Glass House Brands Inc. Subordinate Voting Shares

Good afternoon, ladies and gentlemen. Welcome to the Glass House Brands' first quarter of 2026 earnings call. Matters discussed today during today's conference call may constitute forward-looking statements that are subject to the risks and uncertainties relating to the Glass House Brands' furniture financial or business performance. Houseful results could differ materially from those anticipated in those forward-looking statements. the risk factors that may affect their social detail in the Glasshouse Branch periodic filings and registration statement. This document may be accessed via the SEDAR or S-E-D-A-R plus database. I'd also like to remind everyone that this call is being recorded today, Wednesday, May 13th, 2022. On today's call, we have Kyle Kazan, co-founder and chairman and the Chief Executive Officer of Glasshouse Branch and the Chief Financial Officer, Mark Vendetti. Following preferred remarks, management will open up the call to the analyst questions. Also joining for the questions is Graham Farrar, co-founder and president. And with that, I'll turn the call over to Kyle Kazem.

Good afternoon. Thank you, operator, and to all of you for joining today's call. For greater detail and results, please refer to our first quarter 2026 earnings press release and financial filings. Before I get into our first quarter results, I want to acknowledge the landmark event within our industry, the rescheduling of medical cannabis to Schedule 3. This represents the most important drug reform in my lifetime and is an important step in normalizing the industry. I applaud President Trump and his administration for progressing with this change. one that reflects genuine common sense, acknowledging the beneficial medicinal and therapeutic properties of the cannabis plant and granting people greater access to find relief in healthy and natural ways. We are pleased with the update and anticipate further legislative progress to come in connection with the Administrative Law Judge, or ALJ, hearings scheduled for June 29th, during which we anticipate a similar rescheduling of recreational cannabis. At that time, I'm hopeful that we will also see social reform, and I appeal upon the president to pardon the many people that remain incarcerated in federal prison for nonviolent cannabis offenses. Just as he did with his current pardon czar, Alice Marie Johnson, and my friend and advisor, Weldon Angelos, among many others, President Trump can correct a wrong and give these people their lives back, many of whom are staring bleakly at a nightmare of decades behind bars. I hope the President shows compassion as the war on cannabis won't truly end until these people are brought home. From a business perspective, interpreting the outcomes of the medicinal rescheduling is complicated, and the opportunities presented for us and other cannabis businesses are still being defined in scope and timing. We are working diligently to ensure that initial legal interpretation become reality as we are excited for what the near-term future can hold. We are confident that medical cannabis rescheduling is sufficient to support interstate commerce between companies with the appropriately registered DEA licenses and export. This permits our team to ship low-cost, sought-after California cannabis to compliant medical markets outside the state and country. The opening of either interstate commerce or export off to Europe, a multibillion-dollar importer of Canadian cannabis today, and growing would meaningfully increase our addressable market size and unlock profit and cash generation growth on account of more favorable pricing dynamics that are magnitudes higher than those of California today. We have been training at altitude in the California market, which is the most difficult on the planet, and any beneficial change to pricing dynamics will flow right through to profits. In addition, we believe through rescheduling that we can supply research institutions with cannabis and assist in their efforts to further unlock the therapeutic power of the plant. At the outset, we will look to deepen our relationship with partners at UC Berkeley, who we have been working with on novel medicinal development with hemp for more than a year, ideally deepening our learning on topics such as post-harvest curing, chemical makeup, and terpene expression that we can leverage in producing higher quality and more valuable products. Our entire business is medically licensed and operational, and since the announcement, we have registered our retail stores cultivation and processing licenses with the DEA, permitting us to immediately operate medical operations under a Schedule III designation and have converted each of our cultivation and processing licenses to medical. We have completed an export application and are navigating that permit process. Mark will expand upon this topic further in a section of this call, but we are also working with advisors related to the tax ramifications of medical cannabis becoming Schedule III. Meanwhile, we are in discussion with California regulators to develop a system for tracking cannabis sales and tax collection for out-of-state sales. Given the state's accommodating expedition of license changes in recent weeks, we are confident that a solution can be found in short order that is beneficial for both cannabis companies and the state's tax coffers. Interstate commerce and export offer a huge opportunity to California's agriculture industry and gives cannabis growers pressured by compressed pricing and powerful illicit competition a valuable lifeline. California growers can and should win nationally. The export to other states and countries at more reasonable pricing presents a real opportunity for job creation, tax generation, and would give a genuine incentive for those in the illicit market to become legal. Not to mention, this is what consumers globally really desire. Beyond the activity of recent weeks, preparing for a Schedule III outcome was a top priority for the first half of this year, and we made significant progress in the first quarter. We accelerated and are completing the build-out of the final two-thirds of Greenhouse II. Greenhouse 2 is our fifth operational greenhouse, and in total can produce more than 300,000 pounds of biomass per year. Plants from the final two-thirds will contribute to sales in the second half of this year. Our new production expansion committee within our board of directors continues to discuss future operational partnerships with companies in more traditional industries, including tobacco, alcohol, and cosmetics. We are pleased with initial conversations and expect further rescheduling progress to enhance interest. We believe widespread adoption of cannabinoid products within the traditional consumer product industries is coming and anticipate that further rescheduling progress will hasten adoption. We continue to progress toward a Good Agriculture and Collection Practices, or GAPP, compliance audit, a prerequisite for European medical cannabis market supply and we have been connecting with potential distribution partners in anticipation of establishing future supply agreements. Graham and I recently spent a week in Europe, including attending the ICBC conference in Berlin and Spanibus in Spain, meeting with companies and potential future partners. I can confirm that the rest of the world wants California cannabis, and we look forward to giving it to them. I will be providing further updates as they arise. We recently announced preliminary first quarter 2026 results. Results were mixed with revenue, $41 million, period ending cash, $28 million, average selling price, $171 per pound, and biomass production, 152,000, each matching or exceeding guidance. Cost of production, $175 a pound, adjusted EBITDA, a loss of $4.2 million, and gross margin 25% were below our expectations. We also reduced our full-year 2026 guidance for gross profit, adjusted EBITDA, and period-ending cash as our first quarter results, and those anticipated in the second and third quarters will reflect a higher cost of production than we previously expected. The reason is that we continue to operate with a less experienced workforce of third-party labor contractors. While the staff gains valuable experience every day, the first quarter was their first at pre-raid scale for harvest and production, and there remains a learning curve with operations. This has hindered our productivity. Meanwhile, we are compounding stresses for our legacy staff by accelerating expansion projects in the form of construction and planting new plants through the build-out of Greenhouse 2 and Greenhouse 4 for hemp. The reasons for our shortfall are explainable. It is a massive challenge to put the pedal down on expansion while still training people new to agriculture and at the very same time of turning on a new greenhouse, rescaling back up to pre-rate full production. We hold ourselves accountable and are taking action to ensure that our expectation of our team's growth are realistic and reasonable. We have a history of under-promising and over-performing, and we regret the restatements. Importantly, despite the near-term shortfall, we remain confident that our long-term cost of production target is achievable. We forecast the quarterly cost of production to decline as the remainder of the year progresses and continue to believe our $95 annualized target cost of production is realistic on a quarterly basis within the second half of the year. Longer term, we will never have to pay the high and growing energy bills of indoor peers. nor do we rely on third-party water supply. It is these benefits that have sustained us despite challenging California cannabis market conditions and will further separate the company as we enter new markets as indoor cultivators face increased pressure on rising energy costs. We reiterated guidance to produce 1 million pounds of cannabis biomass this year, a record number for the company, and we continue to anticipate strong revenue growth in 2026 with progressive revenue growth throughout the year as scale comes online. I remind that revenue growth and guidance overall come before factoring in any potential benefit of sales outside of California for our cannabis plants or contributions from hemp sales. As previously discussed, we have hemp plants growing in greenhouse for today and have completed an initial harvest and anticipate sales this summer. With initial product, we plan to supply international hemp and smokable CBD markets and are in active discussions with customers. This is a historic step for the company as it represents the first planned sale of any product outside of California and provides an R&D test for future near-term medical cannabis sales in new markets. With the current build-out, Greenhouse 4 is capable of producing roughly 100,000 pounds of hemp biomass annually. That can eventually be enhanced to approximately 300,000 pounds through a full retrofit of the greenhouse. While we are not ready to provide explicit guidance on hemp contributions in the second half, we are confident that products will be sold at favorable prices relative to those currently achievable with California cannabis. Any contributions to results will be incremental to our current guidance. Long term, we believe greenhouse four production could be an eventual supplier to President Trump's proposed reimbursable CBD market for Medicare patients. We also maintain optionality to supply a U.S. hemp market should the looming hemp ban be eliminated or pushed out as many predict it will be. Finally, before I turn the call to Mark to discuss financial results in greater depth, I would like to provide some initial color on the recently announced California Retail Joint Venture with Vireo Growth, which is one of the fastest growing multi-state operators in cannabis. Together with Vireo, we plan to form a joint venture with the aim of building one of California's largest and best strategically positioned cannabis retailers. This will be a game-changing transaction for the Golden State, and I am excited to be working with the Vireo team a group that I have come to know well and respect over the last few months. The two companies will each contribute its California dispensary operations in exchange for a 50% ownership interest in the new entity. Operations and future expansion will be jointly managed by Vireo's CEO, John Mazarakis, and myself. I am pleased to announce that Vireo's President of California, Corey Azzolino, someone I have known and worked with for many years, has been appointed CEO of the joint venture. Our contribution will be our 10 retail stores and our ongoing LEAF MSA. For Vireo, the contribution is its ease dispensaries and home delivery business. As part of the agreement, we will support the needs of the combined retail network through a supply agreement. By operating retail as a larger consolidated base and in connection with the underlying supply agreement for Glasshouse, we believe we can improve upon the distressed pricing conditions in California and enhance the profitability of both our retail and wholesale businesses. Through the e-delivery business, we can also meaningfully expand our distribution reach, including for the first time within cannabis desert areas of California without dispensaries with our low-cost product lines. In addition, after a five-year operating period, The JV provides an off-ramp that allows us to sell our ownership in the joint venture to Vireo. I look forward to providing further updates on the transaction and the JV's operations as they come available. With that, 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 represented with preliminary results released in April, First quarter revenue was $40.5 million, down from $44.8 million in the same period as last year, but ahead of prior guidance of $39 million. The decline year-over-year can be attributed primarily to lower wholesale prices compared to the same period last year. The first quarter, 2026, was the final quarter with reduced capacity a product available for sale for the wholesale channel following the step back in production in the second half of last year. As has been previously discussed, we ended the fourth quarter of last year with the most acreage planted in Glasshouse history, but the product was not available for sale on January 1st on account of typical growing, harvesting, and processing times. Increased scale only began flowing completely through the business in the second half of the quarter and will be available on a full quarterly basis in Q2 for the first one-third of Greenhouse 2. Within first quarter revenue, $28.6 million stemmed from combined wholesale bulk and CPG sales, down from $33 million for the same period last year. Revenue in our wholesale segment was $24 million, down 15%, from last year due to lower wholesale pricing, while our TPG segment had revenue of $4.6 million, down 2% from last year. Retail sales in the first quarter were $11.9 million, up from $11.8 million last year, as the retail stores continued to grow on a same-store sales basis, outperforming the broader California market, which for the same period declined 8.5%, according to Headset data. In early 2024, we implemented a strategic pricing model with our retail stores, and since that time, our own dispensaries have consistently outperformed state retail sales, confirming that, above all, consumers demand high-quality, low-cost cannabis. No one anywhere matches glasshouse flower quality at low-cost pricing. We produced 152,000 pounds of wholesale biomass in the first quarter, ahead of our 138,000-pound guidance, but down from 153,000 pounds in the prior year period. Production cost per pound was $175 in the first quarter, above guidance of $161 per pound, and $108 per pound for the first quarter of last year. As Kyle discussed, we are experiencing short-term inefficiencies with labor that is resulting in higher costs of production. We have and will continue to take steps to accelerate efficiency at lower cost. We sold 140,000 pounds of wholesale biomass in the quarter, down from 147,000 in the same period last year. The average first quarter selling price for biomass sold was $171 per pound, versus $167 for guidance and $193 last year. Year-over-year price decline of 11% reflects continued California pricing challenges, with flower pricing down in line with the total pricing decline. As a reminder, last year we began selling higher levels of trim on account of improved cultivation practices, which allow us to harvest and sell trim material that would have been previously disposed of. This has the effect of lowering our ASP as the additional material is predominantly trim, which garners lower average selling prices. As we move forward and bring on more product from Greenhouse 2, we expect our flower percentages of sales to increase back up to new normal levels in the mid-30% range. First quarter consolidated gross profit was $10 million, and gross margin was 25%. The gross margin compared to 29% guidance and 45% in the first quarter of 2025. The decline stems from higher production costs and the wholesale business. First quarter adjusted EBITDA was negative $4.2 million, down from a positive $4.4 million in the first quarter last year. Adjusted EBITDA reflects the factors that impacted our gross margin performance, as well as a modest increase in cash operating expenses of 3%. First quarter operating cash flow was negative 11.8 million. Turning to the balance sheet, we ended the quarter with 27.9 million in cash and restricted cash compared to 23.4 million at year-end 2025. Inclusive in cash spending was roughly 3.5 million in CapEx. Additionally, the final cash number includes approximately 22 million raised for the use of our now-closed 25 million ATMs. The shares were primarily issued to existing long-term investors with proceeds from the raise, primarily going to fund the build-out of the remaining two-thirds of Greenhouse 2 and our Greenhouse 4 expansion. In addition, we paid roughly $2.9 million in dividends. As disclosed within our earnings release, we have entered into a new $50 million ATM agreement with ATB CoreMark. as a matter of good business practice should beneficial opportunities arise. Currently, we have no plans to use the ATL. As Kyle mentioned, we've had discussions with our tax advisors regarding the implications of rescheduling on taxes. We are working through to define if and how much of our uncertain tax liability can be eliminated. This will depend on how retroactive the rescheduling makes to ADE. For perspective, our 2025 uncertain tax provision increased almost $10 million, and our Q1 2026 tax provision of $3 million was comprised almost entirely of 280E tax impact. At the end of Q1 2026, the uncertain tax provision was almost $35 million. We expect further changes to come if recreational scheduling occurs as expected this summer. Turning to guidance, as Kyle discussed, we recently updated our full year 2026 guidance. The company anticipates net revenues to be between $235 million and $245 million in line with prior guidance. We plan to produce approximately 1 million pounds of biomass this year and anticipate an average selling price for wholesale product to be in the mid $180 per pound range. We estimate cost of production to be approximately $111 per pound compared to prior guidance of approximately $100, while noting that the company's long-term $95 cost of production target remains intact with expectations to still achieve this level on a quarterly basis within the second half of the year. With the updated cost of production, we now expect gross profit margin to be in the mid-40% range, down from prior guidance of approximately 48%, and adjusted EBITDA to be in the high $30 million range. This compares to prior guidance of an anticipated high $40 million level. 2026 ending cash is expected to be in the low $40 million range, down from prior guidance of approximately $50 million. As a reminder, Full-year guidance did not include contributions from any sales outside of California or any changes to the financial model related to a closing of the announced joint venture with Vireo. Additionally, anticipated sales from our hemp business are incremental to guidance, and we anticipate initial hemp sales to come later this summer. We anticipate that no matter the end market pricing dynamics for hemp, will be favorable to cannabis prices achieved in California. For the second quarter, we anticipate revenue to be in the range of 55 to 60 million as we produce approximately 240,000 pounds of biomass, up from 231,000 pounds in the same period last year. Second quarter average selling price for wholesale biomass is assumed to be approximately 185 to $190 per pound down from 206 last year, while cost of production will be approximately $120 per pound versus 91 last year. As a result of the higher cost of production and lower sales price, we anticipate second quarter gross margin to be in the high 40% range, which compares to 53% last year. On April 28th, we delivered a redemption notice related to those warrants whereby all warrants as of May 28, 2026, will be redeemed on a cashless basis at a redemption price of 0.011826 shares per warrant. In the interim, warrant holders may convert any outstanding warrants at a conversion price of $1,150 per share and exercisable for one equity share of Glasshouse stock until the business day immediately preceding the May 28th redemption date. There are currently 30.6645 million warrants outstanding. And with that, I turn the call back to Kyle for his closing remarks before opening up the call to Q&A. Thank you, Mark. And again, thank you for all who have joined us today and for all of our investors for their continued support. I am encouraged by the recent rescheduling news and believe it presents a true breakthrough for the industry. and may well prove to be just the beginning of change and long-anticipated normalization for this industry. I am genuinely hopeful for the months and years ahead. I'd also like to thank the entire Glasshouse team. We have put the staff, both employees and third-party workers, to the ringer over the past year, and in every path, they have stepped up and demonstrated true grit and spirit to face the challenges presented. Thank you. Finally, we once again plan to host our annual investor event Investor Sesh 5 at the Camarillo Farm. As always, the event will include our annual shareholders meeting, a question and answer period with all members of the senior team, and tours of our facility and operations. It's a can't-miss event for all Glasshouse shareholders. Given all the excitement in the industry and the expansion at Glasshouse, I am confident this will be our best Investor Sesh yet, This year, we have the event scheduled for Thursday, June 18th, and I genuinely hope to meet you there. One request for all cannabis investors listening. Please call your congressperson and ask them to request that President Trump grant clemency to all nonviolent federal cannabis prisoners. These requests make a difference as I communicate with several of these people who are living a nightmare. It is sincerely appreciated. Let's not leave them behind. Thank you again, and I will now ask the operator to open the line for questions.

We are now opening the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star one again. Thank you. Your first question comes from the line of Frederico Gomez from APB. Your line is now open.