Greenlane Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless stated otherwise, amounts are in U.S. dollars. Greenlane distributes cannabis accessories, vaporization products, hemp-derived CBD and liquid nicotine products through wholesale, supply-and-packaging, e-commerce and retail channels. It completed its IPO and related reorganization on April 23, 2019; prior-period financials reflect the predecessor operating company, so comparisons span a material change in corporate structure. The January 2019 acquisition of Pollen Gear also affects comparability.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $53.0 million | $40.6 million | $102.9 million | $83.8 million |
| Gross profit / margin | $9.2 million / 17.3% | $8.4 million / 20.7% | $18.1 million / 17.6% | $17.5 million / 20.8% |
| Operating income (loss) | $(3.9) million | $0.3 million | $(9.1) million | $2.7 million |
| Net income (loss) | $(3.2) million | $0.2 million | $(20.9) million | $2.5 million |
| Adjusted EBITDA (non-GAAP) | $(1.2) million | $1.1 million | $(2.0) million | $3.8 million |
| Operating cash flow | $(11.5) million | $(3.6) million | $(18.8) million | $(6.4) million |
Q2 revenue rose 30.6% year over year, while gross margin fell 3.4 percentage points. Six-month revenue grew 22.7%, but gross margin declined 3.2 points. Higher personnel costs, equity compensation and other operating expenses contributed to operating losses. Six-month net loss included a $12.1 million non-cash loss from the change in fair value of convertible notes; those notes converted into Class A shares at the IPO.
- Cash and working capital: $69.3 million cash and $105.5 million working capital at June 30, versus $7.3 million and $26.7 million, respectively, at December 31, 2018.
- Financing and debt: The IPO generated approximately $80.4 million of net proceeds to Greenlane. The $15 million revolving facility had no borrowings and $15 million available at quarter-end. Long-term real-estate debt was approximately $8.4 million; convertible notes were fully converted. The company reported compliance with its credit covenants.
- Other obligations: Operating and finance lease liabilities totaled $2.6 million. The Tax Receivable Agreement liability was $5.7 million; Greenlane is generally required to remit 85% of specified realized or deemed tax benefits to operating-company members.
- Cash use: Six-month investing cash outflow was $1.2 million; financing inflow was $81.8 million, primarily reflecting IPO and note proceeds.
Material changes and management commentary
- Management attributed sales growth principally to Canadian cannabis legalization and increased sales of leading product lines, including e-cigarette products. Canada merchandise sales rose 181% in Q2; U.S. merchandise sales rose 22.3%.
- JUUL products represented 48.3% of Q2 net sales and 44.1% of six-month net sales, versus 37.4% and 39.8% in the respective 2018 periods. Products from two major vendors accounted for 51% of six-month inventory purchases.
- Cost of sales grew faster than revenue, reflecting product mix and merchandise costs; volume purchase rebates partly offset the increase. Salaries, benefits and payroll taxes rose 94.7% in Q2, including $1.7 million of equity-based compensation and costs associated with 65 additional employees.
- Management expects cost of sales to rise in absolute dollars with revenue and remain relatively consistent as a share of sales; it also expects near-term general and administrative expense to increase as the business grows and incurs public-company costs. The filing provides no numerical revenue or earnings guidance.
- Greenlane’s Up-C structure leaves it with 23.9% of the Operating Company’s economic interests at June 30, while non-controlling holders own 76.1%. Founders and affiliates hold approximately 83% of Greenlane’s voting power. Management stated that available liquidity should fund operations, growth, planned capital expenditures and public-company costs for at least 12 months, but cautioned that operating cash generation and financing availability may not suffice.
Risks, contingencies and unusual items
- A purported IPO-related class action was filed August 2, 2019, alleging material misstatements or omissions in the IPO registration statement. The class was not certified, damages could not be estimated, and Greenlane said it intended to defend the claim.
- Key risks include supplier and product concentration, short-term distribution agreements, changing consumer demand, regulatory restrictions and taxes on e-cigarettes and vaporizers, inventory-demand estimation, competition, and the ability to generate cash for growth. Management reported that enacted local e-cigarette sales bans were expected to have minimal revenue impact, but broader restrictions could be adverse.
- Other exposures include customer credit concentration (one customer represented 14.3% of accounts receivable at quarter-end), LIBOR transition risk for variable-rate debt, Canadian-dollar exposure, and potential future TRA payments. A July 11, 2019 interest-rate swap fixed the rate on the $8.4 million real-estate note at 2.0775%.
- Management reported effective disclosure controls at June 30, 2019 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth can be sustained without further gross-margin erosion, particularly given product mix and substantial JUUL exposure.
- How operating cash use, inventory growth and receivable collections evolve relative to sales and the company’s stated liquidity needs.
- The recurring versus non-recurring components of compensation, public-company costs and adjusted EBITDA; non-GAAP measures exclude material expenses and should be read alongside GAAP results.
- The outcome and potential financial effect of the IPO class action, which the filing says could not be estimated.
- The potential timing and amount of TRA payments, and the effect of future Common Unit redemptions, dilution and concentrated voting control.
- Comparability of reported periods after the IPO/reorganization and Pollen Gear acquisition, and the status of acquisition purchase-price allocation, described as preliminary.