Greenlane Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Greenlane distributes cannabis accessories, packaging, vaporization and lifestyle products through its Consumer Goods and Industrial Goods segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $11.8 | $28.7 | $55.4 | $115.1 |
| Gross profit / margin | $3.1 / 26.5% | $5.0 / 17.3% | $13.2 / 23.9% | $19.0 / 16.5% |
| Operating loss | $(6.9) | $(137.5) | $(23.1) | $(169.4) |
| Net loss | $(10.1) | $(137.2) | $(27.9) | $(170.5) |
| Interest expense | $3.4 | $0.9 | $5.1 | $1.6 |
- Sales declined 58.9% in Q3 and 51.9% for the first nine months. Gross margin improved, which management attributed to shifting toward higher-margin owned brands and commission-based vape sales, and away from lower-margin products.
- At September 30, cash was $2.4 million, versus $6.5 million at year-end 2022. The balance sheet shows current assets of $37.5 million and current liabilities of $31.7 million, implying working capital of $5.8 million; MD&A instead reports approximately $6.4 million.
- Debt totaled $7.0 million, all classified as current: $4.2 million under a secured bridge loan, $2.2 million in future-receivables financings and $0.7 million on the DaVinci note. The company repaid its asset-based loan in August 2023. The receivables financings require weekly payments and were scheduled for repayment within six to eight months.
- The cash-flow statement reports $1.2 million of cash provided by operating activities for the nine months, compared with $22.5 million used in 2022. The 2023 figure included approximately $4.9 million from monetizing the employee retention credit. Investing activities used $0.6 million and financing activities used $10.5 million.
- Total assets were $48.4 million and total stockholders’ equity was $15.4 million at quarter-end.
Material changes versus the prior comparable period
- Consumer Goods sales fell 30.1% in Q3 and 52.4% year to date. Industrial Goods sales fell 71.1% in Q3 and 51.6% year to date, including the impact of moving major vape customers to commission revenue and exiting packaging inventory purchases.
- Operating expenses fell substantially, including nine-month salary and benefit costs down $11.3 million and general and administrative expenses down $10.6 million. The 2022 comparison included $124.8 million of impairment charges; no comparable impairment charge was recorded in 2023.
- Interest expense increased, which the company attributed in part to accelerated amortization of deferred financing costs upon exiting the asset-based loan and acquisition-related notes.
- Equity financing and warrant activity increased potential dilution. The July 2023 offering generated approximately $3.8 million net proceeds; the company also issued pre-funded and standard warrants and reduced exercise prices on certain existing warrants.
Outlook, risks and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern for the next 12 months and that cash may be insufficient to fund planned operations into Q1 2024. Its plans include further cost reductions, revenue growth, margin-supportive partnerships and additional debt or equity capital. There is no assurance these actions will succeed.
- Strategy: Management is prioritizing profitability over top-line sales, expanding proprietary brands, reducing lower-margin third-party offerings, exiting packaging inventory purchases, and pursuing a vape-partner commission model. These actions may reduce reported revenue; expected margin and cash benefits depend on execution.
- Nasdaq: The filing describes deficiencies involving minimum public-float market value and bid price, with stated compliance deadlines of January 30 and February 20, 2024, respectively. A separate late-filing deficiency was cured by filing this report. Delisting could impair share liquidity and access to capital.
- Controls: Disclosure controls were not effective as of September 30, 2023 because previously reported material weaknesses in internal control over financial reporting remained unremediated. Management identified ERP implementation and other control improvements as part of its remediation efforts.
- Contingencies: The company disclosed potential VAT-related liabilities and penalties in European jurisdictions, tax exposure, and a lawsuit seeking repayment of an approximately $0.4 million balance from Unrivaled; recovery is uncertain. No litigation reserves were recorded.
- Unusual comparison: 2022 results included large impairment charges, while 2023 operating cash flow benefited from selling the ERC receivable. The filing’s MD&A also describes nine-month 2023 operating cash flow as “used” despite the cash-flow statement showing cash provided.
- No quantified revenue or earnings guidance is provided in the filing.
Important facts for investors to verify
- Reconcile the working-capital figure in MD&A with the balance-sheet calculation, and confirm the sign and description of operating cash flow in MD&A against the cash-flow statement.
- Assess available liquidity, weekly receivables-financing payments, bridge-loan terms and near-term obligations, including whether additional financing is available.
- Track execution and cash impact of restructuring and strategic partnerships, alongside continued sales declines and customer concentration.
- Review Nasdaq compliance status and the remediation and testing of material weaknesses in internal controls.
- Evaluate dilution from outstanding warrants and future capital needs, as well as outcomes of VAT and other legal or tax contingencies.