Lowell Farms ($LOWL) has not been on TheCannalysts radar until recently.

They’re somewhat ‘typical’ of some of the later entrants to legal cannabis, as previous experience in the executive comes from different sectors. In $LOWL’s case, their CEO was a pastry chef (that’s a first) who grew a white label business out. Their Chairman though – George Allen – recently caught GoBlue’s eye. He seems to be one who loves the environment and supports social justice – and he’s one of the few in-sector who has said the “I” word out loud (interstate). It’s naturally aligned with his business model (much like Graham Farrar’s – who is President of Glasshouse ($GLASF)).

Allen was previously President of Acreage ($ACRG) – and makes a stretch claim of ‘selling’ $ACRG to Canopy Growth ($WEED) in April 2019. I say stretch, because all I saw him do was sell $WEED a contingent non-binding option, flowing through proceeds to shareholders (who were probably appreciative of getting anything by that point). Naturally, all those sexy up front headline numbers became <ahem> notably lower when $WEED decided to reprice the deal last fall.

At any rate, Mr. Allen had begun a fund called ‘Geronimo Capital’ (heh) shortly before $WEED showed him the door he left $ACRG. Geronimo – along with Merida – came into the picture when $LOWL’s previous company – Indus Holdings – was on the rocks. That expensive bridge financing (as in ‘holy shit level‘ expensive) kept them afloat, Allen apparently inserted himself as Chair, and he we are.

$LOWL’s more current positioning is in licensing the ‘Lowell Smokes’ brand – doing a deal with Ascend – and recently closed an $18MM financing with half warrants (Management picked up 16% of total units). They’re a little interesting in that they provide drying/curing services to 3rd party cultivators, and claim to be ramping a contract manufacturing/processing business line. TheCannalysts haven’t seen much traction/profitability in these activities thus far, but likely because there’s so much easier margin to be had in vertical, why bother? <I expect this to change over time given economics/sector consolidation, but also expect top line growth is a ways out yet…. barring catalysts. I could envision interstate trade changing current conditions in a NY minute>

$LOWL is physically in California, and in everything. They sport 200k ft²+ in greenhouses, 2 manufacturing facilities, preroll manufacturing, and a distribution centre. Along with a raft of SKUs and product lines.

And….most of their expansion is pretty recent. The ‘Lowell’ brand acquisition is ‘new’ (February 2021), was done mainly in paper, and prompted Indus’ name change. As is their processing/drying facility in Monterey….which closed in June 2021….and will begin their 3rd party services rollout.

Their share price has been a mess this year (like most in-sector), but remains above that latest $1 USD raise:

Ok, now that we’re oriented…..

To the financials!

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• Cash at $9MM, down from $15MM previous. That’s aside from the ~=$16MM coming in. Inventory flat at $14MM.
• Intangibles at 30% of total assets, Goodwill negligible. Of $41MM in those intangibles, $40MM in the Lowell brand name, and ‘knowhow’ from the processing facility.
• The cost of that brand? $41MM for $4MM in inventory and receivables. Such is the CPG world.
• They had a foray into cultivation and some vape line in Nevada. Whole thing was terminated and wrapped up. Seems $PLTH came in showing more leg to the counter-party, and $LOWL sold their cultivation asset there to $PLTH as well. A number they couldn’t say no to maybe.
• Nope. $LOWL was haemorrhaging cash operationally while packing a negative gross margin. $LOWL gave the vape people $2MM to unwind the deal, get their $10MM in escrow back, accepted $500k from $PLTH for the cultivation site……and…… booked a $4.4MM loss on the affair.
• $13MM in convertibles, $30MM in lease obligations. Nothing otherwise notable around liabilities except for WC being a little thin, that raise will sort that.
• $15MM in revenue this quarter, $11MM prior. Margin 37% & 38% respectively. Yep, California.
• And….SG&A exceeds gross margin by $400k. Lean income statement, not many line items. Depreciation a curiously low $167k for packing $64MM of PP&E on the books. Hmm. Seems they roll most of it into COGS.
• If not for receipt of a $2.65MM payment – they’d have booked a loss on the quarter. As it was, looks like that payment was from an insurance payout. Wildfires in CA took out a crop (smoke damage) last August, and it was from business interruption insurance.
• Related Party transactions are detailed (Note 17) and relate to founders and directors owning companies that provide IT and perform corporate administrative functions. The latter was terminated in summer 2020, and no money has changed hands over the IT contract. Weird they’d go to so much depth around it. Perhaps simply disclosure. If so, good.
• No segmentation (dammit!). Then again, perhaps next quarter we’ll see some revenues split out. They refer to continually dialling in their grow. I’d hope so, it doesn’t look like they’re benefitting much from the lower cost a greenhouse platform relative to revenue. Again: CA.
• They’ve gone from 57MM shares to 92MM this year, primarily through acquisition. Another 27MM to land with that latest financing. Much loading now that $LOWL has a brand ‘something’ to tether to. Since $LOWL was (hopefully) a known quantity prior to purchase, it’s now up to Allen and CEO Ainsworth.
• A note about Ainsworth….he doesn’t exactly reek of ‘CEO’. It looks like he graduated from a cannabis entrepreneurship program somewhere in the near past. Uncommon. I suspect there’s good reason Allen puts out the press releases.
• Aha! We get segmentation in the MD&A. More below.

Ok. These financials are relatively clean, and overall provide pretty good disclosure.

Regarding segmentation, it looks like they’ve cannabalized some of their own sales through the Lowell brand acquisition. No QoQ comparisons, but while the sales ramp is nice, it’s counterbalanced by them showing some attrition within their business lines. This attrition has been apparent YoY moreso, and I can’t help but wonder if the bulk categories in CA – and competition at the wholesale level isn’t reflected here. If so, those brands and organic growth are becoming more important:

Yeah, not terribly material in this case – but YoY it is. According to the MD&A – it’s part of their strategy to enhance margin. They had been bringing in 3rd party product into their lines to support those zillion SKUs – but margin was getting smoked. $LOWL says they’ve been enhancing the grow to support in-vertical supply and development. $LOWL also touts new genetics being brought in around margin improvement YoY (hey, looking at them a year ago, them making 37% now is the equivalent of hitting the Powerball).

Definitely a trend we’ve been seeing within mature landscapes – and public companies looking to drive growth in profitability.

An interesting statement from $LOWL as well regarding 3rd party throughput and revenue from contract manufacturing. I’ll let them say it in their own words:

I’m not quite sure what to make of claims of being ‘anti-scale’. All I can think of is that the market in California (mature, demanding, trendy) demands fast response. That there’s all kinds of competition out there for processing, and that there’s little margin to be had outside of verticality.

I get a facial tic where they refer in the MD&A to ‘investing’ in G&A to “support the increasing complexity of the cannabis business“. Umm, cost is not, and cannot be, an ‘investment’. Maybe this was Ainsworth’s contribution to the statements.

<An aside: Hey $LOWL….if you are reading this…..TheCannalysts do advisory work on MD&A’s. Give us a shout, we can help. Really.>

I’ll need another date point or three to see how their acquisitions are coming along. Whether their drying facility gets uptake (and more importantly, be profitable) is unknown, harvest season is coming I guess. Margin is flat now for the past 2 quarters, although the sales spike is nice. Next several quarters needs to see growth as well – although margins from licensing will probably be muted.

I mentioned good disclosure above, these financials are all of that, and very welcomed. One of the reasons why I can be a little savage here and there.

We’ll look again next financials.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds a small position in $LOWL.