Greenlane Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2019. The quarterly financial results are those of Greenlane Holdings, LLC, the operating company; Greenlane Holdings, Inc. was formed as a holding company and had no substantive business activity before the April 2019 IPO.
Business context
Greenlane distributes vaporizers, consumption accessories, and related products through wholesale, supply and packaging, channel and dropship, and e-commerce channels in the U.S. and Canada. It reported more than 7,000 wholesale customers and over 5,400 SKUs. The IPO and related reorganization occurred after quarter-end.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $49.9 million | $43.3 million |
| Gross profit / margin | $9.0 million / 18.0% | $9.1 million / 20.9% |
| Operating income (loss) | $(5.2) million | $2.3 million |
| Net income (loss) | $(17.7) million | $2.3 million |
| Adjusted EBITDA (non-GAAP) | $(0.8) million | $2.7 million |
| Cash from operating activities | $(7.3) million | $(2.8) million |
At March 31, cash was $2.8 million, working capital was approximately $28.0 million, and total current liabilities were $35.1 million. Total liabilities were $106.4 million. Debt included $60.3 million of convertible notes, an $8.4 million real estate note, and $0.3 million drawn on a $15 million revolving facility; lease liabilities were additional. The company reported compliance with its credit agreement covenants.
Changes versus prior period
- Sales grew 15.3%, primarily reflecting Canadian cannabis legalization and higher sales in Canada: approximately $6.9 million versus $2.1 million. U.S. sales rose 4.7%.
- Cost of sales increased 19.6%, faster than revenue, and gross margin declined 2.9 percentage points to 18.0%.
- Operating expenses more than doubled, with salaries, benefits and payroll taxes up $5.1 million. Drivers included 79 additional employees and approximately $2.8 million in equity-based compensation.
- The $17.7 million net loss included a $12.1 million noncash charge from the fair-value remeasurement of convertible notes. Adjusted net loss, also non-GAAP, was $1.5 million.
- Operating cash use increased to $7.3 million, with working capital investment in inventory and receivables among the cash demands.
Outlook, material events and risks
- IPO after quarter-end: On April 23, Greenlane sold 5.25 million primary shares at $17 per share and reported net proceeds of approximately $80.4 million. Proceeds went to the operating company. The convertible notes converted into 3,547,776 Class A shares at a settlement price equal to 80% of the IPO price. The IPO proceeds therefore were not part of March 31 cash.
- Management planned to use approximately $2 million of IPO proceeds for facility and IT capital expenditures, with the remainder for working capital and general corporate purposes, including potential acquisitions or investments; no such commitments were reported.
- Management stated that available liquidity was expected to support operations, growth, planned capital expenditures, and public-company costs for at least 12 months, while cautioning that future cash generation and financing availability were not assured. It expected higher general and administrative expenses as a public company and higher income-tax expense following the IPO.
- No formal revenue or earnings guidance was provided. Management said near-term cost of sales would likely rise with revenue and remain relatively consistent as a share of sales; it also expected increased operating and public-company expenses.
- Supplier concentration is significant: JUUL products represented approximately 42% of Q1 2019 sales; PAX represented 11.6%. The company also cited reliance on third-party suppliers, short-term distribution agreements, product-mix volatility, and dependence on retailers without long-term purchase commitments.
- The IPO established an Up-C structure. Greenlane initially owned approximately 23.9% of operating-company economics but controls its management. Founder-associated Class C shares represented approximately 83.0% of Greenlane’s voting power. The Tax Receivable Agreement provides eligible members 85% of certain realized tax benefits; management expected payments under it to be significant.
- The company acquired Pollen Gear LLC in January for a 4% operating-company equity interest, with a preliminary purchase allocation including $3.5 million of goodwill. Management reported no pending legal proceeding expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether sales growth can be sustained while restoring gross margins, particularly given product and supplier concentration.
- Cash conversion and working-capital needs, including inventory levels, receivable collections, and the effect of continued operating cash outflows.
- Post-IPO debt balances and liquidity, including the conversion of the notes, revolver availability, and any related covenant requirements.
- The economic and governance effects of the Up-C structure, member unit redemptions, and expected Tax Receivable Agreement payments.
- Whether non-GAAP adjusted results adequately reflect ongoing compensation, public-company costs, and other recurring expenses.