Lowell Farms Inc

Greetings. Welcome to the Lowell Forms, Inc. First Quarter 2022 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. And please note that this conference is being recorded. I will now turn the conference over to Bill Matoulas. Thank you. You may begin.

Good afternoon. And welcome to the conference call to discuss Lowell Farms Incorporated's financial results for the first quarter ending March 31st, 2022. Before we begin, please let me remind you that during the course of this conference call, Lowell Farms Incorporated management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the risk factor section of our Form 10 filed on EDGAR and our listing statement filed on CDAR. 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 Schur, who will go into detail 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. And now I'll hand the call over to George. George, please go ahead.

Good afternoon. I'm grateful for your time. We will jump right into it. The quarter was a success for Lowell despite sequential revenue decline. Nearly all decline this quarter came from our LFS business, which we had indicated last quarter would be seasonal until we transition our customer base from outdoor into greenhouse. Despite the slowdown in LFS, we exited the quarter a lot more healthy than we came in. Both EBITDA and operating cash burn turned positive during the month of March, despite extremely challenging market conditions. Mark and Brian will get into details, but we continue to be mindful of our cash burn and profitability, and this was our top priority during the quarter. While we still consumed cash during the quarter, our burn declined significantly materially from $9.2 million to $2 million during the quarter. For reasons I referenced below, we are cautiously optimistic that the worst is behind us and that we have the resources we need to retain our independence without incremental financing. However, our liquidity leaves very little room for error. California is teaching us all a couple of really important lessons right now. For those paying attention, it's a cheat sheet on the future of cannabis. At the top of the list is the importance of brands as cannabis involves. Without brands, the trend towards commoditization is going to leave little room for profit as operators churn out products and sell them at marginal cost. There's a big gap between marginal cost and investor return on capital. Wohl is a premium brand with a loyal customer base that consistently demonstrates their willingness to pay a premium. This is why Zippo chose us as a partner to get into cannabis. We grew Lowell Smokes during the quarter, even as we held prices against the backdrop where the average price per flower fell 31% since last summer. This is an illustration of the potential of the brand, that we need to be doing more with the brand, a lot more. Our plans will become more clear later this summer, but we are keenly focused on bringing the new bringing a new Lowell Smokes product to a broader audience. Our new product offerings will be designed specifically to address the 62% of cannabis users who today use cannabis at least once a day. We believe that this consumer consumes 90% of the total cannabis sold in America, and there hasn't been a CPG product that is specifically suited for them. That's something we intend to address. Now, Mark will talk about our operational progress during the quarter, and Brian's going to talk about the financial progress. I want to address, most importantly, how we specifically see our plan to bridge ourselves into self-sustainability. Number one, we made operational cuts during the first quarter, for which we did not get the full benefit. The reductions impacted about two-thirds of our first quarter. Number two, we're seeing a gradual rise in the price that we are realizing for our bulk flour. And currently we are selling bulk flour at prices between 15 and 20% higher than we enjoyed during the first quarter. Number three, our farm is on track to produce approximately 10% more sellable flour this quarter than last, given the seasonal improvement in growing conditions. Additionally, We currently handicap the prospect for cannabis cultivation tax relief in the second half of this year as being more probable than not, which would be a significant tailwind. Now, longer term, our increased profitability will be driven by increased utilization of LFS, an increase in out-of-state activity, and improved CPG wallet share within California, specifically driven by our impending product launches. Now, while our new product launches appear to be speculative in nature and our expectations around share growth could be labeled as conjecture, we've been working on this launch for the better part of two years, and we are highly confident in the data that supports our expectations. Moreover, I don't think the growth case for California is dead. Sales growth in the state, which was at 40% this time last year, has since shrunk to null. But this belies a shift into the illicit markets. This shift occurred because the illicit market reacted much more quickly than the legal market did to the falling bulk prices of cannabis flower last summer. It's impossible to know the weight of this factor in terms of overall impact, but we believe it was significant. Retail flower prices have since fallen at dispensaries, and the correction hasn't been easy on the industry, but I do believe that it is the only way to get consumers back into shops. The anticipated relief from cultivation taxes and excise taxes should work even more so to drive consumers into dispensaries. Ultimately, we are in the brand-building business. We're growing our business in and outside of California, and ultimately I firmly believe that Lowell Brand has all the latent potential to stand in the pantheon among the best of consumer goods. But there's a lot of work to get from here to there, and we are operating within the leanest of margin environments inside California today. With that, I'm going to turn it over to Mark. Mark?

Thank you, George, and good afternoon, everyone. This quarter, the whole organization was focused on reducing costs and holding or raising floor pricing on many of our volume SKUs. We began using our LFS business unit to source flower inputs for our houseweed brands, which helped greatly change the margin profile on that product. That change resulted in an approximate 44% reduction in cogs in the houseweed brand. This transition meant that our greenhouse material, which has been sold under houseweed, could now be sold as bulk flower. Our Lowell brand, representing the top tier in quality from our greenhouse flower, is still exclusively powered by our team and their unique cultivars. The transition between source material did cause a small gap in product availability, which adversely impacted sales this quarter, but we believe the impact was temporary and relatively minor. We executed a RIF at the end of January, which reduced our payroll by approximately $2.5 million a year. We also slashed non-essential spending during the quarter and eliminated at least $4 million in annual spending. The team is hyper-focused on automation and resource planning so to drive operational efficiencies. Distribution expenses are a huge cost driver for the company. In addition to headcount reduction, we implemented route optimization and increased our minimum order size. As a result, our distribution expense as a percentage of CPG sales fell from 16.5% in Q4 to 12.5% in Q1. and towards the back half of the quarter fell below 10% of sales. I'll first discuss CPG trends. Brian will walk us through some of the details, but our CPG-owned product sales grew quarter over quarter 10%, while the California market continued to decline another quarter over quarter 3.5%. We attribute our growth to the houseweed brand's entrance into the infused pre-roll and infused jarred flower category, which continues to gain traction. Our packaged flower sales increased 16.8% in the period, and our pre-rolls have seen a 5.5% increase. Vape saw a 20.9% decrease, while edibles have also slipped 23.6%. The loss in vape volume was attributed to a price increase that we passed on that still paid for itself despite the drop in volume. The concentrates coming out of the lab used biomass from our farm and Lowell Farm Services clients have also seen a 5% increase. We recently launched the Lowell Hash Wrap Smoke, a high-volume succession product to last year's hugely popular but limited Lowell Hash Wrap. This version will allow greater scale and ability to service more dispensary partners that are excited for this product. The product is extremely popular and early demand has been extremely strong. We cautiously anticipate growing CPG sales in Q2. Beyond Q2, we are excited to release a series of products that we have been working on for the better part of two years. We will soon share details, but it is deeply connected to the Lowell legacy. Turning to bulk sales, during the first quarter, our bulk volume fell significantly. from 5,200 pounds in Q4 to 3,600 pounds in Q1. However, this was offset by a 34% increase in price. The decline in volume is attributed to seasonal output of our greenhouse, as well as inventory that we stockpiled through the quarter. This quarter, we expect to see a relatively strong performance from bulk sales given the price increase we are seeing and the market combined with our increased output from the greenhouse that George alluded to. Q1 is seasonally the low point for our growing climate when we see the lowest harvest levels. Now let's discuss brand licensing in other markets. Lastly, it would appear that out-of-state sales volume slid during the quarter. Licensing revenues were down approximately 12% during the quarter. This decline was more prominent in Massachusetts, and we think the market requires some brand attention. Both declines could be attributed to a surge in Q4 holiday sales given the giftability nature of the product. Our path to increase revenue through out-of-state licensing is dual track, increasing volume through education, awareness through trade support, and bringing on other states. We have a pipeline of new markets that we should be announcing shortly. We have been frustrated by the delays, but we are working hard to pick the right partners who grow the right type of quality flower. LFS, also known as our processing business, saw at-capacity volume in Q4 with intaking 303,000 wet pounds, 10% of which came from our own greenhouse. In Q4, we experienced a substantial decline due to the seasonal nature of our initial clients, outdoor farmers. That outdoor business was relatively low-hanging fruit, but it is seasonally quiet in Q1. During Q1, our intakes fell to 98,000 wet pounds, the majority of which came from our own greenhouse. We are shifting LFS toward the less seasonal client base of greenhouse growers, and we are already seeing dividends. During Q2 so far, we have already taken 120,000 wet pounds to date. With that, I turn it over to Brian.

Thank you, Mark, and good afternoon, everyone. Before I begin... please note that we are reporting our Q1 2022 results in U.S. GAAP, and a portion of my commentary will be on a non-GAAP basis. So 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 quarterly report on Form 10Q was filed with the SEC and CSC today. We reported Q1 revenue of 12.4 million down 18% sequentially and up 13% year over year. As expected, Lowell Farm Services revenue declined sequentially by 2.8 million from seasonally high revenue levels in Q4. Licensing and bulk flower revenue declined sequentially by 0.4 million and 0.3 million respectively. Offsetting these expected declines was a sequential increase in CPG revenue of 10%, primarily due to increases in pre-roll and packaged flower revenue. Driving the increase in revenue from Q1 last year was a 46% growth in CPG revenue, reflecting a full quarter of Lowell branded revenue, which was acquired at the end of February last year. While bulk flower revenue declined slightly sequentially, Average bulk product pricing increased 34% in the quarter compared to Q4, and bulk flour pricing seems to have bottomed in December, and we anticipate stable to modest pricing increases in the next several quarters. As we look forward to Q2, we are anticipating growth in CPG, LFS, and bulk sales. CPG growth is expected primarily from volume increases in pre-rolls and packaged flour. The expected increase at LFS reflects the impact from seasonal spring harvests compared to minimal outdoor harvest activity during the first quarter. Note the spring outdoor harvest is small compared to the primary outdoor harvest yields in the fall. The expected increase in bulk sales reflects improved cultivation yields as daylight hours expand and modest price increases as pricing improves from December lows. Turning to gross margin. Gross margin, as reported, was 13% in the first quarter compared to negative 12% sequentially and negative 13% year over year. The margin improvement over the fourth quarter last year was due primarily to cost reductions and efficiency improvements in manufacturing and LFS, price increases realized in bulk sales, and the impact of $2.8 million in inventory-related net realizable value charges in Q4. The margin improvement year over year was due to an increase in margin from higher profit-owned brand sales, primarily the Lowell brand, as a result of cost reductions and efficiency improvements. We expect to continue to see market price compression in the bulk flower market when compared to the prior year for the next two quarters, but as noted earlier, we have begun to see modest price increases from December 2021 levels. Operating expenses were $4 million, or 33% of sales for the quarter, compared to $6.3 million, or 42% of sales in Q4 last year, and $4.2 million, or 38% of sales in the first quarter last year, reflecting cost reductions realized in the current quarter. The operating loss in the first quarter was $2.5 million, compared to an operating loss of $8.2 million sequentially and an operating loss of $5.7 million year over year. reflecting the favorable impact from increased sales, cost reductions, and efficiencies. Net loss for the first quarter was 4.1 million compared sequentially to a net loss of 10 million, which compares to a net loss of 6.7 million in the first quarter last year. We expect improved gross margin from higher sales and operating efficiencies in Q2 and remain optimistic that we will realize the operating income for the full year. Adjusted EBITDA in the first quarter was negative 0.9 million compared sequentially to adjusted EBITDA of negative 3.6 million and negative adjusted EBITDA of 4.6 million year over year. We continue to anticipate generating positive adjusted EBITDA going out of the second quarter and growing meaningfully in the second half of 2022. Turning to the balance sheet, working capital was 18 million at the end of the fourth quarter compared to $21.3 million at the end of the third quarter, and the company had $5.9 million in cash compared to $7.9 million at the beginning of the quarter. Capital expenditures of $0.5 million were incurred in the first quarter, including investments in Lowell Farm Services infrastructure. With that, I'll turn the call back to Mark. Mark?

Thanks, Brian. Let's turn it over to the operator for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment, please, while we poll for questions. Our first question comes from the line of Bobby Burleson with Canaccord. Please proceed with your question.

Hi, thanks for taking my questions. So I guess the first one would just be with the product introductions that you're talking about targeting that heavier user kind of part of the population. I'm curious if you have any sense of what the mixed benefit might be for CPG as that starts to contribute. Is it a higher margin benefit? category for you relative to what you're doing generally in CPG?

Yeah, so everything we tried out. Hey, Bobby, by the way, how are you doing? Thanks for the question. All right, all right. We're doing all right.

So everything we put out, we try to put out at a contribution margin of between 40% and 70%. Anything that's sort of flower-based tends to sit around 40%. Most of the products that require some manufacturing expertise, we sort of seek for higher contribution margins. I would say that, and obviously there's a bunch of fixed costs in our cost of goods sold that we sort of amortize across our whole manufacturing base. So in general, higher volumes gives us margin appreciation over time. And that's just, you know, we have a fixed infrastructure in our facility costs, which we amortize across our production volume. So that just makes sense. What I would tell you is that I think that we believe we have cost-engineered products that allow us to come and give the consumer value proposition while still holding on to 40% to 50% contribution margin at the very least. And so I don't think we're compromising our overall trend towards margin appreciation by launching more products. As a matter of fact, all you're really doing is amortizing that sort of fixed infrastructure that's in our manufacturing base over a wider base and seeing gross margins improve.

Okay, great. And then with a licensing business, the Lowell Farms business, brand seems to have a lot of value. I'm curious, do you need to be a little bit higher touch with what you're doing in other states? Does it require maybe investing a little bit more in marketing or how do you incentivize moving that brand on the shelves of these partners?

So let's break it down. I think, first of all, what we showed in terms of sequential revenue decline in licensing is a little bit skewed because what we really experienced in terms of royalties and actual sell-through volumes, we saw a decline of 12% during the quarter. And almost all of that came from Massachusetts. I think we've had some potency issues and some challenges with our our partners in Massachusetts getting the product out the door. So we've struggled a little bit with some growing pains in Massachusetts. Illinois was down, but it was down low single digits in terms of licensing volumes, and that's consistent with everything I've seen about the market. So I'm pretty sure we held share in Illinois, Massachusetts, I need to spend a little bit more time with our partners to get to the bottom of what happened there. A lot of it happened at the tail end of the quarter. But in answer to your question, listen, we can always do a much better job getting in front of the consumer and showing them what our product's all about. And frankly, all the success we've had and all the investor return that we've got so far from these partnerships really has come with almost no marketing expense whatsoever. and no investor capital outlay. So I think we're demonstrating that the return on the first dollar has a lot of potential because we haven't spent that yet. And I see a lot of opportunity there, and we're going to spend some time driving dispensaries over the next couple weeks and asking the same questions you are. But I suspect that we're always in a position where there are some marketing dollars that make sense for us to spend, in order to expand the opportunity. Largely, our partnership that we just announced with Zippo is really fundamentally about that, right? It's about yoking our brand in dispensaries to the sort of return of smoking. And I think that will play out as well as we move into Illinois and Mass. I think that theme has just as much strength there as we're seeing in California.

Okay, great. And then just the last one is on LFS. with your transition to greenhouse customers there, can you get a sense of where you are in that process, how far along, and how long you think it'll take to kind of get to the right mix of outdoor and greenhouse?

Yeah, I mean, listen, there is a huge catalyst coming next April, right? So the thing we built this facility for was next April, everybody in California has to transition from a temporary license to an annual license. And most of the facilities in California have to be code compliant. You have to get a letter from your county that says you're code compliant. Most of them are not code compliant. And the biggest place where they're not code compliant is in this drying space. Right. And largely because the rules in California, you know, they're very difficult to comply with in terms of compliance with drying space. The most challenging, which is you need sprinkler capacity for this, for code compliance. And so a lot of these operators need to either make the capital investment by April 1st of next year, or they need to abandon their claims on a processing license at the greenhouse and and use a third-party facilitator for processing. That, with 5 million square feet of noncompliant cultivation square footage around us and a capacity of LFS that's probably in the 1 to 1.5 million square feet, I feel like we're in a pretty good position, right? That's just in our vicinity, and we've got this sort of state actor aspect to the business. So the business is coming towards us, We have added clients, mix-like clients so far. We've added our first new mix-like client this quarter. We've got a pipeline of a handful of them. And I don't want to say the absolute number that it takes to fill up our facility, but it's not a high number.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Jason Sandberg with PI Financial. Please proceed with your question.

Hi, thanks for taking my questions. I wanted to just touch base on your OPEX costs. So we've seen a dramatic decline, which I applaud. You know, going from $7 million in Q3 down to $6.3 last quarter, and then this quarter at $4 million. You mentioned that, you know, not all the, I believe I heard you, not all the cost savings have been embedded yet. So sort of wanted to know from a sort of expectation modeling process, you know, what should we sort of expect to see on a run rate for operating costs?

So I think one of, let me take that, I want to be careful in giving you guidance specifically on operating costs for next quarter because there's some puts and takes. I know that we have somewhere between a half and three-quarters of a million dollars of sort of net savings from the cost action we took last quarter, but there's some offsetting factors in that I want to make sure that we get a chance to walk you through. So why don't we take the question offline and help you build your forecast? Okay, no problem.

Let's just turn over to your cash position. So you've got roughly $6 million right now, $18 million in working capital. Again, I applaud your burn dramatically down this quarter. I just wanted to get your outlook in terms of the cash position, how you're thinking about that in terms of your CapEx and just operating there. burn moving forward? Are you comfortable with the $6 million? Just your general thoughts on your cash.

Well, I'll talk a little bit about just our general thoughts and how we're thinking about liquidity. And then, Ryan, why don't you weigh in on sort of cash forecasting, if that's okay. So, obviously, we're paying attention to what's going on in cannabis. You know, it's been about a 16-month buyer market for cannabis, and now we're running straight into gale force winds with the broader economy. Cash and cash management is paramount. I would generally say it's the biggest priority within the organization and shepherding our cash. The way we think about it right now is, We don't have an enormous room for error, but we do have the resources that we need to get through to self-sustainability, to turn the corner. And I think, you know, obviously this quarter, I'm really proud. We sort of showed the world that we can take a hard step in that direction. And I think look for us to do the same next quarter and Um, and as we're, we're, we are basically running the business now as if the resources we have are the only resources we get. Um, because there's not, there's, I think these capital markets are a challenge for everyone and certainly, uh, uh, and certainly for us. So I think, you know, from our spec, our expectation, we are a hundred percent still, uh, bought in and, uh, have conviction on the principle that we can get there with the resources we have. But as I say, there's not a tremendous margin for error. Brian, you want to give a comment?

Yeah, I'll just mention also that the $2 million in cash burn in Q1 was right on our plan. Our plan for Q2 has us burning between $1 and $2 million, so a reduction again, which continues the trend from Q4. The one thing I'll say, too, is that the rest of the year plan has a building cash. So just to kind of support what George mentioned, we see sort of these getting through this the tightness here. Although cash will still be tight, we do, as George said, you know, have enough to get through.

Yeah, and Brian, I think it's worth also just highlighting for Jason. Jason, like that number doesn't, you know, Brian says 2 million burn in Q1 and 1 to 2 million in Q2. That suggests that we're, the bottom end of that range is suggesting flat from Q1. But the reality is there's, some liability, uh, in working capital sort of trends. So what's behind the one to 2 million is, uh, is operational, uh, cash creation and some pay downs of operating liabilities.

Got it. Yep. No, that's, that's great. And then, okay. So just, just my last question is more of a clarification. Um, uh, you'd said that, um, So far in quarter, you've already received, I think it was 120,000 pounds of red flower. I just wanted to clarify, was that all third-party biomass, or does that include your own production?

No, no, it definitely includes third-party. Mark, do you remember what the ball is in that number?

Yeah, we've got, yeah, it's like, 41% is our farm and 58% is a third party.

That's for Q1 or for the 120 that's coming so far?

That's the 120 that's in right now.

Okay, great. Thanks very much.

Thank you. And our next question comes from Doug Cooper with Beacon Securities. Please proceed with your question.

Good afternoon, gentlemen, and a great bounce back quarter. I guess, George, I'm Brian, I'm trying to get an idea, just back in the envelope, operating leverage, maybe as you indicated earlier, you didn't get the full benefit from some of the cost savings. So based on the revenue mix in this quarter anyway, it would seem that your break-even revenue level from an EBITDA perspective is around $12.5 or $13 million. Is that in the ballpark figure? I mean, again, depending on your product mix.

Yeah, I think, I mean, Brian, do you want to comment on it? My suspicion is it's closer to the 13 number than 12 and a half, but it's in that 13 to 13 and a half number. I think, Brian, do you have that on top of your mind?

Yeah, that is.

I know we were just running this last night.

Yeah, that's right. It's closer to 13 and a half. It all depends on mix, as you kind of alluded to. Yeah.

Yeah. So as we look forward into the second quarter and then the back half where the CPG, you know, is expected to continue to grow and then with these new products, if they're successful, the contribution margin, George indicated, is 50 points. El Paso grows. Just remind us what the contribution margin of the El Paso business is. And I guess I'm just trying to, you know, if you get to, $20 million run rate quarters driven primarily by CPG and LFS. What kind of margins or gross margins for that matter can we expect?

Yeah, when you strip out on LFS, when you strip out the flour that we use in CPG and just assume bilateral transaction between LFS and manufacturing companies, The way to think about that is that business is running sort of in the 20 to 25 points of margin zip code. Okay.

Okay. And then again, sorry, if you get up to that sort of 20 million revenue quarter, what kind of gross margin would you anticipate driven primarily by CPG?

Brian, how would you answer that question for Doug?

Yeah, we would be sort of in the mid to high 30s, maybe approaching 40%.

Yeah, a lot of it's based on the mix. But with the CPG growth fueling most of that, yeah, I would agree with what Brian said.

If you're in that 35% to 40% gross margin range, I'm assuming your OPEX would grow somewhat to support that increase in that business, obviously. You should be dropping some material EBITDA, which I guess you alluded to in the second half, if you think you're going to be in a position to... That's right.

We think there's a lot of leverage we think there's a lot of leverage, Doug, as you allude to in, in, in our optics. You know, I, I will probably tell you that my sales and, or my marketing team is, is gonna, is begging for, you know, gas to fuel the fires. We talked about a little bit with, with Doug's question about other markets. So I think we're going to have the, position of deciding whether or not we want to reinvest in our own growth or not when we get to that position. Because right now we are, as you can imagine, we're doing a fair amount to shepherd resources and probably not doing as much brand building as we otherwise could.

And I guess my last question is on the California market in general. I mean, just taking a look at the Canadian market for instance, I mean, we're in the midst of serious probably capitulation by some of the producers. There's just too many producers in Canada. And, you know, you take a look at California, I think you've noted that your market share position is 500 brands. Do you think this is the year where, as you said, capital's tight, getting capital's tight? Do a lot of these companies start to go by the wayside? Are we finally in the throes of that consolidation phase? that we've sort of talked about for a while?

Well, I mean, in general, I would say that, you know, a lack of access to capital is usually a positive precursor to return on capital. I mean, that's just, that, that is just like a, you know, sheer arithmetic. And I don't think California is immune to that. So how long that's going to take to sort of see, the snapback of return on capital for our investors, which really, if you think about it, it amounts to the price per flower, you know, for the most part in California. So how long is it going to take for that to come back? I don't know. I don't know. I think the general issue you have with California is we don't know right now whether or not there's a demand challenge in California or whether or not there's a, uh, an illicit market problem in California. It's probably a combination of both. But as I alluded to, we've seen like basically growth, which was 40% this time last year has gone to 0% now year over year. Does that mean that every possible last person in California that's interested in smoking cannabis is smoking precisely as much cannabis as they want to be smoking? Unlikely. Um, I think more likely than that, what we've seen is we've driven a fair amount of consumers from the legal market into the illicit market. And getting that right is really a combination of tax policy and enforcement. I do think the state is trying to address the tax policy issue. I would also generally say the long term for California, regardless of of whether or not you know interstate commerce occurs the long-term uptrend for california is going to be around people exporting the products uh themselves right taking when they travel to california california gets 46 million visitors uh every single summer you know people when they travel to california to to take product homes people getting more and more comfortable with whatever risks that are there or perceived risks that are there. So in my opinion, I think that California has, you know, as a, as a, as sort of like an ecosystem, I think it's gotten better long-term trends than the balance of cannabis in the rest of the country, which is going to be fighting for, as I see it less and less, share as California and larger producer markets take over. I think in general, what's happening in pricing in California, we have seen capitulation in terms of growers just from a micro standpoint. We know of 11 license holders in our vicinity that have stepped away from licenses. We also know of some new entrants. So, you know, it's a mix. But net attrition we are definitely seeing. We're definitely seeing – real decline in year-over-year activity and outdoor cultivation, which I think was the community that was most hit by price declines. And we won't really know how severe that is until sort of October, November, December. But then on the flip side, though, we have a fair amount of indoor growers in California who have come way down on price. And the indoor growers in California – have come so far down in price that they're basically squatting right on top of mixed life, folks like ourselves. And that makes it very difficult for us to get any momentum in price because there's an enormous amount of indoor inventory that appears to be sitting out there. And I'm not really sure what clears that out. Indoor may have been overbuilt a bit in California. But we'll see. I think time can only tell what happens. From our standpoint, we have brands, and sorry for the long diatribe here, but we have brands that I believe show that consumers are willing to pay, even when the price for the commodity is falling, consumers are willing to pay a premium to get into that product. Like that is a port in the storm if there ever was one. And so we need to do more of that, in my opinion, in leveraging that. and leveraging that. I think that's certainly the story behind brands and the reason why we're so focused on building it.

Thanks, George. Appreciate it.

Thank you. At this time, we have reached the end of the question and answer session, and I'm going to turn the call back over to Mark for any 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 our next earnings call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.