Glass House Brands Reports Cultivation Cost of $103 Per Pound

• Glass House achieved record-setting results for more than 10 key metrics, including consolidated revenue and gross profit, wholesale biomass revenue, retail revenue, biomass production and cultivation cost per pound
• Wholesale biomass production was 232,295 pounds, up 128% year-over-year, exceeding the top end of guidance by more than 35,000 pounds
• Third quarter 2024 revenue was $63.8 million, up 18% sequentially and 32% year-over-year
• Consolidated gross margin was 52%, compared to 53% in Q2 2024 and 54% in Q3 2023
• Greenhouse 5 continues to surpass targets for both quantity and quality of flower
• Cash and restricted cash balance rose to $35.1 million on Sept. 30, 2024, compared to $25.9 million on June 30, 2024

LONG BEACH, Calif. and TORONTO, Nov. 13, 2024 – PRESS RELEASE – Glass House Brands Inc., one of the fastest-growing, vertically integrated cannabis companies in the U.S., reported financial results for the third quarter ended September 30, 2024.

Third Quarter 2024 Highlights

(Unaudited results, unless otherwise stated, all results and dollar references are in U.S. dollars)

• Net Revenue of $63.8 million, an increase of 32% from $48.2 million in Q3 2023 and up 18% from $53.9 million in Q2 2024.
• Gross Profit was $33.4 million, compared to $26 million in Q3 2023 and $28.7 million in Q2 2024.
• Gross Margin was 52%, compared to 54% in Q3 2023 and 53% in Q2 2024.
• Adjusted EBITDA¹ was $20.4 million, compared to $10.7 million in Q3 2023 and $12.4 million in Q2 2024.
• Operating Cash Flow was $13.2 million, compared to $9.1 million in Q3 2023 and $8.9 million in Q2 2024.
• Equivalent Dry Pound Production² was 232,295 pounds, up 128% year-over-year.
• Cost per Equivalent Dry Pound of Production³ was $103 per pound, a decrease of 13% compared to the same period last year.
• Cash, Restricted Cash and Cash Equivalents balance was $35.1 million at quarter-end versus $25.9 million at the end of Q2 2024.

Management Commentary

“Glass House Brands achieved record-setting results for the third quarter of 2024, with all three business segments, wholesale biomass, retail and wholesale CPG, delivering positive year-over-year and sequential revenue growth,” said Kyle Kazan, co-founder, chairman and CEO of Glass House. “This included a 128% year-over-year increase in wholesale biomass production, a record low quarterly cultivation production cost of $103 per pound, and robust growth in retail and consumer packaged goods sales. Consolidated revenue for the quarter rose 32% year-over-year and 18% sequentially to $63.8 million. Adjusted EBITDA was a single quarter record high of $20.4 million, also above the top end of guidance.

“These strong quarterly results once again demonstrate Glass House’s ability to grow high-quality cannabis at the lowest cost. They also showcased the benefits of the retail dispensary strategic pricing plan, which has created higher foot traffic, an increase in transactions and better consumer loyalty in the face of the current challenging market conditions in California. Our stores outperformed the market by a massive differential of almost 18 basis points, with Glass House retail sales up 11.5% year-over-year, compared to a 6.4% revenue decline in the broader California retail market per Headset data. Our Allswell brand continues to drive growth in dispensary revenues in our retail stores as well as the broader market. It was a top three brand in unit sales for the second quarter in a row per Headset data. That is an amazing achievement, considering just 16 months ago Allswell was the number 21 brand in the state per Headset data.

“One of the brightest areas of our 2024 year-to-date performance has been the 9% year-over-year increase in cumulative CPG revenues through the first three quarters of this year and a simultaneous doubling in CPG gross margin to 26%. This was enabled by the late 2023 decision to concentrate marketing efforts only on our three top brands, Glass House Farms, Plus and Allswell, as well as by cost-saving measures implemented in our CPG supply chain and manufacturing processes.

“California, the most competitive cannabis market in the world, is experiencing pricing at levels which I would describe as destructive, meaning many cultivators in the state are likely having ‘going concern’ issues. While we expect lower prices to continue in the short-term, longer-term we expect Glass House will benefit, as our company is built to weather market cycles and emerge even stronger. Consolidation has always been our thesis, and we see this as an opportunity to expand market share. As such, we have already begun procuring equipment for the Greenhouse 2 retrofit. We expect to start generating revenue by the fourth quarter of 2025, with Greenhouse 2 production estimated at 275,000 pounds of cannabis in its first full year of production. As is our custom, we will incorporate the learnings from our currently operating SoCal Farm Greenhouses into the Greenhouse 2 retrofit as we work to meet our long-term annual cultivation cost target of $100 per pound. Besides the additional production volume, we also expect Greenhouse 2 to grow our highest quality flower and be the most consistent year-round thanks to the lights and other additional cultivation tools that will be part of the retrofit. The lights will also mean that its production should be less affected by the seasons and would allow us to take advantage of the cyclically higher prices in the first half of the year.

“Over the past six months, we’ve had many conversations with bankers about raising debt and equity capital, and we aim to raise approximately $25 million to fund our Phase III expansion with a focus on equity issuance. We have entered into an equity distribution agreement with ATB Securities Inc. and Canaccord Genuity Corp. to sell up to US$25 million in common equity in an at-the-market (ATM) distribution program. Because we can pay existing obligations from current operating cash flow and have no upcoming debt maturities for more than two years, we will strategically choose the most advantageous pricing and timing.

“We have procured our hemp license and are actively testing hemp strains at the farm so that we will be prepared to enter the hemp-derived cannabis space. We expect to make a final decision to move forward with large-scale production of hemp by the second quarter of 2025. Phase III capex spending requirements of $25 million to $30 million will remain the same whether or not we choose to pursue hemp-derived cannabis.”

Third Quarter 2024 Operational Highlights

Q3 2024 Financial Results Discussion

Net revenues for Q3 2024 were a record $63.8 million, representing growth of 32% compared to the year-ago period, and an 18% increase from Q2 2024 while slightly below guidance of $65 million to $67 million. All three business segments delivered positive sequential and year-on-year growth.

The core wholesale biomass business achieved revenue of $47.8 million, accounting for a record high 75% of total revenue and increasing 41% versus the same period in 2023 and 22% sequentially. Biomass production far outstripped guidance of 185,000 to 195,000, growing by 128% year-over-year to reach 232,295 pounds.

Retail and CPG revenue combined increased 8% sequentially and 11% year-on-year to $16 million, better than the guidance of low single-digit percent growth versus Q2 2024. This reflects the continued success of the company’s retail strategic pricing initiative and consumer demand for its brands. It is also the third straight quarter that retail and CPG revenue have outperformed the company’s guidance, despite the current highly promotional and price-driven retail landscape.

Q3 2024 retail revenue was $11.2 million, versus $10.9 million in the previous quarter and $10.1 million in the third quarter last year. Given that the company’s most recent store opening occurred in the second quarter of 2023, this growth was on a same-store sales basis. Retail gross margin was 44% in the third quarter, down 3 percentage points from 47% in the second quarter. This is consistent with expectations as the strategic pricing plan Glass House implemented earlier this year will result in downward pressure on its retail dispensary margins. As the company stated previously, it expects this trend to continue for at least the remainder of the year.

Wholesale CPG revenues were $4.8 million, representing 20% sequential and 11% year-over-year growth.

Third quarter consolidated gross profit was $33.4 million, compared to $26 million for the year-ago period and $28.7 million in Q2 2024. Gross margin was in line with guidance at 52%, and compares to 54% in the third quarter of 2023 and 53% in the second quarter of 2024. An increase in revenue mix from our highest margin businesses, wholesale biomass and retail, and a 7 percentage point increase in CPG wholesale gross margin were positive contributing factors.

The average selling price was $229 per pound, compared to guidance of $280 to $285 per pound and to $336 in the third quarter of 2023. Flower as a percent of total wholesale biomass sold during the quarter was in the mid-30% range, consistent with last quarter and lower than the 40% to 45% range during the same period last year.

General and administrative expenses were $14.4 million for the third quarter of 2024, down 5% from $15.2 million last year and 17% from $17.4 million in the second quarter. This decrease was mainly due to a reduction in the bonus accrual during the quarter caused by the decrease in the projections for adjusted EBITDA and operating cash flow for the 2024 fiscal year.

Sales and marketing expenses were $0.62 million, up from $0.56 million during the same period last year and down from $0.68 million in the prior quarter.

Professional fees were $0.9 million in Q3, compared to $1.9 million in Q2 2024 and $1.7 million in Q3 2023. The $1 million decrease versus Q2 2024 was primarily due to reduced legal expenditures following the dismissal of the Catalyst lawsuit against Glass House and the withdrawal of our defamation suit against Catalyst.

Depreciation and amortization in Q3 2024 were $3.7 million, consistent with both Q2 and the same period last year.

Adjusted EBITDA was a single-quarter record high of $20.4 million, above the high end of guidance of $18 million to $20 million and considerably higher than $12.4 million in the second quarter of 2024. This was driven by top-line growth and healthy gross margin performance across all three of our business segments as well as a reduction in general and administrative expenses and professional fees versus Q2.

Operating cash flow was $13.2 million, below guidance of $18 million to $20 million and compared to $9.1 million in the year-ago period and $8.9 million in the second quarter of 2024. The majority of the miss compared to guidance is related to an increase in working capital relative to our expectations.

As of Sept. 30, 2024, the company had $35.1 million of cash and restricted cash, up from $25.9 million at the start of the third quarter. The company spent $1.4 million in capex in the third quarter, which was mostly maintenance capex at our SoCal farm. The company also paid $1.9 million in preferred stock dividend payments and $1.9 million in principle on the WhiteHawk loan.

During Q3 2024, Glass House recognized $6.3 million of non-cash impairment expense related to the carrying value of several of our NHC store licenses. Although the company continue to win at retail, its current profitability projections, which are based on the strategic pricing initiative and the difficult California retail market, are below those made at the time of the acquisition approximately two years ago. This decrease in profitability required the impairment.

After careful analysis, management has determined that the company does not owe taxes for the application of Section 280E, and 2023 federal income taxes have been filed accordingly. This decision was made after consulting with external tax and legal counsel. The change will result in about $6 million of cash savings in Q4 2024. The company will also calculate 2024 federal income taxes using this position and is in the process of analyzing prior year federal tax returns to determine the size of potential 280E tax refunds owed to Glass House for the tax years 2022 and earlier.

2024 Outlook

The company is providing the following guidance for the fourth quarter of 2024 based on the strength of third-quarter results and current trends in 2024. This guidance does not contain any impact from potential Greenhouse 2 expansion.

Q4 2024 Outlook

The company expects Q4 revenue of $47 million to $49 million, an increase of 19% year-over-year at the midpoint of guidance.

Glass House anticipates Q4 biomass production of 160,000 pounds to 165,000 pounds, representing 57% year-over-year growth at the mid-point of guidance. This guidance, when added to actual results through the third quarter, implies full-year 2024 production of about 605,000 pounds which is 25,000 pounds higher than the midpoint of our prior guidance of 580,000 pounds.

The company projects that the average selling price for wholesale biomass will be in the range of $195 to $200 per pound. Wholesale biomass pricing has been weaker than expected since the second half of Q2 and has fallen below the lowest levels seen in 2022 and 2023. Glass House believes the current level of pricing is at an economically unsustainable level for many growers, and it expects to see a round of consolidation in the next 12 to 18 months similar to what it saw in the previous cycle.

The company projects that the Q4 2024 cost of production will be $125 per pound, compared to $121 per pound in Q4 2023. Our prior guidance for cost of production was $120 per pound for the second half of 2024. Based on Q3 results and Q4 guidance, our new second-half guidance is $112 per pound, a reduction of $8 per pound versus our previous guidance.

The company expects combined Q4 retail and CPG revenue to remain flat to Q3, as it continues to expect a highly promotional and price-driven retail landscape.

Glass House expects consolidated gross margin to be in the high 30% range, versus 45% last year in Q4. This is mainly due to the lower ASP.

The company projects that adjusted EBITDA will be $3 million to $5 million versus $3.8 million in the fourth quarter last year and that operating cash flow will be break even to negative $1 million, versus positive $1.4 million last year. This will result in an expected cash balance of about $28 million at year-end 2024 excluding Phase III expansion capex, or $23 million including Phase III capex. This guidance does not include the $11.5 million Employee Retention Tax Credit payments the company expects to begin receiving later this year and in 2025.

Capex is projected to be approximately $6 million, with $5 million to be spent on Phase III expansion and the remainder for maintenance capex. We will also make $1.9 million in dividend payments and $1.9 million in debt amortization payments.

At-The-Market Program

Glass House has entered into an equity distribution agreement (the “Equity Distribution Agreement”) with ATB Securities Inc. and Canaccord Genuity Corp., pursuant to which the company may from time to time sell up to US$25 million of its subordinate voting shares, restricted voting shares and limited voting shares (collectively, the “Equity Shares”) in an at-the-market distribution program (the “ATM Program”). The company currently intends to use the net proceeds of the ATM Program, if any, primarily for Phase III expansion and/or general corporate purposes. Launch of the ATM Program is subject to the approval of Cboe Canada, the delivery of customary closing deliverables and the filing of a prospectus supplement to the company’s base shelf prospectus dated May 16, 2024.

Since the Equity Shares will be distributed at trading prices prevailing at the time of the sale, prices may vary between purchasers and during the period of distribution. The volume and timing of sales, if any, will be determined at the sole discretion of the company’s management and in accordance with the terms of the Equity Distribution Agreement.

Sales of Equity Shares, if any, under the ATM Program are anticipated to be made in transactions that are deemed to be “at-the-market distributions” as defined in National Instrument 44-102 Shelf Distributions, as sales made directly on Cboe Canada or any other recognized Canadian “marketplace” within the meaning of National Instrument 21-101 Marketplace Operation.