Greenlane Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results are in U.S. dollars; financial statement amounts below are in millions unless noted. Greenlane distributes cannabis accessories, packaging, vaporization products and lifestyle goods through Consumer Goods and Industrial Goods segments. The August 2021 KushCo merger materially affects year-over-year comparisons: 2022 includes KushCo, while the comparable 2021 reported results generally do not.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $39.9 | $34.7 | $86.5 | $68.7 |
| Gross profit / margin | $8.1 / 20.3% | $9.1 / 26.1% | $14.1 / 16.3% | $17.6 / 25.6% |
| Operating loss | $(13.7) | $(5.6) | $(31.9) | $(13.5) |
| Consolidated net loss | $(14.5) | $(5.8) | $(33.2) | $(13.6) |
| Net loss attributable to Greenlane | $(12.1) | $(3.0) | $(27.5) | $(7.3) |
| Class A loss per share | $(2.27) | $(3.23) | $(5.57) | $(9.07) |
Sales increased 15.0% in Q2 and 25.8% in the first half, principally because KushCo contributed $24.0 million and $53.4 million, respectively. Excluding KushCo, management reported sales declines of 54.2% for Q2 and 50.5% for the first half versus reported 2021 sales. Consumer Goods sales fell 46.9% in Q2 and 45.4% in the first half; Industrial Goods sales reflected the acquired KushCo business.
Margins weakened as the business mix shifted toward lower-margin KushCo products, Greenlane Brands sales declined, and inventory rationalization generated write-offs. Inventory write-offs were $1.4 million in Q2 and $6.8 million in the first half of 2022, compared with $0.2 million and $1.2 million in 2021. Excluding these write-offs, management reported gross margins of 23.9% for Q2 and 24.2% for the first half of 2022, still below the respective prior-year adjusted margins of 26.6% and 27.4%. The company retrospectively reclassified outbound shipping and handling from cost of sales to general and administrative expense, affecting reported gross margin presentation.
Operating expenses rose 48.8% in Q2 and 47.6% in the first half. Drivers included higher payroll and severance, acquisition-related depreciation and amortization, freight, insurance, bad debt, and ERP-related costs. Cash used in operating activities was $13.7 million in the first half, versus $15.2 million in 2021. Cash used in investing was $1.2 million; financing provided $11.1 million, mainly from equity issuance. Cash declined to $9.1 million from $12.9 million at December 31, 2021.
Financial position, debt and liquidity
At June 30, 2022, total assets were $264.6 million, total liabilities $82.2 million, and stockholders’ equity $182.4 million. Working capital was approximately $44.8 million, down from $53.8 million at year-end 2021. Inventory was $60.8 million and vendor deposits $11.5 million.
Debt outstanding was $20.6 million before debt issuance costs and balance-sheet classifications; it included an $8.0 million secured bridge loan from a company director, bearing 15% interest, and acquisition-related notes. The bridge loan was repaid in full by July 19, 2022. The headquarters mortgage was classified with assets and liabilities held for sale; its maturity was subsequently amended to December 1, 2022. Greenlane also reported approximately $6.0 million payable to an inventory vendor and was negotiating a repayment plan. After a $1.0 million cash payment and return of approximately $1.3 million of inventory, it estimated about $3.5 million remained, subject to vendor confirmation.
After quarter-end, the company sold its 50% interest in VIBES for $5.3 million cash and entered into an asset-based loan agreement for a term loan of up to $15.0 million; $1.0 million was in a blocked account pending borrowing-base conditions. Management said cash on hand would be sufficient for at least 12 months, while acknowledging dependence on operations and financing sources. The company also said planned liquidity initiatives could generate more than $30 million by year-end if successful, including the asset-based loan, asset sales, headquarters disposition and inventory reductions; these estimates are not assured.
Material changes, outlook and risks
- Strategy and operating changes: The 2022 plan included workforce and facility reductions, product rationalization, pricing actions, non-core asset sales and a focus on proprietary brands. Nicotine-product sales were zero in the first half of 2022, compared with $2.0 million in the prior-year period. ERP and new CRM/B2B systems also affected sales and operating costs.
- Capital access and dilution: The June offering raised approximately $5.0 million net and included warrants; pre-funded warrants were exercised in July. Nasdaq issuance limits temporarily constrained access to the ATM program and shelf registration. Management noted that prior ATM sales were dilutive and that market conditions or share-price performance could limit future financing.
- Concentration and credit exposure: One customer accounted for approximately 21% of Q2 sales and 19% of first-half sales. Two customers represented 23% and 12% of accounts receivable at quarter-end. The filing reports substantial supplier concentration, including four vendors accounting for 83.3% of purchases in Q2 and 74.0% in the first half.
- Contingencies: European VAT matters remained subject to uncertainty, including potential penalties, litigation and the collectability and timing of seller indemnification. The company recorded $0.9 million of VAT payable related to the matter at quarter-end. Management said ordinary-course legal proceedings were not expected to have a material adverse effect, but outcomes are uncertain.
- Controls: Management concluded disclosure controls and procedures were not effective at June 30, 2022 because previously reported material weaknesses in internal control over financial reporting had not been remediated. Remediation was ongoing; effectiveness had not yet been demonstrated through sufficient operation and testing.
- Other notable events: A one-for-20 reverse stock split became effective August 9, 2022; share and per-share data in the filing are retrospectively adjusted. The COO’s departure was announced for September 2022, and a new President was appointed in August.
Important facts for investors to verify
- Whether post-merger sales trends stabilize, particularly the sharp decline in legacy Consumer Goods and Greenlane Brands sales.
- Whether gross margins improve after inventory write-offs and product rationalization, and whether planned cost reductions deliver savings.
- Cash burn, remaining vendor obligations, mortgage repayment and the conditions, availability and cost of the asset-based loan.
- Progress and realized proceeds from the headquarters and other asset sales, inventory reductions, and the VIBES disposition.
- Potential dilution from outstanding warrants and future financing needs, given restrictions on equity issuance and limited cash resources.
- Resolution of VAT exposures, indemnification recoveries, customer and supplier concentration risks, and remediation of internal-control material weaknesses.