Greenlane Holdings, Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to today’s call to discuss Greenlane Holdings Second Quarter 2022 Financial Results. A press release detailing the financial results for the quarter ended June 30, 2022 was distributed earlier this morning and is available on the Investor Relations section of the 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 IR website at investor.gnln.com. On the call today are Nick Kovacevich, Chief Executive Officer; Darsh Dahya, Chief Accounting Officer; and Craig Snyder, President. 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 inherent risks and uncertainties and other factors discussed in today’s press release. This call also contains time-sensitive information that speaks only as of the date of this live broadcast, August 16, 2022. Factors that could cause Greenlane’s results to differ materially are set forth in today’s press release and in Greenlane’s Annual Report on Form 10-K for the year ended December 31, 2021 and quarterly report on Form 10-Q for the three months ended June 30, 2022, previously 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 gross margin, 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. Nick Kovacevich, Chief Executive Officer of Greenlane. Please go ahead, Nick.

Hello, everyone, and thank you for attending our second quarter 2022 earnings call. We've been extremely busy here at Greenlane over the past several months. Our team has done a tremendous job executing on key initiatives while navigating a challenging macro environment on multiple fronts, including the continued global supply chain headwinds, record inflation, cannabis marketplace pricing compression, and negative sentiment in both the cannabis and broader capital markets. In order to best position Greenlane to meet these challenges and thrive when these headwinds finally subside, we have taken action to properly fund the company and reduce costs considerably, while accelerating our timetable to shift the business into much higher margin and higher value segments. The recent accomplishments include raising $5.4 million through a registered direct offering in June, and selling our interest in VIBES for $5.3 million in July, which in turn allowed us to repay $8 million in short-term debt. Shortly after doing so, we were able to secure an asset-based loan for $15 million from an institutional lender, which will provide the company with non-dilutive financing to help support our working capital needs as we make progress on our overall plan to become the premier house of brands business in the ancillary cannabis marketplace. While properly funding the company was our priority over the last several months, we remain committed to reducing our overall operating costs to sustainable levels. Once again, our team made great progress on several key cost-cutting initiatives, including exiting and eliminating ongoing expenses associated with six of our operating facilities in the United States and Europe. Here, we streamlined our operating and retail footprint, which allows us to achieve over $900,000 of annualized cost savings. Furthermore, we also restructured a longstanding arrangement with one of our key vendors to free up meaningful working capital and eliminate approximately $500,000 of annual expenses. We also continue to make progress on discontinuing selling and distributing lower-margin third-party brands and turning previously reserved inventory back into cash. In fact, we have sold over $2 million of previously reserved inventory since we announced our plan to do so back in March. We also completed our strategic SKU rationalization project and created our new go-forward combined product catalog, which is available online at greenlane.com. Another notable accomplishment in recent months includes the implementation of our compliant B2B PACT Act shipping program through USPS, where we remain one of the only companies, to our knowledge, in the cannabis industry to actually receive this exemption. It isn't easy to be compliant and there are hefty costs to doing things the right way. But we believe this will be a huge advantage for Greenlane in the future as enforcement of regulations will eventually catch up to competition operating in violation of PACT Act rules. While we are proud of the accomplishments thus far, we remain focused on transforming Greenlane into a highly profitable and highly valuable consumer House of Brands business, our long-time stated goal. In order to efficiently complete this transition and properly capitalize the future business, we have made a strategic decision to try to further monetize our existing packaging business by listing this portion of business for sale. Our packaging business is a great business but not necessarily aligned to our future House of Brands strategy. In addition, given our current market capitalization, we believe there exists a unique opportunity to unlock more value with a strategic transaction and bring in substantial cash through a disposition of this segment that currently isn't represented in our public share price. Exiting the Packaging business will not only allow us to focus on our consumer business, further capitalize our growth plans, but also will allow for further warehouse consolidation resulting in estimated savings in excess of $5 million annually. I have a personal interest in this process, having co-founded KushBottles in 2010, we painstakingly developed a world-class packaging operation and closely partnered with top-tier operators over the years. I will lead the sales process, which should provide a unique value proposition for current players in the cannabis space, looking to expand their market share or for traditional packaging companies looking to establish a foothold in the growing cannabis industry. As I mentioned before, we have made significant strides in capitalizing the business and reducing costs and we believe we have identified the remaining initiatives required to complete our full transition to a much leaner, more lucrative consumer business model. Accordingly, we are also realigning the C-suite to support our strategic initiatives effective immediately. Craig Snyder has been promoted from Chief Commercial Officer to President and will take over day-to-day operations of the business. We believe this decision will strengthen our ability to utilize an experienced senior leader with extensive experience in both cannabis and consumer businesses to execute on becoming the premier house of brands business in the ancillary cannabis marketplace. In addition, Mr. Snyder's promotion also allows us to further streamline our organization and recognize additional cost savings. Before I welcome Craig on to the earnings call, I want to say a sincere thank you to our Chief Operating Officer, Mr. Rodrigo De Oliveira, who will be stepping down as COO at the end of September. Rodrigo was essential to restructuring KushCo Holdings in 2020 when the company adjusted its business model and cut costs to move from losing over $5 million of adjusted EBITDA per quarter to achieving our goal of positive quarterly adjusted EBITDA several quarters later. Also during his time at Greenlane following the merger with KushCo, Rodrigo has applied a similar strategy to reduce costs, consolidate operations, streamline the organization and ultimately put the business in a position to be a profitable house of brands. With our future model now in sight, the time has come for Rodrigo to step down and provide further reductions in overhead. Once again, I want to sincerely thank Rodrigo for all of his unwavering passion, work ethic, and leadership over the years. Thank you. And with that, I'd like to pass the call to Craig Snyder, our new President, to talk about the future vision of Greenlane as a consumer business. Welcome, Craig.

Thanks, Nick. First off, I'm honored and excited to accept the role of President of this organization at this exciting and critical time in Greenlane's transformation. One of the key principles I have emphasized since joining Greenlane in March is the need to make the company a more scalable, leverageable, and durable business. I believe we are making progress toward these goals. We have focused this year on solidifying our foundation into one that can be leveraged as we grow and scale. First, Greenlane will lead and innovate with our brands and our products. We have a world-class product team that has developed a vision for our house-owned brands and an exciting product pipeline with innovative products starting to launch in the second half of this year. Second, we are focused on utilizing technology to increase efficiency and performance of sales. We are in the final phase of beta testing our new B2B portal set to officially launch nationwide in the coming weeks. Finally, we are focusing ourselves on more scalable customer channels. We are enhancing our e-commerce footprint, launching relevant products in a global way utilizing these highly scalable channels. In addition, we are focusing our enterprise sales efforts on the largest channels in the marketplace, including vertically integrated MSOs, several with over 100 retail locations and traditional C-Stores, including franchises with hundreds if not thousands of physical locations. There is much work still ahead, but with the milestones we have achieved to date combined with the early successes we are seeing in key areas, I feel very confident for the future of this company.

Thank you, Craig. Now back to the quarter itself. In the second quarter, we achieved just shy of $40 million in sales, up 15% year-over-year, but down sequentially from $46.5 million last quarter. The increase year-over-year can be attributed to the Greenlane KushCo merger which took place in Q3 of 2021. The decrease from Q1 2022 could be attributed to several factors. First off, many operators in our industry have experienced a slowdown this year. Accordingly, the top MSOs are relatively flat while smaller operators are generally down year-over-year, due in part to the broader consumer spending pullback, which has caused retrenchment and a focus on tighter management of working capital. As a result, we have tightened our credit policies and focused our efforts on the larger publicly traded, more stable clientele. Within our opinion, investor sentiment is as bad as it's ever been in our industry, as reflected in broadly deteriorating equity prices. We must be even more prudent today, which means we are actively foregoing revenue generating opportunities that don't satisfy our risk threshold, with a view towards improving the quality of our revenue and credit of our clientele. While it may be painful to pass on potential sales, we have worked extremely hard to properly capitalize our business and we believe it's simply not worth risking our progress. Lastly, these efforts by our team over the previous months have been nothing short of heroic, and I could not be more thankful and appreciative of the Greenlane team. This has required a concerted effort from every part of our organization, which may have temporarily detracted from our normal focus on sales. So although it certainly contributed to our shortfall in Q2, we understand these critical initiatives should be one-time in nature and the bulk of them are now behind us, allowing us as an organization to ramp up the intensity of our sales efforts moving forward. The shortfall on top line had other impacts on our P&L as well. Our adjusted margins compressed slightly from Q1 to 23.4% in Q2, and our adjusted EBITDA loss increased by almost $300,000 despite reducing our total operating expenses by approximately $2.4 million from Q1 2022 to Q2 2022. In light of sales not meeting our expectations, we are removing our previously issued guidance of achieving positive adjusted EBITDA by Q3 2022. However, we do continue to expect cost reductions to materialize over the next two quarters due to our recent efforts. We are modifying our Q3 2022 adjusted SG&A guidance range up to $16 million to $18 million now, which will be down from nearly $19.5 million in Q2 2022. While we are disappointed in the revenue shortfall, we believe we understand the root causes behind it and our strategy and plans do remain on track. We will continue to reduce expenses and rationalize our cost structure, improve our core business by utilizing scalable and leverageable technologies, and ramp our sales efforts with the right customers and the right product segments. We continue to believe Greenlane is one of the best positioned players in the cannabis industry as a picks and shovels provider, listed on the NASDAQ, and we want to capitalize on this once in a generation opportunity of cannabis legalization, not only here in the U.S. but globally. Now, I will turn the call over to Darsh Dahya, our Chief Accounting Officer, to provide more financial details on the Q2 earnings.

Thanks, Nick. I'm excited to discuss the details of Q2 2022 and I'd like to echo the sentiments regarding our efforts to navigate through the challenges we faced in the second quarter of 2022. Revenues for the second quarter were $39.9 million, up $5.2 million or 15% versus the prior year. The increase reflects incremental revenues associated with the KushCo merger, offset partially by lower CPG revenues, primarily driven by the strategic move away from lower margin third-party brands and a reduction in in-house brand sales. Gross margins for the quarter were 20.3% compared with 26.1% during the first quarter of 2021. The decrease was attributable in part to inventory write-downs in the second quarter of 2022 as well as the introduction of lower overall margins associated with KushCo-related brands. SG&A increased by $5.4 million to $19.4 million compared with the second quarter of 2021, principally because of an increase in salaries and wages of $3.3 million related to the KushCo merger and $1.8 million, a reversal of a previously recorded gain associated with the debt and indemnification assets. Our basic and diluted net loss was $2.27 per share for the quarter compared to a net loss of $3.23 per share during the second quarter of 2021 and a net loss of $5.57 per share versus a loss of $9.07 per share for the corresponding year-to-date periods. Adjusted EBITDA loss was $5.8 million during the quarter versus a loss of $3.7 million for the second quarter of 2021 and $11.1 million for the first half of 2022 compared with a loss of $8.9 million for the corresponding period in 2021. Cash balances were $9.1 million as of June 30, 2022. Net cash used in operating activities was $13.7 million. Net cash used in investment activities was $1.2 million, and net cash generated from financing activities was $11.1 million driven primarily by the proceeds from a $5.4 million registered direct offering and the proceeds from the company's ATM program. Overall, the company used $3.7 million in cash versus $18.8 million in the prior year and the difference is largely attributable to proceeds from financing. As of June 30, 2022, the company reported working capital consisting of current assets less current liabilities of $44.8 million versus working capital of $53.8 million as of June 30, 2021. The team continued to manage liquidity effectively and during Q3 successfully secured a $15 million asset-based facility from an institutional lender on favorable terms. The company also successfully repaid an $8 million bridge facility in full using existing resources and funds raised from the aforementioned registered direct offering and the previously reported sale of our interest in Vibes. Looking to the company's balance sheet, the company significantly reduced third-party inventory and vendor deposits by $13.1 million in the first half of 2022, as we transition away from select lower-margin third-party brands and the associated working capital requirements. The company also sold $2 million of E&O inventory under a company-wide program to recruit previously written-off inventory and minimize its facility footprint in general and reduce storage costs. I'd like to turn the call back over to Mr. Nick Kovacevich, our Chief Executive Officer of Greenlane, for his closing remarks. Please go ahead, Nick.

Thank you, Darsh. Before we do closing remarks, I'll turn it over to the operator to open up the line for Q&A.

Ladies and gentlemen, the floor is now open for questions. Your first question for today is coming from Vivien Azer. Please announce your affiliation and pose your question.

Great. Good morning. This is Harrison Vivas on for Vivien today. So just in terms of the pivot away from packaging, so it makes sense to be stepping away from packaging and we appreciate the desire to lean into the higher margin owned brands, which of course have been a priority for Greenlane for some time. But I think VIBES and EYCE always been pointed out to be nicely margin accretive. So was the decision to divest from those businesses entirely liquidity driven? Is it safe to say that there were no alternatives under the circumstances?

Hi, Harrison. Thanks for the question. Look, I think obviously, we're in a position where if opportunistic things arise, we have to consider them, but our plan has always been to focus on the high-margin owned brands. EYCE is still in the portfolio, as is DaVinci. We're really excited about a brand that we're relaunching called Groove. And we have our higher standards brand as well. We have our licensed brands with Marley Natural and with Keith Haring. And then we have our partner brands that we distribute. And so we are going to lean into some partner brands. Obviously, the CCELL relationship is extremely important, and we've got some good stuff growing with them. But we're going to continue to be focused on our home brands growing those organically, complementing them with the partner brands. All of this is in our new investor deck as well. You can kind of see all of our brands. Now as for VIBES, that is a brand that we really did like in the portfolio. But given the structure, remember that was a joint venture arrangement. It was a bit complicated, and there are other partners involved. And there was a deal that came about that made a lot of sense, right? The multiple that we got for VIBES was at the time about six times what our current multiple was in the public markets, and the deal was all cash, cash up front. So again, something like that, we have to take a look at it when it's highly accretive. But for the most part, we do want to stick with our portfolio of our own brands on the consumer side. And if we leverage the sale of our packaging business, that should provide substantial capital to really invest in and further grow our own brands as was planned. So I think we're getting to the right place. Maybe there was again a little bit of a tough decision there with VIBES, but it just made sense given the circumstances and the multiple.

Okay. That makes sense. Thank you, Nick. And just kind of shifting gears to profitability. Understand that your 3Q profit targets have been removed as part of your pivot here. But we think it might be helpful if you provide us a little bit more color about how you're thinking about achieving adjusted EBITDA profitability going forward? Maybe more specifics in terms of the scale you need to achieve in the new business as well as the associated margin profile you expect to see? Thanks.

Yeah. Thank you. And look, I think our message was pretty clear on the call here, right? We were disappointed in the revenue that we achieved for the quarter. But we laid out very specific reasons as to why the revenue was short. But we're not in a position where we want to be super bullish on hitting that revenue number, which would lead to the profitability, right? We had planned for cost reductions and certain revenues and margins to achieve profitability in Q3. Those revenues didn't show up in Q2 and so we don't want to put ourselves out there with the conditions we're seeing that we're going to be able to achieve the revenue numbers that we needed. And we're doing something different now, right? Now we're looking at selling the packaging business, which is going to dramatically reduce our costs and it's going to put us in a position where we don't need the revenue to be where we originally thought it needed to be to be profitable. But we're working on those new plans and we'll be able to provide guidance when that comes together. But we're a little cautious with the market conditions, right? Like we talked about seeing some of the operators struggling to pay bills, and that's commonplace across other ancillary publicly traded companies that have given similar feedback, right? It's hard to collect right now in an industry that's pretty cash starved. And that's why we're not going to keep doing things that don't work, right? We've already been pivoting toward the higher value accounts, the MSOs, the C-Stores, and we're going to continue to do that. We're going to continue to leverage direct-to-consumer online sales through marketplaces and de-risk some of those elements that exist in the cannabis market broadly, but also more specifically in a lot of the legacy markets that are experiencing more price compression. So we're going to be smart about how we approach profitability. It's still the number one goal, right, getting this business profitable. And we're going to take significant costs out of the business with this new strategy, and that's really going to allow us to lean into our higher margin products and achieve profitability with far less revenue. So again, more to come on that, but you kind of get what we're doing here. We've only got two levers to play with, right? You got the revenue and margin and you got the cost. We're doing a great job cutting costs, and now we're realigning our plan on the revenue and margin, exiting one of our business units and ultimately going to deliver a formula that gets us exactly where we need to go. Again, we just don't have direct line of sight into that timing as we sit today.

Okay. That's helpful and that makes sense. Last one for me. Just Nick, do you mind speaking to what you're seeing in terms of the broader M&A landscape? I know it's early days for the sale of the packaging business, but I guess curious just in terms of the context of your divestiture of the VIBES business, what are you seeing in terms of buyers and general appetite for M&A right now? Thanks.

Yeah. I mean, look, it's no secret that the industry is capital starved, right? And so there's not a lot of cash buyers in the industry. Now we were fortunate with VIBES, right? And that's why that deal made sense. But you see a lot of folks with assets for sale, especially on the plant-touching side that aren't able to get meaningful amounts of cash up front. Now we have a big advantage here with our decision to sell our packaging business. Why? Because there's certainly an ample pool of buyers and many of them with balance sheets significantly larger than the majority, vast majority of players in cannabis, right? So we're talking about traditional packaging providers, looking to get a foothold into the cannabis industry. Everybody knows even though the industry is going through some of the dynamics that we talked about, the potential is, has remained gigantic, right? This industry is going to continue to grow. More states are going to legalize eventually, it's going to be federally legal. Eventually, it’s going to be legal around the globe. And so if you're a traditional packaging company and you've yet to crack the code, right, we don't see a lot of them in the industry today competing over the business that we're competing over. What a perfect opportunity, right, to get in deep with a transaction that picks up intellectual property and proprietary products and an extensive customer base, including some of the most desirable names in the industry, right? In addition to that, there's players that are cannabis focused that do have cash that are private equity backed and things like that. So what's unique about our packaging business is we do have a much broader pool of buyers and again people that will have cash to procure this business unit, and then we can put that cash to work. On the consumer side, which is ripe with opportunity. As we've talked about, I mean MSOs are getting significant scale on their dispensaries and have yet to streamline, consolidate and unify their purchasing on the ancillary side. So that opportunity is as alive and well as it's ever been and we're really geared up to capitalize on it. And again, we just want to make sure we have the proper foundation in place and we have the proper balance sheet that we can support those investments and go win those huge opportunities, which are going to pay the long-term dividends to our company if we go get it. The time is now and that's why we're having to make some strategic decisions to ensure that we can capitalize on that opportunity.

Thank you, Nick. I'll jump back in the queue.

Your next question for today is coming from Aaron Grey. Please announce your affiliation, then pose your question.

Hi, Aaron Grey of Alliance Global Partners. Thank you for the questions. So just want to talk a little bit with CPG strategy. So right, so I know you've seen some question in terms of right, the VIBES divestiture, but just on the go-forward strategy specifically the rate to channels, right? So in the last call, you talked about Amazon, some C-Stores as well kind of shifting away, it seemed like from some of the legacy head shops. So just want to see, how that view is now with some of the recent changes that you've made and maybe some updates you could give particularly on the Amazon front would be really helpful with now you're looking to divest the packaging business as well as with the 5% that was big on the C-Store front there. So that'd be helpful. Thanks.

Yes. Craig is here with me, and he can provide an update on the Amazon situation. Regarding your question about the channels, in the cannabis industry, we must be cautious about operators that lack scale or high-margin businesses, especially in the current environment. They often depend on outside capital, which poses risks that we don’t want to take on at Greenlane. Therefore, we need to be more selective with our investments in certain customers, especially when it involves custom branded inventory and extending credit terms. We must ensure that the potential rewards outweigh the risks, and presently, we are taking a cautious approach. Our focus has shifted to stable and secure customers, particularly multi-state operators, both private and public, with publicly traded MSOs generally performing better than others in the industry. On the traditional side, we are also engaging with convenience stores and specialty retailers, who bring scalability. Although the environment presents challenges concerning freight and logistics, larger orders are more beneficial for us in terms of margins and operations. We will continue to serve smoke shops and head shops and aim to enhance our transactional business. As Craig mentioned, we are launching a B2B portal in the coming weeks to facilitate seamless transactions. Even smaller transactions will be valuable as they require less direct involvement. We are focusing on technology to enhance our transactional capabilities for smaller accounts like smoke shops and head shops. This initiative is crucial, and we've made significant progress. Additionally, we are developing our e-commerce approach, which includes direct-to-consumer sales and leveraging marketplaces like Amazon. Craig will elaborate on the progress and future strategy in that area.

Yeah. So thank you, Nick. So on Amazon, we have a very unique strategy we are pursuing to protect our brands and to do that, we're involved in the transparency program. The transparency program would allow us to be the only provider to sell our brands on Amazon. It provides for a unique sticker on the box and allows us to control the buy box and also control the pricing and make sure we don't have rogue sellers undercutting our products on Amazon and allows us to control all the advertising and be part of the prime programs with FBA. There's probably a little over 30% of our products today that we believe will be accepted and will be able to use on FBA on the U.S. side. And as you know, globally, it's slightly different. The Big 5 over in Europe, they are able to do things like vaporizers that make it very unique. But we're at the first stages of our program there, which is really to protect the brand through their transparency program, then be able to scale the brands through the buy box, through FBA and through their inventory programs. We hope to have really a global reach into roughly 14 Amazon marketplaces by the end of this year, this year with transparency with the buy box and that we can advertise into as well. So that's been a major initiative to really work on getting that transparency program in place so we can protect all our brands, control the pricing and control the buybacks and we've made very good progress there to date.

One other thing to add, Aaron, Craig has also been leading product innovation, right? And so we have a strategy of launching our own products that we think are going to do really well in the market with strong margins. And we can actually gear products that we're launching to be Amazon-type products, right? Amazon, as Craig mentioned, doesn't accept everything in the U.S. So we can actually control our fate a little bit there by ensuring that we have products that fit the platform when we're building our product innovation pipeline.

All right. Great. Thanks for that color. That's really helpful there. And then second question for me, you talked about some of the discounting or discontinuing of low margin brands, and you've talked about that for a couple of quarters now. So just want to see where you guys were in terms of what ending you are in terms of discontinuing those SKUs? Are there additional low margin SKUs that you're going to be discontinuing going forward? As we're continuing to see this pressure in the overall marketplace? Are you now having to move up the level of SKUs that you're looking to discontinue than you might have when you initially down this venture? So any help in terms of where you stand on the discontinuing of SKUs would be really helpful. Thanks.

Yes, we've made significant progress and have finally completed our full catalog. It's now available online at greenlane.com and gnln.com. This is the first combined catalog we've launched since the merger, following an extensive SKU rationalization process, which is now finished. We're very pleased with the catalog we've developed. While we still have some discontinued SKUs, which amount to a few million dollars in inventory, we will continue to sell those as usual. Some items may be discounted, but we won't be purchasing any new items that have been discontinued now that the catalog is complete. You should see improvements on the backend with inventory reductions and better inventory velocity as we will only be restocking items that perform well. This process was beneficial; we ended up eliminating over 90% of our SKUs while retaining more than 90% of our revenue. It made a lot of sense, though it involved making some challenging decisions. We've created a catalog that we are proud of, and we are excited to move forward and start launching new products that will complement our current catalog.

Okay. Great. Thanks for the detail. I'll jump back in the queue.

Thanks, Aaron. Appreciate it.

Your next question is coming from Andrew Bond. Please announce your affiliation, then pose your question.

Hi, good morning. This is Andrew Bond with Jefferies. Thank you for taking our questions. I wanted to understand how overall margins might perform without the packaging business. Could you share what the margins were for packaging this quarter or whether the business excluding packaging would have been EBITDA positive? Any insights on how Greenlane performed this quarter or could perform without packaging would be appreciated. Thank you.

Thank you for the question. We don't have the precise numbers separating the business from the packaging. However, I can provide some high-level insights. Currently, packaging occupies more than 50% of our storage space, despite contributing only around 20% to our revenue on average. The bulkiness of these products means they require significantly more storage, and there are considerable freight costs associated with importing them from overseas due to their size. Shipping remains quite expensive, as has been the case throughout COVID. By reducing our reliance on this business, we expect to save more than $5 million annually in warehousing costs. While the packaging business has decent margins, they are affected by freight and supply chain issues, tying up space and working capital. Improving our footprint will lead to meaningful cost reductions and operational efficiencies, which will enhance our path to profitability. Success in consumer products is also crucial; we need to effectively launch new products with higher margins and drive sales growth. Aligning our team around clear goals for the consumer business is expected to yield significant results. We're excited to make this strategic move, although it will take time to execute the process. There has already been interest in our packaging business, and while we've had preliminary discussions, we haven't formally started the process. It's important to communicate our reasoning for this decision—our original plan was to keep the business intact, but the challenging market has presented an opportunity to grow without diluting shareholder value. We believe the market hasn't fully recognized the value of our packaging business, providing an opportunity to unlock that value and reinvest in higher-return areas over the next few years. As we progress and exit this business, we will provide clearer guidance on our revenue and expense profile. Thank you again for the question.

Okay. Thanks. That's helpful detail, Nick. Thank you. And then shifting to Greenlane owned brands, even if just at a high level, are you able to give more color around the puts and takes of the sales performance of owned brands, specifically if there were certain brands that contributed to the sales decline or whether there were certain brands that maybe outperformed? Thank you.

Our consumer business underperformed overall during the quarter, primarily due to the reasons we previously mentioned. This underperformance was also influenced by the team's focus on addressing some legacy issues, such as excess and obsolete inventory. With the launch of the new catalog, we can shift our attention to both the smaller catalog and the own brand products we're introducing. For the quarter, we experienced a decline across the board. The transaction with VIBES occurred before the quarter ended, which impacted us a bit. However, our own brands are performing in line with the rest of the portfolio, and we need to emphasize them more so their growth can surpass that of the overall portfolio. We are optimistic about the Groove brand and have many products to launch under it, but we didn’t have anything released in the market during Q2 that started in Q3. Sales for EYCE remained consistent, while DaVinci, being a premium product, showed some softness potentially linked to reduced consumer spending. We have new products coming that will offer more affordable options for consumers with DaVinci, which, despite being a premium product, is one of the best vaporizers available. Higher Standards is also progressing well. We need to improve our inventory management by clearing out old stock and bringing in new products. We are making progress toward growing our owned consumer brands, but as mentioned, they all showed some softness in Q2.

Thanks for the detail. I'll pass it on.

Your next question for today is coming from Glenn Mattson. Please announce your affiliation, then pose your question.

Hi, Glenn Mattson from Ladenburg. Thanks for taking the questions. First of all, on the effort to kind of talk about moving up the chain in terms of selling to better customers to top-tier MSOs like you said. That was a major effort that was kind of talked about when the merger was announced and the idea being that there were relationships that Kush had and that you'd be able to leverage those relationships to get into the MSOs, and I don't know if that hasn't really gotten traction yet or whatever, but can you just talk about why your enterprise sales force will be able to accomplish that goal when perhaps it didn't happen under the previous plan?

Yeah, Glenn. Thanks for tuning in and appreciate the question. So, look, we're obviously disappointed in how long it's taken to get meaningful traction on the cross-selling. Part of it is due to external factors and just the reality of how these MSOs are operating. Some of it's also just due to us needing to get some of our foundation in order, specifically on the technology side. Right? So starting with and I'll touch on that in more detail here. But starting with the marketplace dynamics, right, the MSOs are also very focused on their initiatives right now, which include cost reductions, expansions into some of the new markets like New Jersey. And as they've been focused and everybody's a little bit resource constrained, some of these conversations which are happening, and we're getting traction behind the scenes have just taken longer, right? This is a shift for MSOs, who right now as we sit, don't do a lot of central consolidated purchasing for their consumer products, right? They don't have a uniform lineup that exists across all of their retail storefronts, right? Those are the conversations we're having. It's resonating really well. They understand the value proposition of consolidating their spend, leveraging their scale to get costs down, having uniformity, putting in some of the merchandise display sets that we have that can actually increase the monetization at the store level. And again, we've got programs that we intend to roll out, and we're getting close. So we're excited to announce those when they come. But one of the things that we needed again talking about internally and building our foundation is our ability to transact online through the B2B portal. Again, we did a system integration earlier this year. Now we're set to launch the portal again in the coming weeks. So you'll see that announcement and that'll give store managers the ability to go online and procure the products. So the way we see it working is an MSO or organization can have central buying where they have price transparency and they can essentially purchase or provide SKUs that fit within their vision for merchandising. And Greenlane will either accept the purchase order and put the goods aside or have a program where we have a net term sort of arrangement but it allow the corporation or the organization to kind of determine what is in scope and what they want to purchase and negotiate the pricing so they can use their scale. But then using technology allow the individual store owners to make the request for goods, whether they're purchasing or not, they can essentially say, hey, we need this many items at this one store and then Greenlane can make the shipment. So rolling a program out like this nationally with a large MSO with everything that Greenlane has going on and everything that the MSOs have had going on has taken longer than we would have liked, but we are making that progress and we are going to get there.

Great. One more for me. I just kind of get a sense of the mindset around the, when I think about the two businesses, I think about the brands, the house brands thing is more of a potentially more volatile, in other words, that is, like, kind of, hit-based where if you get a couple of products, they may just start working well, you can really, see a revenue ramp. I'm not sure that those brands are necessarily have a lot of longevity per se, whereas on the packaging side, that seems like a business is going to do well, as it rides the kind of trends of the rising industry. So just color on why you chose to sell the packaging business as opposed to keeping the consumer business, and perhaps it has something to do with the valuation and how much the packaging business could be worth in relation to the overall company or just kind of some more thoughts on the strategic direction there? Thanks.

Yeah. You're right in the sense that the consumer business is going to be a little bit more transactional whereas the industrial business and the packaging business is going to be more reoccurring, right? Because for every sale, you need a job, right? And whereas on the consumer side, there's a lot of ways to consume cannabis. Things like papers are going to be more of a razor blade type model, but the DaVinci dryer vaporizer at a $300 price point is going to be a little bit more one-time in nature. Now we can make the consumer business more predictable and more reoccurring through the enterprise relationships and the dynamics that I just spoke about partnering with MSOs, partnering with C-Stores, getting our merchandise display sets into these locations, which we're doing right now with C-Stores. For example, and we've seen when we get those sets in the stores that the consistency and the velocity of the reorders of the products, which go into the display sets, increases. We're also seeing C-Stores that purchased, they had one display set up asking for another one, right, wanting to put it, wanted each register. Right? That's a very good sign for us. And so we will make that business more reoccurring in nature, more predictable. And Amazon and marketplace sites will help do that for us as well. So we're going to get there with the consumer business. Now why I sell the packaging business? Again, we're in a position where we feel that the future of this company is best suited being a consumer business. Especially being a publicly traded company, the multiples just aren't as good on a packaging business or an industrial style business, right? So we want to move into the consumer. We think it's ripe for opportunity as I mentioned sort of the dynamics around procurement with multistate operators as they expand the retail footprint. We think that there's huge opportunity globally ahead of cannabis legalization, right? Because even though our industrial products are more tied to regulated cannabis markets, our consumer products are utilized in non-regulated cannabis markets because consumption is occurring, right? And so consumers need consumption devices and things like rolling papers regardless of if the market has a licensed regulated outlet, right? And so we see countries in Europe, legalizing and decriminalizing probably going to take them several years to roll out a highly regulated retail program. Well, fine, we can still sell our devices, right? So we've got a huge opportunity there as well with the consumer side. So deciding that that's really where we want to go. Again, we need to get focused, especially in this environment, right? We just don't have the resources to do everything. So we have to pick a lane. Again, we think the consumer opportunity is much bigger and especially for a publicly traded company a way to create more value in our business. And then the other rationale is the packaging business has a bigger pool of buyers at this current moment, right? A lot of folks looking to buy the consumer business would be more industry type folks. Well, the industry is capital starved. Whereas the packaging business, we have a pool of buyers that are not correlated to the cannabis industry per se, right? So we can unlock a much wider audience that is maybe already at significant scale globally with their packaging business but do not yet have appropriate exposure to this exciting growth industry, right? And this is a perfect opportunity for them to get that through a transaction. So we believe that we can monetize that business better, especially for cash, right, because cash is king right now. And the other thing is the cost reductions, right? We think we can run our consumer business much more lean and efficiently than we can run our industrial business and our packaging business today, right? So in an environment where it's all about managing costs, and all about achieving profitability, we look at our consumer business as being able to operate on lower fixed costs and being able to sell on higher margins, which is ultimately the recipe to profitability, right? So there's a lot of reasons why we've strategically decided to sell this particular business unit. And again, I think it fits with the themes that we've highlighted pre and post-merger. So it is all aligned with sort of the macro vision for Greenlane. Although ideally, we could keep everything together, we determined that that's not a recipe for success in this current climate. And the public markets have also dictated that, right? The valuation that's put on our total business is also telling us not to keep this entire business together. It's telling us that we should look strategically and transact this packaging business. So we're listening to that as well and factoring that into our decision-making.

Okay. Thanks for that color, Nick. Take care.

Thank you.

Your next question for today is coming from Scott Fortune. Please announce your affiliation, then pose your question.

Hey. Good morning. This is Nick on for Scott from ROTH Capital Partners. First question from me, just looking for an update on the sourcing side. You announced the $500,000 in cost savings. I was just wondering if you've seen any other low-hanging fruit or opportunities with suppliers to kind of lower costs despite the supply chain bottlenecks out there and just kind of color around your go-forward sourcing strategy? Thank you.

Yes. Thanks for the question. Look, I think it's been a focus of ours since COVID to diversify our sourcing out of China and in particular out of Asia, right? And some of that's some of the rationale because of tariffs, some of the rationale is just in terms of diversification, but a lot of the rationale is cost, right, because freight is a huge part of cost right now in this climate. And so we've been onshoring some of the products. We've been diversifying our vendor base. We've restructured some of our deals to be able to procure product stateside. So for example, with VIBES, for example, right now, whereas we used to have to deal with imports, the new owners will be selling to a stateside, right? So it dramatically reduces lead times. It improves our cash conversion cycle. So that's really been an emphasis and a focus, and we have made solid progress in a lot of areas and intend to continue to look for ways to unlock value. Pricing, again, that's something where we've got a unique opportunity with new product innovation, right? So as we look to design new products, we're going to look to design them in a very cost-efficient way knowing that if we can produce newly designed products at a lower cost, that's going to enhance our gross margin, and we are very focused on bringing high gross margin revenue into this business. So we've got the opportunity to kind of do new sourcing, bid it out, get a lower cost, find a supplier that's maybe diversified into a strategic region and procure goods potentially without tariff as well. So we've got a fresh start on any new products and we've tried to restructure some of the old relationships to make those more efficient as well.

Got it. I appreciate that color. And then last one for me. Just on your future kind of in-house mix expectations after diagnosing VIBES or do you have an updated target range for kind of longer-term in-house mix now? I think initially it was around 22% to 28% for 2022, but the environment has kind of changed here. So just your outlook on the in-house mix side would be helpful. Thank you.

In Q2, sales for our in-house brands were around 25% of total brands. We aim to increase that to over 50% of our consumer profile. While we still sell CCELL products, which contribute significant revenue, we shouldn’t include them in this analysis, nor should we factor in the packaging business we are exiting or the energy business we plan to retain, which has low operating costs and decent margins. If you look at our consumer business in our new investor deck, you'll notice that the brands we own and the licensed brands we operate also hover around 25% from the last quarter, and we want to increase that to 50% by Q1 of next year. Achieving more sales from partner brands is fine as long as we maintain overall growth. Our goal is to make our house brands the majority of consumer sales, establishing ourselves as a House of Brands. While we're still early in this strategy, reaching that 50% threshold would be significant for us. If we can accomplish it by Q1 or Q2 of next year, it would be a notable achievement. However, we remain open to increased sales of partner brands, as overall growth is beneficial for Greenlane. I took a step back in Q2 to address certain reasons, but we are now refocusing the team on the new strategy, acknowledging that the packaging business will eventually phase out, which should support our house brands and overall growth in the consumer business.

Got it. That's it for me. Thanks for the color.

All right. Thanks a lot.

There are no further questions in queue. I would like to turn the floor back over to Nick for any closing remarks.

Thank you for joining us, especially those on the West Coast—it’s early for you. This announcement is a significant milestone for us. We are strategically assessing the market to ensure Greenlane is well-positioned for long-term success. As I mentioned earlier, Greenlane holds a strong position. We're publicly traded on NASDAQ and are leaders in our market categories. We have a substantial opportunity to grow, particularly with our consumer products and House of Brands, which is still a rarity among public companies. Despite facing significant challenges over the years, we have demonstrated our ability to navigate these difficulties. We’ve found creative and strategic ways to advance the business without diluting our equity. We have taken decisive actions for cost reductions and strategic focus to free up capital. Our recent announcement regarding the sale of our packaging business reflects this strategy. I hope you feel confident in Greenlane's ability to maneuver through tough times and maintain our strategic position for when the market improves, leading to significant growth. We are committed to this path and believe the future is bright. I want to express my gratitude to the Greenlane team; they worked incredibly hard last quarter, and I’m proud of what we achieved. We accomplished a remarkable list of goals in just one quarter. While this intensity may have slightly diverted our focus from sales, these were necessary steps, and now we can refocus on sales in our key areas. I’m thankful for our team's efforts; they truly showed dedication and accomplished a lot. There’s still work ahead, but we’re enthusiastic about the future and the potential cash transaction from our packaging business, which will help us transition further into a House of Brands. I look forward to updating everyone as we progress. Thank you for your time, and I wish you all a wonderful day and week ahead.

Thank you, ladies and gentlemen. 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.