Thursday, November 4, 2021

Guest Idea: Glass House Brands Warrants by "Concho Convexity"

[Our guest writer "Concho Convexity" writes in with an idea. As a marijuana play, it fits in with his predilection for companies that sell "dopamine hits," like tobacco and addictive computer applications.]

The idea is the ~4 year warrants (15th Jan 2026 expiration) on Glass House Brands shares (OTC: GHBWF) which are currently trading for $1.22 and have a strike price of $11.50 for the underlying, common shares of Glass House Brands Inc. (GLASF) which are trading for $4.80. The warrants are obviously out of the money but have a long time until expiration.

Glass House Brands is a busted SPAC that owns an unusual asset: the 2nd largest greenhouse in the United States (six million square feet under glass), located just outside sunny Santa Barbara, California.

The greenhouse is state of the art and was a profitable concern growing tomatoes for a buck a pound and wholesaling them at 1.05. The greenhouse was purchased for cash and stock after the SPAC was funded and what caught my eye was that the experienced owner who was the seller took a large part of his consideration in shares rather than cash. At $4.80 the equity trades for about the value the insiders received in the initial SPAC deal. The market cap is not much above my estimate of the real estate value.

The greenhouse is being converted from tomatoes to Cannabis by an experienced operator and management team. Cannabis, even wholesale, will have much larger margins than tomatoes. This farm may be the lowest cost grower of Cannabis in the US as the year round temperatures in this region will not require much heating or cooling costs. The company just reported this from a recent study: "the average indoor grow uses 262 kilowatt-hour per square foot of flower (kWh/SF). The average greenhouse grow used 134 kWh/SF. Glass House’s average was 13 kWh/SF.”

In addition to the ramp up of the greenhouse, Glass House Brands  has ownership of several dispensaries, well known and liked brands, and plans to ramp up to 21 total dispensaries in California  over the next few years.

Catalysts are: ramp up of the greenhouse and dispensaries, Congress passing safe banking and Interstate deregulation of Cannabis, and potential future uplisting of the stock. I like how four year call options (the warrants) offer plenty of time for the thesis to work out.

Aaron Edelheit has written about Glass House in two different pieces.


CP said...

My calculation, which someone could double check, is that the IV of the warrants is around 60%.

Umami said...

Common seems like the play here. Equivalent returns between stock and warrants happen when the stock gets over $15, and you can still do quite well in scenarios where the warrants stay OTM

CP said...

Yeah, so the vol on the warrants kind of expensive.