Mr. Kyle Kazan reports

GLASS HOUSE BRANDS REPORTS RECORD SECOND QUARTER 2023 FINANCIAL RESULTS

Glass House Brands Inc. today released its financial results for its second quarter ending June 30, 2023. (Unless otherwise stated, all results and dollar references are in United States dollars.)

Second quarter 2023 highlights

• Net Sales of $44.7-million increased 171 per cent from $16.5-million in Q2 2022 and up 54 per cent sequentially from $29.0-million in Q1 2023;
• Gross profit was $24.4-million compared with $300,000 in Q2 2022 and $12.0-million in Q1 2023;
• Gross margin was 55 per cent, compared with 2 per cent in Q2 2022 and 41 per cent in Q1 2023;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $9.5-million, compared with $(9.8)-million in Q2 2022 and $(100,00) in Q1 2023;
• Cost per equivalent dry pound of production was $139 a decrease of 12 per cent compared with the same period last year and down 29 per cent sequentially versus Q1 2023;
• Equivalent dry pound production was 103,336 pounds, up 311 per cent year over year and up 115 per cent sequentially;
• Cash balance was $22.7-million at quarter-end, up 39 per cent from Q1 2023 quarter-end.

Management commentary

"The second quarter of 2023 was the best in our history. We achieved record levels of operating cash flow, exceeded Q2 guidance across several operating metrics and marked our first quarter of positive adjusted EBITDA," stated Kyle Kazan, co-founder, chairman and chief executive officer of Glass House.

"In Q2 2023, we saw our biomass revenues and pounds sold more than quadruple versus the previous year. Revenues from our retail dispensaries doubled to $10-million year over year, due to growth from acquisitions. Consolidated gross margin surpassed 50 per cent and cultivation cost per pound fell by 12 per cent versus last year. Finally, adjusted EBITDA flipped to a positive $9.5-million compared with negative $9.8-million a year ago.

"I believe that our position as a vertically integrated California cannabis company with a competitive core competency in the cost-efficient cultivation of premium flower is the reason why we've been able to persevere in this difficult market environment. We value our retail and brand businesses for the revenues and market awareness they provide, and we see potential for our brands to create significant shareholder value over the long term."

Mr. Kazan concluded, "We anticipate this momentum will continue through the remainder of 2023, and surpassing our second quarter guidance by significant margins only builds our confidence."

Second quarter 2023 operational highlights

• Luke Scarmazzo joins Glass House Brands as lead brand ambassador for NorCal following his recent release from prison;
• Glass House Brands closes Turlock Natural Healing Center dispensary acquisition;
• Glass House Brands summary of upcoming events -- Q1 earnings call, Attendance at Canaccord Global Cannabis Conference, Investor Sesh 2023;
• Glass House Brands to hold second annual investor sesh on Friday, June 23;
• Glass House Brands announces voting results following annual general and special meeting.

Subsequent events

• Glass House Brands announces resignation of board member Hector De La Torre;
• Weldon Angelos, criminal justice reform advocate and music producer, launches his first exclusive cannabis brand -- REEFORM.

Q2 2023 financial results discussion

Net revenues for Q2 2023 were $44.7-million, 171-per-cent growth versus Q2 2022 and a 54-per-cent sequential increase versus Q1 2023. This result was 12 per cent higher than the high end of the company's Q2 guidance range of $38-million to $40-million.

Wholesale biomass revenue of $30.6-million increased 358 per cent versus Q2 2022 and was up 112 per cent sequentially versus Q1 2023. In the quarter, product sold increased 354 per cent year on year to 90,174 pounds of equivalent dry weight. The increase in weight available for sale was driven by a 311-per-cent increase in production versus last year to 103,336 pounds as a result of incremental production from the company's SoCal farm.

Retail revenue in Q2 2023 of $10.1-million increased 108 per cent year over year and was up 7 per cent on a sequential basis. The year-over-year increase was primarily a result of incremental revenues from four retail locations the company acquired in Q3 2022, and from three new stores -- Farmacy Isla Vista which opened in mid-December last year, Farmacy Santa Ynez which opened in January as well as NHC Turlock which opened in late April.

Wholesale CPG revenues were $4.0-million, a decrease of 20 per cent compared with the prior year and a 24-per-cent decline sequentially. The company had expected negative sequential growth in its CPG wholesale sales due to the financial difficulties of HERBL, one of the state's largest distributors, along with the challenges facing all brands in the current California marketplace. The company is currently distributing its CPG product via its co-packer who is providing distribution service to its retail accounts. For the company's own stores, the company now sells direct and treats this as an intercompany transaction instead of booking the sale through the distributor; and this reduced Q2 CPG revenue by $1.1-million -- accounting for almost the entire sequential decline in CPG sales. Without the change, CPG sales would likely have been about flat.

Consolidated gross profit was $24.4-million, or 55 per cent of net revenues, compared with $300,000, or 2 per cent, in Q2 2022 and $12.0-million, or 41 per cent in Q1 2023. This is the highest gross margin percent ever achieved by Glass House. The two key drivers were wholesale biomass average selling price reaching $340 per pound, well above $290 per pound in the first quarter, and cost of production falling to $139 per pound in Q2 from $196 per pound in Q1 2023.

General and administrative expenses were $13.1-million for the quarter compared with $11.4-million in Q1 2023. The $1.7-million increase was primarily attributable to bad debt expense of $1.1-million as a result of HERBL ceasing business operations and to increased wholesale biomass taxes paid to Ventura County due to the large sequential increase in wholesale biomass revenues.

Sales and marketing expenses were $1.0-million, up 11 per cent year on year and 53 per cent sequentially. Professional fees were $2.2-million, down 18 per cent year on year and up 47 per cent from Q1 2023. The sequential increase in professional fees was due to increased legal fees related to litigation, the Turlock acquisition and expenses related to the company's annual shareholders meeting. The company's plan all along has been to limit growth in SG&A spending as the company increased revenue to improve cash flow and profitability.

Depreciation and amortization in Q2 2023 was $3.6-million, down 7 per cent from Q1 2023.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $9.5-million in Q2 2023, compared with adjusted EBITDA loss of $(100,000) in Q1 2023. This was driven by top-line growth, higher gross margins and disciplined management of operating expenses.

The company generated $8.3-million of cash from operations in Q2 2023 versus cash generated from operations of $4.5-million in Q1 2023 and cash usage of $7.8-million in Q2 2022. In Q2, cash impact from net income turned positive for the first time, reaching $2.5-million from negative $4.1-million in Q1. Cash flow also benefited by $5.3-million because there was no income tax paid in the quarter.

Capital spending was $200,000 in Q2, as there were no major spending projects in the quarter. Q1 capital spending was $1.1-million.

2023 outlook

The company is providing the following guidance for 2023 based on the strength of the company's second quarter results and current trends from the first half of 2023.

2023 cash flow and EBITDA

Based on the company's current wholesale average selling price, which the company assumes maintains for the balance of the year, the company expects to have positive operating cash flow and positive adjusted EBITDA in Q3 and Q4.

Q3 2023 outlook

Glass House expect Q3 2023 revenue to be between $45-million and $47-million. The increase versus Q2 2023 is being driven by projected low-to-mid-single-digit per cent growth in wholesale biomass revenue with pricing projected to increase slightly to above the Q2 2023 average selling price of $340 per pound as a seasonally favourable increase in the percentage of flowers and smalls relative to trim offsets a seasonal dip in prices due to increased summer output from outdoor and mixed light farms. the company also assumes that CPG (consumer packaged goods) and retail revenue will collectively be flat relative to Q2 due to the continued difficult retail environment. Production is expected at 100,000 to 103,000 pounds, roughly in line with Q2 levels. While the second half of the year is usually the company's highest in terms of production, Glass House does not expect the typical seasonal uptick in Q3 compared with Q2 this year due to efficiency improvements in postharvest processing that boosted Q2 production by approximately 10,000 pounds and because unusually low sunlight levels in May, June and the first half of July reduced the normal seasonal lift in biomass bulk harvests that the company typically sees in Q3. As a reminder, plants harvested today are the cumulative result of sunlight in the preceding 60 to 90 days.

Glass House expects consolidated gross margin percent to be flat to up slightly versus Q2's 55 per cent as cost of production is projected to decline to $120 per pound, a 14-per-cent reduction from $139 per pound in Q2. Gross margin for CPG and retail are projected to be flat to up slightly.

In addition, the company expects adjusted EBITDA to be similar to Q2 and expects operating cash flow to be about $4-million to $6-million, which is lower than the Q2 level of $8-million.

The company expects non-expansion capex to be below $1-million.

2023 fiscal year

The company is raising its revenue guidance to $165-million to $170-million for 2023 due to higher than projected wholesale biomass production. The company is increasing its wholesale revenue projection to a range of $105-million to $110-million from $100-million. Projected average selling price per pound remains at approximately $330 per pound, while the company is raising its biomass production estimate to 350,000 to 355,000 pounds, an increase of 35,000 to 40,000 pounds over the company's previous guidance. The company is maintaining its cost of production estimate at $140 per pound, with second half cost of production projected at $120 per pound or below. This is still an 8-per-cent decrease versus the same period in 2022. This guidance represents an 84-per-cent increase for production at the midpoint of guidance and a 2-per-cent reduction in costs versus FY 2022.

Revenue projections for the company's retail and CPG businesses remain unchanged at $40-million and $20-million, respectively.

None of this guidance includes any impact from the continuing retrofit of Greenhouse 5, which began in early July. The company expects to have plants in Greenhouse 5 by early 2024, with the first sale projected for Q2 2024. Once operational, Glass House expects Greenhouse 5 will increase its cultivation capacity by roughly 250,000 pounds to a total of 600,000 pounds. At current pricing, Greenhouse 5 is capable of producing over $80-million of incremental revenue annually and over $30-million in incremental EBITDA.

Financial results and analyses will be available on the company's website on the investors and news and events drop-down menus and SEDAR+.

Conference call

The company will host a conference call to discuss the results today, Aug. 14, 2023, at 5 p.m. Eastern Time.

Dial-in number:  1-888-664-6392

Conference ID:  96853256

Replay:  1-888-390-0541

Replay code:  853256 followed by the pound key

(Replay available until midnight Eastern Time Monday, Aug. 21, 2023)

About Glass House Brands Inc.

Glass House is one of the fastest-growing, vertically integrated cannabis companies in the U.S., 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 Kyle Kazan, Chairman and CEO, and Graham Farrar, Board Member and President, instilled at the outset. Through its portfolio of brands, which includes Glass House Farms, PLUS Products, Allswell, FIELD, Forbidden Flowers, and Mama Sue Wellness, Glass House is committed to realizing its vision of excellence: outstanding cannabis products, produced sustainably, for the benefit of all.

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