Greenlane Holdings, Inc.'s (GNLN) CEO Aaron LoCascio on Q1 2020 Results - Earnings Call Transcript

Greenlane Holdings, Inc. (NASDAQ:GNLN) Q1 2020 Results Earnings Conference Call June 4, 2020 8:30 AM ET

Company Participants

Aaron LoCascio - CEO

Ethan Rudin - CFO

Conference Call Participants

Vivien Azer - Cowen & Company

Derek Dley - Canaccord Genuity

Glenn Mattson - Ladenburg Thalmann

Scott Fortune - ROTH Capital Markets

Mike Grondahl - Northland Capital Markets

Operator

Good morning all. Welcome to today's conference call to discuss Greenlane Holdings' First Quarter Financial Results. A press release detailing the financial results for the quarter was distributed this morning and is available on the Investor Relations section of the Greenlane website. As a reminder, today's conference is being recorded. On the call today are Aaron LoCascio, Chief Executive Officer and Ethan Rudin, Chief Financial 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 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 the live broadcast, June 04, 2020. 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 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's management may discuss non-GAAP financial measures, including adjusted net loss 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 our website at gnln.com.

I would like to turn the conference over to Mr. Aaron LoCascio, Chairman and CEO of Greenlane. Please go ahead, Mr. LoCascio.

Aaron LoCascio

Thanks everyone for joining us today. During this call, I will review our first quarter 2020 sales highlights, operating environment and business development activities before turning the call over to Ethan to discuss our financial results in more detail. After Ethan’s comments, we'll open up the call for your questions.

First off, I am, proud to report that Q1 2020 topline revenue came in at $33.9 million, ahead of our initial $32 million to $33 million revenue target. Gross profit was $7.3 million, compared to our original $7.2 million target, representing a 22% gross margin and gross profit increased $0.8 million compared to Q4 2019, representing an improvement in gross margin of 414 basis points.

As we previously announced, we anticipate returning to cash flow positive operations by the fourth quarter of 2020 and remain confident as we track towards this goal. That being said, we continue to monitor the uncertainties in the macro environment that could potentially influence this timing.

Second, as it relates to gross margin, we have continued to pursue our business transformation initiatives and are focused squarely on driving higher margin sales. I'm extremely encouraged by our progress thus far as our gross profit improved sequentially, even though our sales in Q1 2020 declined compared to Q4 2019. This positive trend has persisted since we implemented our strategic repositioning in Q4 2019 and we expect to continue shifting towards more profitable revenue streams going forward.

The investments we have made in developing our Greenlane Brands is bearing fruit as each of our brands has continued to mature. In Q1 2020, Greenlane Brands represented 19% of total revenue, up from 12% in the prior quarter. In particular, VIBES sales have doubled every quarter since our Q2 2019 launch totaling $1.6 million in Q1 2020.

Our supply and packaging revenue channel, which directly services cannabis brands with child-resistant packaging and other supply products contributed over $4.2 million in revenue with strong gross margin of 35%. Our own packaging brand Pollen Gear has seen a 36% increase in revenue resulting in an additional $0.9 million in revenue compared to Q4 2019.

B2C revenue represented approximately 8% of the total net sales in the period, driven by an increase in online consumer activity. Looking at our flagship ecommerce website Vapor.com, we have seen unique visitors and average weekly revenue more than double since late March as compared to the year-to-date average prior to this period.

As a result of our deliberate pursuit of higher margin revenue opportunities, JUUL sales in Q1 2020 represented 13% of total revenue, down from 16% of revenue in Q4 2019, and in line with our target levels. Our JUUL only orders remain at 7% as they were in Q4 2019, highlighting the complementary nature of this product line to our customer base rather than a key driver of activity.

Third, we are continuing to streamline the cost structure of the business. In the first quarter of 2020, we had a targeted reduction in our workforce of approximately 50 full-time employees as a result of our business transformation efforts. We expect to begin to realize the long-term financial impact in subsequent quarters. As much of this reduction took place later in the quarter and further reduction took place shortly after the close of the quarter.

That being the case, on a conservative basis, we estimate that the Q1 changes will result in annualized cost savings of approximately $3 million. Subsequent to the quarter end, we successfully closed our New York distribution center and moved our inventory to our new facility in may, on time with our original expectations as we complete our business transformation plan.

We have further plans in place to transition the majority of our U.S. operations to a more centralized model which is expected to impact roughly 40 employees once completed. As we transform our company with a focus on yielding greater efficiencies, ensuring that we continue to drive high customer satisfaction remains of utmost importance.

While the changes we are implementing will produce additional cost savings, which we expect to come into effect in the third and fourth quarters of this year, we also anticipate that this centralized model will result in improved operational service levels for our customers through a more automated at scale distribution center.

On a matter of COVID-19, broadly speaking, our operating environment today is largely unchanged since our last update in April 2020. Our distribution centers remained open as many state governments have deemed cannabis businesses as essential and out of an abundance of caution our U.S. retail outlets remained closed while our European outlets have recently opened in a limited capacity. Subsequent to the quarter end we officially opened our new cookies partnered location in Barcelona, Spain and I'm excited to provide you with more details on this location soon.

As noted on our prior earnings call, our B2B CPG revenue channel has been the most adversely impacted by COVID-19 since our customer base is primarily comprised of small brick-and-mortar establishments, many of which have experienced closures since mid-March 2020. Our industrious team continues to develop new ways to support our customers during this challenging time.

For instance, we recently created and launched a B2B Dropship program to provide the ability for our brick-and-mortar partners to service their customers when their stores are temporarily closed. We have continued to maintain a strong cash position and balance sheet which we believe provides us the foundation to continue focus on the growth of the business.

Before turning the call over, I just want to thank our team for all of their hard work as we continue to successfully execute our strategic initiatives despite a difficult environment. We have made great progress and I am excited to continue to forge our path for long-term sustainable and profitable growth in 2020 and beyond.

With that, I'll now turn it over to Ethan to run through our first quarter 2020 financial results.

Ethan Rudin

Thanks Aaron and hello everyone. I want to echo Aaron's appreciation for everybody joining and I hope everyone is staying safe and healthy. As a reminder, the results I will be reviewing for you this morning can be found in our earnings release which is available on EDGAR and the Investor Relations section of our website @gnln.com.

Our Q1 2020 revenue was $33.9 million a decline of 32% year-over-year as a result of implementing our business transformation plan to realign the company's focus on higher margin revenue opportunities and shift us away from the lower margin sales such as JUUL. And this was partially offset by an increase in sales related to some of our other brands, primarily the Greenlane Brands, house brands for which we experienced a $2.1 million increase in the first quarter of 2020 as compared to Q1 2019. We are also seeing growth in our core business as we take on other third-party brands and products which in aggregate resulted in an increased revenue of approximately $1 million sequentially since Q4 2019.

As Aaron mentioned, we have continued to progress our plan to reduce concentration of JUUL sales and instead focus on higher margin revenue opportunities, resulting in a sequential margin improvement of 250 basis points from the fourth quarter of 2019. While these changes represent a slowdown in our near-term revenue growth, we believe that this is a positive sign for our business as we move forward into 2020 and beyond.

Gross profit was $7.3 million or 22% of net sales compared to $9 million or 18% of net sales for the prior-year period. The increase in gross profit as a percentage of the net sales on a year-over-year basis primarily reflects fluctuations and factors including sales mix, purchasing efficiencies and average marked up over cost of products. While current market conditions have made it difficult to forecast future performance, the consistent increases in our gross margins over the past quarters is indicative of the improvements we've been driving towards in our operating model.

Salaries, benefits, and payroll tax expenses, for the first quarter of 2020 decreased by $1.5 million to $6.6 million as compared to $8.1 million for the same period in 2019. This decrease is primarily the result of reduction in equity based compensation expenses of $2.5 million offset by increases to wages and related payroll expenses of $1.1 million attributed to hiring additional employees to accommodate our operations as a public company and absorbing new employees from the Conscious Wholesale acquisition.

General and administrative expenses increased by $3.3 million year-over-year to $8.7 million, primarily due to additional costs incurred in connection with our operations as a public company. Net loss for the first quarter of 2020 were $16.8 million compared to $17.7 million for the same period in 2019. This was impacted primarily by investments in people and equipment. Adjusted net loss for the first quarter of 2026 was $6.1 million compared to adjusted net loss of $1.5 million for the first quarter of 2019.

Additionally, we recognized an impairment charge of $9 million to our U.S. reporting units' goodwill during the first quarter of 2020. Adjusted EBITDA was a loss of $6.3 million for the first quarter of 2020 as compared to a loss of $800,000 for the same period in 2019. We ended the quarter with $43.9 million in cash and approximately $81.8 million of working capital.

And with that, I will turn the call back over to the operator to open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from Vivien Azer of Cowen.

Vivien Azer

Thank you, good morning. I hope everyone continues to be safe and healthy. My first question is on the topline nicely relative to your preliminary guidance, any specific callouts on what prices are to be applied? Thanks.

Aaron LoCascio

Great. So, hi Vivien, nice to speak with you. One of the big drivers for us honestly has been some of that house brands in particular. Last minute, some last minute order for VIBES and Pollen Gear product lines in particular were quite strong and as we had mentioned before, we are seeing strong momentum in our B2C revenue channel in particular on e-commerce properties.

Vivien Azer

Great, that's helpful. And then just a follow-up on VIBES, you called out the distribution that you were able to attain in the quarter, like where are you guys tracking relative to your target, ultimately how much distribution do you think they are so available for you on VIBES? Thanks.

Aaron LoCascio

Sure, I mean, we are certainly tracking as for our expectations, we are meeting our targets that we have set internally for ourselves. We do expect continued growth with our house brands in general and in particular VIBES. So we do expect those trends to continue. In Q2 in particular there has been some COVID related potential supply chain impacts, but long-term we do expect that trend to continue.

Vivien Azer

Got it. And last one from me, we know that the supply chain is a bit nuanced in the rolling paper category. Have you seen any disruption because of COVID? Thanks.

Aaron LoCascio

Yes, there have been some disruptions, not just related to the rolling paper supply chain, but other broadly speaking supply chains. It has been largely intact, but when you have a brand such as VIBES that's growing nearly 100% in sequential quarters, to sustain that growth and having even minor supply chain disruptions does create challenges. We do believe that those challenges will be limited in scope and that we will see us some meaningful numbers come out of our subsequent quarters. But yes, Q2 does have some potential supply chain impacts, but we still remain overall very bullish for VIBES and our house brands overall.

Vivien Azer

Thanks for the color. I appreciate it.

Operator

Thank you. Next question is from Derek Dley of Canaccord.

Derek Dley

Yes, hi guys. Sorry, just wanted to follow-up on one, I may have missed it, on Pollen Gear, did you say it was 36%, was that sequential growth or year-over-year?

Aaron LoCascio

That's sequential growth.

Derek Dley

Okay, thanks. And just following up on that, on the last question on the supply chain, I think last call you guys mentioned that your suppliers were about 75% of your suppliers were kind of back up and running in terms of normal capacity. Where do you see them today obviously with the coming mid and the fact that there might be some slight supply chain disruptions in Q2?

Aaron LoCascio

Yes, great question, nice to speak with you Derek. It is a little bit of a one-off basis, supplier to supplier. We are seeing early indications that as stores begin reopening across the country in recent weeks and around the world that we're seeing some positive momentum in terms of economic recovery. And as that recovery started to take place and volumes are starting to pick up, there are definitely additional pressures being placed on supply chains.

I think it remains largely where it is at where we described it to be before, call it roughly a 75% capacity. It is not a blanket statement across every supplier like I said. It is kind of supplier by supplier basis. So yes, there is definitely overall some degree of impacts to supply chain in Q2, but overall relatively strong performance from our suppliers, we do anticipate some strong recoveries in Q3 in terms of their supply chain.

Derek Dley

Okay, that's helpful. On the private label side, obviously VIBES and Pollen Gear looked like they are making up close to the majority if not more the majority of your revenue there. Can you just talk about some other products or form factors that you think would make sense for private label? I think CBD was one that was mentioned in the past?

Aaron LoCascio

Yes, so other – some other house brands that we have, including like our Keith Haring line of glass, our Higher Standards which is not only our brick-and-mortar store fronts but also some of our own house brand is actually also seeing good growth in sequential quarters. Marley Natural is another one that we're seeing great growth. And we'll continue to evaluate new opportunities and new brands for our portfolio going forward, but good to call out we're certainly seeing growth across the board, but we love to now say VIBES in particular because of just the overwhelming strength of VIBES and like you said Pollen Gear.

Derek Dley

Okay, and then just last one from me. On the distribution center consolidation, so how many DCs would you guys be left with, call it by year once your consolidation activity is complete?

Aaron LoCascio

After our consolidation is complete in the U.S. we will have two distribution facilities and in Canada will remain at two as well.

Derek Dley

Great, thank you very much.

Aaron LoCascio

My pleasure.

Operator

Thank you. Your next question is from Glenn Mattson of Ladenburg Thalmann.

Glenn Mattson

Hi, thanks for taking the question. So, on the distribution center, consolidation of additional savings that are savings that you had called out in Q1 the annualized $3 million is that all combined?

Aaron LoCascio

Yes, there will be additional cost savings associated with the consolidation of our DC footprint, not recognized in that number, that $3 million is intended to represent the efficiencies gained out of headcount reduction.

Glenn Mattson

Right, okay. And next question, can you talk about the - on the B2B side, it might be difficult to track but are you having a lot of churn in the customer base, just maybe these are smaller mom and pop operators as you say, so perhaps some of them are going to make it through multi months shutdown, can you give us any color on that?

Aaron LoCascio

Sure. Our B2B CPG customer base is very resilient and we have been able to maintain our existing customer base and we're seeing very little turnover and very exciting to see that a lot of the larger states are starting to reopen and as the states come back online, we're seeing a lot of resilience and purchasing coming out of those customer bases.

Glenn Mattson

Great, thanks. And perhaps I missed it, but did you give an update there will be reopen your own in-house stores and if not can you give an update on when do you expect that to happen?

Aaron LoCascio

We have not yet opened any of our physical U.S. company-owned outlets. However, we have been discussing what a opening plan looks out looks like and we do believe that will likely take place in Q3 likely.

Glenn Mattson

Okay, that's it from me thanks.

Operator

Thank you. Next question is from Scott Fortune of ROTH Capital Partners.

Scott Fortune

Good morning. Thanks for taking the questions. Real quick to follow-up on the Higher Standards stores kind of the strategy now, I know you guys are closed in Ponce in Atlanta and you opened up Malibu, but they are closed right now, can you discuss adding more stores in the U.S. and then kind of the - around the Cookies Barcelona kind of store from that standpoint?

Aaron LoCascio

Sure, so nice speaking with you. Couple of points on the stores, so with COVID the – our brick-and-mortar environment remains relatively uncertain in terms of what the future will look like. We obviously do believe that there is a meaningful opportunity in the brick-and-mortar space, but the Higher Standards stores in particular, the primary driving factor behind those doors has really been to support our Greenlane Brands and also part of our retail merchandising program strategy into dispensary.

So it has largely been successful in that regard. I will likely kind of take a wait-and-see approach in the United States in terms of what additional locations may or may not look like in the future.

And in Europe, we are extremely excited to have opened our Cookie store in Barcelona Spain. Cookies is arguably one of the most notable or the most notable cannabis brands in the world and having access to those products to our European customer base and having that flagship store really does lend itself to a tremendous amount of credibility for our organization in Europe. So we honestly couldn't be more excited about that opportunity.

Scott Fortune

Okay, thanks. And then staying on Europe, have you moved in more of your brands into the distribution in Europe and kind of step us through the Europe expansion from this vision sizing?

Aaron LoCascio

Yes, so we are, we have been moving and we have just started the process of executing on our Greenlane Brand strategy in Europe. It is still very, very early innings there. As the COVID related supply chain disruptions happened during the second quarter we really focused on our existing customer base as opposed to opening up new customer bases were still very early innings with the launch of our Greenlane Brands in Europe, but we're seeing some early traction. And again, we have very strong expectations for the success of our brands not just in the United States but globally. So, we'll look towards the brands success in Europe likely in Q3 and beyond.

Scott Fortune

Okay, and then last question from me shifting to kind of the e-com side and I mean there was good growth there, but have you seen a shift in – you said there was more traffic, but have you seen a shift in the size of the average ticket and then even a product shift away from vape or just some products, how do you kind of call out the strength on the e-comm side?

Aaron LoCascio

Yes, the e-comm strength has just been absolutely phenomenal. It is a great place to be an omnichannels, a distributor like ourselves having these various channels to sell product into because that's e-commerce strength in the online marketplaces the strength has just been really just incredible to watch, not just on our flagship site like Vapor.com, but on our Greenlane brands website like Marley Natural, Shop.com, like our Higher Standards online store.

Just overall it has been really incredible to see just how positive that momentum has been. Obviously, it is being off-set to some degrees by the closure of our physical brick-and-mortar stores as well as the closure of a lot of our brick-and-mortar customers. But it is certainly the shining star in our arsenal thus far.

Scott Fortune

Are the average ticket size is moving up or is it kind of more people more transactions and synthesizes the tickets?

Aaron LoCascio

We are seeing more traffic, more conversions and higher average order value across the board.

Scott Fortune

Okay, perfect. I'll jump back in the queue, thanks.

Aaron LoCascio

Thank you.

Operator

Thank you. Your final question is from Mike Grondahl of Northland Securities.

Mike Grondahl

Yes, thanks guys, good morning. With the 50 people and the consolidation of the distribution centers, could you talk a little bit about what your cost structure can look like in 4Q 2020 or 1Q 2021 what kind of – whenever you expect to get there and what it kind of looks like?

Aaron LoCascio

So, as we kind of stated before, we had originally targeted a returning to profitability by Q4 of this year. Obviously, the macroeconomic environment in particular the impact of COVID has really impacted the potential timing of that which may inevitably end up shifting, but just generally speaking high level, our path to profitability is a combination of incremental improvement in our margin profile as well as incremental improvements in our cost profile. We've obviously made a lot of changes in terms of headcount.

There's a lot of other SG&A expenses that we've been very carefully evaluating and having targeted reductions. So it is difficult again to say specifically when we will be returning to profitability with the macroeconomic environment the way that it is, but it is a core focus of ours as an organization we've made tremendous progress towards that goal so far. We're really just barely scratching the surface and not seeing much of that activity yet in Q1, but we are dedicated to our vision and we are confident that we will get there.

Mike Grondahl

I get that. I guess, I was asking more specifically, in 1Q you had roughly $15 million of salaries and G&A, do you have a goal to get those costs to x level? Where do you think those – what do those costs look like may be in 4Q or 1Q next year?

Aaron LoCascio

Yes, those are great questions. I know Ethan has been particularly close to that, so it is a great question for Ethan.

Ethan Rudin

Yes, thanks so much, Aaron. What I would say Mike is, we're not really broadcasting targets in terms of our transformation efforts. If you can think about what it is like trying to reduce the number of distribution centers, reduce headcount, and get ourselves aligned for what may be a near-term different trajectory in terms of the growth pile, but I guess what I'm saying is we're learning as we go along. Obviously, hiring has become an entirely different ballgame with a number of people that are out in the market and available, so talent is becoming a great opportunity for us.

Obviously, the real estate market in terms of distribution centers provides a lot of opportunity in terms of what we can get out of it and get into in this environment. And lastly, I would say that we are learning and trying to mechanize and automate a lot of what we have going on in our distribution facilities and looking at models that maybe we do three PL in certain locations and staff other distribution facilities with people.

So it's a long-winded way of saying that we really need to get our SG&A down in line with comparables of other distributors that are trying to really, really grow our house of brands. And that's a really unique model. So I would say that's a work in progress, but material reductions as we've already done in the first quarter and we will continue to update you on progress as we go.

Mike Grondahl

Great. Any high-level thoughts on 2Q revenues or just should we refer to the 8-K from a little bit ago?

Ethan Rudin

Yes, I would say that you can refer to the 8-K a little bit ago, but I'd like to believe and we continue to have some very, very cautious optimism about what we're seeing. We're very, very excited about what we've been able to do to date in terms of correcting our gross margin, obviously work to do on the SG&A side as you pointed out. But we've got our heads down and we have no reason to continue to take our foot off the gas. So…

Mike Grondahl

Got it, okay. Hey thanks guys.

Ethan Rudin

Yes, I appreciate the question Mike.

Operator

Thank you. I would now like to turn the call back over to Aaron LoCascio for any additional or closing remarks.

Aaron LoCascio

Great, I appreciate it. I just want to thank everyone again for joining Greenlane's conference call today. The replay for this conference call will be available in approximately two hours on Greenlane's website in the Investor Relations section, and I hope to see everyone in the not-too-distant future. Thank you.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.