Glass House Buries the Lede
In Q3, Revenue Should Soar, COGS Plunge and Cash Flow Vastly Improve
Glass House is at an inflection point. The company, which has been turning on the world’s largest greenhouse approved for cannabis cultivation is finally selling cannabis grown in this state of the art greenhouse and the numbers are astonishing.
Despite a tough California cannabis market in which cultivators are going out of business left and right, Glass House announced that they sold 18,000 pounds of cannabis in the month of July alone compared to 20,000 pounds for all of the second quarter.
Due to the big jump in cultivation, the addition of the PLUS gummy brand and the number of dispensaries Glass House owns increasing from 3 to 11 by year end, Glass House’s revenue is poised to soar and cash flow about to improve dramatically. But you wouldn’t have known it from reading the first page of Glass House’s second quarter earnings release.
On page 5 of Glass House’s earnings release, the company gave guidance that it expects revenue should soar from $16 million in the second quarter to $27 to $30 million in the third quarter and then jump again to $50 million in Q4. Then they gave further guidance that their cost of goods sold, which was already one of the lowest in the country is going to fall from $158 per pound of cannabis to $150 in Q3 and then $125 a pound in Q4. So, what happens when revenue goes up and costs go down? The answer is simply: cash flow goes up.
It isn’t all sunshine and roses, as the company did report an ugly looking Q2, which included ramp up costs of the new greenhouse, and the company continued to burn cash. The company also announced a very expensive preferred financing that clocks in at 20% interest with 20% warrant coverage. So, dilution is coming (anywhere from 7% to 16% dilution depending on whether those warrants get converted or they are converted on a cashless basis). This offering is a sad reflection of how tight the capital markets are and how it is almost impossible to raise money now for anything cannabis related.
Glass House needs to raise $25 million to repay a $10 million debt that is due in October and for $15 million to make sure they bridge to free cash flow positive by year’s end.
After this preferred offering, Glass House’s balance sheet should look like the following: $50 million of senior secured debt, $50 million of preferred equity and roughly 80 million fully diluted shares assuming the worst-case dilution. That means that the company’s current enterprise value is about $260 million at $2 per share.
This compares very well to the company’s assets. A state of the art greenhouse that is appraised at $125 million before the company invested $50 million of additional capital, two other greenhouses in Carpinteria that are next to where movie stars like Kevin Costner live (my estimate is $50 million for both greenhouses in Carpinteria), and a year end count of 11 dispensaries that should easily be worth $5 million a piece. This assigns no value to the any of the company brands, the cannabis operations, or the recently acquired PLUS gummy brand.
Beyond the assets, the company is now guiding to $200 million plus of revenue next year. My own rough math is that the company could be close to EBITDA breakeven in Q3 and positive in Q4 with California cannabis pricing down 50% and everyone else going bankrupt. I believe Glass House has the potential to earn over $40 million in EBITDA next year, and this is with no expectation of an increase in pricing.
It is for this reason, I made a major investment from both of my investment funds into Glass House’s preferred equity offering as I believe it is one of the best risk/rewards I have come across since I bought foreclosed homes on the courthouse steps in Atlanta, Georgia in 2011. With this offering, I get paid while I wait for the company to execute and for cannabis reform to happen, with excellent asset protection and a company in midst of a major cash flow inflection.
What Glass House is doing is really hard. They are trying to grow high quality cannabis at scale from one single greenhouse location all while growing during a vicious downturn. If you look backwards, it doesn’t look like anything is changing, but Glass House is about to report the best growth of any cannabis company by far.
Name another cannabis company that is poised to more than double revenue by year end, whose margins are headed up and who doesn’t depend on limited licenses to boost cash flow, but simply just needs to keep executing? There is only one as far as I can tell.
And as I wrote before, with supply coming out of the market when pricing rebounds above the marginal cost of production for most producers, that’s when Glass House will really shine.
As always, I highly recommend you do your own research and run your own numbers.
Here is the Glass House press release:
Also please note that I’m hosting a Twitter Space today (Friday the 12th) with Glass House CEO Kyle Kazan and President Graham Farrar at 4:30pm ET/1:30pm PT. Send me questions to ask or just join and listen and decide for yourself.