Glass House Brands Inc. Subordinate Voting Shares

Good afternoon, ladies and gentlemen. Welcome to the Glasshouse Brands' first quarter 2025 earnings call. Matters discussed during today's conference call may 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 factors that may affect the results are detailed in Glasshouse Brand's periodic filing and registration statement. This document may be accessed via CDAR Plus database. I'd also like to remind everyone that this call is being recorded today, Tuesday, May 13th, 2025. On today's call, we have Kyle Kazan, co-founder, chairman, and chief executive director 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 question is Graham Farrar, co-founder and president. And with that, I turn the call over to Kyle Kazan. Please go ahead.

Good afternoon. Thank you, operator, and to all of you for joining today's call. For greater detail on results, please refer to our first quarter 2025 press release and financial filing. I'd like to start by discussing the wild pricing ride for publicly traded cannabis companies in recent years. Statements and rumors, or lack thereof, have led to rises and more often falls for stocks, which is amazingly frustrating. I remain steadfast in the belief that it is not if but when the cannabis industry becomes America's next massive normalized industry, and I'm excited to participate along with investors in the corresponding reward that that change will bring. I am encouraged by the recent rhetoric out of Washington, and I'm hopeful that comments from the acting DEA administrator about rescheduling last month are indicative of long-anticipated progress to come later this year. With that said, I also take great comfort in the knowledge that because of our steadfast commitment to execution and and low-cost production, along with the continued grit and effort shown daily by the entire team at Glasshouse, we are a company that does not require federal legalization for survival. I consider my teammates to be the best in the cannabis industry, and despite ever-present and evolving challenges, we continue to successfully execute on both reported results and the progression of long-term strategic plans. One comparison which I heard is the online legalized gambling industry, which for years was treated as quasi-legal to criminals. Companies like FanDuel and DraftKings played in the shadows, competing with the illicit bookmakers who had been around for generations, many of which were run by organized crime and or the mafia. Investments in these companies were seen as risky and were largely done through private equity until seemingly overnight the industry became legitimate and is everywhere, including commercials, on television, and social media. And the companies now are regulated, worth billions of dollars, and their employees and customers benefit and are protected by a legal market. Not to mention that the government now collects taxes and the illicit market is largely out of business. Much like alcohol and prohibition was lifted in 1933. I strongly believe our industry, cannabis, is on deck and next up. Now for the results. Our first quarter exceeded expectations and our guidance targets across an array of key deliverables, including biomass production, revenue, gross profit, adjusted EBITDA, and period-ending cash. Outperformance occurred despite an unplanned transition to a new distributor relationship, which resulted in a modest one-time drag on results and a continuation of challenging California pricing conditions with wholesale prices down 18 percent year-over-year. We will elaborate further on the distributor change later in this call. First quarter revenue was $45 million, up 49 percent year-on-year, while down 16 percent quarter-over-quarter. Quarter one is traditionally the weakest seasonal quarter, and the sequential decline from the fourth quarter to the first quarter of 16 percent compares to a 26 percent drop in the equivalent period of 2024. Our strong year-over-year revenue growth, meanwhile, is largely attributed to a full-period contribution from Greenhouse 5, where commercial operations began last January, but we did not realize revenue until the second quarter, along with continued retail strength. Retail revenue remarkably increased 19 percent year-over-year in the first quarter, while over the same period, California headset data shows State retail sales declined 13%. That is a jaw-dropping 32% variance for our stores. I take my hat off to our retail team for their amazing execution. Importantly, with our dispensary footprint held at 10 stores, retail strength comes on same-store sales and reflects our entire team's strong performance all the way from the farm to the stores. We continue to reap the benefit of the strategic pricing initiatives that we began implementing last year, highlighted by our everyday out-the-door price of $9.99, including tax, for a farm fresh eighth of an ounce of our Allswell flour. The first quarter of 2025 was the fifth quarter in a row with same-store sales growth for our retail stores on an annualized basis, which is a notable achievement given the challenging conditions in the Golden State. By all accounts, our public comparisons outside of California and our peers in-state have experienced declining metrics during that time. We continue to prove that execution in even a mature, low-price environment is possible. On the cultivation side, we produced nearly 153,000 pounds of biomass in the quarter. This was 6,500 pounds ahead of the high end of our guidance range and up from 61,000 pounds in the comparable period last year. Cost per production was $108 per pound, reflecting a substantial improvement compared to $182 last year and $110 in the fourth quarter as we continue marching towards our $100 per pound target. As discussed on our fourth quarter call, we have implemented improved cultivation practices, which allows us to sell trim material that would have previously been disposed of. This enables more pounds of production at a lower cost. This does have the effect of lowering our average sales price as the additional material is predominantly trim, which garners lower sales price. But the extra pounds and the lower cogs more than offset this reduction, resulting in increased gross margin. This can be seen in our expanded margin percentage year over year, despite price compression in the broader market. Low-cost capabilities while maintaining the highest quality of California-grown cannabis is our unique advantage. Today, this is what separates and sustains us in the market, and this core competency will gain even greater importance amidst continuing California pricing pressure and with regulators still expected to impose an expanded excise tax on California retail sales this summer. Tomorrow, it will allow us to enjoy one of the highest, if not the highest, margins in the industry. We vehemently disagree with this punitive tax burden on legal operators and consumers at a time when companies are failing and jobs are being lost. This added tax on the legal and regulated market directly benefits the cartels who not only do not pay taxes but supply the streets with untested and often dangerous products. The anticipated tax increase, which raises the state excise tax on retail dollars spent from 15% to 19%, is likely to push many more consumers into illicit purchases, and in our view, authorities would be far better served by reducing the excise tax from current levels to instead grow the legal and regulated industry. This will ultimately raise the amount of taxes collected as more people enjoy safe and regulated products. We continue to make our case in Sacramento alongside other legal operators. While Glasshouse will continue to thrive in either outcome, given our low-cost model, we strongly argue that the legal and regulated market is much better for society and a rising tide floats all boats. If the regulators fail to halt the pending gift to the cartels, we will comply as required and will remain one of the state's largest cannabis taxpayers. Adding to the local headwinds, as everyone on this call is acutely aware, there are pressing concerns related to the broader economy. We are following those trends closely. Economists are forecasting tighter consumer wallets due to higher prices and potential unemployment spikes ahead. We are fortunate to be largely immune from import cost in our business. However, consumer wallet pressure will likely lead to further reduction of ASPs and consumer basket size in the months and quarters ahead. This is a trend that we have seen throughout much of last year, but fortunately we remain uniquely capable of withstanding and succeeding in this type of environment. due to our scale, critical integration, and low cost of goods sold. In fact, Glasshouse has recently named the Financial Times list of America's fastest-growing companies, 2025, based on growth achieved between 2020 and 2023, also known as a time when California cannabis operating conditions were deemed to be completely untenable for legal public operators. We intend to maintain this momentum even amidst further tightening. Turning to our CPG business, revenue declined 5% quarter over quarter from the record fourth quarter results, but increased 12% versus the first quarter of 2024. TPG results were impacted by a distributor change late in the quarter. In March, we transitioned from Alchemist to a new distribution partner as Alchemist went into receivership. The change led to a roughly $500,000 loss to revenues and cash collections, as well as a modest drag on overall margins for the period. If not for the change, CPG results would have been largely flat quarter over quarter. The first quarter impact was modest compared to potential losses from a prolonged disruption, and the fact that a transition was accomplished so quickly and smoothly is a testament to the strength and grit of our operations team under the very capable leadership of Chief Revenue Officer Halal Tash. That we can pivot so quickly also speaks to our leading position in the California marketplace. Our customers ensured that they would not be without Glasshouse products. We expect to see modest to no further impact from this transition in the second quarter and moving forward. As this was the second time that the third-party distributor we were contracted with went into receivership and shortly thereafter ceased operations, we've taken steps each time to minimize future issues. For both CPG and within our stores, consumer demand is robust for our branded products, as our Allswell and Glasshouse brands resonate with consumers, with both continuing to gain share in the California market, according to Headset. We continue to prioritize focus on both of these as our core brands, along with Plus. For Plus, we recently announced a licensing partnership with Eaze to launch Plus cannabis gummies in dispensaries in the state of Florida. EASE is a trusted partner, and we are thrilled to introduce our Plus Gummies to consumers outside of California for the first time and to now share them with the more than 900,000 medical patients in Florida. Entry into Florida also aligns with our long-term commitment to deliver premium cannabis products to new markets. Along this line, we will continue to consider additional collaborative licensing opportunities moving forward. Beyond the reported results, the first quarter saw important progress achieved on longer-term initiatives that we are confident ensure future growth opportunities and financial stability for the company. Progress includes the continuation of our Phase 3 expansion of the SoCal farm. As previously discussed, we are pursuing cannabis in greenhouse 2. We are on track to generate initial revenues prior to year-end, with a full year's contribution anticipated in 2026. Greenhouse 2's incremental production contribution is estimated to be 275,000 pounds in its first full year of operation, giving us a significant growth driver for next year's results, while consolidated annual capacity at that time will be more than 1 million pounds of biomass. As we previously discussed, Greenhouse 2 is equipped with supplemental lighting made up of over 11,000 high-pressure sodium lights, adding indoor lights to the full spectrum light from the sun shining in our greenhouse, making it possible to produce even higher quality flower, higher yield per square foot, and more consistent production throughout the year. I believe that combining the sun, which is the best phospholite on the planet, with HPS lights, that we will grow the highest grade of this plant. We expect the impact of seasonal weather changes to be significantly mitigated and believe the higher quality flower output mentioned should support higher pricing. As a reminder, the power needed for this lighting will be generated cleanly onsite via our three co-gen facilities and solar panels at modest additional cost. Meanwhile, I'm pleased to share an update to our hemp strategy. As discussed on our prior earnings call, we began growing hemp on an R&D basis in the first quarter. We are pleased with results and remain confident that there is a great opportunity to grow and sell 2018 U.S. Farm Bill compliant hemp to compliance dates, which is our stated goal. The rest of the country wants California weed, and that includes hemp. We are ready to progress with the next stage of development of our hemp strategy and will commence the build-out for commercial hemp production at one of our vacant greenhouses before the end of the quarter with the aim of generating initial hemp revenues this year. Ultimately, with a full CapEx build-out, we believe one greenhouse can generate 240,000 pounds or more annually. Assuming a price of $900 per pound and adjusting for mix, we believe that output would garner $72 million of top-line revenue at a 66% gross margin, given lower cost of production due to limited compliance costs. But for this initial build, we decided to prioritize cost and time, which will give us a more modest initial scale and spend with an anticipated annual revenue contribution of approximately $33 million beginning next year. Required capital investment will be roughly $3 million spent this year. As we progress with commercial operations, we maintain optionality to further enhance the initial greenhouse build as well as retrofit and develop other greenhouses for additional near-term hemp production. Each of our six Existing greenhouses offers a nearly identical footprint, and after this build, only one more remains vacant, which could be retrofitted in 2026. Even on only the initial buildup, the scale of revenue contribution represents a significantly larger hemp exposure than that of any other public company. Importantly, this comes without our deviating from the legacy greenhouse for competency of growing low-cost cannabis or sacrificing anything from the existing business. On our last earnings call, we announced a collaboration with the University of California at Berkeley to explore hemp-related research, including novel medicinal product development, identification improvement of hemp genetics, market analysis, supply chain sustainability, and AI automation for cultivation and production. This collaboration also aims to evaluate data-driven and evidence-based approaches to hemp policy and regulation with the aim of reducing uncertainty for California hemp growers. To our knowledge, this is the first collaboration of its kind in the industry. We are very excited to work with UC Berkeley as we continue to evaluate our long-term hemp strategy. We are also in talks with the DCC and Governor Newsom's office as the state needs to mirror its definition of hemp-derived cannabis with the federal government with the federal governments under the 2018 Farm Bill. Doing so would offer a huge opportunity to California's agriculture industry and give cannabis growers who are forced to close their doors due to compressed pricing the chance to pivot to selling hemp via interstate commerce. California growers can and should win nationally, and the export of hemp presents a real opportunity for job creation and tax generation. Finally, before I turn the call over to Mark Venditti, our Chief Financial Officer, I want to talk briefly about the steps we took during the first quarter to strengthen our balance sheet. In March, we secured a new $50 million senior secured credit facility. This facility has strengthened our balance sheet, significantly improved our cash flow, and has pushed out the maturity of our senior secured debt into 2030. The transaction was completed at attractive terms. This includes a fixed rate of 8.58% for the five-year term, a rate which is on par with non-cannabis businesses. We are committed to taking additional paths to best promote the interest of shareholders and improve our capital structure. Refinancing our high interest rate Series B and C preferred equity is a key priority for the coming months. The primary goal, as always, will be to work with existing investors to restructure their position. These individuals have long been advocates for and partners to the company, and we would like them to participate and be rewarded with our long-term success. With that said, we have also been diligent and are confident that additional source of capital can be made available to replace these positions as needed. We are an attractive investment and lending partner amidst the current economic and cannabis landscape. With that, I'll turn the call over to Mark Venditti, our Chief Financial Officer, to discuss our financial results for the quarter in detail. Mark. Thank you, Kyle. And good afternoon, everyone. Q1 revenue of $45 million was up 49 percent year-on-year and represents growth in all three business segments, including exceptional 78 percent growth in wholesale biomass revenue. We benefited from a full quarter of contribution from Greenhouse 5 versus last year when commercial operation began in January. We produced 153,000 pounds of biomass in Q1, surpassing our guidance of 144,000 pounds to 146,000 pounds and increasing from roughly 61,000 pounds last year. Production cost per pound was $108, a considerable improvement compared to the $130 cost per pound We originally forecasted versus $182 per pound in Q1 2024. We sold 147,000 pounds of wholesale biomass in Q1 compared to 165,000 in Q4 and 56,000 pounds in the same period last year. The average selling price for biomass sold was $193 per pound which came in line with guidance of $190 to $200 per pound and compared to $220 in Q4. First quarter consolidated gross profit was $20 million and gross margin at 45 percent, up 3 percent from the equivalent period last year. Lower than anticipated cultivation costs, tight cost management within retail operations and cost-saving initiatives in our CPG supply chain and manufacturing processes continue to support our gross margin improvement despite the lower sales price. Cash operating expenses, which exclude impairment charges, depreciation and amortization, and stock compensation were $15.4 million in Q1 versus $13.7 million in Q4 and $14.1 million in the first quarter of 2024. Adjusted EBITDA was $4.4 million in Q1, down from $9 million in Q4, but up from a loss of $1.6 million in the same period last year. This surpassed Q1 guidance of between $1 million and $3 million, despite the lost DPG sales from the distributor transition. Q1 operating cash flow was $2.5 million, versus $8.2 million in Q4 24 and negative $1.9 million in the first quarter of 2024. Turning to the balance sheet, we ended the quarter with $37.6 million in cash and restricted cash, up from $36.9 million last quarter and $24.4 million for Q1 2024. The company grew cash $700,000 during the quarter, despite spending $6.5 million in CapEx, $1.9 million on dividends, and $1.3 million of debt payments related to the prior credit facility. CapEx for the quarter was mainly associated with Phase III expansion, which includes Greenhouse II. As Kyle mentioned, we announced the new debt facility in March. This provided an immediate net cash inflow of $8.1 million and permits meaningful cash savings throughout the life of the loan. The loan and our lack of debt maturities for the next five years better positions us to self-fund further growth initiatives as they become available. Looking ahead, we expect second quarter total revenue to be between $57 and $59 million. reflecting 8% growth at the midpoint compared to Q2 2024, with meaningful growth across all three business segments. Over quarter revenue will be up nearly 30%, mainly on positive seasonal trends and continued strong execution with wholesale. The average Q2 selling price for wholesale biomass is assumed at $202 per pound, down from 283 last year. For the period, we expect to produce approximately 213,000 pounds of biomass production, up from 150,000 pounds last year, and with a cost of production projected to be $105 per pound. Projected cost of production reflects a more than $40 reduction to Q2 last year. as we benefit from continued strong execution. As a reminder, Greenhouse 5 had its first full quarter production in Q2 24, but was still in startup mode. We anticipate gross margin to be approximately 49 percent, down versus 53 percent last year. We expect both adjusted EBITDA and operating cash flow to be in the range of 11 million and 13 million By comparison, for last year, Q2 adjusted EBITDA was $12.4 million, and operating cash flow was $8.9 million. We expect to exit the second quarter with a cash balance of approximately $38 million, with approximately $13 million spent on CapEx during the quarter, primarily on Phase 3 expansion. We maintain previously provided full-year revenue and adjusted EBITDA guidance. as we await greater clarity on market conditions for the second half, as the typical seasonal increase in cannabis production and decline in wholesale biomass prices begins this quarter. We do not anticipate improved California pricing this year. As a reminder, 2025 guidance does not include any contribution from Greenhouse Two as we continue to anticipate the first production output and initial revenue in Q4 2025. Greenhouse 2 will provide a meaningful growth catalyst for full-year contributions in 2026. 2025 also does not include the impact of the hemp expansion Kyle discussed earlier. We will provide additional details in August during our Q2 results earning call. 2025 full-year revenue is anticipated to be in the range of $220 to $230 million at the midpoint. The range reflects 12% year-over-year growth. Full-year adjusted EBITDA is expected to be in the mid-$40 million range with a margin holding relatively flat at the midpoint while we anticipate positive operating cash flow to be in the low $40 million range. We anticipate year-end cash to increase by approximately 10 million from the end of last year to 47 million. Within our assumptions, wholesale biomass production is forecast to be between 780,000 and 800,000 pounds with a cost of production of approximately $105 per pound. Average selling price is estimated between 203 and $208 per pound for 2025. We note that these numbers are updated from prior guidance of between 760,000 pounds and 780,000 pounds of wholesale biomass produced across the production of $112 per pound and a selling price of roughly $218 per pound. 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. As Kyle mentioned, enhanced trim production is based on a process change in cultivation, whereby we are 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 a 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 always, we will provide further color on pricing trends on our Q2 call in August. And with that, I will turn the call over to Kyle for his closing remarks before opening up the call to Q&A. Thank you, Mark. As many on this call know well by now, gaining release for individuals incarcerated in federal and state prisons for nonviolent cannabis offenses is a cause for which I care deeply. As I've stated time and time again over many years, no one should be in prison for this plant. That, more than one year after the Department of Justice recommended cannabis to be federally scheduled to a Schedule III classification, a classification that I remind is akin to Tylenol. There has been extremely limited to no progress on initiatives to release the thousands of prisoners who remain incarcerated for cannabis-related nonviolent crimes at the federal and state level. It's one of this country's greatest injustices in hypocrisies. Many of these people locked up for the plant that I'm discussing on this financial call are serving life sentences in maximum security prisons. This failure imbrues American justice and lifts the veil on the illusion of a fair and just system. I am a proud board member of Mission Green, an organization founded and run by Weldon Angelos. Weldon, as you likely know, was released from prison and granted clemency by President Trump during his first term after having served 13 years out of a 55-year sentence for a very small amount of cannabis. By any measure, Weldon's release can be viewed as a successful story. I am encouraged by Weldon's meeting last month with President Trump's newly appointed pardoner, Alice Johnson. At this point, Weldon is no stranger to events and meetings in Washington. However, Ms. Johnson represents a new type of ally in the White House and one with hopefully a more sympathetic and understanding ear to our effort and this cause. As a reminder, Ms. Johnson is herself a criminal justice reform advocate who gained national attention after her own life sentence for a nonviolent drug offense was commuted by President Donald Trump in 2018. Her release and pardon similarly has been a success story. I implore Ms. Johnson to get the attention of the President and ensure that he and other members of his administration remember pre-election promises on cannabis, and to do what is right and create additional success stories with the release and pardon of these prisoners. Finally, before we take your questions, as I mentioned on our last earnings call, we will host our fourth annual investor sesh on June 20th, which will be held concurrently with our annual general meeting at the SoCal Farm. I warmly welcome investors to join us and visit the farm in Camarillo to see firsthand why we are so excited about the days ahead at Glasshouse. We'll be hosting tours of our greenhouses, and you'll be able to see in person our recently retrofitted Greenhouse 5, our progress retrofitting Greenhouse 2, and the ongoing development of hemp in Greenhouse 4. Our leadership team will be present as usual for our traditional investor-assessed question and answer session. Participants can see up close our commitment to transparency. We welcome you all to share your ideas with us. Those who attend will enjoy an interactive and fun day, including food. exclusive merch and glasshouse products available for purchases under the beautiful California sun. I hope to see you there. Thank you again, and I will now ask the operator to open the line for questions.

Apologies for the delay. Our next question comes from the line of Federico Gomez with ATV Capital Markets. Your line is open.