The Sun Shines Through Glass House
A Cash Flow Generating Quarter is a Fantastic Start to the Year
Glass House just announced a strong first quarter during a time when most California cannabis companies are struggling.
Sales increased 108% year-over-year, gross margins soared to 41% and the company cut $3 million in SG&A costs sequentially at the same time allowing Glass House to reach essentially EBITDA breakeven in their seasonally weakest quarter of the year (when production is the lowest due to low levels of sunlight and shorter days). Further, the company projected record quarterly sales in Q2, and that EBITDA will exceed $5 million in Q2 and continue climbing throughout the year despite a brutal California environment.
I have repeatedly made the case that what Glass House is doing is special and that the company has durable cost and quality advantages with their state-of-the-art greenhouse in Ventura County, CA that cannot be easily replicated.
In my Q1 investor letter, I wrote about how obvious it was that Glass House’s performance was so far superior that it was like the company was in a different industry when compared to Lowell Farms (OTC: LOWLF), another California operator with a greenhouse.
Not to pick on Lowell, but they announced their first quarter last week and announced 1.8% gross margins.
By now, even a blind person should be able to see how far superior Glass House’s cultivation capabilities are to every other California operator.
To pull off these results when every other large California operator is failing, spewing losses and on the brink of bankruptcy is simply amazing, but not surprising due to its special greenhouse and strong management team.
So, what’s next?
The company is remarkably only using 20% of its capacity at its Ventura greenhouse. Even with its incredible out-performance, capital is almost non-existent for cannabis companies. The company needs to figure out how to turn on its other greenhouses in a disciplined and cost-effective manner.
The ROI on the next greenhouse could not be better: $10 million capital cost should spit out $30 million of additional EBITDA. But what will the financing costs be? What is the timing?
Also, how will the dicey retail and brand market shake out the rest of the year?
These are great questions and for some answers and more please be sure to join my Twitter Space with CEO Kyle Kazan and President Graham Farrar on Tuesday the 16th at 10am pacific. The Space will be recorded. Here is the link:
Since so few investors are involved in cannabis and so few people cover Glass House, I will continue to write about the company as I think it is one of the most asymmetric opportunities I have ever invested in. Why do I think that?
Glass House can produce 1.5 million pounds of cannabis at a cost of approximately $100 a pound when they fully utilize their capacity. They are currently only producing 20% of what they can, but they selling it for around $300 a pound since their cannabis cannot cross California state lines. In other states, cannabis sells for much more, as much as thousands of dollars a pound. Once interstate commerce restrictions fall, Glass House has the opportunity to annually earn its market cap once or twice over when its capacity is fully utilized. Until then, it should thrive in California where is has a size and scale advantage and should earn solid returns in the largest cannabis market in the world.
The rest of the year should be quite fun as a Glass House investor, but it’s the long term that is so exciting and makes it such a fantastic opportunity.