Glass House Reports 2% Gross Margins For Q2, To Sell Preferred’s With 20% Dividend

Glass House Brands (NEO: GLAS.A.U) last night reported its second quarter financial results. While revenues were down on a year over year basis by 12%, there was a notable 18% improvement on a sequential basis, with revenues climbing to $16.5 million for the quarter ended June 30.

This 12% decline in revenue comes despite the company selling 38% more cannabis than the year ago period, demonstrating how bad saturation currently is within the market. Adding to that saturation is the fact that the company saw July production of 22,000 pounds of biomass, versus 25,000 pounds in all of the second quarter.

“We are poised to almost triple our revenue run rate to $200 million by 2023. Our competitive position remains strong as we continue to leverage the efficiency of our model to deliver high-quality cannabis at the lowest cost of production,” commented CEO and Chairman Kyle Kazan.

The saturated market that is California however continued to take a toll on the company overall, with gross margins of 2% being reported for the three month period, with gross profits amounting to just $0.3 million. Expenses meanwhile came in at $17.3 million, resulting in an overall net loss of $16.1 million. Adjusted EBITDA meanwhile was reported as being $9.8 million.

Cash on hand as of the end of the quarter was $17.5 million, a decline of $7.4 million.

The real news released yesterday however was that the company intends to conduct a preferred equity offering. The offering itself will see the company look to raise $26.5 million, of which $19.4 million is already committed. A further $23.5 million of preferred equity in a subsidiary of the company meanwhile will be converted to Glass House preferred equity, resulting in the series overall amounting to $50.0 million.

Preferred shares will be entitled to a 20% dividend in the first year, which is set to increase to 25% by year four. Paid quarterly, the dividend is to be paid 10% in cash, while the remainder is to accrue in principal. Every $10 of investment is also to come with two warrants, which contain an exercise price of $5.00 per share and are valid for a term of five years.

The problem with the preferred shares, obviously, is the rate at which they provide a dividend, relative to the companies cash balance.

At 20% per annum, the impact of $50 million in outstanding preferred’s is $10 million a year, half of which is to be paid in cash. With just $26.5 million in new capital to be issued in connection with the $50 million series being created, it’ll take just two and a half years in dividends for that amount to be fully consumed by the debt it creates, before considering the expanded interest from principal being added in lieu of payment.

Funds raised from the financing will see $10 million go towards the retirement of a bridge loan from WhiteHawk. The remainder will go towards working capital, which at the current rate of cash burn will provide the company enough cash to continue for roughly four quarters when combined with the current cash position.

The company however is currently guiding to being free cash flow positive in early 2023, despite the challenges it faces in the local market. The firm currently expects Q3 revenues between $27 and $30 million, while for the fourth quarter it is targeting revenue of $50 million.

Glass House Brands last traded at US$2.09 on the Neo.

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Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.