Greenlane Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Greenlane distributes cannabis accessories, packaging, vaporization and lifestyle products through Consumer Goods and Industrial Goods segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $19.6 | $39.9 | $43.6 | $86.5 |
| Gross profit / margin | $4.6 / 23.3% | $8.1 / 20.3% | $10.1 / 23.2% | $14.1 / 16.3% |
| Operating loss | $(9.5) | $(13.7) | $(19.2) | $(31.9) |
| Net loss | $(10.5) | $(14.5) | $(20.8) | $(33.2) |
| Net loss attributable to Greenlane | $(10.5) | $(12.1) | $(20.7) | $(27.5) |
| Basic and diluted loss per share | $(6.56) | $(22.70) | $(12.96) | $(55.70) |
Q2 sales fell 50.8% year over year; first-half sales fell 49.6%. Consumer Goods sales declined 62.1% in Q2 and 58.1% in the first half; Industrial Goods sales declined 43.3% and 44.3%, respectively. Management attributed the declines primarily to a shift toward proprietary, higher-margin products, reduced third-party offerings, the Vibes brand divestment, and packaging and vape partnerships that reduce inventory needs and reported revenue.
Gross margin improved, but management said this largely reflected lower inventory write-offs versus 2022: $0.0 million in Q2 2023 versus $2.4 million in Q2 2022, and $0.6 million in the first half versus $7.6 million. Operating expenses fell year over year, including first-half salaries and benefits down 44.3% and general and administrative expenses down 33.7%. Interest expense increased, mainly due to the asset-based loan entered into in 2022.
Cash flow, liquidity and debt
- At June 30, cash was $4.7 million, versus $6.5 million at December 31, 2022. Working capital was $20.6 million, down from $41.0 million.
- First-half operating cash flow was positive $4.7 million, compared with negative $13.7 million in 2022. The 2023 figure included approximately $4.85 million from selling an economic interest in Employee Retention Credit proceeds, as well as cash released through reductions in working capital.
- Investing cash use was $0.3 million; financing cash use was $12.1 million, primarily reflecting debt repayments. Cash decreased by $7.5 million over the six months.
- At June 30, debt principal balances included $5.5 million on the asset-based loan and $1.6 million on the DaVinci note; the Eyce note had been repaid. Reported notes payable, net of debt issuance costs and current classification, totaled $4.9 million on the balance sheet.
- After quarter-end, Greenlane repaid approximately $4.3 million remaining on the asset-based loan on August 7, 2023. It also received approximately $3.0 million through short-term receivables financings in July and August, repayable through weekly payments over approximately six to eight months.
Outlook, significant developments and risks
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern for the next 12 months. It cited recurring losses, weaker-than-planned demand and projected cash needs. Plans include further cost reductions, growing sales through new products and customers, executing margin-enhancing partnerships, and seeking additional debt or equity. There is no assurance these plans will succeed; the financial statements include no adjustments for the uncertainty.
- Capital access and dilution: The July 2023 stock-and-warrant offering generated about $3.8 million net proceeds. The company said a late Q1 2023 filing prevents use of its shelf registration statement and ATM program for 12 months, limiting financing options. The July offering included substantial pre-funded and standard warrants and repriced certain prior warrants, creating potential dilution.
- Nasdaq listing: On August 3, 2023, Nasdaq notified Greenlane it fell below the $5 million minimum market value of publicly held shares. The company had until January 30, 2024 to regain compliance under the stated grace period; otherwise, its shares could face delisting.
- Strategy: Greenlane is reducing its workforce and operating footprint, liquidating excess inventory, emphasizing proprietary brands including Groove, and shifting packaging and certain vape activities to partners. Management expects lower working-capital needs and improved margins, while acknowledging these changes may further reduce revenue.
- Controls and contingencies: Disclosure controls were deemed ineffective as of June 30 due to previously reported material weaknesses in internal control over financial reporting. Remediation, including implementation of a new ERP system, was ongoing. The filing also discusses unresolved European VAT exposure, potential non-income tax claims, and a lawsuit seeking repayment of approximately $0.4 million owed by Unrivaled; recovery is uncertain.
- Concentration: One customer represented approximately 38% of Q2 sales. Four largest vendors represented about 89.9% of Q2 purchases. These concentrations increase exposure to key counterparties.
Most important facts for investors to verify
- Whether cash generation, cost reductions and strategic partnerships can offset continued revenue declines and recurring losses.
- Cash runway and required payments under the short-term receivables financings, after the asset-based loan repayment.
- Ability to obtain additional financing despite shelf/ATM restrictions, and the potential dilution from outstanding warrants.
- Progress toward Nasdaq compliance and the status of internal-control remediation and ERP implementation.
- Customer and supplier concentration, recovery of the Unrivaled receivable, and the eventual cost or resolution of VAT and other tax contingencies.