GLASF 1Q23 Earnings
Glasshouse Brands (GLASF) is a Hedgeye Cannabis Best Idea Long.
We continue to be impressed by the results the company is putting up, as well as the forward-looking plan that management has put together. In 1Q23, Glasshouse exceeded its guidance for production, revenue, and margin while narrowing its adjusted EBITDA losses. The company also noted that they became free cash flow positive in the quarter, which they had previously said would happen in 2Q23. To become free cash flow positive ahead of schedule is quite remarkable considering the pressures facing consumers, excessive taxes, 280E, price deterioration, and operating in the most competitive cannabis market in the world. The company also released its plan to expand its Southern California farm by building out its second greenhouse. This second greenhouse will cost $10M to build it out and will produce an additional 250k of biomass every year. This additional greenhouse will increase biomass production by 80% and increase gross profits by $30M annually. It is to be noted that after this build-out is complete, Glasshouse is still only using 40% of its Southern California farm for cannabis production, meaning there is still plenty of room to expand cultivation.
Back to the quarter, net revenues came in at $29M (guided for $27-$29M), which represents a YoY increase of 108% but down 10% sequentially. Wholesale biomass revenue accounted for $14.5M, up 182% YoY but down 7% sequentially. Retail revenue accounted for $9.4M, up 93% YoY but down 12 sequentially. Wholesale CPG accounted for $5.2M in revenue, up 30% YoY but down 13% sequentially. Consolidated gross profit was $12.0M, or 41% of net revenues. This is the highest gross margin percent since 2Q22 which was the last quarter before wholesale prices began their large decline. Importantly, gross margins in each of our three business lines were flat or showed improvement on both a sequential and YoY basis. The sequential increase in gross margin was primarily due to a 23% sequential increase in the average wholesale biomass selling price, which rose to $290 per pound. Adj EBITDA was $(0.1)M, compared to an adj EBITDA loss of $2.6M in 4Q22. The increase was driven by top-line growth, gross margin expansion, and improved management of operating expenses. They generated $4.5M of cash from operations. Cost per pound in the quarter increased to $196, down 18% YoY but up 54% sequentially, which was driven by seasonality and tough weather conditions.
In terms of guidance, management noted that they expect wholesale prices to stay elevated for the rest of 2023 and will have both positive free cash flow and adj EBITDA for the remainder of the year. Management also noted that 1 in 4 cultivation licenses are up for renewal in the coming three months. Preliminary cultivation licenses in California are also going away in 2023, and there are much harder qualifications to have an annual license versus a preliminary license. All said the back half of the year is setting up for less biomass to be on the market meaning prices should, at the bare minimum, stabilize. Glasshouse did reiterate its revenue guidance of $160M for 2023 but is shifting sales between our segments. They are increasing their wholesale revenue projection to $100M (from $85M), reducing its CPG revenue guidance to $20M (from $25M), and reducing its retail revenue guidance to $40M (from $50M). For fiscal year 2023, they are also raising their biomass production estimate to 315k lbs (from 310k lbs), but raising our cost of production estimate to $140 per pound (from $130). Given the state of the wholesale biomass market, with strong demand and improving pricing, management has increased their emphasis on maximizing production, which is reflected in our increased production estimates. They remain confident in their long-term cost target of $100 per pound.
To sum it up, we are thrilled with what we are seeing from Glasshouse Brands. They continue to execute its plan to be the low-cost cultivator in California and the world. If they can put up these types of results when everything seems to be going against the cannabis industry, just wait and see what happens to them when they have some tailwinds at their back. GLASF remains our top long idea in the cannabis space.
California Cannabis Trends
In the month of April, California recorded ~$410M in cannabis sales, which represents a sequential decline of 2% and a YoY decline of 8.8%. Unit volumes in the month were down 0.1% sequentially but up 0.4% YoY. The average price per unit was down 1.9% sequentially and down 9.1% YoY.
AYR NEEDS CASH
AYR Wellness announced that it had reached an agreement with Elk Spring Partners to amend the earn-out payment terms relating to the company's acquisition of New Jersey-based GSD NJ, LLC. The earn-out formula and payment terms under the MIPA were amended as follows: The first $10M portion of the earn-out will continue to be payable in cash, and payment is expected to be made to the NJ Counterparties by May 19th. The next $14M portion of the earn-out, which was to be satisfied by issuing 12.5% promissory notes due September 2024 with interest and principal payments, will instead be satisfied by issuing 13.5% promissory notes due December 2026 with monthly interest-only payments until May 2024. This amendment results in a meaningful extension of the maturity date and delays repayment of principal, thereby preserving cash on the balance sheet in the short term.
