Greenlane(GNLN) - 2023 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements (Unaudited) This section presents Greenlane Holdings, Inc.'s unaudited condensed consolidated financial statements for the quarter ended June 30, 2023, including balance sheets, statements of operations and comprehensive loss, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining business operations, significant accounting policies, and specific financial instrument details Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | | :------------------------------------------------------------------------------------------------ | :------------------------ | :------------------ | | ASSETS | | | | Cash | $4,651 | $6,458 | | Restricted cash | — | $5,718 | | Accounts receivable, net | $3,089 | $6,468 | | Inventories, net | $29,840 | $40,643 | | Total current assets | $49,486 | $76,703 | | Total assets | $114,483 | $146,053 | | LIABILITIES | | | | Accounts payable | $17,166 | $14,953 | | Total current liabilities | $35,289 | $35,659 | | Total liabilities | $39,433 | $50,694 | | STOCKHOLDERS' EQUITY | | | | Total stockholders' equity attributable to Greenlane Holdings, Inc. | $75,095 | $95,358 | | Total stockholders' equity | $75,050 | $95,359 | - Total assets decreased by $31.57 million (21.6%) from $146.05 million at December 31, 2022, to $114.48 million at June 30, 2023, primarily driven by a decrease in current assets, including cash, restricted cash, accounts receivable, and inventories[9] - Total liabilities decreased by $11.26 million (22.2%) from $50.69 million at December 31, 2022, to $39.43 million at June 30, 2023, mainly due to a significant reduction in notes payable[9] Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $19,625 | $39,916 | $43,584 | $86,450 | | Cost of sales | $15,051 | $31,817 | $33,491 | $72,383 | | Gross profit | $4,574 | $8,099 | $10,093 | $14,067 | | Total operating expenses | $14,103 | $21,773 | $29,273 | $45,952 | | Loss from operations | $(9,529) | $(13,674) | $(19,180) | $(31,885) | | Net loss attributable to Greenlane Holdings, Inc. | $(10,533) | $(12,124) | $(20,727) | $(27,456) | | Net loss per share - basic and diluted | $(6.56) | $(22.70) | $(12.96) | $(55.70) | - Net sales decreased by 50.8% for the three months ended June 30, 2023, and by 49.6% for the six months ended June 30, 2023, compared to the same periods in 2022[12] - Gross profit decreased by 43.5% for the three months and 28.3% for the six months ended June 30, 2023, year-over-year, despite an increase in gross margin percentage[12] - Net loss attributable to Greenlane Holdings, Inc. decreased by 13.1% for the three months and 24.5% for the six months ended June 30, 2023, compared to the same periods in 2022, indicating a reduction in losses[12] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance December 31, 2022 | Balance June 30, 2023 | | :------------------------------------------------ | :------------------------ | :-------------------- | | Total Stockholders' Equity | $95,359 | $75,050 | | Net loss | $(10,194) (Q1 2023) / $(10,533) (Q2 2023) | $(10,533) | | Equity-based compensation | $110 (Q1 2023) / $(11) (Q2 2023) | $(11) | | Issuance of Class A shares - Amended Eyce APA | $95 (Q1 2023) / $65 (Q2 2023) | $65 | | Other comprehensive income | $178 (Q1 2023) / $27 (Q2 2023) | $27 | - Total stockholders' equity decreased by $20.31 million from $95.36 million at December 31, 2022, to $75.05 million at June 30, 2023, primarily due to net losses[14] - The company issued Class A shares related to the Amended Eyce APA, contributing to additional paid-in capital[14] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $4,656 | $(13,730) | | Net cash provided by (used in) investing activities | $(253) | $(1,197) | | Net cash provided by (used in) financing activities | $(12,133) | $11,115 | | Net increase (decrease) in cash | $(7,525) | $(3,727) | | Cash and restricted cash, as of end of the period | $4,651 | $9,130 | - Net cash provided by operating activities significantly improved, moving from a use of $13.73 million in H1 2022 to a provision of $4.66 million in H1 2023, partly due to the ERC sale[17][54] - Net cash used in financing activities increased substantially to $12.13 million in H1 2023, compared to a provision of $11.12 million in H1 2022, primarily due to debt repayments[17][256] Notes to Condensed Consolidated Financial Statements NOTE 1. Business Operations and Organization - Greenlane Holdings, Inc. is a Delaware corporation, a holding company for Greenlane Holdings, LLC, which merchandises cannabis accessories, packaging, vaporization solutions, and lifestyle products globally[22][23] - The company has developed proprietary brands (Greenlane Brands) including Groove, Eyce, DaVinci, and Higher Standards, and holds exclusive licenses for Marley Natural and K.Haring branded products[24] - As of December 31, 2022, Greenlane owned 100% of the voting and economic interests in the Operating Company, simplifying its corporate structure[31] NOTE 2. Summary of Significant Accounting Policies - The company completed a one-for-20 reverse stock split in August 2022 and a one-for-10 reverse stock split in June 2023, retroactively adjusting all share and per share amounts[33][34][36] - Management has identified substantial doubt about the company's ability to continue as a going concern due to net losses and projected cash needs, contingent on successful execution of liquidity and profitability plans[55][247][248] - The company manages its global business through two reportable segments: Industrial Goods and Consumer Goods, based on how the CODM evaluates performance and allocates resources[57][153] NOTE 3. Business Acquisitions - An amendment to the Eyce Asset Purchase Agreement (Amended Eyce APA) in April 2022 accelerated the issuance of $0.9 million in Class A common stock and provided for $0.9 million in cash payments contingent on deliverables and continued employment[68][70] NOTE 4. Fair Value of Financial Instruments Contingent Consideration Fair Value (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :------------------------- | :------------ | :---------------- | | Contingent consideration | $2,541 | $2,738 | - The company revalues contingent consideration obligations associated with business acquisitions to fair value each period, using scenario-based methods with unobservable inputs[78] - The balance of contingent consideration decreased from $2.74 million at December 31, 2022, to $2.54 million at June 30, 2023, after cash payments and fair value adjustments[79] NOTE 5. Leases Future Minimum Lease Payments (in thousands) | Period | Operating Leases | | :------------------------ | :--------------- | | Remainder of 2023 | $637 | | 2024 | $914 | | 2025 | $942 | | 2026 | $81 | | Total minimum lease payments | $2,574 | | Present value of minimum lease payments | $2,478 | | Long-term portion | $1,473 | - Rent expense under operating leases decreased from $0.7 million to $0.6 million for the three months ended June 30, 2023, and from $1.4 million to $1.2 million for the six months ended June 30, 2023, compared to the same periods in 2022[85] NOTE 6. Debt Debt Balance (in thousands) | Debt Type | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Line of Credit | $5,548 | $15,000 | | DaVinci Promissory Note | $1,584 | $2,538 | | Eyce Promissory Note | — | $647 | | Total Debt (gross) | $7,132 | $18,185 | | Debt, net, excluding leases | $2,591 | $13,040 | - The company fully repaid the Eyce Promissory Note by June 30, 2023, and the Real Estate Note in September 2022[91][92] - The Asset-Based Loan (Line of Credit) was significantly reduced from $15.0 million to $5.55 million by June 30, 2023, with the remaining $4.3 million repaid in August 2023[88][101][102] NOTE 7. Commitments and Contingencies - The company is involved in various legal proceedings in the ordinary course of business but does not believe any pending matters will have a material adverse effect[104] - Potential claims related to non-income taxes (e.g., VAT) from various tax authorities could result in significant additional tax liabilities[105] NOTE 8. Supplemental Financial Statement Information - In February 2023, the company sold its Employee Retention Credit (ERC) receivable for approximately $4.9 million in cash[108] Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :------------ | :---------------- | | VAT payable | $3,258 | $2,809 | | Contingent consideration | $2,541 | $2,738 | | Accrued employee compensation | $2,665 | $3,812 | | Total Accrued expenses and other current liabilities | $11,718 | $11,882 | - The four largest vendors accounted for approximately 89.9% and 82.2% of total purchases for the three and six months ended June 30, 2023, respectively, indicating high supplier concentration[113] NOTE 9. Stockholders' Equity - The company completed a one-for-20 reverse stock split in August 2022 and a one-for-10 reverse stock split in June 2023, retroactively adjusting all share and per share amounts[116][117][118] - As of December 31, 2022, Greenlane owned 100% of the economic interests in the Operating Company, as all Common Units and Class B common stock were exchanged for Class A common stock[119] Class A Common Stock Sales under ATM Program (in thousands) | Metric | August 2021 (Inception) through June 30, 2023 | | :-------------------- | :-------------------------------------------- | | Class A shares sold | 97,262 | | Gross proceeds | $12,684 | | Net proceeds | $12,303 | - Due to untimely filing of its Q1 2023 10-Q, the company is unable to issue additional Class A common stock via its ATM Program or Shelf Registration Statement for 12 months, limiting capital market liquidity[124] NOTE 10. Compensation Plans - The Third Amended Plan, approved in June 2023, increased the authorized Class A common stock for issuance under the equity incentive plan by 209,862 shares to an aggregate of 319,862 shares[141] Equity-Based Compensation Expense (in thousands) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $28 | $261 | $79 | $935 | | Restricted shares | $(39) | $170 | $21 | $358 | | Total equity-based compensation expense | $(11) | $431 | $100 | $1,304 | NOTE 11. Income Taxes - Effective December 31, 2022, the Operating Company converted from a partnership to a disregarded entity, meaning 100% of its US income and expenses are now included in Greenlane's US and state tax returns[145] - A full valuation allowance was established against deferred tax assets as of June 30, 2023, and December 31, 2022, as management determined it was not more likely than not that sufficient taxable income would be generated to realize these benefits[146] - The Tax Receivable Agreement (TRA) liability was $0 as of June 30, 2023, and December 31, 2022, because the amount or timing of payments to noncontrolling interest holders was no longer probable or reasonably estimable[150] NOTE 12. Segment Reporting - Greenlane operates two reportable segments: Consumer Goods (proprietary brands, lifestyle products) and Industrial Goods (packaging, vaporization solutions for cannabis operators)[153][154][155] Segment Net Sales and Gross Profit (in thousands) | Segment | Net Sales (Q2 2023) | Net Sales (Q2 2022) | Gross Profit (Q2 2023) | Gross Profit (Q2 2022) | | :---------------- | :------------------ | :------------------ | :--------------------- | :--------------------- | | Consumer Goods | $6,025 | $15,912 | $1,803 | $3,064 | | Industrial Goods | $13,600 | $24,004 | $2,771 | $5,035 | | Total | $19,625 | $39,916 | $4,574 | $8,099 | - Both segments experienced significant declines in net sales year-over-year, with Consumer Goods decreasing by 62.1% and Industrial Goods by 43.3% for the three months ended June 30, 2023[157] NOTE 13. Subsequent Events - On August 7, 2023, the company repaid the remaining $4.3 million outstanding under the Asset-Based Loan, releasing it from its obligations[158] - In July and August 2023, Greenlane received approximately $3.0 million in cash from future receivables financings, with weekly payments scheduled for six to eight months[159] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Greenlane's financial performance and condition for the quarter ended June 30, 2023, highlighting significant revenue declines, cost reduction efforts, strategic partnerships, and ongoing liquidity challenges, including a going concern warning and Nasdaq listing deficiency Overview - Greenlane is a global platform for cannabis accessories, vape devices, and lifestyle products, strengthened by acquisitions of Eyce, DaVinci, and KushCo Holdings in 2021[167] - The company offers proprietary Greenlane Brands (Groove, Eyce, DaVinci, Higher Standards, Pollen Gear) and licensed products (Marley Natural, K.Haring) through wholesale, retail, and e-commerce channels[168][169][170] - Business is managed through two segments: Consumer Goods (direct-to-consumer, retail, e-commerce) and Industrial Goods (packaging, vaporization solutions for cannabis operators)[172] Plan to Accelerate Path to Profitability and Capitalize the Business - Greenlane is focused on achieving profitability and improving capitalization through cost reduction, margin enhancement, and strategic partnerships[173] - Strategic partnerships with MJ Pack (packaging) and a Vape Partner aim to reduce cost structure, enhance margins, and convert inventory to cash by shifting direct purchasing to commission-based models[174] - Other initiatives include renegotiating supplier terms, consolidating operations, reducing workforce (44.3% decrease in salaries/benefits for H1 2023), and liquidating excess/obsolete inventory[175][176] USPS PACT Act Exemption - In January 2022, Greenlane received a USPS PACT Act Exemption, allowing it to ship vaporizers and accessories (ENDS products) to compliant businesses, making over 97% of annual sales eligible for USPS and other major parcel carriers[180] - This exemption is expected to reduce shipping costs, decrease fulfillment times, and enhance customer experience for approved wholesale customers[181] Reverse Stock Splits - The company executed a one-for-20 reverse stock split in August 2022 and a one-for-10 reverse stock split in June 2023, retroactively adjusting all share and per share amounts[182][183][184] - These splits did not change the par value or authorized number of common stock shares, but adjusted outstanding options, restricted stock awards, and warrants[184] Nasdaq Deficiency Letter - On August 3, 2023, Greenlane received a Nasdaq deficiency letter for failing to maintain a minimum market value of $5.0 million for publicly held Class A common stock for 30 consecutive business days[185] - The company has a 180-calendar-day grace period until January 30, 2024, to regain compliance, which requires meeting the $5.0 million minimum for at least 10 consecutive business days[186] Results of Operations Consolidated Operating Results (in thousands) | Metric | Q2 2023 | Q2 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Net sales | $19,625 | $39,916 | $(20,291) | (50.8)% | | Gross profit | $4,574 | $8,099 | $(3,525) | (43.5)% | | Gross margin | 23.3% | 20.3% | +3.0% | | | Salaries, benefits and payroll taxes | $5,157 | $8,836 | $(3,679) | (41.6)% | | General and administrative | $6,968 | $10,588 | $(3,620) | (34.2)% | | Loss from operations | $(9,529) | $(13,674) | $4,145 | (30.3)% | | Net loss attributable to Greenlane | $(10,533) | $(12,124) | $1,591 | (13.1)% | - Net sales decreased by 50.8% for Q2 2023 and 49.6% for H1 2023, driven by a strategic shift to higher-margin in-house brands and rationalization of third-party offerings, as well as strategic partnerships in packaging and vape products[190][191][192] - Gross margin improved to 23.3% in Q2 2023 (from 20.3% in Q2 2022) and 23.2% in H1 2023 (from 16.3% in H1 2022), primarily due to reduced inventory write-offs[194][196] - Operating expenses significantly decreased, with salaries, benefits, and payroll taxes down 41.6% in Q2 2023 and 44.3% in H1 2023, and general and administrative expenses down 34.2% in Q2 2023 and 33.7% in H1 2023, reflecting major restructuring and cost reduction efforts[197][198][199][200] - Interest expense increased significantly by 245.1% in Q2 2023 and 157.9% in H1 2023, primarily due to the new Asset-Based Loan closed in Q3 2022[204][205] Segment Operating Performance Segment Net Sales and Gross Profit (in thousands) | Segment | Net Sales (Q2 2023) | Net Sales (Q2 2022) | Gross Profit (Q2 2023) | Gross Profit (Q2 2022) | | :---------------- | :------------------ | :------------------ | :--------------------- | :--------------------- | | Consumer Goods | $6,025 | $15,912 | $1,803 | $3,064 | | Industrial Goods | $13,600 | $24,004 | $2,771 | $5,035 | | Total | $19,625 | $39,916 | $4,574 | $8,099 | - Consumer Goods net sales decreased by 62.1% in Q2 2023 and 58.1% in H1 2023, due to a strategic shift towards higher-margin in-house brands and rationalizing third-party offerings, and the sale of the Vibes brand minority interest[215][216] - Industrial Goods net sales decreased by 43.3% in Q2 2023 and 44.3% in H1 2023, primarily due to transitioning out of the industry packaging business and entering strategic partnerships for vape products to reduce working capital and enhance margins[220][221] - Consumer Goods gross margin increased to 29.9% in Q2 2023 (from 19.3% in Q2 2022) and 29.6% in H1 2023 (from 17.8% in H1 2022), largely due to reduced inventory write-offs[218][219] - Industrial Goods gross margin increased to 20.2% in H1 2023 (from 15.3% in H1 2022), also attributed to lower inventory write-offs[223] Net Sales by Geographic Regions Net Sales by Geographic Region (in thousands) | Region | Q2 2023 Net Sales | Q2 2022 Net Sales | H1 2023 Net Sales | H1 2022 Net Sales | | :------------- | :---------------- | :---------------- | :---------------- | :---------------- | | United States | $18,560 | $37,601 | $40,952 | $80,592 | | Canada | $119 | $874 | $425 | $2,729 | | Europe | $946 | $1,441 | $2,207 | $3,129 | | Total | $19,625 | $39,916 | $43,584 | $86,450 | - United States net sales decreased by 50.6% in Q2 2023 and 49.2% in H1 2023, reflecting the company's strategic shift and restructuring efforts[226][227] - Canadian net sales saw a significant decline of 86.4% in Q2 2023 and 84.4% in H1 2023, attributed to reduced sales and marketing spend, with the company evaluating distribution channels[228][229] - European net sales decreased by 34.4% in Q2 2023 and 29.5% in H1 2023, primarily due to restructuring efforts aimed at improving profitability[230][231] Liquidity and Capital Resources Liquidity Metrics (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :---------------- | | Cash | $4,651 | $6,458 | | Working capital | $20,600 | $41,000 | - The company's cash position decreased from $6.46 million to $4.65 million, and working capital decreased from $41.0 million to $20.6 million between December 31, 2022, and June 30, 2023[232] - Substantial doubt exists about the company's ability to continue as a going concern due to net losses, projected cash needs, and current liquidity levels, contingent on successful execution of management's plans[247][248] - Management's plan to improve liquidity and profitability includes further reducing operating costs, increasing revenue through new products and customers, executing strategic partnerships, and seeking additional capital[247][248] - Recent capital raises include $3.8 million from the July 2023 Offering and $3.0 million from Future Receivables Financings in July/August 2023[237][241] Cash Flows Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $4,656 | $(13,730) | | Net cash provided by (used in) investing activities | $(253) | $(1,197) | | Net cash provided (used in) by financing activities | $(12,133) | $11,115 | - Operating activities generated $4.7 million in cash in H1 2023, a significant improvement from $13.7 million cash used in H1 2022, primarily due to a $20.6 million decrease in working capital and the ERC sale[251] - Financing activities used $12.1 million in cash in H1 2023, compared to $11.1 million provided in H1 2022, mainly due to $11.8 million in debt service payments, including $10.2 million for the Asset-Based Loan[256] Critical Accounting Policies and Estimates - The company refers to its Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of critical accounting policies and estimates[258] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that quantitative and qualitative disclosures about market risk are not required for the company - The company is not required to provide quantitative and qualitative disclosures about market risk[259] Item 4. Controls and Procedures Management concluded that Greenlane's disclosure controls and procedures were not effective as of June 30, 2023, due to un-remediated material weaknesses in internal control over financial reporting. The company is actively implementing a remediation plan, including a new ERP system, but expects limited efforts on legacy system controls - As of June 30, 2023, the CEO and CFO concluded that disclosure controls and procedures were not effective due to un-remediated material weaknesses in internal control over financial reporting[261] - The company is implementing a multi-year ERP system to replace existing core financial systems, expected to be completed in 2023, which will result in changes to internal control over financial reporting[263][265] - Remediation efforts include enhancing risk assessment, improving documentation, strengthening review procedures, and educating control owners, but material weaknesses related to user access controls are not expected to be remediated until the new ERP system is fully implemented[263][264] PART II. Other Information Item 1. Legal Proceedings This section refers to Note 7 of the financial statements for a description of the company's material pending legal proceedings - Information on material pending legal proceedings is detailed in Note 7 of the Condensed Consolidated Financial Statements[268] Item 1A. Risk Factors This section highlights that there have been no material changes to the risk factors previously disclosed, except for the substantial doubt about the company's ability to continue as a going concern, driven by ongoing net losses, cash needs, and a challenging macroeconomic environment - No material changes to risk factors from the 2022 Annual Report on Form 10-K, except for the substantial doubt about the company's ability to continue as a going concern[269][270] - The going concern risk is due to net losses ($20.8 million in H1 2023, $125.9 million in FY 2022), cash needs, current liquidity levels, and weaker demand in the macroeconomic environment[270] - The company's ability to continue as a going concern is contingent on successfully executing management's plan to improve liquidity and profitability, including cost reductions, revenue growth, strategic partnerships, and seeking additional capital[272] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities or use of proceeds to report[273] Item 5. Other Information This section states that there is no other information to report - No other information is reported in this section[274] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to the certificate of incorporation, forms of warrants and purchase agreements related to the July 2023 Offering, and certifications required by the Sarbanes-Oxley Act - Exhibits include amendments to the Certificate of Incorporation, forms of July 2023 Standard and Pre-Funded Warrants, July 2023 Warrant Amendment, July 2023 Securities Purchase Agreement, and Placement Agency Agreement[276] - Certifications from the Chief Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed[276]