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Jun 13, 2023
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Lawsuit accuses California cannabis grower Glass House of illicit activity

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More brash attention-seeking behavior?

Or is Catalyst Cannabis Co.’s Elliot Lewis the first cannabis CEO willing to voice what’s been said in private – and actually name names, in court?

The audacious lawsuit filed last week that accuses California cannabis mega-grower Glass House Brands of being “one of the largest, if not the largest, black marketers of cannabis in the State of California, if not the country” could be both.

But if the recent past is any indication, it could be a long time before anything changes – if anything does at all.

In a complaint filed June 6 in Los Angeles County Superior Court, 562 Discount Med, which does business as Catalyst, alleged that Glass House “knowingly is entering into illicit sales – both inside and outside California.”

Glass House does this, the suit alleges, by selling marijuana in the legal market as well as via a “network” of so-called “burner distros” – licensed distributors set up to be briefly used as conduits for legally grown cannabis to enter the illicit market.

Those distributors then send legally grown flower to illicit markets “as far away as New York and New Jersey,” where illegal marijuana sales are rampant and where many illicit shops do sell cannabis in packaging featuring California branding, the suit alleges.

Reached late Monday, a spokesperson for Glass House Brands said the company was unaware of the lawsuit.

Kyle Kazan, Glass House’s founder and CEO – as well as a former Torrance, California, police officer – did not respond to an email from MJBizDaily seeking comment.

The suit by Southern California-based Catalyst alleges unlawful and unfair business practices and seeks an injunction from a judge.

No hearings are currently scheduled in the case, according to court records. There is also no record of Glass House being served with the suit.

Observers generally reacted one of two ways to the suit: quietly agreeing with Lewis’ argument, or publicly dismissing this latest outburst as a self-centered gimmick.

Critics point out that if Catalyst has any concrete evidence of Glass House’s alleged illicit-market dealing, nothing was offered in the suit beyond circumstantial arithmetic.

“It’s all attention-seeking,” Aaron Edelheit, CEO of Santa Barbara, California-based investment firm Mindset Capital, told MJBizDaily.

“If Glass House was flooding the black market, it wouldn’t be sold in California.”

Axe to grind

Catalyst’s Lewis, first accused Long Beach, California-based Glass House Brands of allegedly engaging in illicit-market activity in a LinkedIn post last month.

Lewis anchored that argument on white-board arithmetic, claiming that – based on Glass House’s reported production and sales, compared to statewide recorded sales – only 25% of the company’s product is sold legally.

“They are the f****** problem,” he said. “The cartel is Glass House. Allegedly.”

That same math appeared in the lawsuit.

Lewis who also filed suit against California’s Department of Cannabis Control in 2021, alleging that regulators were aware of the “burner distro” situation but have been unable or unwilling to curtail it.

That suit was initially dismissed by a judge before it could go to discovery but is currently on appeal, according to court filings.

The current lawsuit, to prove its case, seeks both internal Glass House documents as well as state track-and-trace data via the discovery process.

Familiar complaints

Lewis’ public crusade against Glass House echoes what’s become conventional wisdom in most cannabis executive circles: At least some licensed cultivators, retailers or distributors are selling cannabis on the illicit market – be it out of greed or necessity, with the badly needed profits available on the tax-free illicit market used to meet payroll or pay taxes.

And it tracks with other, more oblique accusations that do not identify alleged malefactors by name.

In a talk hosted on Twitter Spaces in late May, Boris Jordan, the chair of Massachusetts-based multistate operator Curaleaf Holdings – which recently announced the shuttering of its California operations – also repeated the commonly held belief that legally grown marijuana is ending up on the illicit market via “burner distros.”

“It’s interesting,” Jordan said. “Without naming names, a lot of the legal players are turning to the illicit market by basically saying, ‘OK, we’re selling to legal distros, and the fact that the product is going across the country – that doesn’t bother us, because the counter party we’re selling to is legal, even though they know they’re never entering that product into the Metrc system and they’re selling it across the country and bankrupting that distribution company and setting up a new one.’”

Jordan did not identify any companies or operators by name, and a Curaleaf spokesperson did not respond to MJBizDaily requests for comment on Jordan’s statement.

Whipping boy

Glass House has become a favorite target of many frustrated legal-market operators in California for its ambitious efforts to become one of the largest cannabis producers in the country.

The vertically integrated company opened a 5.5 million-square-foot cultivation complex in Southern California last year.

The company borrowed up to $100 million to retrofit that greenhouse complex suitably for marijuana.

And in addition to distributing cannabis to other licensed retailers, Glass House also operates nine retail locations, three of which it acquired last year in a $22.6 million deal.

Glass House shares trade as GLAS on Canada’s NEO Exchange and as GLASF on U.S. over-the-counter markets.

The company reduced its reported quarterly losses to $100,000 in the first quarter of 2023 on $29 million in sales, down from a $2.6 million loss in the last quarter of 2022, according to its most recent earnings report.

Part of the reason is that Glass House continues to cultivate an immense amount of cannabis even as other cultivators go out of business.

In its most recent earnings report, Glass House estimated licensed cultivation space in California dropped by 21% since last June, a figure based on state data.

In that same time frame, Glass House has continued to grow marijuana and also find higher margins.

The company plans to grow 310,000 pounds of cannabis in 2023, at a cost $140 per pound.

The company also claimed to have sold marijuana at an “average selling price” of $325 per pound in the past quarter.

These low prices and relatively high margins are reflected in Glass House’s average retail prices, with eighths available for as little as $26.50, according to online menus.

“What we think we can do is, we can beat the illicit market just on price,” Kazan said during a recent interview on Cannabis Talk 101.

“We believe very, very soon we’ll be able we’ll be able to provide legal weed at illegal prices.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.



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