Glass House Brands announced the intent to restate and reissue its financial statements for the fiscal years ended December 31, 2021 and 2022 and the interim period ended March 31, 2023 and any corresponding management's discussion and analyses.
Management has determined the company needs to restate the financial statements for certain revenue transactions processed through a distributor. These revenue transactions only impact the company's Consumer Products (CPG) and Retail business units. The company also expects to restate the allocation of the purchase consideration for certain acquisitions that were made in 2022 and will assess the impairment of goodwill recognized during the quarter ended March 31, 2023 to determine if it should be recognized in 2022.
"An issue was brought to our attention whereby we were questioned about how sales of our CPG brands into our stores were booked. During that time, we used Herbl as the distributor for our CPG sales to all third-party dispensaries along with our owned retail stores. As we never held any ownership or decision-making authority at Herbl which was the largest distributor in California, we accounted for the sales as third-party transactions. Upon further consideration, we have decided to restate our CPG sales into our stores during that time period as inter-company transactions. We expect this restatement will have an immaterial impact on our gross profit, adjusted EBITDA and net cash used in operating activities," said Glass House CEO Kyle Kazan.
The company's Q3 2023 and Q2 2023 results, which produced record quarterly revenue, gross profit, adjusted EBITDA and net cash provided by operating activities will not be affected by the restatement. The effect of the restatements will also have no impact on the company's Q4 2023 results or ongoing operations.
The company will restate the accounting for Glass House's relationship with its CPG distributor during the Restatement Period for transactions between the distributor and company-owned retail stores from a third-party distribution relationship to intercompany transactions. This will result in a reduction of wholesale CPG revenue and a similar reduction in costs associated with these transactions. In addition, the company will reclassify the distribution fee paid to the distributor from cost of goods sold to a reduction in revenue. The effect of the restatement on consolidated gross profit is expected to be immaterial, and gross margin percentage will increase given the reduction to revenues and similar reduction to the cost of goods sold.
On March 28, 2023, Glass House ended the distribution arrangement with its CPG distributor and changed the relationship to a logistics-only agreement for delivery of Glass House products to retail dispensary customers including company-owned stores. From that point on, all transactions between the company's CPG business and its owned retail stores have been accounted for as intercompany transactions, and delivery fees have been treated as a cost of goods sold.
The company also expects to restate the allocation of the purchase consideration for certain acquisitions that were made in 2022 and will assess the impairment of goodwill recognized during the quarter ended March 31, 2023 to determine if it should be recognized in 2022. This is primarily a timing adjustment that will affect net income in each period restated but will have no impact on the Company's net cash provided by operating activities.
It is expected that the restated documents and the 2023 audited annual financial statements will be filed before the end of March. The adjustments set forth above remain preliminary and could change as a result of additional work performed in connection with the preparation of such Restated Documents. In addition, there may be other items in the Restated Documents that may be impacted by the restatement. All adjustments are subject to change until the Restated Documents are approved by the Company's Audit Committee and Board of Directors and filed on SEDAR+.
