After a brief wait, Glasshouse Brands ($GLAS.U) released their Q4 F2021 financials.

Our last look at them (and their momentum) was a little dour, but driven by several reasons. $GLAS.U is in the midst of increasing speed on a metaphorical cultivation highway, but there’s currently no visible exit ramp for the increased production. They lost their deal with Element 7 (or more accurately, it’s in legal limbo & TBD), and wholesale price decay has proven challenging to increasing revenue. They did secure financing in December to support the development of Phase 1.

Unless and until interstate commerce becomes a ‘thing’ – intra-state sales and organic growth will need to suffice.

Their share price has seen some durability lately – lifted by the sabre rattles of the lobbyists and regulatory mavens who remain optimistic that some sort of banking reform will get done in this Congress:

There’s a ton of outfits releasing now that are on my plate – as well as the Cresco Labs ($CL) Columbia Care ($CCHV) takeout. So, let’s get on it.

To the financials!

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• Cash at $51MM. That’s up $21MM from quarter previous, but a new $44MM Note payable now exists – more below.
• Inventory down $5MM QoQ – looks like they’re selling through their bulge of last quarter.
• $18MM in sales, $18MM in COGS. Small negative gross margin reported in this quarter. That’s set against $14MM in SG&A (yeep).
• Yet, they’re in full ramp of Phase 1 now, and that QoQ increase in SG&A (~=$5MM) makes up most of the increase. Professional fees ballooned in the year to $9MM. An increase was to be expected – and we find out that it cost $5MM to ultimately close the greenhouse (Camarillo) acquisition. It had been subject to multiple revisions while $GLAS’s share price declined, and that’s likely a big driver.
• Those Bella Boxes I referred to last time sold $1.4MM during Q4, down $400k QoQ. A hat tip to $GLAS.U on disclosure – it’s been improving every quarter so far.
• Worryingly, their Retail sales over the past 3 Q’s (oldest to newest) have been $6.9MM, $5.2MM, $5.1MM.
• During the same periods, wholesale has been $12.2MM, $11.9MM, and $13.2MM. That sales mix isn’t optimal, nor is the trend – and they’re going to need retail incitation far more than they’ve been demonstrating.
• A deal done late in the year saw $GLAS.U acquire ‘Plus Products’. Initially, the deal, touted at $25.6MM – has ultimately come in at $33MM in shares/convertible debt/RSU’s (Note 22). It’s quite the feat, in that $GLAS.U acquired the company from receivership.
• Plus had announced a ‘record quarter’ of sales back in early August of 2021. 5 weeks later, Plus applied for creditor protection, and that was that. Plus blamed their business failure on the slow dispensary rollout in CA – and has now landed in $GLAS.U’s lap.
• We’ll have a look at Plus’ run rates and gross margins – but probably not until Q3 F2022. That’s quite a wait. In late September, Plus was still messaging that they’d simply restructure, and continue on as ‘normal’. Obviously, that changed – or was a pipe dream in the first place (my guess would be firmly on the latter).
• Intangibles and Goodwill at $GLAS.U are a mercifully low $9MM (~=$5MM & $4MM respectively) – but – that’s gonna change thanks to the acquisition of Plus Products (an edible manufacturer/brand). More below.

Ok.

Ultimately, they’ve burned $20MM on operations – across $70MM in revenue during 2021.

Regarding that $50MM Note Payable – the total amount available ($100MM) is contingent on the lender, and on a very short leash. The first tranche also ended up being pretty expensive. Note 16 (iv) details the initial cost included 2MM of 3 year warrants going out to the lender as well. $GLAS.U recorded a $3.3MM expense against this (spot on to my calculation), and is required to hold 6% of the loan amount ($3MM) as ‘restricted cash’. The remaining $50MM available has been bifurcated into 2 tranches too – which increases total cost. The disclosure up front and in the financials on this are very good, while also revealing that this money is locked up very tightly by the lender:

The greenhouse deal itself finally closed (as mentioned) – and we get a trued-up value for the contingent consideration attached, which grew $7MM over the quarter. If there’s one enhancement to financial statement disclosure I’d like to see in the cannabis sector – it would be the terms around ‘contingent consideration’ paid in acquisitions. It’ll never happen (sadly), but a boy can dream:

What’s notable in the table above is the ‘new’ $7.6MM that emerged over the 4th quarter. That value has accrued to Mercer Park L.P., who sponsored the Glasshouse SPAC. You might recall that Mercer Park is run by AYR Wellness’ own Jonathan Sandelman. This $7MM represents the remaining 66% of $GLAS.U’s obligation to Mercer Park – as this quarter saw a third of 1MM shares held in lockup released. A bit of a jack-in-the-box kind-of surprise – but hey – it was disclosed up front (previously in ‘derivative liabilities). It’s all in the fine print of $GLAS.U’s formal ‘birth’ at the end of June 2021. As to when/if this remaining $7MM gets released, well – it’s perfectly in line with how I’d think a banker would structure their contingent payout:

The remaining Equity Shares are subject to a capital-based earnout of permitted debt or equity financings within one year following closing as further defined in the Investor Rights Agreement entered into on June 29, 2021

Hey – $7MM in equity going out the door for zip isn’t much – but it is 2.5% of the existing share count. I went into this to illustrate complexity within deals – and emphasize how important ‘trust’ is in leadership in a nascent sector. I’ve no view to this deal in particular, but I’m reflexively turned off by this level of financial structuring around selling dope. Maybe I’m just getting old.

Their total PP&E now stands at $195MM – $178MM of which is mainly attributable to Camarillo.

I think $GLAS.U is a tale of how risk tangibly impacts an outfit. We had a look at their footprint when Mercer Park flipped the switch – and I’ll refer to it here to illustrate how far marketing pamphlets can stray from reality.

Yes, Phase one is underway, and frequent videos from grower Graham Farrar is documenting the build. But the collapse in gross margins in the first 2 quarters was due to the grow being linear: it had no nursery potential, so all feedstock were externally sourced clones (which in turn, hammered margins).

As well, an existing run rate of ~=$54MM/yr in sales has ended up being $69MM for 2021. A half a billion dollar deal to acquire the greenhouses, and now an incremental spend (vis a vis debt) of $100MM is being undertaken after a quarter billion in paper – was committed. The SPAC process itself mitigated exposure for early participants who exited, and $GLAS.U bore a good chunk of risk when cash holdings diminished. <Ultimately, I think it’s a pretty good example of how SPAC’s are supposed to help diffuse risk>

I see severe challenges if wholesale/retail off-take doesn’t match the ramp. There will be no cowboy riding in with a white hat to buy it from them – certainly not in California. Competitors would love nothing better than to see inventory accumulate on someone else’s books. Which, leaves price.

$GLAS.U has always stated their low cost advantage will see them through the inevitable winnowing of cultivators and sluggish storefront growth. CA’s a competitive market now, and IF incremental production at scale (and if quality comparative) comes forward – one could envision an Oregon-ian like landscape happening in CA.

I doubt Sandelman/Kazan envisioned the cumulative events that’s occurred so far in $GLAS.U’s existence. They desperately need to find outlets for their gear (preferably retail). A genuine upside is that the tenor of their debt is *somewhat* aligned with the larger macro perspective (2026). That’ll probably shift with the ‘how much’ and ‘when’ the new Plus convertibles come in at.

I like the idea behind $GLAS.U – that of interstate trade coming about. But, it all comes down to the timing of that, and the inherent quality of the product. If you like risk, $GLAS.U offers up buckets of it in these two facets alone.

They desperately need an outlet for their gear in any event, and until some sort of catalyst like that occurs, this thing is radioactive to myself. If I put myself in $GLAS.U’s shoes – and was to spend $33MM to acquire something – anything – it would have been on increasing core sales potential – and not a failed edible manufacturer. Maybe one believes the Element 7 thing will sort – perhaps. But the timing of it and any positive resolution currently lays as simply yet another risk. Not to mention the capital that’ll be required to consummate that deal (~=$35MM).

We’ll ultimately see what $GLAS.U got for that $33MM in Plus. And if there isn’t already enough risk here as is, we’re also going to have to wait until September to actually find that out. There are few companies I’ve seen out there in cannabis that face so many strategic challenges concurrently as $GLAS.U.

The preceding is in the opinion of the author, and is in no way written nor intended as a recommendation to buy or sell any security or derivative. The author holds no positions in any of the companies mentioned.