Mar 17, 2022
Operator
Good morning. Thank you for standing by.
Welcome to the Glass House Brands Fourth Quarter and Year-end 2021 Investors Call. I would now like to hand the conference over -- call to Mr.
John Brebeck, Glass House Brands, Vice President of Investor Relations. Please go ahead.
John Brebeck
Thank you, sir. I'd like to welcome everyone to Glass House Brands fourth quarter and year-end 2021 conference call for the 3 and 12-month period ending December 31, 2021.
Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Glass House Brands’ future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements.
The risk factors that may affect results are detailed in Glass House Brands periodic filings and registration statements. These documents may be accessed via the SEDAR database.
I’d like to remind everyone that this call is being recorded today, Thursday, March 17, 2022. And I would like to introduce Mr.
Kyle Kazan, Chairman and Chief Executive Officer of Glass House Brands. Kyle, please go ahead.
Kyle Kazan
Thanks, John. Good morning, everyone and thank you for joining us for today's call.
I would like to take a few minutes to review our strategic priorities and provide an overview of our business positioning vis-à-vis the conditions of the California market and will give an update on our facilities. Mark Vendetti, our Chief Financial Officer, will then discuss our financial results for the quarter and year-end details.
Following which, Mark, Graham Farrar, our President and I will take your questions. I'd like to start with a highlight of 2021.
The acquisition of our 5.5 million square feet SoCal facility located in Camarillo, California which well positions us to produce at scale the highest quality craft cannabis at the lowest cost. Phase 1 is operational and construction is on time and on budget with a price tag of $30 million and includes approximately 500,000 square feet of nursery and propagation facility.
The nursery, which we believe is the largest for cannabis in the world, uses advanced operational approaches such as an ebb and flow system, which is a technology designed for efficiency and thus not commonly used for cannabis. The system allows for automated plant handling as well as the capture and recycling of both water and fertilizer.
This reduces COGS and helps insulate us from inflationary pressures. This is an example of our approach to making CapEx investments to lower our COGS which is key to our goal of producing the highest quality and lowest cost craft cannabis.
Beyond the nursery, Phase 1 includes an approximately 900,000 square foot Kubo Ultra Clima high efficiency greenhouse. We're also building a new distribution center, which will support the entire operation through all future phases of expansion.
Phase 1 of the SoCal facility is expected to increase our greenhouse footprint by approximately 1.6 million square feet, enabling us to produce an additional 180,000 dry pounds of craft cannabis. When Phase 1 is fully operational, the SoCal facility will make us California's largest and most efficient greenhouse grower.
Our total targeted long-term footprint is 6 million square feet. I'm happy to report that we have received all necessary approvals to operate Phase 1 of the SoCal facility, including all California state licenses for nursery cultivation and processing operations, and the local cannabis business license from Ventura County.
Phase 1 also includes a packhouse for distribution and the automation of clone transplanting and a second packhouse for processing to be completed in the near future. We have already commenced nursery activities and these plants will be transitioned to flower in greenhouse.
We look forward to our first harvest and sale from the facility which we project will occur in the third quarter of this year. We expect that the SoCal facility will allow us to significantly reduce our cost of production.
This quarter, we reported production costs of $166 per pound, down from $179 per pound in the third quarter of 2021, a savings of more than 7% and we believe we can eventually lower production costs to $100 per pound in the SoCal facility. Please note, however, that quarter one typically shows lower volume biomass output due to seasonality.
So, a quarterly uptick in cost of sales per pound is possible in that quarter. While this facility is extremely cost effective, it also enables us to produce cannabis in an energy efficient and environmentally friendly manner.
Situated in arguably the best agricultural area for cannabis cultivation in California, and with 20 acres of supplemental life, will have the ability to grow indoor quality cannabis at outdoor costs, using the site's solar and cogeneration capabilities. Our facility uses 95% less energy and generates 95% less carbon dioxide per kilogram of flower compared to the average indoor grow.
ESG is more than a commitment for us, it's a competitive advantage. Turning to our retail footprint, we are currently operating four dispensaries and expect to open our Eureka location during the third quarter, as well as our Isla Vista and Santa Ynez locations in the fourth quarter.
The Eureka location extends our retail reach into the heart of the Emerald Triangle, which some I referred to as the cannabis capital of the world. Isla Vista and Santa Ynez in prime areas which are both limited to a single license, providing the advantage of regulatory loading and what we expect to be robust retail markets, and these dispensaries will offer the same award-winning customer experience as our existing stores.
All three of these properties will be branded as pharmacy locations. We are extremely excited about these stores.
And after a 9 to 12-month ramp up period, we expect the revenue performance to be similar on average to the three existing pharmacy stores that we consolidate in our financials today. I would like to note that after additional due diligence, we decided not to pursue the Dunsmuir retail opportunity.
We are well-positioned to continue investing in and expanding our retail presence. We remain focused on exploring new opportunities and potential targets to scale our retail network through a mix of acquisitions, new license wins and partnerships.
Adding new stores to our portfolio provides what we refer to as the vertical advantage. By increasing the number of own stores, we expect to maximize our brand penetration.
We have historically sold 15x more volume of our own brands and stores we operate compared to non-Glass House operated stores. While we will increase our wholesale production, adding more to our CPG business is a core focus because it leverages our vertical advantage through higher margins and tax efficiency.
Late last year, we announced the definitive agreement to acquire PLUS, leading cannabis edibles company in California. PLUS is one of the state's top ranked brands in the coming segment, such that our combination with the company would place us in a top five position in both the flower and edible categories.
We're extremely excited about this transaction, which we expect will close during the month of April. Finally, I will address the current market conditions in California.
Wholesale flower prices bottomed in November, but extreme challenges remain. To be clear, we expected these conditions would come as commoditization as natural in all industries as they mature.
I would describe the wholesale pricing today as destructive, as there is too much flower on the market. Following the pattern of other states, which experienced this part of the cycle, many growers will be forced to cease operations.
Knowing this was coming was precisely why we set our sights on and eventually purchased the SoCal facility since low COGS is our strategy to not only survive, but to thrive going forward. I expect that the most efficient growers will persevere and pricing will continue to slowly rebound, but not to the levels we saw pre-commoditization.
For clarity, we are not experiencing a demand issue as that remains quite strong. Oversupply is causing the price disruption.
Because of the continued strong demand in the market for our flower, we exceeded our original projections for top line revenue growth driven by a 27% increase in dry product sold versus the third quarter. Our push now is to lean in and fully expand into our first phase expansion at SoCal, as we expect the transaction -- sorry, the transition will position us to have positive margins even if this unsustainable lower pricing continues for prolonged periods.
In other words, this new facility will allow us to grow profitably when almost nobody else can. The strength of our Glass House Farms brand is also another factor that should ensure Glass House Brands continued success.
Since late 2020, we have maintained a top three or above ranking based on BDSA data, and we were ranked number one at the end of the fourth quarter. With that I will turn the call over to Mark for a review of our financials for the quarter and the year.
Mark?
Mark Vendetti
Thanks, Kyle, and good morning, everyone. As a reminder, the results I will be sharing today can be found in our financial statements and MD&A, which are reported in U.S dollars and prepared in U.S GAAP.
Total revenue for Q4 2021 was $18.4 million and beat our guidance for the quarter of flat to down slightly by $1.2 million. These results represent a 7% increase over Q3 '21and an 8% increase over Q4 2020.
The sequential revenue growth was driven by wholesale biomass sales, which increased 31% compared to Q3 2021. Retail sales declined 2% and CPG sales declined 4% versus Q3.
We are pleased with the results as we continue to navigate the difficult California cannabis landscape. From a market perspective, Headset estimated total cannabis sales declined 4% in the quarter compared to Q3.
This compares to our retail sales decline of 2% which includes our three consolidated dispensaries in Santa Barbara, Berkeley and Santa Ana. Please note the Pottery dispensary is a partnership and accounted for using the equity method.
Within the cannabis market flower sales decreased 11% compared to our 4% decrease in CPG revenue. In both cases, we beat our relevant benchmarks.
In biomass, revenue increased 31% over Q3, despite continued wholesale price declines that started earlier in the year. Prices continue to fall in the fourth quarter of 2021 when compared to the third quarter.
Average pricing for our flower fell 27% in the quarter, while smalls dropped 59%. This resulted in a $3.2 million drop in revenue and gross margin versus Q3 prices it held into Q4.
As Kyle mentioned, within the quarter, our wholesale prices reached their bottom in November, but it stands rebounded in January and February with flower pricing up 20% and smalls up 12% versus our Q4 average. The current pricing is consistent with our forward-looking internal budgeting for biomass prices for the remainder of the year.
We were able to achieve these results by selling 27% more dry weights than the prior quarter and increasing our mix with higher priced flower and smalls sold from 27% of total weight sold in Q3 to 47% of weight sold in Q4. These results continue to reinforce our belief that current -- that the current pricing environment is caused by overproduction and not by a lack of demand.
Revenue for the fiscal year 2021 was $69.4 million, an increase of 44% versus the prior year. The increase was driven primarily by our CPG business which increased 93% as a result of the strong growth in Glass House Farms brands.
Again, from a BDSA analytics, the brand grew from the -- flower brand rank below number 16 in California flower sales in the first quarter of 2020 to a consistent top three brand during each quarter in 2021. Retail sales increased 50% driven mainly by the full year impact of our Berkeley store opened in January of 2021.
Wholesale biomass increased 8%, but was negatively impacted by large declines in wholesale prices, particularly during the second half of 2021. On average for the fiscal year, we experienced that 38% decrease in our flower prices and a 45% decrease in smalls between 2020 and 2021.
If 2020 average pricing had been unchanged versus 2020, our 2020 wholesale biomass revenue would have been $12.1 million higher and we would have shown a 67% year-over-year increase in our biomass revenues versus the actual 8% growth. In other words, we lost $12.1 million in potential revenue due to the declining prices in 2021.
Gross margin for the fourth quarter was negative $0.4 million or negative 2%. The quarter included roughly $3 million of non-cash expenses related to inventory reserves for obsolete or slow-moving product as well as inventory revaluation for our biomass live plants to lower values to reflect current production costs.
These expenses reduced gross margin by 16 percentage points. These costs are reflected in the inventory values on a balance sheet as well, which decreased by almost $5 million versus Q3.
In addition, the $3.2 million of lost wholesale biomass revenues due to price declines that we discussed earlier in the revenue comments, reduced margins by an additional 15 points in Q4 '21 versus Q3. Gross margin for fiscal 2021 was 23% compared to 39% for fiscal year 2020.
The decrease in average biomass pricing in fiscal 2021 versus 2020, most of which occurred in the second half of 2021 accounted for the majority of the decrease in gross margin, and decreased gross margin by approximately 11 margin points. The gross margin was also hurt by the earlier reference $3 million inventory reserves and revaluation.
Q4 '21 general and admin expenses increased by $5 million when compared to Q3 '21. The current quarter contain $3.2 million of non-operational notes receivable charged to bad debt reserve.
$2.2 million of the reserve is related to the Element 7 transaction and an additional $1 million is related to a note issued to our Pottery venture. There is an additional $1 million G&A related to startup expenses associated with our SoCal facility and the expansion of our retail footprint within the quarter.
Q4 '21 marketing expenses increased $0.3 compared to Q3 '21, primarily due to seasonal promotions, digital marketing and trade marketing. Professional increased by $0.4 million primarily relating to spending to support the company's expansion initiatives.
Depreciation and amortization increased $1.7 million in Q4 '21 versus Q3 '21 because of the capital spent in our SoCal facility during the fourth quarter. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, adjusted for transaction costs, restructuring cost, share-based compensation and other non-cash operating costs.
Adjusted EBITDA was negative $9.1 million in Q4 compared to negative $5.4 million in Q3. The decrease of $3.8 million is primarily caused by lower wholesale pricing and inventory reserves in Q4 that negatively impacted gross margin.
We ended the quarter with $54 million in cash including $3 million of restricted cash, up from $28 million at the end of Q3. During the quarter, the company entered into a credit facility with WhiteHawk Capital Partners to provide up to $100 million in gross loan proceeds.
The company closed on the initial term loan with gross proceeds of $50 million in December, resulting in $47 million net addition of cash. We spent $11 million on CapEx during the quarter with the majority of that spent on Phase1 hit our SoCal facility.
Operating cash flow in Q4 was negative $8 million. Net loss for the quarter of $19 million was offset by non-cash items including bad debt expense of $3.3 million, depreciation and amortization of $2.5 million and share-based compensation of $3.2 million.
This compares to operating cash flow of negative $10 million in Q3. Looking into 2022, we are assuming for budgeting purposes that the difficult market conditions and current level of wholesale pricing persists throughout the year, which makes the addition of the SoCal facility even more critical to Glass House Brands.
As Kyle mentioned, we expect to begin generating revenue from the new facility in the third quarter of the year with output ramping up through the rest of the year and approach -- approaching annualized production rates for Phase 1 in Q4. The ability to produce high quality craft cannabis, and an extremely low cost of sales will allow us to succeed in these difficult conditions.
We are in the final stages of our PLUS acquisition and expect to close this in April. This brand has an annualized revenue run rate of $14 million based on 2021 trends.
We have already begun integration planning and are also actively developing plans to use both Glass House farms and PLUS Gummies respective retail distribution presence to help improve the other distribution to get incremental sales. In addition, we have plans to aggressively manage overhead as we look to combine organization.
The acquisition of this brand when combined with Glass House Brands is expected to increase our CPG revenue to approximately $40 million on a pro forma basis based on 2021 results. Kyle and I have both discussed the difficult state of the California market on this call.
As the year unfolds, we believe there will be many opportunities to make additional acquisitions of good assets at the stretch values and we will rigorously continue to evaluate opportunities as they arise. It is very important we acquire assets at the correct price and with the right strategic set.
This effort will be led by our Chief Business Development Officer, Erik Thoreson. As part of the acquisition strategy, we will evaluate additional sources of capital to help fund this expansion as needed.
With our size and scale, we feel we can be attractive partners and most potential acquisitions. Finally, the cultivation having started in our SoCal facility, we are even more focused on the cash flow potential of the company.
Assuming wholesale and CPG pricing remain stable throughout the year and into next and we were able to deliver our current production metrics and fully utilize our Phase 1 production capacity, we believe we are on path to generate positive cash flow from operations by early 2023. I will now turn the call back over to Kyle.
Kyle Kazan
Thanks, Mark. Finally, I'd like to take a moment to talk about a cause I'm particularly passionate about, the Weldon Project.
The Weldon Project is a nonprofit organization co-founded by former cannabis prisoner, Weldon Angelos. The organization is dedicated to gaining the release and pardon of all nonviolent cannabis prisoners, along with ending the federal prohibition of cannabis.
Having worked with the Weldon Project since 2020, Glass House was honored to donate $25,000 in December, and I was equally honored to join the project's Board of Directors to further support the organization's ongoing mission to assist individuals incarcerated for nonviolent cannabis related offenses. We look forward to spearheading fundraising initiatives for this important cause, while I lean in to support the organization as a member of the Board.
With that, I will turn the call back to John Brebeck. John?
John Brebeck
Thank you, Kyle. At this point, I'd like to turn the call over to the operator to begin the question-and-answer portion of the call.
Operator, turning over to you.
Operator
Thank you, sir. [Operator Instructions] Your first question comes from Scott Fortune with ROTH Capital.
Please go ahead.
Scott Fortune
Good morning. Very early here in California, but appreciate the update on the SoCal facility and the plantings and timings.
But can you provide a little color on the quality and the ability to compete with kind of the indoor quality flower with your post-harvest processes that you put in place from that standpoint? And then, kind of follow-up question on that.
And how and what are you looking at for in the California market to eventually start developing the Phase 2 of your facility from that standpoint?
Kyle Kazan
So, Scott, thank you. Thank you for getting up early because we feel your pain.
So, thanks for that. I'm going to ask Graham to answer that, the first question and even start with the second and I can follow-up.
Graham Farrar
Sure. Hey, how's it going Scott?
Thanks for the question. Yes, so going after indoor quality is very much our goal, particularly with the SoCal facility.
I would note that in the past even with our existing greenhouses we did a Glass House Farms growers choice product, which was kind of our premium line there. And part of that are of actually marketing campaign on that was to do a blind taste test with cannabis influencers and connoisseurs between the flower that we grew and our existing greenhouses, an indoor cultivated flower.
The SoCal facility, we think where you're going to get even further along on the quality path because of the design of those greenhouses. If you think about indoor, it's really just shorthand for good climate control, and the entire SoCal facility is built for ultimate climate control.
But doing that leveraging what mother nature gives us naturally. So, we take mother nature, and then we polish her and supplement her that high positive pressure greenhouses, humidity control, temperature control, CO2 supplementation, our goal is not at all to compete -- competing with outdoor.
It is entirely to be competing with indoor and providing consumers a product that to them is functionally the same, at a much lower cost and in a way that's a lot more sustainable for the planet. To your second question, the -- our expect -- expectations were basically just going to continue the retrofit.
We're going to roll through Phase 1, which is the first flowering greenhouses. There's [indiscernible] flowering greenhouses behind it.
I think we have a really great setup there, where the greenhouses, the square footage that's not used for cannabis is currently leased to a vegetable grower in a way that covers all the carrying cost. So, we can be excited for additional expansion, but not anxious and not having to burn from parts of the facility that aren't yet converted.
So, our expectation is with the quality and costs that we're targeting, that there's going to be plenty of demand for what we're growing, in which case just like now, where we could sell 3x as much as we are, if we had the supply. We think after we finished Phase 1, the market is going to see the quality and see the cost, and we're going to be excited to do the additional phases after that.
Kyle Kazan
And Scott, let me ask Mark, he's got some -- a little bit of color on the numbers on the second question.
Mark Vendetti
So, Scott, within our credit agreement with WhiteHawk, we do have certain, I'm going to say performance metrics that were called out related to sales and EBITDA. The sales target is $15 million over a 90-day period and the EBITDA target is I think, $2.25 million over that same period.
So, as we ramp up the facility, our expectation is we should hit that before year-end. And once we hit that, we'll move on to the second phase of the project.
Scott Fortune
I appreciate the color. It's helpful.
Thank you. And then switching to kind of the California regulations.
Obviously, there's onerous taxes that the legislature and even the governors are looking to potentially repeal here. Can you provide any little bit color on that?
And then -- how are you looking at the organic retail store potential in California still slow bureaucratic process for a lot of these city set that proves, bringing stores on board, kind of the organic side, and then also the M&A side, what are you seeing? Are you seeing retail owners approaching Glass House now?
And the valuation starting to get geared at more impressed [ph] levels that make it interesting from that standpoint to expand your retail presence?
Kyle Kazan
Yes. So, Scott, good questions.
I will tell you that, as you can imagine, being California focused, we are very engaged with our state representatives and leaders. If you ask me just, I think it's -- people ask me at the ROTH Conference, what I would pin that, I would say probably 95% chance that we're going to see cultivation tax go away.
And I think that that's our second largest cost to grow if you throw that in. So, it'll be great for the market, it'll be great for us, it will make us more competitive with the illicit.
In regards to one of the other big call outs, 65% of the state of California is still illegal when it comes to retail. I will tell you from watching the governor and the legislature, their action, they got frustrated when cities were not allowing development.
And they went ahead and they just went took away local control and pass an ADU law, which allows any real estate owner to look at just adding units and ignore what the local city does. They haven't threatened it, but I will tell you, it caught the ire of many mayors that I talked to here in LA.
And so, I would tell you that the Governor and Nicole are serious about increasing. So, I think what we'd see is -- my expectation is you'll see a little bit of that velocity pick up where more and more cities are opening.
So that's we're looking at. And the last question, in regards to acquisitions, if you're not vertically integrated in California, it is -- right now, as we said, kind of acknowledging on the call.
It's a destructive environment, like most companies are losing money. And so, if you are a retailer faced with 280E, and you have one or two stores, or even if you have five stores, it's a really tough go right now.
And you don't have say, banking. So, I would tell you that there is interest to speak with us, for sure.
And I'm sure a couple other large companies too. But I would tell you that I think you're going to start to see more consolidation over the next 12 to 24 months than we have thus far.
Graham Farrar
Yes, I can add just a little bit to that too, Scott. On the legislative side, there's currently four bills circulating on tax reform.
And there's basically two topics that the governor [indiscernible], lower taxes and more retail, which we believe are exactly the right spots to be aiming at. So, there's four bills circulating on the tax reform side, every single one of them proposes removing the cultivation tax.
So, on the most conservative side, they want to put the tax elsewhere, which would still be an improvement. On the most aggressive side, not only do they want to remove cultivation tax, but they're proposing cutting the excise tax from 15% to 5%.
So, I think there's a lot of positive reform out there. The additional thing they're doing is they're doing some developments so that cities and municipalities, as Kyle mentioned, 65%, still ban cannabis would have a very easy pathway and not have to build an ordinance on their own, which has been a lot -- with a lot of the friction is from going from prohibited to allowed into the state would basically give them a template that they could tack on to.
And on the retail side, I think we're in a really good position because the vertical integration that Kyle mentioned, where even a door, a retail store, that's breakeven on a unit basis, can be accretive to us, because we sell about 25% of the revenue is our own brands in our stores. So even a store that's breakeven still represents a significant increase in CPG sales for us.
And that's the power of the vertical integration where there's lots of different ways and synergies that we can find by taking everything from cultivation, processing, brands and retail and putting them together.
Scott Fortune
I appreciate that. Thanks for unpacking that, and I will jump back in the queue.
Operator
Thank you. [Operator Instructions] There are no further questions.
Mr. Brebeck, back over to you.
John Brebeck
Okay. Thank you very much.
This has been our call for Q4 '21 earnings. We welcome you to join us in about a month's time when we reporting our call -- our earnings for Q1 in 2 months time, apologies.
So, thank you all for joining us at this early hour. This concludes our call.
Operator, turn it back to you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Have a great day.