California-based Glass House Brands (NEO: GLAS.AU) (NEO: GLAS.WT.U) (OTCQX: GLASF) (OTCQX: GHBWF) is one of the biggest beneficiaries of the downturn in the Golden State market, according to the company’s leadership during the company’s third quarter earnings call this week.
“In general, the number of active mixed-life and outdoor licenses decreased by 39% from 7,190 in June last year to 4,364 at the end of October. We estimate that this resulted in a fall in the low 20% of the square footage that is under cultivation,” CFO Mark Vendetti told investors.
That led to “the phone ringing more often,” said President Graham Farrar.
It’s not all rosy, however, added CEO Kyle Kazan. The California market as a whole is even more depressed, continuing a long-standing problem of sellers not paying their vendors in full. Glass House makes sure that it only deals with stores that pay for inventory, but its own legal retail shop in Los Angeles still has to compete with 10–20 unlicensed marijuana shops every day.
“And yet, as challenging as the industry is, it’s incredibly flexible,” Kazan said.
Another bright spot in the industry: Glass House expects millions of dollars in federal tax savings in the 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 lawmakers in California and Washington, DC, I believe there is a high probability that the Drug Enforcement Administration will issue its recommendation to reschedule a Schedule III before the end of this year, which will probably be implemented in the middle of next year,” he said.
Moving cannabis to Schedule III, Kazan said, would eliminate the hated provision of 280E of the federal tax code as it relates to legal state marijuana companies. That provision prevents the plant from claiming many of the standard business tax deductions, thereby raising the federal tax rate significantly for companies like Glass House.
If the 280E had not been available this year, “it would have saved us $10 million,” Kazan said. He estimates that the company’s tax savings next year if the rescheduling is implemented will be close to $15 million.
But he cautiously noted, “Trying to prepare for what the federal government might or should do is like standing in the middle of a minefield, because they haven’t done anything to help this industry on the level” of the federal” since launched by President Richard Nixon. the war on drugs.
