Transcript
Good afternoon and welcome to today's conference call to discuss Greenlane Holdings' Second Quarter Financial Results. A press release detailing the financial results for the quarter ended June 30, 2023, was distributed today 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 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 the 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 14, 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 on 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.
Hello, everyone and thank you for attending our second quarter 2023 earnings call. During Q2, we made strides at each of the key segments to our business, including our focus on profitability and advancing our house of brands with new and innovative products. Quarterly revenue declined from Q1 to Q2 2023 by $4.3 million. The quarter-over-quarter decrease was primarily driven by a $1.8 million decrease in the Consumer Goods segment and a decrease in the Industrial segment of $2.5 million overall. The decline can be attributed to three factors: The expected seasonality change from Q1 to Q2 where the business has historically had a more modest quarter than Q1; a shift in parts of our business model from gross to net recognition and the restructuring of our packaging group, consistent with our partnership with A&A Global Marijuana Packaging. As our agreement intensifies in the industrial space with significant revenue being recognized on a net basis versus gross, we do expect revenues to moderate and margins to increase related to that activity, which will accelerate in Q3. In a return to our roots, we feel very encouraged by our new products and partnerships in the e-cigarette nicotine space and expect those advances to have a substantial impact on the business in the coming months. The business continues to attract new partners in the MSO space based on our continued execution and we remain bullish about the expansion of many MSOs purchasing in our Consumer segment. We have reduced our total operating expenses from $15 million in Q1 to $14.1 million in Q2, respectively, a reduction of $900,000. We expect these reductions to accelerate in Q3 showing substantial reductions as we have aggressively attacked expenses related to facilities, professional fees and technology. We have completed consolidation of eight of our facilities, including our former third-party logistics partner, Verst. The facility's line item alone is anticipated to save the company more than $4 million annually and we believe, through our own management, give customers a better experience with Greenlane. We have similar initiatives being executed in technology and professional services and we expect to continue to realize those savings over the next two quarters. Labor-related expenses decreased from $5.4 million to $5.2 million quarter-over-quarter. For the six months ended June 30, labor-related expenses decreased significantly from $18.9 million in 2022 to $10.5 million in 2023. Labor is another area where the business has become more efficient and we expect continued reductions in both headcount and overall cost of labor. In Q2, we had charges related to severance of two former senior executives which clouded the gains we have made in overall cost of labor. These two agreements represented more than 12% of the overall labor number in Q2 and are one-time in nature. We expect overall cost of labor to continue to reduce aggressively and are focused on labor structure that brings the business to profitability. Overall, G&A decreased from $7.7 million in Q1 to $7 million in Q2. For the six months ended June 30, G&A decreased 34% or $7.5 million from $22.3 million in 2022 to $14.8 million in 2023. As leadership has previously stated, our goal is to bring costs in line with the gross profit to create a profitable, durable business. Expense adjustments in our portfolio are often a lagging indicator as we continue to make active and aggressive changes to the company's expense profile. This quarter, we had meaningful consolidation costs from the multiple facility closures. These costs were one-time in nature and we expect overall expenses to continue to reduce as we manage them aggressively. Gross margins improved slightly from 23% in Q1 to 23.3% in Q2 2023. We are pleased that margins are slightly improved quarter-over-quarter as we initiate our new asset-light programs which will provide net revenue recognition and should improve overall margin performance. Of note, for the six months ended June 30, margins improved significantly from 16.3% in 2022 to 23.2% in 2023. Let's move to innovation next. This quarter, we launched five new products from our house brands. In addition to the Eyce ORAFLEX line with the rig, a new line of Groove Glass, the Groove Micro Rigs and a limited edition Spoon Pipe. From DaVinci, we brought a new colorway to market in the MIQRO-C line, along with the Artiq, the newest premium portable vaporizer, offering DaVinci's clean technology in the convenience of a 510 oil compatible vaporizer. The Artiq has garnered a lot of popularity and critical acclaim in a short period of time. We also announced our expansion of products to include disposable nicotine offerings. This is part of our strategic vision as a leader in the market to diversify our product portfolio. With the total addressable U.S. market exceeding $6 billion annually and expected to grow at a compound annual rate exceeding 11%, disposable nicotine products have a significant impact on our customer revenues. We identified industry-leading partners, manufacturers, and brands to capitalize on our expansion into the nicotine industry, including Fume, Death Row Vapes, Packspod, and Tyson 2.0. And finally, in strategic direction in order to make the business more scalable, leverageable, and durable, we recently announced the payoff of our previously existing facility with White Oak Capital. The business was able to pay off this $15 million facility prior to the first anniversary date and we believe by doing so, allows us much more authority over our future. I'll now turn it over to Lana to run through our financial results in further detail.
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 today can be found in our earnings release that is available on EDGAR and the Investor Relations section of our website at investor.gnln.com. For the second quarter of 2023, total net sales were $19.6 million compared to approximately $24 million for the three months ended March 31, 2023, representing a decrease of $4.3 million or 18.1%. The quarter-over-quarter decrease was primarily driven by a decrease in the Consumer Goods segment of $1.8 million or 23% decrease and a decrease in the Industrial segment of $2.5 million or a 16% decrease. This compares to the company's reported $39.9 million in total net sales for the second quarter of 2022, representing a decrease of $20.3 million or 51% decrease year-over-year. Year-to-date, total net sales were $43.6 million compared to $86.5 million, representing a decrease of $42.9 million or 49.6%. The decrease is related to the management initiatives and change in revenue strategies mentioned previously. For the second quarter of 2023, gross profit was $4.6 million compared to $5.5 million for the prior quarter, representing a decrease of $900,000 or 17%. Gross margin was relatively flat, increasing by 0.3% to 23.3% for Q2 2023 compared to a gross margin of 23% for the prior quarter. The company reported gross profit of $4.6 million and gross margin of 23.3% for Q2 2023 compared to $8.1 million and a gross margin of 20.3% for Q2 2022. The increase is related to Q2 2022 inventory write-offs that damaged and obsolete inventory of $2.1 million compared to no write-offs in Q2 2023. Year-to-date, gross profit was $10.1 million and gross margin of 23.2% compared to $14.1 million and 16.3% for the six months ended June 30, 2022. The 6.9% increase in gross margin is related to year-to-date 2022 inventory write-offs of damaged and obsolete inventory of $7.2 million compared to only $0.6 million for year-to-date 2023. Total operating expenses decreased $900,000 for Q2 2023 to $14.1 million compared to $15 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 $7.7 million or 35.2% to $14.1 million for the three months ended June 30, 2023, compared to $21.8 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. Year-to-date, total operating expenses decreased by approximately $16.7 million or 36.3% to $29.3 million, comparing favorably to the $46 million in the first six months ending June 30, 2022. Net loss for Q2 2023 was $10.5 million compared to a loss of $10.2 million for the prior quarter. Net loss attributable to Greenlane Holdings, Inc. was $10.5 million or $6.56 per share, basic and diluted, compared to a loss of $10.2 million or $6.40 per share, basic and diluted, for the prior quarter. This compares to the company's reported net loss of $14.5 million and a net loss attributable to Greenlane Holdings, Inc. of $12.1 million or $22.70 per basic and diluted share for the second quarter of 2022. Year-to-date, net loss for the six months ended June 30, 2023, was $20.8 million compared to a loss of $33.2 million for the six months ended June 30, 2022. Net loss attributable to Greenlane Holdings, Inc. was $20.7 million or $12.96 per share, basic and diluted, compared to a loss of $27.5 million or $55.70 per share, basic and diluted, for the six months ended June 30, 2022. Adjusted EBITDA loss for Q2 2023 was $5.9 million compared to a loss of $6.8 million for the prior quarter. On the balance sheet, we ended the second quarter with $4.7 million in total cash and working capital of $14.2 million compared to $5.9 million in total cash and working capital of $25.7 million as of March 31, 2023. The company continues to reduce the working capital cycle focused on operating more efficiently with lower inventory levels. We ended the quarter with $29.8 million in net inventories versus $37 million as of March 31, 2023. The company continues to focus on improving cash flow from operations and managing existing debt. With that, I'll now turn it back over to Craig.
Despite revenue decline quarter-over-quarter, we continue to show positive steps toward profitability. The company's strategic initiatives focused on innovation and effective cost management strategies continue to improve and position it for future growth. We continue to make progress on our roadmap for profitability. 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.
The first question comes from Aaron Grey with Alliance Global Partners.
So first question for me. Obviously, you guys have done a lot of things in terms of changing the business around working towards profitability with more of an asset-light model. Just if you could help kind of paint a picture how that path to profitability might look? It looks like you're going to start having some of the improved gross margins with some of the asset-light things you guys have now in place. Just on the nicotine sales coming in. So if you could talk about how that margin base is going to be? And just whether or not we should be looking for meaningful sales growth to be needed for you to reach that profitability? Or if the gross margin improvement with the asset-light model and the cost cuts will be enough to get you there?
Thank you for the question, Aaron. I believe it's a combination of two factors. On the expense side, you will notice that our key cuts will accelerate as we have made many necessary adjustments. However, some of these adjustments are limited by contracts or leases. You will see significant reductions in Q3 and Q4. Additionally, we anticipate changes in headcount and labor costs, as well as significant reductions in certain elements of SG&A that will not be present in Q3 and Q4 compared to today. We are confident not only in the progress we have made year-to-date but also in the expected accelerated progress for the remainder of the year. Regarding the sales side, your question had two components. Firstly, concerning the asset-light strategy, Q3 will be the first full quarter implementing this strategy, which will help alleviate cash flow pressures we faced before with our major manufacturing partner, CCELL. We believe this partnership will greatly benefit the business, and we will recognize revenues on a net basis. While you may see a moderation in revenues, we expect to see an increase in margins in these areas. With the nicotine and e-cigarette segment, demand remains very strong. The product mix in the Smoke Shop/Vape Shop segment has shifted significantly towards nicotine. We hope to capitalize on this trend and expect it to positively impact the latter half of Q3. We are optimistic about our efforts to manage expenses and confident in our progress with the asset-light strategy alongside CCELL. Despite experiencing some overall weakness, mainly due to seasonality from Q1 to Q2, we are also launching new products this quarter, and we anticipate nicotine sales will provide a substantial boost in the second half of Q3. There are various factors at play, but our primary objective remains achieving a clear path to profitability, where our gross profit aligns with our overall SG&A.
That was helpful. And the second question for me, just turning to the traditional business with some of the MSO operators, have you done this transition and right kind of shift away from some of the packaging as well? How has the initiative to kind of get more of your products within dispensary, be MSOs or some of the broader, more mom-and-pop dispensaries out there as well? How is that fair? Is that still an initiative that's frontline to you guys or has the asset-light model kind of shifted you away from that for the near term?
No. I mean I think it's accelerated. I think we've seen a couple of things from the MSO segment. One is cannabis has become, in many places, a mainstream product for mainstream people. And with the dispensaries, they are turning to more, what I'll call, retail-centric analytics. Those analytics would look like revenue per square foot, attachment rate and average order size. And as you know, that their main commodity, cannabis, has been decreasing in price. So I think the merchandising of the dispensary is becoming a more and more important part or an important component of what they do. We are having deeper and deeper conversations for how that looks and we are one of the few players in the space that can bring the full array of products, whether it's for their processing facility or for their dispensary to bear. So those conversations have aggressively improved and we expect them to continue to improve in Q3 and Q4.
We have no further questions. We have reached the end of the question-and-answer session. I will now turn the call over to Craig Snyder for closing remarks.
Thank you all for joining the call today. We appreciate everyone's interest. We are excited about the progress we are making towards building a profitable business and feel we have taken significant steps in the first two quarters of the year. Thank you for your time today and have a good evening.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.