Glass House Brands Inc. Subordinate Voting Shares

Good afternoon, ladies and gentlemen. Welcome to the Glasshouse Brands' third 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 results are detailed in Glasshouse Brands' periodic filings and registration statement. These documents may be accessed via the SellerPlus database. I'd also like to remind everyone that this call is being recorded today, Wednesday, November 12th, 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 question is Ram Farrar, co-founder and president. And with that, I turn the call over to Kyle Kazan. You may begin.

Good afternoon. Thank you, operator, and to all of you for joining today's call. For greater detail on results, please refer to our third quarter 2025 press release and financial filings. For obvious reasons related to recent events, the third quarter was the company's most difficult to date. That statement speaks volumes given the many challenges faced over the past 10 years by operations and within the industry in general. I'd like to thank our entire team, customers, business partners, and investors for their support and commitment through the period of time and since. As with every difficulty, we have adjusted and through dedication and grit are emerging as a better and even more durable company for having faced it. As most on this call are aware, two of our farms were raided by federal agents on July 10th as part of a broader immigration crackdown in California and specifically the state's agriculture industry. For anyone interested in further detail on those events and our subsequent response, I refer you to the company's August 4th press release. With that said, in light of the events, this past summer, we made the very hard decision to completely revamp hiring and staffing practices for both employees and third-party labor contractors. We did this voluntarily, and the resulting practices go way above and beyond what is required by both federal and state law. While we believed we took proper measures in the past to comply with state and federal immigration laws, we are confident that we now have procedures in place that To our knowledge, nobody else has implemented to ensure that all of our employees and employees of farm labor contractors at our facility meet legal requirements for age and immigration status. As outlined in the August earnings call, changes made and the resulting temporary staffing shortages prompted our scaling back of new planting and production in the third quarter. In short, We accepted a roughly six-month step back in operations to protect the company's short and long-term interest and ensure the greatest possible success moving forward. In addition, we delayed construction on ongoing expansion projects into next year to better utilize the available workforce as we scale back up. These projects remain priorities and will drive meaningful growth in the future. Third quarter results reflect the impact of the difficult decisions. Total revenue is roughly $38 million, slightly ahead of guidance but down from $64 million in the equivalent period last year and below the mid to high $60 million level that we were tracking on prior to July 10th. The retail and CPG segments remain strong and with revenues up again year over year. The gains were not a one-off performance and year-to-date retail sales have increased 13% year over year, outperforming broader California retail sales by more than 23%. Yes, California sales in general are down by more than 10% year to date. Allswell was the top-selling flower brand in California by units sold per headset. Our everyday $9.99 per one-eighth out-the-door price at our retail stores continues to differentiate us. Consumer wallet pressure is a trend that we unfortunately expect to continue for the near future, and we are confident that further share gains will come based on our unique capability to withstand and succeed in this type of environment. Retail results were based primarily on same-store sales at our 10 owned dispensaries, while in CPG we saw some modest contribution in the third quarter from the LEAF MSA agreement, which commenced in July. MSAs present a platform to expand without capital investment, and we are pursuing additional opportunities for both retail and cultivation and production. Our team's same-store sales strength and production capabilities offer a compelling narrative to any potential partner looking for the best way to leverage assets within the challenging market. As planned, we experienced meaningful declines in revenues and production within our wholesale segment. Wholesale revenues declined substantially year over year, and we produced 124,000 pounds of biomass, less than half of what would typically be expected. We count only fully processed cannabis in production, and as discussed on our second quarter earnings call, we plan to push some biomass processing from the third to fourth quarter to utilize a temporarily reduced labor force more efficiently. We aim to start the fourth quarter with a much higher than normal amount of harvested but not yet processed product. We saw greater deterioration in the plants from the delays than we originally anticipated. We have an incredibly talented team, but this is agriculture, and plants, unfortunately, do not have a pause button. We are confident that the impacts are transitory, but simply stated, we saw lower volumes and quality of biomass product available for sale than we originally anticipated. The average third quarter selling price was $155, well below the $181 level we projected. For reference, price was $229 in the third quarter of last year. Cost of production beat guidance at $128, partially offsetting the pricing dip, but was still way above the $91 level that we achieved in the second quarter and what we would have otherwise expected. Lower selling prices and higher cost of production in wholesale dragged on our overall margins resulting in a total reported gross margin for the third quarter of roughly 31% and adjusted EBITDA loss of $2.3 million, both well below seasonal and recent levels. Looking ahead, Mark will provide explicit guidance. However, we expect to have a larger impact on 2025 production than we initially thought. The events of July 10th were unprecedented and has taken longer than anticipated to assess the situation and reset fully. For the fourth quarter, we had less starting inventory available for sale from the third quarter than we expected. We will continue to work through the sale of deteriorated product with the inventory we have. This will result in lower revenues and a margin drag from what we previously anticipated. The processing and sell-through of legacy product will be completed prior to year end. Fourth quarter headwinds will drive a cash burn during the remainder of the year, and we now anticipate ending 2025 with roughly $20 million in cash. and equivalents. Now, looking ahead beyond the fourth quarter, we are ramping back to full production capacity within existing greenhouses and remain on track for that in the first quarter of 2026. We have completed the build out and planting of the first one third of greenhouse two. And by the end of this year, our cultivation team will have the most acreage planted in glasshouses history. The remainder of Greenhouse 2 will be fully built out and operational within 2026, and we maintain the option to turn on Greenhouse 4 this year, depending on the status of hemp-derived cannabis and our ability to ship outside of California. A reminder that when Greenhouse 2 and 4 are completed, we maintain a sixth greenhouse still undeveloped, giving us the ability to expand capacity by more than 50% from our current footprint. To be clear, Glasshouse Brands will soon plant a new record amount of plants and expect 2026 to be our best year ever. Meanwhile, despite the changes made, our long-term cost structure is intact. We are back to roughly full seasonal staffing capacity at the farms, including both employees and third-party labor contractors. New workers gain invaluable experience every day, and we do not foresee a change in the cost of labor from the more stringent hiring practices moving forward. I remind that with our second quarter update, we lowered our full year cost production target from $100 per pound to $95 and are confident that we will achieve roughly that level for each of the final three quarters of 2026. Our low-cost production capabilities stem from our consolidated scale of capacity the skill of our fees and leadership team and advantageous weather conditions here in California. We will never have to pay the high and growing energy bills of indoor peers. It is these benefits that have sustained us despite challenging California cannabis market conditions, and will further differentiate the company once prohibitions are removed, and we can sell into new markets. While most cannabis farms shutter amid skyrocketing cogs driven by rapidly rising electricity costs from AI server farms and electric cars, we enjoy the beautiful and free sunshine. Like all stakeholders in the industry, we are hopeful for looming change to come out of Washington and anxiously await further progress on long-speculated legislative action. We believe change would bring opportunities to greatly expand upon our current addressable market and profitability in the near term. without our deviating from the legacy core competency of the company, growing low-cost cannabis or sacrificing anything from the existing business. That capability separates Glasshouse from the peer group in and outside our current market. We understand that declassification or reclassification of cannabis to Schedule III under the current administration may provide export opportunities into international markets. Anyone following the earnings results of our Canadian peers has heard of the multibillion-dollar wholesale opportunity presented by European export and how European wholesale contribution has benefited those companies' results in terms of growth outlook and margin expansion on account of premium wholesale prices. Our cost of production looks to be multiples lower than these companies, and our capacity to produce is significantly larger. In some European markets, we understand premium top-tier cannabis is already referred to as Cali product, so we strongly believe there is an immediate available marketing pitch. It is still early, but we are evaluating what procedures would be required to bring Glasshouse product into Europe. We will be prepared to quickly pivot to participate when possible. We also understand that legislative change could bring opportunities for interstate regulations to change, particularly as it relates to the medical market. We are confident that we would similarly be ready to capitalize on any opportunities presented based on our low-cost production model and in leveraging the experience gained through our UC Berkeley relationship in hemp, which has prioritized novel medicinal development. As with European wholesale, any medical cannabis opportunities outside California would similarly offer dramatic price premium multiples to what is currently available in the Golden State. Finally, as it relates to intoxicating hemp, we do not know what will ultimately occur with the ban in Washington. However, this is a complicated issue, and a one-year implementation period is significant, so further debate seems likely. Ultimately, we expect a broader resolution permitting natural hemp to be like state regulated cannabis, based on a combination of age gating and testing. To that end, we continue to proceed with a commercial hemp strategy. To date, we have not sold hemp, and if a ban does occur while disappointing, we will shift our plans for Greenhouse 4 back to cannabis. Suffice to say, our excitement for potential legislation goes well beyond the positive outcomes that have been widely discussed in the industry, including the permanent elimination of 280e taxes, the opening of capital markets and greater investment access. We certainly welcome any of these changes. However, in our case, we believe there are even greater opportunities ahead to transform results. Regarding capital market openings and normalization, we are pleased and honored last month to become the first U.S. plant-touching cannabis company to have our stock listed on the Robinhood trading platform. Unencumbered investor access is a long time coming for this industry, and this represents an important next step. Specifically, Robinhood has an investor universe of nearly 27 million accounts and 11 million unique users. We welcome the ability to reach this large platform of potential investors. With that said, I'll turn the call over to Mark Vendetti, our Chief Financial Officer, to discuss our financial results for the quarter in detail. Thank you, Kyle. Good afternoon, everyone. As Kyle highlighted, third quarter revenue was $38.4 million, down from $63.8 million in the same period last year, and $59.9 million in the second quarter of 2025. The decline stemmed from the difficult decisions that Kyle previously explained and the resulting impact within our wholesale segment. We produced 124,000 pounds of biomass the third quarter, nearly half of what we would produce in the prior quarter and in the third quarter 2024. Because of inefficiencies from reduced production volume, production cost per pound was $128 in the third quarter. This compares to $103 last year and the $91 we reported in the second quarter. Even with the recent updates to staffing procedures at full production capacity, the third quarter cost of production would have been in line or better than the second quarter levels. We sold 137,000 pounds of wholesale biomass in the quarter, down from 209,000 in the same period last year, and 204,000 in the second quarter. The average selling price for biomass sold was $155 per pound versus $229 last year and $206 in the second quarter. Year-over-year price declines reflect continued California pricing challenges. However, more significantly, the sequential decline can be attributed to an unfavorable mix shift from flour to trim within the product mix. For the third quarter, flower would normally approach 40% of production. However, in the third quarter, we were in the mid-20% range. As a reminder, we have been selling higher levels of trim this year on account of improved cultivation practices, which allow us to harvest and sell trim material that would have previously been disposed of. This has the effect of lowering our ASPs, as the additional material is predominantly trim, which garners lower average selling prices. The greater trim volumes, though, were exacerbated in the third quarter due to deterioration in the product that was available for sale because of delays in processing as we face temporary staffing shortages. Third quarter consolidated gross profit was $11.8 million, and gross margin was 31%. The gross margin compared to 52% in third quarter 2024 and 53% for the second quarter this year, we declined seven from the lower average selling prices and higher production costs in the wholesale business. Gross margin within our retail segment improved both quarter over quarter and year over year. Adjusted EBITDA was negative 2.3 million for the period compared to $20.4 million in the third quarter of 2024 and $18.1 million in the second quarter of this year. Adjusted EBITDA reflects the factors that impacted our gross margin performance as well as a modest increase in operating expenses. Third quarter operating cash flow was negative $5.1 million compared to $13.2 million last year and $17.7 million in the second quarter. Turning to the balance sheet, we ended the quarter with approximately $30 million in cash and restricted cash, compared to $44 million last quarter. Inclusive in cash spending was roughly $9 million in CapEx, of which $3.5 million was related to the purchase of the Lompoc manufacturing facility, with the principal remaining balance going to fund the build-out of Greenhouse 2, for which the first third is already planted. In addition, we paid $1.9 million in preferred equity dividends. Investment for the first third of Greenhouse 2 build-out is largely complete. As discussed on the second quarter earnings call, we completed the refinancing of our Series B and C preferred stock for $77.5 million. The preferred equity refinancing eliminated burdensome payment in kind terms related to the former Series B and Series C preferred stock. In turn, reducing cumulative interest and saving the company approximately $5 million in dividends in the second half of the year and $18 million through 2026. We also received $2.3 million in ERC tax credits in the third quarter. And we continue to await the remaining 5.1 million in tax credits from the federal government, as well as the $2 million refund from the state of California for 2021 and 2022 taxes. Turning to guidance, as Kyle discussed, we pushed some wholesale sales into the third quarter and experienced greater deterioration in product from production delays than we anticipated at the time of our previous investor call. These factors will exclusively impact fourth quarter results because we expect all older inventory to be sold within the period. We expect fourth quarter total revenues to be between 37 and 39 million, which is 18 to $20 million below where we were tracking based on production levels prior to July 10th and typical seasonality. The revenue drag will occur within the wholesale biomass segment as we will produce between 140 and 145,000 pounds of biomass for the quarter, roughly two-thirds of what we would typically expect. The fourth quarter selling price for wholesale biomass is assumed to be between 145 and $150 per pound, down from the 220 last year, while cost of production will be approximately $130 per pound. versus $110 last year. As a result of the higher cost of production, we anticipate Q4 gross margin to be in the high 20% range, which compares to 43% last year. With the update, full-year revenue is now anticipated to be in the range of $180 million and $182 million, down from prior guidance of $190 million to $195 million. Full year gross margin at 41% versus 48% last year, and full year adjusted EBITDA to be between 14 million and 16 million. The adjusted EBITDA guidance compares to prior guidance of 23 million and 26 million. Within our assumptions, wholesale biomass production is forecasted to be between 647,000 pounds and 652,000 pounds. with a cost of production of approximately $110. Full year average selling price is expected to be $179 per pound. We plan to spend between $3 million and $4 million on CapEx in order to complete the first phase of Greenhouse 2. And as Kyle mentioned, we will see further cash burn in the fourth quarter and expect to end the year at approximately $20 million. Consistent with our normal seasonal patterns, we will again generate significant cash in the second quarter of next year and anticipate ending the year at record highs for the company. Given the evolving factors within the market and the organizational changes we have implemented, we will provide further updates on guidance, pricing trends, and the timing of expansion projects as appropriate. And with that, I turn the call back to Kyle for his closing remarks before opening up this call to Q&A. Thank you, Mark. I would like to conclude today's call by acknowledging the recent passing of Coach George Raveling, a valued member of Glass House's board of directors, the Glass House family, and someone who had an immeasurable impact on my life. Coach joined the board when we went public in 2021. and brought with him extensive experience in marketing and corporate governance learned during his Hall of Fame basketball coaching career and time as a senior executive at Nike. Coach was a trailblazer throughout his life, and all who knew him are better for it. I am personally thankful for the 38 years in which I knew and learned from him, and I am grateful for the significant contributions that he made to our company. We extend our deepest condolences to Mrs. Dolores Raveling, Coach's son, Mark, and his daughter, Latisha, as well as the countless others he impacted. We have commenced the search to fill the vacant board seat and will provide further updates as appropriate. Thank you again, and I will now ask the operator to open the line for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to return your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and one follow-up question only. Thank you. Our first question comes from the line of Federico Gomez with ATB Financial. Your line is open.