Greenlane Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Greenlane distributes cannabis accessories, packaging, vaporization products and lifestyle goods through its Consumer Goods and Industrial Goods segments. Comparisons are affected by the August 2021 KushCo merger, whose results were included only from the merger date in 2021.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $28.7 | $41.3 | $115.1 | $110.0 |
| Gross profit / margin | $5.0 / 17.3% | $1.5 / 3.6% | $19.0 / 16.5% | $19.1 / 17.4% |
| Operating loss | $(79.5) | $(27.7) | $(111.3) | $(41.2) |
| Net loss attributable to Greenlane | $(75.1) | $(16.3) | $(102.6) | $(23.6) |
| Net loss per Class A share | $(11.43) | $(8.19) | $(18.01) | $(19.60) |
Q3 operating loss includes a $66.8 million goodwill and indefinite-lived intangible impairment charge, recorded after declines in the share price and expected cash flows. The impairment eliminated goodwill, which was $41.9 million at year-end 2021. Management reported Q3 gross margin of 20.8% and nine-month margin of 20.8% excluding specified damaged and obsolete inventory write-offs; these adjusted figures are not GAAP margins.
- Segment mix: Q3 Consumer Goods sales fell 65.4% to $8.6 million, while Industrial Goods sales rose 21.2% to $20.1 million, substantially reflecting the KushCo acquisition comparison. Nine-month Consumer Goods sales fell 51.2% to $41.6 million; Industrial Goods sales increased 196.4% to $73.5 million.
- Liquidity: September 30 cash was $8.0 million, plus $2.2 million restricted cash; working capital was approximately $39.4 million, down from $53.8 million at December 31, 2021. Current assets were $86.5 million and current liabilities $47.1 million.
- Cash flow: Nine-month operating cash outflow was $22.5 million, versus $32.0 million in 2021. Investing provided $12.5 million, including proceeds from asset sales and the VIBES disposition; financing provided $7.5 million, including equity proceeds and asset-based borrowing. Cash and restricted cash declined by $2.7 million from the start of the period.
- Debt: Debt principal totaled $18.8 million at September 30, including a $15.0 million asset-based loan and Eyce and DaVinci notes; reported long-term debt, net of issuance costs, was $13.5 million, with $3.2 million current. The loan bears interest at prime plus 8%, is secured by company assets and was reported covenant-compliant. The $8.0 million related-party bridge loan and headquarters mortgage had been repaid.
Material changes and management plans
Q3 sales declined 30.6% year over year, largely due to a steep fall in Consumer Goods and lower third-party brand sales; nine-month reported sales grew 4.6%, mainly because 2022 included more KushCo activity. Management attributed weaker legacy Consumer Goods sales in part to its move away from lower-margin third-party brands, the VIBES sale, and disruption associated with ERP and customer-system implementations. The company is pursuing cost reductions, smaller facility footprints, price increases, non-core asset and inventory sales, and greater emphasis on proprietary Greenlane Brands.
Management said its 2022 liquidity initiatives could generate more than $30 million of liquidity on a non-dilutive basis by year-end if successful, including more than $10 million expected from inventory sales and sell-downs. However, Greenlane also completed a dilutive public equity-and-warrant offering after quarter-end to address short-term funding needs. Management stated that available cash would cover working capital, capital expenditures, debt service and other needs for at least 12 months, while also warning that capital-market access may be limited and future financing may not be available on favorable terms.
Risks, contingencies and subsequent events
- On October 27, 2022, Greenlane raised approximately $6.8 million net in an offering of 6.96 million Class A shares, pre-funded warrants for 1.38 million shares and 16.67 million warrants. The pre-funded warrants were exercised in November; the standard warrants are exercisable at $0.90 for seven years. This creates material potential dilution.
- A vendor settlement entered in October covered approximately $1.8 million of remaining inventory-related liabilities, payable in weekly installments through December 9, 2022.
- Greenlane disclosed potential VAT liabilities and penalties in European jurisdictions. The recorded VAT payable related to the matter was approximately $0.4 million at September 30; further costs and recovery from indemnifying sellers remain uncertain.
- Customer and supplier concentration is significant: one customer accounted for approximately 24% of Q3 sales, and the four largest vendors represented approximately 51.9% of Q3 sales and 66.9% of purchases.
- Disclosure controls and procedures were deemed ineffective at September 30 because previously identified material weaknesses in internal control over financial reporting had not been remediated. The company was continuing remediation and could not assure when it would be complete.
- After quarter-end, Greenlane announced its CEO would transition to a corporate development role effective January 1, 2023, and that it was exploring board changes. It also agreed to pay approximately $0.46 million to terminate a California lease; management estimated potential savings of $1.7 million, without assurance of the final amount.
The filing provides no formal numerical revenue or earnings guidance. Its forward-looking liquidity and savings expectations are conditional and subject to execution and financing risks.
Key facts for investors to verify
- Whether Greenlane can stabilize legacy Consumer Goods demand and improve segment-level gross margins while reducing inventory and operating costs.
- Cash runway and borrowing availability, including restrictions on the $15 million asset-based facility, scheduled debt payments and vendor settlement obligations.
- Actual proceeds and dilution from the October offering, warrant exercises and other equity issuances; compare against the share count reported as of November 10, 2022.
- Progress in remediating material weaknesses, completing ERP implementation and improving disclosure controls.
- Resolution and potential additional costs of the European VAT matter, and the collectability of related indemnification claims.
- Reconcile the headquarters sale proceeds: the filing cites approximately $9.6 million in one discussion and $9.95 million elsewhere.