Q3 2019 Earnings Call

It at that time for you to queue up hosted in today's conference call will be Liz Zale, Let's start said burden as a reminder, today's conference is being recorded I would now like to turn the conference over to Miss out. Please go ahead.

Thank you Sherri good morning, everyone and welcome to Green laser third quarter 2019 calls.

Reminder, press release detailing the financial results for the quarter is available on the Investor Relations section of the Greenland website. This call is being webcast a replay will be available on the company's website for approximately 30 days on the call today or air Locascio, Chief Executive Officer, and even routing Chief Financial Officer.

Before we begin I'd like to remind everyone that Greenland prepared remarks may contain forward looking statements and management may make additional forward looking statements in response to your question.

These statements do not guarantee future performance and therefore undue reliance should not be placed upon these statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factors included in Greenland IPO prospectus dated April 17th 2019 and in today's press.

This call also contains time sensitive information that is accurate only as of the date of this live broadcast November eight 2019.

Greenland assumes no obligation to update any forward looking statements that may be made in today's release or call. During today's call management will discuss non-GAAP financial results, including adjusted net income and adjusted EBITDA.

Management believes these financial measures can facilitate more complete analysis and greater transparency into Greenland ongoing results of operations, particularly when comparing underlying results from period to period. Greenland has included a reconciliation of these non-GAAP financial measures in today's press release now I will turn the call over the air Ocasio.

Thanks lists and good morning, everyone I'll start with a brief review of our third quarter sales highlights operating environment and business development activities and then we'll turn the call over to Ethan to discuss our financial results in more detail.

After Eaton's comments, we'll open up the call for your questions.

Let me start by noting that our core business remains strong and we continue to make progress on the three pillars of our strategy one building our house brands to growing our supply and packaging business and three strengthening our direct to consumer operations.

We are confident these will be key drivers of our growth as we think about 2020 and beyond.

Before I talk more about these growth drivers and our progress there I want to directly address certain industry headwinds that impacted our sales this quarter.

Overall revenues were up 3% year over year to 44.9 billion, but decreased from the second quarter. The unforeseen crisis of acute liquid vaping related health conditions, coupled with the lack of clarity around regulatory actions negatively affected our sales a jewel and other vaporization related products and caused some b to b customers to reduce their.

Orders.

As a result of these and other factors, which he then we'll provide more context on shortly Jules sales decreased sequentially from Q2.

As a leading distributor of vaporization hardware in E. Cigarettes were of course, the very concerned about recent reports of acute health issues related to vaping.

Studies and investigations into they think related illness are ongoing and no clear conclusions happened reach today, we're closely monitoring the situation for additional developments.

I believe it is important to reiterate that Greenland is dedicated to consumer safety and we have taken numerous steps to protect the health and safety of end users to ensure the quality and integrity of our products as some of you may have seen we recently shared some additional thoughts about this issue on our website.

I also want to be clear that one while our products have not been directly linked to acute health issues. We do believe the impact on our sales is correlated with the associated reporting and uncertainty uncertain regulatory environment and to not all our products were impacted by these broader macro issues are open system products like the Vulcan.

No hybrid a next generation product by sourcing Bekele do not fall under most current regulatory bands given that they are loaded directly by consumers as opposed to closed system vaporizers, where consumers by Prefilled cartridges.

For now we expect to concerns about vaping related illness and impact on beeping related product sales to continue to pressure sales over the near term. We also note that the regulatory environment with regard to some of these products continues to remain unclear with ongoing discussions at both the federal and state levels and some federal activity expected in the near future.

And I'm sure you saw the announcement by Jewel yesterday that they are no longer selling mint flavor. We believe some consumers may switch from mid two flavors traditionally known to smokers.

That said, we are making a purposeful effort to actively reduce our jewel concentration by eliminating aspect of this business that do not deliver on our margin expectations. We expect you over remain part of our portfolio, but we're going to be deliberate about allocating our sales resources to focus on higher Mark.

Foreign opportunities.

Ethan we'll talk more specifically about the impact of these developments on the business, but as we continue to focus on the three pillars that I mentioned above I am now more confident than ever that this strategy best positions us for long term broken success.

With all this in mind and turning back to our core business, which comprises our products outside of jewel impacts during the third quarter, we made significant progress on driving our long term growth strategy and diversification of our business model.

We invested in a variety of ongoing initiatives within our three pillars and we are well funded to continue to execute on our pipeline of growth opportunities.

The first pillar of our growth is our focused on expanding and diversifying our portfolio of owned brands.

Overall sales of house brands are growing double digits year over year.

As an example, since our five launch sales have more than doubled over sequential quarters and that trend is expected to continue.

Our aim is to continue to grow our house of brands and launch new innovative ones by leveraging our deep understanding of the market and our technical expertise in design and product development. As many of you know we were pioneers in the industry and we can continue to be trend setters and innovators as the market evolves.

[noise], particularly we see opportunities in the CBD space, where we nearly doubled our sales between Q2 and Q3 and we are looking to capitalize on the 22 billion U.S. CBD market opportunity created by the 2018 farm Bill and further develop a portfolio of CBD and home products. This quarter, we have announced some great news.

Distribution at partnership agreements with bouquet cookies Green Lotus sure Penske is entry point.

We also wants it continued to partner with specialized cannabis production companies to develop our own ancillary products the benefit from the potential future Decriminalisation I've cannabis and more U.S. states.

With regard to supply and packaging, our second growth pillar, we continue to develop our manufacturing and supply chain excellence and have signed several new distribution agreements to expand the strength of our platform. We launched an exclusive U.S. and Canadian distribution partnership with a more up the first of its kind flower cartridge vaporizer offering a unique.

Nick Vaping experience a whole flower candidates using next generation heat not burn technology.

We have signed an agreement in the quarter freight sourcing office in Hong Kong, which will bolster our supply chain and allow us to be geographically closer to contract manufacturers in order to best control cost quality and timeliness of deliveries to our network. We continued to focus on our flagship premium packaging brand pollen year sales for the quarter have increased by <unk>.

25%.

The prior year period.

The third pillar of our growth is direct to consumer as we continue to leverage our higher standards retail stores and E Commerce platform vapor dot com to reach consumers we've entered into a lease agreement for higher standards third retail location in Malibu, California and are expecting to sign a lease for one additional higher standards location by the ended the year, which will get us to.

For permanent stores in the U.S. with more growth to come.

Baber Dot com, which we own and operate remains one of the most visited North American direct to consumer ecommerce websites in the vaporization product and consumption accessories industry.

Throughout the quarter. We also continued to focus our internationally on our international expansion in areas of our core business. We made significant strides with our acquisition of conscious wholesale a leading European wholesaler and retailer of consumption accessories vaporizers and other high quality products. We view this as a launching pad to pursue more opportunities in Europe .

Which we consider a high potential market.

According to industry estimates Europe is forecasted to have the worlds largest legal and medical cannabis markets by 2023.

The acquisition expands our footprint geographically across 20 European markets right multichannel sales platform with approximately 700 point of retail distribution. This also gives us new ways to grow our higher margin house of brands portfolio.

We also have opportunities.

We also have other opportunities in Europe , we now have access to a UK distribution facility and our partnership with new and no. You asked that will bring higher standards branded and curated shop in shops, the Paris, France. Each of these it individually and together create more avenues for Greenland to participate in the improving global landscape for cannabis, we're keeping a close eye on.

In America for near term opportunities.

As discussed looking ahead to Q4, while we continue to see the same market dynamics at play we are predominantly focused on driving growth in our higher margin business areas, which we expect to contribute to margin expansion in the long term.

Well, we of course continue to monitor the baby situation and regulatory environment I'm incredibly excited about our path forward and firmly believe that our continued focus on the three pillars to drive our core business best positions us for long term sustainable growth with that I'll now turn it over to eat into run through our third quarter financial results.

Thanks, Aaron and Hello, everyone. Our Q3 2019 revenues increased year over year, 3% to 44.9 million. If we include the revenue conscious wholesale on a pro forma basis net sales would've been 40 to 47.3 million for the third quarter of 2019 positive dry.

<unk> revenue growth for the quarter, where the continued growth in popularity and availability of our top six products from our top product lines as well as continued innovation from these brands, which collectively resulted in a 6.3% increase in net sales year over year. We also had strong performance in Canada, where the expansion of the Canadian candidates.

Market drove a 100% year over year increase in sales for the quarter to 6.4 million.

Our total sales growth was impacted by a 2 million dollar increase decrease excuse me in sales related to the beep risers and vaporizer accessory products within the top six brands as Aaron briefly touched on in the third quarter, we were impacted by industry headwinds related to consumer concerns around.

Around beeping related illnesses as we look ahead to Q4, we anticipate a meaningfully negative impact on revenue due to the beeping regulatory environment, our deliberate decision to proactively move away from low margin deals and limit discounts on jewel and other products moving forward and the discontinuation of sales may.

Mint in the U.S. announced by Jewel yesterday in light of these impacts we anticipate up to a 50% decline in our tool sales from Q3 2019, we expect these dynamics and deliberate business decisions to contribute to margin expansion going forward.

Gross profit for the third quarter of 2019 was 6.4 million, resulting in a gross margin of 14.3%, including the contribution from conscious wholesale on a pro forma basis gross profit would have been 7.6 million or 16.1% of revenue for that.

Third quarter of 2019.

As we've noted gross margin fluctuate based on a variety of factors, including the mix of products sold and volume purchase rebates. Our gross margin in the quarter was largely driven by jewels sales, which comprise 45.4% of net sales due to the nature and timing of Jewell purchase rebates, we experienced a display.

Unfortunately negative effect on our Q3 margin profile as we look ahead to the key drivers of growth in our business. We're gonna be focused on the higher margin parts of the business that will better position us for the long term the key to driving this gross margin profile is continued investment in growing our house brands, the supply and packaging business.

And our direct to consumer businesses on a standalone basis. These combined businesses are accretive to our current margin mix and we expect their growth to provide an important tailwind for margin expansion.

Salaries benefits and payroll tax expenses for the third quarter increased 2.7 million year over year as a percent of net sales sales benefits payroll taxes increased to 14.6% from 8.9% in the prior year quarter. This increase is primarily due to.

The incremental personnel expenses of 1.2 million as we added 45, new employees to further expand our domestic sales and marketing efforts. We also recorded approximately 1.5 million in equity based compensation expense.

General and administrative expenses relatively stable up half a million to 4.8 million or 10.6% of net sales compared to 9.7% of revenues in the prior year.

These included an incremental 200000 in marketing expenses and a 100000 increased each in insurance expenses bank merchant fees and computer hardware and software expenses.

Net loss for the third quarter 2019 was 9 million. This was negatively impacted by 1.5 million of equity based compensation as previously mentioned and 5.4 million attributable to the establishment of a valuation allowance against the deferred tax asset during the period. The overall loss was.

Offset by a gain of 1.5 million recognized on an equity investment pro forma net loss, including conscious wholesale would've been 8.4 million adjusted net loss for the third quarter was 7.5 million compared to the adjusted net income of $20000 in the third.

Quarter of 2018.

Adjusted EBITDA was a loss of 3.4 million in the third quarter compared to a gain of approximately 900000 for the same period in 2018.

We ended the quarter with 52.5 million in cash and approximately 100 million of working capital Aaron previously referenced our acquisition efforts in his comments and I want to build on that and reiterate on what I said last quarter, while M&A continues to be a focus for us and we rigorously consider all sorts of opportunities.

Including bolt on and transformational acquisition, we will always remain disciplined.

Just as a reminder, for our long term financial targets, we expect approximately 25% annual net revenue growth.

Average gross margins of 20% plus and adjusted EBITDA margin of 10% plus before I turn the call over for Q1 day I want to touch upon the share repurchase authorization, we announced our board has provided the authorization for the company to repurchase up to $5 million worth of shares we're focused on striking the right.

Balance between our capital allocation priorities of delivering value to shareholders in the near term first investing in growth strong strategic acquisitions to create long term value with that I'll turn the call back to the operator and open it up for Q1 day.

Thank you if he would like to ask a question. Please press star one and your telephone keypad confirmation till the indicate your line is in the question Q you May press star to if he would like three love. Your question from the Q and for parts instead, choosing speaker equipment may be necessary to pick up your heads up before pressing the star.

Yes.

Our first question is from Vivian.

As there with Cowen and company. Please proceed.

Hi, good morning.

Hi, good morning Marni.

So even I understand your commentary around gross margin volatility, but if I reflect back on some of our understanding of your gross margin profile last quarter. What we were thinking about it was you know jewels like a 10% margin. The rest of the business is a 24 not done we can.

He is your revenue mix and get to 17.3% that you reported.

Last quarter that math doesn't seem to hold this quarter is there any incremental detail you can offer to help us think about modeling.

Gross margin based on the evolution of your revenue mix in particular, given your commentary around a de prioritize enjoy a little bit. Thank you.

Yes. Thanks for the question Vivien I would say that obviously the quarter would intimate that theres been some margin degradation in the jewel business and I would say that over the quarter. The margin profile has been in the mid to high single digits.

Additionally, I'll also add to that this is Aaron.

That the nature and timing of the jewel rebates.

Contributed in excess of 200 basis points to the margin decline.

Okay. That's great. Thank you for that so.

It's encouraging that you guys are going to focus on higher margin opportunities.

Reiterating your target for a 20% plus gross margin how should we think about the timing of attaining that kind of targeted margin. Thank you.

Well you know I would say that in the last quarter, we reiterated that when you remove jewel from the margin profile blended of our entire gross margin.

You actually you serve those long term targets I would say that our continued focus.

You know on reducing that you will concentration of particularly self selecting not to do the low margin part of the business should have us back there hopefully in the coming quarters.

And yeah, we've got our own estimate of what we think control did in the quarter, but can you disclose what was jewel versus non total revenue. Thanks.

So Joe revenue for the quarter in total was 20.4 million.

Perfect. Thanks very much.

Our next question is from Glenn Mattson with Ladenburg Thalmann. Please proceed.

Hi, Thanks for taking the call I'm curious it little bit on the conscious wholesale acquisition. A you know obviously, you're expanding into Europe , you've talked about those plans in the past but.

Is part of that.

As part of the idea there to distribute a jewel products and is there.

Large presented their business is a baby in and just give us kind of maybe some sense the background as to whether or not this news is traveled.

Across the pond.

Kind of a.

Negative.

Backdrop.

Thanks, So a couple of things. Thanks for the question appreciate it. So we we have seen some of the concerns around vaping Cross borders in particular in Canada, where we have Oh up a long term business in Europe , where were relatively new we recently I made this acquisition.

In the conscious also acquisition does not currently have any nicotine products within its portfolio. It's something that we'll continue to evaluate as we go forward.

Otherwise their business is relatively analogous to our business in terms of the products they sell.

They do sell a lot of open system Vaporizers, which I will also comment that in light of or your or despite the fact of around the vaping concerns and the industry the effect to the open system vaporization products.

As been limited.

And we anticipate that's trends to continue but really this acquisition is launching pad for us to expand our portfolio, namely of our high margin House brands.

More than 20, new markets in Europe .

Okay, great. So squeeze one more and on the retail store rollout can you give us outlook for what.

You're thinking about for next year and I'm just a.

The thought process as to how quickly.

I think you'll be moving as far as opening new stores and how orders to find locations and just background around that.

Sure so.

New York and yes, we have art in New York location, Chelsea market, which continues to perform very well upon cities. Early days were excited for the holiday season, just opened up or about to open up rather I should say the Malibu location were nearing a fourth location that we're not quite ready to disclose as we look tore.

Our.

Next year, we aren't specifying this the exact number of locations where targeting a however, we have previously cited that on average typically around three stores per year, but we want to be very thoughtful around each individual location, we want to study and learn from each individual located.

And the differences between how Chelsea market performance against Palm city against Malibu, and the various demographics, but we have a great partner on the real estate front, Jamestown, which has a have a large number of real estate assets across the country.

And we are evaluating a number of other potential locations for next year launches.

Oh, great things, there and that's it for me.

Our next question is from Scott Fortune with Roth Capital Partners. Please proceed.

Good morning, Thanks, guys could you provide a little more color on Canada, and kinda Jewel sales says going on there and then the roll out kind of from a timing standpoint, where what are you, saying I'm the rollout in Canada look like from a from a timing standpoint here.

Yeah. Thanks for the question. So in terms of jewel concentration in Canada. The split is about 80, 20, 20%, Canada, 80% U.S.

Canada is still very early days and as we mentioned in our prepared comments that you know we've doubled the business there it's gone to over 6 million from.

From a from 3 million and what I would say is that we're very very encouraged at the introduction of our house brands up there. Obviously, we're looking to increase our margin profile. Unfortunately, the margin profile jewels sales in Canada is better than what we're doing in the U.S. as it isn't this pervasive.

Yeah.

Okay, Great and are you seeing any kind of the laser or push that for for the campus 2.0 rollout or kind of timing expected probably a first quarter next year to really start.

We've seen some meaningful revenues from that side of things.

Yes, as I said you know the it's still such early days and we have plenty of wood to chop that.

We don't see it slowing us down although we do see delays in the broader market.

Okay, and then real quick on the operation side kind of almost fuel obviously love all totally there, but it's kind of speak me on the rightsizing of kind of STN, a going forward and potential and their timing a of getting a adjusted EBITDA positive from that standpoint.

We're always in a in a state of reassessing, our talent and thinking through our we set up for growth for the future and so.

You know wall salaries have increased a lot of it is figuring out where to strategically placed sales thinking about how to do more specified sales targeting.

So at the end of the day, we will be rationalizing a bit of the workforce, but it's not at this stage anything that we're prepared to talk about that he sort of detail.

Okay. Thanks for the color I'll jump in the Q.

As a reminder to star one and your telephone keypad, if he would like to ask a question. Our next question is from Mike Grondahl with Northland Capital markets. Please proceed.

Hi, guys, what one or two product categories are you kind of most confident that can kind of.

Drive revenues incrementally in margin, how should we think about that going forward.

Rather than a rather than a product category more more broadly speaking we are and remain focused on our house brands. We've launched a number of various house brand. They typically have a much higher margin profile associated with them.

It's higher than our general long term margin targets. So as that business continues to grow a we expect that to have a disproportionately meaningful effect on our margin profile and this quarter. We grew it up to 7.7% of our total revenue.

And we expect to see double digits in the very near term.

Okay.

Is there a second area, we should think about or watch or is that the main one.

Well, there's there's really three areas of the business as it relates to products. It's the house brands predominantly than we have our our business to consumer operations, which includes both our ecommerce properties as well as our brick and mortar stores higher standards.

And then the third pillar that we focus on that have higher margin profile associated with it is our supply and packaging business, which is predominantly made up of our patented child resistant packaging pauling here by virtue of our acquisition earlier earlier this year and some of our closed cartridge paper systems.

Those three areas of our business all have much higher margin profiles associated with them and frankly, even our beat to be CPG category, which is selling the consumer package goods to our independent smoke shops, and they've shops across the country absent jewel have a margin profile.

Thats much more substantial than otherwise blended with jewel.

Definitely in the in how we're in the mail.

<unk>.

Our ecommerce sales in the quarter.

There was no material change to our performance on E Commerce sequentially. So there's nothing specific to report there, but it is a key focus area for us going forward. So we will.

Continue to make a investments it's essentially the work in progress as we continue to invest in that segment of our business.

Okay, great. Thank you.

We have reached the end of the question and answer session I would like to turn the conference back over to area for closing remarks.

Thank you very much I just wanted to say thank you for everyone's time today and I look forward to seeing many of you in Boston in the coming to us.

Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.