Glass House Brands is one of the most high-profile marijuana brands in California, and easily one of the largest vertically integrated operators in the Golden State.
CEO Kyle Kazan and CFO Mark Vendetti sat down with Green Market Report after the company released its second quarter earnings to share some of their thoughts on market trends and where the national marijuana industry may be headed in the not-too-distant future.
In the conversation, Kazan also echoed a common theme: He expects that the Biden administration will reschedule marijuana prior to the election next year, and the business impacts from that shift likely will be positive.
This interview has been edited for length and clarity.
On Glass House’s second-quarter results, could you expand on the statement you made about this past quarter being the best in the company’s history?
Kazan: Part of that is we were really able to lay into our Camarillo facility. And so when you look at our second quarter of last year, the pounds produced, I think that was less than the difference of what we said we would do and what we actually did. The numbers are pretty staggering.
The biomass price rebound from last year to this year obviously played a big part of it. But the fact is that the team grew amazingly good quality cannabis at a very low price, which drove our margins up.
And I would just tell you running this company this year compared to last year is just night and day, as evidenced by our preferred D round, which we raised in a higher interest rate environment than last year, and paid 5% less dividend, and also $1 higher in the in the warrant strike price.
Can you talk a little bit more about what makes it so different?
Kazan: One, we’re producing a lot more pounds. Two, we’re dialing it in, so the (cost of goods) continue to lower.
The market is cyclical. And the cycle of the market is in our favor this year over what it was last year. So we control the controllables of the COGS.
Profitability has been elusive for a lot of different companies, not just MSOs, but private companies as well, particularly in California. What’s the biggest barrier to profitability for Glass House?
Kazan: Well, we did hit profitability. We crossed that sound barrier.
Vendetti: (We saw) positive operating cash flow.
But this past quarter, the company posted a $24.9 million loss.
Vendetti: The best way to think about this is, when you look at when you look at the P&L, there is a bunch of activity below the line that says operating gain or loss. Other than interest expense, most of that is typically related to derivatives and contingent liabilities.
So the reason there was a big negative loss there is because one of the deals we have with the purchase of the Camarillo farm is such that the person we bought it from has a potential to earn shares in the future. During the quarter, our prospects improved, so much so that he looks like he’s going to earn basically $20 million. And so we had to take that loss in the quarter.
So it’s a good news-bad news (situation). Our prospects improved, it looks like he’s going to get shares, we put the shares in the P&L. So it’s non-cash.
As a shareholder, if you really peel the onion and get in there, it’s a good thing, because it means there’s a higher likelihood we’re gonna pay out an earn out, which is driven by achieving $75 million in EBITDA toward the end of 2024 and early 2025, for just the Camarillo farms.
Kazan: Cash-cash, that’s what we’re going to care most about. We have more cash in the account this quarter than last. That’s what I’m most focused in on.
The legal dispute between Glass House and Catalyst Cannabis Co. over allegations of illicit market dealing. Anything that you can tell me as far as where that all stands?
Kazan: One side is talking endlessly on social media. The other has chosen to focus in on growing the company and trying to get good results. So what I would tell you is, we have a very good legal team, we turned it over to them.
When I tell you I don’t think about that, I don’t think about it. I blocked the social media chatter, anybody who’s chattering about it is blocked, so they don’t show up on my feed.
So on the legal case, no comment.
In regards to just a general question, John, we’re a one of the largest companies in the largest market in the world. It’s highly regulated. And we are audited for two different countries. So you can imagine, we have to be very, very tight about what we do.
What’s top of mind for Glass House these days? What are the biggest issues your company is facing?
Kazan: Everything in California is going so peachy that I get so much sleep at night, I barely even come in here, it’s so easy. (laughs) It almost feels like Mr. Toad’s Wild Ride. We as a team are like, “Okay, what happens if the distributor blows up? What percentage chance is that?”
In the first quarter (2023) and the fourth quarter of last year, those were discussions we were having with the senior team at Herbl. When the worst case scenario for them played out, happily our team was ready for it, and we literally just shifted gears and it was pretty smooth.
Now watching the distributors, that’s something that we’re a little bit concerned about. Part of the reason that they’re in distress is because retailers had the excise tax (collection responsibility) shifted to them. And I would say, a decent percentage is not paying that. And they’re not paying their bills to the brands.
Vendetti: The hard work is finally starting to be realized. You go back a year, 18 months ago, and people were saying, “Why are you expanding? Prices are down, this is the dumbest thing you guys can be doing right now. Focus on (consumer packaged goods).”
We are laser focused on what we can control. And that is pretty much grow really good cannabis, grow lots of it, at a very low cost. Even if the market price drops – and we don’t think it would drop back to its lowest because all the cultivators have left the market – we can still earn a healthy margin.
What systemic market issues are you still experiencing in California?
Kazan: We have an uneven distribution of retail licenses throughout the state of California. Long Beach, we have like 30. And then you go to the South Bay, where I live, and there’s zero. Are people buying cannabis in California? 100% they are. And if it’s not easy for them to do it legally, then they’ll do it through the illicit market.
I take my hat off to the cities that issue 30 licenses, but for that for that to actually be a healthy industry , it probably needs eight or five or something like that. With 30, you just have everybody fighting for scraps. And it’s really, truly nasty.
Still a lot of uneven geographic distribution of retailers, sounds like.
Kazan: Oh, 100%. And so I think is, over time, we’ll see more stores open up in like Southbank, Hopper, and Redondo. That’ll take some of the pressure, and more people will go to the legal market.
And then in cities like Long Beach, depending on how the state handles nonpayment of excise tax or significant underpayment, if you’re one of those stores that decides to play some sort of a tax scheme game … If they start to shut stores down like that, it’ll be a little bit of a forest fire that will help the stores that are doing OK.
Ultimately, what’s really going to turn this whole thing around, I believe, is going to be federal reform, either descheduling or rescheduling to at least three. And I think you’ll start to see more of a free market open up.
The only way the illicit market is going to shrink is if those folks decide it’s in their best interest to join the legal market. And I think that happens when they can sell their wares throughout the United States.
So it’s going to take a minute, and it’s going to still be a very difficult go in California. And you better have a durable competitive advantage if you’re going to try and survive, and you better not have over-leveraged yourself, you better not have done a number of things that some of these companies unfortunately have done.
If marijuana gets moved to Schedule 3, what do you anticipate that would could mean for Glass House? What could be the business ramifications?
Kazan: (Health and Human Services Secretary Xavier) Becerra, supposedly, in December, is supposed to come back with a recommendation. (People who know him say) he is pro-cannabis.
Now that said, he’s also a soldier in the Biden administration. So temper that for a second.
We’re all hoping for descheduling. We think that’s the right thing to do. That stops putting people in prison. That is the moral thing to do.
But it’s highly likely (Becerra) comes back and recommends schedule three. That’s what I’m hearing.
I would think sometime next year before the election, we could get (rescheduling), hopefully no higher than scheduled three. What does that mean? For all cannabis companies, 280E would go away. Those that are publicly traded could look to uplist, likely on Nasdaq or NYSE. It would change the fortunes quite a bit.
I don’t know what it means for interstate commerce. But I would tell you that I think the floodgates of money start to open up.
How much could negating 280E mean in savings this year or next year for a company the size of Glass House?
Vendetti: Should be significantly more than $10 million of cash a year. That’s enough to pay for the retrofit of a single greenhouse, which can throw off $80 million of cash, which then in turn throws off $30 million plus of EBITDA, and you get this really virtuous cycle. Then the cash flow really starts to kick in.
So the $10 million becomes $20 million, and it becomes a bigger number as we get bigger.
If the Biden administration announces cannabis is moving to Schedule 3, what do you think then happens for cannabis company stock prices?
Kazan: I think part of the reason why our stocks don’t move right now, besides the general beat down that anybody that has put any money into it has gotten over the last few years, it’s that you can’t custody your stock. So if it’s a schedule three and that changes, which I think it probably would, you could actually go to Morgan Stanley, have an account and, custody stock in the United States. That allows more liquidity.
Right now, there’s a huge lack of liquidity. I mean, today, we traded like 12,600 shares on the (over the counter markets). It’s so anemic that it doesn’t take much to have it move up or down.
Just allowing us to be treated like any other company by the financial sector, I think, would be massive.
Publicly, I might come out against rescheduling; I’m gonna be 100% for descheduling. That said, I’m not batshit crazy. Take the incremental change, move the ball. You don’t have to score a touchdown on one throw.