Glass House Capitalizes on California Cannabis Contraction

Glass House Capitalizes on California Cannabis Contraction

California-based Glass House Brands (NEO: GLAS.A.U) (NEO: GLAS.WT.U) (OTCQX: GLASF) (OTCQX: GHBWF) has been one of the largest beneficiaries of market contraction in the Golden State, according to company leadership during the company’s third-quarter earnings call this week.

“In total, the number of active mixed-life and outdoor licenses has dropped by 39% from 7,190 in June of last year to 4,364 at the end of October. We estimate that this has resulted in a fall in the low 20% range in the square footage under cultivation,” CFO Mark Vendetti told investors.

That has led to “the phone ringing more frequently,” President Graham Farrar said.

It’s not all rosy, though, CEO Kyle Kazan added. The California market in general is still very much distressed, which has perpetuated a longstanding problem of retailers not paying their vendors in full. Glass House makes sure it deals only with shops that pay for inventory, but its own legal retail shop in Los Angeles still must compete with 10-20 unlicensed marijuana shops daily.

“And yet, as challenging as the industry is, it is getting easier,” Kazan said.

Another bright spot in the industry: Glass House anticipates millions of dollars in federal tax savings in coming years due to the expected rescheduling of marijuana at the federal level, to Schedule III from Schedule I, Kazan said.

“Based on my discussions with policymakers in California and Washington, D.C., I believe there is a high probability that the (Drug Enforcement Administration) will provide its recommendation on rescheduling to a Schedule III before the end of this year, with implementation likely by the middle of next year,” he said.

Moving cannabis to Schedule III, Kazan noted, would eliminate the hated 280E provision of the federal tax code as it pertains to state-legal marijuana companies. That provision bars plant-touching from claiming many standard business tax deductions, thus raising the federal tax rate enormously for companies like Glass House.

If 280E hadn’t been applicable this year, “it would have saved us $10 million,” Kazan said. He estimated the company’s tax savings next year if rescheduling becomes a reality could be closer to $15 million.

But, he noted cautiously, “Trying to prepare for what the federal government may or should do is like standing in the middle of a minefield, because they’ve literally done nothing to help this industry at the federal level” since President Richard Nixon launched the war on drugs.

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