Q2 2021 Greenlane Holdings Inc Earnings Call

August 17, 2021

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Today's conference is scheduled to begin shortly please continue to standby.

For your patients.

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Good morning, all welcome to today's conference call to discuss Green Lane Holdings second quarter 2021 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 Green Lane website.

As a reminder, today's conference is being recorded.

On the call today are Aaron Locascio, Chief Executive Officer, and Bill Mote, Chief Financial Officer.

Before we begin Green lane, we'd 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 this live broadcast August 17th 2021.

Factors that could cause green lines results to differ materially are set forth in today's press release and in Green lanes annual report on Form 10-K, and quarterly reports 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 Green Lane assumes no obligation to update these statements as a result of new information or future events.

During today's call Green Lane management May discuss non-GAAP financial measures, including adjusted net loss and adjusted EBITDA Green.

Green Lane 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 G and L N Dot com.

I would like to turn the call over to Mr. Aaron Locascio, Chief Executive Officer of Green Lane. Please go ahead Mr. Locascio.

Thank you everyone for joining us today. This morning, I will review key highlights from the quarter and the recent progress on our growth strategy before turning the call over to our Chief Financial Officer, Bill Mote for a review of our financial results.

We started 2021 on strong footing following our successes in 2020, and we have made tremendous progress we continue to gain momentum on the growth of our core revenue and Green Lane brands core revenue was up 14.9% to $34.5 million for Q2, 2021 compared with $30 million in Q2 two.

'twenty 'twenty.

And accounted for 99% of our total revenue for the second quarter of 'twenty 'twenty. One. We're also seeing continued growth from our higher margin Green Lane owned brands with revenue up 62, 5% to a record $9 million in Q2, 2021 from $5.5 million in Q2 'twenty 'twenty.

Which I am extremely proud to share is our third consecutive quarter of record revenue for our owned brands.

These owned brands continued to perform exceptionally well in the market and accounted for 25, 9% of total revenue for the second quarter of 2021.

These financial metrics demonstrate continued positive results from the work we completed throughout 2020 to increase our revenue mix to one more heavily weighted to our higher margin Green Lane owned brands.

I'm also excited to share the advancements we have made on the execution of our strategic vision, which continues to focus on launching exciting new consumer products into the market expanding our platform through carefully selected M&A opportunities and growing green lines position as the leading provider of cannabis consumption products globally.

As we continue growing our Green Lane brands revenue, we benefit from the deep and long standing relationships. We have built over the past 16 years, which a large percentage of the industry's leading brands.

We work with brands over their lifecycle and have developed significant insights into the market, which gives us a strong sense of when is the most opportune time to acquire.

Our criteria to add brands to our portfolio is very selective and we focus on products that will not only enhance our margin profile, but ones that will elevate our customers experiences.

Curating products that continue to position us as the industry, leading provider of premium cannabis accessories.

We have a robust pipeline of opportunities and expect to continue executing on similar opportunities as we anticipate industry consolidation will continue to happen over the next few years.

Our second quarter results demonstrate our focus on growing our portfolio of owned brands and driving strong performance from our existing brand portfolio is not only working but exceeding our initial expectations.

Together with our upcoming merger with Costco, we are exceptionally well positioned to grow our business and be the leader in ancillary cannabis space.

On that note before I turn the call over to Bill I'd like to end by discussing the status of our transformative merger with <unk>.

We are combining to robust differentiated and innovative offerings to create a best in class product portfolio.

In addition to a differentiated and complementary product offering we will also be merging two distinct customer bases.

The combined company will serve a premier group of customers, which includes many of the leading multi state operators single state operators and Canadian Lps. The majority of the top smoke shops in the U S and millions of direct consumers, allowing for tremendous cross selling opportunities.

With a combined 26 years of experience over 200 articles of intellectual property and strong relationships with key vendors. We believe we will be best positioned to continue delivering innovative product solutions to our global customer base.

Following completion of this transaction, we believe the combined company will have a strong platform for accelerated organic growth and should be well positioned to capitalize on attractive market opportunities to grow profitably and drive value for all shareholders.

With our shareholder vote scheduled for next week, our expectation is that the transaction will close shortly thereafter.

We've made substantial progress on our strategic initiatives during the second quarter and will continue to accelerate this growth strategy moving through 2020 one.

With that I'll now turn it over to bill to run through our financial results in further detail.

Thanks, Eric and Hello, everyone. As a reminder, the results I will be reviewing with you. This morning can be found in our earnings release that is available on Edgar and the Investor Relations section of our website at GNL N Dot com as a reminder, before I begin our core revenue is defined as all <unk>.

Non nicotine revenue.

Net sales of Green Lane owned brands grew 62, 5% to $9 million for the year, increasing to approximately 25, 9% of total net sales for Q2 2021.

880 basis points from 17, 1% for Q2 2020 core revenue grew 14, 9% to $34.5 million in Q2 2021.

From $30 million in Q2, 2020 total net sales increased to $34.7 million in Q2 2021 from $32.4 million in Q2 2020 with core revenue now accounting for 99% of revenue for the quarter compared with 93 per.

In Q2 2020.

Our United States segment net sales increased 16, 4% to $30.7 million for Q2 2021 from $26.4 million. In Q2 2020, we are very pleased with the growth in the United States, which occurred despite the lingering impacts of the COVID-19 pandemic.

Net sales in the United States increased due to a $4.9 million increase in B to B sales, a $1.4 million increase in supply and packaging sales.

And a $300000 increase in retail sales offsetting declines in E Commerce and channel and drop ship sales of $1.6 million and $600000 respectively.

Our Canadian segment decreased $2.1 million for the Q$2.2021 quarter from $3.5 million in Q$2.2020 due to a decrease of $2.2 million in our noncore revenue sales, resulting from our strategic shift away from low margin sales.

Looking at our European segment sales were flat at $2.6 million, primarily due to the establishment of third party website sales, resulting in $400000 of additional net sales and $200000 growth in <unk> sales, which offset a $600000 decrease in e-commerce sales.

Europe remains an exciting growth Avenue for us and we look forward to increased performance in the back half of the year.

Gross profit was $7.8 million or 22, 4% of net sales in Q2, 2021 compared to $6.8 million or 21% of net sales in Q2 2020.

While merchandise margin increased two 3% or 113 basis points and resulted in an $800000 or seven 4% increase in merchandise gross profit.

The improvements were largely negated by $900000 increase in inventory adjustments and a $500000 increase in customs duties and fees. We expect our overall gross margin to continue to improve as we execute on our strategic vision with Green Lane brands at the core.

G&A costs for Q2, 2021 decreased to $7.1 million compared to $10.9 million in Q2 2020, primarily to a reduction in bad debt expense of $1.1 million attributable to the EU that tax issue as well as a reduction in accounting fees of approximately $300.

<unk>.

These reductions were partially offset by an increase in legal and M&A expenses of approximately $1.5 million in connection with our due diligence and merger related services. During Q2 2021, we expect our third party logistics cost will decrease going forward as we continue to optimize our distribution platform.

Net loss for Q2, 2021 was $5.8 million compared to $6.3 million in Q2 2020, adjusted net loss was $4.2 million in Q2 2021 compared to $5.1 million for Q2 2020.

Adjusted EBITDA loss was $3.7 million in Q2 2021 compared to an adjusted EBITDA loss of $4.3 million in Q2 2020, we.

We ended the quarter with $11.6 million in cash and subsequent to the quarter end, we announced and completed a $32 million direct offering priced at the market under NASDAQ rules as a result of that financing, we are well equipped and positioned to execute on our near term strategic initiatives.

We have developed a robust pipeline of potential M&A and are currently in discussion with several attractive acquisition opportunities. We believe we can execute on these opportunities throughout the remainder of 2021 with the improvements in our financial performance and strong growth in both core and Green Lane owned brands revenue as a result of our recent acquisition.

<unk> of ice and future merger with Costco. We believe this will be a pivotal year for us and we are more excited than ever about the future for greenway with that I will turn the call back over to the operator and open it up for Q&A.

Yes.

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.

In the interest of time, we ask that you limit yourself to three questions and then rejoin the queue for any additional questions.

Our first question comes from Aaron Grey with Alliance Global partners.

Hi, good morning, and thank you for the question Alright, good morning. Thanks.

So just quickly then I was wondering if I could get some color in terms of how some of the other Green Lane brand performed during the course specifically.

And I know that.

Bob did very well thank you.

Yes, I mean, we continued to see strong growth pretty uniformly across all of our own brands. Some are outperforming others.

Ice is an example is up 85% year over year.

And pollen gear is another example that you referenced is up 35% on a year over year basis.

Okay, great. Thank you for that color and then second question for me would just be around.

Some of the initiatives you talked about in terms of the dispensaries in getting some of the glassware and nice material within that I know you guys have also talked about with <unk> coming on.

Relationships that they have in terms of helping them to get to in terms of adult in front of doors, but.

How did you have all these new licenses coming online I just wanted to know in terms of.

What you guys are doing to maybe.

The part of the original plan O Gram for these dispensaries versus trying to go into existing dispensaries and change up the plan agreement, where you fit and maybe some of the efforts youre doing to get him with the licenses before these stores they've been opened thank you.

Sure.

It's a combination.

It's a combination effort.

Both inside and outside.

We do leverage the existing infrastructure, we have with an outside sales team to actually go into stores and communicate with.

Both existing brick.

Brick and mortar locations as well as new and up and coming locations a lot of times, we're working with existing customers.

We're setting up new stores, that's another great Avenue for us, where we can really leverage.

Our expertise in plant in grams from day, one store go lives.

So it's really the combination of our.

Product expertise, what sells what demographics and what geographic locations.

Coupled with our inside team as well as our outside sales team to really make sure. We are hitting the ground running on both existing operations as well as new stores.

Yeah.

Alright, great. Thanks for the color and I'll jump back into the queue.

Thank you.

Our next question comes from Vivien <unk> with Cowen.

Hi, good morning.

Good morning Vivien.

So I was wondering if you could talk a little bit about the shape of the quarter.

Revenue slipped looks good and in particular, the Green lane growth to be sure, but you know for a lot of your MSL partners. They commented on the deceleration in growth.

The quarter, just curious whether that translates into similar trends for your business. Thanks.

Yeah.

Sure so.

Yeah.

Again, we saw some meaningful growth in our core and brands business, particularly in the United States.

Again for the most part we're dealing with smoke shops across the country.

It's a big part of why we're particularly excited about the merger with Kiszko because they have much deeper relationships with the msos.

So we've seen some meaningful growth come out of the existing.

<unk> licensed customers enterprise level cannabis customers Msos.

But we're still very very early innings there.

Yes, Aaron had kind of asked before Theres, certainly a lot of opportunity in both existing storefronts and new store fronts, but.

But we're going to continue to focus on again are our core revenue and more importantly than that even our our branded revenue.

We look to enter those brick and mortar storefronts across the country.

I'm not sure it did that did that answer your question.

Alright, yes, perhaps I didn't articulate it.

I could have.

The smoke shops that you guys deal with did you see the similar.

The sequential deceleration in growth that the msos articulated in the marketplace.

You know, we're not seeing that same deceleration in the smoke shops.

We're seeing again, if we're focused on the U S. In particular, which is our largest segment by far.

20% growth year over year on our core business as a total in the U S.

There is definitely still a lot of logistical and operational challenges that exist in the marketplace that I think we're all very well aware of.

But in terms of kind of a deceleration and I've seen some of the data coming out of the Msos.

Patient counts.

We are we have not seen that type of change.

Within the independent smoke shops space.

Although we are watching very carefully for any potential impacts right now.

Any any of the challenge that we have right now still remains the operational the supply chains, most notably with China particular.

Understood and then my last one for me you did call out kind of the work you're going to be doing on third party logistics when would we expect to see that start to show up in gross margin. Thanks.

We continue we transitioned into a third party warehouse last year and we just continue to optimize that so we're seeing it already kind of roll through but we continue every every month every quarter to optimize that relationship with the <unk>.

We also transitioned two of <unk> in Europe back in April of this year and that continues to ramp up and come come online and full bore so we'll continue to see slight improvements in margin as a result of those changes, but overall I think we've recognize the bulk of those improvements.

We will continue to optimize that though.

Got it understood. Thank you.

Yeah.

Our next question comes from Derek delay with Canaccord.

Yeah, Hi, Darin guidance.

Hi, Derik.

When I look at.

The gross margins obviously, some good strong results on the gross margin guidance seems to obviously coincide with the growth in the Green Lane to owned brands I was just wondering if you could give us.

Some commentary on what do you think that gross margin can go as you as you increase your exposure in Greenland brands to your target of 40%.

So thanks, that's a great question much appreciated.

Have.

Long stated Green Lane as a Standalone organization.

It should be able to achieve on a blended basis, including the third party brands.

In the mid Thirty's as a total gross margin profile.

Certainly be.

A natural maturation and ebbs and flows as we continue to make our way to those higher gross margins.

Some examples of what we saw in the second quarter to kind of give you some.

Directional understanding we have on a year over year basis, a decrease in total e-commerce sales, which are higher margin as again, our stores open up and we're seeing less people buy online and more people buy in store, but we're it's being offset by an increase in Greenland owned brands.

But then again being offset to a degree by a very substantial increase in operational costs, particularly with sea freight and air freight and logistics related to getting products.

From various manufacturers around the world to the United States.

So we're very happy to see the progress that we've made but there's.

Plenty more room for that to continue to grow.

Alaska.

Sorry go ahead, yes, I was just going to just very quickly follow up on that.

If I can if I think I heard you correctly, you kind of had two headwinds and one tailwind in the quarter. So.

Would you say that the tailwind of the strength in the Green Lane brand.

It was offset in part by.

Obviously, the supply chain disruptions, which hopefully are temporary and it's not just you guys. Its everybody basic those.

And then obviously the drop in e-commerce.

Yeah honestly, we believe that all to be.

We believe that tailwind to be sustainable again, especially as it relates to the growth in our in our owned brands.

Which is going to be a great tailwind for continuing to grow our margins.

E Commerce has stabilized and we still have plenty of room to grow that although it's a very tough comparison year over year.

Given where we were a year ago with the pandemic and how explosive E Commerce was.

And the supply chain challenges, while it's difficult to predict how long they will persist for.

We do believe them to be temporary in nature.

So all of those things lead to a continued path our expectations are that we will continue to see incremental improvement of our margin profile to our ultimate goal of around 35% on a green line standalone basis, and that 35% was a three year horizon.

We gave and that was assuming 40% of our products are green Lane owned brands. So.

At at <unk>.

Q2, 2021, and we're in the 22 range and margins and that's kind of squarely within the.

What we said in Q1, which is our margins for the year should be in the.

<unk>.

Low to mid.

Twenties.

We're continuing to progress on that road and 26% of our product right now.

Greenway branded product.

Yeah, Okay, no that's great.

One more just from the 10-Q it looks to me like like Europe turned profitable this quarter on a on an EBIT perspective.

Can you just provide an update on Europe, and how that integration is going.

Yes look I wouldn't say, there's an integration there I would just say that were flat to last year in Q2 like I said in our our earnings script, we're confident that that's going to return to growth.

Europe Europe was our highest growth area for the year in terms of our initial internal projections, obviously COVID-19 has taken a larger hit to Europe than we originally anticipated and <unk>.

Profitability was also impacted by the VAT issues that we've had in Europe.

We will be streamlining the operations as we move through the remainder of the year.

It was just over in Europe last week working with the team to.

To build that streamline the operation plan. So we're confident that will return to profitability as we move through the rest of the year and obviously, we've had some cleanup to do with that tax and things to that nature with which of.

Overshadowed some of the good performance that we've seen there.

Okay, great. Thank you very much.

As a reminder that is star then one if you'd like to ask a question at this time.

Our next question comes from Scott Fortune with Roth Capital Partners.

Hey, good morning, Scott.

Hey, guys. This is Nick stepping in for Scott first question kind of around Canada. It looks like it's kind of a decline in sales as you shift away from nicotine sales.

And he went through the ERP implementation you indicated in your 10-Q, you will see a recovery in that market can you kind of quantify that recovery heading into the back half here and where you expect to see that revenue come from.

Yes so.

Canada, historically has been almost 50% nicotine, although as a whole of the worldwide revenue not not substantial nicotine revenue, which we've now moved nicotine almost a zero percent of our sales.

So we're going to.

Year over year compares are going to be difficult for Canada over the course of the next couple of quarters, but we'll continue to build the non nicotine component of the Canadian sales not necessarily giving guidance overall, but you can continue to expect that the non nicotine component of the revenue, which was almost 50% of the revenue in prior years, we will.

<unk> to be low.

That's just our strategic initiative to get away from single digit margins in nicotine business and continue to build the core revenue, which is our own green Lane brands and other non nicotine products by third parties, so I'm going to stay away from guidance, but I'll give you the indication that I think the non nicotine component of our revenue.

Which we do breakout will continue to return to levels, where we were previously to Q2.

That did.

<unk>.

It did impact our sales in Q2, just simply as ERP. It was our first implementation of a multi stage ERP system in Canada was a bit of a guinea pig. So we worked out.

Worked out a good deal of our our bugs on the Canadian implementation.

Got it I appreciate that color and then second question for me kind of around your recent raise can you touch on the rationale behind the raise capital and kind of the go forward strategy around deployment there. Thank you.

Yes, so obviously the merger with Cush is a large merger it requires a significant amount of expenses related to legal and banker's fees and whatnot. We wanted to be prepared for both the close of the <unk> deal as well as the any incremental working capital necessitated as a.

<unk> of that merger.

<unk> is carrying a balance on the ABL, we will we will take out that ABL at the close of the.

The transaction as well so when I talked about near term strategic needs. This raise covers us for that and then as we move into a combined company and look at our overall M&A strategy and related working capital, we evaluate that as we move into the back half of the year.

I appreciate the color guys. Thank you.

That concludes today's question and answer session I'd like to turn the call back to Aaron Locascio for closing remarks.

Okay. Just wanted to say thank you again for joining <unk> conference call today as always I want to finish by sincerely thanking our team for all their dedicated hard work and we look forward to updating you on our further 2021 progress in the next quarter. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Yes.

Okay.

Great.

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Yes.

[music].

Good morning, all welcome to today's conference call to discuss Green Land Holdings second quarter 2021 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 Green Lane website.

As a reminder, today's conference is being recorded.

On the call today are Aaron Locascio, Chief Executive Officer, and Bill Mote, Chief Financial Officer.

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 17th 2021.

Factors that could cause green lines results to differ materially are set forth in today's press release and in Green lines Annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the SEC.

During today's call Green line management May discuss non-GAAP financial measures, including adjusted net loss and adjusted EBITDA Green.

Green Lane 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 G and L N Dot com.

I would like to turn the call over to Mr. Aaron Locascio, Chief Executive Officer of Green line. Please go ahead Mr. Locascio.

Thank you everyone for joining us today.

Morning, I will review key highlights from the quarter and the recent progress on our growth strategy before turning the call over to our Chief Financial Officer, Bill Mote for a review of our financial results.

We started 2021 on strong footing following our successes in 2020, and we have made tremendous progress we continue to gain momentum on the growth of our core revenue and Green Lane brands core revenue was up 14, 9% to $34.5 million for Q2, 2021, compared with $30 million in Q2 two.

<unk> thousand 20.

And accounted for 99% of our total revenue for the second quarter of 2021. We're also seeing continued growth from our higher margin Green Lane owned brands with revenue up 62, 5% to a record $9 million in Q2 2021 from $5.5 million in Q2 2020.

Which I am extremely proud to share is our third consecutive quarter of record revenue for our owned brands.

These owned brands continued to perform exceptionally well in the market and accounted for 25, 9% of total revenue for the second quarter of 2021.

Yeah.

We work with brands over their lifecycle and have developed significant insights into the market, which gives us a strong sense of when is the most opportune time to acquire.

Our criteria to add brands to our portfolio is very selective and we focus on products that will not only enhance our margin profile, but ones that will elevate our customers experience as.

Curating products that continue to position us as the industry, leading provider of premium cannabis accessories.

We have a robust pipeline of opportunities and expect to continue executing on similar opportunities as we anticipate industry consolidation will continue to happen over the next few years.

Together with our upcoming merger with Costco, we are exceptionally well positioned to grow our business and be the leader in ancillary cannabis space.

On that note before I turn the call over to Bill I'd like to end by discussing the status of our transformative merger with <unk>.

We are combining to robust differentiated and innovative offerings to create a best in class product portfolio.

In addition to a differentiated and complementary product offering we will also be merging two distinct customer bases.

With our shareholder vote scheduled for next week, our expectation is that the transaction will close shortly thereafter.

We've made substantial progress on our strategic initiatives during the second quarter and will continue to accelerate this growth strategy moving through 2021.

With that I'll now turn it over to bill to run through our financial results in further detail.

As a reminder, before I begin our core revenue is defined as all non nicotine revenue.

Net sales of Green Lane owned brands grew 62, 5% to $9 million for the year, increasing to approximately 25, 9% of total net sales for Q2 2021.

880 basis points from 17, 1% for Q2 2020.

Core revenue grew 14, 9% to $34.5 million in Q2 2021.

From $30 million in Q2, 2020 total net sales increased to $34.7 million in Q2 2021 from $32.4 million in Q2 2020 with core revenue now accounting for 99% of revenue for the quarter compared with 93%.

In Q2 2020.

Sales in the United States increased due to a $4.9 million increase in <unk> sales, a $1.4 million increase in supply and packaging sales.

And a $300000 increase in retail sales offsetting declines in E Commerce and channel and drop ship sales of $1.6 million and $600000 respectively.

Looking at our European segment sales were flat at $2.6 million, primarily due to the establishment of third party website sales, resulting in $400000 of additional net sales and $200000.

Growth in <unk> sales, which offset a $600000 decrease in E. Commerce sales Europe remains an exciting growth Avenue for us and we look forward to increased performance in the back half of the year.

Gross profit was $7.8 million or 22, 4% of net sales in Q2, 2021 compared to $6.8 million or 21% of net sales in Q2 2020.

While merchandise margin increased two 3% or 113 basis points and resulted in an $800000 or seven 4% increase in merchandise gross profit.

These reductions.

<unk> were partially offset by an increase in legal and M&A expenses of approximately $1.5 million in connection with our due diligence and merger related services. During Q2 2021, we expect our third party logistics cost will decrease going forward as we continue to optimize our distribution platform.

Net loss for Q2, 2021 was $5.8 million compared to $6.3 million in Q2 2020, adjusted net loss was $4.2 million in Q2 2021 compared to $5.1 million for Q2 2020.

Adjusted EBITDA loss was $3.7 million in Q2 2021 compared to an adjusted EBIT loss of $4.3 million in Q2 2020.

Yes.

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.

In the interest of time, we ask that you limit yourself to three questions and then rejoin the queue for any additional questions.

Our first question comes from Aaron Grey with Alliance Global partners.

Yes.

Hi, good morning, and <unk>.

Thank you for the question Hi, good morning. Thanks.

So just quickly then I was wondering if I can get some color in terms of house them together No Green Lane brand performed during the course specifically.

Ice in Poland, I know that.

Bob did very well thank you.

Yes, so I mean, we continued to see strong growth pretty uniformly across all of our own brands. Some are outperforming others ice as an example is up 85% year over year and.

And pollen gear is another example that you referenced is up 35% on a year over year basis.

Okay.

Okay, great. Thank you for that color and then second question for me would just be around.

Some of the initiatives, we've talked about in terms of the dispensaries in getting some of the year glassware and actually tier within that I know you guys have talked about with <unk> coming on and some of the relationships that they have in terms of helping them to get to in terms of adult in front of doors, but.

How did you have all these new licenses coming online I just wanted to know in terms of.

What you guys are doing to maybe <unk>.

Part of the original plan of Graham for these dispensaries versus trying to go into existing dispensaries and change up the plan O grams.

Where do you fit and maybe some of the efforts youre doing to get him with the licenses before these stores they've been not one thank you.

Sure.

It's a combination.

It's a combination effort.

Both inside and outside.

We do leverage the existing infrastructure, we have with an outside sales team to actually go into stores and communicate with.

Existing.

Brick and mortar locations as well as new and up and coming locations a lot of times, we're working with existing customers.

We're setting up new stores, that's another great Avenue for Us, where we can really leverage our.

Our expertise in plant of grams from day, one store go lives.

So it's really the combination of our.

Product expertise, what sells what demographics and what geographic locations.

Bold with our inside team as well as our outside sales team to really make sure we're hitting the ground running on both existing operations as well as new stores.

Okay.

Alright, great. Thanks for the color and I'll jump back into the queue.

Thank you.

Our next question comes from Vivien <unk> with Cowen.

Hi, good morning.

Good morning Vivien.

So I was wondering if you could talk a little bit about the shape of the quarter.

Revenue slipped.

Good yeah in particular, the Green lane growth to be sure, but for a lot of your MSL partners. They commented on a deceleration in growth.

Through the quarter I'm, just curious whether that translates into similar trends for your business. Thanks.

Okay.

Sure so.

Yeah.

Again, we saw some meaningful growth in our core and brands business, particularly in the United States.

Again for the most part we're dealing with smoke shops across the country. It's.

It's a big part of why we're particularly excited about the merger with Costco because they have much deeper relationships with the msos.

So we've seen some meaningful growth come out of the existing.

Ed did licensed customers enterprise level cannabis customers Msos.

But we're still very very early innings there.

Yes, Aaron I kind of asked before Theres, certainly a lot of opportunity in both existing storefronts and new store fronts, but we're going to continue to focus on again are our core revenue and more importantly than that even our our branded revenue.

As we look to enter those brick and mortar storefronts across the country.

I'm not sure to that did that answer your question.

Sorry, yes, perhaps I didn't articulate it as eloquently.

As I could have.

The smoke shops that you guys deal with did you see the similar.

The sequential deceleration in growth at the Msos articulate that in the marketplace.

You know, we're not seeing that same deceleration in the smoke shops.

We're seeing again, if we're focused on the U S. In particular, which is our largest segment by far.

About 20% growth year over year on our core business as a total in the U S.

There is definitely still a lot of logistical and operational challenges that exist in the marketplace that I think we're all very well aware of.

But in terms of kind of a deceleration and I've seen some of the data coming out of the Msos and patient counts.

We are we have not seen that type of change.

Within the independent smoke shops space.

Although we are watching very carefully for any potential impacts right now.

Any any of the challenge that we have right now still remains the operational the supply chains, most notably with China particular.

Understood and then my last one for me you did call out kind of the work you're going to be doing on third party logistics when would we expect to see that start to show up in gross margin. Thanks.

We will continue to optimize that.

Got it understood. Thank you.

Our next question comes from Derek delay with Canaccord.

Yeah, Hi, Darin guidance.

Hi, Derik.

When I look at.

Some commentary on where you think that gross margin can go as you as you increase your exposure in Greenland brands to your target of 40%.

So thanks, that's a great question much appreciated.

Have.

Long stated Green Lane as a Standalone organization.

Should be able to achieve on a blended basis, including the third party brands.

In the mid Thirty's as a total gross margin profile.

Certainly be.

A natural maturation and ebbs and flows as we continue to make our way to those higher gross margins.

Some examples of what we saw in the second quarter to kind of give you some.

Directional understanding we have are on a year over year basis, a decrease in total e-commerce sales, which are higher margin as again, our stores open up and we're seeing less people buy online and more people buy in store, but we're it's being offset by an increase in Greenland owned brand.

But then again being offset to a degree by a very substantial increase in operational costs, particularly with sea freight and air freight and logistics related to getting products.

From various manufacturers around the world to the United States.

So we're very happy to see the progress that we've made but there's plenty more room for that to continue to grow.

Yes.

Sorry go ahead, yes, I was just going to just very quickly follow up on that so if we.

If I take if I kind of if I think I heard you correctly, you kind of had two headwinds and one tailwind in the quarter. So would you say that the.

The tailwind of the strength in the Green leaf brand.

It was up was offset in part by.

Obviously, the supply chain disruptions, which hopefully are temporary and it's not just you guys. Its everybody basic those.

And then obviously the drop in e-commerce.

Yeah honestly, we believe that also be.

We believe that tailwind to be sustainable again, especially as it relates to the growth in our in our owned brands.

Which is going to be a great tailwind for continuing to grow our margins.

E Commerce has stabilized and we still have plenty of room to grow that although it's a very tough comparison year over year.

Given where we were a year ago with the pandemic and how explosive E Commerce was.

And the supply chain challenges, while it's difficult to predict how long they will persist for.

We do believe them to be temporary in nature.

We gave and that was assuming 40% of our products are green Lane owned brands. So.

At at <unk>.

Q2, 2021, and we're in the 22 range and margins and that's kind of squarely within the.

What we said in Q1, which is our margins for the year should be in the <unk>.

<unk>.

Low to mid.

<unk>.

We're continuing to progress on that road and 26% of our product right now.

Green Lane branded product.

Yeah, Okay, no that's great.

One more just from the 10-Q it looks to me like you like Europe turned profitable this quarter on a on an EBIT perspective.

Can you just provide an update on Europe, and how that integration is going.

Yes, but I wouldn't say there is an integration there I would just say that were flat to last year in Q2 like I said in our our earnings script, we're confident that that's going to return to growth.

Europe Europe was our highest growth area for the year in terms of our initial internal projections, obviously COVID-19 has taken a larger hit to Europe than we originally anticipated and <unk>.

Profitability is also impacted by the VAT issues that we've had in Europe.

We will be streamlining the operations as we move through the remainder of the year.

It was just over in Europe last week working with the team to.

Overshadowed some of the good performance that we've seen there.

Okay, great. Thank you very much.

As a reminder that is star then one if you'd like to ask a question at this time.

Our next question comes from Scott Fortune with Roth Capital Partners.

Hey, good morning, Scott.

Hey, guys. This is Nick stepping in for Scott first question kind of around Canada. It looks like it's kind of a decline in sales as you shift away from nicotine sales.

Yes so.

Canada, historically, there's been almost 50% nicotine, although as a whole of the worldwide revenue not not substantial nicotine revenue, which we've now moved nicotine almost a zero percent of our sales.

So we're going to.

Year over year compares are going to be difficult for Canada over the course of the next couple of quarters, but we'll continue to build the non nicotine component.

The Canadian sales not necessarily giving guidance overall, but you can continue to expect that the non nicotine component of the revenue, which was almost 50% of the revenue in prior years, we will continue to be low.

Which we do breakout will continue to return to levels, where we were previously to Q2.

That did.

It.

It did impact our sales in Q2, just simply as ERP. It was our first implementation of our multi stage ERP system in Canada was a bit of a guinea pig. So we worked out.

Worked out a good deal of our our bugs on the Canadian implementation.

Yeah. So obviously the merger with Cush is a large merger it requires a significant amount of expenses related to legal and banker's fees and whatnot. We wanted to be prepared for both the close of the <unk> deal.

As well as the any incremental working capital necessitated as a result of the merger and Cushing carrying a balance on their ABL. We will we will take out that ABL at the close of the.

The transaction as well so when I talked about near term strategic needs. This raise covers us for that and then as we move into a combined company and look at our overall M&A strategy and related working capital, we'll reevaluate that as we move into the back half of the year.

I appreciate the color guys. Thank you.

That concludes today's question and answer session I would like to turn the call back to Aaron Locascio for closing remarks.

Okay I just want to say thank you again for joining <unk> conference call today as always I want to finish by sincerely thanking our team for all their dedicated hard work and we look forward to updating you on our further 2021 progress in the next quarter. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2021 Greenlane Holdings Inc Earnings Call

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