Greetings. Welcome to Lowell Farms fourth quarter and year-end 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Bill Mitoulas, Investor Relations. Thank you. You may begin.
Good afternoon, and welcome to the conference call to discuss Lowell Farms Inc.'s financial results for the fiscal fourth quarter of 2021. Before we begin, please let me remind you that during the course of this conference call, Lowell Farms Inc.'s management may make forward-looking statements. These forward-looking statements are based on current expectations, which are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors section of our Form 10 filed on EDGAR and our listing statement filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future.
This call includes George Allen, Chairman of the Board, Mark Ainsworth, Co-founder and Chief Executive Officer, as well as Chief Financial Officer, Brian Shure, who will go into details about the company's financial results for the quarter later in the call. The Q&A portion of this call will be open to analyst questions to provide further insight into the company's performance, operations, and go-forward strategy. For those of you who may happen to leave our call before its conclusion, please be advised that this conference call will be recorded and archived on our investor relations website page. Now, I'll hand the call over to George. George, please go ahead.
Good afternoon. I want to briefly set the call by recapping where we have come over the last 12 months. We started the year with a modest position in California dispensary shelf space in a greenhouse that was struggling to recover from damage caused by the prior summer's wildfires. We pledged to investors that we would fix the greenhouse and offer monthly updates to give transparency into this objective. To compound the importance of that pledge, we acquired the Lowell brand during the first quarter. The acquisition was built around a turnaround strategy for that brand that was entirely based on improving the quality of input material into that branded product. Nine months later, in the fourth quarter, Lowell Farms became the best-selling flower company in all of California, according to Headset.
We've doubled sales in our Lowell Herb brand and restored it to a top 10 brand in the state from barely being in the top 30 the year prior. What is even more impressive is that our House Weed brand has grown even faster. Our cultivation team quickly went from improving harvest yields to serving up new and differentiated genetics. Now, I'm pleased to report that according to Headset, we've extended and even expanded the lead through the first month of the year. Now, there are over 1,000 companies trying to sell cannabis products in California. CPG manufacturers outnumber retailers in California, a totally upside-down market structure from traditional CPG. This is why the keystone, or markup in California retail, is substantially higher than in any other market. Dispensaries have enormous leverage over their vendors.
Against this backdrop, over the course of the year, we rose from being the number 16 largest cannabis portfolio to being the number 8. Unfortunately, our success has been in the face of a stiffening headwind. Cannabis sales have contracted for the second sequential quarter in a row in California, and the industry is going through a severe rationalization. With the exception of retail, there is oversupply at nearly all stages of the value chain. Over the past two quarters, we have watched as market share has slowly begun to favor the larger, more stable operators who can offer consistent supply. Now, this obviously favors Lowell, and we are growing share in nearly all of our categories. There is a larger battle at play, which is the overall health of retail in California.
As cannabis prices have fallen, the price advantage held by the black market has been compounded, shifting more and more sales away from the legal market. This dynamic is driven by the inherent fixed costs and taxes borne by the legal market in California. Without those cost burdens, the illicit market has been swamped by inexpensive material, specifically in the flower and concentrate categories, driven by oversupply in cultivation. Without policy change in Sacramento, it is entirely possible that Lowell and its peers are left fighting forever declining pieces of pie. The incoming increases of cultivation supply promise only to exacerbate the issue. Thankfully, it does appear that policymakers are paying attention, and we are optimistic for some level of relief, although it's too soon to quantify. CPG scale is inherently not about capacity. It's about execution.
We have ample flower capacity to double our market share in packaged flower sales, but the constraining factor is demand. We can make millions of gummies to satisfy nearly all the demand in the state, but demand creation takes time in a sales and distribution network. Anyone who presumes to enter California by merely multiplying market price by capacity is gonna be disappointed with a lot of unused capacity. Our machinery that we have built only works in tandem with people and the networks that we have to distribute our products.
I fully expect this to continue to lead us higher in the league tables as the year progresses. Now, I'm also proud of our launch at LFS. It was a new business model that we built to service the California cannabis growing community. California cannabis is made great by competition from thousands of growers, and we wanna support that diversity. LFS allows growers to more closely compete with the economies of scale of the largest facilities in the country by variabilizing costs that were traditionally fixed, thereby allowing them to compete on quality without a severe disadvantage in price.
This has not made us very popular with a small handful of large operators who are hoping to reduce California into a limited license marketplace with, like, fifteen really cool strains, and that's it. We agree to disagree. Who is Lowell Farms and where are we going? Instead of achieving our profitability targets during the year, we were substantially behind, and we consumed more liquidity than is sustainable. Our path to profitability cannot solely rely on hoping for a return to normalized bulk flower prices. Our future requires a combination of increased efficiency and greater scale.
The infrastructure that we have is expensive, and the linchpin of profitability for us is about capacity utilization. We have launched two new flower brands in the last 12 months, and we'll continue to launch new products on a cost-effective basis. We've also taken substantial steps to reduce expenses, increase automation, and reduce waste. We also need to increase our out-of-state licensing footprint to capitalize on the vitality of our brands, and we expect to have a handful of new markets identified in the first half of this year. The California market is rife with consolidation opportunities, and we believe that Lowell is the right platform for CPG consolidation. The success we had in restoring the Lowell brand provides a template for doing it again. We see several compelling brands struggling to achieve the requisite scale to be independent, and we are actively in discussions with several of them.
As to our liquidity, we consumed substantially more cash during the quarter than was anticipated. While some of this cash consumption came in the form of increased receivables generated by our LFS business, the operational burn of the business suffered from continued decline in the price of bulk flower. We ended the quarter with $7.9 million in cash. With a combination of organic growth in CPG, combined with a very dramatic series of cost actions, we have a plan to get to cash flow neutrality by the end of the quarter. We are also pursuing contingency alternatives, including non-dilutive sources of financing, as well as the divestiture of non-core assets. With that, I'm gonna turn it over to Mark. Mark?
Thank you, George, and good afternoon. While the business's overall financial performance was not immune to the California cannabis headwinds, we are pleased with the progress our team has made on many of our KPIs. I will speak briefly about the health of our businesses, CPG, bulk product sales, LFS, and licensing. I will also briefly discuss our outlook for the first quarter. Starting with CPG, revenues from CPG were down 9% during the quarter, led by declines in packaged flower and concentrates. We experienced a system-wide slowdown in retail traffic, combined with an effort among several of our customers to reduce inventory volumes to avoid larger year-end inventory tax. The product and operations teams launched 21 new products in Q4, of which 19 were permanent SKUs and two were seasonal holiday SKUs.
This resulted in an increase of approximately 75% on our median drop value, taking us from 1,952 in Q4 2020 to 3,426 in Q4 2021, telling us that our brands and products are in demand by consumers, and dispensaries know the value and traffic they drive. This shows that dispensaries are increasing their spend, which validates our decision to increase product offerings. This January, we continue to see improvement with an approximate 10% increase in median drop value. At the end of the third quarter 2021, we began to restructure the sales team directly under the leadership of our COO. By realigning the sales, we now have dedicated key account support, and we also expanded the territories for our key account managers. Since the restructure, the sales team has shown positive trends with opening 51 new accounts.
Within CPG, our packaged flower sales decreased 5% in the period, and our pre-rolls increased by 2%, both outpacing broader industry performance according to Headset. Vapes were flat during the quarter, while edibles slipped 19%. The majority of the contraction during the quarter came from the concentrate sales, which were down 38% during the quarter as we relaunched our marquee concentrate brand, Kaizen, in the middle of the quarter. While we continue to hold relatively high market share in concentrates, we are seeing enormous pricing pressure in this category in particular. Moving to bulk products, our biggest headwind in the California market was the near evaporation of the bulk market channel. Our team quickly jumped to rebuild our go-to-market strategy and work hard to identify a larger customer base of smaller transaction buyers and several brokerage partnerships.
We also opened a showroom in our Los Angeles licensed distribution facility to help expedite the showing of material to buyers. While Q4 bulk sales were $2.6 million during the quarter, up from $2 million in the prior quarter, reflecting a decrease in both price and volume during the quarter. We currently believe that the market has bottomed from December lows. We haven't seen the recovery in prices that we are expecting this quarter, given the seasonal differences in supply. Our newest business unit, Lowell Farm Services or LFS, saw the busiest quarter on record with $3.1 million in revenue by intaking and drying approximately 315,000 of wet weight biomass. The net result of that intake of wet weight biomass was approximately 14,800 pounds of finished trimmed product.
The team focused hard on optimizing the intake, drying, bucking, and trimming processes, and we left Q4 having reduced costs through automation in several of the labor-intensive key functions. We continue to refine the model at LFS as we attempt to shift our client base from outdoor cultivators to year-round client list of greenhouse operators. Lastly, in our out-of-state licensing, we were happy with the organic growth this quarter, but we have been slower to launch Michigan due to delays in getting our product approved by regulators. We expect to launch this spring in Michigan and anticipate to add additional markets this summer. During the quarter, licensing royalties grew by 92% at a run rate for December, GMV grew by 37% sequentially over September to $15 million.
Finally, I wanted to comment on actions we have taken in Q1 to rapidly move towards positive cash flow and profitability. In January, we reduced our full-time employee headcount by 15% and significantly reduced our seasonal workforce. While this was a very difficult decision, we remain committed to preserving long-term shareholder value. With that, I will turn it over to Brian.
Thank you, Mark, and good afternoon, everyone. Before I begin, please note that we are reporting our Q4 and 2021 full year results in U.S. GAAP. A portion of my commentary will be on a non-GAAP basis. Please refer to today's earnings release for a full reconciliation of GAAP to non-GAAP results. We report all figures in U.S. dollars unless otherwise indicated. I would also note that these results are unaudited. Our annual report on Form 10-K will be filed with the SEC and CSE later this month. We reported Q4 revenue of $15.1 million, up 21% sequentially, and 65% year-over-year.
Revenue in the quarter was favorably impacted by revenue of $3.2 million associated with Lowell Farm Services, a $2.4 million sequential increase, and bulk product sales of $2.6 million, a $0.6 million increase, or 30% over the third quarter. However, average bulk product pricing declined 38% in the quarter compared to Q3, adversely impacting bulk product sales by $1.6 million had Q3 pricing held in Q4. We believe bulk flower pricing bottomed out in December, and we have experienced some modest pricing increases in the new year. In Q4, out-of-state licensing revenue grew by 80% to $1.1 million, which includes both earned royalties and the sale of branded packaging. As Mark mentioned, CPG product sales declined 9% sequentially, due primarily to a delay in relaunching our Kaizen concentrate brand and softer edible sales.
Additionally, flower sales contracted 5% during the quarter. For the year, revenue was $53.7 million compared to $42.6 million, an increase of 26%, reflecting the impact from the Lowell Farms brand during the year. Lowell brand revenue was $17.6 million since our acquisition in March 2021. I should also note that revenues for the year were impacted by the decision to significantly reduce lower-margin third-party agency and distributed brand sales and focus primarily on higher-margin owned brand products. Agency and distributed brands declined $8 million to $2.7 million, or 75% year-over-year. As we look forward to Q1, we are anticipating growth in CPG offset by declines in LFS and bulk sales. The LFS decline reflects the seasonal nature of that business as there will be minimal outdoor harvest activity during the quarter.
The decline in bulk sales is related to increased usage of our flower into CPG in anticipation of elevated sales for the 4/20 holiday. Looking further out, we anticipate generating positive adjusted EBITDA going out of the second quarter and growing meaningfully in the second half of 2022. Turning to gross margin. Gross margin as reported was negative 12% in the fourth quarter compared to 1% sequentially and 2% year-over-year. The margin decline over the third quarter this year and fourth quarter last year was due primarily to bulk sales and $2.8 million in inventory-related net realizable value charges, reflecting lower cannabis market pricing in the period. The margin decline year-over-year was offset somewhat by an increase in margin from higher profit own brand sales, primarily the Lowell brand.
We expect to continue to see market compression in the bulk flower market when compared to the prior year, but as noted earlier, in 2022, we have begun to see modest price increases from December 2021 levels and are not anticipating further net realizable value adjustments. Operating expenses were $6.3 million or 42% of sales for the quarter, compared to $7.0 million or 56% of sales in Q3, and $4.9 million or 54% of sales in the fourth quarter last year. Impacted primarily by the lower gross profit, the operating loss in the fourth quarter was $8.2 million, compared to an operating loss of $7.0 million sequentially, and an operating loss of $4.7 million year over year.
The 2021 full year operating loss was $21.3 million, compared to $15.8 million in 2020. Net loss for the fourth quarter was $10 million, compared sequentially to a net loss of $8.7 million, which compares to a net loss of $4.1 million in the fourth quarter last year. Adjusted EBITDA in the fourth quarter was -$3.6 million, compared sequentially to adjusted EBITDA of -$5.2 million and negative adjusted EBITDA of $1.6 million year over year. Turning to the balance sheet, working capital was $21.3 million at the end of the fourth quarter, compared to $30.9 million at the end of the third quarter, and the company had $7.9 million in cash, compared to $17 million at the beginning of the quarter.
Capital expenditures of $1 million were incurred in the fourth quarter, including investments on automation equipment and Lowell Farm Services infrastructure. With that, I'll turn the call back to Mark. Mark?
Thank you, Brian. I'm incredibly thankful for the team's passion to execute at the best of their abilities. I am also thankful for our investors who quarter after quarter continue to double down on their support. I look forward to sharing more with you as we continue to solidify our positioning within the California market and beyond. Thank you. With that, I will turn it back to the operator.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Doug Cooper with Beacon Securities. Please proceed.
Hi, good afternoon, everybody. I just wondering, there's a lot of numbers there. I just wanna make sure I got them all. I think Mark, you said bulk pricing was down 39% from Q3. Is that, is that what you said?
Hi, this is Brian. It's down 38%. Yes, Doug.
Okay. If I recall, this was an issue in Q3 as well, so that was down like, How much was it down versus Q2 in Q4? Q4 versus Q2, just as a point of reference.
Doug, I'll get you that number, but it's over 50% in Q4.
Yeah. Okay. The gross margin, you know, the $1.1 million of the essentially royalty revenue, there, I mean, there's some packaging, I guess, in that, but I'm assuming this is pretty high margin stuff. You know, excluding that, the gross margin obviously looks, you know, a little bit even worse. I know this is a higher operating leverage business, but, you know, if I look back on Q3, just as a for instance, when you did $50 million in revenue, you did a 43% gross margin. Now similar revenue number, and you got a negative gross margin. Is this all to do with the bulk pricing, or is there something else that I'm missing?
It's a couple things. First of all, it's not fair to say that all the 1.1 in licensing is all margin. The royalty revenues in licensing is all margin, but the packaging there is-
Mm-hmm
Almost all one for one.
Got it.
There's more margin.
Like a 50/50 split kind of thing?
Yeah, that's about right. I'll get you the exact numbers. I don't have them off the top of my head. I think your point is still a very valid one. What happened was, in general, you've seen not only bulk prices compress, but you've seen pricing pressure sort of across the categories. The most obvious of which is packaged flower, but we've also seen it in concentrates as we alluded to in the call. You know, we've been working really hard to rationalize costs to bring down our unit costs. That's obviously been something we've been sort of chasing an active market.
I would generally say yes, we think we've got room for significant margin improvement this quarter based on higher volume, because it's all about capacity utilization. As it stands now, your point is well taken. The pricing pressure exists not only across the bulk, but across the balance of the business as well. You know, we did hold price on our Lowell, on our Champion brands. We did hold price, and we held out pretty well, but we also captured some incremental dollar volume by competing in some of the lower-end categories.
Just curious then. Say, the difference between, say, California and Massachusetts or Illinois, where you have the license, you're selling the Lowell brand there under license. What is the difference in pricing for the similar SKU?
I think in Illinois, I think our retail price is, I wanna say it's, $65. I gotta get back on that, Doug. One of the things that you get, and I mentioned this in a call. One of the things you have in Massachusetts, and you have it in Illinois, you have a much more traditional keystone markup, traditionally around
Mm-hmm
2x at retail.
Yeah.
California has sort of gravitated to something closer to 2.5 times markup. More of the end price value is captured by retail versus goes to the wholesale. That you have competing factors there. Not only are you getting a higher price point in those markets, but you're also getting a greater portion of retail sales.
Of the retail price. Right. Period end cash December, $7.9. What is it today?
I don't think we're not disclosing where we are today. As I said, the guidance we gave on cash is that by the end of the quarter, we're expecting to be close to cash flow break even. Cash flow break even or close to it.
For, for that-
We have adequate-
For that month? You know what I mean? Or for the quarter, you know, presumably for the
As we get-
when they get to the quarter.
As we get to that sort of run rate, right. We've been reducing expenses throughout the course of this quarter, and we believe that we have a plan to get to cash flow neutrality by the end of the quarter with sufficient-
You're talking the quarter being March, right?
March.
Yeah. Okay. When you indicated that you could be selling some assets, you know, on call it non-strategic assets now, what were those? What kind of assets would those be?
Well, we've seen a fair amount. You know, obviously from our standpoint, we're watching market conditions and the lack of liquidity and depth of market right now is something that we follow. Just making sure that we're aware of our options. We've actually gotten inbound interest for a couple of our different assets, including infrastructure and licenses that we have. For example.
Mm-hmm
Facilities and license that we have in Southern California for distribution as well as our overall distribution capability is something that's attracted some interest. We feel pretty comfortable that we don't have to take those measures now because we like the strategic functionality that it gives us. But it's a good safety net to have in our back pocket.
Right. The bulk of the costs I'm assuming are still associated with the greenhouse. If the LFS business is sort of the way to go maybe in California, would you consider selling the greenhouse?
Yeah, we've definitely had interest in the greenhouse, for sure. It's one of the best performing greenhouses in the entire country in terms of yield per square foot and cost metrics. I feel really good about that. It's far more technologically advanced than the vast majority of greenhouses in the state, especially those in the surrounding areas in Monterey County. In terms of how the tax structure works in Monterey, you know, there's a lot more margin and higher yield per square foot greenhouses. It's certainly something we've thought about.
I will generally say that while I believe we've got a lot of liquidity and depth of market in terms of cultivation for the foreseeable future, the California market, it's got such volatility in terms of how flower has priced in the past. While I don't see anything likely right now, it's simply too difficult to run a business yeah on the CPG side if you have severe volatility on the input cost side.
Mm-hmm
such that the safety net that we get from having a steady stream of our own supply right now, until the market matures and the volatility decreases, I think it's an unlikely decision. There are a few people out there who are sort of shopping sort of long-term supply agreements that we've seen, that I would say there's the prospect that we could replace our cultivation with something like that. that's, you know, that's way down the road, and I don't think right now.
Mm-hmm
It's something worth contemplating.
Okay. You've shied away from, say, lease backs in the past. Is that you know, maybe on your greenhouse asset, is that still something you're
Not likely to see-
Yeah, it's important to note that our greenhouse is a leased asset, so we already do lease that.
Okay.
We believe it's a below-market lease.
Okay.
We do have equity in our processing facility, our large third-party processing facility. That's definitely something we've looked at, and I probably should have mentioned before as an alternative.
Okay. Let me leave it there, and I'll circle back. Thanks.
Our next question is from Jason Zandberg with PI Financial. Please proceed.
Yeah, thanks for the questions. Just wanted to in terms of, you know, what your growth outlook is on that licensing side. You mentioned that, you know, Michigan is probably not gonna be realizing any sales until, or licensing, until Q- or later in this year. You know, are you still on a growth path on the states that you are licensing? Is packaging sales, that's embedded in that expected to stay on par quarter? Just in terms of that licensing growth, would be helpful.
Yeah. I think it's a great question. I think there's still latent potential for growth there. It's really about whether or not we get the amount of supply out of our partner that we're looking for. We've been supply-constrained, specifically in Illinois. In Massachusetts, I think we have more room for growth there in terms of developing more baseline revenues. But I'd say the step function that we're gonna get. We did, you know, we obviously enjoyed a lot of growth this quarter. We, you know, as I said, went from $11 million, I think roughly $11 million of annualized GMV at the end of last quarter to over $15 million this quarter.
I feel, you know, obviously that's impressive growth, and I think we could, you know, it's hard to imagine that just stops there. I think the flip side of that is our partner, Ascend, you know, they don't have infinite supply in terms of flower capacity. That's something we're negotiating with them and working through with them. In terms of the packaging, I think it is fair to say that there are episodic purchases of packaging that our partner makes and passes through that number. I can't say for sure whether or not that's gonna lead to the same larger or smaller number this quarter. We simply haven't worked through that yet.
I think in general, our expectation is that we've got a little bit of organic growth on the royalty side and probably the same on packaging.
Okay. No, that's great insight. In terms of your farm services seasonality, you mentioned that, you know, which would be, you know, expected that there would be some seasonality in that business. Any guidance that you'd be prepared to share in terms of what to expect for Q1? I recognize that, you know, you're not gonna have a large harvest, outdoor harvest that comes online in Q1. You may have some indoor clients, but just sort of any sort of guidance in terms of, you know, what to expect in, you know, how.
We have a.
[Inaudible]
Good question, yeah, we'll probably see this quarter, you know, relatively material contraction on LFS revenues. What I'll say is, that business we obviously had what was I thought of phenomenal fourth quarter and really gives us a fair amount of trajectory. The real advantage of that fourth quarter is that, you know, we process 14,000 pounds of inventory or potential inventory that we can use, you know, into lower price retail sale products for the balance of the year or at least for the next two quarters. Where we see LFS going is we obviously we took in revenues that we could get immediately from processing outdoor flower in the fourth quarter. We think that the long term trajectory there is to get more greenhouse clients. We do have some greenhouse clients.
We had a fair amount in the fourth quarter as well. There's some regulatory drivers that make it attractive for us to be in that business with greenhouse clients the pipeline build there is developing. So it's going to take us a little bit of time to ramp up that business and of course there are seasonal peaks both in the second quarter and the fourth quarter with outdoor harvest. So from our standpoint, we also built a business not only just doing drying and trimming, but we also just do trimming for the third party clients. And in that business we've gotten a more healthy stream this quarter. And so I think net-net will be a pretty material declined this quarter in sequential revenues for that category with more revenue growth sort of throughout the year and we expect it to be a strong performance here.
Sure. Okay. No, that's great insight and guidance on that. Then just last question, and I hate to make you repeat yourself, but I was feverishly writing down notes and missed. You said positive EBITDA exiting which quarter this year? Is that Q1, Q2, Q3? I didn't catch the quarter.
Yeah. Brian, can you give clarity there?
It was Q2, as we exit Q2, Jason.
Q2. Okay, that's perfect. Thanks very much.
Our next question is from John Desorcy with Viridian Capital Advisors. Please proceed.
Hey, guys. Thanks for taking the call. Appreciate it. A lot of questions have already been answered. Just couple kind of bigger picture ones, for me, you know. With the pricing already having come down so far, the demand down, in the fourth quarter in California on sales, and obviously a lot of product coming online from competitors this year, you know, what brings pricing back, and what helps pricing out beyond state legislation, in California?
Well, it's a great question. I think, you know, generally you're starting to see strength right now in pricing. It's starting to return to. I wouldn't say we're back nearly where we were this time last year, but we've definitely seen a return in some pricing, and that usually is driven just by seasonality. Yield levels drop this part of the year in greenhouses, and most of the outdoor flowers sort of digested through the system. I think, you know, longer term, I think it's. We're not building a business around a price deck that is much more aggressive than it is now. We're building and rationalizing to a price deck right now that is cultivation input materials at or above sort of the marginal cost of mixed light growers.
I think I wouldn't say that we're counting on or building a lot of you know sort of secular growth in bulk prices. You know, anecdotally, there has been a fair amount of attrition. We've heard about you know large footprint in Santa Barbara that just went under. We've heard a fair amount of greenhouse capacity in Monterey that has mothballed. I think you've seen a fair amount of attrition in the marketplace. I don't know. It's my first you know sort of cycle in seeing how fast capacity turns off. I will generally say from spending a lot of time around growers you know this is not just a marginal cost decision for growers.
I think a lot of cases they are farmers by nature and optimistic by nature. I think that the usual sort of signaling that goes on, price signaling that goes on in a commodity here is probably I'm less convinced it's gonna be as efficient in terms of capacity going offline, which is probably why you don't see us adding mixed light capacity aggressively right now. I think a lot of people would take the counter side to that argument and suggest that we are seeing a fair amount of attrition in supply.
Okay. Now as a follow-up on that, you know, I'm reading about local level regulations changing and some tax breaks coming, including even in Monterey. Can you kinda touch on, you know, what's the viability of that and kind of what the impact will be for you guys?
Yeah. We did get a tax reduction in Monterey, which I think was helpful. We also got a cultivation tax reduction in Monterey, and it was worth about a quarter of a million dollars a year to us. It's a decent drop off, and I think a lot of growers sort of point to local cultivation tax as an easy target to get reduction in. Monterey is a county that's very progressive and wants to really be committed to cultivation, and they've dropped their canopy tax in the county. I think, you know, more broadly, we're actively in discussions with our city about dropping our manufacturing tax.
I think a lot of respects, where we are right now in terms of cannabis and policy is that, you know, legislators have decided that cannabis is a job creator and not public enemy number one. They're going from trying to really monetize cannabis in terms of tax policy to actually trying to harvest and attract cannabis. What you're gonna see, I think, in the next 6-12 months is a fair amount of municipal competition as to who's gonna attract business over time. That's certainly something that, you know, we're paying close attention to and interested in.
More broadly, the biggest sets of relief though is gonna come from, you know, what we see in terms of cultivation tax and excise tax relief in Sacramento, both of which are sort of proposed. We have a handful of bills that have proposed to either postpone or eliminate them altogether.
Okay. That's interesting. Now, just two last questions for you both on kind of the M&A environment. You know, you talked about looking for more brands out there, and adding that to the portfolio. You know, what's the market for kind of brands that can be meaningful contributors, you know, help really kind of change the pricing dynamics, but yet still are obviously pretty small, given that, you know, you only have the $8 million in cash, probably some burn in the first quarter, and I can't imagine you wanna give up a lot of equity at this point. You know, what's kind of the market for players out there that could fit in that sweet spot?
Well, I think in a lot of respects you've got assets that have embedded brand equity, but not a lot of prospects because there is a bit of a capital strike going on for California cannabis. We'll see where that sort of shakes out in terms of valuation for those types of assets. I would say there's not a lot of great options right now, and the reality is there's also not a lot of great acquirers for them.
For example, if you don't own your own distribution and you use like a third-party distributor like Herbl, you know, you're gonna have to go and get permission from Herbl to add a new brand or product to your portfolio and to get conviction from them that they can move that through their channel. For us, we're one of the few operators that owns our own distribution and sales infrastructure, so it's a much easier conversation for us to have internally about our ability to move volume and a product. A lot of brands that are either self-distributed or have a less than ideal distribution footprint or partner, they're under distributed in the state, so available in dispensaries.
What we'll look for in brands like that are brands that have high shelf velocity in the stores that they're in, but don't necessarily have the breadth of market coverage that they need to get where they wanna go, and they can't find that elsewhere.
Okay. You know, kind of as a different take on the M&A environment, you know, seems like it's getting closer to the time where MSOs will be looking to enter the market and, you know, you guys certainly seem like you'd be a nice partnership candidate for somebody. You know, kind of what are your thoughts on that, you know, partnering with a larger entity and additionally, kind of your thoughts on kind of the hindrances or challenges to an MSO getting into California?
Well, I think you've got three MSOs that are in California right now maturely, and they sort of have, in terms of CPG brand footprint, they haven't really been all together all that successful. I think the best, you know, portfolio out there is I think ranked number 12 or 13, and then beyond that, it's sort of way down the league tables. I think that there is a chance that MSOs who wanna come into the state or expand in the state to get critical mass, they're gonna look to acquire brand portfolios, and we've certainly had those conversations.
I think it's from what I can tell, the MSOs seem very keen on the retail footprint and backfilling with verticalization to populate that retail footprint, and that's something we've seen, you know, had a fair amount of conversation with those MSOs about. I think it's certainly something that's out there. We're always having, you know, various conversations. You know, from my standpoint, I think, you know, at the right price and the right valuation, we're certainly willing to partner with somebody, but for the most part, we're committed to sort of winning the CPG war in the best market in the country.
Okay. No, that makes sense. You know, I'll jump back in the queue. Thanks so much for answering the question.
Thank you.
Thank you.
This is all the questions we have for today. I would like to turn the conference back over to Mark for closing remarks.
Thank you again for joining the call and for taking the time to get an update on our business. We look forward to talking with you on the next earnings call.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.