Greenlane Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Greenlane distributes cannabis accessories, vaporizers and liquid nicotine products through wholesale, e-commerce and retail channels in the U.S., Canada and Europe.
Key financial results
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $33.9 | $49.9 | Down 32.1% |
| Gross profit / margin | $7.3 / 21.6% | $9.0 / 18.0% | Margin up 3.6 percentage points |
| Operating expenses | $25.0 | $14.2 | Includes $9.0 goodwill impairment in 2020 |
| Operating loss | $(17.7) | $(5.2) | Loss widened |
| Net loss | $(16.7) | $(17.7) | Loss narrowed |
| Net loss attributable to Greenlane Holdings, Inc. | $(4.5) | $(17.7) | 2019 comparator predates post-IPO consolidation presentation |
| Adjusted net loss (non-GAAP) | $(6.1) | $(1.5) | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(6.3) | $(0.8) | Loss widened |
Q1 2020 diluted loss per Class A share was $0.43; the filing does not present a comparable Q1 2019 per-share figure. The company’s post-IPO consolidation and non-controlling interests affect period comparisons.
Cash flow, liquidity and debt
- Operating cash use was $1.1 million, compared with $7.3 million in Q1 2019. Investing cash use was $2.3 million, including $1.0 million of capital expenditures and $1.3 million related to the Conscious Wholesale acquisition. Financing cash use was $0.1 million.
- Cash was $43.7 million at March 31, 2020, down from $47.8 million at December 31, 2019. Working capital was $81.6 million, versus $88.7 million at year-end.
- Debt consisted mainly of an $8.3 million real estate note; net long-term debt excluding leases was $8.0 million. No amounts were drawn on the $15 million revolving credit facility, which matured August 23, 2020. The company reported compliance with its credit covenants at quarter-end.
- Operating and finance lease liabilities totaled $5.0 million. Total liabilities were $35.9 million.
Material changes versus the prior comparable period
- U.S. sales declined 37.0% to $27.1 million; Canadian sales declined 35.3% to $4.4 million. Europe contributed $2.3 million following the 2019 Conscious Wholesale acquisition.
- Management attributed lower sales to FDA restrictions on flavored ENDS products, a strategic pullback from lower-margin JUUL sales, COVID-19 disruptions and, in Canada, regulatory uncertainty and an unusually strong prior-year comparison.
- Gross margin improved to 21.6% from 18.0%, which management linked to a richer mix of higher-margin Greenlane Brands and reduced JUUL sales. Greenlane Brands generated $6.3 million, or 18.5% of sales, versus $4.6 million, or 9.2%, a year earlier.
- General and administrative expense rose 60.8% to $8.7 million, including higher public-company, legal, subcontractor, rent and software costs. Salaries and benefits fell 18.2%, partly due to lower equity compensation.
- Other income/expense improved substantially because Q1 2019 included a $12.1 million convertible-note fair-value expense. The notes converted in connection with the 2019 IPO and were no longer outstanding.
Outlook, management commentary and risks
- Before COVID-19, management had anticipated returning to cash-flow-positive operations by Q4 2020. It continued to work toward that goal but warned timing could shift depending on the pandemic.
- Management reported significant sales declines among independent smoke and vape shop customers amid stay-at-home orders; some could close permanently. E-commerce sales increased after mid-March, with Vapor.com average weekly merchandise revenue up approximately 96% from the pre-restriction period through May 23, 2020, but online sales were a small share of Q1 revenue.
- The company recorded a $9.0 million U.S. goodwill impairment, citing COVID-19 impacts on current and forecast wholesale revenue and FDA product restrictions. Further impairments may arise if conditions or assumptions worsen.
- Management was consolidating distribution operations into fewer, more automated facilities. It expected approximately $2.4 million in annual savings from workforce reductions of 50 employees; subsequent facility closures and potential lease costs were disclosed.
- Regulatory risks include FDA enforcement concerning flavored and unauthorized ENDS products, state and local sales restrictions and product taxes, and changing cannabis rules. The filing also notes U.S. countervailing duties of approximately 25% to 320% on certain Chinese glass-container imports that may affect sourcing costs.
- Five purported IPO-related securities class actions were consolidated in state and federal proceedings. The company said it intended to defend the claims; damages, if any, could not be estimated.
- Disclosure controls and procedures were reported ineffective at March 31, 2020 because of previously identified material weaknesses. The company was implementing a remediation plan. The filing was submitted under SEC COVID-19 timing relief after remote-work disruptions delayed accounting and review processes.
- Management stated that available liquidity was expected to cover existing needs for the next 12 months, while cautioning that cash generation, credit availability and access to additional financing were not assured.
Important facts for investors to verify
- Whether sales and cash flow recover as retail customers reopen, and whether the stated path toward positive cash flow remains achievable.
- Whether improved gross margin and growth in Greenlane Brands can offset lower sales and ongoing operating costs.
- Availability and renewal or replacement of the revolving credit facility, and the effect of debt, lease and potential restructuring payments on liquidity.
- Further COVID-19, FDA, state-level and import-duty effects on product availability, demand, costs and goodwill valuations.
- Progress in remediating internal-control weaknesses and developments in the IPO-related litigation.