Greenlane Holdings, Inc. Q3 FY2022 earnings call

• Liquidity initiatives: Raised over $27 million of non-dilutive capital in 2022, including disposing of non-core assets, monetizing written off E&O inventory, and securing a $15 million asset-based loan. Also closed a public offering for gross proceeds of $7.5 million.
• Cost cutting: September reduction in force reduced annual labor expense by ~$1.8 million; exit of Orange County Office Lease saves over $500,000 annually. Plans to exit packaging business to reduce costs.
• Business focus: Focus on accretive high margin and sustainable revenues; looking for consumer revenue (own high margin house brands and higher margin third party products), automated revenue via e-commerce platforms, and large customer revenue from MSOs and C-store chains.
• Industry outlook: Believes federal cannabis reform could bring institutional capital back to the sector, benefiting Greenlane as a picks and shovels provider.

Revenues decreased 31% to $28.7 million in the third quarter of 2022 compared to the prior year. Third party consumer brand sales decreased $14.3 million, and Greenlane brands decreased $3.6 million, while higher KushCo post-merger sales of $20.1 million partially offset these declines. Gross margin increased to 17% for the three months ended September 30, 2022 compared to 4% for the same period in 2021. Excluding write offs of damaged and obsolete inventory, gross margins decreased 1% to 21% versus 22% during the corresponding quarter in 2021. Salaries, benefits and payroll taxes were $7 million during the third quarter, down 21% sequentially from $8.8 million in the second quarter of 2022. General and administrative expenses were $8.5 million during the quarter, including a $2.2 million net gain on assets sold. The company's net loss for the third quarter of 2022 was $79.2 million which included $66.8 million related to the goodwill impairment charge.

• Expect revenue to decrease, especially in packaging. Focus on achieving profitability in the back half of 2023. Savings from exiting packaging business and reducing inventory will contribute to this. Plans to have a lower cost model for 2023 as the company transforms to a smaller, more profitable house of brands business.
• Anticipate continued efforts to manage liquidity, reduce expenses, and expand margins, with a focus on mid-2023 for achieving profitability.

• Macroeconomic factors affecting liquidity and capital raising. - Industry competition and regulatory uncertainties. - Execution risks related to business transitions, including inventory reduction and packaging business exit. - Dependence on successful execution of strategic initiatives for profitability.

Q: What SG&A levels do you expect to be at once all the savings are realized and what sales mark do you need to hit to reach profitability?

A: Nick Kovacevich mentioned cost reductions are key, with significant savings coming from exiting the packaging business and consolidating operations, expected to be fully recognized in the back half of 2023. Specific sales and margin targets not precisely stated but focus on mid-2023 for profitability.

Q: Can you speak to the margin outlook for the consumer brands business and break out between own brand and third-party brands?

A: Nick Kovacevich stated house products aim for close to 40% margin, with logistics tailwinds helping. Third-party brands see margins affected by channel differences, but focus on higher margin channels. Q3 saw moves to rationalize brands, reducing from 173 to 25, retaining 95% of revenue.

Q: Where are you at with the product rationalization and inventory reduction?

A: Nick Kovacevich and Craig Snyder discussed reducing inventory to core consumer base, aiming to run consumer business with ~20 million in inventory, down from current levels. Brand rationalization reduced brands from 173 to 25, with further SKU rationalization planned. New products in development to hit different market segments.

Q: Can you provide an update on e-commerce discussions and legislation movement?

A: Nick Kovacevich mentioned efforts on e-commerce, including applying for Amazon's transparency program, revamping e-commerce platforms like vapor.com, and brand sites. Legislation progress is awaited, with preparations in place to launch products once regulations allow. E-commerce initiatives expected to drive revenue in Q4 and 2023.

Q: Can you give more detail on working with MSOs for the consumer segment?

A: Nick Kovacevich and Craig Snyder discussed MSOs' need for consistent customer experience and visibility, with Greenlane offering a comprehensive solution. Conversations are progressing, with programs in the works to address MSOs' challenges in procurement and merchandising, expected to benefit Greenlane's financials and customers in the long term.