Filed Pursuant to Rule 424(b)(3)
 
Registration No. 333-256450
 
PROSPECTUS SUPPLEMENT NO. 1
(To Prospectus Dated June 3, 2021)
 
 
 
 
22,643,678 Subordinate Voting Shares
 
Lowell Farms Inc.
 
This prospectus supplement (this “Supplement No. 1”) is part of the prospectus of Lowell Farms Inc. (the “Company”), dated June 3, 2021 (the “Prospectus”). This Supplement No. 1 supplements, modifies or supersedes certain information contained in the Prospectus. Any statement in the Prospectus that is modified or superseded is not deemed to constitute a part of the Prospectus, except as modified or superseded by this Supplement No. 1. Except to the extent that the information in this Supplement No. 1 modifies or supersedes the information contained in the Prospectus, this Supplement No. 1 should be read, and will be delivered, with the Prospectus. This Prospectus Supplement No. 1 is not complete without, and may not be utilized except in connection with, the Prospectus.
 
The purpose of this Supplement No. 1 is to update and supplement the information in the Prospectus with the information contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, as filed with the Securities and Exchange Commission (“SEC”) on August 16, 2021, which is attached hereto.
 
Investing in our securities involves risks that are described in the “Risk Factors” section beginning on page 8 of the Prospectus.
Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
The date of this prospectus supplement is September 3, 2021.
 
 
 

 
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 Circle – Suite B, Salinas, California.
 
93907
(Address of Principal Executive Offices)
 
(Zip Code)
 
(831) 998-8214
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class registered
Trading Symbol(s)
Name of each exchange on which registered
NONE
NONE
NONE
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒
 
There were 78,805,938 shares of the Registrant’s Subordinate Voting Shares outstanding as of August 13, 2021.
 

 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
3
 
 
3
 
 
4
 
 
5
 
 
6
 
 
7
 
22
 
34
 
34
 
 
 
 
 
 
 
 
 
 
 
 
35
 
35
 
35
 
35
 
 
35
 
 
36
 
 
 
2
 
 
 
  
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
 
 
 
 
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
 
 
 
 
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
 
 
 
  
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
 
 
 
  
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.
 
 
7
 
 
 
 
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.
 
 
8
 
 
 
  
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.
 
 
9
 
 
 
  
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.
 
 
10
 
 
 
  
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
 
 
 
  
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.
 
 
12
 
 
 
  
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
 
 
 
 
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.
 
 
14
 
 
 
 
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
 
 
 
  
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
 
 
 
16
 
 
 
 
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