Glass House Brands Inc. Subordinate Voting Shares

Good afternoon, ladies and gentlemen. Welcome to the Glasshouse Brands' fourth quarter and full year 2024 investor call. Matters discussed during today's conference call could constitute forward-looking statements that are subject to the risks and uncertainties relating to Glasshouse Brands' future financial or business performance. Actual results could differ materially from those anticipated in those forward-looking statements. The risk factor that may affect results are detailed in Glasshouse Brands' periodic filings and registration statement. These documents may be accessed via the CETR Plus database. I'd also like to remind everyone that this call is being recorded today, Tuesday, March 25, 2025. On today's call, we have Kyle Kazan, co-founder, chairman, and chief executive officer of Glasshouse Brands and chief financial officer Mark Vendetti. Following prepared remarks, management will open up the call to analyst questions. Also, joining for questions is Graham Farrar, co-founder and president. And with that, I will turn the call over to Kyle Kazan.

Thank you for joining today's call. Before discussing results, I'd like to refer to our fourth quarter and full year 2024 press release, and financial filings where you can review results in greater detail. Additionally, I'd like to thank the entire team at Glasshouse for their continued dedication and execution despite the continued tumultuous market conditions in California. 2024 was a year of significant development and growth for Glasshouse. Commercial operation of Greenhouse 5 began in January, completing phase two expansion at the SoCal farm. The facility achieved its first full quarter of production and sales in the second quarter, and production volumes, quality, and yields from this facility have all exceeded expectations. We began phase three expansion last quarter, commencing the retrofit of greenhouse two, along with investment in ancillary support facilities. We expect initial revenues from greenhouse two by the fourth quarter of this year, with an incremental production contribution estimated to be 275,000 pounds in the first full year, bringing consolidated annual capacity to more than 1 million pounds of biomass. Importantly, Greenhouse 2 has existing supplemental lighting consisting of over 11,000 high-pressure sodium lights, creating a blend between greenhouse and indoor, making it possible to produce an even higher quality of flour, higher yield per square foot, and more consistent production throughout the year. We believe the higher quality flower will yield to higher pricing compared to our existing greenhouses. Additionally, the power needed for this lighting will be generated cleanly onsite via our three co-gen facilities and solar panels. We have made considerable progress since we last talked regarding our phase three expansion. We're now pursuing a strategy as our base case, which will allow us to cultivate cannabis in greenhouse two. In addition, we shifted our hemp license to Greenhouse 4 and are currently growing hemp-derived cannabis plants on a research and development basis. This approach will allow us to develop both revenue streams in parallel and potentially accelerate our growth. This gives us maximum flexibility. We have applied for cannabis licenses for Greenhouse 2, but still have a couple of months before we must commit to cannabis. As discussed earlier, we're on track to get initial revenues from Greenhouse 2 in the fourth quarter, and the retrofit is proceeding on schedule and within our budget of $25 million to $30 million. Regarding hemp in Greenhouse 4, we are pleased with early cultivation trials and feel we will be able to grow 2018 U.S. Farm Bill compliant hemp. for export outside of California. In our market evaluation, we believe that the demand for hemp-derived cannabis nationally is massive and that we could sell everything we grow as the initial response from the hemp distribution channels has been very positive. Pending developments with the Farm Bill and a regulatory change at the state level, we are confident that opportunities to sell outside of California exist right now. Proforma annual numbers for Greenhouse III with full CapEx build-out would generate 240,000 additional pounds. At current market pricing of $900 to $1,000 per pound, using $900 would garner 72 million top-line revenue when fully mix-adjusted at a 66 percent margin. Demand for our products should come as no surprise. We have always said the rest of the U.S. wants California weed. We will provide additional insight into our strategy in mid-May when we review our first quarter results. We never lose sight of the fact that at its core, this is an agricultural business and everything in the cannabis industry starts with the plant. Our aim remains to use the added scale of each new greenhouse combined with process improvements and technology to reduce costs. From the farm to our retail stores and branded products to the C-suite, a focus on quality cannabis at the lowest costs grown at massive scale is our main focus, and that will continue with these expanded facilities. Our core tenet of low-cost operation is now more imperative than ever amidst persistent California pricing pressure and broader economic headwinds on consumer spending. Even with further headwinds coming as regulators are expected to impose and expanded excise tax on California retail sales this summer, we have shown throughout our history that we are uniquely positioned to sustain and thrive in the face of these challenges. I am proud of our cultivation team's performance. Q4 cultivation cost per pound was $110 per pound versus initial guidance of $125 per pound. For the full year, cost of cultivation fell by 10% year over year, to $123 per pound. The decline represents an acceleration in the rate of cost reduction versus 2023 when cultivation costs fell by 6%. Mark will provide guidance on cost and production later in the call. However, we expect further cost reductions this year as we keep getting closer to our $100 per pound target. Meanwhile, our quality and brands resonate in the market. With the 2023 year-end call, we announced three strategic product initiatives. One, a $999 out-the-door price for Allswell eighth-ounce package of flour in our stores. That's right, $999. A retail dispensary strategic pricing plan. And our decision to prioritize focus on the top brands within the CPG business, namely Glasshouse Farms plus products in Allswell. One year later, results exceeded internal projections and growth rates accelerated as the year progressed. This is particularly impressive as California stays challenged. Our growth in all three segments of the company was achieved despite taxable sales in California declining by 10% year over year in 2024 versus 2023 per the CDTFA. The Allswell brand was a top three brands in unit sales in 2024 per headset data, and Glasshouse Brands was recognized amongst the LeafLink List 24 brand winners in California as a top two best-selling family of brands. Despite sales declines, consumer demand has stayed robust, and buyers are unwilling to sacrifice quality even as wallets are pressured on ASPs. While most cannot, we are uniquely capable of succeeding in this environment as a result of our vertical integration and low costs. As we look ahead, with experts calling for further economic headwinds to come, we believe the Allswell brand and our ability to provide a consistent low-cost offering drives our performance. For PLUS, we are seeing promising early returns on efforts to enhance the offering, including new TINs, an impulse buy five pack, a consumer sampling program, and even more emphasis on sleep gummies, including our recently introduced deep sleep gummies. For the fourth quarter, we had the best quarter for CPG wholesale revenues since the end of our distribution relationship with Herbal. It should be noted that for most of our multi-year relationship with Herbal, they purchased 100% of our products and handled all sales. We totally restructured and currently keep control of the CPG process as we handle all sales, credit approvals, and only utilize 3PL services. CPG revenues versus last quarter were up 22% and up 12% for the full year 2024. This happened without adding any new sales staff as we maintain one of the most disciplined accounts receivable policies in the industry, which limited the number of dispensaries we were willing to do business with. We're working closely with customers who pay bills on time and who have proven to be good business partners, increasing sales of existing SKUs we have with them and closing category voids. In other words, we seek to grow with our customers who pay responsibly and help them win new business. I am also extremely proud of the work done by our retail team. When we first introduced the Retail Dispensary Strategic Pricing Plan and the $9.99 out-the-door Allswell 8, we knew that the retail business would suffer gross margin pressure from the lower pricing. But our goal was to offset any drag with increased foot traffic and volume sales so that gross profit dollars would grow year-on-year. In the fourth quarter, we met this goal. Retail dispensary revenue grew 23% year-over-year to $12 million, and gross profit grew 4% to $5.4 million. This was done by the team's disciplined approach of keeping headcount growth to a bare minimum while revenue rocketed up. Importantly, the $9.99 out-the-door Allswell aid attracts a younger customer demographic whose loyalty we think we've won through our menu and positive in-store experience. As an on-time payer with 10 retail stores, our vendor relationships are also a differentiating factor, allowing our buyers to renegotiate purchase agreements to lower COGS, improve gross profit, and gain enhanced marketing support. By comparison, many peer dispensary chains struggle to keep popular products on the shelves due to account receivable holes. Looking ahead for 2025, we do not anticipate improvement in California pricing, and with the challenging economic environment and higher base of comparison for growth created in the second half of the year, it is unlikely that we will match revenue growth rates of 2024. However, we are confident that growth in revenues and profitability is achievable in 2025 and beyond within our core business. Few, if any, of our peers in California and elsewhere in the industry can make similar claims. Before I turn the call over to Mark Venditti, our Chief Financial Officer, I want to touch upon the recently announced refinancing of our senior credit facility. I thank White Hawk Capital, whose senior secured loan was refinanced. White Hawk was a long-term partner in our development, having extended credit before the first greenhouse at the SoCal facility was planted and at a time when credit was difficult to come by for cannabis companies. Their trust in our vision is still sincerely appreciated. We are pleased to commence the new facility through another longstanding relationship with a bank who believes in our continued expansion and execution. Interest for the new loan is fixed at 8.58% for the five-year term, a rate which is on par with non-cannabis businesses. We believe the interest rate to be the lowest for any U.S. cannabis company. With interest-only payments until the third year, the refinancing saves roughly $13 million in principal payments, which would have otherwise been required for monthly payments in 2025 and 2026. With the maturity of the new credit facility pushed into 2030 versus late 2026, for the prior facility, the interest-only payments, and upfront cash generated from refinancing, the total incremental cash generated between the two facilities is almost $50 million in 2025 and 2026. The cash savings enhances our financial flexibility to support further development initiatives and improve the liability side of our balance sheet. Even with the debt refinancing, cash preservation and cheaper capital remain a top priority, and we are committed to finding additional paths to further reduce cash outflow and improve our capital structure. Now that we have completed the credit facility, we will be focused on refinancing our high interest rate Series B and Series C preferred equity. Although it is too soon to discuss our approach, this is one of our highest balance sheet priorities in 2025. With that, I'll turn the call over to Mark Bendetti, our Chief Financial Officer discuss our financial results for the quarter in detail. Thank you, Kyle, and good afternoon, everyone. As a reminder, we provided updated guidance in February for the fourth quarter and full year 2024. As a result, exceeded expectations across key reporting categories, including revenue, gross margin, cultivation cost per pound, average selling price, adjusted EBITDA, and operating cash flow. Revenue for the fourth quarter was $53 million, up 31% year-on-year and reflecting more than 20% growth in all three business segments. All three business segments achieved positive year-on-year revenue growth, for all four quarters in 2024, showcasing the broad strength of our business for the entire year. Fourth quarter consolidated gross profit was 23 million, or 43% of net revenue, versus 18 million and 45% of net revenue in the fourth quarter of 2023. Adjusted EBITDA was 9 million in Q4, down from a record high 20.4 million in Q3, but up from 3.8 million versus the same period last year. For the full year 2024, revenue was 201 million, representing a 25 percent increase year over year. Growth was primarily from a 32 percent increase in wholesale biomass revenue, which accounted for 69 percent of consolidated revenues. We sold a record 568,000 pounds of wholesale biomass in 2024, compared with 339,000 pounds in 2023, reflecting a nearly 70% increase, which more than offset the roughly 21% decrease in average wholesale selling price per pound. Full-year gross profit represented a record high of $97 million versus the reported $81 million in 2023. As importantly, gross margins declined by only 1% despite the meaningful broader price declines in all three business segments. The resilience of our gross margin was enabled by a reduction in cultivation cost, tight cost management within retail operations, and cost savings initiatives in our CPG supply chain and manufacturing processes. Our efforts to minimize operating expenses paid off again in 2024 as cash operating expenses, which exclude impairment charges, depreciation and amortization and stock compensation were 56.9 million, increasing by only 3% year-on-year. This is the second straight year in which cash operating expenses were well below top-line growth. We generated a record high $40.3 million of adjusted EBITDA in 2024, an improvement of $15.8 million versus 2023 adjusted EBITDA of $24.5 million. Adjusted EBITDA margin expanded by five percentage points to 20% versus 15% in 2023. Full-year 2024 operating cash flow was a record high, $28.4 million versus $23.2 million in 2023, despite startup working capital investment in Greenhouse 5. Turning to the balance sheet, we ended the year with $36.9 million in cash and restricted cash. This compares to $35.1 million last quarter and $32.5 million at year-end 2023. The company grew cash $4.4 million during the year despite spending $10.3 million in capex, $7.7 million on dividends, and $7.6 million on debt payments. In the fourth quarter, we spent $2.5 million in capex, mainly for Phase 3 expansion in Camarillo. The company generated operating cash flow of 8.2 million. As Kyle previously highlighted, we announced the new debt facility earlier this month. This provided an immediate net cash inflow of 8.1 million and will permit meaningful cash savings throughout the life of the loan. Looking ahead, we expect first quarter total revenue to be between 42 and 44 million. reflecting more than 40% growth compared to Q1 2024 at the midpoint, with meaningful growth across all three business segments led by wholesale. On a sequential basis, we anticipate continued gains in retail on strong execution with CPG and wholesale down in the quarter, but improved seasonal trends relative to the equivalent period of 2024. The average Q1 selling price for wholesale biomass is assumed at $195 per pound, down 31% versus the equivalent period last year, while Q1-25 cost of production is projected to be $130 per pound. Projected cost of production reflects a 29% reduction to Q1 last year. as we see continued benefits on expansion and greater efficiency. For the period, we expect to produce 145,000 pounds of biomass production, 136% increase versus Q1 last year. As a reminder, Greenhouse 5 came fully online in Q2 2024. We anticipate gross margins to be approximately 40% down versus 42% last year and the Q4 level of 43%. In addition, we expect both adjusted EBITDA and operating cash flow to be in the range of $1 million to $3 million. By comparison, for last year, Q1 adjusted EBITDA was negative $1.6 million and operating cash flow was negative $1.9 million. We expect to exit the first quarter with a cash balance of approximately $36 million and to spend approximately $9 million of CapEx during the quarter primarily on phase three expansion. For the full year, we anticipate revenue to be between $220 million and $230 million. We're selecting 12% growth at the midpoint, with meaningful growth anticipated for each of our segments, but overall led by wholesale strength. Full year adjusted EBITDA is expected to be in the mid-$40 million range, with a margin holding relatively flat at the midpoint to 2024, while we anticipate positive operating cash flow to be in the low $40 million range. We anticipate year-end cash to increase by approximately $13 million to $50 million. Our guidance does not include receiving any of the approximate $11 million of the ERTC outstanding or any additional use of the ATM. Within our assumptions, wholesale biomass production will be 760,000 to 780,000 pounds, an increase of 27% from the midpoint with a cost of production approximately $112 per pound, which is a 9% decrease year on year. Average selling price is estimated between $215 and $220 per pound for 2025, down from $245 last year. Within average selling price and cost of production statistics, we anticipate a higher mix of trim this year reduces average selling price and production cost. Enhanced trim production is based on a process change in cultivation whereby we were able to grow more extractable trim for sale which would have previously been disposed of without adding significant additional cost in production. With this change, our mix of trim will increase to the low 50% range, up by approximately six percentage points from the prior year. Our pricing assumptions at the wholesale segment level of flower smalls and trim are essentially flat to 2024. As a reminder, the 2025 guidance does not include any contribution from Greenhouse 2 as we continue to anticipate the first production output and initial revenue in Q4 2025. We will provide more specifics on our Q1 call in mid-May. And with that, I will turn the call over to Kyle for his closing remarks. Kyle? Thank you, Mark. Most listeners on this call will know that gaining the release for those incarcerated in federal and state prisons for nonviolent cannabis offenses is a cause that I care deeply about. I am a proud board member of Mission Green, which was founded and is run by Weldon Angelos, who served 13 out of a 55-year sentence for such an offense. On January 17th, with just days left in Joe Biden's presidency, Weldon and I wrote a contributor guest column titled Biden Can and Should Pardon Nonviolent Marijuana Offenders in MJBizDaily. We stated that President Biden's decision to pardon his son, Hunter, underscored a painful hypocrisy in our justice system and a failure to provide real reform by the administration. While Hunter Biden walked free, thousands of Americans remained incarcerated for nonviolent marijuana offenses, despite the president's explicit campaign promises to address these injustices. In the waning days of his first and only term, Biden granted precious few commutations for those languishing in federal prison for marijuana, leaving families such as those of Parker Coleman, Jose Valero Jr., or Ali, and Jerry Heyman in agony. The hypocrisy is too obvious to ignore. While state-regulated cannabis companies like ours thrive in a federally illegal market, thousands of Americans remain in prison for marijuana offenses that are no longer considered crimes in most of the country. We concluded that if President Biden chose to leave this vital work undone and tarnish his legacy, we hope the next administration, led by President Trump, who is already committed to granting marijuana clemency, will finally right these wrongs. Two days after Trump's inauguration, Mike Tyson and Weldon Angelos followed up with an article, an opinion piece in Fox News. Mr. Tyson and Mr. Angelos expressed hope that President Trump will fight our country's awful cannabis laws. In the article, they stated that Biden's wave of clemency at the end of his term largely bypassed cannabis offenders. Both Weldon, who was pardoned by President Trump in 2020, and Mike Tyson, who has known Trump for decades, attest that President Trump is a man of his word. They stated that they believe Trump has the vision, the courage, and the determination to finally reschedule cannabis, support banking for the industry, and grant clemency to Americans incarcerated for marijuana. I am encouraged by President Trump's appointment of Alice Marie Johnson as his pardon czar. I believe it signals that the Trump administration will indeed take a different approach to cannabis than the previous administration. Ms. Johnson is a criminal justice reform advocate who gained national attention after her life sentence for a nonviolent drug offense was commuted by President Donald Trump in 2018. In appointing her, he stated, Alice was in prison for doing something that today probably wouldn't even be prosecuted. You've been an inspiration to people, and we're going to be listening to your recommendation on pardons. Ms. Johnson stated, I've been working on this nonstop since my release. This is really a continuation of the work that I've already been doing. I brought many pardon cases for the president in the past, And one thing I can say about President Trump, he was very interested in their families. He wants to know if they have a solid reentry program in place. I wanted to make sure that I brought him the best candidates. She continued, I have to make sure that the communities are ready to receive the released prisoners. My number one recommendation is safety in the communities. I want to make sure that they have jobs that they are ready to go home to. that they have the ability not only for a second chance, but for their best chance of success. We fully endorse Ms. Johnson's statements, and we hope that the President's appointment of Ms. Johnson leads to the release and successful reintegration of the nonviolent cannabis prisoners currently in federal prisons. To that end, we are planning on hiring some released cannabis prisoners immediately, like we did when Luke Scaramazzo was released from federal prison. We agree with Ms. Johnston and will do our part to hire these people who have paid such a high price for this plant. The Senate approval of Robert F. Kennedy Jr. to HHS Secretary and President Trump's nomination of the new DEA Chief and the HHS Legal Counsel had the potential to be catalysts for our industry. But instead, it appears he has prioritized solving the country's opioid crisis over legalizing cannabis. We continue to hope that President Trump remembers his pre-election commitment to legalize cannabis and work for better financing services for the industry. A looming issue for the second half of the year is the likely increase in California's cannabis excise tax from 15% to 19% starting on July 1st. This increase was mandated by Assembly Bill 195, which requires that beginning in the 2025-2026 fiscal year and every two years thereafter, California Department of Tax and Fee Administration, TDTFA, in consultation with the Department of Finance, must adjust the cannabis excise tax rate to generate revenue equivalent to what would have been collected under the former cultivation tax. the adjusted rate is capped at 19% of the gross receipts from retail sales. Because retail revenues in California have shown negative growth since 2022, the CDTFA is widely expected to increase the rate. In this price-sensitive market, which competes side by side with the illicit market, we expect that such an increase will likely drive more consumers to the illicit market, and that the authorities will be better off concentrating on enforcement policies while reducing the excise tax, or at worst, leaving it at the current rate. All key industry players are making their case heard in Sacramento. Taxes are already about one-third of what customers are paying when they buy at retail, and we stand with the consumer in not wanting that proportion to increase. As Governor Gavin Newsom has stated many times that he is pro-business, we are counting on him to use his business sense. I would like to announce the date of our fourth annual investor sesh which will be held concurrently with our annual general meeting on June 20th at our SoCal farm. For those shareholders who have not attended in the past, as well as those who joined in the past three years, I warmly welcome you to come visit our farm in Camarillo and see what the future holds for Glasshouse. Our C-suite will be on hand to greet you, and we'll be hosting tours of our greenhouses and you'll be able to see our progress in retrofitting greenhouse two as well as our early stage hemp trials. The last three years have shown that our transparency in being the only cannabis company to hold an in-person annual meeting can also be a fun time with food trucks, our products, and the wonderful California weather just miles from the Pacific Ocean in Malibu. We hope all investors will join. Thank you again. and I will now ask the operator to open the line for questions.

Before we open up for questions, Mr. Kyle Kazan would like to add his final statement. Please go ahead, sir.