UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period ended June 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from _______________ to ______________

 

Commission File Number 000-56254

 

LOWELL FARMS INC.

(Exact name of Registrant as Specified in its Charter)

  

British Columbia, Canada

 

N/A

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

19 Quail Run CircleSuite B, Salinas, California.

 

93907

(Address of Principal Executive Offices)

 

(Zip Code)

 

(831) 998-8214

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class registered

Trading Symbol(s)

Name of each exchange on which registered

NONE

NONE

NONE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No ☒

 

There were 78,805,938 shares of the Registrant’s Subordinate Voting Shares outstanding as of August 13, 2021.

 

 

 

  

TABLE OF CONTENTS

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

3

 

 

Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2021 and 2020

5

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020

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

34

 

Item 4.

Controls and Procedures

34

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

35

 

Item 1A.

Risk Factors

35

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

Item 6.

Exhibits

35

 

 

Exhibit Index

35

 

 

Signatures

36

 

 

 
2

Table of Contents

  

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

LOWELL FARMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$9,113

 

 

$25,751

 

Accounts Receivable - net of allowance for doubtful accounts of $1,024 and $1,389 at June 30, 2021 and December 2020, respectively

 

 

6,223

 

 

 

4,529

 

Inventory

 

 

14,736

 

 

 

9,933

 

Prepaid expenses and other current assets

 

 

4,144

 

 

 

6,391

 

Total current assets

 

 

34,216

 

 

 

46,604

 

Property and equipment, net

 

 

64,496

 

 

 

49,243

 

Goodwill

 

 

357

 

 

 

357

 

Other intangibles, net

 

 

40,919

 

 

 

736

 

Other assets

 

 

601

 

 

 

476

 

 

 

 

 

 

 

 

 

 

Total assets

 

$140,589

 

 

$97,416

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$3,313

 

 

$2,137

 

Accrued payroll and benefits

 

 

1,142

 

 

 

1,212

 

Notes payable, current portion

 

 

369

 

 

 

1,213

 

Lease obligation, current portion

 

 

2,410

 

 

 

2,301

 

Other current liabilities

 

 

5,012

 

 

 

8,860

 

Total current liabilities

 

 

12,246

 

 

 

15,723

 

Notes payable

 

 

258

 

 

 

303

 

Lease obligation

 

 

35,260

 

 

 

36,533

 

Convertible debentures

 

 

13,646

 

 

 

13,701

 

Mortgage obligation

 

 

8,938

 

 

 

-

 

Total liabilities

 

 

70,348

 

 

 

66,260

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Share capital

 

 

170,613

 

 

 

125,540

 

Accumulated deficit

 

 

(100,372)

 

 

(94,384)

Total stockholders' equity

 

 

70,241

 

 

 

31,156

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$140,589

 

 

$97,416

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 
3

Table of Contents

 

LOWELL FARMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net revenue

 

$15,157

 

 

$9,894

 

 

$26,183

 

 

$19,336

 

Cost of goods sold

 

 

9,413

 

 

 

11,157

 

 

 

21,915

 

 

 

22,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

5,744

 

 

 

(1,263)

 

 

4,268

 

 

 

(2,992)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

3,817

 

 

 

1,456

 

 

 

6,285

 

 

 

4,733

 

Sales and marketing

 

 

2,233

 

 

 

1,184

 

 

 

3,667

 

 

 

2,410

 

Depreciation and amortization

 

 

167

 

 

 

885

 

 

 

491

 

 

 

1,762

 

Total operating expenses

 

 

6,217

 

 

 

3,525

 

 

 

10,443

 

 

 

8,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(473)

 

 

(4,788)

 

 

(6,175)

 

 

(11,897)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

1,858

 

 

 

-

 

 

 

1,416

 

 

 

25

 

Loss on termination of investment

 

 

-

 

 

 

(3,524)

 

 

-

 

 

 

(3,524)

Unrealized gain on change in fair value of investment

 

 

18

 

 

 

306

 

 

 

124

 

 

 

391

 

Interest expense

 

 

(598)

 

 

(726)

 

 

(1,215)

 

 

(1,576)

Total other income (expense)

 

 

1,278

 

 

 

(3,944)

 

 

325

 

 

 

(4,684)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

 

805

 

 

 

(8,732)

 

 

(5,850)

 

 

(16,581)

Provision for income taxes

 

 

74

 

 

 

25

 

 

 

138

 

 

 

50

 

Net income (loss)

 

$731

 

 

$(8,757)

 

$(5,988)

 

$(16,631)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.01

 

 

$(0.26)

 

$(0.10)

 

$(0.50)

Diluted

 

$0.00

 

 

$(0.26)

 

$(0.10)

 

$(0.50)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

71,021

 

 

 

33,307

 

 

 

61,956

 

 

 

33,025

 

Diluted

 

 

201,278

 

 

 

33,307

 

 

 

61,956

 

 

 

33,025

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 
4

Table of Contents

 

LOWELL FARMS INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands)

 

Three Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

Subordinate

 

 

Super

 

 

 

 

 

 

 

 

 

Voting

 

 

Voting

 

 

Share

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance—March 31, 2021

 

 

83,221

 

 

 

203

 

 

$161,006

 

 

$(101,103)

 

$59,903

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

731

 

 

 

731

 

Shares issued in connection with conversion of convertible debentures

 

 

1,003

 

 

 

-

 

 

 

200

 

 

 

-

 

 

 

200

 

Issuance of shares associated with acquisitions

 

 

7,998

 

 

 

-

 

 

 

9,023

 

 

 

-

 

 

 

9,023

 

Exercise of options

 

 

76

 

 

 

-

 

 

 

46

 

 

 

-

 

 

 

46

 

Share-based compensation expense

 

 

125

 

 

 

-

 

 

 

338

 

 

 

-

 

 

 

338

 

Balance—June 30, 2021

 

 

92,423

 

 

 

203

 

 

$170,613

 

 

$(100,372)

 

$70,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinate

 

 

Super

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voting

 

 

Voting

 

 

Share

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance—March 31, 2020

 

 

32,988

 

 

 

203

 

 

$97,772

 

 

$(80,348)

 

$17,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,757)

 

 

(8,757)

Shares issued in connection with conversion of convertible debentures

 

 

250

 

 

 

-

 

 

 

62

 

 

 

-

 

 

 

62

 

Issuance of warrants

 

 

-

 

 

 

-

 

 

 

1,556

 

 

 

-

 

 

 

1,556

 

Share-based compensation expense

 

 

104

 

 

 

-

 

 

 

213

 

 

 

-

 

 

 

213

 

Balance—June 30, 2020

 

 

33,342

 

 

 

203

 

 

$99,603

 

 

$(89,105)

 

$10,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinate

 

 

Super

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voting

 

 

Voting

 

 

Share

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance—December 31, 2020

 

 

57,617

 

 

 

203

 

 

$125,540

 

 

$(94,384)

 

$31,156

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,988)

 

 

(5,988)

Shares issued in connection with conversion of convertible debentures

 

 

2,393

 

 

 

-

 

 

 

478

 

 

 

-

 

 

 

478

 

Issuance of shares associated with acquisitions

 

 

30,641

 

 

 

-

 

 

 

43,259

 

 

 

-

 

 

 

43,259

 

Exercise of warrants

 

 

1,325

 

 

 

-

 

 

 

665

 

 

 

-

 

 

 

665

 

Exercise of options

 

 

76

 

 

 

-

 

 

 

46

 

 

 

-

 

 

 

46

 

Share-based compensation expense

 

 

371

 

 

 

-

 

 

 

625

 

 

 

-

 

 

 

625

 

Balance—June 30, 2021

 

 

92,423

 

 

 

203

 

 

$170,613

 

 

$(100,372)

 

$70,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinate

 

 

Super

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voting

 

 

Voting

 

 

Share

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance—December 31, 2019

 

 

32,844

 

 

 

203

 

 

$96,160

 

 

$(72,474)

 

$23,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,631)

 

 

(16,631)

Shares issued in connection with conversion of convertible debentures

 

 

250

 

 

 

-

 

 

 

62

 

 

 

-

 

 

 

62

 

Issuance of warrants

 

 

-

 

 

 

-

 

 

 

1,556

 

 

 

-

 

 

 

1,556

 

Share-based compensation expense

 

 

248

 

 

 

-

 

 

 

1,825

 

 

 

-

 

 

 

1,825

 

Balance—June 30, 2020

 

 

33,342

 

 

 

203

 

 

$99,603

 

 

$(89,105)

 

$10,498

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 
5

Table of Contents

  

LOWELL FARMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$(5,988)

 

$(16,631)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,858

 

 

 

1,762

 

Amortization of debt issuance costs

 

 

420

 

 

 

-

 

Share-based compensation expense

 

 

625

 

 

 

1,825

 

Provision for doubtful accounts

 

 

173

 

 

 

720

 

Termination of branding rights agreement

 

 

152

 

 

 

-

 

Unrealized gain on change in fair value of investments

 

 

(125)

 

 

(395)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,526)

 

 

1,390

 

Inventory

 

 

(1,501)

 

 

1,980

 

Prepaid expenses and other current assets

 

 

(553)

 

 

(333)

Other assets

 

 

-

 

 

 

-

 

Accounts payable and accrued expenses

 

 

(4,320)

 

 

2,307

 

Other current and long-term liabilities

 

 

-

 

 

 

(98)

Net cash used in operating activities

 

$(10,785)

 

$(7,473)

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from asset sales

 

$1,979

 

 

$-

 

Purchases of property and equipment

 

 

(608)

 

 

(4,110)

Disposition of business interest, net of cash received

 

 

-

 

 

 

2,743

 

Acquisition of business assets, net

 

 

(6,642)

 

 

-

 

Investment in corporate interests

 

 

-

 

 

 

-

 

Net cash used in investing activities

 

$(5,271)

 

$(1,367)

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Principal payments on lease obligations

 

$(1,164)

 

$(1,053)

Payments on notes payable

 

 

(128)

 

 

(31)

Proceeds from convertible notes, net of financing costs

 

 

-

 

 

 

13,663

 

Issuance of warrants associated with convertible notes offering

 

 

-

 

 

 

1,556

 

Proceeds from brokered private placement

 

 

-

 

 

 

62

 

Proceeds from lease financing

 

 

-

 

 

 

-

 

Proceeds from notes payable

 

 

-

 

 

 

-

 

Proceeds from exercise of warrants and options

 

 

710

 

 

 

-

 

Issuance of subordinate voting shares for acquisition

 

 

-

 

 

 

-

 

Payment of debt issuance costs

 

 

-

 

 

 

-

 

Net cash (used) provided by financing activities

 

$(582)

 

$14,197

 

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents and restricted cash

 

$(16,638)

 

$5,357

 

Cash and cash equivalents—beginning of year

 

 

25,751

 

 

 

1,344

 

Cash, cash equivalents and restricted cash—end of period

 

$9,113

 

 

$6,701

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$605

 

 

$1,403

 

Cash paid during the period for income taxes

 

$187

 

 

$-

 

 

 

 

 

 

 

 

 

 

OTHER NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Property and equipment acquired via capital lease

 

$-

 

 

$578

 

Disposition of business interests

 

$-

 

 

$2,743

 

Issuance of warrants

 

$-

 

 

$1,556

 

Shares issued for services in connection with convertible debenture offering

 

$-

 

 

$62

 

Issuance of subordinate voting shares in exchange for net assets acquired

 

$43,259

 

 

$-

 

Liabilities assumed and receivable forgiveness in exchange for net assets acquired

 

$2,910

 

 

$-

 

Debt and associated accrued interest converted to subordinate voting shares

 

$478

 

 

$-

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 
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 10 filed for the year ended December 31, 2020. There have been no material changes to our significant accounting policies as of and for the six months ended June 30, 2021.

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all intercompany balances and transactions.

 

The condensed consolidated balance sheet at December 31, 2020, has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include allowance for doubtful accounts and credit losses, carrying value of inventory, revenue recognition, accounting for stock-based compensation expense, and income taxes. Actual results could differ from those estimates.

 

The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates. This impacts the Company's normal operations. To date, the Company has been able to provide uninterrupted access to its products and services, including certain employees that are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of the Company’s employees or its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Recently Adopted Accounting Standards

 

In May 2020, the SEC adopted the final rule under SEC release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, amending Rule 1-02(w)(2) which includes amendments to certain of its rules and forms related to the disclosure of financial information regarding acquired or disposed businesses. Among other changes, the amendments impact SEC rules relating to (1) the definition of “significant” subsidiaries, (2) requirements to provide financial statements for “significant” acquisitions, and (3) revisions to the formulation and usage of pro forma financial information. The final rule became effective on January 1, 2021; however, voluntary early adoption was permitted. The Company early adopted the provisions of the final rule in 2020. The guidance did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.

 

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases Topic 842 Target improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which further clarifies the determination of fair value of the underlying asset by lessors that are not manufacturers or dealers and modifies transition disclosure requirements for changes in accounting principles and other technical updates. The Company adopted the standard effective January 1, 2019 using the modified retrospective adoption method which allowed it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit. In connection with the adoption of the new lease pronouncement, the Company recorded a charge to accumulated deficit of $847. Refer to the Summary of Effects of Lease Accounting Standard Update Adopted in First Quarter of 2019 in the audited consolidated financial statements and notes thereto in the Company’s Form 10 filed for the year ended December 31, 2020.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequent amendments to the initial guidance: ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, ASU 2019-05 “Financial Instruments-Credit Losses”, ASU 2019-11 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (collectively, Topic 326),ASU 2020-02 Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842) and ASU 2020-03 Codification Improvements to Financial Instruments. Topic 326 requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the year ended December 31, 2020. The Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses. We continue to monitor the economic impact of the COVID-19 pandemic, however based on current market conditions, the adoption of the ASU did not have a material impact on the condensed consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606. This guidance amended Topic 808 and Topic 606 to clarify that transactions in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer for a distinct good or service (i.e., unit of account). The amendments preclude an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance is effective for the year ended December 31, 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. This guidance was effective for the Company in our fiscal year and interim periods beginning on January 1, 2021 and did not have a material impact on our condensed consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01 Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance addresses accounting for the transition into and out of the equity method and provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. We are currently evaluating the impact of ASU 2020-01 on our Consolidated Financial Statements, which was effective for the Company in our fiscal year and interim periods beginning on January 1, 2021 and did not have a material impact on our condensed consolidated financial statements.

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Accounting standards not yet adopted

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This update amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity and improves and amends the related EPS guidance for both Subtopics. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021, which means it will be effective for our fiscal year beginning January 1, 2022. Early adoption is permitted. We are currently evaluating the impact of ASU 2020-06 on our condensed consolidated financial statements.

 

No other recently issued accounting pronouncements had or are expected to have a material impact on our condensed consolidated financial statements.

 

2. ACQUISITIONS

 

Completed Acquisitions

 

 

 

(1)

 

 

(2)

 

 

(3)

 

 

(4)

 

 

 

 

 

 

 

 

 

 

The Humble

 

 

The Hacienda

 

 

Lowell Farm

 

 

 

 

(in thousands)

 

Kaizen Inc.

 

 

Flower Co.

 

 

Company, LLC

 

 

Services

 

 

Total

 

CONSIDERATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent Payment

 

$50

 

 

$44

 

 

$-

 

 

$-

 

 

$94

 

Cash

 

 

 

 

 

 

 

 

 

 

4,019

 

 

 

-

 

 

 

4,019

 

Transaction costs

 

 

 

 

 

 

 

 

 

 

428

 

 

 

190

 

 

 

618

 

Note payable and other obligations

 

 

200

 

 

 

65

 

 

 

3,115

 

 

 

9,000

 

 

 

12,380

 

Fair value of subordinate voting shares

 

 

62

 

 

 

55

 

 

 

34,358

 

 

 

9,610

 

 

 

44,085

 

Total consideration

 

$312

 

 

$164

 

 

$41,920

 

 

$18,800

 

 

$61,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PURCHASE PRICE ALLOCATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

$-

 

 

$6

 

 

$3,300

 

 

$-

 

 

$3,306

 

Accounts receivable - net

 

 

-

 

 

 

-

 

 

 

1,312

 

 

 

-

 

 

 

1,312

 

Other tangible assets

 

 

-

 

 

 

-

 

 

 

739

 

 

 

15,750

 

 

 

16,489

 

Intangible assets - brands and tradenames

 

 

104

 

 

 

80

 

 

 

37,299

 

 

 

-

 

 

 

37,483

 

Intangible assets - technology and know-how and other

 

 

208

 

 

 

78

 

 

 

-

 

 

 

3,050

 

 

 

3,336

 

Liabilities assumed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payables and other liabilities

 

 

-

 

 

 

-

 

 

 

(730)

 

 

-

 

 

 

(730)

Fair value of net assets acquired

 

$312

 

 

$164

 

 

$41,920

 

 

$18,800

 

 

$61,196

 

 

The Company completed the following asset acquisitions, and allocated the purchase price as follows:

 

The Kaizen Inc. and The Humble Flower Co. acquisitions qualified as a business combination under ASC 805. The Hacienda Company, LLC acquisition qualified as an asset acquisition under ASU 2017.01. Consideration has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. No goodwill was recognized. The results of these acquisitions are included in the Company’s net earnings from the date of acquisition.

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The fair value of the assets acquired and the liabilities assumed for Kaizen Inc. and the Humble Flower Company were finalized in the quarter ended June 30, 2020.

 

Kaizen Inc.

 

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.

 

The Humble Flower Co.

 

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, we acquired real property and related assets of a first-of-its-kind cannabis drying and midstream processing facility located in Monterey County for a purchase price of $18,800. The 10-acre, 40,000 square foot processing facility will provide drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 lbs. of wholesale cannabis flower annually. The new facility will process nearly all the cannabis that we grow at our existing cultivation operations. Additionally, we commissioned a new business unit called Lowell Farm Services (“LFS”), which will engage in fee-based processing services for regional growers from the Salinas Valley area. The acquisition consideration was comprised primarily of a note payable of $9.0 million and the issuance of 7,997,520 subordinate voting shares and obligations assumed. LFS operations are expected to become operational during the third quarter of 2021.

 

Terminated Acquisition

 

On May 14, 2019, the Company entered into a definitive agreement to acquire the assets of W The Brand (“W Vapes”), a manufacturer and distributor in Nevada and Oregon of cannabis concentrates, cartridges and disposable pens, in a cash and stock transaction. Under the terms of the agreement, the purchase consideration to W Vapes shareholders consisted of $10 million in cash and $10 million in Subordinate Voting Shares (based on a deemed value of CDN$15.65 per share). In November 2019, the definitive agreement was amended whereby the Company advanced $2 million in non-recourse funds to the seller in exchange for release of $10 million of cash held in escrow related to the acquisition and in December 2019, the Company purchased the Las Vegas, Nevada facility for $4.1 million.

 

On July 17, 2020, the Company announced the termination of the definitive agreement with W Vapes and the obligation to acquire the assets of W Vapes was terminated. The termination coincided with an asset acquisition announcement between W Vapes and Planet 13 Holdings Inc. (“Planet 13”). Additionally, the Company sold the Las Vegas facility to certain affiliates of Planet 13 for a cash payment of approximately $500, and an additional cash payment of approximately $2.8 million upon regulatory approval of the W Vapes and Planet 13 transaction which was received in January 2021, and in the third quarter the Company finalized a note payable of $843 to the owners of W Vapes, payable coinciding with the receipt of the $2.8 million payment from the facility sale, which was paid in January 2021. As a result, the Company reflected a $4.4 million loss in loss on termination of investments, net on its consolidated statement of operations for the year ended December 31, 2020.

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3. PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets were comprised of the following items:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Deposits

 

$533

 

 

$572

 

Insurance

 

 

917

 

 

 

593

 

Supplier advances

 

 

1,623

 

 

 

504

 

Nevada building sale proceeds

 

 

-

 

 

 

2,800

 

Other

 

 

1,071

 

 

 

1,922

 

Total prepaid and other current assets

 

$4,144

 

 

$6,391

 

 

4. INVENTORY

 

Inventory was comprised of the following items:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Raw materials

 

$11,852

 

 

$7,950

 

Work in process

 

 

45

 

 

 

-

 

Finished goods

 

 

2,839

 

 

 

1,983

 

Total inventory

 

$14,736

 

 

$9,933

 

 

5. OTHER CURRENT LIABILITIES

 

Other current liabilities were comprised of the following items:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Excise and cannabis tax

 

$3,912

 

 

$5,780

 

Third party brand distribution accrual

 

 

269

 

 

 

584

 

Insurance and professional fee accrual

 

 

820

 

 

 

746

 

Other

 

 

11

 

 

 

1,750

 

Total other current liabilities

 

$5,012

 

 

$8,860

 

 

 
11

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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

6. PROPERTY AND EQUIPMENT

 

A reconciliation of the beginning and ending balances of property and equipment and accumulated depreciation during the six months ended June 30, 2021 and property and equipment, net as of December 31, 2020 are as follows:

 

 

 

Land and

 

 

Leasehold

 

 

Furniture

 

 

 

 

 

 

Construction

 

 

Right of

 

 

 

(in thousands)

 

Buildings

 

 

Improvements

 

 

and Fixtures

 

 

Equipment

 

 

Vehicles

 

 

in Process

 

 

Use Assets

 

 

Total

 

Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2020

 

$-

 

 

$10,799

 

 

$50

 

 

$1,276

 

 

$854

 

 

$2,528

 

 

$41,530

 

 

$57,037

 

Additions

 

 

-

 

 

 

73

 

 

 

-

 

 

 

268

 

 

 

-

 

 

 

814

 

 

 

-

 

 

 

1,155

 

Business Acquisitions

 

 

14,529

 

 

 

-

 

 

 

-

 

 

 

1,413

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,942

 

Disposals

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance—June 30, 2021

 

$14,529

 

 

$10,872

 

 

$50

 

 

$2,957

 

 

$854

 

 

$3,342

 

 

$41,530

 

 

$74,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2020

 

$-

 

 

$(634)

 

$(47)

 

$(427)

 

$(411)

 

$-

 

 

$(6,275)

 

$(7,794)

Depreciation

 

 

-

 

 

 

(167)

 

 

(1)

 

 

(72)

 

 

(77)

 

 

-

 

 

 

(1,527)

 

 

(1,844)

Disposals

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance—June 30, 2021

 

$-

 

 

$(801)

 

$(48)

 

$(499)

 

$(488)

 

$-

 

 

$(7,802)

 

$(9,638)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Book Value-June 30, 2021

 

$14,529

 

 

$10,071

 

 

$2

 

 

$2,458

 

 

$366

 

 

$3,342

 

 

$33,728

 

 

$64,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Book Value -December 31, 2020

 

$-

 

 

$10,165

 

 

$3

 

 

$849

 

 

$443

 

 

$2,528

 

 

$35,255

 

 

$49,243

 

 

Construction in process represent assets under construction related to cultivation, manufacturing, and distribution facilities not yet completed or otherwise not placed in service.

 

Depreciation expense of $946 and $1,044 were recorded for the three months ended June 30, 2021 and 2020, respectively, of which $584 and $769 respectively, were included in cost of goods sold. Depreciation expense of $195 was also recorded in other income (expense) for the three months ended June 30, 2021.

 

Depreciation expense of $1,844 and $1,909 were recorded for the six months ended June 30, 2021 and 2020, respectively, of which $1,168 and $1,283 respectively, were included in cost of goods sold. Depreciation expense of $195 was also recorded in other income (expense) for the six months ended June 30, 2021.

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

A reconciliation of the beginning and ending balances of goodwill during the six months ended June 30, 2021 is as follows:

 

(in thousands)

 

 

 

Costs

 

 

 

Balance - December 31, 2020

 

$357

 

Additions

 

 

-

 

Business Acquisitions

 

 

-

 

Impairment

 

 

-

 

Balance - June 30, 2021

 

$357

 

 

The Company evaluates goodwill for impairment annually during the fiscal third quarter and when an event occurs, or circumstances change such that it is reasonably possible that impairment may exist. The Company accounts for goodwill and evaluates its goodwill balances and tests them for impairment in accordance with related accounting standards. The Company performed its annual impairment assessment in its third quarter of fiscal 2020, and its analysis indicated that the Company had no impairment of goodwill.

 

Other Intangible Assets

 

A reconciliation of the beginning and ending balances of intangible assets and accumulated amortization during the six months ended June 30, 2021 and intangible assets, net as of December 31, 2020 are as follows:

 

 

 

 

Definite Life Intangibles

 

 

Indefinite Life Intangibles

 

 

 

 

 

Branding

 

 

Technology/

 

 

Brands &

 

 

 

(in thousands)

 

Rights

 

 

Know How

 

 

Tradenames

 

 

Total

 

Costs

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2020

 

$250

 

 

$208

 

 

$408

 

 

$866

 

Business acquisition

 

 

-

 

 

 

3,050

 

 

 

37,299

 

 

 

40,349

 

Agreement termination

 

 

(250)

 

 

-

 

 

 

-

 

 

 

(250)

Balance—June 30, 2021

 

$-

 

 

$3,258

 

 

$37,707

 

 

$40,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2020

 

$(93)

 

$(37)

 

$-

 

 

$(130)

Agreement termination

 

 

98

 

 

 

-

 

 

 

-

 

 

 

98

 

Amortization

 

 

(5)

 

 

(9)

 

 

-

 

 

 

(14)

Other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance—June 30, 2021

 

$-

 

 

$(46)

 

$-

 

 

$(46)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Book Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

$-

 

 

$3,212

 

 

$37,707

 

 

$40,919

 

Net Book Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

$157

 

 

$171

 

 

$408

 

 

$736

 

 

Intangible assets with finite lives are amortized over their estimated useful lives. Amortization periods of assets with finite lives are based on management's estimates at the date of acquisition. The Company recorded amortization expense of $14, and $44 for the six months ended June 30, 2021, and 2020, respectively.

 

The Company estimates that amortization expense for our existing other intangible assets will be approximately $220 annually for each of the next five fiscal years. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors or changes.

 

 
13

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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

8. SHAREHOLDERS’ EQUITY

 

Shares Outstanding

 

The table below details the change in Company shares outstanding by class during the six months ended June 30, 2021:

 

 

 

Subordinate

 

 

Super

 

(in thousands)

 

Voting Shares

 

 

Voting Shares

 

Balance—December 31, 2020

 

 

57,617

 

 

 

203

 

Shares issued in connection with exercise of warrants

 

 

1,325

 

 

 

-

 

Shares issued in connection with conversion of convertible debentures

 

 

2,393

 

 

 

-

 

Shares issued in connection with asset acquisition

 

 

30,641

 

 

 

-

 

Issuance of vested restricted stock units

 

 

371

 

 

 

-

 

Stock issued in connection with exercised of stock options

 

 

76

 

 

 

-

 

Balance—June 30, 2021

 

 

92,423

 

 

 

203

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Balance—December 31, 2020

 

 

 

 

 

 

93,898

 

Warrants issued in conjunction with broker option exercise (1)

 

 

 

 

 

 

163

 

Warrants expired

 

 

 

 

 

 

(358)

Warrants converted into subordinate voting shares

 

 

 

 

 

 

(1,000)

Balance—June 30, 2021

 

 

 

 

 

 

92,703

 

(1) Excluded 390 warrants issuable should underwriter options be exercised.

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. DEBT

 

Debt at June 30, 2021 and December 31, 2020, was comprised of the following:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Current portion of long-term debt

 

 

 

 

 

 

Vehicle loans(1)

 

$186

 

 

$170

 

Note payable(3)

 

 

183

 

 

 

1,043

 

Total short-term debt

 

 

369

 

 

 

1,213

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

 

 

 

 

 

 

Vehicle loans(1)

 

 

162

 

 

 

233

 

Note payable(2)

 

 

56

 

 

 

65

 

Note payable(3)

 

 

40

 

 

 

5

 

Mortgage payable(4)

 

 

8,938

 

 

 

-

 

Convertible debenture(5)

 

 

13,646

 

 

 

13,701

 

Total long-term debt

 

 

22,842

 

 

 

14,004

 

Total Indebtedness

 

$23,211

 

 

$15,217

 

 

(1) Primarily fixed term loans on transportation vehicles. Weighted average interest rate at June 30, 2021 was 8.1%.

(2) Note payable in connection with Acme acquisition to be paid as and if financial performance targets are met over the earnout period.

(3) Note payable in connection with Humble Flower and Kaizen acquisitions and termination of the W Vapes acquisition.

Weighted average interest rate at June 30, 2021 was 4%.

(4) Net of deferred financing costs of $422.

(5) Net of deferred financing costs of $1,879.

 

Stated maturities of debt obligations are as follows as of June 30, 2021:

 

 

 

June 30,

 

(in thousands)

 

2021

 

2021

 

$268

 

2022

 

 

321

 

2023

 

 

15,876

 

2024

 

 

383

 

2025

 

 

421

 

2026 and thereafter

 

 

8,113

 

Total debt obligations

 

$25,382

 

 

 
15

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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

10. LEASES

 

The Company adopted ASU 2016-02 (Topic 842) effective January 1, 2019 using the modified retrospective adoption method which allowed it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit. In connection with the adoption of the new lease pronouncement, the Company recorded a charge to accumulated deficit of $847.

 

A reconciliation of lease obligations for the six months ended June 30, 2021, is as follows:

 

(in thousands)

 

 

 

Lease Liability:

 

 

 

December 31, 2020

 

$38,834

 

Lease principal payments

 

 

(1,164)

June 30, 2021

 

$37,670

 

 

 

 

 

 

 

 

June 30,

 

 

 

2021

 

Lease obligation, current portion

 

$2,410

 

Lease obligation, long-term portion

 

 

35,260

 

Total

 

$37,670

 

 

All extension options that are reasonably certain to be exercised have been included in the measurement of lease obligations. The Company reassesses the likelihood of extension option exercise if there is a significant event or change in circumstances within its control.

 

The components of lease expense for the three and six months ended June 30, 2021 and 2020 are as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Amortization of leased assets (1)

 

$785

 

 

$839

 

 

$1,527

 

 

$1,631

 

Interest on lease liabilities (2)

 

 

634

 

 

 

491

 

 

 

1,197

 

 

 

964

 

Total

 

$1,419

 

 

$1,330

 

 

$2,724

 

 

$2,595

 

____________

(1) Included in cost of goods sold and general and administrative in the consolidated statement of operations.

(2) Included in interest expense in the consolidated statement of operations.

 

The key assumptions used in accounting for leases as of June 30, 2021 were a weighted average remaining lease term of 17.6 years and a weighted average discount rate of 6%. The key assumptions used in accounting for leases as of December 31, 2020 were a weighted average remaining lease term of 18.1 years and a weighted average discount rate of 6.0%.

 

The future lease payments with initial remaining terms in excess of one year as of June 30, 2021 were as follows:

 

 

 

June 30,

 

(in thousands)

 

2021

 

Balance of 2021

 

$1,187

 

2022 - 2023

 

 

5,137

 

2024 - 2025

 

 

3,844

 

2026 and beyond

 

 

27,502

 

Total

 

$37,670

 

 

 
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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

11. SHARE-BASED COMPENSATION

 

During 2019 the Company’s Board of Directors adopted the 2019 Stock and Incentive Plan (the “Plan”), which was amended in April 2020 and March 2021. The Plan permits the issuance of stock options, stock appreciation rights, stock awards, share units, performance shares, performance units and other stock-based awards, and, as of June 30, 2021, 13.2 million shares have been authorized to be issued under the Plan and 4.6 million are available for future grant. The Plan provides for the grant of options as either non-statutory stock options or incentive stock options and restricted stock units to employees, officers, directors, and consultants of the Company to attract and retain persons of ability to perform services for the Company and to reward such individuals who contribute to the achievement by the Company of its economic objectives. The awards granted generally vest in 25% increments over a four-year period and option awards expire 6 years from grant date.

 

The Plan is administered by the Board or a committee appointed by the Board, which determines the persons to whom the awards will be granted, the type of awards to be granted, the number of awards to be granted, and the specific terms of each grant, including the vesting thereof, subject to the provisions of the Plan.

 

During the three and six months ended June 30, 2021 and 2020, the Company granted shares to certain employees as compensation for services. These shares were accounted for in accordance with ASC 718 – Compensation – Stock Compensation. The Company amortizes awards over the service period and until awards are fully vested.

 

For the three and six months ended June 30, 2021 and 2020, share-based compensation expense was as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Cost of goods sold

 

$-

 

 

$-

 

 

$-

 

 

$-

 

General and administrative expense

 

 

338

 

 

 

213

 

 

 

625

 

 

 

1,825

 

Total share-based compensation

 

$338

 

 

$213

 

 

$625

 

 

$1,825

 

 

The following table summarizes the status of stock option grants and unvested awards at and for the six months ended June 30, 2021:

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Stock

 

 

Weighted-Average

 

 

Remaining

 

 

Aggregate

 

(in thousands except per share amounts)

 

Options

 

 

Exercise Price

 

 

Contractual Life

 

 

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding—December 31, 2020

 

 

6,260

 

 

$0.97

 

 

 

4.7

 

 

$3,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

1,880

 

 

 

1.41

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(1,153)

 

 

1.60

 

 

 

 

 

 

 

 

 

Outstanding—June 30, 2021

 

 

6,987

 

 

$0.95

 

 

 

2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable—June 30, 2021

 

 

1,677

 

 

$1.02

 

 

 

3

 

 

$69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest—June 30, 2021

 

 

6,987

 

 

$0.95

 

 

 

2.6

 

 

$2,254

 

 

The weighted-average fair value of options granted during the three and six months ended June 30, 2021, estimated as of the grant date, were $1.18 and $1.41, respectively. As of June 30, 2021, there was $1,252 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 2.0 years.

 

 
17

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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table summarizes the status of restricted stock unit (“RSU”) grants and unvested awards at and for the six months ended June 30, 2021:

 

 

 

 

 

Weighted-Average

 

(in thousands except per share amounts)

 

RSUs

 

 

Fair Value

 

 

 

 

 

 

 

 

Outstanding—December 31, 2020

 

 

450

 

 

$0.33

 

 

 

 

 

 

 

 

 

 

Granted

 

 

1,395

 

 

 

1.15

 

Vested

 

 

-

 

 

 

-

 

Cancelled

 

 

(10)

 

 

1.11

 

Outstanding—June 30, 2021

 

 

1,835

 

 

$0.95

 

 

As of June 30, 2021, there was $963 of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a remaining weighted-average vesting period of 20 months.

 

The fair value of the stock options and RSUs granted were determined using the Black-Scholes option-pricing model with the following weighted average assumptions at the time of grant.

 

Stock Options

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

Three Months Ended March 31,

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Expected volatility

 

 

50%

 

 

50%

 

 

50%

 

 

50%

Dividend yield

 

 

0%

 

 

0%

 

 

0%

 

 

0%

Risk-free interest rate

 

 

1.1%

 

 

2.2%

 

 

0.9%

 

 

2.2%

Expected term in years

 

 

4.25

 

 

 

4.12

 

 

 

4.25

 

 

 

4.14

 

 

RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

Three Months Ended March 31,

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Expected volatility

 

 

50%

 

 

50%

 

 

50%

 

 

50%

Dividend yield

 

 

0%

 

 

0%

 

 

0%

 

 

0%

Risk-free interest rate

 

 

0.9%

 

 

0.9%

 

 

0.9%

 

 

0.9%

Expected term in years

 

 

0.74

 

 

 

0.60

 

 

 

0.74

 

 

 

0.60

 

 

12. INCOME TAXES

 

Coronavirus Aid, Relief and Economic Security Act

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law in response to the market volatility and instability resulting from the COVID-19 pandemic. It includes a significant number of tax provisions and lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the “2017 Act”). The changes are mainly related to: (1) the business interest expense disallowance rules for 2019 and 2020; (2) net operating loss rules; (3) charitable contribution limitations; (4) employee retention credit; and (5) the realization of corporate alternative minimum tax credits.

 

The Company continues to assess the impact and future implication of these provisions; however, it does not anticipate any amounts that could give rise to a material impact to the overall consolidated financial statements.

 

The provision for income tax expense for the three months ended June 30, 2021, was $74, representing an effective tax rate of 9.20%, compared to an income tax expense of $25 for the three months ended June 30, 2020, representing an effective tax rate of 0.29%. The provision for income tax expense for the six months ended June 30, 2021, was $138, representing a effective tax rate of 2.36% compared to an income tax expense of $50 for the six months ended June 30, 2020, representing an effective tax rate of 0.30%.

 

 
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Table of Contents

  

LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

13. NET INCOME (LOSS) PER SHARE

 

Net income (loss) per share represents the net earnings/loss attributable to shareholders divided by the weighted average number of shares outstanding during the period on an as converted basis.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(in thousands except per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$731

 

 

$(8,757)

 

$(5,988)

 

$(16,631)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.01

 

 

$(0.26)

 

$(0.10)

 

$(0.50)

Diluted

 

$0.00

 

 

$(0.26)

 

$(0.10)

 

$(0.50)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

71,021

 

 

 

33,307

 

 

 

61,956

 

 

 

33,025

 

Diluted

 

 

201,278

 

 

 

33,307

 

 

 

61,956

 

 

 

33,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average potentially diluted shares (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares

 

 

71,021

 

 

 

33,307

 

 

 

61,956

 

 

 

33,025

 

Options

 

 

2,908

 

 

 

-

 

 

 

-

 

 

 

-

 

Warrants

 

 

60,767

 

 

 

-

 

 

 

-

 

 

 

-

 

Convertible debentures

 

 

64,796

 

 

 

-

 

 

 

-

 

 

 

-

 

Restricted stock units

 

 

1,786

 

 

 

-

 

 

 

-

 

 

 

-

 

Total weighted average potentially diluted shares:

 

 

201,278

 

 

 

33,307

 

 

 

61,956

 

 

 

33,025

 

 

(1) For the above net loss periods, the inclusion of options, warrants, convertible debentures and restricted stock units in the calculation of diluted earnings per share would be anti-dilutive, and accordingly, were excluded from the diluted loss per share calculation.

 

 
19

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, and December 31, 2020 the carrying value of cash and cash equivalents, accounts receivable, prepaid expense and other current assets, accounts payable and other current liabilities approximate fair value due to the short-term nature of such instruments.

 

The carrying value of the Company's debt approximates fair value based on current market rates (Level 2).

 

Nonrecurring fair value measurements

 

The Company uses fair value measures when determining assets and liabilities acquired in an acquisition as described above in the Notes to Condensed Consolidated Financial Statements, which are considered a Level 3 measurement.

 

15. COMMITMENTS AND CONTINGENCIES

 

Commitments

 

In January 2021, the Company signed a letter of intent to expand its cultivation footprint. The agreement contemplates a land-lease from a developer that has prepared the property for cannabis cultivation. Lowell would be responsible for construction costs of greenhouses using cash raised in the equity offering in December 2020 and cash generated from operations. The transaction is subject to final site due-diligence and negotiation of construction contracts. In the event the transaction contemplated in the letter of intent is pursued, the Company anticipates the site will be ready for operation in 2023.

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of June 30, 2021, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future. In 2020, the Company entered into a payment plan offered by California regulatory authorities to pay certain excise and cultivation taxes over a 12 month period. If such taxes are not paid in accordance with the agreed payment plan the Company could be subject to certain late payment penalties.

 

Litigation and Claims

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of June 30, 2021, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates are an adverse party or have a material interest adverse to the Company’s interest.

 

Insurance Claims

 

In September 2020 the Company experienced a small fire at its manufacturing facility which resulted in suspending certain operations until the facility was repaired. As a result, the company filed a business interruption claim which resulted in a payment of $1.4 million from the insurance carrier in March 2021. The proceeds from the claim were reflected in other income on the consolidated statement of operations for the year ended December 31, 2020.

 

In August 2020 the Company experienced adverse air quality conditions that resulted in the Company closing the air vents in its greenhouse facilities at a time when extreme temperatures existed. As a result, plant health suffered due to the situation. The Company filed a business interruption claim which resulted in a payment of $2.65 million from the insurance carrier in July 2021, and is included in other income (expense) in the accompanying condensed consolidated statements of income (loss).

 

 
20

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LOWELL FARMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

16. GENERAL AND ADMINISTRATIVE EXPENSES

 

For the three and six months ended June 30, 2021 and 2020, general and administrative expenses were comprised of:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Salaries and benefits

 

$1,561

 

 

$980

 

 

$2,398

 

 

$1,976

 

Professional fees

 

 

777

 

 

 

251

 

 

 

1,259

 

 

 

850

 

Share-based compensation

 

 

336

 

 

 

213

 

 

 

625

 

 

 

1,825

 

Administrative

 

 

1,143

 

 

 

12

 

 

 

2,004

 

 

 

82

 

Total general and administrative expenses

 

$3,817

 

 

$1,456

 

 

$6,286

 

 

$4,733

 

 

17. RELATED-PARTY TRANSACTIONS

 

Transactions with related parties are entered into in the normal course of business and are measured at the amount established and agreed to by the parties.

 

Lowell received certain administrative, operational and consulting services through a Management Services Agreement with Edible Management, LLC (“EM”). EM is a limited liability company owned by the co-founders of Lowell and was formed to provide Lowell with certain administrative functions comprising: cultivation, distribution, and production operations support; general administration; corporate development; human resources; finance and accounting; marketing; sales; legal and compliance. The agreement provided for the dollar-for-dollar reimbursement of expenses incurred by EM in performance of its services. Amounts paid to EM for the three and six months ended June 30, 2020 was $2,201 and $5,041, respectively. The Management Services Agreement with EM was terminated as of December 31, 2020.

 

In April 2015, Lowell entered into a services agreement with Olympic Management Group (“OMG”), for advisory and technology support services, including the access and use of software licensed to OMG to perform certain data processing and enterprise resource planning (ERP) operational services. OMG is owned by one of the Company’s co-founders. The agreement provides for the dollar-for-dollar reimbursement of expenses incurred by OMG in performance of its services. There were no amounts paid to OMG for the quarters ended June 30, 2021 and 2020. Amounts paid to OMG for the six months ended June 30, 2021 and 2020, were $nil and $5, respectively.

 

18. SEGMENT INFORMATION

 

The Company's operations are comprised of a single reporting operating segment engaged in the production and sale of cannabis products in the United States. As the operations comprise a single reporting segment, amounts disclosed in the financial statements also represent a single reporting segment.

 

19. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through August 16, 2021, the date the financial statements were available to be issued.

 

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

 

This management's discussion and analysis ("MD&A") of the financial condition and results of operations of the Company is for the three and six months ended June 30, 2021 and 2020. It is supplemental to, and should be read in conjunction with, the Company's consolidated financial statements and the accompanying notes for the year ended December 31, 2020. All dollar amounts in this MD&A are expressed in thousands of United States dollars ("$" or "US$"), unless otherwise indicated.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, results of operations and future growth prospects. The forward-looking statements contained herein are based on certain key expectations and assumptions, including, but not limited to, with respect to expectations and assumptions concerning receipt and/or maintenance of required licenses and third party consents and the success of our operations, are based on estimates prepared by us using data from publicly available governmental sources, as well as from market research and industry analysis, and on assumptions based on data and knowledge of this industry that we believe to be reasonable. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” in our registration statement on Form 10, as amended (the “Form 10”). Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available after the date of this Quarterly Report on Form 10-Q. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.

 

OVERVIEW OF THE COMPANY

 

We are a California-based cannabis company with vertically integrated operations including large scale cultivation, extraction, processing, manufacturing, branding, packaging and wholesale distribution to retail dispensaries. We manufacture and distribute proprietary and third-party brands throughout the State of California, the largest cannabis market in the world. We also provide manufacturing, extraction and distribution services to third-party cannabis and cannabis branding companies. We operate a 225,000 square foot greenhouse cultivation facility and a 40,000 square foot processing facility in Monterey County, a 15,000 square foot manufacturing and laboratory facility in Salinas, California, a separate 20,000 square foot distribution facility in Salinas, California and a warehouse depot and distribution vehicles in Los Angeles, California.

 

Our present product offerings include flower, vape pens, oils, extracts, chocolate edibles, mints, gummies, topicals, tinctures and pre-rolls. We sell our products under owned and third-party brands. Brands we own include the following: Lowell Herb Co. and Lowell Smokes (premium packaged flower, pre-roll, concentrates, and vape products); Cypress Reserve (a premium flower brand); Flavor Extracts (crumble and terp sugar products): Kaizen (premium brand cannabis concentrates); House Weed (a value driven flower and concentrates offering delivering a flavorful and potent experience); Moon (a range of high-potency, high-quality and high-value edibles); Altai (hand-crafted and award-winning edibles); Humble Flower (a premium brand offering cannabis-infused topical creams, balms and oils); Original Pot Company (baked edibles); CannaStripe (gummy edibles); and Acme Elixirs (high quality, lab-tested vaporizing pens). We also exclusively manufacture and distribute third party brands in California and provide third party extraction processing and distribution services and bulk extraction concentrates and flower to licensed manufacturers and distributors.

 

We conduct cannabis cultivation operations located in Monterey County, California. We currently operate a cultivation facility which includes four greenhouses totaling approximately 225,000 square feet sited on 10 acres located on Zabala Road. Farming cannabis at this scale enables us to curate specialized strains and maintain greater control over the quantity and quality of cannabis available for our products, preserving the consistency of our flower and cannabis feedstocks for our extraction laboratory and product manufacturing operations. We maintain a strict quality control process which facilitates a predictable output yield of pesticide-free products.

 

Our manufacturing facility is located in Salinas, California and houses our edible product operations and extraction and distillation operations. The edible product operations utilize internally produced cannabis oil, which can also be supplied from multiple external sources. Our manufacturing operations produce a wide variety of cannabis-infused products in our 15,000 square foot manufacturing facility in Salinas. Our products include chocolate confections, tinctures, baked goods, hard and soft non-chocolate confections, and topical lotions and balms. Lowell Farms utilizes modern commercial production equipment and employs food grade manufacturing protocols, including industry-leading standard operating procedures designed so that its products meet stringent quality standards. We have implemented updated compliance, packaging and labeling standards to meet the requirements of the California Medical and Adult-Use Cannabis Regulation and Safety Act with the advent of adult use legalization in California.

 

 
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We also operate an automated flower packaging line and a pre-roll assembly line for making finished goods in those respective categories with feedstock grown at our cultivation operations.

 

On June 29, 2021 we announced that we acquired real property and related assets of a first-of-its-kind cannabis drying and midstream processing facility located in Monterey County, nearby our flagship cultivation operation. The 10-acre, 40,000 square foot processing facility will provide drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 lbs. of wholesale cannabis flower annually. The new facility will process nearly all the cannabis that we grow at our existing cultivation operations. Additionally, we are commissioning a new business unit called Lowell Farm Services (“LFS”), which will engage in fee-based processing services for regional growers from the Salinas Valley area, one of the largest and fastest growing cannabis cultivation regions in the country. LFS operations are expected to become operational during the third quarter of 2021.

   

Our business is conducted by the following subsidiaries of the Company:

 

 

·

Indus Holding Company is the owner of our principal brand intellectual property (other than the Lowell Herb Co. and Lowell Smokes brands) and an intermediate holding company for our operating entities.

 

 

 

 

·

Cypress Manufacturing Company conducts the majority of our cannabis operations, including cultivation, extraction, manufacturing and distribution, and holds all manufacturing and distribution licenses.

 

 

 

 

·

Cypress Holding Company owns the majority of our equipment and is a lessee for facility and equipment leases.

 

 

 

 

·

Wellness Innovation Group Incorporated provides sales, marketing, administrative and managerial services to our other operating entities.

 

 

 

 

·

Indus LF LLC is the owner of the brands and assets acquired in the Lowell Acquisition. Licensed activities acquired by Indus LF LLC in the Lowell Acquisition have been transitioned to Cypress Manufacturing Company.

 

 

 

 

·

Lowell SR LLC is the owner of our drying and midstream processing facility located in Monterey County, located at 20800 Spence Road, and is a wholly owned subsidiary of Lowell SR LLC, which holds certain permits related to the processing facility. LFS will be operated under Lowell SR LLC.

 

The Company's corporate office and principal place of business is located at 19 Quail Run Circle, Salinas, California. As of June 30, 2021, we had 212 full-time employees and 4 part-time employees, substantially all of which are located in California. Additionally, Lowell Farms utilizes contract employees in security, cultivation, packaging and warehousing activities. The use of contract employees enables Lowell Farms to manage variable staffing needs and in the case of cultivation and security personnel, access to experienced, qualified and readily available human resources.

 

Recent Developments

 

Acquisitions

 

On February 25, 2021, we acquired the Lowell Herb Co. and Lowell Smokes trademark brands, product portfolio and production assets from The Hacienda Group, a California limited liability company (“Hacienda”), and its subsidiaries. The acquisition is referred to in this Form 10-Q as the “Lowell Acquisition.” The Lowell Acquisition expanded our product offerings by adding a highly regarded, mature line of premium branded cannabis pre-rolls, including infused pre-rolls, to our product portfolio under the Lowell Herb Co. and Lowell Smokes brands. The Lowell Acquisition also expanded our offerings of premium packaged flower, concentrates, and vape products. Upon the completion of the acquisition of certain regulatory assets in the Lowell Acquisition, we acquired certain non-hydrocarbon extraction assets used for the production of oils, water hashish, bubble hashish and rosin. The acquisition was valued at approximately $41 million, comprised of $4.1 million in cash and the issuance of 22,643,678 Subordinate Voting Shares. In connection with this acquisition, the Company changed its corporate name to Lowell Farms Inc. effective March 1, 2021.

 

On June 29, 2021, we acquired real property and related assets, and commissioned a first-of-its-kind cannabis drying and midstream processing facility located in Monterey County. The 10-acre, 40,000 square foot processing facility will provide drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 lbs. of wholesale cannabis flower annually. The new facility will process nearly all the cannabis that we grow at our existing cultivation operations. Additionally, we will commission a new business unit called Lowell Farm Services (“LFS”), which will engage in fee-based processing services for regional growers from the Salinas Valley area. LFS operations are expected to become operational during the third quarter of 2021.

 

 
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Reconciliations of Non-GAAP Financial and Performance Measures

 

The Company has provided certain supplemental non-GAAP financial measures in this MD&A. Where the Company has provided such non-GAAP financial measures, we have also provided a reconciliation below to the most comparable GAAP financial measure, see “Reconciliations of Non-GAAP Financial and Performance Measures” in this MD&A. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the GAAP financial measures presented herein.

  

In this MD&A, reference is made to adjusted EBITDA and working capital which are not measures of financial performance under GAAP. The Company calculates each as follows:

  

 

EBITDA is net income (loss), excluding the effects of income taxes (recovery); net interest expense; depreciation and amortization; and adjusted EBITDA also includes non-cash fair value adjustments on investments; unrealized foreign currency gains/losses; share-based compensation expense; and other transactional and special expenses, such as out-of-period insurance recoveries and acquisition costs and expenses related to the markup of acquired finished goods inventory, which are inconsistent in amount and frequency and are not what we consider as typical of our continuing operations. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations. We use adjusted EBITDA internally to understand, manage, make operating decisions related to cash flow generated from operations and evaluate our business. In addition, we use adjusted EBITDA to help plan and forecast future periods.

 

 

 

 

Working capital is current assets less current liabilities. Management believes the calculation of working capital provides additional information to investors about the Company’s liquidity. We use working capital internally to understand, manage, make operating decisions related to cash flow required to fund operational activity and evaluate our business cash flow needs. In addition, we use working capital to help plan and forecast future periods.

 

These measures are not necessarily comparable to similarly titled measures used by other companies.

 

The table below reconciles Net income (loss) to Adjusted EBITDA for the periods indicated:

  

 

 

Three Months

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$731

 

 

$(8,757)

 

$(5,988)

 

$(16,631)

Interest expense

 

 

598

 

 

 

726

 

 

 

1,215

 

 

 

1,576

 

Provision for income taxes

 

 

75

 

 

 

25

 

 

 

138

 

 

 

50

 

Depreciation in cost of goods sold

 

 

584

 

 

 

514

 

 

 

1,168

 

 

 

1,283

 

Depreciation and amortization in operating expenses

 

 

167

 

 

 

371

 

 

 

491

 

 

 

479

 

Depreciation in other income (expense)

 

 

195

 

 

 

-

 

 

 

195

 

 

 

-

 

EBITDA

 

 

2,350

 

 

 

(7,121)

 

 

(2,781)

 

 

(13,243)

Investment and currency (gains)/ losses

 

 

(19)

 

 

(306)

 

 

(125)

 

 

(391)

Share-based compensation

 

 

336

 

 

 

213

 

 

 

625

 

 

 

1,825

 

Net effect of cost of goods on mark-up of acquired finished goods inventory

 

 

497

 

 

 

-

 

 

 

662

 

 

 

-

 

Transaction and other special charges

 

 

(2,424)

 

 

-

 

 

 

(2,424)

 

 

-

 

Adjusted EBITDA(1)

 

$740

 

 

$(7,214)

 

$(4,043)

 

$(11,809)

______________

(1) Non-GAAP measure

 

 
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RESULTS OF OPERATIONS

 

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020

 

Revenue

 

We derive our revenue from sales of extracts, distillates, branded and packaged cannabis flower, pre-rolls, concentrates and edible products to retail dispensaries in the state of California. In addition, we distribute proprietary and third-party brands throughout the state of California. The Company recognizes revenue upon delivery of goods to customers since at this time performance obligations are satisfied.

The Company classifies its revenues into three major categories: Owned, Agency and Distributed brands.

 

 

·

Owned brands are the proprietary brands of the Company.

 

 

 

 

·

Agency brands are third-party brands that the Company manufactures and/or sells utilizing our in-house sales team and distributes on behalf of the third-party.

 

 

 

 

·

Distributed brands are brands in which the Company provides distribution services to retail dispensaries.

   

Revenue by Category

 

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020:

 

 

 

Three Months

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

(in thousands)

 

2021

 

 

2020

 

 

% Change

 

Owned

 

$14,539

 

 

$7,231

 

 

 

101%

Agency

 

 

535

 

 

 

1,981

 

 

 

-73%

Distributed

 

 

83

 

 

 

682

 

 

 

-88%

Net revenue

 

$15,157

 

 

$9,894

 

 

 

53%

   

 

Revenue increases compared to the same quarter in the prior year were driven by expanded cultivation capacity, resulting in flower and pre-roll brand sales increasing approximately 98% which included over $5.8 million in Lowell brand sales, and the reorganization of owned brand product offerings resulting in edible brand sales increasing 10% and concentrates brand sales declining 22%. Customer onboarding and targeted marketing initiatives also favorably impacted owned brand sales.

 

 

Revenues in the quarter ended June 30, 2021 were adversely impacted by a strategic decision to focus only on the agency and distributed brands that realize a higher per order sales level. As a result, agency and distributed brands revenues declined $2.1 million or 77% for the quarter ended June 30, 2021 compared to the same period in the prior year, and no new agency or distributed brands were onboarded in the three months ended June 30, 2021.

 

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:

 

 

 

Six Months

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

(in thousands)

 

2021

 

 

2020

 

 

% Change

 

Owned

 

$24,204

 

 

$12,438

 

 

 

95%

Agency

 

 

1,765

 

 

 

4,690

 

 

 

-62%

Distributed

 

 

214

 

 

 

2,208

 

 

 

-90%

Net revenue

 

$26,183

 

 

$19,336

 

 

 

35%

 

 
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Revenue increases compared to the same period in the prior year were driven by expanded cultivation capacity, resulting in flower and pre-roll brand sales increasing approximately 107%, which included over $6.7 million in Lowell brand sales, and the reorganization of owned brand product offerings resulting in edible brand sales increasing 14% and concentrates brand sales declining 7%. Customer onboarding and targeted marketing initiatives also favorably impacted owned brand sales.

 

 

Revenues in the six months ended June 30, 2021 were adversely impacted by a strategic decision to focus only on the agency and distributed brands that realize a higher per order sales level. As a result, agency and distributed brands revenues declined $4.9 million or 71% for the six months ended June 30, 2021 compared to the same six months in the prior year, and no new agency or distributed brands were onboarded in the six months ended June 30, 2021.

 

Lowell expects to continue its focus on profitable sales growth in 2021 primarily through increased cultivation yields as a result of completing greenhouse renovations in 2020, including installation of environmental monitoring equipment designed to significantly reduce plant stress should the Company encounter severe temperature and atmospheric conditions as occurred at the end of the summer in 2020. Flower capacity in 2021 is expected to increase to approximately 40,000 pounds harvested, more than twice the harvest in 2020. The increased output will also increase internally sourced materials for distillation and concentrate products. Revenues are also expected to increase, although at a slower pace, through improved penetration of edible products and selective new product introductions including pre-rolls, vapes and gummies. Our focus on agency and distributed brand sales will continue to be on those brands that realize a higher per order sales level that will enable profitable growth. As a result, we expect agency and distributed brand sales to continue to decline from 2020 levels. Lastly, LFS revenue is expected to be modest in the third quarter and begin to ramp up in the fourth quarter as new customers are onboarded.

   

Cost of Sales, Gross Profit and Gross Margin

 

Cost of goods sold consist of direct and indirect costs of production and distribution, and includes amounts paid for direct labor, raw materials, packaging, operating supplies, and allocated overhead, which includes allocations of right of use asset depreciation, insurance, managerial salaries, utilities, and other expenses, such as employee training, cultivation taxes and product testing. The Company manufactures products for certain brands that do not have the capability, licensing or capacity to manufacture their own products. The fees earned for these activities absorbs fixed overhead in manufacturing. Our focus in 2021 is on flower, pre-rolls and concentrates from our expanded cultivation operations, and on increased vertical integration utilizing greater internally sourced biomass for edible and vape products. We are focusing on executing smaller, more frequent production runs to lower inventory working capital, optimize efficiencies and expedite product getting to the market faster, while continuing to decrease third party manufacturing activities.

 

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020:

 

 

 

Three Months

 

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

Net revenue

 

$15,157

 

 

$9,894

 

Cost of goods sold

 

 

9,413

 

 

 

11,157

 

Gross profit (loss)

 

$5,744

 

 

$(1,263)

Gross margin

 

 

37.9%

 

 

(12.8)%

 

Gross margin was 37.9% and (12.8)% in the quarters ended June 30, 2021 and 2020, respectively. The improvement between periods in gross profit and gross margin is primarily due to efficiencies from the $7.3 million, or 101% increase in owned brand revenue, reflecting increased cultivation output of flower and biomass which more than doubled in the second quarter of 2021 compared to the same quarter in the prior year, on a similar cost base. Additionally, the $2.0 million, or 77% reduction in revenue in the second quarter of 2021 compared to the same quarter in the prior year, from lower margin agency and distributed brands had an unfavorable impact on gross profit of approximately $0.2 million in the second quarter of 2021, while having a favorable impact on gross margin in the current quarter.

 

 
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In the quarter ended June 30, 2021, as a result of the change in brand product mix and increased cultivation output, cost of goods sold decreased 16% compared to the 53% increase in revenue resulting in the gross margin improvement over the same period last year. Cultivation yields returned to levels realized in the same period in the prior year as a result of the introduction of new genetics in 2021.

 

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:

 

 

 

Six Months

 

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

Net revenue

 

$26,183

 

 

$19,336

 

Cost of goods sold

 

 

21,915

 

 

 

22,328

 

Gross profit (loss)

 

$4,268

 

 

$(2,992)

Gross margin

 

 

16.3%

 

 

(15.5)%

 

Gross margin was 16.3% and (15.5)% in the six months ended June 30, 2021 and 2020, respectively. The improvement between periods in gross profit and gross margin is primarily due to efficiencies from the $11.8 million, or 95% increase in owned brand revenue, reflecting increased cultivation output of flower and biomass which more than doubled in the current quarter compared to the same quarter in the prior year, on a similar cost base. Additionally, the $4.9 million, or 71% reduction in revenue in the six months ended June 30, 2021 compared to the same period in the prior year, from lower margin agency and distributed brands had an unfavorable impact on gross profit of approximately $0.5 million in the current year to date period, while having a favorable impact on gross margin in the current year to date period.

 

In the six months ended June 30, 2021, as a result of the change in brand product mix and increased cultivation output, cost of goods sold decreased 2% compared to the 35% increase in revenue resulting in the gross margin improvement over the same period last year. Cultivation yields returned to levels realized in the same period in the prior year as a result of the introduction of new genetics in 2021.

  

Total Operating Expenses

 

Total operating expenses consist primarily of costs incurred at our corporate offices; personnel costs; selling, marketing, and other professional service costs including legal and accounting; and licensing costs. Sales and marketing expenses consist of selling costs to support our customer relationships, including investments in marketing and brand activities and corporate infrastructure required to support our ongoing business. We expect marketing expenses to increase as we invest in the development of our proprietary brands while selling costs as a percentage of revenue decrease as our business continues to grow, due to efficiencies associated with scaling the business, and reduced focus on non-core brands. We expect to incur periodic acquisition and transaction costs related to expansion efforts and to continue to invest where appropriate in the general and administrative function to support the increasing complexity of the cannabis business.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020:

 

 

 

Three Months

 

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2021

 

 

2020

 

Total operating expenses

 

$6,217

 

 

$3,525

 

 

Total operating expenses increased $2.7 million for the quarter ended June 30, 2021, compared to the same quarter in the prior year. Operating expenses increased as a percentage of sales from 36% in the quarter ended June 30, 2020, to 41% in the same quarter this year. While operating expenses are expected to increase as owned brand marketing and infrastructure expenditures are incurred in support of revenue increases, operating expenses as a percentage of sales are expected to continue to decline.

 

 
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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