Mr. Kyle Kazan reports

GLASS HOUSE BRANDS REPORTS SECOND QUARTER 2022 FINANCIAL RESULTS

Glass House Brands Inc. has released its financial results for its second quarter ending June 30, 2022.

Second quarter 2022 highlights (unless otherwise stated, all results and dollar references are in U.S. dollars):

• Net sales of $16.5-million decreased 12 per cent from $18.7-million in Q2 2021 and increased 18 per cent sequentially from $14.0-million in Q1 2022.
• Gross profit was $300,000, compared with $8.6-million in Q2 2021 and $2.3-million in Q1 2022.
• Gross margin was 2 per cent, compared with 46 per cent in Q2 2021 and 17 per cent in Q1 2022.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $9.8-million, compared with $2.2-million in Q2 2021 and negative $6.4-million in Q1 2022.
• Cost per equivalent dry pound of production was $158 at Casitas and Padaro farms, a decrease of 18 per cent compared with Q2 2021 and down 34 per cent sequentially versus Q1 2022.
• Equivalent dry pound production was 25,188 pounds, up 9 per cent year over year and 51 per cent sequentially.
• Cash balance was $17.5-million at the quarter-end, compared with $24.8-million at the Q1 2022 quarter-end.

Management commentary

"We continued to make solid progress against our strategic growth priorities during the second quarter," stated Kyle Kazan, chairman and chief executive officer of Glass House Brands. "The initial harvest from our SoCal farm was completed in late May followed by the first sales of cannabis grown at the facility in June, both well ahead of schedule and significantly faster than the previous ramp-up of our Casitas and Padaro farms. Over the past few years, our Casitas and Padaro farms have established a strong reputation for consistently growing high-quality cannabis at a low cost. So, I can't emphasize enough how thrilled we are that the SoCal farm is already producing cannabis with a higher and more consistent quality than the Casitas and Padaro farms. In addition, it has shown particular promise at growing high-quality genetics at extremely close to indoor quality. Volume has ramped quickly and, in July, we produced 22,000 pounds of biomass across all three facilities, compared to a total of 25,000 pounds in the entire second quarter.

"In April, we closed the acquisition of the Plus Products business, becoming the first California operator with top five brands in both flower and edibles. We are now the only edibles company that controls the process from plant to product, and our marketing team is already developing products that leverage our unique ability to make self-grown strain-specific products. We are swiftly integrating Plus into our organization and, in the short few months since closing, it has been accretive to our financials and shown potential to be a strong contributor to Glass House's overall cash flow generation. We expect to realize synergies in distribution of both Glass House Farms and Plus in the second half of this year, and we have major product innovations planned for the fourth quarter.

"Our aggressive retail expansion also remains firmly on track and we are on pace to have at least 11 dispensaries by year-end 2022, up from three just over a year ago, when we started our life as a public company. We closed our acquisition of the remaining 50-per-cent equity stake in The Pottery Dispensary in July and expect to open three new Farmacy locations in the fourth quarter. In May, we announced the acquisition of three Natural Healing Center (NHC) dispensaries and we are moving forward on closing these acquisitions. In addition, we are very happy to announce that we have agreed to acquire Natural Healing Center's flagship Grover Beach store for $15.9-million, with $8.1-million of the purchase price in assumed debt, $7.7-million in stock and $100,000 in cash net of working capital. The Grover Beach store is the crown jewel of NHC's dispensaries and netted $16-million (U.S.) in revenues in 2021. It is one of only four total dispensaries in Grover Beach and is the No. 1 taxpayer in the city, given its high sales volume and strong cash flow generation. The deal multiple based on the annualized EBITDA of the Grover Beach store in the first half of 2022 is 4.8 times.

"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. We are announcing today a new preferred equity financing to provide additional capital to solidify our balance sheet and we expect to be free cash flow positive by the first quarter of next year, excluding capital expenditures for facility expansion."

Second quarter 2022 operational highlights:

• Glass House Brands completes acquisition of Plus, a leading California edibles brand;
• Glass House Brands to acquire remaining equity, property ownership in The Pottery Dispensary;
• Glass House Brands to acquire three Natural Healing Center dispensaries;
• Glass House Brands completes first SoCal harvest ahead of schedule.

Subsequent events:

• Glass House Brands completes the acquisition of the remaining equity ownership in The Pottery Dispensary.

Preferred equity offering of $26.5-million

Glass House Brands is announcing a private placement of preferred equity shares with a target raise of approximately $26.5-million. The company intends to use $10-million of the proceeds to retire the bridge loan from WhiteHawk and the remainder for working capital, including capex to complete the buildout of the new Farmacy stores. Glass House Brands has received $10.7-million in cash-in-hand and signed agreements, and additional commitments of $8.7-million for a total of $19.4-million of Glass House Brands preferred shares. Additionally, the company will convert the existing $23.5-million of preferred equity issued by the company's subsidiary, GH Group Inc., in 2021 into the Glass House Brands preferred shares to create a $50-million series. The company currently has commitments to convert $22.5-million of the $23.5-million of existing GH Group preferred equity. Holders of the Glass House Brands preferred shares will be entitled to a 20-per-cent dividend that gradually increases to 25 per cent by year 4. The dividend will be paid quarterly with 10 per cent in cash and the additional amount accruing to the principal. In addition, with each $10 of preferred equity investment, the holder will receive two warrants of Glass House Brands, each warrant being exercisable to acquire one share of Glass House Brands at a price of $5 for a term of five years following issuance. The first closing of the preferred equity share offering, subject to the approval of NEO, is expected to occur by the end of August, 2022. A final close is targeted for 30 to 60 days thereafter.

The management team is confident this incremental capital will provide the necessary runway to reach free-cash-flow-positive operations in early 2023, excluding expansion capex. Despite the continued difficult market conditions, Glass House Brands is reaffirming this guidance.

Q2 2022 financial results discussion

Total revenue for Q2 2022 was $16.5-million, a 12-per-cent decline versus Q2 2021 and 18-per-cent sequential growth versus Q1 2022.

Wholesale revenue of $6.7-million increased 8 per cent versus Q2 2021 and grew 31 per cent sequentially versus Q1 2022. Glass House Brands sold almost 20,000 pounds, representing 38 per cent more equivalent dry weight in Q2 this year than last year. Demand for Glass House Brands grown product is strong and inventories are low. The increase in weight available for sale was driven by a 9-per-cent increase in production versus last year and additional weight available to sell due to lower-than-anticipated need for biomass for CPG (consumer packaged goods) sales. Average pricing was 13 per cent lower than last year but would have been much lower if Glass House Brands' greenhouses had not produced a much higher percentage of flower this quarter than the same quarter last year.

Retail revenue in Q2 of $4.8-million was flat to Q1, which was slightly below overall market growth of 1 per cent. On a year-on-year basis, retail revenue was down 10 per cent year over year on a normalized basis, excluding the $1-million loyalty program true-up in Q2 2021.

CPG revenue jumped 24 per cent sequentially but decreased 19 per cent from last year. Glass House Brands CPG business is mainly in the flower category and is being impacted by declines in the cannabis market. The quarter also includes about two months of Plus edibles revenue of $1.7-million, which helped comparisons with prior periods. During the quarter, significant progress was made cleaning up aged inventory and rebalancing strain management issues that impacted sales in Q1 and Q2. This came at the price of heavy discounting, resulting in the level of discounting reaching 41 percentage points of gross sales, versus the prior four quarters of about 10 per cent. Cleaner inventory to start Q3 should reduce markdowns to levels closer to other recent quarters.

Gross profit was $300,000 or 2 per cent, compared with $8.6-million or 46 per cent in Q2 2021 and $2.3-million or 17 per cent in Q1 2022. Glass House Brands' Q2 2022 gross margin when compared with its Q1 2022 gross margin was negatively impacted by two major factors. The first was the high level of CPG markdowns within the quarter, which hurt revenue and margin by $1.7-million. During the quarter, wholesale spent $2.2-million of start-up expenses related to the commencement of commercial operation at the SoCal farm.

General and administrative expenses were $10.9-million, compared with $5.9-million in the prior-year period or $9.4-million in Q1 2022. The $1.5-million sequential increase is primarily attributable to a $1.1-million increase in stock compensation, and salary and benefits related to the Plus acquisition and $200,000 associated with the increased cost of cannabis licences. The full integration of Plus will occur mainly during the third quarter. Most of the SG&A (selling, general and administrative) expenses from Plus employees will be eliminated, with the exception of those related to the sales team.

Sales and marketing expenses were $900,000, compared with $1.0-million in the prior-year period, and were flat compared with Q1 2022.

Professional fees were $2.7-million, compared with $2.0-million in the prior-year period and $2.6-million in Q1 2022. In Q2 2022, increased legal fees due to acquisitions and deal-related costs were offset by a reduction in accounting fees related to year-end audit expenses in Q1, which did not occur in Q2.

Depreciation of $2.8-million compared with $700,000 in the prior-year period and $2.6-million in Q1 2022. Very little of the capex spending in the quarter was placed into service.

Adjusted EBITDA loss widened by $3.4-million to $9.8-million in the second quarter, compared with a loss of $6.4-million in Q1 2022. The major impact was from gross margin, which fell to 2 per cent from 17 per cent in the first quarter of 2022.

As of June 30, 2022, the company had $17.5-million in cash, including $3-million of restricted cash. This was down from $24.8-million in Q1 2022. Net cash used in operating activities was $7.8-million, a 50-per-cent sequential improvement compared with Q1 2022, reflecting effective management of working capital. Capex was $7.6-million during Q2 2022, a sequential decline of 41 per cent compared with Q1 2022 as phase 1 of the Camarillo facility was largely completed.

In addition, Glass House Brands is providing the following new guidance for the balance of the year. Glass House Brands has a long-term target of reducing cultivation cost to $100 per pound. The management team is now ready to provide projections for the average cost of production across all three farms of $150 per pound for Q3 and $125 per pound for Q4 of this year. Please note that the SoCal farm is completing its ramp-up through Q3. The projected improvement to $125 per pound in Q4 represents a 25-per-cent reduction from Q4 last year.

Lastly, with the commercial start-up of the SoCal farm and full quarter of Plus edibles, Glass House Brands is providing revenue guidance for Q3. In Q3, the company expects to achieve revenues of between $27-million and $30-million for the quarter, a 64-per-cent-to-82-per-cent increase versus Q2 this year. This assumes the wholesale pricing Glass House Brands is currently experiencing in Q3 remains constant through the balance of the quarter. Glass House Brands' Q4 revenue target is $50-million and assumes Q4 wholesale pricing remains consistent with Q3, and includes revenue from the company's NHC acquisition as well as a partial quarter for its new Farmacy stores.

As Glass House Brands is almost halfway through the third quarter, the company's primary focus is on execution for the balance of the year. Glass House Brands has the pieces already in place to achieve $200-million in run rate revenue as it exits the year and to become free cash flow positive in early 2023. With base business SoCal's 630,000-square-feet of cultivation joining Glass House Brands' existing 307,000 square feet of cultivation, the addition of Plus, four Natural Healing Center dispensaries and four new Farmacy dispensaries, Glass House Brands is well positioned to be successful in California and to deliver against its financial goals.

Financial results and analyses will be available on the company's investor relations website and on SEDAR.

Conference call

The company will host a conference call to discuss the results on Aug. 11, 2022, at 5 p.m. Eastern Time.

Dial-in number:  1-888-664-6392

Conference ID No.:  77242140

Replay:  1-888-390-0541

Replay code:  242140 followed by the pound key (replay available until 12 a.m. Eastern Time on Thursday, Aug. 18, 2022)

About Glass House Brands Inc.

Glass House Brands is one of the fastest-growing, vertically integrated cannabis companies in the United States, with a dedicated focus on the California market and building leading, lasting brands to serve consumers across all segments. From its greenhouse cultivation operations to its manufacturing practices, from brand building to retailing, the company's efforts are rooted in the respect for people, the environment and the community that co-founders Mr. Kazan and Graham Farrar, president, instilled at the outset. Through its portfolio of brands, which includes Glass House Farms, Forbidden Flowers and Mama Sue Wellness, Glass House Brands is committed to realizing its vision of excellence: outstanding cannabis products, produced sustainably, for the benefit of all.

We seek Safe Harbor.