ITEM 7. 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 YEAR ENDED DECEMBER 31, 2023, COMPARED TO YEAR ENDED DECEMBER 31, 2022
This management's discussion and analysis ("MD&A") of the financial condition and results of operations of the Company is for the years ended December 31, 2023 and 2022. 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
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K and, in particular, the risks discussed under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and those discussed in other documents we file with the SEC. We undertake no obligation, and specifically disclaim any obligation, to revise or publicly release the results of any revision to these and any other forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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 a limited number of third-party brands throughout the State of California, the largest cannabis market in the world. We also provide manufacturing, extraction and distribution services to several third-party cannabis and cannabis branding companies. We operate a 255,000 square foot greenhouse cultivation and warehouse 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 21,000 square foot distribution and flower packing facility in Salinas, California and a warehouse depot in Los Angeles, California. On January 12, 2024, we surrendered possession of the greenhouse facility. See “Recent Developments.”
Our present product offerings include flower, pre-rolls, vape pens, oils, extracts, chocolate edibles, mints, gummies, topicals and tinctures. We sell our products under owned and third-party brands. Brands we own include the following: Cypress Cannabis (a premium flower brand); Flavor Extracts (crumble and terp sugar products): Kaizen (premium brand cannabis concentrates); House Weed (a value driven flower, vapes and concentrates offering delivering a flavorful and potent experience); Moon (a range of high-potency, high-quality and high-value edibles); Humble Flower (a premium brand offering cannabis-infused topicals, pre-rolls, sublingual tablets); and Original Pot Company (baked edibles). We also exclusively manufacture and distribute Lowell Herb Co. and Lowell Smokes (premium packaged flower, pre-roll, concentrates, and vape products); 35s (a line of automated pre-rolls) and products for several other 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.
Since 2017, we have conducted cannabis cultivation operations located in Monterey County, California. We operated a cultivation facility which included four greenhouses totaling approximately 255,000 square feet sited on 10 acres located on Zabala Road. Farming cannabis at this scale enabled 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 maintained a strict quality control process which facilitates a predictable output yield of pesticide-free products. As noted previously, we surrendered possession of the cultivation facility on January 12, 2024.
We operate a 40,000 square foot processing facility in Monterey County in close proximity to our cultivation operations that provides drying, bucking, trimming, sorting, grading, and packaging operations for up to 250,000 pounds of wholesale cannabis flower annually. The facility processes nearly all the cannabis that we grow at our existing cultivation operations as well as processing services for regional growers from primarily the Salinas Valley area.
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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.
We also operate an automated flower packaging line, an automated pre-roll line and a pre-roll assembly line for making finished goods in those respective categories with feedstock grown at our cultivation operations.
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 lessee of our drying and midstream processing facility located in Monterey County, located at 20800 Spence Road, and through its wholly owned subsidiary 20800 Spence Road LLC, which holds certain permits and licenses related to the processing facility. LFS is 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 December 31, 2023, we had 165 full-time employees, including 163 full-time and 2 part-time, substantially all of whom are located in California. Additionally, Lowell Farms utilizes contract employees in security, cultivation, processing, 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.
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Recent Developments
Surrender of Cultivation Facility
On January 12, 2024, Cypress Holding Company, LLC (“Cypress”), a wholly owned subsidiary of the Company, surrendered possession of approximately 10 acres of real property at 139 Zabala Road, Salinas, California (the “Zabala Road Property”) leased by Cypress pursuant to a Lease Agreement dated April 1, 2017 (the “Zabala Road Lease”) with Tinhouse, LLC, dba Tinhouse Partners, LLC, as landlord (the “Landlord”). Prior to vacating the premises on January 12, 2024, the Company had operated a cultivation facility, which includes four greenhouses totaling approximately 255,000 square feet, on the Zabala Road Property.
As previously announced, in January 2023, the Company’s Board of Directors formed a strategic alternatives special committee of independent directors to explore, review and evaluate strategic and financial alternatives. As part of these efforts, the Company entered into negotiations with the Landlord to restructure the terms of the Zabala Road Lease, which provided for an expiry date of December 31, 2027, subject to five 5-year extension options exercisable by Cypress.
In September 2023, the Company and the Landlord reached a settlement amending the terms of the Zabala Road Lease and reaching agreement on all rent-related issues. The Landlord terminated the Zabala Road Lease via a letter dated October 6, 2023, which was served by its counsel on the Company on October 10, 2023. In October 2023, the Company filed a lawsuit for breach of contract and specific performance against the Landlord to enforce the settlement terms. The Landlord filed counterclaims and an unlawful detainer action against the Company, claiming damages of more than $36 million, which the Landlord claims are based on an analysis of accelerated rent due through the end of the term of the Zabala Road Lease, along with attorney’s fees, improvements, and other undefined costs.
The Company intends to vigorously defend itself against the claims made by the Landlord. However, no assurance can be provided as to whether or not the Company will prevail, and it may be required to pay significant monetary damages.
Refer to “Subsequent Events” for more information.
Non-GAAP Financial 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.
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The table below reconciles Net loss to Adjusted EBITDA for the periods indicated:
Years Ended
December 31,
December 31,
(in thousands)
Net loss
Interest expense (2)
Provision for income taxes
Depreciation and amortization in cost of goods sold
Depreciation and amortization in operating expenses
Depreciation and amortization in other income (expense)
EBITDA (1)
Investment and currency losses
Inventory revaluation
Impairment Expense
Debt Repurchase Charges (3)
Impairment on Cultivation Facility
Share-based compensation
Other charges (2) (4) (5)
Adjusted EBITDA (1)
(1) Non-GAAP measure
(2) In 2022, net of $864 of financing charges related to the ERC claim, reclassified from interest expense on the Condensed Consolidated Statements of Income (Loss) to transaction and other special charges in the Adjusted EBITDA table.
(3) Comprised of $13,245 of impairment charges on intangible assets and $232 of legal expenses incurred in the year ending December 31, 2023 related to the debt settlement and asset sale. All charges were included in other income (expense) on the Condensed Consolidated Statements of Income (Loss).
(4) For the year ended December 31, 2023, reflects a one time, non-recurring adjustment to prior period yield and processing variances on the Company’s processing facility, included in cost of goods sold on the Condensed Consolidated Statements of Income (Loss).
(5) Includes a $3,884 gain on lease transactions during the year. All charges were included in other income (expense) on the Condensed Consolidated Statements of Income (Loss).
RESULTS OF OPERATIONS
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenue
We derive our revenue from sales of extracts, distillates, branded and packaged cannabis flower, pre-rolls, concentrates and edible products to retail licensed dispensaries and bulk flower, biomass and concentrates to licensed manufacturers and distributors in the state of California. In addition, we distribute proprietary and several third-party brands throughout the state of California, and commencing in the quarter ended September 30, 2021, we began providing fee services for drying and processing third-party product for licensed cultivators in the State of California and we licensed the Lowell Smokes brand in Illinois and Massachusetts in 2021. The Company licensed the Lowell Smokes brand to Schwazze in Colorado and New Mexico in 2022. On October 6, 2023, as part of the Debenture Repurchase, the Company sold the rights to the Lowell Smokes brand. The Company recognizes revenue upon delivery of goods to customers since at this time performance obligations are satisfied.
The Company classifies its revenues into the following major categories: Consumer Packaged Goods (“CPG”) revenue, Bulk revenue, Lowell Farm Services revenue, and Licensing revenue.
CPG products are primarily sales of proprietary brands of the Company.
Bulk product includes revenue from flower, biomass and distillates sales.
Lowell Farm Services revenue is related to our processing facility that provides drying, bucking, trimming, sorting, grading, and packaging services.
Licensing revenue includes fees from licensing the Lowell Smokes brand and sales of packaging and support services associated with non-California based activities.
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Revenue by Category
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022:
Years Ended
December 31,
December 31,
(in thousands)
$ Change
% Change
CPG
Bulk
Lowell Farm Services
Licensing
Net revenue
CPG Revenues decreased to $18.0 million during the year ended December 31, 2023, a decline of $10.3 million compared to the same period in the prior year. While overall revenue declined, Lowell brand revenues continue to make up the largest percentage of sales with approximately $13.8 million for the year ended December 31, 2023, and represented approximately 78% of total CPG revenues. Lowell brand revenues year over year declined 30%, as Lowell brand revenues were $19.6 million and represented approximately 30% of CPG revenues for the year ended December 31, 2022. House Weed brand revenues decreased to $1.2 million in the year ended December 31, 2023 compared to $6.4 million in the same period of the prior year. As a percentage of total CPG revenues, House Weed decreased to 7% for the current period, compared to 23% in the prior year. The Company focused efforts on expanding third party distributed brands in the year ended December 31, 2023 resulting in third party distributed revenue increasing by $2.0 million, from $0.2 million during the year ended December 31, 2022. Revenue from third party distributed brands are included within CPG revenue. The increase in revenue for the year is driven by an expanded brand portfolio when comparing periods.
During the year ended December 31, 2023, bulk sales decreased to $8.0 million, a decline of $1.9 million compared to same period in the prior year. Total pounds of self-grown bulk flower sold decreased by approximately 42% during the year, however realized prices per pound on that flower increased by approximately 22% during the same period. Additionally, the Company realized an approximately 39% decrease in bulk flower pricing during the fourth quarter of the year ended December 31, 2023, but that was offset by a 162% increase in pounds sold, compared to the third quarter of the same year.
LFS and licensing revenues decreased to $2.2 million for the year ended December 31, 2023, compared to $5.3 million in the same period of the prior year. Licensing revenue was $0.7 million for the year ended December 31, 2023 compared to $1.6 million for the same period in the prior year. The Company sold the out of state licensing agreements during the convertible debt repurchase.
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Cost of Sales, Gross Profit and Gross Margin
Cost of goods sold consists of direct and indirect costs of production processing and distribution, and includes amounts paid for direct labor, raw materials, packaging, operating supplies, and allocated overhead, which includes allocations of right of use asset depreciation, insurance, managerial salaries, utilities, and other expenses, such as employee training, cultivation taxes and product testing. The Company manufactures for several brands and processes for cultivators that do not have the capability, licensing or capacity to process their own products. The fees earned for these activities absorb fixed overhead in manufacturing and generates service revenue. Our focus in 2024 is expected to be on flower, pre-rolls and on processing third party product at our processing facility. With the exit from the cultivation facility during early 2024, we will be able to react quickly to the demands of the market to better source our production needs and better control spending on third party purchased flower to manage cash outflows on flower and CPG manufacturing. 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.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022:
Years Ended
December 31,
December 31,
(in thousands)
Net revenue
Cost of goods sold
Gross profit
Gross margin
Gross margin was (26.3%) and (4.2%) in the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, the Company recorded impairment and write downs related to the cultivation facility, which was exited during early 2024. Included in cost of goods sold is $2.6 million of inventory impairment related to existing the cultivation facility, $1.6 million of expense related to the reclassification of leases from finance leases to operating leases, $1.7 million of one-time non-recurring yield and processing variances on the cultivation and processing facilities and approximately $3 million of variances recorded on the cultivation facility prior to lease termination. The variances recorded on the cultivation facility were the result of lower yields harvested during the year from adverse weather conditions and plant health which led to higher costs per pound of production and unfavorable product margins. The cultivation and yield and processing variances are not expected to recur during subsequent periods.
We expect to realize improved gross margin in 2024 as a result of exiting our cultivation facility, taking advantage of favorable per pound pricing on purchased flower and increased operating efficiencies. We recognized certain non-routine expenses related to inventory valuation and manufacturing variances that we do not expect to reoccur in 2024 that would favorably impact gross margin in future periods.
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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, 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. Selling costs as a percentage of retail revenue are expected to decrease as our business continues to grow due to efficiencies associated with scaling the business. We expect to incur periodic 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.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022:
Years Ended
December 31,
December 31,
(in thousands)
Total operating expenses
Total operating expenses decreased $5.2 million for the year ended December 31, 2023, compared to the prior year, primarily as a result of lower salaries and wage related expenses, a reduction in professional fees during the year, a reduction in slotting fees which are recognized as a sales discount in 2022 and an overall decline in travel and entertainment expenses incurred, all of which was offset by an increase in legal fees related to the sale leaseback, exiting the cultivation facility and the convertible debt repurchase. Operating expenses increased as a percentage of sales to 36% in the year ended December 31, 2023, from 35% in the year ended December 31, 2022. Stock based compensation expense for the year ended December 31, 2023 decreased compared to the prior year by $0.3 million. Operating expenses in 2024 are expected to be relatively flat year over year as we maintain current headcount, marketing levels and infrastructure expenditures while pursuing revenue generating leads.
Other Income (Expense)
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022:
Years Ended
December 31,
December 31,
(in thousands)
Total other expense
During the year ended December 31, 2023, the Company incurred approximately $15.2 million of intangible asset impairment related charges, including $13.2 million related to the Lowell brand assets. The Company recorded $8.7 million of impairment related to long lived assets of the cultivation facility, which were primarily leasehold improvements and equipment, as well as a $4.9 million gain on the net right of use assets and liabilities from the cultivation facility. The Company recorded $3.1 million of interest expense related to the right of use liabilities, the mortgage on the processing facility prior to the sale lease back and on the convertible debt prior to the Brandco deal. The results in the year ending December 31, 2022 include recognition of a sale of an Employee Retention Credit of $2.8 million that was earned during the period, net of financing costs of $862 to facilitate the sale of the credit. During the year ended December 31, 2022, the Company recognized $3.2 million of impairment expense on certain capitalized fixed and right-of-use assets related to the Los Angeles distribution facility.
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Provision for Income Taxes
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022:
Years Ended
December 31,
December 31,
(in thousands)
Provision for income taxes
Effective Tax Rate
Provision for income taxes for the year ended December 31, 2023, is comparable to the prior year and primarily reflects state and franchise taxes due to existing net operating losses.
Net Loss
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022:
Years Ended
December 31,
December 31,
(in thousands)
Net loss
We incurred a net loss of $37.3 million in the year ended December 31, 2023 compared to a net loss of $24.6 million in the prior year, as a result of the factors noted above.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary need for liquidity is to fund the working capital requirements of our business, capital expenditures, general corporate purposes, and debt service. Our primary source of liquidity is funds generated by financing activities. Our ability to fund our operations, to make planned capital expenditures, to make scheduled debt payments and to repay or refinance indebtedness depends on our future operating performance and cash flows, and ability to obtain equity or debt financing, which are subject to prevailing economic conditions, as well as financial, business and other factors, some of which are beyond our control. Cash generated from ongoing operations were not sufficient to fund operations and, in particular, to fund the Company’s short term capital investments into manufacturing and cultivation expansions or to fund growth initiatives in the long-term. The Company raised additional funds from a $6.6 million convertible debenture and warrant financing in the third quarter of the year ended December 31, 2022, and an additional $9.0 million from a sale leaseback transaction during the quarter ending June 30, 2023
As of December 31, 2023, the Company had $2.3 million of cash and cash equivalents and $3.5 million of working capital, compared to $1.1 million of cash and cash equivalents and ($13.1) million of working capital as of December 31, 2022. As of December 31, 2023, included in working capital is $1.0 million of deposits that are held for future cash management needs. The increase in working capital is due to $21.4 million of convertible debentures that were repurchased by the Company during October, 2023.
The Company is focused on improving its balance sheet by improving accounts receivable collections, right-sizing inventories and increasing gross profits. We have taken a number of steps to improve our cash position and to continue to fund operations and capital expenditures including:
Focusing on collection of principal balances only. Effective in 2023, excise tax is assessed to retailers which simplifies accounts receivable management;
Scaled back our investment in and support for non-core brands;
Focused marketing and brand development activities on significantly growing Lowell and owned brands;
Restructured our organization and identified operating, selling and administrative expense cost efficiencies;
Developed LFS, which commenced operations in the third quarter of 2021 to add revenue and cash flow generation through processing third party flower;
In 2022 and 2023 we reduced headcount and significantly decreased our seasonal workforce as we focus on necessary infrastructure to support our current operations;
Re-negotiating leases on facility space, including leasing more economically feasible facilities in Los Angeles and selling and leasing back our processing facility; and
Exited our cultivation facility to take advantage of profitably sourcing flower from multiple third party sources. Refer to “ Recent Developments ” and “ Subsequent Events. ”
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Cash Flows
The following table presents the Company's net cash inflows and outflows from the consolidated financial statements of the Company for the years ended December 31, 2023 and 2022:
Years Ended
December 31,
December 31,
Change
(in thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Change in cash and cash equivalents
Cash used in operating activities
Net cash used in operating activities was $(6.0) million for the year ended December 31, 2023, compared to ($6.4) million or a 6% favorable improvement from the year ended December 31, 2022. The change was primarily driven by operating losses of $37.3 million which included non-cash impairment expenses of $24.3 million, inventory decreasing by $6.0 million, prepaids and other assets decreasing by $2.8 million and offset by accounts receivable decreasing by $0.9 million in the year ended December 31, 2023, reflecting collection efforts. For the year ended December 31, 2023, included in operating activities is $0.4 million of principal payments on operating leases.
Cash used in investing activities
Net cash used in investing activities was $0.1 million for the year ended December 31, 2023, compared to $4.2 million or a 97% usage reduction from the year ended December 31, 2022. For the year ended December 31, 2022 the Company invested $4.3 million, primarily for manufacturing equipment for the automated pre-roll line while there were no major capital expenditures during the year ended December 31, 2023.
Cash provided by financing activities
Net cash provided by financing activities was $7.4 million for the year ended December 31, 2023, compared to net cash provided by financing activities of $3.8 million or a 92% increase from the year ended December 31, 2022. The change was due to funding received from the sale leaseback transaction compared to proceeds from convertible debt issuances in the prior year.
Working Capital and Cash on Hand
The following table presents the Company's cash on hand and working capital position as of December 31, 2023 and 2022:
Years Ended
December 31,
December 31,
Change
(in thousands)
Working capital (1)
Cash and cash equivalents
(1) Non-GAAP measure - see Non-GAAP Financial Measures in this MD&A.
At December 31, 2023, we had $2.3 million in cash and cash equivalents and $3.5 million of working capital, compared to $1.1 million of cash and cash equivalents and ($13.1) million of working capital at December 31, 2022. The increase in cash and cash equivalents in the year ended December 31, 2023 was primarily due to funding operational losses being offset by proceeds from the $8.9 million sale lease back. The working capital improvement was driving by the convertible debt repurchase during October, 2023.
The Company’s future working capital is expected to be significantly impacted by the growth in operations and continuing margin improvement.
Refer to “ Recent Developmen ts” and “ Subsequent Events ” for further discussion on exiting cultivation activities in January 2024. Through sourcing competitively priced flower and focusing on current CPG products, third party distribution and processing activities, the Company believes that cash on hand and cash flows from operations will be adequate to meet our operational needs for the next 12 months. Should market conditions significantly change adversely, there is no guarantee that our cash on hand and cash flows from operations will be adequate to meet our operational needs for the next 12 months.
CHANGES IN OR ADOPTION OF ACCOUNTING PRONOUNCEMENTS
This MD&A should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2023. See Note 1 of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a full description of recently adopted accounting pronouncements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A description of significant accounting policies are described in Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements are described below.
Estimated Credit Losses - Accounts receivable are recorded at invoiced amounts and when credit terms are extended to customers, management performs a periodic assessment of whether accounts receivable will be collected. A reserve is booked against doubtful accounts and determined based on factors such as credit worthiness of the customer, past performance with the customer, the age of the receivable and the customer’s ability to pay outstanding amounts.
Estimated Useful Lives and Depreciation of Property and Equipment - Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.
Estimated Useful Lives and Amortization of Intangible Assets - Amortization of intangible assets is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any.
Identifiable assets acquired and liabilities assumed are recognized at the acquisition date fair values as defined by accounting standards related to fair value measurements.
Fair Value of Investments in Private Entities - The Company uses discounted cash flow model to determine fair value of its investment in private entities. In estimating fair value, management is required to make certain assumptions and estimates such as discount rate, long term growth rate and, estimated free cash flows.
Share-Based Compensation - The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options and warrants granted. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.
Deferred Tax Asset and Valuation Allowance - Deferred tax assets, including those arising from tax loss carry-forwards, requires management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.
CONSOLIDATED FINANCIAL POSITION
December 31,
December 31,
Consolidated Financial Position
Cash and cash equivalents
Current assets
Property, plant and equipment, net
Right of use assets, net
Total assets
Current liabilities (1)
Working capital (1)
Long-term notes payable including current portion
Lease obligations including current portion
Total stockholders' equity
(1) During December 31, 2022, includes $21,398 of convertible debentures, net that mature in October 2023
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OUTSTANDING SHARE DATA
As of March 26, 2024, the Company had the following securities issued and outstanding:
Number of Shares
(in thousands)
(on an as converted basis)
Issued and Outstanding
Subordinate voting shares
Class B shares (1)
Super voting shares
Reserved for Issuance
Options
Warrants
(1) Class B shares reserved for conversion to Subordinate voting shares.
Seasonality, Cyclicality and Quarterly Revenue Trends
Our quarterly results reflect a pattern of increased customer buying and processing seasonality at year-end, which has positively impacted revenue activity in the fourth quarter. In the first quarter, we generally experience lower sequential customer buying, followed by an increase in buying in the second quarter. Although these seasonal factors are common in the industry, historical patterns should not be considered a reliable indicator of future revenue activity or performance.
Off-Balance Sheet Arrangements
During 2023 and 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
