Math is Glass House’s Flywheel
How the Company’s Cost of Goods Sold Advantage Is Growing
Glass House (OTC: GLASF) announced their Q4 numbers and on the surface they looked ugly. But strip out some one-time costs of $7 million and their numbers do not look so bad considering that cannabis pricing is down about 50% since last year.
But the more important story is that Glass House’s Cost of Goods Sold (COGS) fell again and this is before they move into their state of the art 5.5 million square foot greenhouse that should really drive down costs. And because of the sheer size and scale of the greenhouse, Glass House is now forecasting that after phase one is fully operational, they will be cash flow positive even at historically low pricing.
This is important because if you can be cash flow positive at $400 to $500 a pound cannabis pricing, you have a cost advantage not only in California, but for the rest of the U.S. In other words, Glass House’s COGS is their flywheel that few can compete with. By being situated in the perfect growing climate for cannabis where it is sunny nearly 320 days a year and it never gets too hot or too cold and now owning the largest cannabis greenhouse in the world, Glass House can harness the sun, use less energy, and use the near perfect weather to produce high quality craft like cannabis at scale consistently.
What’s remarkable is all of this is happening while the California regulatory environment is doing a 180 degree turn from stifling over-regulation and excessive taxation to the opposite.
California has been well known to be hostile to business through excessive regulation and taxes and nowhere has this been truer than in cannabis. The state taxes and regulates cannabis to an excessive degree exemplified by being the only state to tax the cultivation of cannabis. Then the cannabis industry has been beset by red tape and layers of local and state bureaucracy that has led to the state having less than 900 dispensaries. Judging by other mature states, California should have 4000-5000 dispensaries.
But the price collapse in cannabis has put the legal cannabis industry on the brink of collapse. Only a few scaled producers like Glass House can weather such a pricing climate. Consider that 80% of the cultivators in the state are sub-scale. California cannot let its legal industry collapse and let the illicit market takeover. This has spurred the California government to move at a speed that it is not normally known for. Consider:
There are now multiple bills in the legislature to eliminate the cultivation tax, including one drafted by the current State Senate Majority Leader.
The number of dispensary approvals are near record highs for January and February and the state is now actively working and giving grants to work through the backlog of dispensary licenses.
The state is overhauling the provisional licensing procedure that led to an over abundance in cultivation licenses and at the same time forcing CEQA compliance for all new licenses starting July 1. CEQA is a brutal environmental law that has and can be weaponized to slowdown or stop any project. This would significantly slow down new supply or even grind it to a halt.
Several California cities are now cutting or eliminating local taxes.
There is a new medical cannabis bill that would stop local municipalities from prohibiting cannabis. Be sure to read this thread on what it would mean as it could have an enormous impact:
One year from now, the California cannabis market should look and feel different than it does today, all the while Glass House continues to improve its cost advantages. While it has been a tough ride so far for investors, Glass House and the California cannabis business environment is about to reflect the sunny weather it’s known for.
I recorded a Twitter Space in conjunction with Calderwood Capital in which we talked to Glass House CEO Kyle Graham and President Graham Farrar. The recording is good for only a week. So be sure to listen to it before it expires: