Greenlane(GNLN) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents Greenlane Holdings, Inc.'s unaudited condensed consolidated financial statements, reflecting significant changes from the KushCo merger, including asset and liability increases, growing revenues, and widening net losses Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, highlighting substantial growth in assets and equity primarily due to the KushCo merger Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash | $13,215 | $30,435 | | Inventories, net | $61,545 | $36,064 | | Goodwill | $32,862 | $3,280 | | Intangible assets, net | $80,216 | $5,945 | | Total Assets | $266,798 | $122,650 | | Liabilities & Equity | | | | Total current liabilities | $49,183 | $41,856 | | Total liabilities | $66,606 | $53,393 | | Total stockholders' equity | $200,192 | $69,257 | | Total Liabilities and Stockholders' Equity | $266,798 | $122,650 | - Total assets more than doubled from $122.7 million at year-end 2020 to $266.8 million as of September 30, 2021, primarily driven by significant increases in Goodwill and Intangible Assets resulting from recent acquisitions, notably the merger with KushCo[10] Condensed Consolidated Statements of Operations and Comprehensive Loss This section details the company's financial performance, showing increased net sales but a sharp decline in gross profit and a widening net loss Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $41,314 | $35,764 | $110,038 | $102,032 | | Gross profit | $122 | $2,467 | $15,206 | $16,613 | | Loss from operations | $(27,699) | $(13,815) | $(41,222) | $(37,845) | | Net loss | $(28,715) | $(13,793) | $(42,269) | $(36,844) | | Net loss attributable to Greenlane | $(16,281) | $(4,493) | $(23,580) | $(11,005) | | Net loss per share (basic and diluted) | $(0.41) | $(0.35) | $(0.98) | $(0.95) | - Net sales increased 15.5% YoY for the third quarter of 2021, but gross profit plummeted by 95.1% from $2.5 million to just $0.1 million[12] - Operating expenses nearly doubled, leading to a significant increase in net loss attributable to the company, which grew to $16.3 million from $4.5 million in the prior-year quarter[12] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash movements, indicating increased cash usage in operations and investing, partially offset by financing activities Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(32,028) | $(3,756) | | Net cash used in investing activities | $(14,256) | $(3,579) | | Net cash provided by (used in) financing activities | $28,871 | $(310) | | Net decrease in cash | $(17,220) | $(7,780) | - For the first nine months of 2021, the company used significantly more cash in operating activities ($32.0 million) compared to the prior year ($3.8 million)[20] - Cash used in investing activities also increased substantially to $14.3 million, primarily for acquisitions[20] - These outflows were largely offset by $28.9 million in cash provided by financing activities, mainly from the issuance of Class A common stock[20] Notes to Condensed Consolidated Financial Statements These notes detail accounting policies and financial results, including the KushCo merger, other acquisitions, segment performance, legal contingencies, and financing activities - On August 31, 2021, Greenlane completed its merger with KushCo Holdings, Inc., with legacy Greenlane stockholders owning 51.9% and former KushCo stockholders owning 48.1% of the combined company on a fully diluted basis, and KushCo's financial results are included from the merger date forward[24] - The company continues to be impacted by business and supply chain disruptions from the COVID-19 pandemic, including increased air freight costs, difficulties securing freight space, and severe congestion at U.S. ports[40] - Subsequent to the quarter end, on October 13, 2021, the company entered into an agreement to acquire the DaVinci brand for a total consideration of up to $20.0 million, consisting of cash and Class A common stock[165] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the transformational KushCo merger, focus on higher-margin proprietary brands, Q3 2021 revenue increase, sharp gross margin decline due to inventory rationalization, regulatory impacts, and bolstered liquidity - The August 2021 merger with KushCo is described as transformational, creating a leading ancillary cannabis company serving over 8,000 retail locations, including major MSOs and LPs[172] - The company is strategically focused on growing its proprietary 'Greenlane Brands' (e.g., VIBES, Pollen Gear, Marley Natural), which deliver higher margins, with sales of these brands growing 25.7% in Q3 2021 compared to Q3 2020[173][179] Greenlane Brands Sales Performance (in millions) | Period | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $8.4 | $6.7 (approx) | +25.7% | | Nine Months Ended Sep 30 | $25.9 | $19.4 | +33.4% | - Regulatory changes, particularly the amendment to the PACT Act affecting Electronic Nicotine Delivery Systems (ENDS), are creating logistical burdens and higher shipping costs, though management believes Greenlane is well-positioned to handle these challenges compared to competitors[188][190][191] - Gross margin for Q3 2021 fell to 0.3% from 6.9% in Q3 2020, and for the nine-month period, it decreased to 13.8% from 16.3%, primarily due to an $8.7 million inventory adjustment related to post-merger product rationalization[203] - The company bolstered its liquidity through an 'at-the-market' (ATM) equity program and a public offering of common stock and warrants in August 2021, which generated net proceeds of approximately $29.9 million[214][215] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company reports no material changes to its market risk disclosures since its Annual Report on Form 10-K for the year ended December 31, 2020 - There were no material changes to the company's market risk disclosures since the 2020 Form 10-K[225] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were ineffective as of September 30, 2021, due to un-remediated material weaknesses, with a new ERP system implementation planned for early 2022 as part of the remediation - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of September 30, 2021[227] - The ineffectiveness is attributed to material weaknesses identified in the 2020 Form 10-K, which are still undergoing remediation[227][228] - A key part of the remediation plan is the implementation of a new ERP system, expected to be completed in early 2022, and the company is also integrating KushCo's operations into its system of internal controls[229][230][231] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section refers to Note 7 for details on material pending legal proceedings, primarily merger-related complaints alleging omitted information, which the company believes are without merit - The company is facing several legal complaints related to the merger with KushCo, alleging that filed documents were false or misleading due to omitted information, and the company believes these claims are without merit and intends to defend them vigorously[119][120] ITEM 1A. RISK FACTORS The company reports no material changes to its risk factors since its Annual Report on Form 10-K for 2020 and its Q2 2021 Form 10-Q - There have been no material changes to the company's risk factors since the Q2 2021 Form 10-Q[235] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company disclosed the unregistered issuance of 31,768 Class A common shares on July 6, 2021, in exchange for Class B common stock and Common Units of the Operating Company - On July 6, 2021, the company issued 31,768 shares of Class A common stock in a private exchange for Class B common stock and Common Units of the Operating Company[236] ITEM 6. EXHIBITS This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, warrant forms, equity plans, and CEO/CFO certifications SIGNATURES