Lowell Farms Inc. (ticker: LOWL), a California-based cannabis company, recently held its First Quarter 2024 Earnings Conference Call, where CEO Mark Ainsworth and CFO Jamie Schniedwind addressed the company's performance. Despite strategic improvements, Lowell Farms experienced a significant decline in net revenue and gross margin, alongside a reported net loss. The company's shift to procuring biomass on the spot market has allowed for an expansion in their genetic lineup and product offerings.
However, challenges such as the credit crisis in the Canadian sector and consolidation within the California dispensary market have impacted the company's financial results. Lowell Farms is exploring subleasing options to optimize facility capacity in response to the decrease in working capital and cash reserves.
Key Takeaways
- Lowell Farms saw a 35% decrease in net revenue year-over-year and sequentially.
- Gross margin was negative 17%, primarily due to costs from exiting the cultivation facility.
- The company reported an operating loss and net loss of $2.9 million for the quarter.
- Lowell Brand remains the dominant revenue source, contributing 70% of CPG sales.
- Lowell Farms plans to explore subleasing options to improve facility capacity utilization.
Company Outlook
- Lowell Farms is looking into subleasing strategies to better utilize its facility capacity.
- The company is adapting its product offerings by expanding its genetic lineup.
Bearish Highlights
- Net revenue decreased by 35% both sequentially and year-over-year.
- Gross margin suffered, landing at negative 17% in Q1.
- Operating expenses increased to $2.1 million, or 42% of sales, due to higher legal expenses.
- The company experienced a net loss of $2.9 million and negative adjusted EBITDA of $1.1 million.
Bullish Highlights
- Lowell Farms improved margins by sourcing biomass on the spot market.
- The company's brand Lowell Herb Co. showed resilience and strategic growth.
- Lowell Farms is strengthening retail partner relationships through its brands Moon, Original Pot Co., and others.
Misses
- CPG revenue fell by 10% sequentially and 11% year-over-year.
- Bulk flower revenue plummeted by 66% sequentially.
- Lowell Farm Services revenue dropped to $0.1 million from $0.9 million in the previous quarter and year.
Q&A Highlights
- The company discussed the impact of the credit crisis in the Canadian sector on its operations.
- The consolidation within the California dispensary market was acknowledged as a contributing factor to the financial challenges faced by Lowell Farms.
- The management team fielded questions regarding the strategic shift to spot market procurement and its effects on product diversification and margin improvement.
InvestingPro Insights
Lowell Farms Inc. (LOWLF) has navigated a challenging landscape, as reflected in the recent earnings call. The company's strategic shift and market conditions have influenced its financial performance. Here are some insights from InvestingPro that could provide additional context to the situation:
InvestingPro Data:
- Market Cap (Adjusted): 1.79M USD, indicating the company's current valuation in the market.
- Revenue LTM as of Q4 2023: 28.27M USD, showing the total revenue generated over the last twelve months, which has seen a decline.
- Gross Profit Margin LTM as of Q4 2023: -26.33%, highlighting the challenges in profitability and cost management Lowell Farms is facing.
InvestingPro Tips:
- Lowell Farms operates with a significant debt burden and is quickly burning through cash, which are crucial factors for investors to consider given the company's need to optimize facility capacity and improve financial health.
- The stock has experienced high price volatility and has seen a significant price decline over various timeframes, including the last year and three months. This aligns with the bearish highlights mentioned in the article, such as the decrease in net revenue and gross margin.
For investors seeking a deeper analysis of Lowell Farms Inc., there are additional InvestingPro Tips available at https://www.investing.com/pro/LOWLF. These tips can provide further insights into the company's financial health and market performance. Interested readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking access to a total of 13 InvestingPro Tips that can help inform investment decisions.
Full transcript - Indus Inc (LOWLF) Q1 2024:
Operator: Good day everyone, and welcome to today’s Lowell Farms Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, today’s call will be recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Bill Mitoulas with Investor Relations. Please go ahead.
Bill Mitoulas: Welcome to the conference call to discuss the Lowell Farms Incorporated financial results for the fiscal first quarter of 2024 Before we begin, please let me remind you that during the course of this conference call, Lowell Farms Incorporated management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factor section of our Form 10 filed on EDGAR and our listing statement filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that in the outlook we presented as of today, and management does not undertake any obligation to revise any forward-looking statements in the future. This call includes Mark Ainsworth, Co-Founder and Chief Executive Officer as well as Chief Financial Officer Jamie Schniedwind, will go into detail about the company's financial results for the quarter later in the call. The Q&A portion of this call will be open to analyst questions to provide further insight into the company's performance, operations, and go-forward strategy. For those of you who may happen to leave this call before its conclusion, please be advised that this conference call will be recorded and archived on our Investor Relations website page. With that, I'll turn the call over to Mark. Mark, please go ahead.
Mark Ainsworth: Thank you, Bill. Lets dive into our progress for the first quarter of 2024. Throughout the majority of Q1, we continue to utilize the final name biomass harvested from our Zabala cultivation site, which we exited at mid January of 2024. The Zabala cultivation costs and yields have been negatively impacting margins within our core consumer product goods product lineup. However, as we move toward the end of Q1, we begin to see improvements in margin by procuring biomass on the spot market. This strategic shift has had no supply interruption for our operations and has additionally allowed us to maintain continuous sourcing of genetics across all of our brands within the portfolio. Additionally, this change has enabled us to expand our genetic lineup. From the 12 genetics we previously cultivated at Zabala, we are now incorporating a larger range into our products offering, our dispensary customers an enhanced selection. Looking ahead, we anticipate this trend of improving margins to continue into the second quarter, reflecting our adaptive strategies and ongoing commitment to enhancing our product offerings. With Q1 2024 behind us and our team having successfully transition from the model where our cultivation was providing biomass, we see ourselves with more solid footing with margins improving. To provide an update on the current conditions of the California cannabis market from our ground level perspective, we are observing significant consolidation within the dispensary market. We are experiencing smaller shops frequently closing only to reopen under the umbrella of larger partners. This trend appears to be driven largely by ownership fatigue due to the complex regulatory landscape and tax burdens, prompting smaller operators to either exit the market or seek stronger and larger partnerships. We are actively monitoring this evolving retail landscape as a strategic opportunity that would allow the company to continue to solidify itself within the California market. Additionally, the outgoing credit crisis in California Canada sector continues to shape our financial strategies, particularly in terms of accounts receivable and setting credit limits for our customers. This environment compels us to manage sales by judiciously limiting exposure to any single customer and maintain financial health and stability. As we delve into our consumer packaged goods strategy, the spotlight shines on Lowell Herb Co., which has demonstrated resilience and strategic growth in Q1. The 30 Fox product line remain stable from Q4 to Q1, maintaining robust sales at just over 900,000. The stability is noteworthy given the typical fluctuations in consumer demand and market dynamics. This consistency in the market solidifies the product line strong market fit. The Lowell infused 35's signed up showed no growth, registering an increase of approximately 50,000 to reach sales of 170,000 in the period. This represents a commendable growth rate of above 42% from the previous quarters, singling strong consumer acceptance and increasing demand for our infused offerings. Furthermore, our low pre-roll sales have maintained the ground without any contraction. The sales holding steady at around 2.1 million. This consistency from 24, 2024 and to Q1, 2024, exemplifies the enduring popularity and solid market presence of our pre-rolls. This is a performance and a competitive landscape highlights the effectiveness of our branding and the quality of our products. The low pre-roll is celebrated by consumers as the great American Cannabis brand, a testament to its enduring appeal and quality. Anchored by the strong brand identity we remain committed as partners to innovating within this pre-roll category while continuing to supply our high-quality packaged flower for our partner dispensaries. In the first quarter, sales of the Lowell Herb Co's. packaged flower SKUs experienced a decrease totaling approximately $722,919, down from approximately $1 million in Q4 2023. This represents a decline of approximately 28%. Despite this downturn, we are poised to capitalize on new opportunities by embracing a strategic shift sourcing flower from external farms with which we have established partnerships. This approach not only diversifies our offerings, but also enhances our ability to introduce additional genetics into our product lineup, ensuring that our portfolio remains dynamic and there was market to market demands. The Cypress Cannabis brand, which we recently reintegrated back into our consumer packaged goods lineup offers a jarred 3.5 gram option and has brought in approximately $125,000 in Q1 down from approximately 146,000 Q4, a decline of about 14%. This brand was a cornerstone in our early years and is beginning to regain momentum admits competitive and often unpredictable packaged flower market. The reintroduction aims to leverage its historical strength and familiarity among customers, strategically positioning on dispensary shelves as a premium mid shelf option. House Weed, our value oriented everyday brand, faced challenges in Q1, achieving sales of approximately $70,000, down from $180,000 in Q4 2023, marking a significant drop of about 60%. This decline was primarily influenced by committed customers were placed on credit holes which temporarily impacted those placements and sales. Despite these hurdles, our team is dedicated to revitalizing House Weed's market presence, particularly focusing on innovation in the vape category as the year progresses. We believe these initiatives will not only enhance the brand's appeal but also strengthen its performance in the latter part of the year. Let's now overlook our other own brands within the portfolio, Moon, Original Pot Co. and [indiscernible] each of these brands play a vital role in selling specific niches within venues on several of our dispensary partners consistently delivering good value to consumers. In the first quarter of 2024, these brands relatively generated approximately $52,000 in revenue compared to around $59,000 in Q4 2023, marking a modest decrease of about 12%. While these may not be the largest contributors to our top line revenue, they play a crucial role in strengthening our relationships with retail partners. These partnerships rely on our diverse offerings to enhance the menu and address gaps that appeal to various consumer preferences. As we move forward, we anticipate growth for these brands, especially as the number of competing brands in the market continues to contract. This contraction provides an opportunity for our well established and trusted brands to capture a larger market share and deepen our impact within our partner dispensaries. We are committed to supporting their growth through strategic marketing and continuous product development, ensuring they remain competitive and preferred choices among our offerings. In the challenging landscape of California cannabis, brands are increasingly seeking to minimize overhead by downsizing infrastructure and moving away from traditional brick-and-mortar setups. This strategic shift is essential for aligning costs with current market conditions and maintaining competitive positioning. As these brands adapt, there is a growing demand for partnerships that can offer distribution solutions without the added burden of extensive physical infrastructure. Our company continues to feel strong incoming demand for our third-party distribution services. Thanks to our exceptional customer service and consistent product availability, we've earned the trust of both our retail partners and brands seeking access to our distribution network. Our plan includes expanding our portfolio, which currently comprises over 20 brands, which further solidify our position in the California market. For Q1 2024, our third-party consumer packaged goods brands remained stable at approximately $952,000, closely matching the $955,000 from Q4 2023. The flat growth in existing brand revenues can largely be attributed to several key brands undergoing transitions, relocating their facilities to streamline operations and better serve our dispensary partners. These changes are part of a broader effort by brands to adjust to the economic pressures within the California cannabis industry. Our team remains committed to growing this category, focusing on enhancing our distribution capabilities and supporting our partner brands through these transitions. As the market evolves, our adaptability and commitment to service excellence will continue to be crucial in attracting new brands and strengthening existing partnerships. Since we discontinued our cultivation operations, the bulk sales segment of our business is expected to become more seasonal, largely influenced by fluctuations in demand for our Lowell Farm services, which I will elaborate on shortly. In the period, bulk sales amounted to approximately $681,000. This revenue primarily came from selling off the remaining for from our symbolic cultivation that did not meet their quality standards for our in-house brands. Looking forward, while we continue to report any of revenue from bulk sales, starting from Q2 2024, we will also begin to disclose revenue from manufacturing services. This new reporting reflects our strategic shift toward maximizing the use of existing infrastructure. The introduction of manufacturing services is designed to enhance our operational efficiency and better capitalize on our assets, aligning our business model with evolving market dynamics and our long-term growth strategy. As previously noted, we concluded operations at our Zabala cultivation site in early January of 2024. We successfully harvested approximately 2,119 pounds of biomass, marking the final yield before we officially see farming operations at this facility. This final harvest represents a culmination of our cultivation efforts at Zabala and sets the stage for the next phase of our strategic business transformation. Regarding Lowell Farm Services, Q1 LFS generating approximately $68,000 in revenue, primarily from completing processing for our customers with their harvest. Following our strategic decision to exit from direct farming operations, we have adjusted our staffing levels at LFS to meet the operational demands of this inherently seasonal business, which typically ramps up from late May through October. Recognizing the opportunity to optimize the use of our facilities, we have decided to explore subleasing options for the space. This decision comes as we aim to efficiently utilize the additional 50% capacity made available by our shift away from cultivation. We look forward to updating you on the progress of these initiatives and ongoing evolution of our business at our Q2 report. With that, I will turn it over to Jamie.
Jamie Schniedwind: Thank you, Mark, and good afternoon, everyone. Before I begin, please note that we are reporting our Q1 2024 financial results in U.S. GAAP and a portion of my commentary will be on a non-GAAP basis. Please refer to today's earnings release for a full reconciliation of GAAP to non-GAAP results. We report all figures in U.S. dollars, unless otherwise indicated. I would also note that these results are unaudited and our quarterly report, Form 10-Q will be filed presently with the SEC and CSE. We are reporting Q1 net revenue of $4.9 million, down 35% sequentially and down 35% year-over-year. CPG revenue decreased 10% sequentially to $4.1 million and declined 11% year-over-year. Despite the decline in CPG revenue, Lowell Brand revenues remained strong, finishing the year at $2.9 million or 70% of CPG sales while sales of third-party brands generated $1 million in revenue or 24% of CPG sales. Bulk flower revenue decreased 66% sequentially to $0.7 million and decreased 17% to 3% year-over-year. Lowell Farm Services revenue during Q1 decreased to $0.1 million compared to $0.9 million in the prior quarter, $0.1 million compared to the prior year. Gross margin as reported was negative 17% in the first quarter compared to negative 90.6% sequentially and positive 1.8% year-over-year. In the first quarter, the margin decline was due to expenses related to exiting the cultivation facility reduced volume at our processing facility and the reclassification of operating lease expenses, which unfavorably impacted year-over-year margin comparison. Excluding the effect of the adjustments that I just identified, gross margins would have been negative 6.1% for the quarter. Operating expenses were $2.1 million or 42% of sales for the quarter, compared to $2.8 million or 38% of sales sequentially and $2.5 million or 33% of sales year-over-year. The increase in operating expenses as a percentage of sales during the quarter were impacted by increased legal expenses in conjunction with exiting the cultivation facility. The operating loss in the first quarter was $2.9 million compared to an operating loss of $9.6 million sequentially and an operating loss of $2.4 million year-over-year. Net loss for the first quarter was $2.9 million compared sequentially to a net loss of $13.1 million, which compares to a net loss of $4 million in the first quarter last year. Adjusted EBITDA in the first quarter was negative $1.1 million compared sequentially to adjusted EBITDA of negative $4.1 million and adjusted EBITDA of negative $1.1 million year-over-year. Adjusted EBITDA reflects adjustments of $0.5 million of expenses related to exiting the cultivation facility that are not expected to reoccur. Turning to the balance sheet. Working capital was $1.1 million at the end of the quarter compared to $3.5 million at the end of 2023. The company had $1.2 million in cash compared to $2.3 million at the end of 2023. With that, I'll turn the call over to the operator for questions.
Operator: Q - A - And there are no questions at this time. I would now like to turn it back to Mark Ainsworth for any additional or closing remarks.
Mark Ainsworth: Thank you again for joining the call and for taking the time to get an update on our business. We look forward to talking with you on our next earnings call.
Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.
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