Glass House Brands charts contrarian course as ex-cop fights for release of cannabis convicts and eyes low-cost cultivation in California

By Steve Gelsi

Glass House Brands aims for low-cost production in California's challenging cannabis market while pushing for federal legalization and amnesty

Glass House Brands Inc. (GLASF) Chief Executive Kyle D. Kazan differs from most chief executives of cannabis companies because he worked for years in law enforcement as a former and currently retired Torrance, Calif., police officer.

During his years on the job, Kazan came to the conclusion that cannabis is less dangerous for police officers than alcohol because people who consume it tend to avoid violent behavior.

"When I was a cop, people who were drunk would sometimes decide to punch me in the face, but that never happened with people who were on cannabis," Kazan told MarketWatch.

Along with his background in law enforcement, Kazan sets himself apart in the industry with his focus on amnesty for federal and state prisoners serving time for marijuana offenses.

It makes no sense that federal officials continue to keep people in jail for cannabis, while legal marijuana companies handle enough cannabis in a day to lock someone up for years, Kazan said in a video on social media. The video was made last year when Kazan voiced support for Jose Valero Jr., 25, in a court hearing that resulted in a sentence of seven years in federal prison for cannabis offenses.

While federal law-enforcement officials characterized Valero as an "armed drug trafficker," Kazan pointed out in remarks to the trial judge that the several pounds of cannabis that officials used in the case amounts to a tiny portion of the product his company handles legally every day.

"It's important to basically come out and say, 'Look, this who I am your Honor. This is the amount of cannabis I am moving. Compared to what you're about to sentence this person for, it is absolute insanity'," Kazan said in the video. "You gotta either arrest those in the industry or stop arresting those that are not. This is nonsense."

Although President Joe Biden has moved to pardon federal cannabis convictions for possession of cannabis -- of which there are relatively few -- people remain behind bars for other cannabis offenses.

The number of marijuana-trafficking offenders that faced federal sentencing totaled 806 people in 2022, according to data from the U..S. Sentencing Commission. In 2022, the average sentence for marijuana trafficking was 34 months, or just under three years. To be sure, the number of marijuana trafficking offenders has fallen from 2,118 in 2018.

While last week's favorable vote by the U.S. Senate's banking committee on the SAFER Banking Act to open up the financial system to legal cannabis companies marks a step in the right direction, Kazan called on more action from federal lawmakers to stop "doing evil" by keeping damaging federal policies in place.

Rather than re-scheduling cannabis from a Schedule I drug to Schedule III as recommended by the U.S. Department of Health and Human Services, Kazan said marijuana should be de-scheduled entirely.

"With cannabis still a Schedule I drug, making it federally illegal, there can never be a thriving, regulated marketplace," Kazan told MarketWatch. "Legislation like this does nothing to address the thousands of people who are still sitting in jail for non-violent cannabis offenses, and it does nothing to deter the illicit market, which will continue to thrive."

Glass House Brands (GLASF) is among the cannabis companies to support the Mission Green Alliance to promote individual clemencies among the U.S. population of roughly 3,000 people who are currently incarcerated for federal cannabis convictions, most of them on low-level distribution charges.

Luke Scarmazzo, who was sentenced in 2008 to 22 years in federal prison for operating a cannabis business that was legal in California, was released in February and is now an advocate for Mission Green Alliance.

Pivoting to how Glass House Brands differs from other cannabis companies in the challenging California market, Kazan said he has focused on low-cost production by building large greenhouses and benefitting from economies of scale. The company also operates 10 cannabis dispensaries in the California market, which faces stiff competition from the illicit market.

In the company's second-quarter results released on Aug. 14, Glass House Brands said its net loss widened to $24.9 million from $14.19 million in the year-ago period. Second-quarter revenue more than doubled to $44.7 million from $16.47 million.

The company plans to begin planting its Greenhouse 5 in early 2024 with first sales by the second quarter. The facility is expected to increase its cultivation capacity to 600,000 pounds from 350,000 pounds.

With competition from the illicit market and high operating costs causing fewer permits for cultivation, Glass House Brands saw its consolidated gross margin top 50%, as cultivation cost of production fell by 12%.

The company's "competitive core competency" in efficient products "is the reason why we've been able to persevere in this difficult market environment," Kazan said on the firm's Aug. 14 call with analysts.

Looking ahead, the company's ample production capacity would be a boost if federal legalization for cannabis takes place and interstate commerce of cannabis becomes allowed, he said.

Glass House Brands stock is up 131% in 2023, compared to a 10.2% gain by the AdvisorShares Pure U.S. Cannabis ETF MSOS.

Also read: HHS recommends rescheduling cannabis, and stocks rally

-Steve Gelsi

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10-03-23 1417ET

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