Cannabis Musings - July 21, 2025

Glass House did a thing.

Correction - the original post has been updated to correct an error. Specifically, in the paragraph discussing the three triggers that would allow Glass House to redeem the new Series E Preferred Stock, I had originally used an “or” qualifier, suggesting that any one of the three events could trigger the right. That qualifier should have been an “and”, such that all three events need to occur to trigger the right. The post has been updated, and my apologies for any confusion. Thanks to reader L.M. for pointing out my error.

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Friends – it’s time for another deep dive into a transaction press release. Just last week, Glass House Brands announced a refinancing of its expensive preferred stock, right in the middle of a news cycle about raids by Immigration and Customs Enforcement on two of its cultivation facilities, which we talked about recently. Glass House is one of the largest cannabis cultivators in the State of California, and has an active presence in cannabis media and social media, making it worth our time to understand their capital transaction.

Back in December 2022, when cannabis equity and debt was already a scarce commodity, Glass House announced the first of three preferred stock financings. This was kind of a big deal during a fallow period, notable not only for its size, but also for the fact that it was a preferred stock deal. Think of preferred stock as the platypus of capital markets – it’s a weird sort of equity that looks and acts a lot like debt, and very few people have actually come across one. When we think of a company issuing stock (and what’s usually traded when we buy or sell a share of stock of a company on an exchange), we typically think of what’s referred to as common stock – a ratable portion of the company that enjoys voting rights and an equal share of the company’s economic fortunes. There’s riffs on that, such as common stock with supervoting rights, usually held by founders to control the vote of the company (like appointing the board).

There’s also preferred stock, which has the word “preferred” in its name because it has a preference over the common stock. So, when a company pays a dividend on its stock, or liquidates (sells everything) and distributes out its cash to its stockholders, the preferred stockholders get paid before the common stockholders. They’re preferred. There are terms, of course – typically, the preferred gets paid a set dollar amount per share, usually the amount invested or a multiple of that, plus a dividend/preference rate.

Sort of sounds like debt, right? That’s because it’s very similar – with debt, the lender gets paid the amount they lent to the borrower, plus interest, before a dime is paid to the equityholders. The reason it’s not debt is that it’s still equity of the company. That matters for a few reasons, the most important of which are that the preferred will often (but not always) also be treated like common stock once it receives its preference payment so that it may participate in the upside of the company (which debt doesn’t do), and that, in bankruptcy, debt (almost always) gets paid before equity, including preferred (not that that’s an issue in cannabis anyway). Since preferred is effectively similar to debt, if you’re an investor putting money into a financially challenged company, you’d rather put it in as debt, not equity, so that you get some protection if the company goes insolvent. This is why public company preferred stock historically is the tool of utilities and other large, stable companies with predictable cash flows – investors could get a nice dividend on a stock that they could easily sell with the push of a button (or, back when people still cared about utility stocks, a call to the broker).

But, if you’re a small, high-growth public cannabis company, and you can convince your investors to put their money in as preferred equity, you get a few added benefits. First, if you’re not paying interest on a loan, the lender has very clear rights in court. They can probably fairly summarily get a judgment and start seizing assets (particularly if they already have a lien), and make life very difficult. On the other hand, if a company doesn’t have enough free cash lying around to pay a scheduled dividend on preferred stock, the preferred equityholder’s rights are much less well defined. By statute and caselaw, a company generally can’t forego paying its debts in order to pay a dividend. (Not legal advice!) So, if you’re financially challenged, preferred equity gives you more flexibility in a crisis.

Second, while debt and interest payments clearly show up on the financials, and affect key metrics like net income and EBITDA, neither preferred stock’s preference (again, the amount the company has to pay out to the preferred stockholders before paying anything to its common stockholders) nor its dividend play into those metrics or are treated as an obligation, because it’s equity, not debt. In other words, you get the benefit of investors effectively lending you money, but magically don’t have to treat it as debt, so you’ve got that going for you, which is nice.

Glass House raised nearly $70 million of preferred stock over those three tranches (Series B, C, and D) in 2022 and 2023. Looking at the first issuance, Series B, it was notable for its dividend rate – 20% for the first two years, 22.5% in the third year, and 25% until the 54-month anniversary, with 10% paid in cash quarterly to its holders, with the remainder compounding. Compounding, also known as “paid-in-kind” (or, if you want to sound cool at parties, “PIK”), means that it’s added to the principal amount of the preference, which then increases the amount of the dividend paid because it’s paid on an ever-growing preference (principal) amount. After 54 months, the compounding feature was to go away and become a straight 20% (!) cash dividend. The Series C Preferred Stock had similar terms, while the Series D, issued about a year later, paid a straight 15% cash dividend for five years, then 20% afterwards. Oh, and all of those came with warrants (rights to buy more common stock) issued to the buyers to help sweeten the deal.

Notably, none of the Series B-D Preferred participated with the common. When venture capital and private equity firms invest into early and mid-stage companies, they’ll also typically invest in preferred stock, but invariably that preferred gets paid out their initial investment (and perhaps a multiple of that) and then effectively morphs into common stock, so the investor gets their cake (their investment back plus dividends) and eats it too (all of the buttercream-frosted upside that the common stockholders enjoy). Glass House’s earlier preferred stock didn’t have this participation feature, meaning that the common wasn’t going to get diluted, and also making that preferred look even more like straight debt.

That was not inexpensive financing. It’s not like having an uncle in the preferred stock investing business. Instead, it was one of the many different Faustian bargains that cannabis companies are forced to make in order to raise money to fund growth and keep the lights on. Because it’s not debt, it never quite fit squarely within the debt maturity maelstrom of malicious mayhem storyline, but it was still out there lurking under the waves.

Last week, Glass House announced that it had finally refinanced (recapitalized, more accurately, but basically the same thing) its Series B and C Preferred Stock by …. issuing different preferred stock. Namely, Series E Preferred Stock. In short, they got most of the Series B and C holders to exchange their stock for Series E stock, and then paid the holdouts cash (the preference amount plus unpaid dividends). The new Class E comes with a straight 12% cash pay dividend (substantially less than the Series B/C, with none of that costly PIK, but a higher cash pay out the door), exchangeable into a new, fancy Class B of common stock (which the press release doesn’t, and they haven’t filed anything publicly about it yet) at a conversion price of $9.00 per share, and ultimately exchangeable into tradeable Glass House common stock (so, if the company is sold for eleventy billion dollars, the Series E holders share in that upside).

Plus, Glass House may redeem the Series E Preferred Stock for cash (the preference amount plus unpaid dividends) if the stock price exceeds $12 (60-day volume weighted average), if they average more than 1 million shares traded, and if they’re listed on a US stock exchange. This is a kind of hammer for the issuer to force holders to exchange into common, because if those thing happen, the common stock is probably doing really well, and the investor’s return is probably better than the 12% cash dividend.

The press release notes that the Series E offering will be for approximately $77.5 million. Looking at Glass House’s most recent publicly-filed financials, the preference on the Series B was about $67.5 million on March 31, 2025 (against $50 million originally invested – the raw power of compounding!), and about $6.5 on million on the Series C (against $4.7 million invested). They paid out $4.1 million of cash to the holdouts who refused to exchange, meaning about $70 million of Series B and C rolled (exchanged) into Series E. They also note that they raised $14.7 million of new capital for the Series E offering, of which officers and directors of the company “purchased a substantial amount” in addition to exchanging their Series B and C.

Why is this all notable? It’s a novel version of the same extend-and-pretend playbook that we’re seeing in cannabis capital markets and elsewhere. Glass House wasn’t facing a maturity date when it had to pay back the preferred equityholders, but it was soon going to get even more untenably expensive to service that debt-cum-equity. So, they swapped out one preferred equity instrument for another with the substantial financial support of management, offering up a higher interest cash pay dividend (on a materially higher principal preference amount than what it first received) and a common conversion feature to get a much less expensive all-in cost without any future overhang. It’s extend-and-pretend because, if cannabis capital markets were normal and the industry thriving, they would have just issued common stock to replace what’s still expensive debt equity (12% isn’t nothing). These days, you take what you can get.

Ez iz nito keyn shlekhter bronfn far a shiker, un keyn shlekhte matbeye far a soykher. (“There is no bad brandy to a drunkard, no tainted money to a merchant.”)

Be seeing you.

© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín, B&Y Ventures, or anyone else who employs/hires me.