Greenlane Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context
Greenlane distributes cannabis accessories, packaging, vaporization solutions and lifestyle products across Consumer Goods and Industrial Goods. It is shifting toward proprietary, higher-margin brands and reducing lower-margin third-party offerings, while restructuring operations and working capital.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $24.0 | $46.5; down 48.5% |
| Gross profit / margin | $5.5 / 23.0% | $6.0 / 12.8% |
| Operating expenses | $15.0 | $24.2; down 37.8% |
| Operating loss | $(9.5) | $(18.2) |
| Net loss attributable to Greenlane | $(10.2); $(0.64) per share | $(15.3); $(3.40) per share |
| Cash from operating activities | $1.9 | $(12.0) |
| Cash and working capital at March 31 | $5.9 cash; $25.7 working capital | December 31, 2022: $6.5 cash; $41.0 working capital |
Gross margin improved year over year partly because Q1 2022 included $5.8 million of damaged and obsolete inventory write-offs; excluding those write-offs, margin declined from 25.3% to 23.0%. Operating cash flow benefited from inventory and other working-capital reductions, including approximately $4.9 million collected through the ERC transaction.
Consumer Goods sales were $7.8 million, down 54.4%, with gross margin of 29.3%. Industrial Goods sales were $16.1 million, down 45.1%, with gross margin of 20.0%. Sales fell across both segments as Greenlane resized operations, rationalized product offerings and focused on profitability.
Debt totaled $10.7 million before unamortized issuance costs, including an $8.5 million asset-based line of credit and Eyce and DaVinci promissory notes. The balance-sheet carrying amount was $8.2 million, including $2.7 million current. The company repaid approximately $6.6 million under its asset-based loan in February; the loan bears interest at prime plus 8%. Greenlane reported compliance with its loan covenants. Financing cash outflow was $8.2 million, mainly from debt repayments and loan costs.
Changes, outlook and risks
- Management said it is pursuing profitability in 2023 through cost reductions, facility consolidation, supplier renegotiations, inventory reduction and investment in proprietary brands. Workforce reductions during 2022 helped lower Q1 salaries and benefits expense by 46.6% year over year.
- In April 2023, Greenlane entered packaging and vape partnerships. Management expects these to reduce costs, improve margins and release cash from inventory, but noted they may reduce reported revenue. The company also said E&O inventory sales and other non-core inventory reductions could generate more than $10 million in liquidity; this is an expectation, not a reported result.
- Management believes available cash and operating cash flow will fund working capital, capital expenditures, debt service and other needs for at least 12 months. However, access to capital is constrained: the shelf/ATM program is subject to public-float limits, and a proposed $8 million unit offering registration had not become effective as of the filing. Management cautioned that financing or trade credit could become less available.
- Greenlane sold its ERC payment rights for approximately $4.9 million cash. It reported one customer represented 26% of Q1 sales; its four largest vendors represented 79.7% of purchases.
- Potential contingencies include European VAT matters and other tax claims. Greenlane is suing related-party customer Unrivaled to collect an outstanding $0.4 million receivable and cannot assure recovery. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Disclosure controls were deemed ineffective at March 31, 2023 because previously reported material weaknesses in internal control had not been remediated. The company was implementing a new ERP system, expected to be completed in 2023.
- After quarter-end, the board proposed seeking approval for a 1-for-5 to 1-for-15 reverse stock split and issued Series A Preferred Stock with substantial voting power limited to the split proposal and certain adjournment votes. The split was not yet approved or effected in the filing.
Important facts for investors to verify
- Whether the cost reductions, strategic partnerships and inventory sell-down deliver the expected margin, cash and profitability improvements—and how much revenue may be lost in the process.
- Cash conversion and liquidity durability: operating cash flow was positive but relied on working-capital reductions and the ERC sale; working capital fell $15.3 million from year-end.
- Debt repayment obligations, the high floating interest rate, covenant compliance and access to additional financing, including the status of the proposed offering.
- Customer and supplier concentration, collection of the Unrivaled receivable, and resolution or potential costs of VAT and other tax matters.
- Progress in remediating internal-control weaknesses and implementation of the new ERP system.
- Approval, timing and final terms of the proposed reverse stock split and related preferred-stock voting arrangements.