 million between periods.
Cash used in investing activities
Net cash used in investing activities was $2.9 million for the nine
months ended September 30, 2022, a decrease in cash used of $3.8
million or 57%, compared to the same period of the prior year. The
change in cash used between periods was primarily due to the Lowell
brand acquisition of $6.6 million which was off-set in part by net
proceeds of $2.0 million from the sale of assets during the nine
months ended September 30, 2021. The Company invested $2.9 million
into machinery primarily related to the production of the new
Lowell 35 pre-rolls in the nine months ended September 30, 2022
compared to equipment purchases of $2.1 million in the same period
of the prior year.
Cash provided by financing activities
Net cash provided by financing activities was $4.6 million for the
nine months ended September 30, 2022, a decrease in cash provided
by financing activities of $11.8 million compared to the same
period of the prior year. The change was primarily due to $18
million of subordinate share offerings in the nine months ended
September 30, 2021 compared to $6.6 million of new convertible debt
offerings in the nine months ended September 30, 2022.
We are evaluating cash on hand, cash flows from operations and
potential new sources of funding to meet the operating needs of the
organization. The Company’s strategic alternatives committee will
continue to evaluate these factors in conjunction with evaluating
discussions with interested parties.
Working Capital and Cash on Hand
The following table presents the Company’s cash on hand and working
capital position as of September 30, 2022 and December 31,
2021:
|
|
September 30,
|
|
|
December 31,
|
|
|
Change
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
$
|
|
|
%
|
|
Working capital(1)
|
|
$
|
15,131
|
|
|
$
|
21,305
|
|
|
$
|
(6,174)
|
|
|
|
-29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,292
|
|
|
$
|
7,887
|
|
|
$
|
(4,595)
|
|
|
|
-58
|
%
|
_________________
(1) Non-GAAP
measure - see Non-GAAP Financial Measures in this
MD&A. (Total current assets less total current
liabilities)
At September 30, 2022, we had $3.3 million in cash and cash
equivalents and $15.1 million of working capital, compared to $7.9
million of cash and cash equivalents and $21.3 million of working
capital at December 31, 2021. The decrease in cash and cash
equivalents was primarily due to funding operational losses and
equipment purchases.
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,
2021. 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 revision
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.
|
|
|
|
|
·
|
Fair Value of Investments in Private Entities - The Company uses a
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 September
30, 2022 and December 31, 2021 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 September 30, 2022 and
December 31, 2021:
|
|
|
Maturity: < 1 Year
|
|
|
Maturity: > 1 Year
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Accounts payable and Other accrued liabilities
|
|
$ |
6,910 |
|
|
$ |
6,808 |
|
|
$ |
- |
|
|
$ |
- |
|
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, including volatility in bulk flower pricing, as a result
of increased competition and other factors. 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.
|
SELECTED FINANCIAL DATA
Consolidated Financial Position
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2022
|
|
|
2021
|
|
Cash
|
|
$ |
3,292 |
|
|
$ |
7,887 |
|
Current assets
|
|
$ |
25,467 |
|
|
$ |
31,428 |
|
Property, plant and equipment, net
|
|
$ |
62,722 |
|
|
$ |
64,779 |
|
Total assets
|
|
$ |
129,616 |
|
|
$ |
137,379 |
|
Current liabilities
|
|
$ |
10,336 |
|
|
$ |
10,123 |
|
Working capital
|
|
$ |
15,131 |
|
|
$ |
21,305 |
|
Long-term notes payable including current portion
|
|
$ |
58 |
|
|
$ |
249 |
|
Capital lease obligations including current portion
|
|
$ |
34,678 |
|
|
$ |
36,496 |
|
Mortgage obligation
|
|
$ |
9,009 |
|
|
$ |
8,857 |
|
Total stockholders’ equity
|
|
$ |
57,284 |
|
|
$ |
70,307 |
|
OUTSTANDING SHARE DATA
As of November 14, 2022, the Company had the following securities
issued and outstanding:
|
|
Number of Shares
|
|
(in thousands)
|
|
(on an as converted basis)
|
|
Issued and Outstanding
|
|
|
|
Subordinate voting shares
|
|
|
100,613
|
|
Class B shares (1)
|
|
|
11,413
|
|
Super voting shares
|
|
|
203
|
|
Reserved for Issuance
|
|
|
|
|
Options
|
|
|
8,609
|
|
Restricted Stock Units
|
|
|
473
|
|
Warrants
|
|
|
23,464
|
|
Convertible debenture shares
|
|
|
106,275
|
|
Convertible debenture warrants
|
|
|
150,523
|
|
|
|
|
401,573
|
|
____________________
(1) Class B shares reserved for conversion to Subordinate
voting shares.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
As a smaller reporting company, we are not required to provide the
information requested by this Item.
Item 4. Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures
As of the end of the period covered by this Quarterly Report on
Form 10-Q, we conducted an evaluation, under the supervision and
with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on the evaluation of these
disclosure controls and procedures, the Chief Executive Officer and
Chief Financial Officer concluded that, as of September 30, 2022,
our disclosure controls and procedures were effective to ensure
that the information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms.
Changes in Internal Control over Financial
Reporting
Our management is responsible to report any changes in our internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the period
to which this report relates that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting. Management believes that there have not been
any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the period to which this report relates that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. There were
no significant changes to our internal control over financial
reporting during the three months ended September 30, 2022.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We periodically become involved in various claims and lawsuits that
are incidental to our business. In the opinion of management, after
consultation with counsel, there are no matters currently pending
that would, in the event of an adverse outcome, have a material
impact on our consolidated financial position, results of
operations or liquidity.
Item 1A. Risk Factors
There were no material changes to the risk factors disclosed in,
Item 1A. “Risk Factors” in our Form 10-K for the year ended
December 31, 2021.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
During the nine months ended September 30, 2022, no unregistered
sales of equity related securities identified, outside of those
already reported.
Item 6. Exhibits