Greenlane Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Greenlane sells cannabis accessories and liquid nicotine products through wholesale, e-commerce, and retail channels in the United States, Canada, and Europe. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $35.8 | $44.9 | $102.0 | $147.8 |
| Gross profit / margin | $2.5 / 6.9% | $6.4 / 14.3% | $16.6 / 16.3% | $24.6 / 16.6% |
| Operating loss | $(13.8) | $(5.5) | $(37.8) | $(14.6) |
| Net loss | $(13.8) | $(9.0) | $(36.8) | $(29.8) |
| Net loss attributable to Greenlane | $(4.5) | $(6.4) | $(11.0) | $(25.8) |
- Nine-month operating cash use was $3.8 million, compared with $33.5 million in 2019. Investing activities used $3.6 million; financing activities used $0.3 million. Cash declined $7.8 million from year-end 2019 to $40.0 million.
- At September 30, cash was $40.0 million and working capital was $64.8 million. Total debt excluding leases was approximately $8.2 million, principally the real estate note. No borrowings were outstanding on the $15 million revolving credit line.
- Total assets were $128.8 million, total liabilities $49.4 million, and stockholders’ equity $79.5 million. The balance sheet included $7.6 million of VAT payable and $4.5 million of VAT receivable.
Material changes versus the prior comparable period
- Q3 sales fell 20.3%; nine-month sales fell 31.0%. U.S. sales declined 24.9% in Q3 and 36.1% year to date; Canada declined 29.3% and 34.1%, respectively. Europe contributed $2.3 million in Q3 and $7.2 million year to date following the 2019 acquisition of Conscious Wholesale.
- Management attributed lower sales primarily to FDA restrictions on flavored vaping products, reduced low-margin JUUL sales, COVID-19 disruption, and Canadian regulatory uncertainty. Q3 JUUL sales were $3.3 million, or 9.2% of sales, versus $20.2 million, or 45%, a year earlier.
- Q3 gross margin fell to 6.9%, mainly reflecting approximately $3.2 million of inventory write-offs and net realizable value adjustments; management said these reduced margin by about 9 percentage points. Higher-margin Greenlane Brand sales rose to $5.6 million, or 15.5% of Q3 sales, from $3.4 million, or 7.5%.
- Nine-month results included a $9.0 million goodwill impairment. Q3 general and administrative expense included a $2.2 million charge for an indemnification asset management did not consider probable of recovery.
Outlook, risks, and unusual items
- Management’s prior goal of returning to cash-flow-positive operations in Q4 2020 shifted to 2021; timing may shift further. Management believed cash on hand would fund working capital, capital expenditures, debt repayments, and other requirements for at least 12 months.
- Management expects to focus on higher-margin Greenlane Brands, supply and packaging, and direct-to-consumer sales, and expects European revenue to increase. E-commerce sales grew $8.3 million, or 160%, in the first nine months. September B2B monthly sales were approximately $7.8 million versus $4.2 million in April.
- The company is consolidating distribution operations and using third-party logistics facilities. It reported $1.7 million of lease-closure-related charges during the first nine months and reduced its workforce by 77 employees; an additional 16 North American employees were cut in October. Management estimated annual savings of $3.8 million from earlier reductions and $1.7 million from the October reductions, excluding payroll and other taxes.
- COVID-19, evolving FDA and other vaping-product restrictions, supplier availability, and weak demand remain risks. The revolving credit facility was due to expire November 30, 2020 and would not be renewed; the company was evaluating future banking relationships.
- European VAT reviews produced the $7.6 million payable and $4.5 million receivable. Recovery beyond a $0.9 million bank-guaranteed indemnification asset is uncertain; further costs, penalties, litigation, or unrecovered amounts may arise.
- Five purported securities class actions relating to the IPO were consolidated in Florida state and federal courts; motions to dismiss were pending. The company said it believed the claims were without merit but could not estimate damages or costs.
- Disclosure controls were deemed ineffective as of September 30 because of previously reported material weaknesses, including IT user-access controls. Remediation continued; a new ERP implementation was expected to be completed during 2021.
Important facts for investors to verify
- Whether the company achieves its revised 2021 cash-flow-positive objective and maintains adequate liquidity after the credit line expires.
- Whether inventory rationalization improves turnover and margins without further material write-offs.
- Potential final VAT liabilities, recovery from the European sellers, and any related penalties or legal costs.
- Effects of FDA, state, and international vaping rules on sales, and the sustainability of growth in higher-margin brands and e-commerce.
- Progress in remediating material weaknesses and implementing the new ERP system, as well as developments in the IPO-related lawsuits.