Greenlane Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; comparable quarterly financial statements are not provided in the supplied text. Financial amounts below are in U.S. dollars.
Business context
Greenlane distributes vaporizers, cannabis accessories, packaging and related products through wholesale, supply-and-packaging, e-commerce and retail channels. It reported U.S., Canadian and European segments; the European segment began with the September 2019 acquisition of Conscious Wholesale. The company completed its IPO in April 2019, receiving approximately $79.5 million in net proceeds.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $185.0 million | $178.9 million |
| Gross profit / margin | $31.1 million / 16.8% | $35.7 million / 20.0% |
| Operating loss | $24.9 million | $2.5 million |
| Consolidated net loss | $39.8 million | $5.9 million |
| Net loss attributable to Greenlane Holdings, Inc. | $28.8 million | $5.9 million |
| Adjusted EBITDA (non-GAAP) | $(13.4) million | $4.1 million |
| Cash used in operating activities | $36.9 million | $13.6 million |
| Cash at year-end | $47.8 million | $7.3 million |
| Working capital at year-end | $88.7 million | $26.7 million |
Cost of sales rose 7.5%, faster than sales growth of 3.4%. Operating expenses increased to $56.0 million from $38.2 million, including higher payroll, equity compensation and public-company costs. FY2019 included a $12.1 million loss from the change in fair value of convertible notes, which converted into Class A shares at the IPO. A $10.0 million valuation allowance on deferred tax assets contributed to the $10.9 million income-tax provision despite the pretax loss.
At year-end, total liabilities were $38.9 million. Long-term debt included approximately $8.2 million outstanding on the real-estate note; the $15 million revolving credit facility had no borrowings outstanding. The real-estate note’s floating rate was hedged with a swap. The company reported no material off-balance-sheet arrangements.
Material changes and operating developments
- Sales increased $6.1 million, or 3.4%. Canada grew 48.3% to $22.1 million; Europe contributed $2.6 million; U.S. sales declined 2.3% to $160.2 million.
- Vaporizers and components remained the dominant product category but declined to 76.0% of sales from 83.1%. Hemp-derived CBD products generated $3.4 million in 2019.
- Lower gross margin was attributed primarily to JUUL sales. Management said it was shifting away from high-volume, lower-margin business toward higher-margin sales and proprietary brands.
- In Q4, house brands represented 11.8% of sales, approximately $4.4 million. JUUL sales were $5.9 million, down from $20.2 million in Q3; the reported share of sales fell to 15.9% from 45.4%.
- The company acquired Pollen Gear in January and Conscious Wholesale in September, expanded in Europe, and continued developing Vapor.com and proprietary brands.
Outlook, risks and unusual items
Management stated that cash and available resources were expected to meet operating and other liquidity needs for the following 12 months, but warned that additional financing might be needed if operating cash flows or credit availability proved insufficient. No specific revenue or earnings guidance was provided.
COVID-19 had already reduced sales to independent smoke and vape retailers: average daily revenue from these customers fell approximately 43% between the periods January 1–March 14 and March 15–April 22, 2020. Vapor.com merchandise revenue increased more than 100% from March 15, although online sales were a minority of FY2019 revenue. Management cautioned that pandemic effects on results and liquidity were uncertain; it also reported temporary store and office closures, expense reductions and furloughs or layoffs.
- Regulatory restrictions on vaping products, including FDA enforcement priorities, affected products equal to 17.8% of FY2019 sales, versus 25.6% in FY2018. The filing identifies potential further sales impacts.
- Supplier concentration is significant: JUUL products were 38.7% of FY2019 net sales and PAX products 11.1%. Two vendors together accounted for 49.8% of sales.
- Federal cannabis-law uncertainty, evolving CBD rules, tariffs and anti-dumping/countervailing duties on certain glass imports could affect demand, costs or product availability.
- Five purported securities class actions related to the IPO were consolidated in state and federal courts. Greenlane filed motions to dismiss; it said damages were not estimable and outcomes uncertain.
- Management identified material weaknesses in risk assessment, control activities and monitoring, including inventory controls, journal-entry review and IT access. Disclosure controls were deemed ineffective as of December 31, 2019; remediation was ongoing.
- The auditor gave an unqualified opinion on the financial statements, but was not engaged to provide an opinion on internal-control effectiveness.
Most important facts for investors to verify
- Whether operating cash burn, inventory and vendor deposits can be managed without materially reducing the year-end cash balance or requiring new financing.
- Whether gross margins and operating losses improve as Greenlane reduces JUUL exposure, grows proprietary brands and consolidates distribution facilities.
- Current effects of COVID-19 on independent retailer customers, online sales, suppliers and the company’s liquidity.
- How vaping regulation, supplier concentration and import duties affect sales, product access and margins.
- Progress in remediating material weaknesses and any subsequent financial-reporting or inventory-control issues.
- Developments and potential costs in the IPO-related litigation, and the timing and dilution implications of Common Unit redemptions and the Tax Receivable Agreement.