Greenlane Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Greenlane distributes cannabis accessories, vaporizers and related products through wholesale, e-commerce and retail channels in the U.S., Canada and Europe.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $32.4 | $53.0 | $66.3 | $102.9 |
| Gross profit / margin | $6.8 / 21.0% | $9.2 / 17.3% | $14.1 / 21.3% | $18.1 / 17.6% |
| Operating loss | $(6.4) | $(3.9) | $(24.0) | $(9.1) |
| Consolidated net loss | $(6.3) | $(3.2) | $(23.1) | $(20.9) |
| Net loss attributable to Greenlane | $(2.1) | $(1.8) | $(6.5) | $(19.4) |
| Adjusted EBITDA (non-GAAP) | $(4.3) | $(1.2) | $(10.9) | $(2.0) |
Q2 diluted and basic loss per Class A share was $0.18, versus $0.03 in Q2 2019. The six-month figure was $0.60 versus $0.03; the prior-year per-share comparison reflects the post-IPO period only.
- Cash and working capital: Cash was $41.8 at June 30, down from $47.8 at year-end 2019. Working capital was $77.8, versus $88.7 at December 31.
- Cash flow: Operating cash use was $1.3 in Q2 and $2.4 for the first half, compared with $11.5 and $18.8, respectively, in the prior-year periods. First-half investing cash use was $3.1; financing cash use was $0.3.
- Debt and liquidity: Long-term debt, net of issuance costs and current portion, was $7.9; the real estate note had $8.2 principal outstanding. No borrowings were outstanding on the $15.0 revolving credit line, which matured August 23, 2020; the company said it was negotiating renewal terms and was in covenant compliance at June 30.
- Balance sheet: Total assets were $128.9, liabilities $35.1 and stockholders’ equity $93.8. Goodwill declined to $3.0 following a $9.0 impairment charge in Q1.
Material changes versus the prior period
- Q2 sales fell 38.9% year over year; first-half sales fell 35.6%. U.S. sales declined 44.2% in Q2 and Canada declined 38.4%. Europe contributed $2.5 of Q2 sales following the 2019 Conscious Wholesale acquisition.
- Management attributed the declines to FDA restrictions on flavored ENDS products, its decision to reduce lower-margin JUUL sales, and COVID-19 disruption, including lower sales to independent retailers. Q2 JUUL sales were $2.3, or 7.0% of sales, versus 48.3% of sales in Q2 2019.
- Gross margin improved to 21.0% from 17.3%, supported by product mix, gross-margin floors and Greenlane Brands, which represented 15.0% of Q2 sales versus 6.1% a year earlier. E-commerce sales were $5.8 in Q2; management reported Vapor.com weekly merchandise revenue from March 15 through August 1 was 66.7% above the pre-restriction period.
- Q2 consolidated net loss widened to $6.3 from $3.2, while Greenlane-attributable loss increased to $2.1 from $1.8. For the first half, consolidated loss increased to $23.1 from $20.9, including the goodwill impairment; the prior-year period included a $12.1 convertible-note fair-value expense.
Outlook, risks and unusual items
- Management said it had previously anticipated cash-flow-positive operations by Q4 2020, but timing could shift depending on the duration of COVID-19 impacts. It expected cash on hand and line availability to cover working capital, capital expenditures and other needs for at least 12 months, while cautioning that the outlook depends on uncertain conditions. No formal revenue or earnings guidance was provided.
- Management reported June B2B revenue was 83.4% higher than April as states reopened. The company reduced its workforce by 77 employees and estimated approximately $3.2 of annual savings. It incurred about $1.7 in first-half distribution and office closure charges, partly offset by derecognition of lease liabilities; additional distribution-center closures were planned for Q3.
- COVID-19 and regulatory developments remain material risks. FDA enforcement priorities and state/local restrictions affect ENDS products and sales channels; management also cited potential customer failures, sourcing disruption, vaping-related public-health concerns and import duties on certain glass containers.
- Three vendors supplied approximately 31.4% of Q2 sales and 42.7% of first-half purchases. The company also faces five consolidated purported securities class actions related to its IPO; it disputes the claims, but cannot estimate potential damages.
- Disclosure controls were deemed ineffective at June 30 because previously reported material weaknesses in internal control over financial reporting remained under remediation. The company was implementing inventory/order-fulfillment controls and a multi-year ERP system replacement.
Important facts for investors to verify
- Whether the $15.0 revolving credit facility was renewed or replaced after its August 23, 2020 maturity.
- Subsequent revenue, margin and cash-flow trends, including whether management’s cash-flow-positive target remained achievable.
- Further COVID-19 effects, ENDS regulation and the ability to replace restricted products with higher-margin sales.
- Progress and testing of internal-control remediation, including inventory controls and ERP implementation.
- Developments in the IPO-related lawsuits and any resulting financial exposure.
- Potential dilution and voting control: founders’ Class C shares represented 82.7% of voting interest at June 30; non-controlling holders owned 70.2% of the Operating Company’s economic interests.