Greenlane Holdings, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2019, compared with the periods ended September 30, 2018. Greenlane distributes cannabis accessories, vaporization and related products through wholesale, supply and packaging, and consumer channels. The company completed its IPO and related Up-C reorganization on April 23, 2019; accordingly, the reporting structure and per-share presentation changed during 2019.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $44.9 million | $43.6 million | $147.8 million | $127.4 million |
| Gross profit / margin | $6.4 million / 14.3% | $8.9 million / 20.4% | $24.6 million / 16.6% | $26.3 million / 20.7% |
| Operating income (loss) | $(5.5) million | $0.3 million | $(14.6) million | $3.0 million |
| Net income (loss) | $(9.0) million | $(0.1) million | $(29.8) million | $2.4 million |
| Operating cash flow | $(14.8) million | $1.3 million | $(33.5) million | $(5.1) million |
- Q3 net loss attributable to Greenlane was $6.4 million, or $0.64 per Class A share. The nine-month Class A loss per share was $0.67, but the per-share measure covers only the period after the April IPO; it is not comparable to the full-period consolidated net loss.
- At September 30, cash was $52.5 million and working capital was approximately $100.0 million. Current assets were $122.2 million and current liabilities $22.2 million.
- Long-term debt, net of current portion and issuance costs, was $8.1 million; current notes payable were $0.2 million. There were no revolving-credit borrowings and $15 million remained available under the line of credit. Lease liabilities totaled $2.8 million, including current and long-term portions.
- Nine-month investing cash outflow was $3.1 million, including $1.3 million of property and equipment purchases. Financing cash inflow was $81.7 million, primarily reflecting the IPO and convertible-note proceeds.
Material changes versus prior comparable periods
- Sales grew 3.0% in Q3 and 16.0% for the nine-month period. Canadian merchandise sales rose 100% in Q3 and 163% over nine months, while U.S. sales declined 4.5% in Q3 and increased 6.9% over nine months.
- Gross margin contracted to 14.3% in Q3 from 20.4%, and to 16.6% over nine months from 20.7%. Management attributed the decline mainly to lower margins on JUUL products; cost of sales grew faster than revenue.
- Operating expenses rose substantially. Q3 salaries, benefits and payroll taxes increased 69%, including $1.5 million of equity-based compensation; nine-month expense more than doubled, including $6.1 million of equity-based compensation.
- Operating cash use increased to $33.5 million for nine months. The cash-flow statement shows inventory use of $15.8 million and accounts-payable use of $13.2 million; cash flow also reflects substantial noncash accounting adjustments.
Outlook, commentary, risks and unusual items
- No numeric revenue or earnings guidance was provided. Management expected cost of sales to grow faster than revenue because of lower JUUL margins, and general and administrative expenses to rise in the near term. Management believed available liquidity would support operations, growth plans and expected public-company costs for at least 12 months, while cautioning that future cash generation and financing availability are not assured.
- Q3 other income included a $5.7 million gain from reversing the tax receivable agreement liability and a $1.5 million unrealized gain on an Airgraft investment. The company also recorded an $11.0 million income-tax provision after establishing a full valuation allowance against deferred tax assets. These items materially affected reported results; the filing reports Q3 pretax income of $2.1 million but a net loss of $9.0 million.
- Nine-month results included a $12.1 million loss from the change in fair value of convertible notes, which converted into Class A shares at the IPO. The notes were no longer outstanding at September 30.
- Greenlane acquired Pollen Gear in January and Conscious Wholesale, a European wholesaler and retailer, on September 30. Conscious Wholesale consideration was estimated at $5.9 million, including $1.6 million of contingent consideration; purchase accounting was provisional. Management expected European operations to affect future sales.
- Sales are concentrated in supplier products: JUUL represented 45.0% of Q3 net sales, and two vendors together accounted for 54.5% of nine-month inventory purchases. Management cited the possibility of supplier changes or nonrenewals, shifting product demand, and reduced margins.
- Management discussed EVALI-related scrutiny and potential restrictions or taxes on vaping products, including flavored-product bans and JUUL’s discontinuation of mint products. It also cited potential impacts from cannabis/CBD regulation, competition, trade policy, and tariffs on imported child-resistant glass products.
- Five purported class-action lawsuits alleged IPO registration-statement disclosure violations. No class had been certified, damages could not be estimated, and the company said it intended to defend the claims.
- The company’s Up-C structure gives Greenlane approximately 23.9% of the Operating Company’s economic interest while noncontrolling holders own the balance; founders held approximately 83.0% of Greenlane’s voting power. Future unit redemptions and tax receivable agreement payments may affect cash needs. A $5.0 million share-repurchase program was authorized after quarter-end, on November 8, 2019.
Most important facts for investors to verify
- Whether revenue growth can continue while gross margins remain pressured, particularly given JUUL sales concentration and supplier dependence.
- Drivers and sustainability of operating cash outflows, inventory requirements, and the company’s ability to maintain liquidity without additional financing.
- Effects of vaping-related regulation, public-health concerns, taxes, and supplier product decisions on sales and margins.
- Final purchase accounting, contingent consideration, and operating contribution of Conscious Wholesale; also the performance of Pollen Gear.
- Deferred-tax-asset valuation, the tax receivable agreement’s potential future payments, and the noncontrolling-interest and voting structure.
- Developments and potential costs in the IPO-related lawsuits, and whether any share repurchases occur under the authorized program.