Earnings Transcript for GNLN - Q1 Fiscal Year 2023

Operator: Good afternoon and welcome to today’s conference call to discuss Greenlane Holdings First Quarter Financial Results. A press release detailing the financial results for the quarter ended March 31, 2023 was distributed today and is available on the Investor Relations section of Greenlane website at investor.gnln.com. As a reminder, today’s conference is being recorded. A replay of this call as well as a copy of the supplemental earnings slides will be archived on the company’s website at investor.gnln.com. On the call today are Craig Snyder, Chief Executive Officer; and Lana Reeve, Chief Financial and Legal Officer. Before we begin, Greenlane would like to remind listeners that today’s prepared remarks may contain forward-looking statements and management may make additional forward-looking statements in response to the questions received. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company’s management and involve the inherent risks and uncertainties and other factors discussed in today’s press release. This call also contains time-sensitive information that speaks only as the date of the live broadcast, May 15, 2023. Factors that could cause Greenlane’s results to differ materially are set forth in today’s press release and in Greenlane’s quarterly report form 10-Q filed with the SEC. Any forward-looking statements made today on this call are based on assumptions as of today, and Greenlane assumes no obligation to update these statements as a result of new information or future events. During today’s call, Greenlane management may discuss non-GAAP financial measures, including adjusted SG&A and adjusted EBITDA. Greenlane has included a reconciliation of these non-GAAP measures in today’s press release, which is available in the Investor Relations section of the company’s website at investor.gnln.com. I would now like to turn the call over to Mr. Craig Snyder, Chief Executive Officer of Greenlane. Please go ahead, Craig.

Craig Snyder: Hello, everyone and thank you for attending our first quarter 2023 earnings call. We have been busy here at Greenlane executing on our aggressive transformative strategy for our path to profitability. As I mentioned during our 2022 year end call, we continue to maintain three key areas of focus for Greenlane

Lana Reeve: Thanks Craig and hello everyone. Thank you for joining us on the call today. As a reminder, the results I will be reviewing for you can be found in our earnings release that is available on EDGAR in the Investor Relations section of our website at investor.gnln.com. Starting with net sales. For the first quarter of 2023, total net sales were approximately $24 million compared to approximately $22 million for the 3 months ended December 31, 2022, representing an increase of $2 million or 9%. The quarter-over-quarter increase was primarily driven by an increase in the consumer goods segment of $1.3 million or 19.3% increase and an increase in the industrial segment of $0.7 million or a 4.6% increase. The increase in the consumer goods segment revenue was driven by higher Eyce through Storz & Bickel and PAX sales. This compares to the company’s reported $46.5 million in total net sales for the first quarter of 2022, representing a decrease of $22.6 million or 48.5% year-over-year. The year-over-year decrease in net sales was due to our major restructuring efforts, and our shift in strategy to focus on our in-house brands that carry a higher margin profile while rationalizing our third-party brand offerings, which generate top line revenue with lower margins. The company is focused on profitable revenue, and as a result, top line revenue has significantly been reduced. Net sales were also affected by the sale of the company’s minority interest in the VIBES brand during 2022 and in the company’s announcement of its intention to sell its packaging business, which adversely affected sales. For the first quarter of 2023, gross profit was $5.5 million compared to $5.9 million for the prior quarter, representing a decrease of $0.4 million or 6.1%. Gross margin decreased by 3.7% to 23% for Q1 2023 compared to gross margin of 26.7% for the prior quarter. The decrease in margin is due to a negative impact to cost of goods sold due to inventory adjustments and staff expense of $0.6 million for Q1 2023 versus $0 for Q4 2022. Excluding the $0.6 million negative impact recorded in Q1 2023, gross margin is 25.4% for Q1 2023 compared to 26.7% for Q4 2022. The company reported gross profit of $5.5 million and gross margin of 23% for Q1 2023 compared to $6 million and gross margin of 12.8% for Q1 2022. Excluding inventory write-offs of damage and obsolete inventory for Q1 2022 of $5.8 million compared to $0 for Q1 2023, gross margins decreased 2.3% to 23% for Q1 2023 compared to 25.3% for the same period in 2022. Total operating expenses decreased $7.1 million or 32% for Q1 2023 to $15 million compared to $22.2 million for the prior quarter. Excluding intangibles impairment charges of $4.6 million for Q4 2022, total operating expenses decreased $2.5 million or 14% to $15 million compared to $17.6 million for the prior quarter. The decrease is a result of cost reduction throughout the quarter, which were related to our ongoing corporate initiatives to reduce operating spend as a percentage of revenue. Total operating expenses decreased by approximately $9.1 million or 37.8% to $15 million for the 3 months ended March 31, 2023, compared to $24.2 million for the same period in 2022. The decrease is related to a greater than 50% reduction in workforce and a major restructuring effort by the company to rightsize the business and focus on profitability. Net loss for Q1 2023 was $10.2 million compared to a loss of $13.5 million for the prior quarter, inclusive of a $4.6 million intangible asset impairment charge. Net loss attributable to Greenlane Holdings, Inc. was $10.2 million or $0.64 per share basic and diluted compared to a loss of $13.3 million or $1.02 per share basic and diluted for the prior quarter. This compares to the company’s reported net loss of $18.7 million and a net loss attributable to Greenlane Holdings, Inc. of $15.3 million or $3.40 per basic and diluted share for the first quarter of 2022. The company’s efforts to rightsize the business and focus on profitability has resulted in an $8.5 million or 45.3% reduction in net loss for Q1 2023 compared to the same period in 2022. Adjusted EBITDA loss for Q1 2023 was $6.8 million compared to a loss of $7.6 million for the prior quarter. The company reported a $5.3 million adjusted EBITDA loss for the same comparable period in 2022. We ended the quarter with $5.9 million in total cash and working capital of $25.7 million compared to $41 million as of December 31, 2022. The company continues to reduce the working capital cycle focused on operating more efficiently with lower inventory levels. We ended the quarter with $37 million in net inventory versus $40.6 million as of December 31, 2022. The company recently reduced the $15 million loan facility in February of this year by over 40% to $8.5 million, while also receiving $4.8 million from the sale of its employee retention credit. The company will continue focusing on improving cash flow from operations and managing existing debt. With that, I will now turn it back over to Craig.

Craig Snyder: Thank you, Lana. In summary, Greenlane delivered improved financial performance during the quarter, achieving quarter-over-quarter revenue growth of 9%, improved profitability with a quarter-over-quarter reduction in G&A of 23% and 16 new innovative product launches. The company’s strategic initiatives focused on innovation and effective cost management strategies continued to improve, position it well for future growth. We maintain a positive market outlook and a roadmap for profitability. Greenlane remains confident in its ability to generate value for its shareholders and maintain its leadership position in the industry. Thank you for your time today and we look forward to your questions. I will now turn it back over to the operator to begin Q&A.

Operator: [Operator Instructions] Your first question is coming from Aaron Grey with Alliance Global Partners. Please post your question. Your line is live.

Remi Smith: Hi. This is Remi Smith on for Aaron Grey. Thanks for the questions. So my first one is in regards, can you just speak about the progress you made in your asset-light models for CCELL and your packaging business? Have both those partnerships been coming together as expected? And then when do you expect to realize the margin benefits for those?

Craig Snyder: Yes. Thanks for the question, Remi. And yes, they continue to be on track with where we expect. It will largely affect the third quarter and fourth quarter of the year as we will work through the inventory that’s currently on our balance sheet in Q1 and Q2. And the reason for those structures is pretty clear. One, when we are doing those investments in those products, the cash flow timing becomes challenging as that cash is tied up sometimes in excess of six months to seven months from manufacturer to sale, to invoice, to receive the payment. So, this allows us to move a lot quicker and not have cash tied up for that significant period of time. Meanwhile, that inventory that’s already been paid for will act as a funding event for the business as we won’t have to refill that inventory, it will just that as capital coming back into the business. And as I mentioned, I think the timing on most of that benefit where we will see the revenue go from a gross basis to a net basis will really start in Q3, probably the middle of Q3 and run through Q4 where we expect revenues to decline in line with the net recognition, but also you will expect to see gross margin percentages rise.

Remi Smith: Great. And that was more so in the 3Q. So, I guess for 2Q, do you expect a little bit more fluctuation as you continue to work through that inventory? Is that kind of sounding right?

Craig Snyder: Yes. I don’t – I think the timing on it is a little different. What we see is some of the large MSOs that are our main customers in that Industrial segment do pull forward a lot of inventory in Q1 and Q2, so to be determined in Q2. Q1 was a strong quarter industrialized for us as we indicated. Q2 is off to a strong start as well. I think the back half of Q2 is where you will start to see that transition from our products that are on our balance sheet to products that are off balance sheet and that we have recognized now.

Remi Smith: Great. And then my last question, kind of in regards to your CPG business. Your expectations for that over the rest of the year, I know you talked a little bit about new product launches in 1Q and a little bit in 2Q. And then are you seeing any impact from a constrained consumer wallet on any of those high-ticket items? And then how is your sales mix between the kind of high and low ticket items?

Craig Snyder: Sure. I think there – so first, that is the reason we launched Groove is we wanted to have a brand that was much more approachable for the new user or the average user. And we say on that product, it’s approachable and affordable. The other side of the house is really the connoisseur side where you are dealing with vaporizers that may be in excess of $300. We do see a little bit of a barbell type in the space for those that are very experienced users and want to continue to get premium products. But where I would say we are seeing more growth is in that – in the more affordable segment and therefore, Groove has had a nice start for us really just starting in Q4 and Q1. And we expect to see a lot more in that marketplace. We are seeing heavy strength in the disposable marketplace and the rechargeable marketplace. Those are two segments where Groove will play well, and we are kind of seeing that across the board. So, there still is a blend, but I would say more of the emphasis or more of the pull-through in the marketplace has been on the more modest end of the spectrum, and that’s a reflection, I think of two things, more new users coming online and a reflection, as you mentioned, in the consumer wallet.

Remi Smith: Great. Thank you. I will hop back in the queue.

Operator: [Operator Instructions] There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Craig Snyder for any closing remarks.

Craig Snyder: Thanks everyone. I appreciate your time today and for joining the Greenlane call. We continue to make progress against our plan and look forward to keeping you updated as we make that progress. Appreciate everyone’s time today. Thank you.

Operator: Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.