Greenlane Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Greenlane sells cannabis accessories and liquid nicotine products through wholesale, e-commerce, retail and packaging channels in the United States, Canada and Europe.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $34.0 | $33.9 |
| Gross profit / gross margin | $7.3 / 21.5% | $7.3 / 21.6% |
| Operating loss | $(7.9) | $(17.7) |
| Net loss | $(7.7) | $(16.7) |
| Net loss attributable to Greenlane | $(4.3) | $(4.5) |
| Basic and diluted loss per Class A share | $(0.28) | $(0.43) |
| Net cash used in operating activities | $(15.3) | $(1.1) |
- At March 31, cash was $12.3, down from $30.4 at December 31, 2020. Working capital was approximately $43.0, versus $58.2 at year-end.
- Debt, excluding lease liabilities, was $10.6 gross: an $8.1 real estate note and a $2.5 Eyce acquisition note. The revolving credit line was not renewed in November 2020 and had no balance outstanding.
- Cash used in investing activities was $2.8, including $2.4 paid for the Eyce acquisition and $0.4 of capital expenditures. Financing activities used $0.1.
- Management reported adjusted EBITDA, a non-GAAP measure, of $(5.2), compared with $(6.3) a year earlier. This measure excludes specified items and is not a substitute for GAAP results.
Material changes versus Q1 2020
- Sales were nearly flat overall, but the mix shifted: U.S. sales rose 5.7% to $28.7; Canadian sales fell 41.9% to $2.6; and European sales rose 19.2% to $2.8.
- Management said nicotine sales fell 65.2% to $1.7, while Greenlane Brand sales, including Eyce, increased 18.4% to $8.5. Greenlane Brands represented 25.1% of sales, versus 21.3% a year earlier.
- Gross margin was broadly unchanged. Improved merchandise margins were offset by $0.9 of additional damaged and obsolete inventory write-offs and $0.5 of higher third-party profit-sharing fees.
- The GAAP operating and net loss comparisons improved substantially, mainly because Q1 2020 included a $9.0 goodwill impairment charge. Greenlane-attributable net loss narrowed modestly.
- Operating cash use increased to $15.3, largely reflecting lower accounts payable and accrued expenses, including a $10.5 decrease in accounts payable.
Outlook, commentary and risks
- No numerical revenue or earnings guidance was provided. Management stated that cash on hand was expected to cover working capital, capital expenditures, debt repayments and other existing operating needs for at least 12 months. The company also received a $4.1 Dutch VAT refund in April 2021.
- Greenlane acquired Eyce on March 2 for preliminary total consideration of $8.1, including cash, stock, a promissory note and contingent consideration. The purchase-price allocation remained preliminary.
- Greenlane agreed to merge with KushCo Holdings; management expected closing in the second half of 2021, subject to stockholder, regulatory and other conditions. The filing cautions that closing is not assured. The stated expected ownership was approximately 50.1% for existing Greenlane holders and 49.9% for KushCo holders, subject to adjustment. Possible termination fees of $8.0 and dilution are among the disclosed risks.
- Management cited continuing COVID-19 effects on physical retail: U.S. retail sales fell 57.1% and European retail revenue fell 73.1% year over year. It also reported supply-chain disruption from winter storms and port backlogs.
- PACT Act requirements and USPS, FedEx and UPS shipping restrictions create uncertainty around eligible products, shipping costs and delivery times. Broader carrier restrictions could adversely affect sales and margins.
- European VAT matters remain contingent. At March 31, VAT payable was $7.4 and VAT receivable was $4.2; the April refund reduced the receivable to approximately $0.1. A $1.6 indemnification asset was recorded for amounts management believed probable of recovery, but additional recovery is uncertain. German authorities had commenced a criminal investigation, and other jurisdictions could investigate; penalties, litigation costs and other expenses may result.
- Four major vendors accounted for 42.9% of sales and 35.5% of purchases in Q1 2021. The filing also identifies evolving product regulation, vaping-related public-health concerns, and potential tax and shipping restrictions as business risks.
- Disclosure controls and procedures were deemed ineffective at March 31 because previously reported material weaknesses in internal control over financial reporting had not been remediated. A new ERP system was being implemented, with financial reporting changes expected to begin in Q2 2021.
Important facts for investors to verify
- Whether operating cash use moderates and cash, working capital and supplier-payment trends remain adequate.
- Whether Greenlane improves underlying margins and reduces obsolete-inventory write-offs while continuing its shift toward higher-margin brands.
- How PACT Act implementation and carrier policies affect shipping availability, cost, delivery times and sales.
- The resolution, recoverability and potential additional costs related to European VAT liabilities and seller indemnification.
- Whether the KushCo merger closes on the expected terms and timeline, including final exchange ratio, approvals, dilution and any termination-fee exposure.
- Progress in remediating material weaknesses and implementing and testing controls under the new ERP system.