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Glass House Revs Its Camarillo Engine
The Ferrari of Greenhouses Starts to Show Its Potential
For over a year, I have written and talked extensively about how Glass House’s (OTC: GLASF) new Camarillo, CA greenhouse is special and unique, the Ferrari of greenhouses. It is located in the ideal spot, has almost perfect weather, and is equipped with state-of-the-art technology that provides Glass House a structural and hard-to-duplicate cost advantage.
The challenge has been waiting for this new greenhouse to turn on during the worst possible conditions: where both stock and wholesale cannabis prices have been plunging.
Rightfully skeptical and beleaguered cannabis investors have openly wondered how Glass House was different from any of the large Canadian cannabis companies which have incinerated capital with giant boondoggle projects and no demonstrable ability to grow high-quality cannabis. Many have also wondered why in the world anyone would expand and invest in cannabis capacity in California, which is beset with numerous problems, especially an oversupply of cannabis and a vigorous illicit market.
And so, it is all the more gratifying to see the first fruits of Glass House’s new “Ferrari” in the recently completed quarter. Have you ever heard of a company, inside or outside cannabis, seeing margins soar even as prices fell by 21% sequentially?
This remarkable feat was achieved because the company’s realized COGS (Cost of Goods Sold) plunged to $134 a pound, outpacing the fall in the wholesale price. The net result: gross margins increased from 5% on a wholesale basis to an excellent 36%. Equally impressive was how, in a market beset by oversupply, Glass House could barely keep up with demand. They sold an incredible 69,000 pounds of cannabis in the quarter and remarked that they only have a week’s worth of inventory available right now.
Consider competitor Lowell Farms (OTC: LOWLF), which has an average run-of-the-mill greenhouse in Monterrey County, CA. Their production and sales fell, and Lowell reported a negative 2.9% gross margin for the third quarter. If Glass House can put up a 36% gross margin in the worst of market conditions while competitors are reporting a negative gross margin, something special is going on. And when an asset allows your sales and gross margins to soar in an oversupplied market while prices fall 20% sequentially, you know it is truly special.
Even better is that the company’s cash flow statement is starting to improve. Cash that gushed out of the company in Q2 to the tune of over $28 million, due to losses and CapEx, has moderated substantially in Q3 to just $7 million cash flow from operations outflow. Of note, is that of that $7 million, $5 million was inventory build for the much higher sales level. And more importantly, the company is guiding to a minimal cash outflow of $2-$3 million in Q4 even assuming continued depressed cannabis pricing.
This isn’t to say everything is perfect. Due to bizarre weather in early October, in which the remnants of a hurricane from Mexico sat over Southern California for over a week with not only oppressive heat, but brutal humidity, Glass House’s sequential production will stagnate, and they will not hit the previously forecasted Q4 step up in production. This appears to be an event driven issue, with corrective actions taken that they believe should prevent it from happening again in the future. Some other issues will also curtail production as well, all short-term in nature.
Were there bound to be hiccups in turning on this greenhouse? For sure. But we know from Glass House’s past results that the company only gets better the more time they have with a greenhouse. Next year should see a big bump in production without any expansion or capex needed. Also, a hurricane affecting Ventura County is a pretty rare event unlikely to repeat itself.
Another concern is that the company is struggling with their CPG business (consumer packaged goods). Admittedly this is a different business, as you are taking cannabis and creating products with a brand that commands a higher price point and a higher margin. Trying to create a CPG business while turning on the world’s largest cannabis greenhouse can’t be easy and I’m glad the company is taking a more measured approach. The CPG business is worth executing on because it can take what is a 40% gross margin business to over 50%. At scale, this could be worth an incredible amount of additional cash flow, but it is a longer-term project. However, we do not need the CPG business to succeed for Glass House to be an excellent investment.
I’m also encouraged that the company is signaling that its sole focus is its current business and operations, and it doesn’t seem to need any additional M&A. The company is being very conservative with its guidance and is not including three new high-profile dispensaries opening in cannabis deserts.
The best part about this quarter is the gross margins though. If Glass House can make a 36% gross margin on $200 a pound biomass and $400 a pound flower pricing in the first cycle of growing all the while operating at only 20% capacity utilization of the greenhouse, my god what happens if pricing recovers in California?
Even better - what happens when Glass House can sell across state lines when interstate commerce is allowed?
I would implore investors and those following the cannabis industry to simply run the numbers on Glass House. Run the numbers on what happens if they can produce 1.5 million pounds at $100 COGS a pound and what they could earn in different scenarios at different pricing. It’s an eye-opening exercise.
You can even crunch those numbers assuming a large amount of share dilution, and the result can still be silly estimates like $5 or $10 a share of cash flow per year. And yet, the stock trades at $4 with 80 million fully diluted shares with only $50 million of debt and $50 million of preferred equity.
I’ve made the case that what Glass House is doing is worth funding and worth investing in. It’s great for the environment, great for consumers (good consistent cannabis at a great price) and should be great for investors. This isn’t a limited license story depending upon regulatory capture that faces an uncertain future upon legalization. Glass House’s model is the future of cultivation.
This company looks so different from other publicly traded cannabis stocks, and it should be analyzed differently as Glass House is trying to do something really hard, but really valuable: build a business with structural cost advantages to attack a wholesale cannabis market, that is estimated to be at least a $21 billion market (including the illicit market).
I’m not sure how you can invest in cannabis and not have Glass House in your portfolio even if it is just a hedge against interstate commerce. But even if you don’t believe in interstate commerce happening anytime soon, they are clearly on an upward trajectory in the world’s largest cannabis market, California, and with a cost advantage that no one can touch.
The inflection is finally here and Glass House’s engines are starting to roar.