California-based Glass House Brands Inc. (NEO: GLAS.A.U) (OTCQX: GLASF) is “one of the largest, if not the largest, illicit marketers of cannabis in the State of California, if not the country,” and has been shipping cannabis across state lines on airplanes, according to a new lawsuit filed by one of the company’s retail competitors.
The suit, filed by Long Beach-based 562 Discount Med Inc., which does business as retailer Catalyst, contends that Glass House Brands has been capitalizing on the illicit cannabis trade in California, and in doing so is undercutting the legal market and those trying to operate by the book.
Glass House relies on both legal distributors and also so-called “burner distros,” an industry term for licensed distributors that channel legally produced cannabis to the underground market nationwide, the suit alleges. The method allows Glass House to sell marijuana to both the legal and illegal markets, effectively propping up its balance sheet, the suit asserts.
“By specifically choosing to deal with Burner Distros and others to channel its cannabis to the illicit market, GHB is supporting a flourishing illicit market that pays no taxes – a market that permits GHB to sell ‘excess capacity’ that it could not otherwise sell in the legal market without substantially affecting the legal price of cannabis – and by doing so has been able to sell a veritable mountain of illegal cannabis at high margins,” the suit claims.
“This in turn has allowed them to ‘cook the books,’ to make its operations look better than they actually are, to obtain substantial investment and/or financing, and to grow in competitive strength and market power – something legal cultivators are unable to do,” the suit claims. “That in turn permits unlicensed dispensaries to sell GHB’s cannabis at prices that legal dispensaries such as Catalyst cannot match, leading to lower sales and profits.”
The suit further alleges that publicly available information can be used to prove Glass House’s culpability and charged that in the fourth quarter of 2022 alone that “upwards of 75% of GHB’s Q4 2022 sales were outside the legal market.”
Selling into the underground market, the suit alleges, is the only viable way that Glass House could justify opening a 5.5 million-square-foot cultivation facility last year, with plans to ramp up production by 62% this year.
“The dual channel structure it has employed is a huge ‘win-win’ for GHB, but a huge loss for Catalyst and other legal operators who lose sales to illegal dispensaries and are required to actually pay the mandated taxes that are not paid in illicit market transactions,” the suit claims.
“Enough is enough,” the suit claims. “Via this action, Catalyst seeks to put an end to GHB’s illegal, fraudulent and unfair business practices, and hopefully help bring about what actually was envisioned when California first legalized cannabis – a regulated market where illicit marketeers do not reign supreme.”
The suit was filed in Los Angeles County Superior Court on June 6 and has not yet been scheduled for any hearings. It requests a preliminary and permanent injunction against Glass House.
Catalyst CEO Elliot Lewis took Glass House to task on social media last month and made many of the same allegations in a video.
Representatives for Glass House did not immediately respond to a request for comment Monday.
Glass House Brands posted a $36.2 million net loss in 2022.
Catalyst has tried taking on the issue of burner distros in the past with a lawsuit against the state in 2021, and though the case was dismissed, the new suit against Glass House refers to it as currently on appeal.
