Well, good morning. I'd like to welcome everyone for joining us here first thing in the morning, as we call it in the cannabis world, Wake and Bake timeframe. But my name is Scott Fortune, and I'm the senior research analyst for Roth MKM, covering the health and wellness space and also agriculture business-based sector now. Our today institutional investor conference will feature 100 fireside chats and 30 panels. There are over 400 companies here presenting, available for one-on-one meetings. And if you've not booked meetings, there's still opportunities, so please visit our one-on-one desk for that upstairs. Panels and track lineups are electronically displayed throughout the venue and listed in the conference website, paper schedules and conference app, so on that side. But I'd like to give a special acknowledgment to our conference sponsors, and this track is sponsored by Centri.
And with that, thank you for making it to Orange County and being part of the 36th annual Roth conference. I've been going to this for about 20-25 years on the buy side, and with Roth Capital for the last 6 years, so it's always a great event to come here. So, we'll kick off the morning. This morning we have Glass House Brands. We have the CEO, Kyle Kazan, and the president, Graham Farrar, from Santa Barbara, as everyone knows. And just wanted to kind of set the industry.
We've come a long ways in the last five, six years, but just, you know, as we get federal reform coming about—and it's been obviously very slow—but just give us your guys' strategy or kind of idea how you think and your positioning this industry eventually turns out as we look 7-10 years down the road, and just kind of put it there and see where you guys are going, and then we can talk about the federal side and your business going forward here.
Well, number one, thank you guys for being early, coming on down right after a great night with Marshmello. That's a that's pretty cool, actually. I missed the Marshmello. You know, what's interesting is, as a longtime investor, I always try and look to see what's the value of where things are going, what's the logical outcome. And so I think it's sort of dangerous if you invest thinking that the structure during prohibition stays the same. For instance, what do you think dispensaries nationwide are gonna be worth in the future when legalization happens? And unfortunately, I don't know any dispensaries that is nearly as well located as any 7-Eleven or Circle K or even, like, Sam's liquor store. And I think ultimately, all of those that's where the retail for our product will be.
and then I look across and I'm like, "Do you think we'll be growing cannabis in a room like this at $600-$800 a pound?" I can't think of another agriculture product around the world that, that, that sells grown inside a room like this. So I think ultimately we're gonna go back to just kinda normal business fundamentals. And that's what when Graham and I founded the company, it was like, "Hey, let's make very good quality cannabis. Let's grow it at a very good price, and let's watch COGS." This is agriculture. Agriculture in every other sector is a penny's game. So we know it's going to get there at some point, so that's why we bought the big farm. That's why we're not expanding past 10 retail, because someday those will all be write-downs.
Every single company in the space will be writing down or writing off all their retail. Something nobody's talking about, but we don't sell M&M's or Dr Pepper, and those guys know what they're doing, and they collect a lot of taxes. So we think we're extremely well-positioned, though, on the production side, and we see ourselves potentially as, like, a future Sunkist.
Yeah, you know, I think from the beginning we've always kind of tried to lead and keep our eyes on where we think things are gonna end up and lead from the front towards making that happen. And, and in line with that, we think the future of the rest of the country looks like California. It looks like other CPG products. It looks like alcohol. It looks like agriculture. And we've always been focused on building towards that. You know, at the end of the day, the entire industry starts with a plant. And so we wanted to be not only the best but kind of the only, and is being able to grow the highest quality cannabis for the lowest possible price and make products that consumers love. They're willing to pay us more than it costs us to grow them for.
That's the case around the country and eventually around the planet, and then be able to do that at a scale that's unmatched. So we've really built the cornerstone around our efficiency and quality and consistency on the cultivation side. We have retail stores, but as Kyle mentioned, don't believe that that's the future of what we are. That's our today connection to the consumer. It's our beta platform. It's our data and analysis. It's the feedback loop that we use so that we can take that high quality, high consistency, very low cost, large scale production of the plant and turn it into products that consumers love. So it's really a, a kind of product development or beta platform. Our goal is to make the most consumed cannabis brands on the planet. You can look around the illicit market with all of its challenges.
One beautiful thing it does give us is a really large and free focus group, and it tells you what consumers want across the country and across the planet. What they want is California cannabis. You've got stores in every state that are unlicensed and selling illicit products from other states. They're, you know, in New York, you literally have to drive by 47 legal states to get to California. You couldn't go farther. Yet they drive by all those states: Michigan, Florida, Illinois, Colorado, all the states. They all have products. They all have weed. It's all closer. It's all easier. And they skip them because they only have one rule that they're working towards, and that's to make the consumer happy. And what satisfies the consumer is weed from California. Eventually, I think we, you know, can all see this, this coming now.
Recent events make it even more clear. You know, you got Biden mentioning it in the State of the Union. You got Kamala Harris off mic saying we should legalize cannabis. You got 47 states, and, you know, we, we could be close to 50 by the end of this year if Florida and a few others go the right direction that will have cannabis. More than half the population lives in a legal state at this point. So we know where this is going. And like Kyle said, it's, it's not gonna be what the past looks like. It's gonna be the future. And while that doesn't always repeat itself, it oftentimes rhymes. And if you look at tobacco and alcohol, both more dangerous products, both highly regulated, both that require taxes, they've got thousands and thousands of vendors that sell them today.
The far idea that those vendors are not gonna want the brands that consumers want on their shelves is a ludicrous proposition. So I think rescheduling happens soon. I think that's gonna have a whole bunch of catalysts. I think we're gonna see the future sooner than we think. All the way from uplisting to interstate commerce pacts, I think are gonna be coming much sooner than history would've told us or based on what we've seen so far, things are gonna start moving pretty quick.
You just answered, like, six of Scott's questions.
Yeah, let's go there. Let's, you know, rescheduling, obviously. The elimination of 280E. We got three prongs going on now, right? We'll talk about tax strategy because a lot of the MSOs now are saying, "Hey, we're not paying 280E." They filed their amended tax returns to get back. Trulieve led that. You know, we have their rescheduling potentially coming. We think it's probably likely this year, whether it's April or August. It depends, but it's likely. But that puts you back into traditional businesses where you're gonna have cash flow, and you're not giving the profits to the government anymore. You're giving cash flow. So talk to us kind of on how that changes your, your operations. You know, what's your plan? Obviously, you're building this without rescheduling coming, but potential for that additional cash flow.
And then kind of how rescheduling interstate commerce is big for you guys, kind of what the landscape is for interstate commerce potentially moving?
You know, Scott, it's interesting. Every time we do a budget, every time we look at the world, we just assume we're getting nothing. And so we just figure we're gonna stay hungry. Now, that said, we do think it's going to happen. None of our budget numbers have 280E going away, but that would add $10-$15 million of cash to us. And as we continue to grow out our greenhouses, it only adds to more. In regards to interstate commerce, you know, I don't think Schedule III gets us there. We'll see if we get some interstate compacts. It's nice that we're starting to see more and more politicians just calling for a complete descheduling. And we're gonna. I mean, that's what we want.
It is self-serving, but also we don't want people going to prison in a schedule. Schedule III is not gonna stop people going to prison for this plant.
Yeah, you know, reiterate what Kyle said. We've never made a plan that ever counted on things getting better. That's not what typically happens in cannabis. What that means is that our business works and is cash flow positive in California with the walls up, so everything that happens just makes things better. And that's a much better way, we think, to live. I think, you know, between Biden mentioning it and Kamala Harris's conference and the HHS and FDA recommendations, it, you know, certainly seems like Schedule III is coming. It's absurd and incredible to consider that cannabis is currently scheduled as a more dangerous drug than fentanyl, which is killing hundreds of thousands of people a year. So it makes all the sense in the world.
What would make even more sense would be to completely deschedule it, just like alcohol and tobacco are not on the schedule. Taking cannabis off the schedule would be the true right answer. It would also start to get people out of prison, which, as Kyle mentioned, Schedule III doesn't do. But we won't look incrementalism in the mouth. And I think a move to Schedule III would have a whole bunch of catalysts, far beyond just the scheduling. We know that a number of senior exchanges are looking at it. We've got a pretty active and aggressive shareholder base that we're building that's pushing for a number of those things, and have some indications that we believe that, that they, they will pay attention to that, even if it's not specifically there.
It does, just in the way that 280E goes away, it does take away the idea of it being a, you know, federally illegal drug and business. I think that we're gonna start to see some first, first mover advantage when that happens.
Tax strategy, really quick, any comments on that?
Well, real quick. In other words, we think it could start FOMO. Like, it may be close enough to all of a sudden exchanges, banks, things like that just start to say, "Okay, now we're close enough," and they start moving. On tax strategy, as you can imagine, we have our accountants looking at it, you know, as if it's going to happen, but also if it doesn't happen. And, and how do we maximize? We see what Trulieve did. There's a couple other big, big companies, looking at their options, and, and we're doing the same.
Good. Okay, let's get into your, your production. Obviously, you're bringing on a new greenhouse here. I've seen it. It's not the new one yet, but it's very impressive. Just kinda step us through resetting the California market. We've seen a lot of licenses come off. Pricing seems to be stabilized as we go through the seasonal opportunity. But you, you I think you guys have said this greenhouse can add $80 million, you know, $40 million gross profit, $30 million EBITDA. Just kinda step us through that process. You're planning January, coming on in April, kind of the next iteration for you guys.
Yeah, so actually excited to I guess announce that our first harvest from the new greenhouse is tomorrow. So that's right in line with our guidance, which is that we were gonna get it operational in Q1 and have revenue in Q2. So, we're right there on that. It's an amazingly impressive facility. It's almost a carbon copy of the first greenhouse that we had that you've seen, Scott, at our SoCal farm. So it's about 1 million sq ft. It's actually almost 10% bigger than our existing greenhouse. So it's growth not only an additional 1 million sq ft, but it's also now our biggest greenhouse that we're operating. We took everything that we learned from the first greenhouse, Greenhouse Six, we call it, and applied it to Greenhouse Five. So I think it's actually gonna be our best greenhouse that we've ever had.
And, you're right. It's about 250,000 pounds of additional output. It's about $80 million in revenue and about $40 million in gross profit. So if you think about what we're already doing and layer that on, you know, first, tremendous work to the team to be operating three farms, the biggest cannabis greenhouse on the planet, and all at the same time, both retrofit, plant, and now start harvesting, literally almost all at the same time. Incredible work and incredible results. And, you know, we're talking $3+ million a month in additional gross profit from just the addition of that greenhouse. So it's pretty exciting stuff. Question I think you're gonna probably ask is, what about the market?
I think the key thing that a lot of people lose track of or don't know is, in the last 18 months, 20 million sq ft, approximately, of cultivation has left California. So us, you know, rightly saying it's big, it's adding back.
How, how big are we compared to the $20 million?
We're, you know, somewhere in, like, the 2% range, right? So, well, 2% of the market. So 20 million left, we're talking about adding back in one million. So it's far less than what's leaving. We're vastly less supply, on a net basis than we were a year and a half ago. And pricing reflects that. We're probably 2X the price for a pound of flower that it was when we started the greenhouse and holding very steady now and in a place that's really comfortable for us.
So thank you, uncertain, for production. Obviously, where is demand? What type of demand are you seeing from the, you know, the other retailers? Obviously, retail's a tough market in California. But just kinda step us through. Who's soaking up that demand with your new production? And how do you see that portraying into your next Glass House potentially, which you could add lights and go quality and so it's from that side?
Yeah, there's a lot of excitement. So our plan has always been we have six greenhouses at the SoCal farm. The plan was always to roll them out basically as the market could absorb it. So we had a great structure where we lease to a veggie grower the greenhouses that aren't in cannabis. So that helps cover, you know, property tax, insurance. They pay rent. They pay their share of the utilities. We have six greenhouses. As of now, three of them are cannabis. So three of them are still in vegetables.
What we're seeing is between our brands, the brands we work with directly, and distributors that service other brands, as well as processors that extract, trim into the distillate that fills vapes and edibles and things like that, our sales guys are every day, they're calling and saying, "When's the first harvest of the new greenhouse?" So they're selling it faster than we can grow it. And I think it's just simple supply and demand. There's less supply. Demand really hasn't changed. If you see compression, it's almost always dollars, not units. Unit volume has continued to stay strong, and there's less suppliers for it. So, we're seeing a lot of demand out there in the market, and I think it's just the result of growing the best quality for the lowest cost and in a way that's consistently available for people.
Scott, you brought up the greenhouse that's that has lights. We have 1 million sq ft that I don't know if you guys have driven up the 101. As you're coming down, especially at, like, 4:00 A.M. or 5:00 A.M. in the morning, you see what looks like just a spaceship out in the middle of the farmland. That is Greenhouse Two, right now with tomatoes. But, you know, if you grow in a room like this and we have had a small indoor grow in Los Angeles, you shower it with lights. It's very consistent. You don't have any seasonality. Well, we can do that, not be on the grid, you know, since we make our own electricity on site. And then we can shower extra light from the sunshine, which is even more full spectrum.
So to me, it's like, as someone who enjoys the plant, it seems to me you're gonna get everything and more. So this would be, like, an ultra premium. If nothing else, we wouldn't deal with any seasonality, so it'd be more consistent. And also, we do think we'd fetch a higher price. So we are looking into that being our next greenhouse to turn on.
Yeah, for context, that greenhouse is 1 million sq ft with 11,000-watt lights in it, which consume about 14 megawatts of power, all which we can make on site for about a quarter of the cost of buying it and get free heat and CO2, both byproducts that we use. So it would effectively be the largest indoor cultivation operation, again, anywhere in the planet, and the most efficient all at the same time.
I know you guys wanna go down the CPG, the brand side of things eventually. Just kinda step us through your brand strategy, and kinda the health of California, right? Obviously, it's very difficult. There's 1,200 retail stores, but maybe only working with 300 because of the situation. Just kinda step us through how you position your brands for the long term and, and kinda the California market. As a law enforcement side, are they starting to enforce the illicit side? Just kinda step us through that.
Yeah, right now, it's a recession for brands and retail in California since the retailers are really hurting. And, you know, most of you guys probably already know, in California, you either have 65% of the cities and counties that have no retail or the 35% that have too many, 20 in Santa Ana, 30 in Long Beach, and they're just not being able to pay their taxes. They're falling behind and not paying the brands. Like, you know, MedMen and Grassdoor went out. I think there's more of that to come. And so for us, our feeling is, since we have such a robust wholesale side, we only sell to stores that can pay. And if they, you know, so we, we run our credit very, very tightly. We don't like losses anywhere. And, I would say it's gonna get worse before it gets better.
And then you're gonna start to see some strong stores come back, like you may have seen in the 2015 kinda days. Our brand strategy is to continue to press our COGS. We're doing a lot of our own self-packaging. And I think you guys will be pretty surprised at what you see if you go into our stores. We have an Allswell brand that I think is the best value by far, not, not best value, but the best value by far in the flower sector in California.
I'll open up for questions here pretty quick. But I wanna hit kind of just on the financial side. You guys haven't reported for Q yet. You're gonna do a little miss or restatement here. Just kinda step us through the financial side, then we can open up some questions. Unless, Mark, Graham, do you want?
You know, the restatement basically just kind of immaterial numbers. It had to do with how we book stuff with HERBL. When it was brought to our attention, we looked at it, and we said, "That's fine. We'll just book it as an intercompany transaction and call it a day and move on." And that just delayed. We're gonna do our earnings this week, and we're just pushed out to next week. It's no big deal. And Mark wanted to come down and say hi, but he's in there getting ready for next week, so. But nothing really big there.
Yeah, I guess just a, you know, clarifying that. Nothing; it didn't impact anything in the last three quarters, which were our record quarters. It doesn't touch anything in our wholesale business. It only affected our brands going to our stores, so a very small slice. And we looked at it and, as Kyle mentioned, decided it's better to treat it as an intercompany than a third-party. So it actually improved our margins overall and improved our year-over-year comparisons 'cause it dropped some of the cost out as well.
Okay, we got about five minutes for any questions from the audience.
I was gonna say I could chat a little bit about the brands 'cause one of the things I think we are seeing, despite the challenges out there, it's important to keep in mind that California is still a $5 billion legal market. It should be a $13 billion market if we did things with less regulations, less taxes, and more retail. But the $5 billion legal market is still the largest in the country by, you know, several multiples. I think it's as big as the next two or three largest markets combined. And we are starting, I think, to see the front end of some of the consolidation. According to Headset, for February, our brands combined were the most consumed cannabis flower in the state.
So, I think you are starting to see some of these brands fall away and some of the stores fall away. You'll probably end up, I think, with a healthier market over time. You're starting to see that, you know, develop, what we see in other consumer packaged goods markets where you don't have a 20%, you know, 52% brands. You've got, you know, three 20% brands and then 10 more, you know, 5% brands. And, flower's always been really fragmented, and I think you're gonna start to see that consolidate down as consumers get used to brands being on the shelf and trying to find them everywhere.
Let's say there is a windfall here for cash flow priorities, you know, pay down debt, expansion, you know, grow. Obviously, some are buying back stock from at these levels. But any priorities if you do get this cash windfall here?
You know, certainly, we'd look to. We'd look at our debt. We'd look at our preferred equity. But we're also looking at how do we turn on more to increase more, you know, put more revenue and cash in our account. So we just juggle to see which is our priority. We haven't made that decision just yet. And also, rescheduling hasn't happened. One thing, if you don't mind me saying, you know, we're sitting here. I, we all came walking up, or some of you guys probably stayed here. There's not much of a more beautiful setting than being down here in Dana Point, California. And we're all gonna have a lovely day. We're talking about how to make money. And I think it's important since we're in cannabis that there's approximately 3,000 people sitting in federal prison right now.
I talked to some of these guys. I talked to a gentleman over the weekend, and just tell me how shitty life is. And, you know, we're on pace to grow about 600,000 pounds when we start, you know, fully on Greenhouse Five. Nobody in prison has ever been anywhere close to the magnitude of what we're doing. And it's still Schedule I. So President Biden continues to gaslight the country. He, when he says simple possession, nobody is in prison for simple possession. He hasn't let one person out. We're happy what he did for Brittney Griner. But he can make that he doesn't have to trade anybody. He can just do 3,000 signatures.
So to the extent that you guys speak to your congresspeople, to the extent that you have any kind of political sway, this is a no-brainer just to encourage the president to do the right thing. This is absolutely and utterly ridiculous that we're sitting up here doing what we're doing while people are rotting away in prison. It's just not acceptable.
We're staying in rooms at the Ritz while they're sitting in a cage, right? That's obviously not the way that things should be. When you're talking to the politicians, the scorecard is how many people got out of prison. You should ask them for that number. That's the only number that matters.
Well, I appreciate that. You know, California's the largest cannabis market. You think, you know, there's gonna be a lot of consolidation, but you guys are well positioned for to benefit from that position going forward. So thank you, Glass House Brands, and open for one-on-one meetings. Thank you.
Thank you. In June, we have our investor session up at our farm. It's the best way to get to know us is actually see our farms. You can call out the entire C-suite, call us idiots, whatever you wanna do, but we'll at least, you know, engage with you, and you can see what we are.
It's at the farm. There's tours. You can see Greenhouse Five that we're talking about.
Food too.
It really is fun. It's the Warren Buffett investor meeting of cannabis.
Now, I know you guys are gonna applaud. Graham's gonna get mad that I cut that off. So thank you, guys.
Thank you.