Q2 2020 Greenlane Holdings Inc Earnings Call

Welcome to today's conference call to discuss Greenline holdings second 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 Greenland Web site.

A reminder, today's conference is being recorded.

On today's call, our Castillo Chief Executive Officer.

And Bill Moler, Greenland incoming chief financial Officer.

Before we begin greenlee would like to remind listeners that today's prepared remarks may contain forward looking statements.

Management may make additional forward looking statements in response to the questions received.

These statements do not guarantee further performance and therefore undue really the reliance should not be placed upon them.

The statements are based on current expectations of the company's management and involve inherent risks and uncertainties and other factors discussed on todays press release.

This call also contains time sensitive information that speaks only as of the date of this live broadcast August 7th 2020.

Factors that could cause green lanes results to differ materially are set forth in today's press release. It Didnt Green lanes annual report on form 10-K, and its quarterly reports on form 10-Q filed with the FCC.

Any forward looking statements made today on this call are based on assumptions as of today and Greenlight assumes no obligation to update these statements as the result of new information or further event.

During today's call Greenlee management may discuss non-GAAP financial measure, including adjusted net loss and adjusted EBITDA.

Greenline has included a reconciliation of the non-GAAP measures in today's press release, which is available in the Investor Relations section of our webcast edgy in El en dotcom.

I'd now like to turn the conference over to Mr., Aaron Locascio, Chief Executive Officer of Greenline. Please go ahead Mr. locascio.

Good morning, and thank you everyone for joining us today.

During this call I will review, our second quarter 2020 sales highlights operating environment and business development activities.

Before getting into our financial results I wanted to take a moment to discuss a few of the recent additions to our team that we announced last week.

I would like to formally welcome Bill buying our new Chief operating officer and building out our incoming Chief Financial Officer, who you will hear from shortly as well as for additional experienced senior executives, we have added to drive other strategic priorities.

They'll find isn't accomplish executive with more than 25 years of experience, leading supply chain and operations growth and transformation in the consumer products and manufacturing industries.

Among his many priorities we're excited to have them apply his skill set the scaling our greenline brand supply chain to support the growing demand.

Bill mobile oversee the accounting business support financial planning, an analysis treasury and tax functions.

Hi, guys over 25 years of experience building and leading finance teams and global corporations with significant operating scale and complexity.

Now onto the numbers I am proud to report that even amid the ongoing covert 19 pandemic the benefits of the important changes that we began implementing earlier. This year are beginning to come into focus. These changes include repositioning our focus towards higher margin revenue opportunities a strategic review of our workforce and the stay.

Dream lining up our global operations.

In the quarter, we achieved revenues of 32.4 million and gross profit of 6.7 million.

Well Koeppen 19 has introduced some additional uncertainty to our forecasting we believed that we are well underway to achieving our goal of returning to adjusted EBITDA profitability supported by the savings from the operational efficiencies we continue to implement.

With our focus squarely on higher margin revenue opportunities, we have successfully reduced the proportion of our revenues derived from jewel products to below 10%, representing 2.5 million in the quarter.

Looking at the business another way if we factor at all Jewel revenues from Q2, 2020, and Q2 2019, our revenue has improved by 9.2% compared to the prior year period and sequentially. Our topline revenue has increased 2.1% from Q1 2020.

We expect you all to remain around these levels as our focus remains squarely on higher margin well rounded product assortment.

Both our B to C and channel in Dropship revenue channels continued to show strong growth in the quarter with beat to see more than doubling over sequential quarters to 6 million and channel and dropship up 60% over sequential quarters to 5.69.

In the period beat to see revenue represented 18% of total net sales and we believe that our emphasis around E commerce through vapor dot com and our affiliated sites will drive long term revenue growth.

On that point, we have seen order volumes increased 75% sequentially through vapor dot com and our order values have remained strong.

With states reopening across the country. We're pleased to see our beat to be revenue has begun to normalize from the lows that we saw at the beginning of the quarter due to the pandemic.

During the quarter, we announced our international expansion of vibes into Europe in Canada. Following the opening of our cookies branded retail store in Barcelona, Spain.

Vibes products are now available at over 200 retailers across Europe, and more than 100 specialty stores in Canada.

While vibes and our other Greenland brands experienced short term supply chain challenges, which were expected given the pressure that the covert 19 pandemic has placed on our operations.

We were able to achieve our second highest greenline brands quarterly sales to date, representing 15% of total sales.

Greenlight has always in short our customers have access to a comprehensive assortment of products and while we have works to develop our own line of Greenland brands. We will continue to deliver the innovative products our customers expect from Greenline and support our partners and network I've complementary brands as they represent a key component of our offering.

We have also been making significant progress on our transformational initiatives announced on our last call, which included streamlining and consolidating our distribution centers.

As we look ahead, we anticipate that some transitional operational inefficiencies will remain through Q3.

But that we should achieve a strong steady state by Q4.

Our business is undergoing a heightened pace of change brought on by both the macro environment, we operate in today and our desire to run a high growth profitable business. While we strongly believe that the outcome of this change will be for the better we recognize the importance of bringing the customer along for that journey.

To that end, we're upgrading our customer service approach to support the broader customer experience like the automation that we're driving in our distribution centers, we are bringing best in class practices to multiple teams across the <unk> company, including bringing new leadership to our supply and packaging revenue channel and our international business segments.

We see that especially in a pandemic environment with rapidly shifting consumer demand digital has been critical component of winning companies strategies, both b to B and B to C. We're closely evaluating different digital solutions that can be integrated into the Greenland platform through both internal development and putts.

Central M&A opportunities.

I want to again, thank our team for all their hard work as we have continued to successfully execute on our priorities despite a difficult macro environment.

We have made great progress and I'm excited to continue to forge our path for long term sustainable and profitable growth and the second half of 2020 and beyond with that I'll now turn it over to build out to run through our second quarter 2020 financial results.

Thanks, Aaron and Hello, everyone before starting I, just like to say how excited I am to be joining the green Lane team and proud of the work that the team has done in getting us to where we are today.

As a reminder, the results I will be reviewing the view. This morning can be found in our earnings release that is available on Edgar and the Investor Relations section of our web site at GE and El en Dot com.

Our Q2 2020 revenue was 32.4 million, representing a sequential decline of 1.5 million, reflecting full quarter.

Of the impact that the cobot to cope with 19 pandemic placed on consumer purchasing behaviors and our operations.

Our Q2 revenue was also affected by the implementation of our business transformation plan that realigned our focus on higher margin revenue opportunities, which resulted in jewel sales accounting for less than 10% of our total sales in the quarter.

Gross profit was 6.7 million or 21% of net sales compared to 7.3 million R. 22% of net sales in Q1 2020, we had a significantly higher than average adjustment relating to the steel and obsolete inventory of 700000.

For reference last quarter that amount was 120000.

If we were do exclude the 700000 from our calculations, our adjusted gross margin would've been 23%.

This adjustment was largely due to purchasing decisions made last year.

Since that time, we've brought in new leadership and advanced our purchasing processes and software and we believe that going forward, we will drive better performance in this dimension.

Salaries benefits and payroll tax expenses for the second quarter of 2020 decreased by half a million to 6.1 million from 6.6 million in Q1 Twentytwenty.

As a result of the strategic review of our workforce completed earlier this year.

General and administrative expenses decreased by 2.4 million.

6.4 million sequentially.

Net loss for the second quarter of 2020 improved to 6.4 million compared to 16.7 million in the first quarter of 2020.

Adjusted net loss for the second quarter 2020 was 5.2 million compared to adjusted net loss of 6.1 million in the first quarter of 2020.

Adjusted EBITDA loss improved by 1.9 million to 4.4 million for the second quarter of 2020 compared to a loss of 6.3 million in the first quarter 2020.

We ended the quarter with 41.8 million in cash and approximately 77.8 million of working capital.

We have continued to prudently manage our accounts receivable balances and closely monitor inventory levels to maintain a healthy balance sheet.

With that I will turn over the call back to the operator and open it up for QNX.

Thank you if you will like Laskin audio question. Please press star followed by the number one on your telephone keypad. Once again that is star one to ask the phone question.

And your first question is from the line of Vivien Azer with Cowen.

Hi, good morning.

Yeah, Marty Vivian.

So.

All the color.

To get a little bit more clarity on the purchase decisions and what that entailed typically in whether they're going to be a residual impact as we think.

Yeah. Thanks.

Sure Great question, no, we specifically called it out because we do not anticipate a that level of activity to take place going forward.

Now since our keep beginning of Q4 of last year. We spent a lot of time refocusing, our energy and efforts towards higher margin activities and really a a broad scale transformational effort and part of the result that came out of that was a this 700000 dollar impact to our reserve for obsolete.

Inventory in Q2.

Okay Fair enough. That's helpful. Thanks for that if we think about your business you offered that you're starting to see that business.

The lives of economies are reopening, we're certainly seeing kind of mixed bag opening and closing so is there some volatility there or is it kind of a little bit more kind of steady improvement in terms that is out there.

So we're seeing.

We are seeing some level of volatility as states reopened overall, there's a pretty good overall cadence of improvement compared to the early parts of Q2, we're definitely seeing a higher level of activity in the positive direction and the beat to be channel, but you're correct.

Say that Theres also some volatility.

So we're going to closely watch that going forward, but we do anticipate to see a bit of a normalization in our beat to be revenues in Q3.

Okay perfect. That's helpful. Thanks, and then.

Well, obviously your exposure to that business, it's come down.

Later on but you Didnt know that you think that said the current sales level, it's probably kind of the rights steady state that kind of implies you don't expect any disruption in the near or medium term frankly on.

So.

Clarify that are applied on that thanks.

Yes so.

And part part of the reason why it was impacted was that it was we don't sell jewel in any other channel or any other revenue channel except for a b to b add so considering there was a lot of brick and mortar closures. There a there's definitely need to be was slower for for the quarter. So so yes jewel is definitely impacted.

By that but from the FDA fronts, we have seen positive progress.

From Joel and other suppliers as it relates to the PMTA process and we're not currently anticipating any disruptions related to the FDA.

Perfect. Some of this week last one last one if you don't mind on D. divide commentary on encouraging around the distribution from Europe can you remind us what youre margin profile looks like.

Domestically on a like for like basis, so that pipeline.

[noise] on specifically to fives.

Yeah, we've been talking about geographic segment margins of happy here. Thanks.

Sure. So Europe has a higher margin profile.

In general, which is largely driven by the type of business lines that we have there there's a lot more E commerce activity. There, there's a lot more <unk> direct to consumer business. So our overall margin profile in Europe is.

As typically in a 25.

To 35% range.

Depending on again.

Covert impacts and how that's shifting from business channel to business channel.

Vibes overall is one of our strongest performing margin items, a and often times, we're seeing margin profiles for that product line in excess of 50 or even 60%.

That's great. Thank you for the color.

Your next question if someone I have Glenn Mattson with Ladenburg Thalmann.

Hi, So couple of questions you mentioned.

You know a possible M&A activities can you maybe just expand on that as far as.

Things you're looking at given.

No I don't know.

And she is strong, but it's not an infinite and.

You know the share price is still a little bit depressed. So could you just give us some some of your thoughts on that.

Sure and good morning so.

As it relates to M&A opportunities historically, we've talked about it from two lenses, both a vertical and horizontal perspective vertical being.

Potential acquisitions of brands to bolt on to our Greenland brands, the strategy and from a horizontal perspective or from a geographical reach new territories new customers.

So I would say that still remains a key focus for the green line going forward, but we've also added in the opportunity to look at potential M&A opportunities around digital assets.

Pandemic has certainly made a quite clear that digital is a critical component of winning company strategies going forward.

So looking we're worked very carefully looking at new technologies.

And different platforms to really build out our digital infrastructure going forward, which may involve M&A, but it may also involve just some organic building our ourselves.

Okay. Thanks, and then in the with regards to out New House brands can you give us kind of a cadence of what do you expect a it's coming down the pipe over the next six months or so and where you think.

What the status of where you think house brands could be say I don't know by the into next year maybe.

Sure. So we're seeing some tremendous quarter over quarter growth in most of our <unk> our brands with the exception being the ones that we experienced short term supply chain challenges with so examples include we're seeing a greater than 100% increase for modeling 100.

Quarter over quarter increase for Marley natural as an example, a we've seen a a 45% increase in Keith haring quarter over quarter. I was just a couple of examples in the pipeline at any given point, we have approximately 10, new products new brands that were carefully evaluating and looking at timing.

Launch I don't suspect that they'll all launch between now and the ended the year as we go through a very thoughtful evaluation process, but that's right that that gives you a bit of color and clarity in terms of the cadence in which we look to be launching products and evaluating products in the go forward basis.

Internally, we talk long term, meaning a as a 2023 initiative I really building our brands division to a point, where it represents close to 50% of our total overall revenues.

Okay, great. Thanks, that's it for me.

[laughter].

Your next question, it's in light of Scott Fortune with Roth capital partner.

Good morning, Scott.

Uh huh.

If your immediate please on mute.

Got your line is open.

Well move to the next question. Your next question from the line of Mike Rhonda Ho with Northland Securities.

Good morning, My good morning, guys.

Good morning, HM vapor dot com, how did that continue to trend into July.

Great question, so our vapor dot com and our overall our ecommerce sites do remains strong. However, there are there looking more like Q1 activity as more and more brick and mortar stores reopen they're taking share back from on.

Line.

So we do anticipate to see just overall continued growth in b to b to C. On a year over year basis, but there will likely be a flattening or potential decline even on b to C as fee to be gains more share.

Got it got it and then kind of overall in Canada, how were field goal going up there.

Sales in Canada remain strong.

We've seen.

On a year over year basis, there was definitely a lot of load and as it relates to the cannabis legalization that occurred. So we saw a lot of upfront activity. There. If the business remains very strong from a historical perspective, but we're seeing a bit about a flattening in Canada overall.

On our on our core brands, we have been focusing a lot more energy and efforts on our Greenline brands as you might imagine there's a higher proportion of fuel sales in Canada than in other geographies, but overtime. We will look to continue to transition that revenue to our core product sets in particular.

There are Greenland brands, but I'd say overall, we're very pleased with the performance from Canada, thus far.

Got it and they lastly, anything to call out with with the CBD products and whatnot.

[noise] <unk> CBD remains at a good opportunity overall, however, there's a tremendous amount of a dilution that's taking place in the marketplace. A lot of brand dilution. I mean, you know we kind of saw this coming from from the beginning of of really the you know as CBD really started to pay.

Maybe.

Roughly a year ago or so there's just a lot of brands, there's a lot of noise and it's difficult for consumers to.

Find a and connect with brands. So I expect that there will be some net winners in the CBD space.

You will see a lot of consolidation take place over the next 12 months.

So overall, it's it is part of our overall assortment, but I wouldn't call. It a key driver of performance going forward.

That's fair, Okay, Hey, thanks, a lot.

Once again, if he would like to African audio question. Please press star followed by the number one on your telephone keypad.

And your next question from the line of Scott Fortune with Roth capital partner.

Good morning, Thank for taking yeah. Good morning, Thank for taking the call just real quick.

Oh look on the higher standards and kind of pushing that is more into the European side. If you can.

Well go down that process a little bit.

Yeah, I mean in general we've been focusing a lot of our activities.

Our house brands are Greenline brands really started in the you asked is kind of our our ground zero for our brands, but we're definitely pushing our brands, including higher standards out to.

All geographies, including Europe now we also have are higher standards retail stores I'm not sure. If you were referring to the retail footprint.

But in Europe, we we opted to launch a cookies store in collaboration with cookies in Barcelona, Spain, where we don't have any near term intentions to launch any higher standards physical locations frankly anywhere in the world right now with the current environment I can also mentioned.

We did reopened both our Chelsea market store and our Malibu store, how higher standards.

And we are seeing some early indications of a positive progress there, but still remain depressed overall compared to historical figures due to that over 19 pandemic.

Okay, and they're real quick follow ups you do you plan to expand the cookies offering are you kind of waiting to see the Barcelona rollout and then go from there.

I would say overall, we're going to take a very cautious approach right now and in light of takeover 19 pandemic, a we do have a lot of broad opportunities that we've been discussing.

With a key partners like cookies, and we'll look to continue to add to these opportunities going forward, but from a physical brick and mortar standpoint, we will remain very cautious in our approach while the pandemic continues around the world.

Okay. Thanks for the color.

And at this time there are no further questions I will turn the call back to Mr. Castillo for any closing remarks.

Well I want I again want to thank everyone for joining Greenland conference call today, a replay for this conference call will be available on approximately two hours on Green Plains website in the Investor Relations section and I hope everyone enjoy the rest of the day.

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