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 EXCHANGEACT OF 1934 |
|
For the Quarterly Period ended March 31, 2022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT 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 |
| 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☐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 | ☐ | 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 78,805,938100,288,094 shares of the Registrant’s Subordinate Voting Shares outstanding as of August 13, 2021.May 9, 2022.
TABLE OF CONTENTS
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Item 1. | Financial Statements (unaudited) | 3 | ||
Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 | 3 | |||
Condensed Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2022 and 2021 | 4 | |||
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2022 and 2021 | 5 | |||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 | 6 | |||
Notes to Condensed Consolidated Financial Statements | 7 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 35 | ||
Item 4. | Controls and Procedures | 35 |
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Item 1. |
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| 36 | |
Item 1A. | Risk Factors | 36 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 | ||
Item 6. | Exhibits | 36 |
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Exhibit Index |
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2 |
Table of Contents |
PARTPART I —- FINANCIAL INFORMATION
ItemItem 1. Financial Statements
LOWELL FARMS INC.
CONDENSEDCONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
|
| June 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 9,113 |
| $ | 25,751 |
|
| $ | 5,886 |
| $ | 7,887 |
| ||
Accounts Receivable - net of allowance for doubtful accounts of $1,024 and $1,389 at June 30, 2021 and December 2020, respectively |
| 6,223 |
| 4,529 |
| |||||||||||
Accounts Receivable - net of allowance for doubtful accounts of $827 and $1,139 at March 31, 2022 and December 31, 2021, respectively |
| 5,644 |
| 8,222 |
| |||||||||||
Inventory |
| 14,736 |
| 9,933 |
|
| 15,807 |
| 13,343 |
| ||||||
Prepaid expenses and other current assets |
|
| 4,144 |
|
|
| 6,391 |
|
|
| 2,702 |
|
|
| 1,976 |
|
Total current assets |
| 34,216 |
| 46,604 |
|
| 30,039 |
| 31,428 |
| ||||||
Property and equipment, net |
| 64,496 |
| 49,243 |
|
| 63,833 |
| 64,779 |
| ||||||
Goodwill |
| 357 |
| 357 |
| |||||||||||
Other intangibles, net |
| 40,919 |
| 736 |
|
| 40,674 |
| 40,756 |
| ||||||
Other assets |
|
| 601 |
|
|
| 476 |
|
|
| 346 |
|
|
| 416 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total assets |
| $ | 140,589 |
|
| $ | 97,416 |
|
| $ | 134,892 |
|
| $ | 137,379 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
| ||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable |
| $ | 3,313 |
| $ | 2,137 |
|
| $ | 2,317 |
| $ | 3,102 |
| ||
Accrued payroll and benefits |
| 1,142 |
| 1,212 |
|
| 744 |
| 650 |
| ||||||
Notes payable, current portion |
| 369 |
| 1,213 |
|
| 258 |
| 221 |
| ||||||
Lease obligation, current portion |
| 2,410 |
| 2,301 |
|
| 2,503 |
| 2,444 |
| ||||||
Other current liabilities |
|
| 5,012 |
|
|
| 8,860 |
|
|
| 6,224 |
|
|
| 3,706 |
|
Total current liabilities |
| 12,246 |
| 15,723 |
|
| 12,046 |
| 10,123 |
| ||||||
Notes payable |
| 258 |
| 303 |
|
| 19 |
| 28 |
| ||||||
Lease obligation |
| 35,260 |
| 36,533 |
|
| 33,407 |
| 34,052 |
| ||||||
Convertible debentures |
| 13,646 |
| 13,701 |
|
| 14,196 |
| 14,012 |
| ||||||
Mortgage obligation |
|
| 8,938 |
|
|
| 0 |
|
|
| 8,813 |
|
|
| 8,857 |
|
Total liabilities |
| 70,348 |
| 66,260 |
|
| 68,481 |
| 67,072 |
| ||||||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
| ||||||
STOCKHOLDERS' EQUITY |
|
|
|
|
| |||||||||||
STOCKHOLDERS’ EQUITY |
|
|
|
|
| |||||||||||
Share capital |
| 170,613 |
| 125,540 |
|
| 189,529 |
| 189,368 |
| ||||||
Accumulated deficit |
|
| (100,372 | ) |
|
| (94,384 | ) |
|
| (123,118 | ) |
|
| (119,061 | ) |
Total stockholders' equity |
|
| 70,241 |
|
|
| 31,156 |
| ||||||||
Total stockholders’ equity |
|
| 66,411 |
|
|
| 70,307 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities and stockholders' equity |
| $ | 140,589 |
|
| $ | 97,416 |
| ||||||||
Total liabilities and stockholders’ equity |
| $ | 134,892 |
|
| $ | 137,379 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
3 |
Table of Contents |
LOWELL FARMS INC.
CONDENSEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
(in thousands, except per share amounts)
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Net revenue |
| $ | 15,157 |
| $ | 9,894 |
| $ | 26,183 |
| $ | 19,336 |
|
| $ | 12,409 |
| $ | 11,026 |
| ||||
Cost of goods sold |
|
| 9,413 |
|
|
| 11,157 |
|
|
| 21,915 |
|
|
| 22,328 |
|
|
| 10,835 |
|
|
| 12,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Gross profit (loss) |
| 5,744 |
| (1,263 | ) |
| 4,268 |
| (2,992 | ) |
| 1,574 |
| (1,477 | ) | |||||||||
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Operating expenses |
|
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| ||||||||||
General and administrative |
| 3,817 |
| 1,456 |
| 6,285 |
| 4,733 |
|
| 2,164 |
| 2,460 |
| ||||||||||
Sales and marketing |
| 2,233 |
| 1,184 |
| 3,667 |
| 2,410 |
|
| 1,761 |
| 1,441 |
| ||||||||||
Depreciation and amortization |
|
| 167 |
|
|
| 885 |
|
|
| 491 |
|
|
| 1,762 |
|
|
| 108 |
|
|
| 324 |
|
Total operating expenses |
| 6,217 |
| 3,525 |
| 10,443 |
| 8,905 |
|
| 4,033 |
| 4,225 |
| ||||||||||
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|
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|
|
|
|
|
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Loss from operations |
| (473 | ) |
| (4,788 | ) |
| (6,175 | ) |
| (11,897 | ) |
| (2,459 | ) |
| (5,702 | ) | ||||||
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Other income/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other income (expense) |
| 1,858 |
| 0 |
| 1,416 |
| 25 |
|
| (143 | ) |
| (229 | ) | |||||||||
Loss on termination of investment |
| 0 |
| (3,524 | ) |
| 0 |
| (3,524 | ) | ||||||||||||||
Unrealized gain on change in fair value of investment |
| 18 |
| 306 |
| 124 |
| 391 |
| |||||||||||||||
Unrealized change in fair value of investment |
| (70 | ) |
| 106 |
| ||||||||||||||||||
Interest expense |
|
| (598 | ) |
|
| (726 | ) |
|
| (1,215 | ) |
|
| (1,576 | ) |
|
| (1,310 | ) |
|
| (831 | ) |
Total other income (expense) |
| 1,278 |
| (3,944 | ) |
| 325 |
| (4,684 | ) |
| (1,523 | ) |
| (954 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Income (loss) before provision for income taxes |
| 805 |
| (8,732 | ) |
| (5,850 | ) |
| (16,581 | ) | |||||||||||||
Loss before provision for income taxes |
| (3,982 | ) |
| (6,656 | ) | ||||||||||||||||||
Provision for income taxes |
|
| 74 |
|
|
| 25 |
|
|
| 138 |
|
|
| 50 |
|
|
| 75 |
|
|
| 63 |
|
Net income (loss) |
| $ | 731 |
|
| $ | (8,757 | ) |
| $ | (5,988 | ) |
| $ | (16,631 | ) | ||||||||
Net loss |
| $ | (4,057 | ) |
| $ | (6,719 | ) | ||||||||||||||||
|
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| ||||||||||
Net income (loss) per share: |
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|
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Net loss per share: |
|
|
|
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| |||||||||||||||||||
Basic |
| $ | 0.01 |
|
| $ | (0.26 | ) |
| $ | (0.10 | ) |
| $ | (0.50 | ) |
| $ | (0.04 | ) |
| $ | (0.13 | ) |
Diluted |
| $ | 0.00 |
|
| $ | (0.26 | ) |
| $ | (0.10 | ) |
| $ | (0.50 | ) |
| $ | (0.04 | ) |
| $ | (0.13 | ) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
| 71,021 |
|
|
| 33,307 |
|
|
| 61,956 |
|
|
| 33,025 |
|
|
| 100,118 |
|
|
| 53,592 |
|
Diluted |
|
| 201,278 |
|
|
| 33,307 |
|
|
| 61,956 |
|
|
| 33,025 |
|
|
| 100,118 |
|
|
| 53,592 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
4 |
Table of Contents |
LOWELL FARMS INC.
CONDENDSEDCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands)
Three Months Ended June 30, 2021 | ||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||
|
| Subordinate |
|
| Super |
|
|
|
|
|
|
| ||||||||||
|
| Voting |
|
| Voting |
|
| Share |
|
| Accumulated |
|
| Stockholders’ |
| |||||||
|
| Shares |
|
| Shares |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
Balance—March 31, 2021 |
|
| 83,221 |
|
|
| 203 |
|
| $ | 161,006 |
|
| $ | (101,103 | ) |
| $ | 59,903 |
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 731 |
|
|
| 731 |
| ||
Shares issued in connection with conversion of convertible debentures |
|
| 1,003 |
|
|
| - |
|
|
| 200 |
|
|
| 0 |
|
|
| 200 |
| ||
Issuance of shares associated with acquisitions |
|
| 7,998 |
|
|
| - |
|
|
| 9,023 |
|
|
| 0 |
|
|
| 9,023 |
| ||
Exercise of options |
|
| 76 |
|
|
| - |
|
|
| 46 |
|
|
| 0 |
|
|
| 46 |
| ||
Share-based compensation expense |
|
| 125 |
|
|
| - |
|
|
| 338 |
|
|
| 0 |
|
|
| 338 |
| ||
Balance—June 30, 2021 |
|
| 92,423 |
|
|
| 203 |
|
| $ | 170,613 |
|
| $ | (100,372 | ) |
| $ | 70,241 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended June 30, 2020 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Subordinate |
|
| Super |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Voting |
|
| Voting |
|
| Share |
|
| Accumulated |
|
| Stockholders’ |
| |||||||
|
| Shares |
|
| Shares |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
Balance—March 31, 2020 |
|
| 32,988 |
|
|
| 203 |
|
| $ | 97,772 |
|
| $ | (80,348 | ) |
| $ | 17,424 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (8,757 | ) |
|
| (8,757 | ) | ||
Shares issued in connection with conversion of convertible debentures |
|
| 250 |
|
|
| - |
|
|
| 62 |
|
|
| 0 |
|
|
| 62 |
| ||
Issuance of warrants |
|
| 0 |
|
|
| 0 |
|
|
| 1,556 |
|
|
| 0 |
|
|
| 1,556 |
| ||
Share-based compensation expense |
|
| 104 |
|
|
| - |
|
|
| 213 |
|
|
| 0 |
|
|
| 213 |
| ||
Balance—June 30, 2020 |
|
| 33,342 |
|
|
| 203 |
|
| $ | 99,603 |
|
| $ | (89,105 | ) |
| $ | 10,498 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Six Months Ended June 30, 2021 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Subordinate |
|
| Super |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Voting |
|
| Voting |
|
| Share |
|
| Accumulated |
|
| Stockholders’ |
| |||||||
|
| Shares |
|
| Shares |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
Balance—December 31, 2020 |
|
| 57,617 |
|
|
| 203 |
|
| $ | 125,540 |
|
| $ | (94,384 | ) |
| $ | 31,156 |
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (5,988 | ) |
|
| (5,988 | ) | ||
Shares issued in connection with conversion of convertible debentures |
|
| 2,393 |
|
|
| - |
|
|
| 478 |
|
|
| - |
|
|
| 478 |
| ||
Issuance of shares associated with acquisitions |
|
| 30,641 |
|
|
| - |
|
|
| 43,259 |
|
|
| - |
|
|
| 43,259 |
| ||
Exercise of warrants |
|
| 1,325 |
|
|
| - |
|
|
| 665 |
|
|
| - |
|
|
| 665 |
| ||
Exercise of options |
|
| 76 |
|
|
| 0 |
|
|
| 46 |
|
|
| - |
|
|
| 46 |
| ||
Share-based compensation expense |
|
| 371 |
|
|
| - |
|
|
| 625 |
|
|
| - |
|
|
| 625 |
| ||
Balance—June 30, 2021 |
|
| 92,423 |
|
|
| 203 |
|
| $ | 170,613 |
|
| $ | (100,372 | ) |
| $ | 70,241 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Six Months Ended June 30, 2020 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Subordinate |
|
| Super |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Voting |
|
| Voting |
|
| Share |
|
| Accumulated |
|
| Stockholders’ |
| |||||||
|
| Shares |
|
| Shares |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
Balance—December 31, 2019 |
|
| 32,844 |
|
|
| 203 |
|
| $ | 96,160 |
|
| $ | (72,474 | ) |
| $ | 23,686 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| - |
|
|
| (16,631 | ) |
|
| (16,631 | ) | ||
Shares issued in connection with conversion of convertible debentures |
|
| 250 |
|
|
| 0 |
|
|
| 62 |
|
|
| - |
|
|
| 62 |
| ||
Issuance of warrants |
|
| 0 |
|
|
| 0 |
|
|
| 1,556 |
|
|
| - |
|
|
| 1,556 |
| ||
Share-based compensation expense |
|
| 248 |
|
|
| 0 |
|
|
| 1,825 |
|
|
| - |
|
|
| 1,825 |
| ||
Balance—June 30, 2020 |
|
| 33,342 |
|
|
| 203 |
|
| $ | 99,603 |
|
| $ | (89,105 | ) |
| $ | 10,498 |
|
Three Months Ended March 31, 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 |
|
| - |
|
|
| - |
|
|
| 0 |
|
|
| (4,057 | ) |
|
| (4,057 | ) |
Share-based compensation expense |
|
| 220 |
|
|
| - |
|
|
| 161 |
|
|
| 0 |
|
|
| 161 |
|
Balance—March 31, 2022 |
|
| 112,026 |
|
|
| 203 |
|
| $ | 189,529 |
|
| $ | (123,118 | ) |
| $ | 66,411 |
|
Three Months Ended March 31, 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 |
|
| - |
|
|
| - |
|
|
| 0 |
|
|
| (6,719 | ) |
|
| (6,719 | ) |
Shares issued in connection with conversion of convertible debentures |
|
| 1,390 |
|
|
| - |
|
|
| 277 |
|
|
| 0 |
|
|
| 277 |
|
Issuance of shares associated with acquisitions |
|
| 22,644 |
|
|
| - |
|
|
| 34,237 |
|
|
| 0 |
|
|
| 34,237 |
|
Exercise of warrants |
|
| 1,324 |
|
|
| - |
|
|
| 665 |
|
|
| 0 |
|
|
| 665 |
|
Share-based compensation expense |
|
| 246 |
|
|
| - |
|
|
| 287 |
|
|
| 0 |
|
|
| 287 |
|
Balance—March 31, 2021 |
|
| 83,221 |
|
|
| 203 |
|
| $ | 161,006 |
|
| $ | (101,103 | ) |
| $ | 59,903 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
5 |
Table of Contents |
LOWELL FARMS INC.
CONDENSEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
| Three Months Ended |
| |||||||||||||
|
| Six Months Ended June 30, |
|
| March 31, |
| March 31, |
| ||||||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
CASH FLOW FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
| $ | (5,988 | ) |
| $ | (16,631 | ) |
| $ | (4,057 | ) |
| $ | (6,719 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation and amortization |
| 1,858 |
| 1,762 |
|
| 1,511 |
| 908 |
| ||||||
Amortization of debt issuance costs |
| 420 |
| 0 |
|
| 226 |
| 204 |
| ||||||
Share-based compensation expense |
| 625 |
| 1,825 |
|
| 161 |
| 287 |
| ||||||
Provision for doubtful accounts |
| 173 |
| 720 |
|
| 243 |
| 224 |
| ||||||
Termination of branding rights agreement |
| 152 |
| 0 |
|
| 0 |
| 152 |
| ||||||
Unrealized gain on change in fair value of investments |
| (125 | ) |
| (395 | ) |
| 70 |
| (106 | ) | |||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| (1,526 | ) |
| 1,390 |
|
| 2,335 |
| (2,471 | ) | |||||
Inventory |
| (1,501 | ) |
| 1,980 |
|
| (2,464 | ) |
| (653 | ) | ||||
Prepaid expenses and other current assets |
| (553 | ) |
| (333 | ) |
| (726 | ) |
| 1,058 |
| ||||
Other assets |
| 0 |
| 0 |
|
| 0 |
| (9 | ) | ||||||
Accounts payable and accrued expenses |
| (4,320 | ) |
| 2,307 |
|
|
| 1,827 |
|
|
| (2,146 | ) | ||
Other current and long-term liabilities |
|
| 0 |
|
|
| (98 | ) | ||||||||
Net cash used in operating activities |
| $ | (10,785 | ) |
| $ | (7,473 | ) |
| $ | (874 | ) |
| $ | (9,271 | ) |
CASH FLOW FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Proceeds from asset sales |
| $ | 1,979 |
| $ | 0 |
|
| $ | 0 |
| $ | 1,980 |
| ||
Purchases of property and equipment |
| (608 | ) |
| (4,110 | ) |
| (483 | ) |
| (373 | ) | ||||
Disposition of business interest, net of cash received |
| 0 |
| 2,743 |
| |||||||||||
Acquisition of business assets, net |
| (6,642 | ) |
| 0 |
|
|
| 0 |
|
|
| (4,569 | ) | ||
Investment in corporate interests |
|
| 0 |
|
|
| 0 |
| ||||||||
Net cash used in investing activities |
| $ | (5,271 | ) |
| $ | (1,367 | ) |
| $ | (483 | ) |
| $ | (2,962 | ) |
CASH FLOW FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Principal payments on lease obligations |
| $ | (1,164 | ) |
| $ | (1,053 | ) |
| $ | (586 | ) |
| $ | (580 | ) |
Payments on notes payable |
| (128 | ) |
| (31 | ) |
| (58 | ) |
| (31 | ) | ||||
Proceeds from convertible notes, net of financing costs |
| 0 |
| 13,663 |
| |||||||||||
Issuance of warrants associated with convertible notes offering |
| 0 |
| 1,556 |
| |||||||||||
Proceeds from brokered private placement |
| 0 |
| 62 |
| |||||||||||
Proceeds from lease financing |
| 0 |
| 0 |
| |||||||||||
Proceeds from notes payable |
| 0 |
| 0 |
| |||||||||||
Proceeds from exercise of warrants and options |
| 710 |
| 0 |
|
|
| 0 |
|
|
| 665 |
| |||
Issuance of subordinate voting shares for acquisition |
| 0 |
| 0 |
| |||||||||||
Payment of debt issuance costs |
|
| 0 |
|
|
| 0 |
| ||||||||
Net cash (used) provided by financing activities |
| $ | (582 | ) |
| $ | 14,197 |
|
| $ | (644 | ) |
| $ | 54 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in cash and cash equivalents and restricted cash |
| $ | (16,638 | ) |
| $ | 5,357 |
| ||||||||
Change in cash and cash equivalents |
| $ | (2,001 | ) |
| $ | (12,179 | ) | ||||||||
Cash and cash equivalents—beginning of year |
|
| 25,751 |
|
|
| 1,344 |
|
|
| 7,887 |
|
|
| 25,751 |
|
Cash, cash equivalents and restricted cash—end of period |
| $ | 9,113 |
|
| $ | 6,701 |
| ||||||||
Cash, cash equivalents—end of period |
| $ | 5,886 |
|
| $ | 13,572 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
| ||||||
Cash paid during the period for interest |
| $ | 605 |
| $ | 1,403 |
|
| $ | 1,018 |
| $ | 846 |
| ||
Cash paid during the period for income taxes |
| $ | 187 |
| $ | 0 |
|
| $ | 268 |
| $ | 91 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||||||
OTHER NONCASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Property and equipment acquired via capital lease |
| $ | 0 |
| $ | 578 |
| |||||||||
Disposition of business interests |
| $ | 0 |
| $ | 2,743 |
| |||||||||
Issuance of warrants |
| $ | 0 |
| $ | 1,556 |
| |||||||||
Shares issued for services in connection with convertible debenture offering |
| $ | 0 |
| $ | 62 |
| |||||||||
Purchase of property and equipment not yet paid for |
| $ | 79 |
| $ | 0 |
| |||||||||
Issuance of subordinate voting shares in exchange for net assets acquired |
| $ | 43,259 |
| $ | 0 |
|
| $ | 0 |
| $ | 34,237 |
| ||
Liabilities assumed and receivable forgiveness in exchange for net assets acquired |
| $ | 2,910 |
| $ | 0 |
|
| $ | 0 |
| $ | 2,910 |
| ||
Debt and associated accrued interest converted to subordinate voting shares |
| $ | 478 |
| $ | 0 |
|
| $ | 0 |
| $ | 665 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
6 |
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein have been prepared by Lowell Farms Inc. (the “Company” or “Lowell”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Form 1010-K filed for the year ended December 31, 2020.2021. There have been no material changes to our significant accounting policies as of and for the sixthree months ended June 30, 2021.March 31, 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, 2020,2021, has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
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 generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include allowance for doubtful accounts and credit losses, carrying value of inventory, revenue recognition, accounting for stock-based compensation expense, and income taxes. Actual results could differ from those estimates.
The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates. This impacts the Company'sCompany’s normal operations. To date, the Company has been able to provide uninterrupted access to its products and services, including certain employees that are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of the Company’s employees or its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.
7 |
Table of Contents |
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)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;2021; however, voluntary early adoption was permitted. The Company early adopted the provisions of the final rule in 2020. The guidance did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases Topic 842 Target improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which further clarifies the determination of fair value of the underlying asset by lessors that are not manufacturers or dealers and modifies transition disclosure requirements for changes in accounting principles and other technical updates. The Company adopted the standard effective January 1, 2019 using the modified retrospective adoption method which allowed it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit. In connection with the adoption of the new lease pronouncement, the Company recorded a charge to accumulated deficit of $847. Refer to the Summary of Effects of Lease Accounting Standard Update Adopted in First Quarter of 2019 in the audited consolidated financial statements and notes thereto in the Company’s Form 10 filed for the year ended December 31, 2020.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequent amendments to the initial guidance: ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, ASU 2019-05 “Financial Instruments-Credit Losses”, ASU 2019-11 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (collectively, Topic 326),ASU 2020-02 Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842) and ASU 2020-03 Codification Improvements to Financial Instruments. Topic 326 requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the year ended December 31, 2020. The Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses. We continue to monitor the economic impact of the COVID-19 pandemic, however based on current market conditions, the adoption of the ASU did not have a material impact on the condensed consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606. This guidance amended Topic 808 and Topic 606 to clarify that transactions in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer for a distinct good or service (i.e., unit of account). The amendments preclude an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance is effective for the year ended December 31, 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. This guidance was effective for the Company in our fiscal year and interim periods beginning on January 1, 2021 and did not have a material impact on our condensed consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01 Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance addresses accounting for the transition into and out of the equity method and provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. We are currently evaluatingevaluated the impact of ASU 2020-01, on our Consolidated Financial Statements, which was effective for the Company in our fiscal year and interim periods beginning on January 1, 2021 and it did not have a material impact on our condensed consolidated financial statements.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting standards not yet adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—ContractsHedging-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'sentity’s own equity and improves and amends the related EPS guidance for both Subtopics. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021, which means it will be effective for our fiscal year beginning January 1, 2022. Early adoption is permitted.2021. We are currently evaluatingevaluated 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 condensed consolidated financial statements.
.
No other recently issued accounting pronouncements had or are expected to have a material impact on our condensed consolidated financial statements.
2. ACQUISITIONS
Completed Acquisitions
|
| (1) |
|
| (2) |
|
| (3) |
|
| (4) |
|
|
|
| |||||
|
|
|
|
|
| The Humble |
|
| The Hacienda |
|
| Lowell Farm |
|
|
|
| ||||
(in thousands) |
| Kaizen Inc. |
|
| Flower Co. |
|
| Company, LLC |
|
| Services |
|
| Total |
| |||||
CONSIDERATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Contingent Payment |
| $ | 50 |
|
| $ | 44 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 94 |
|
Cash |
|
|
|
|
|
|
|
|
|
| 4,019 |
|
|
| 0 |
|
|
| 4,019 |
|
Transaction costs |
|
|
|
|
|
|
|
|
|
| 428 |
|
|
| 190 |
|
|
| 618 |
|
Note payable and other obligations |
|
| 200 |
|
|
| 65 |
|
|
| 3,115 |
|
|
| 9,000 |
|
|
| 12,380 |
|
Fair value of subordinate voting shares |
|
| 62 |
|
|
| 55 |
|
|
| 34,358 |
|
|
| 9,610 |
|
|
| 44,085 |
|
Total consideration |
| $ | 312 |
|
| $ | 164 |
|
| $ | 41,920 |
|
| $ | 18,800 |
|
| $ | 61,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PURCHASE PRICE ALLOCATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
| $ | 0 |
|
| $ | 6 |
|
| $ | 3,300 |
|
| $ | 0 |
|
| $ | 3,306 |
|
Accounts receivable - net |
|
| 0 |
|
|
| 0 |
|
|
| 1,312 |
|
|
| 0 |
|
|
| 1,312 |
|
Other tangible assets |
|
| 0 |
|
|
| 0 |
|
|
| 739 |
|
|
| 15,750 |
|
|
| 16,489 |
|
Intangible assets - brands and tradenames |
|
| 104 |
|
|
| 80 |
|
|
| 37,299 |
|
|
| 0 |
|
|
| 37,483 |
|
Intangible assets - technology and know-how and other |
|
| 208 |
|
|
| 78 |
|
|
| 0 |
|
|
| 3,050 |
|
|
| 3,336 |
|
Liabilities assumed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables and other liabilities |
|
| 0 |
|
|
| 0 |
|
|
| (730 | ) |
|
| 0 |
|
|
| (730 | ) |
Fair value of net assets acquired |
| $ | 312 |
|
| $ | 164 |
|
| $ | 41,920 |
|
| $ | 18,800 |
|
| $ | 61,196 |
|
The Company completed the following asset acquisitions, and allocated the purchase price as follows:
The Kaizen Inc. and The Humble Flower Co. acquisitions qualified as a business combination under ASC 805. The Hacienda Company, LLC acquisition qualified as an asset acquisition under ASU 2017.01. Consideration has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. No goodwill was recognized. The results of these acquisitions are included in the Company’s net earnings from the date of acquisition.
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. ACQUISITIONS
Recently Completed Acquisitions
The fair value ofCompany recently completed the assets acquiredfollowing asset acquisitions, and allocated the liabilities assumed for Kaizen Inc. and the Humble Flower Company were finalized in the quarter ended June 30, 2020.purchase price as follows:
|
| The Hacienda |
|
| Lowell Farm |
|
|
|
| |||
(in thousands) |
| Company, LLC |
|
| Services |
|
| Total |
| |||
CONSIDERATION |
|
|
|
|
|
|
|
|
| |||
Cash |
| $ | 4,019 |
|
| $ | 0 |
|
| $ | 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 |
|
| $ | 0 |
|
| $ | 3,300 |
|
Accounts receivable - net |
|
| 1,312 |
|
|
| 0 |
|
|
| 1,312 |
|
Land |
|
| 0 |
|
|
| 8,261 |
|
|
| 8,261 |
|
Buildings |
|
| 0 |
|
|
| 6,268 |
|
|
| 6,268 |
|
Equipment |
|
| 0 |
|
|
| 1,221 |
|
|
| 1,221 |
|
Other tangible assets |
|
| 739 |
|
|
| - |
|
|
| 739 |
|
Intangible assets - brands and tradenames |
|
| 37,299 |
|
|
| 0 |
|
|
| 37,299 |
|
Intangible assets - technology and know-how and other |
|
| 0 |
|
|
| 3,050 |
|
|
| 3,050 |
|
Liabilities assumed |
|
|
|
|
|
|
|
|
|
|
| |
Payables and other liabilities |
|
| (730 | ) |
|
| 0 |
|
|
| (730 | ) |
Fair value of net assets acquired |
| $ | 41,920 |
|
| $ | 18,800 |
|
| $ | 60,720 |
|
|
|
On May 1, 2019, the Company acquired all of the assets, global rights and business interests of Kaizen Inc. for a purchase price of $556 that will be paid as and if financial performance targets are met during the period beginning on May 1, 2019 and ending on April 30, 2023. Kaizen is a premium brand offering a full spectrum of cannabis concentrates. Effective July 15, 2020 the asset purchase agreement was modified, eliminating payments associated with meeting financial performance targets in exchange for the issuance of 225 thousand options to purchase Subordinate Voting Shares and a note payable of $200, with payments over two years. Had the modifications been reflected as of the date of acquisition, net assets would have decreased $223 at December 31, 2019 and net loss in 2019 would have been reduced by $21.
|
|
On April 18, 2019, the Company acquired all of the assets, global rights and business interests associated with the brand Humble Flower Co. for a purchase price of $472 that will be paid as and if financial performance targets are met during the period beginning on April 19, 2019 and ending on April 18, 2023. The acquisition marks the Company’s expansion into cannabis-infused topical creams, balms, and oils. Effective June 1, 2020 the asset purchase agreement was modified, eliminating payments associated with meeting financial performance targets in exchange for the issuance of 225 thousand options to purchase Subordinate Voting Shares and a note payable of $65, with payments commencing on January 1, 2021 for 24 months. Had the modifications been reflected as of the date of acquisition, net assets would have decreased $308 at December 31, 2019 and net loss in 2019 would have been reduced by $34.
| The Hacienda Company, LLC. |
On February 25, 2021, the Company acquired substantially all of the assets of the Lowell Herb Co. and Lowell Smokes trademark brands, product portfolio, and production assets from The Hacienda Company, LLC for a purchase price of $41,920. Lowell Herb Co. is a leading California cannabis brand that manufactures and distributes distinctive and highly regarded premium packaged flower, pre-roll, concentrates, and vape products. The acquisition consideration was comprised of $4.1 million in cash and the issuance of 22,643,678 subordinate voting shares and obligations assumed. In connection with this acquisition, the Company completed a change in its corporate name to Lowell Farms Inc. effective March 1, 2021.
| Lowell Farm Services |
On June 29, 2021, wethe 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 will provide drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 lbs. of wholesale cannabis flower annually. The new facility will process nearly all the cannabis that we grow at our existing cultivation operations. Additionally, we commissioned a new business unit called Lowell Farm Services (“LFS”), which will engage in fee-based processing services for regional growers from the Salinas Valley area. The acquisition consideration was comprised primarily of a note payable of $9.0 million and the issuance of 7,997,520 subordinate voting shares and obligations assumed. LFS operations are expected to becomebecame operational during the third quarter of 2021.
Terminated Acquisition
On May 14, 2019, the Company entered into a definitive agreement to acquire the assets of W The Brand (“W Vapes”), a manufacturer and distributor in Nevada and Oregon of cannabis concentrates, cartridges and disposable pens, in a cash and stock transaction. Under the terms of the agreement, the purchase consideration to W Vapes shareholders consisted of $10 million in cash and $10 million in Subordinate Voting Shares (based on a deemed value of CDN$15.65 per share). In November 2019, the definitive agreement was amended whereby the Company advanced $2 million in non-recourse funds to the seller in exchange for release of $10 million of cash held in escrow related to the acquisition and in December 2019, the Company purchased the Las Vegas, Nevada facility for $4.1 million.
On July 17, 2020, the Company announced the termination of the definitive agreement with W Vapes and the obligation to acquire the assets of W Vapes was terminated. The termination coincided with an asset acquisition announcement between W Vapes and Planet 13 Holdings Inc. (“Planet 13”). Additionally, the Company sold the Las Vegas facility to certain affiliates of Planet 13 for a cash payment of approximately $500, and an additional cash payment of approximately $2.8 million upon regulatory approval of the W Vapes and Planet 13 transaction which was received in January 2021, and in the third quarter the Company finalized a note payable of $843 to the owners of W Vapes, payable coinciding with the receipt of the $2.8 million payment from the facility sale, which was paid in January 2021. As a result, the Company reflected a $4.4 million loss in loss on termination of investments, net on its consolidated statement of operations for the year ended December 31, 2020.
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets were comprised of the following items:
|
| June 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Deposits |
| $ | 533 |
| $ | 572 |
|
| $ | 548 |
| $ | 548 |
| ||
Insurance |
| 917 |
| 593 |
|
| 608 |
| 624 |
| ||||||
Supplier advances |
| 1,623 |
| 504 |
|
| 1,395 |
| 575 |
| ||||||
Nevada building sale proceeds |
| 0 |
| 2,800 |
| |||||||||||
Interest and taxes |
| 98 |
| 147 |
| |||||||||||
Other |
|
| 1,071 |
|
|
| 1,922 |
|
|
| 53 |
|
|
| 82 |
|
Total prepaid and other current assets |
| $ | 4,144 |
|
| $ | 6,391 |
|
| $ | 2,702 |
|
| $ | 1,976 |
|
4. INVENTORY
Inventory was comprised of the following items:
|
| June 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Raw materials |
| $ | 11,852 |
| $ | 7,950 |
|
| $ | 10,379 |
| $ | 8,558 |
| ||
Work in process |
| 45 |
| 0 |
|
| 110 |
| 292 |
| ||||||
Finished goods |
|
| 2,839 |
|
|
| 1,983 |
|
|
| 5,318 |
|
|
| 4,493 |
|
Total inventory |
| $ | 14,736 |
|
| $ | 9,933 |
|
| $ | 15,807 |
|
| $ | 13,343 |
|
5. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
|
| June 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Excise and cannabis tax |
| $ | 3,912 |
| $ | 5,780 |
|
| $ | 4,754 |
| $ | 2,830 |
| ||
Third party brand distribution accrual |
| 269 |
| 584 |
|
| 77 |
| 78 |
| ||||||
Insurance and professional fee accrual |
| 820 |
| 746 |
|
| 1,078 |
| 651 |
| ||||||
Other |
|
| 11 |
|
|
| 1,750 |
|
|
| 315 |
|
|
| 147 |
|
Total other current liabilities |
| $ | 5,012 |
|
| $ | 8,860 |
|
| $ | 6,224 |
|
| $ | 3,706 |
|
Table of Contents |
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 sixthree months ended June 30, 2021March 31, 2022 and property and equipment, net as of December 31, 20202021 are as follows:
|
| Land and |
| Leasehold |
| Furniture |
|
|
| Construction |
| Right of |
|
|
| Land and |
| Leasehold |
| Furniture |
|
|
| Construction |
| Right of |
|
| ||||||||||||||||||||||||||||||||||||
(in thousands) |
| Buildings |
|
| Improvements |
|
| and Fixtures |
|
| Equipment |
|
| Vehicles |
|
| in Process |
|
| Use Assets |
|
| Total |
|
| Buildings |
|
| Improvements |
|
| and Fixtures |
|
| Equipment |
|
| Vehicles |
|
| in Process |
|
| Use Assets |
|
| Total |
| ||||||||||||||||
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Balance—December 31, 2020 |
| $ | 0 |
| $ | 10,799 |
| $ | 50 |
| $ | 1,276 |
| $ | 854 |
| $ | 2,528 |
| $ | 41,530 |
| $ | 57,037 |
| |||||||||||||||||||||||||||||||||||||||
Balance—December 31, 2021 |
| $ | 15,907 |
| $ | 13,950 |
| $ | 50 |
| $ | 2,992 |
| $ | 921 |
| $ | 703 |
| $ | 41,530 |
| $ | 76,053 |
| |||||||||||||||||||||||||||||||||||||||
Additions |
| 0 |
| 73 |
| 0 |
| 268 |
| 0 |
| 814 |
| 0 |
| 1,155 |
|
| 0 |
| 0 |
| 0 |
| 108 |
| 0 |
| 375 |
| 0 |
| 483 |
| ||||||||||||||||||||||||||||||
Business Acquisitions |
| 14,529 |
| 0 |
| 0 |
| 1,413 |
| 0 |
| 0 |
| 0 |
| 15,942 |
|
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||||||||||||||||||||||||||||
Disposals |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||||||||||||||||||||
Balance—June 30, 2021 |
| $ | 14,529 |
|
| $ | 10,872 |
|
| $ | 50 |
|
| $ | 2,957 |
|
| $ | 854 |
|
| $ | 3,342 |
|
| $ | 41,530 |
|
| $ | 74,134 |
| ||||||||||||||||||||||||||||||||
Disposals and Transfers |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0 |
| ||||||||||||||||||||||||||||||||
Balance—March 31, 2021 |
| $ | 15,907 |
|
| $ | 13,950 |
|
| $ | 50 |
|
| $ | 3,100 |
|
| $ | 921 |
|
| $ | 1,078 |
|
| $ | 41,530 |
|
| $ | 76,536 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Accumulated Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Balance—December 31, 2020 |
| $ | 0 |
| $ | (634 | ) |
| $ | (47 | ) |
| $ | (427 | ) |
| $ | (411 | ) |
| $ | 0 |
| $ | (6,275 | ) |
| $ | (7,794 | ) | ||||||||||||||||||||||||||||||||||
Balance—December 31, 2021 |
| $ | (132 | ) |
| $ | (980 | ) |
| $ | (48 | ) |
| $ | (618 | ) |
| $ | (566 | ) |
| $ | 0 |
| $ | (8,930 | ) |
| $ | (11,274 | ) | |||||||||||||||||||||||||||||||||
Depreciation |
| 0 |
| (167 | ) |
| (1 | ) |
| (72 | ) |
| (77 | ) |
| 0 |
| (1,527 | ) |
| (1,844 | ) |
| (52 | ) |
| (405 | ) |
| (10 | ) |
| (107 | ) |
| (38 | ) |
| 0 |
| (817 | ) |
| (1,429 | ) | |||||||||||||||||||
Disposals |
|
| 0 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0 |
|
Balance—June 30, 2021 |
| $ | 0 |
|
| $ | (801 | ) |
| $ | (48 | ) |
| $ | (499 | ) |
| $ | (488 | ) |
| $ | 0 |
|
| $ | (7,802 | ) |
| $ | (9,638 | ) | ||||||||||||||||||||||||||||||||
Balance—March 31, 2022 |
| $ | (184 | ) |
| $ | (1,385 | ) |
| $ | (58 | ) |
| $ | (725 | ) |
| $ | (604 | ) |
| $ | 0 |
|
| $ | (9,747 | ) |
| $ | (12,703 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net Book Value-June 30, 2021 |
| $ | 14,529 |
|
| $ | 10,071 |
|
| $ | 2 |
|
| $ | 2,458 |
|
| $ | 366 |
|
| $ | 3,342 |
|
| $ | 33,728 |
|
| $ | 64,496 |
| ||||||||||||||||||||||||||||||||
Net Book Value-March 31, 2022 |
| $ | 15,723 |
|
| $ | 12,565 |
|
| $ | (8 | ) |
| $ | 2,375 |
|
| $ | 317 |
|
| $ | 1,078 |
|
| $ | 31,783 |
|
| $ | 63,833 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net Book Value -December 31, 2020 |
| $ | 0 |
|
| $ | 10,165 |
|
| $ | 3 |
|
| $ | 849 |
|
| $ | 443 |
|
| $ | 2,528 |
|
| $ | 35,255 |
|
| $ | 49,243 |
| ||||||||||||||||||||||||||||||||
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 $946$1,429 and $1,044$899 were recorded for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively, of which $584$1,260 and $769$584 respectively, were included in cost of goods sold. Depreciation expense of $195$143 was also recorded in other income (expense) for the three months ended June 30, 2021.
Depreciation expense of $1,844 and $1,909 were recorded for the six months ended June 30, 2021 and 2020, respectively, of which $1,168 and $1,283 respectively, were included in cost of goods sold. Depreciation expense of $195 was also recorded in other income (expense) for the six months ended June 30, 2021.March 31, 2022.
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
A reconciliation of the beginning and ending balances of goodwill during the six months ended June 30, 2021 is as follows:
(in thousands) |
|
|
| |
Costs |
|
|
| |
Balance - December 31, 2020 |
| $ | 357 |
|
Additions |
|
| 0 |
|
Business Acquisitions |
|
| 0 |
|
Impairment |
|
| 0 |
|
Balance - June 30, 2021 |
| $ | 357 |
|
The Company evaluates goodwill for impairment annually during the fiscal third quarter and when an event occurs, or circumstances change such that it is reasonably possible that impairment may exist. The Company accounts for goodwill and evaluates its goodwill balances and tests them for impairment in accordance with related accounting standards. The Company performed its annual impairment assessment in its third quarter of fiscal 2020, and its analysis indicated that the Company had no impairment of goodwill.
Other Intangible Assets
A reconciliation of the beginning and ending balances of intangible assets and accumulated amortization during the sixthree months ended June 30, 2021March 31, 2022 and intangible assets, net as of December 31, 20202021 are as follows:
|
| Definite Life Intangibles |
|
| Indefinite Life Intangibles |
|
|
| ||||||||||||||||||||
|
| Definite Life Intangibles |
| Indefinite Life Intangibles |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Branding |
| Technology/ |
| Brands & |
|
|
| Technology/ |
| Brands & |
|
| ||||||||||||||
(in thousands) |
| Rights |
|
| Know How |
|
| Tradenames |
|
| Total |
|
| Know How |
|
| Tradenames |
|
| Total |
| |||||||
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Balance—December 31, 2020 |
| $ | 250 |
| $ | 208 |
| $ | 408 |
| $ | 866 |
| |||||||||||||||
Balance—December 31, 2021 |
| $ | 3,258 |
| $ | 37,707 |
| $ | 40,965 |
| ||||||||||||||||||
Business acquisition |
| 0 |
| 3,050 |
| 37,299 |
| 40,349 |
|
| 0 |
| 0 |
| 0 |
| ||||||||||||
Agreement termination |
|
| (250 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (250 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Balance—June 30, 2021 |
| $ | - |
|
| $ | 3,258 |
|
| $ | 37,707 |
|
| $ | 40,965 |
| ||||||||||||
Balance—March 31, 2022 |
| $ | 3,258 |
|
| $ | 37,707 |
|
| $ | 40,965 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Accumulated Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Balance—December 31, 2020 |
| $ | (93 | ) |
| $ | (37 | ) |
| $ | 0 |
| $ | (130 | ) | |||||||||||||
Balance—December 31, 2021 |
| $ | (209 | ) |
| $ | 0 |
| $ | (209 | ) | |||||||||||||||||
Agreement termination |
| 98 |
| 0 |
| 0 |
| 98 |
|
| 0 |
| 0 |
| 0 |
| ||||||||||||
Amortization |
| (5 | ) |
| (9 | ) |
| 0 |
| (14 | ) |
| (82 | ) |
| 0 |
| (82 | ) | |||||||||
Other |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Balance—June 30, 2021 |
| $ | 0 |
|
| $ | (46 | ) |
| $ | 0 |
|
| $ | (46 | ) | ||||||||||||
Balance—March 31, 2022 |
| $ | (291 | ) |
| $ | 0 |
|
| $ | (291 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net Book Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
June 30, 2021 |
| $ | 0 |
|
| $ | 3,212 |
|
| $ | 37,707 |
|
| $ | 40,919 |
| ||||||||||||
December 31, 2021 |
| $ | 3,049 |
|
| $ | 37,707 |
|
| $ | 40,756 |
| ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net Book Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2020 |
| $ | 157 |
|
| $ | 171 |
|
| $ | 408 |
|
| $ | 736 |
| ||||||||||||
March 31, 2022 |
| $ | 2,967 |
|
| $ | 37,707 |
|
| $ | 40,674 |
|
Intangible assets with finite lives are amortized over their estimated useful lives. Amortization periods of assets with finite lives are based on management'smanagement’s estimates at the date of acquisition. The Company recorded amortization expense of $14,$82 and $44$9 for the sixthree months ended June 30,March 31, 2022, and 2021, and 2020, respectively.
The Company estimates that amortization expense for our existing other intangible assets will be approximately $220$325 annually for each of the next fiveten 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.
Table of Contents |
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 sixthree months ended June 30, 2021:March 31, 2022:
|
| Subordinate |
|
| Super |
| ||
(in thousands) |
| Voting Shares |
|
| Voting Shares |
| ||
Balance—December 31, |
|
|
|
|
| 203 | ||
| ||||||||
| ||||||||
|
| |||||||
Issuance of vested restricted stock units |
|
| ||||||
|
|
|
| - |
| |||
Balance— |
|
|
|
|
| 203 |
|
Warrants
A reconciliation of the beginning and ending balances of warrants outstanding is as follows:
| |||||||||
|
|
|
| ||||||
Balance—December 31, | |||||||||
| |||||||||
| |||||||||
| |||||||||
|
|
| 93,897 |
| |||||
Balance—March 31, 2022 |
|
|
|
(1) Excluded 390 warrants issuable should underwriter options be exercised.
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. DEBT
Debt at June 30, 2021March 31, 2022 and December 31, 2020,2021, was comprised of the following:
|
| June 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
| ||||||
Vehicle loans(1) |
| $ | 186 |
| $ | 170 |
|
| $ | 38 |
| $ | 50 |
| ||
Mortgage payable(2) |
| 170 |
| 105 |
| |||||||||||
Note payable(3) |
|
| 183 |
|
|
| 1,043 |
|
|
| 50 |
|
|
| 66 |
|
Total short-term debt |
| 369 |
| 1,213 |
|
| 258 |
| 221 |
| ||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, net |
|
|
|
|
|
|
|
|
|
| ||||||
Vehicle loans(1) |
| 162 |
| 233 |
|
| 19 |
| 28 |
| ||||||
Note payable(2) |
| 56 |
| 65 |
| |||||||||||
Note payable(3) |
| 40 |
| 5 |
| |||||||||||
Mortgage payable(4) |
| 8,938 |
| 0 |
| |||||||||||
Convertible debenture(5) |
|
| 13,646 |
|
|
| 13,701 |
| ||||||||
Mortgage payable(3) |
| 8,813 |
| 8,857 |
| |||||||||||
Convertible debenture(3) |
|
| 14,196 |
|
|
| 14,012 |
| ||||||||
Total long-term debt |
|
| 22,842 |
|
|
| 14,004 |
|
|
| 23,028 |
|
|
| 22,897 |
|
Total Indebtedness |
| $ | 23,211 |
|
| $ | 15,217 |
|
| $ | 23,286 |
|
| $ | 23,118 |
|
(1) | Primarily fixed term loans on transportation vehicles. Weighted average interest rate at |
(2) | Mortgage payable |
acquired processing facility. Weighted average interest rate at | |
| Net of deferred financing costs at March 31, 2022 and December 31, 2021 of |
|
Stated maturities of debt obligations are as follows as of June 30, 2021:March 31, 2022:
|
| June 30, |
|
| March 31, |
| ||
(in thousands) |
| 2021 |
|
| 2022 |
| ||
2021 |
| $ | 268 |
| ||||
2022 |
| 321 |
| |||||
Balance of 2022 |
| $ | 193 |
| ||||
2023 |
| 15,876 |
|
| 15,783 |
| ||
2024 |
| 383 |
|
| 311 |
| ||
2025 |
| 421 |
|
| 352 |
| ||
2026 and thereafter |
|
| 8,113 |
|
|
| 8,317 |
|
Total debt obligations |
| $ | 25,382 |
|
| $ | 24,956 |
|
Table of Contents |
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 sixthree months ended June 30, 2021,March 31, 2022, is as follows:
(in thousands) |
|
|
| |
Lease Liability: |
|
|
| |
December 31, 2020 |
| $ | 38,834 |
|
Lease principal payments |
|
| (1,164 | ) |
June 30, 2021 |
| $ | 37,670 |
|
|
|
|
|
|
|
| June 30, |
| |
|
| 2021 |
| |
Lease obligation, current portion |
| $ | 2,410 |
|
Lease obligation, long-term portion |
|
| 35,260 |
|
Total |
| $ | 37,670 |
|
(in thousands) |
|
|
| |
Lease obligation |
|
|
| |
December 31, 2021 |
| $ | 36,496 |
|
Lease principal payments |
|
| (586 | ) |
March 31, 2022 |
| $ | 35,910 |
|
Current and long-term portions of lease obligations are as follows:
|
| March 31, |
|
| December 31, |
| ||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Lease obligation, current portion |
| $ | 2,503 |
|
| $ | 2,444 |
|
Lease obligation, long-term portion |
|
| 33,407 |
|
|
| 34,052 |
|
Total |
| $ | 35,910 |
|
| $ | 36,496 |
|
All extension options that are reasonably certain to be exercised have been included in the measurement of lease obligations. The Company reassesses the likelihood of extension option exercise if there is a significant event or change in circumstances within its control.
The components of lease expense for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 are as follows:
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Amortization of leased assets (1) |
| $ | 785 |
| $ | 839 |
| $ | 1,527 |
| $ | 1,631 |
|
| $ | 817 |
| $ | 742 |
| ||||
Interest on lease liabilities (2) |
|
| 634 |
|
|
| 491 |
|
|
| 1,197 |
|
|
| 964 |
|
|
| 573 |
|
|
| 563 |
|
Total |
| $ | 1,419 |
|
| $ | 1,330 |
|
| $ | 2,724 |
|
| $ | 2,595 |
|
| $ | 1,390 |
|
| $ | 1,305 |
|
____________
(1) | Included in cost of goods sold and general and administrative expenses in the consolidated statement of operations. |
(2) | Included in interest expense in the consolidated statement of operations. |
The key assumptions used in accounting for leases as of June 30, 2021March 31, 2022 were a weighted average remaining lease term of 17.614.7 years and a weighted average discount rate of 6%. The key assumptions used in accounting for leases as of December 31, 20202021 were a weighted average remaining lease term of 18.117.2 years and a weighted average discount rate of 6.0%6%.
The future lease payments with initial remaining terms in excess of one year as of June 30, 2021March 31, 2022 were as follows:
|
| June 30, |
|
| March 31, |
| ||
(in thousands) |
| 2021 |
|
| 2022 |
| ||
Balance of 2021 |
| $ | 1,187 |
| ||||
2022 - 2023 |
| 5,137 |
| |||||
2024 - 2025 |
| 3,844 |
| |||||
Balance of 2022 |
| $ | 3,948 |
| ||||
2023 |
| 4,890 |
| |||||
2024 |
| 4,280 |
| |||||
2025 |
| 3,451 |
| |||||
2026 and beyond |
|
| 27,502 |
|
|
| 43,038 |
|
Total lease payments |
| 59,607 |
| |||||
Less imputed interest |
|
| (23,697 | ) | ||||
Total |
| $ | 37,670 |
|
| $ | 35,910 |
|
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11. SHARE-BASED COMPENSATION
During 2019 the Company’s Board of Directors adopted the 2019 Stock and Incentive Plan (the “Plan”), which was amended in April 2020 and March 2021. The Plan permits the issuance of stock options, stock appreciation rights, stock awards, share units, performance shares, performance units and other stock-based awards, and, as of June 30, 2021,March 31 2022, 13.2 million shares have been authorized to be issued under the Plan and 4.62.3 million are available for future grant. The Plan provides for the grant of options as either non-statutory stock options or incentive stock options and restricted stock units to employees, officers, directors, and consultants of the Company to attract and retain persons of ability to perform services for the Company and to reward such individuals who contribute to the achievement by the Company of its economic objectives. The awards granted generally vest in 25% increments over a four-year period and option awards expire 6 years from grant date.
The Plan is administered by the Board or a committee appointed by the Board, which determines the persons to whom the awards will be granted, the type of awards to be granted, the number of awards to be granted, and the specific terms of each grant, including the vesting thereof, subject to the provisions of the Plan.
During the three and six months ended June 30,March 31, 2022 and 2021, and 2020, the Company granted shares to certain employees and directors as compensation for services. These shares were accounted for in accordance with ASC 718 –- Compensation –- Stock Compensation. The Company amortizes awards over the service period and until awards are fully vested.
For the three and six months ended June 30,March 31, 2022 and 2021, and 2020, share-based compensation expense was as follows:
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Cost of goods sold |
| $ | 0 |
| $ | 0 |
| $ | - |
| $ | 0 |
|
| $ | 0 |
| $ | 0 |
| ||||
General and administrative expense |
|
| 338 |
|
|
| 213 |
|
|
| 625 |
|
|
| 1,825 |
|
|
| 161 |
|
|
| 287 |
|
Total share-based compensation |
| $ | 338 |
|
| $ | 213 |
|
| $ | 625 |
|
| $ | 1,825 |
|
| $ | 161 |
|
| $ | 287 |
|
The following table summarizes the status of stock option grants and unvested awards at and for the sixthree months ended June 30, 2021:March 31, 2022:
|
|
|
| Weighted-Average |
|
|
|
|
|
|
| Weighted-Average |
|
|
| |||||||||||||||||
|
| Stock |
| Weighted-Average |
| Remaining |
| Aggregate |
|
| Stock |
| Weighted-Average |
| Remaining |
| Aggregate |
| ||||||||||||||
(in thousands except per share amounts) |
| Options |
| Exercise Price |
| Contractual Life |
| Intrinsic Value |
|
| Options |
|
| Exercise Price |
|
| Contractual Life |
|
| Intrinsic Value |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Outstanding—December 31, 2020 |
| 6,260 |
| $ | 0.97 |
| 4.7 |
| $ | 3,162 |
| |||||||||||||||||||||
Outstanding—December 31, 2021 |
| 6,598 |
| $ | 0.99 |
| 4.3 |
| $ | - |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Granted |
| 1,880 |
| 1.41 |
|
|
|
|
|
| 3,240 |
| $ | 0.31 |
|
|
|
|
| |||||||||||||
Exercised |
| - |
| - |
|
|
|
|
|
| - |
| $ | 0 |
|
|
|
|
| |||||||||||||
Cancelled |
|
| (1,153 | ) |
|
| 1.60 |
|
|
|
|
|
|
|
| (879 | ) |
| $ | 0.99 |
|
|
|
|
| |||||||
Outstanding—June 30, 2021 |
|
| 6,987 |
|
| $ | 0.95 |
|
|
| 2.6 |
|
|
|
| |||||||||||||||||
Outstanding—March 31, 2022 |
| 8,959 |
| $ | 0.74 |
| 4.5 |
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Exercisable—June 30, 2021 |
|
| 1,677 |
|
| $ | 1.02 |
|
|
| 3 |
|
| $ | 69 |
| ||||||||||||||||
Exercisable—March 31, 2022 |
| 3,688 |
| $ | 0.87 |
| 1.5 |
| $ | 30 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Vested and expected to vest—June 30, 2021 |
|
| 6,987 |
|
| $ | 0.95 |
|
|
| 2.6 |
|
| $ | 2,254 |
| ||||||||||||||||
Vested and expected to vest—March 31, 2022 |
| 8,959 |
| $ | 0.74 |
| 4.5 |
| $ | 261 |
|
The weighted-average fair value of options granted during the three and six months ended June 30,March 31, 2022 and 2021, estimated as of the grant date, were $1.18$0.31 and $1.41,$0.58, respectively. As of June 30, 2021,March 31 2022, there was $1,252$926 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 2.02.3 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 sixthree months ended June 30, 2021:March 31, 2022:
|
|
| Weighted-Average |
|
|
|
| Weighted-Average |
| |||||||
(in thousands except per share amounts) |
| RSUs |
|
| Fair Value |
|
| RSUs |
|
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Outstanding—December 31, 2020 |
|
| 450 |
|
| $ | 0.33 |
| ||||||||
Outstanding—December 31, 2021 |
| 642 |
| $ | 1.18 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Granted |
| 1,395 |
| 1.15 |
|
| - |
| $ | 0 |
| |||||
Vested |
| - |
| - |
|
| (125 | ) |
| $ | 1.49 |
| ||||
Cancelled |
|
| (10 | ) |
|
| 1.11 |
|
|
| (30 | ) |
| $ | 1.11 |
|
Outstanding—June 30, 2021 |
|
| 1,835 |
|
| $ | 0.95 |
| ||||||||
Outstanding—March 31, 2022 |
| 487 |
| $ | 1.11 |
|
As of June 30, 2021,March 31, 2022, there was $963$320 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 2021 months.
The fair value of the stock options and RSUs granted were determined using the Black-Scholes option-pricing model with the following weighted average assumptions at the time of grant.
Stock Options |
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||
Three Months Ended March 31, |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Expected volatility |
|
| 50 | % |
|
| 50 | % |
|
| 50 | % |
|
| 50 | % |
Dividend yield |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
Risk-free interest rate |
|
| 1.1 | % |
|
| 2.2 | % |
|
| 0.9 | % |
|
| 2.2 | % |
Expected term in years |
|
| 4.25 |
|
|
| 4.12 |
|
|
| 4.25 |
|
|
| 4.14 |
|
16 |
RSUs |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||
Three Months Ended March 31, |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Expected volatility |
|
| 50 | % |
|
| 50 | % |
|
| 50 | % |
|
| 50 | % |
Dividend yield |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
Risk-free interest rate |
|
| 0.9 | % |
|
| 0.9 | % |
|
| 0.9 | % |
|
| 0.9 | % |
Expected term in years |
|
| 0.74 |
|
|
| 0.60 |
|
|
| 0.74 |
|
|
| 0.60 |
|
Stock Options:
|
| Three Months Ended |
| |||||
|
| March 31, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Expected volatility |
|
| 50 | % |
|
| 50 | % |
Dividend yield |
|
| 0 | % |
|
| 0 | % |
Risk-free interest rate |
|
| 1.01 | % |
|
| 0.73 | % |
Expected term in years |
|
| 4.5 |
|
|
| 4.25 |
|
RSUs:
|
| Three Months Ended |
| |||||
|
| March 31, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Expected volatility |
|
| 50 | % |
|
| 50 | % |
Dividend yield |
|
| 0 | % |
|
| 0 | % |
Risk-free interest rate |
|
| 0.73 | % |
|
| 0.62 | % |
Expected term in years |
|
| 1.00 |
|
|
| 0.78 |
|
17 |
Table of Contents |
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;2020; (2) net operating loss rules;rules; (3) charitable contribution limitations;limitations; (4) employee retention credit;credit; and (5) the realization of corporate alternative minimum tax credits.
The Company continues to assess the impact and future implication of these provisions;provisions; however, it does not anticipate any amounts that could give rise to a material impact to the overall consolidated financial statements.
The provision for income tax expense for the three months ended June 30, 2021,March 31, 2022, was $74,$75 representing an effective tax rate of 9.20%(1.88)%, compared to an income tax expense of $25$63 for the three months ended June 30, 2020,March 31, 2021, representing an effective tax rate of 0.29%(0.95)%. The provision for income tax expense for the six months ended June 30, 2021, was $138, representing a effective tax rate of 2.36% compared to an income tax expense of $50 for the six months ended June 30, 2020, representing an effective tax rate of 0.30%.
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. NET INCOME (LOSS) PER SHARE
Net income (loss) per share represents the net earnings/loss attributable to shareholders divided by the weighted average number of shares outstanding during the period on an as converted basis.
|
| Three Months Ended |
| Six Months Ended |
|
| For the Three Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||||||
(in thousands except per share amounts) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Net income (loss) |
| $ | 731 |
| $ | (8,757 | ) |
| $ | (5,988 | ) |
| $ | (16,631 | ) | |||||||||
Net loss |
| $ | (4,057 | ) |
| $ | (6,719 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
| |||||||||||||||
Net loss per share: |
|
|
|
|
| |||||||||||||||||||
Basic |
| $ | 0.01 |
|
| $ | (0.26 | ) |
| $ | (0.10 | ) |
| $ | (0.50 | ) |
| $ | (0.04 | ) |
| $ | (0.13 | ) |
Diluted |
| $ | 0.00 |
|
| $ | (0.26 | ) |
| $ | (0.10 | ) |
| $ | (0.50 | ) |
| $ | (0.04 | ) |
| $ | (0.13 | ) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
| 71,021 |
|
|
| 33,307 |
|
|
| 61,956 |
|
|
| 33,025 |
|
|
| 100,118 |
|
|
| 53,592 |
|
Diluted |
|
| 201,278 |
|
|
| 33,307 |
|
|
| 61,956 |
|
|
| 33,025 |
|
|
| 100,118 |
|
|
| 53,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Weighted average potentially diluted shares (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic shares |
| 71,021 |
| 33,307 |
| 61,956 |
| 33,025 |
|
| 100,118 |
| 53,592 |
| ||||||||||
Options |
| 2,908 |
| - |
| - |
| - |
|
| 0 |
| 0 |
| ||||||||||
Warrants |
| 60,767 |
| - |
| - |
| - |
|
| 0 |
| 0 |
| ||||||||||
Convertible debentures |
| 64,796 |
| - |
| - |
| - |
|
| 0 |
| 0 |
| ||||||||||
Restricted stock units |
|
| 1,786 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
Total weighted average potentially diluted shares: |
|
| 201,278 |
|
|
| 33,307 |
|
|
| 61,956 |
|
|
| 33,025 |
|
|
| 100,118 |
|
|
| 53,592 |
|
___________________________
(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. |
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14. FAIR VALUE MEASUREMENTS
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. An asset’s or liability’s level is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are valued and disclosed in one of the following three levels of the valuation hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.
At June 30, 2021 and 2020,March 31, 2022, and December 31, 20202021 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'sCompany’s debt approximates fair value based on current market rates (Level 2).
Nonrecurring fair value measurements
The Company uses fair value measures when determining assets and liabilities acquired in an acquisition as described above in the Notes to Condensed Consolidated Financial Statements, which are considered a Level 3 measurement.
15. COMMITMENTS AND CONTINGENCIES
Commitments
In January 2021,As of March 31, 2022, the Company signed a letter of intent to expand its cultivation footprint. The agreement contemplates a land-lease from a developer that has prepared the property for cannabis cultivation. Lowell would be responsible for construction costs of greenhouses using cash raised in the equity offering in December 2020 and cash generated from operations. The transaction is subject to final site due-diligence and negotiation of construction contracts. In the event the transaction contemplated in the letter of intent is pursued, the Company anticipates the site will be ready for operation in 2023.no significant commitments.
Contingencies
The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of June 30, 2021,March 31, 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 2020,2022, 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, the Company could be subject to certain late payment penalties.
Litigation and Claims
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of June 30, 2021,March 31, 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.
19 |
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $2.65$ 2.65 million from the insurance carrier in July 2021, and is included in other income (expense)being recorded in the accompanying condensed consolidated statements of income (loss).
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)quarter ended June 30, 2021.
16. GENERAL AND ADMINISTRATIVE EXPENSES
For the three and six months ended June 30,March 31, 2022 and 2021, and 2020, general and administrative expenses were comprised of:
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Salaries and benefits |
| $ | 1,561 |
| $ | 980 |
| $ | 2,398 |
| $ | 1,976 |
|
| $ | 970 |
| $ | 981 |
| ||||
Professional fees |
| 777 |
| 251 |
| 1,259 |
| 850 |
|
| 259 |
| 482 |
| ||||||||||
Share-based compensation |
| 336 |
| 213 |
| 625 |
| 1,825 |
|
| 161 |
| 287 |
| ||||||||||
Administrative |
|
| 1,143 |
|
|
| 12 |
|
|
| 2,004 |
|
|
| 82 |
|
|
| 774 |
|
|
| 710 |
|
Total general and administrative expenses |
| $ | 3,817 |
|
| $ | 1,456 |
|
| $ | 6,286 |
|
| $ | 4,733 |
|
| $ | 2,164 |
|
| $ | 2,460 |
|
17. RELATED-PARTY TRANSACTIONS
Transactions with related parties are entered into in the normal course of business and are measured at the amount established and agreed to by the parties.
Lowell received certain administrative, operational and consulting services through a Management Services Agreement with Edible Management, LLC (“EM”). EM is a limited liability company owned by the co-founders of Lowell and was formed to provide Lowell with certain administrative functions comprising: cultivation, distribution, and production operations support; general administration; corporate development; human resources; finance and accounting; marketing; sales; legal and compliance. The agreement provided for the dollar-for-dollar reimbursement of expenses incurred by EM in performance of its services. Amounts paid to EM for the three and six months ended June 30, 2020 was $2,201 and $5,041, respectively. The Management Services Agreement with EM was terminated as of December 31, 2020.
In April 2015, Lowell entered into a services agreement with Olympic Management Group (“OMG”), for advisory and technology support services, including the access and use of software licensed to OMG to perform certain data processing and enterprise resource planning (ERP) operational services. OMG is owned by one of the Company’s co-founders. The agreement provides for the dollar-for-dollar reimbursement of expenses incurred by OMG in performance of its services. There were no amounts paid to OMG for the quarters ended June 30, 2021 and 2020. Amounts paid to OMG for the sixthree months ended June 30,March 31, 2022 and 2021, were $36 and 2020, were $nil, and $5, respectively.
20 |
Table of Contents |
LOWELL FARMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
18. SEGMENT INFORMATION
The Company'sCompany’s operations are comprised of a single reporting operating segment engaged in the production and sale of cannabis products in the United States. As the operations comprise a single reporting segment, amounts disclosed in the financial statements also represent a single reporting segment.
19. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 16, 2021,May 10, 2022, the date the financial statements were available to be issued.
21 |
Table of Contents |
ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2022 AND 2021 AND 2020
This management'smanagement’s discussion and analysis ("(“MD&A"&A”) of the financial condition and results of operations of the Company is for the three and six months ended June 30, 2021March 31, 2022 and 2020.2021. It is supplemental to, and should be read in conjunction with, the Company'sCompany’s consolidated financial statements and the accompanying notes for the year ended December 31, 2020.2021. All dollar amounts in this MD&A are expressed in thousands of United States dollars ("(“$"” or "US$"“US$”), 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-lookingforward- looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” in our registration statement on Form 10, as amended10-Kfor the year ended December 31, 2021, (the “Form 10”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.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, and are in discussion with regard to Michigan.
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 will process 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 and a 40,000 square foot processing facility in Monterey County, a 15,000 square foot manufacturing and laboratory facility in Salinas, California, a separate 20,000 square foot distribution facility in Salinas, California and a warehouse depot and distribution vehicles in Los Angeles, California.
22 |
Table of Contents |
Product Offerings
Our present product offerings include flower, vape pens, oils, extracts, chocolate edibles, mints, gummies, topicals, tinctures and pre-rolls. We sell our products under owned and third-party brands.
Brands we own include the following:
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 (premium packaged flower, pre-roll, concentrates, and vape products); Cypress Reserve (a premium flower brand); Flavor Extracts (crumble and terp sugar products): Kaizen (premium brand cannabis concentrates); House Weed (a value driven flower and concentrates offering delivering a flavorful and potent experience); Moon (a range of high-potency, high-quality and high-value edibles); Altai (hand-crafted and award-winning edibles); Humble Flower (a premium brand offering cannabis-infused topical creams, balms and oils); Original Pot Company (baked edibles); CannaStripe (gummy edibles); and Acme Elixirs (high quality, lab-tested vaporizing pens). brands were acquired in the Lowell Acquisition. Our remaining brands were developed prior to such acquisition.
We also exclusively manufacture and distribute third party brandsDr. May tinctures and topicals in California andCalifornia. 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 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 35,000 and 40,000 pounds in 2022 as a result of these facility upgrades and improvements. We have invested approximately $7.2 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. In 2022 we expect to complete the headhouse which will include redundant drying and processing capacity should LFS reach processing capacity during the fall outdoor harvesting season.
23 |
Table of Contents |
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 also 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, tinctures, baked goods, hard and soft non-chocolate confections, and topical lotions and balms. Lowell Farms utilizes modern commercial production equipment and employs food grade manufacturing protocols, including industry-leading standard operating procedures designed so that its products meet stringent quality standards. We have implemented updated compliance, packaging and labeling standards to meet theall regulatory requirements, ofincluding the California MedicalMedicinal and Adult-Use Cannabis Regulation and Safety Act with the advent of adult use legalization in California.Act.
We also operate an automated flower filling and packaging line and aan automated pre-roll assembly line for making finished goods in those respective categories with feedstock grown at ourby the Lowell Farms cultivation operations.
Processing
On June 29, 2021 we announced that we acquired real property and related assets of a first-of-its-kind cannabis drying and midstream processing facility located in Monterey County, nearby our flagship cultivation operation. The 10-acre, 40,000 square foot processing facility will provideprovides drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 lbs.pounds of wholesale cannabis flower annually. The new facility will processprocesses nearly all the cannabis that we grow at our existing cultivation operations. Additionally, we are commissioning acommissioned the new business unit called Lowell Farm Services (“LFS”),LFS, which will engageengages 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.country, as well as throughout California. LFS operations are expected to become operational during the third quarter of 2021.
Our business is conducted by the following subsidiaries of the Company:
| ||
| ||
| ||
| ||
| ||
|
The Company's corporate office and principal place of business is located at 19 Quail Run Circle, Salinas, California. As of June 30, 2021, we had 212 full-time employees and 4 part-time employees, substantially all of which are located in California. Additionally, Lowell Farms utilizes contract employees in security, cultivation, packaging and warehousing activities. The use of contract employees enables Lowell Farms to manage variable staffing needs and in the case of cultivation and security personnel, access to experienced, qualified and readily available human resources.
Recent Developments
Acquisitions
On February 25, 2021, we acquired the Lowell Herb Co. and Lowell Smokes trademark brands, product portfolio and production assets from The Hacienda Group, a California limited liability company (“Hacienda”), and its subsidiaries. The acquisition is referred to in this Form 10-Q as the “Lowell Acquisition.” The Lowell Acquisition expanded our product offerings by adding a highly regarded, mature line of premium branded cannabis pre-rolls, including infused pre-rolls, to our product portfolio under the Lowell Herb Co. and Lowell Smokes brands. The Lowell Acquisition also expanded our offerings of premium packaged flower, concentrates, and vape products. Upon the completion of the acquisition of certain regulatory assets in the Lowell Acquisition, we acquired certain non-hydrocarbon extraction assets used for the production of oils, water hashish, bubble hashish and rosin. The acquisition was valued at approximately $41 million, comprised of $4.1 million in cash and the issuance of 22,643,678 Subordinate Voting Shares. In connection with this acquisition, the Company changed its corporate name to Lowell Farms Inc. effective March 1, 2021.
On June 29, 2021, we acquired real property and related assets, and commissioned a first-of-its-kind cannabis drying and midstream processing facility located in Monterey County. The 10-acre, 40,000 square foot processing facility will provide drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 lbs. of wholesale cannabis flower annually. The new facility will process nearly all the cannabis that we grow at our existing cultivation operations. Additionally, we will commission a new business unit called Lowell Farm Services (“LFS”), which will engage in fee-based processing services for regional growers from the Salinas Valley area. LFS operations are expected to becomebecame operational during the third quarter of 2021.
Table of Contents |
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 21 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) |
25 |
Table of Contents |
|
|
|
|
| Working capital is current assets less current liabilities. Management believes the calculation of working capital provides additional information to investors about the Company’s liquidity. We use working capital internally to understand, manage, make operating decisions related to cash flow required to fund operational activity and evaluate our business cash flow needs. In addition, we use working capital to help plan and forecast future periods. |
These measures are not necessarily comparable to similarly titled measures used by other companies.
The table below reconciles Net income (loss) to Adjusted EBITDA for the periods indicated:
|
| Three Months |
| Six Months Ended |
|
|
| Three Months Ended |
| |||||||||||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
|
| March 31, |
| March 31, |
| |||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| (in thousands) |
|
| 2022 |
|
| 2021 |
| ||||||
Net income (loss) |
| $ | 731 |
| $ | (8,757 | ) |
| $ | (5,988 | ) |
| $ | (16,631 | ) | |||||||||||
Net loss | Net loss |
| $ | (4,057 | ) |
| $ | (6,719 | ) | |||||||||||||||||
Interest expense |
| 598 |
| 726 |
| 1,215 |
| 1,576 |
| Interest expense |
| 1,310 |
| 831 |
| |||||||||||
Provision for income taxes |
| 75 |
| 25 |
| 138 |
| 50 |
| Provision for income taxes |
| 75 |
| 63 |
| |||||||||||
Depreciation in cost of goods sold |
| 584 |
| 514 |
| 1,168 |
| 1,283 |
| |||||||||||||||||
Depreciation and amortization in cost of goods sold | Depreciation and amortization in cost of goods sold |
| 1,260 |
| 584 |
| ||||||||||||||||||||
Depreciation and amortization in operating expenses |
| 167 |
| 371 |
| 491 |
| 479 |
| Depreciation and amortization in operating expenses |
| 108 |
| 324 |
| |||||||||||
Depreciation in other income (expense) |
|
| 195 |
|
|
| - |
|
|
| 195 |
|
|
| - |
| ||||||||||
Depreciation and amortization in other income (expense) | Depreciation and amortization in other income (expense) |
|
| 143 |
|
|
| - |
| |||||||||||||||||
EBITDA |
| 2,350 |
| (7,121 | ) |
| (2,781 | ) |
| (13,243 | ) |
| (1,161 | ) |
| (4,917 | ) | |||||||||
Investment and currency (gains)/ losses |
| (19 | ) |
| (306 | ) |
| (125 | ) |
| (391 | ) | Investment and currency (gains)/ losses |
| 70 |
| (106 | ) | ||||||||
Share-based compensation |
| 336 |
| 213 |
| 625 |
| 1,825 |
| Share-based compensation |
| 161 |
| 287 |
| |||||||||||
Net effect of cost of goods on mark-up of acquired finished goods inventory |
| 497 |
| - |
| 662 |
| - |
| Net effect of cost of goods on mark-up of acquired finished goods inventory |
| - |
| 167 |
| |||||||||||
Transaction and other special charges |
|
| (2,424 | ) |
|
| - |
|
|
| (2,424 | ) |
|
| - |
| Transaction and other special charges |
|
| 30 |
|
|
| - |
| |
Adjusted EBITDA(1) |
| $ | 740 |
|
| $ | (7,214 | ) |
| $ | (4,043 | ) |
| $ | (11,809 | ) | Adjusted EBITDA(1) |
|
| $ | (900 | ) |
| $ | (4,569 | ) |
______________
(1)(1) Non-GAAP measure
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2021March 31, 2022, Compared to Three and Six Months Ended June 30, 2020March 31, 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.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 threethe following major categories: Owned, AgencyConsumer Packaged Goods (“CPG”) revenue, Bulk revenue, Lowell Farm Services revenue, and Distributed brands.Licensing revenue.
| · | CPG products are |
26 |
Table of Contents |
· | Bulk product includes revenue from flower, biomass and distillates sales. | |
|
|
|
| · | Lowell Farm Services revenue is related to our processing facility that |
|
|
|
| · | Licensing revenue includes fees from licensing the |
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 June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020:March 31, 2021:
|
| Three Months |
|
|
| |||||||
|
| June 30, |
|
| June 30, |
|
|
| ||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| % Change |
| |||
Owned |
| $ | 14,539 |
|
| $ | 7,231 |
|
|
| 101 | % |
Agency |
|
| 535 |
|
|
| 1,981 |
|
|
| -73 | % |
Distributed |
|
| 83 |
|
|
| 682 |
|
|
| -88 | % |
Net revenue |
| $ | 15,157 |
|
| $ | 9,894 |
|
|
| 53 | % |
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
|
| |||||||
|
| March 31, |
|
| March 31, |
|
|
|
|
|
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
|
| % Change |
|
| $ Change |
| ||||
CPG |
| $ | 9,077 |
|
| $ | 6,224 |
|
|
| 46 | % |
| $ | 2,853 |
|
Bulk |
|
| 2,259 |
|
|
| 4,802 |
|
|
| -53 | % |
|
| (2,543 | ) |
Lowell Farm Services |
|
| 350 |
|
|
| - |
|
|
| N/A |
|
|
| 350 |
|
Licensing |
|
| 723 |
|
|
| - |
|
|
| N/A |
|
|
| 723 |
|
Net revenue |
| $ | 12,409 |
|
| $ | 11,026 |
|
|
| 13 | % |
| $ | 1,383 |
|
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:
|
| Six Months |
|
|
| |||||||
|
| June 30, |
|
| June 30, |
|
|
| ||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| % Change |
| |||
Owned |
| $ | 24,204 |
|
| $ | 12,438 |
|
|
| 95 | % |
Agency |
|
| 1,765 |
|
|
| 4,690 |
|
|
| -62 | % |
Distributed |
|
| 214 |
|
|
| 2,208 |
|
|
| -90 | % |
Net revenue |
| $ | 26,183 |
|
| $ | 19,336 |
|
|
| 35 | % |
|
|
|
|
Lowell expects to continue its focus on profitable sales growth in 2021 primarily through increased cultivation yields as a result of completing greenhouse renovationsacquiring the Lowell Smokes and Lowell Herb Co. brands in 2020, including installationFebruary 2021. Lowell brand revenues for the three months ended March 31, 2022 were $5.0 million and represented 55% of environmental monitoring equipment designedCPG revenues. House Weed brand sales increased $2.5 million in the three months ended March 31, 2022 compared to significantly reduce plant stress should the Company encounter severe temperaturesame period last year, reflecting increased packaged flower sales and atmospheric conditionsintroducing new vape and concentrates offerings in the House Weed brand. Offsetting the addition of Lowell brands and increased House Weed sales was a decline in third-party agency and distributed brand revenue from $1.4 million in the first quarter of 2021 to $0.2 million in the first quarter of 2022, a $1.5 million decline in Cypress Reserve packaged flower sales which were replaced by Lowell and House Weed flower sales, and a $0.9 million decline in the flavor concentrates brands as occurred atwe reorganized our concentrates brand offerings.
Bulk sales decreased in the endfirst quarter of 2022, compared to the summersame period in 2020. Flower capacitythe 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 three months ended March 31, 2022, declined approximately 48% from the same period in the prior year, while increasing approximately 27% compared to the fourth quarter of 2021.
LFS and licensing revenues were new activities initiated in the second half of 2021, with LFS generating $350 in the first quarter of 2022, and licensing revenues were $723 for the same period. LFS revenues are expected to be seasonal in alignment with outdoor harvest yields, with the first quarter being the lowest revenue and the fourth quarter being the highest.
A strategic decision was made in 2021 is expected to increase to approximately 40,000 pounds harvested, more than twice the harvest in 2020. The increased output will also increase internally sourced materials for distillation and concentrate products. Revenues are also expected to increase, although at a slower pace, through improved penetration of edible products and selective new product introductions including pre-rolls, vapes and gummies. Our focus only on agency and distributed brand sales will continue to be on those brands that realize a higher per order sales level that will enable profitable growth. As a result, we expect agency and distributed brand sales to continue to decline from 2020 levels. Lastly, LFS revenue is expected to be modest in the third quarter and begin to ramp up in the fourth quarter as new customers are onboarded.level.
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 products for certaina few brands and processes for cultivators that do not have the capability, licensing or capacity to manufactureprocess their own products. The fees earned for these activities absorbs fixed overhead in manufacturing.manufacturing and generates service revenue. Our focus in 20212022 is expected to be on flower, pre-rolls and concentrates, fromon processing owned and third party product at our expanded cultivation operations,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.
27 |
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Three Months Ended June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020:March 31, 2021:
|
| Three Months |
|
| Three Months Ended |
| ||||||||||
|
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Net revenue |
| $ | 15,157 |
| $ | 9,894 |
|
| $ | 12,409 |
| $ | 11,026 |
| ||
Cost of goods sold |
|
| 9,413 |
|
|
| 11,157 |
|
|
| 10,835 |
|
|
| 12,503 |
|
Gross profit (loss) |
| $ | 5,744 |
| $ | (1,263 | ) | |||||||||
Gross profit |
| $ | 1,574 |
| $ | (1,477 | ) | |||||||||
Gross margin |
| 37.9 | % |
| (12.8 | )% |
| 12.7 | % |
| -13.4 | % |
Gross margin was 37.9%12.7% and (12.8)%-13.4% in the quartersthree months ended June 30,March 31, 2022 and 2021, and 2020, respectively. The improvementchange between periods in gross profit and gross margin is primarily due to efficiencies from the $7.3 million, or 101% increase in owned brandhigher margin CPG products representing 73% of net revenue reflecting increased cultivation output of flower and biomass which more than doubledcompared to 56% in the second quartersame period last year, the addition of 2021licensing revenue in the current period and a reduction of lower margin third party flower sales in the current period compared to the same quarter in the prior year, on a similar cost base. Additionally, the $2.0 million, or 77% reduction in revenue in the second quarter of 2021 comparedperiod last year.
We expect to the same quarter in the prior year, from lower margin agency and distributed brands had an unfavorable impact on gross profit of approximately $0.2 million in the second quarter of 2021, while having a favorable impact onrealize improved gross margin in the current quarter.
In the quarter ended June 30, 2021,throughout 2022 as a result of the change in brand product mixcontinuing growth of retail flower and increasedpre-roll products and concentrates from biomass produced at our cultivation output, cost of goods sold decreased 16% compared to the 53%facility, an anticipated increase in revenue resultingLFS revenues, and an increase in licensing fees. While we experienced a modest increase in bulk flower pricing in the gross margin improvement over the same period last year. Cultivation yields returned to levels realizedfirst quarter, we expect that pricing will remain soft in the samefirst half of 2022, and modestly increase from current period inpricing, and will than maintain relatively stable throughout the prior year as a result of the introduction of new genetics in 2021.fall outdoor crop harvesting season.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:
|
| Six Months |
| |||||
|
| June 30, |
|
| June 30, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Net revenue |
| $ | 26,183 |
|
| $ | 19,336 |
|
Cost of goods sold |
|
| 21,915 |
|
|
| 22,328 |
|
Gross profit (loss) |
| $ | 4,268 |
|
| $ | (2,992 | ) |
Gross margin |
|
| 16.3 | % |
|
| (15.5 | )% |
Gross margin was 16.3% and (15.5)% in the six months ended June 30, 2021 and 2020, respectively. The improvement between periods in gross profit and gross margin is primarily due to efficiencies from the $11.8 million, or 95% increase in owned brand revenue, reflecting increased cultivation output of flower and biomass which more than doubled in the current quarter compared to the same quarter in the prior year, on a similar cost base. Additionally, the $4.9 million, or 71% reduction in revenue in the six months ended June 30, 2021 compared to the same period in the prior year, from lower margin agency and distributed brands had an unfavorable impact on gross profit of approximately $0.5 million in the current year to date period, while having a favorable impact on gross margin in the current year to date period.
In the six months ended June 30, 2021, as a result of the change in brand product mix and increased cultivation output, cost of goods sold decreased 2% compared to the 35% increase in revenue resulting in the gross margin improvement over the same period last year. Cultivation yields returned to levels realized in the same period in the prior year as a result of the introduction of new genetics in 2021.
Total Operating Expenses
Total operating expenses consist primarily of costs incurred at our corporate offices;offices; personnel costs;costs; selling, marketing, and other professional service costs including legal and accounting;accounting; and licensing costs. Sales and marketing expenses consist of selling costs to support our customer relationships, including investments in marketing and brand activities and corporate infrastructure required to support our ongoing business. We expect marketing expenses to increase asdecline from 2021 levels while we continue to invest in the development of our proprietary brands while sellingbrands. 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. We expect to incur periodic acquisition and transaction costs related to expansion efforts and to continue to invest where appropriate in the general and administrative function to support the increasing complexity of the cannabis business.
Three Months Ended June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020:March 31, 2021:
|
| Three Months |
|
| Three Months Ended |
| ||||||||||
|
| June 30, |
| June 30, |
|
| March 31, |
| March 31, |
| ||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Total operating expenses |
| $ | 6,217 |
| $ | 3,525 |
|
| $ | 4,033 |
| $ | 4,225 |
|
Total operating expenses increased $2.7decreased $0.2 million for the quarterthree months ended June 30, 2021,March 31, 2022 compared to the same quarter inperiod of the prior year.year, primarily reflecting increased sales and marketing activity supporting the Lowell brands offset in part by lower depreciation, professional fees and stock compensation expense. Operating expenses increaseddecreased as a percentage of sales from 36%38.3% for the three months ended March 31, 2021, to 32.5% for the three months ended March 31, 2022. Operating expenses in the quarter ended June 30, 2020, to 41% in the same quarter this year. While operating expenses2022 are expected to increase asbe relatively flat or decline slightly year over year despite continuing investment in owned brand marketing and infrastructure expenditures are incurred in support of revenue increases, and operating expenses as a percentage of retail sales are expected to continue to decline.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:
|
| Six Months |
| |||||
|
| June 30, |
|
| June 30, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Total operating expenses |
| $ | 10,443 |
|
| $ | 8,905 |
|
Total operating expenses increased $1.5 million for the six months ended June 30, 2021, compared to the same period in the prior year. Stock based compensation expense for the six months ended June 30, 2021 decreased compared to the same period in the prior year by $1.2 million as restricted stock unit grants associated with the reverse takeover fully vested at the end of the first quarter in 2020. Operating expenses declined as a percentage of sales from 46% in the year to date period of 2020 to 40% in the same period of 2021. Operating expenses are expected to increase as owned brand marketing and infrastructure expenditures are incurred in support of revenue increases, and operating expenses as a percentage of sales are expected to be similar to the percentage in the first six months of the current year.
Other Income (Expense)
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020:
|
| Three Months |
| |||||
|
| June 30, |
|
| June 30, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Total other income/(expense) |
| $ | 1,278 |
|
| $ | (3,944 | ) |
Other income in the three months ended June 30, 2021 includes a $2.6 million insurance recovery associated with claims filed as a result of plant stress incurred in the third quarter of 2020 while other expense in the three months ended June 30, 2020 included a $3.5 million loss related to selling the rights to Nevada operations and associated assets. Interest expense in the three months ended June 30, 2021 decreased $128 from the same period in 2020, reflecting the impact of the issuance of convertible debentures in the second quarter last year refinancing the higher interest bridge financing that was in place previously.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:
|
| Six Months |
| |||||
|
| June 30, |
|
| June 30, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Total other income (expense) |
| $ | 325 |
|
| $ | (4,684 | ) |
Other income in the six months ended June 30, 2021 includes the insurance recovery realized in the second quarter while other income in the six months ended June 30, 2020 included the loss on disposing the Nevada operations in the second quarter last year. Interest expense in the six months ended June 30, 2021 decreased $361 from the same period in 2020, due to higher interest bridge financing being outstanding through mid-April until being refinanced by the convertible debenture offering.
Net Income (Loss)
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020:
|
| June 30, |
|
| June 30, |
| ||
(in thousands, except per share amounts) |
| 2021 |
|
| 2020 |
| ||
Net income (loss) |
| $ | 731 |
|
| $ | (8,757 | ) |
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.01 |
|
| $ | (0.26 | ) |
Diluted |
| $ | 0.00 |
|
| $ | (0.26 | ) |
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
Basic |
|
| 71,021 |
|
|
| 33,307 |
|
Diluted |
|
| 201,278 |
|
|
| 33,307 |
|
28 |
Table of Contents |
We generated netOther Income (Expense)
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021:
|
| Three Months Ended |
| |||||
|
| March 31, |
|
| March 31, |
| ||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Total other income (expense) |
| $ | (1,523 | ) |
| $ | (954 | ) |
Other income of $731 in(expense) increased $0.6 million for the quarterthree months ended June 30, 2021,March 31, 2022 compared to a net loss of $8,757 for the same period of the prior year, as a resultprimarily due to an increase in interest expense of $0.5 million related to the factors noted above.mortgage on the new Lowell Farm Services processing facility.
SixNet Income (Loss)
Three Months Ended June 30, 2021March 31, 2022 Compared to SixThree Months Ended June 30, 2020:March 31, 2021:
|
| Six Months |
| |||||
|
| June 30, |
|
| June 30, |
| ||
(in thousands, except per share amounts) |
| 2021 |
|
| 2020 |
| ||
Net loss |
| $ | (5,988 | ) |
| $ | (16,631 | ) |
Net loss per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | (0.10 | ) |
| $ | (0.50 | ) |
Diluted |
| $ | (0.10 | ) |
| $ | (0.50 | ) |
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
Basic |
|
| 33,025 |
|
|
| 28,931 |
|
Diluted |
|
| 61,956 |
|
|
| 28,931 |
|
|
| Three Months Ended |
| |||||
|
| March 31, |
|
| March 31, |
| ||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Net income (loss) |
| $ | (4,057 | ) |
| $ | (6,719 | ) |
We generated a net loss of $5,988$4.1 million in the six monthsquarter ended June 30, 2021,March 31, 2022 compared to a net loss of $16,631$6.7 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 to a lesser extent debt service. OurHistorically our primary source of liquidity ishas 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 ongoing operations, while positive in 2020March 2022, were not sufficient in the quarter to fund operations, and, in particular, to fund the Company’s cultivation 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 the short-term,part by financing should it be available and growth initiatives in the long-term. The Company raised additional funds from a $16.1 million convertible debenture and warrant financing which was initially funded in April 2020 and finalized in May 2020 and a $25.0 million unit financing (with each unit consisting of one Subordinate Voting Share and one-half of one warrant, each whole warrant exercisable for a Subordinate Voting Share) in December 2020.economically feasible.
AsAt March 31, 2022, we had $5.9 million in cash and cash equivalents and $18.0 million of June 30, 2021, the Company had $9.1working capital, compared to $7.9 million of cash and cash equivalents and $22.0$21.3 million of working capital compared to $25.8 million of cashat December 31, 2021. Cash and cash equivalents in the quarter funded operations, capital expenditures and $30.9 million of working capital as of December 31, 2020.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 cash position and to continueability to fund operations and capital expenditures including:
| · | Accelerated cultivation facility and operating assets renovations |
|
|
|
| · | Developed new |
|
|
|
| · | |
| Scaled back our investment in and support for non-core brands, |
29 |
Table of Contents |
| · | 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 |
generation,
· | Licensed the Lowell Smokes brand through affiliations with Ascend Wellness LLC in Illinois and Massachusetts, and, |
The Company realized marginanticipates continued improvement in the first six months of 2021, compared to the same period in the prior year, as greenhouse renovations were substantially completed, low profit agency and distributed brands were eliminated, and operational efficiencies improved. The Company anticipates improvement in gross margin for the balance of the year,2022 due in large part to yield improvements in cultivation.cultivation, greater revenues from LFS and licensing operations and improved operational efficiency.
Cash Flows
The following table presents the Company'sCompany’s net cash inflows and outflows from the condensed interim consolidated financial statements of the Company for the sixthree months ended June 30, 2021March 31, 2022 and 2020:2021:
|
| Six Months |
|
|
|
|
|
| Three Months Ended |
|
|
|
|
| ||||||||||||||||||
|
| June 30, |
| June 30, |
| Change |
|
| March 31, |
| March 31, |
| Change |
| ||||||||||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| $ | % |
|
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
| ||||||||||
Net cash used in operating activities |
| $ | (10,785 | ) |
| $ | (7,473 | ) |
| $ | (3,312 | ) |
| (44 | )% |
| $ | (874 | ) |
| $ | (9,271 | ) |
| $ | 8,397 |
| 91 | % | |||
Net cash used in investing activities |
| (5,271 | ) |
| (1,367 | ) |
| (3,904 | ) |
| (286 | )% |
| (483 | ) |
| (2,962 | ) |
| 2,479 |
| 84 | % | |||||||||
Net cash (used) provided by financing activities |
|
| (582 | ) |
|
| 14,197 |
|
|
| (14,779 | ) |
|
| (104 | )% |
|
| (644 | ) |
|
| 54 |
|
|
| (698 | ) |
|
| -1,293 | % |
Change in cash and cash equivalents and restricted cash |
| $ | (16,638 | ) |
| $ | 5,357 |
|
| $ | (21,995 | ) |
|
| (411 | )% | ||||||||||||||||
Change in cash and cash equivalents |
| $ | (2,001 | ) |
| $ | (12,179 | ) |
| $ | 10,178 |
|
|
| 84 | % |
Cash used in operating activities
Net cash used in operating activities was $10.8$0.9 million for the sixthree months ended June 30, 2021, an increaseMarch 31, 2022, a decrease in cash used of $3.3$8.4 million or 44%91%, compared to the sixthree months ended June 30, 2020.March 31 2021. The increasedecrease was primarily driven by inventory increasing $1.5net loss decreasing $2.7 million for the three months ended March 31, 2022, compared to the same period in 2021, accounts receivable decreasing by $2.3 million in the sixthree months ended June 30,March 31, 2022, compared to an increase of $2.5 million in the same period in 2021, primarily reflecting increased collection efforts, and accounts payable and accrued expenses increasing $2.0 million in the three months ended March 31, 2022, compared to a reduction of $2.0$2.1 million in the same period of 2021. These changes were partially off-set by an increase in inventory of $2.5 million in the three months ended March 2022, primarily due an increase in pre-roll manufacturing volumes and third party bulk flower purchases, compared to a increase of $0.7 million in the first sixthree months of 2020, and accounts receivable increasing by $1.5 million in the six months ended June 30, 2021 due to higher sales levels, compared to a decrease of $1.4 million in the first six months of 2020.2021.
Cash used in investing activities
Net cash used in investing activities was $5.3$0.5 million for the sixthree months ended June 30, 2021, an increaseMarch 31, 2022, a decrease in cash used of $3.9$2.5 million or 84%, compared to the same period of the prior year. CashThe change in cash used inwas primarily due to the Lowell brand acquisition wasof $4.6 million which was off-set by net proceeds of $2.0 million from the terminationsale of assets, during the W Vapes acquisition agreement. See Note 2 in notes to the condensed consolidated financial statements. Capital expenditures were $0.6 million in the sixthree months ended June 30, 2021, principally associated with greenhouse renovations, compared to $4.1 million in capital expenditures in the same period last year. Greenhouse renovations were substantially completed at the end of the third quarter in 2020. Remaining construction at the cultivation facility consists primarily of the construction of a head house for processing of flower and biomass, which is expected to be completed around the end of the third quarter inMarch 31, 2021.
Cash (used in) provided by financing activities
Net cash used in financing activities was $0.6 million for the six months ended June 30, 2021, compared to net cash provided by financing activities of $14.2 million in the same period of the prior year, primarily due to proceeds from the note payable financing in the prior year.
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Cash (used in) provided by financing activities
Net cash used by financing activities was $0.6 million for the three months ended March 31, 2022, compared to net cash provided by financing activities of $54 for the three months ended March 31, 2021, an increase of cash used of $0.7 million. The change was primarily due to proceeds from exercise of warrants and options of $0.7 million during the three months ended March 31, 2021.
We expect that our cash on hand and cash flows from operations will be adequate to meet our current operational needs for the next 12 months. The Company intends to seek additional external financing to fund new business initiatives, including the construction or expansion of additional cultivation sites.
Working Capital and Cash on Hand
The following table presents the Company'sCompany’s cash on hand and working capital position as of June 30, 2021March 31, 2022 and December 31, 2020:2021:
|
| June 30, |
| December 31, |
| Change |
|
| March 31, |
| December 31, |
| Change |
| ||||||||||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
| ||||||||
Working capital(1) |
| $ | 21,970 |
| $ | 30,882 |
| $ | (8,912 | ) |
| (29 | )% |
| $ | 17,993 |
| $ | 21,305 |
| $ | (3,312 | ) |
| -15.5 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Cash and cash equivalents |
| $ | 9,113 |
| $ | 25,751 |
| $ | (16,638 | ) |
| (65 | )% |
| $ | 5,886 |
| $ | 7,887 |
| $ | (2,001 | ) |
| -25.4 | % |
_______________________________
(1) Non-GAAP measure - see Non-GAAP Financial Measures in this MD&A. |
At DecemberMarch 31, 2020,2022, we had $25.8$5.9 million in cash and $30.9cash equivalents and $18.0 million of working capital, compared to $9.1$7.9 million of cash and $22.0cash equivalents and $21.3 million of working capital at June 30,December 31, 2021. The decrease in cash and cash equivalents was primarily due to funding operational losses and cash used in the Lowell brand asset acquisition.losses.
The Company’s future working capital is expected to be significantly impacted by the growth in operations, increased cultivation output, and continuing margin improvement.
CHANGES IN OR ADOPTION OF ACCOUNTING PRONOUNCEMENTS
This MD&A should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2020.2021. 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 reviewrevision 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 |
|
| |
· | Estimated Useful Lives and Amortization of Intangible Assets |
|
| |
· | Identifiable assets acquired and liabilities assumed are recognized at the acquisition date fair values as defined by accounting standards related to fair value measurements. |
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|
| Fair Value of Investments in Private Entities |
|
| |
· | Share-Based Compensation |
|
| |
· | Deferred Tax Asset and Valuation Allowance |
FINANCIAL INSTRUMENTS AND FINANCIAL RISK
The Company'sCompany’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities;liabilities; current portion of long-term debt;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 |
|
| |
· | Level 2 |
|
| |
· | Level 3 |
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 |
|
| |
· | 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. |
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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 |
|
| Maturity: < 1 Year |
|
| Maturity: > 1 Year |
|
| Maturity: < 1 Year |
| Maturity: > 1 Year |
| |||||||||||||
|
|
|
|
|
|
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| ||||||||||
(in thousands) |
|
|
|
|
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||
Accounts payable and Other accrued liabilities |
| $ | 8,325 |
|
| $ | - |
|
| $ | 8,541 |
| $ | 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 |
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 |
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. |
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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
|
| 2021 |
|
| 2021 |
| ||
|
| First |
|
| Second |
| ||
(in thousands, except per share amounts) |
| Quarter |
|
| Quarter |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 11,026 |
|
| $ | 15,157 |
|
Gross profit (loss) |
| $ | (1,477 | ) |
| $ | 5,744 |
|
Operating loss |
| $ | (5,702 | ) |
| $ | (473 | ) |
Income (loss) before income taxes |
| $ | (6,656 | ) |
| $ | 805 |
|
Net income (loss) |
| $ | (6,719 | ) |
| $ | 731 |
|
Income (loss) per share - basic |
| $ | (0.13 | ) |
| $ | 0.01 |
|
Income (loss) per share - diluted |
| $ | (0.13 | ) |
| $ | 0.00 |
|
|
|
|
|
|
|
|
|
|
|
| 2020 |
|
| 2020 |
| ||
|
| First |
|
| Second |
| ||
(in thousands, except per share amounts) |
| Quarter |
|
| Quarter |
| ||
Revenue |
| $ | 9,442 |
|
| $ | 9,894 |
|
Gross loss |
| $ | (1,729 | ) |
| $ | (1,263 | ) |
Operating loss |
| $ | (7,109 | ) |
| $ | (4,788 | ) |
Loss before income taxes |
| $ | (7,849 | ) |
| $ | (8,732 | ) |
Net loss |
| $ | (7,874 | ) |
| $ | (8,757 | ) |
Loss per share - basic |
| $ | (0.24 | ) |
| $ | (0.26 | ) |
Loss per share - diluted |
| $ | (0.24 | ) |
| $ | (0.26 | ) |
Consolidated Financial Position |
| June 30, 2021 |
|
| December 31, 2020 |
| ||
Cash |
| $ | 9,113 |
|
| $ | 25,751 |
|
Current assets |
| $ | 34,216 |
|
| $ | 46,604 |
|
Property, plant and equipment, net |
| $ | 64,496 |
|
| $ | 49,243 |
|
Total assets |
| $ | 140,589 |
|
| $ | 97,416 |
|
Current liabilities |
| $ | 12,246 |
|
| $ | 15,723 |
|
Working capital |
| $ | 21,970 |
|
| $ | 30,883 |
|
Long-term notes payable including current portion |
| $ | 23,211 |
|
| $ | 15,217 |
|
Capital lease obligations including current portion |
| $ | 37,670 |
|
| $ | 38,834 |
|
Total stockholders' equity |
| $ | 70,241 |
|
| $ | 31,156 |
|
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Consolidated Financial Position |
| March 31, |
|
| December 31, |
| ||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Cash |
| $ | 5,886 |
|
| $ | 7,887 |
|
Current assets |
| $ | 30,039 |
|
| $ | 31,428 |
|
Property, plant and equipment, net |
| $ | 63,833 |
|
| $ | 64,779 |
|
Total assets |
| $ | 134,892 |
|
| $ | 137,379 |
|
Current liabilities |
| $ | 12,046 |
|
| $ | 10,123 |
|
Working capital |
| $ | 17,993 |
|
| $ | 21,305 |
|
Long-term notes payable including current portion |
| $ | 107 |
|
| $ | 249 |
|
Capital lease obligations including current portion |
| $ | 35,910 |
|
| $ | 36,496 |
|
Mortgage obligation |
| $ | 8,813 |
|
| $ | 8,857 |
|
Total stockholders’ equity |
| $ | 66,411 |
|
| $ | 70,307 |
|
OUTSTANDING SHARE DATA
As of August 13, 2021,May 9, 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 |
|
| ||
Class B shares (1) | 11,738 |
| ||
Super voting shares |
|
| 203 |
|
Reserved for Issuance |
|
|
|
|
Options |
|
|
| |
Restricted Stock Units |
|
|
| |
Warrants |
|
|
| |
Convertible debenture shares |
|
|
| |
Convertible debenture warrants |
|
|
| |
|
|
|
|
(1) Class B shares reserved for conversion to Subordinate voting shares.
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ItemItem 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.
ItemItem 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 June 30, 2021,March 31, 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 March 31, 2022.
Changes in Internal Control over Financial Reporting
Subsequent to the quarter ended March 31, 2021, our Form 10 became effective with the SEC. We are engaged in the process of the design and implementation of our internal control over financial reporting in a manner commensurate with the scale of our operations.
Table of Contents |
PARTPART II —- OTHER INFORMATION
ItemItem 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.
ItemItem 1A. Risk Factors
There were no material changes to the risk factors disclosed in, Item 1A. of“Risk Factors” in our Form 10-Kfor the Form 10.year ended December 31, 2021.
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2021,March 31, 2022 we did not make any repurchases of our equity securities.
ItemItem 6. Exhibits
Exhibit
|
| Exhibit Description |
31.1 |
| Certification of Chief Executive Officer filed pursuant to Exchange Act Rules 13a-14(a)and 15d-14(a) of the Securities |
31.2 |
| Certification of Chief Financial Officer filed pursuant to Exchange Act Rules 13a-14(a)and 15d-14(a) of the Securities |
|
| Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
| Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
______________________________
* | Furnished herewith. This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LOWELL FARMS, INC. | ||
|
|
|
|
Date: | By: | /s/ Mark Ainsworth | |
|
| Mark Ainsworth |
|
|
| Chief Executive Officer (principal executive officer) |
|
|
|
|
|
Date: | By: | /s/ Brian Shure |
|
|
| Brian Shure |
|
|
| Executive Vice President, Finance and Chief Financial Officer | |
|
|