Greenlane Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited. Greenlane distributes cannabis accessories, packaging, vaporization products and lifestyle goods. It completed its merger with KushCo on August 31, 2021; reported results include KushCo only from that date, so year-over-year comparisons are not fully comparable.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $41.3 million | $35.8 million | $110.0 million | $102.0 million |
| Gross profit / margin | $0.1 million / 0.3% | $2.5 million / 6.9% | $15.2 million / 13.8% | $16.6 million / 16.3% |
| Operating loss | $27.7 million | $13.8 million | $41.2 million | $37.8 million |
| Consolidated net loss | $28.7 million | $13.8 million | $42.3 million | $36.8 million |
| Net loss attributable to Greenlane | $16.3 million | $4.5 million | $23.6 million | $11.0 million |
| Basic and diluted loss per Class A share | $0.41 | $0.35 | $0.98 | $0.95 |
Q3 sales rose 15.5%; nine-month sales rose 7.8%. KushCo contributed approximately $12.6 million of sales and $6.7 million of net loss after closing. Management said KushCo’s September sales carried lower merchandise margins, while nine-month gross profit also reflected $8.7 million of inventory adjustments related to post-merger product rationalization. Excluding those adjustments, management reported a 21.3% nine-month gross margin; this is a management-adjusted measure.
For the nine months, operating cash flow was negative $32.0 million, investing cash flow was negative $14.3 million, and financing cash flow was positive $28.9 million. Cash fell to $13.2 million from $30.4 million at December 31, 2020. Working capital was $70.8 million. At September 30, notes payable were approximately $10.2 million before debt issuance costs, excluding lease liabilities; operating and finance lease liabilities totaled approximately $10.4 million. The former revolving credit facility was not renewed and had no balance outstanding.
Changes, outlook and notable matters
- Q3 sales growth was led by the acquired KushCo business and U.S. supply-and-packaging sales. Canada sales fell 77.9% in Q3, partly due to lower nicotine sales, inventory shortages and earlier ERP implementation disruption. Management said Canadian operations had stabilized and expected a Q4 2021 recovery.
- Greenlane reported that Greenlane Brands sales increased 25.7% in Q3 to $8.4 million; VIBES sales rose 144.3% to $3.2 million. Management said it would continue prioritizing higher-margin products and explore expense reductions and merger synergies.
- Management believed cash on hand and capital-market access would be sufficient for operating, working-capital and debt needs for at least 12 months. The company had a $50 million at-the-market program, with approximately $0.2 million of gross sales through September 30, and reported approximately $29.9 million of net proceeds from its August registered offering.
- Supply-chain congestion, freight costs, container shortages and COVID-19 disruptions remained uncertain risks. Restrictions and taxes on vaping products, including PACT Act-related shipping rules and carrier policies, could raise costs or reduce demand.
- European VAT matters remain contingent: the company reported $3.1 million of VAT payable and $0.1 million of VAT receivable, alongside a German criminal investigation and potential actions by other EU jurisdictions. Management is pursuing seller indemnification; further recovery and the timing or amount of any additional liability are uncertain.
- Greenlane agreed in October to acquire the DaVinci brand and substantially all related assets for consideration of up to $20 million, partly in stock; closing was expected in Q4 2021. No formal revenue or earnings guidance was provided.
- Disclosure controls were deemed ineffective because previously identified material weaknesses in internal control had not been remediated. Management expected the new ERP implementation to be completed in early 2022 and said KushCo was excluded from the quarter’s internal-control assessment during integration.
- Merger-related shareholder lawsuits were partly dismissed; the company said it would defend the remaining claims. It reported no other pending legal proceedings expected to have a material adverse effect.
Key facts for investors to verify
- How much of reported growth and loss reflects KushCo’s limited post-close contribution, and how will combined results compare once fully consolidated?
- Whether gross margins recover after inventory rationalization, and whether management’s adjusted margin excludes all relevant costs.
- Cash burn, working-capital needs and financing capacity, including potential dilution from warrants, equity programs and acquisition consideration.
- The final KushCo purchase-price allocation, expected synergies, and performance of the Eyce and planned DaVinci acquisitions.
- Progress remediating material weaknesses and completing the ERP implementation; resolution and financial exposure from the VAT matter and remaining litigation.
- Effects of ongoing supply-chain disruption and changing cannabis, vaping, shipping and tax regulations on sales, margins and costs.