Greenlane Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Greenlane distributes cannabis accessories, child-resistant packaging, vaporization solutions and lifestyle products through wholesale, e-commerce and retail channels. Results include KushCo, acquired in August 2021; the 2021 comparison does not.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $46.5 million | $34.0 million |
| Gross profit / margin | $6.0 million / 12.8% | $8.6 million / 25.2% |
| Operating loss | $18.2 million | $7.9 million |
| Net loss | $18.7 million | $7.7 million |
| Net loss attributable to Greenlane | $15.3 million | $4.3 million |
| Loss per Class A share, basic and diluted | $0.17 | $0.28 |
| Cash used in operating activities | $12.0 million | $15.3 million |
Sales rose 36.8%, primarily because KushCo contributed $28.4 million. Excluding KushCo, sales were $18.1 million, down 46.8% from the prior-year quarter. Reported gross margin fell to 12.8%; excluding inventory write-offs of $5.8 million in 2022 and $1.0 million in 2021, management reported margins of 25.3% and 28.1%, respectively. The filing retrospectively reclassified outbound shipping costs from cost of sales to general and administrative expense; prior-period margin comparisons reflect that change.
- Segments: Consumer Goods sales fell 43.9% to $17.1 million, with gross margin of 16.5%. Industrial Goods sales were $29.4 million, largely reflecting KushCo, and gross margin was 10.7%. Management attributed pressure to lower-margin KushCo sales, product rationalization and reduced Greenlane Brands sales.
- Operating expenses: Total operating expenses rose 46.6% to $24.2 million. Salaries and benefits increased 57.9% to $10.1 million; general and administrative expense increased 22.3% to $11.7 million. Depreciation and amortization rose to $2.4 million, mainly due to acquired assets.
- Balance sheet and liquidity: Cash was $5.9 million at March 31, versus $12.9 million at year-end 2021. Working capital was $41.7 million, down from $53.8 million. Total assets were $281.1 million and stockholders’ equity was $189.3 million.
- Debt: Debt excluding leases was $21.6 million, including an $8.0 million related-party Bridge Loan bearing 15% interest and due in full in June 2022. $11.6 million of notes payable was classified as current. The company was pursuing financing to repay or refinance the Bridge Loan.
- Cash flow and capital: Investing activities used $0.7 million. Financing activities provided $5.7 million, mainly from $6.8 million net ATM proceeds, partly offset by debt payments. The company sold 11.1 million Class A shares through the ATM during the quarter. Cash declined by $6.9 million overall.
Outlook, risks and unusual items
- Greenlane announced a 2022 Plan to reduce costs and improve liquidity, including workforce and facility reductions, a planned headquarters sale-leaseback, non-core asset dispositions, discontinuing lower-margin third-party brands, selective price increases and seeking an asset-backed loan. Management expects the March workforce reduction to save about $8.0 million in annualized cash compensation. No revenue or earnings guidance was provided.
- Management said cash, operating cash generation and capital-market access should cover working capital, capital expenditures and obligations for at least 12 months. This outlook depends on financing access; the filing cautions that capital markets may be unavailable or financing may be unattractive. ATM sales are subject to limits while public float is below $75 million and may be dilutive.
- The Bridge Loan is secured by company assets and restricts additional borrowing and certain asset dispositions until repayment or June 30, 2022. Management cautioned that failure to repay or refinance could hinder obtaining an asset-backed loan. The proposed asset-backed loan and headquarters sale-leaseback were not assured.
- A European VAT matter remains uncertain. The company recorded approximately $1.0 million of VAT payable related to the matter at March 31 and recognized a $1.8 million gain from a partial reversal based on expected indemnification recovery. Additional recovery, penalties, litigation costs and timing remain uncertain.
- One customer accounted for approximately 16% of Q1 sales. Four largest vendors represented 44.6% of sales and 67.0% of purchases. These concentrations create customer and supplier exposure.
- Disclosure controls were ineffective as of March 31 because previously reported material weaknesses in internal control over financial reporting had not been remediated. ERP implementation continued during the quarter and caused business interruptions cited by management.
- Subsequent events: an April amendment accelerated certain Eyce contingent-share vesting; on May 16, CFO William Mote entered a separation agreement, with employment ending May 17. The filing says his departure was not due to disagreement with the company.
Investor verification priorities
- Track operating cash use, cash levels, working capital and the ability to repay or refinance the $8.0 million Bridge Loan at maturity.
- Confirm whether the asset-backed loan and headquarters sale-leaseback close, and review their terms, collateral and effect on liquidity.
- Assess underlying sales trends excluding KushCo and whether Greenlane Brands growth can offset declining legacy Consumer Goods sales.
- Reconcile reported margins with inventory write-offs and monitor product mix, rationalization charges and ERP-related disruption.
- Review further equity issuance, ATM capacity and dilution under the public-float restrictions.
- Monitor resolution and recoverability of the European VAT indemnification, customer and supplier concentration, and remediation of material control weaknesses.