Q1 2022 Greenlane Holdings Inc Earnings Call

Good morning, and welcome to today's conference call to discuss screen nine holdings first quarter 2022 financial results.

This release detailing the financial results for the quarter ended March 31, 2022, I was distributed earlier. This morning and is available on the Investor Relations section of the Green Light Green named website Investor don't G N L and dotcom.

As a reminder, today's conference is being recorded a replay of this call as well as a copy of the supplemental earnings slides will be archived on the company's IR website at Investor <unk> G N L and dotcom.

On the call today are Nick Coe, Vaskevitch, Chief Executive Officer, Bill Mote, outgoing Chief Financial Officer, and Dr. Stein, Chief Accounting Officer.

Before we begin green I 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 future performance and therefore undue reliance should not be placed on 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 May 17, 2022 factors that could cause green lines results today.

Materially all set forth in today's press release and in Green <unk> Annual report on Form 10-K for the year ended December 31, two inch trying to them.

And quarterly report on Form 10-Q for the three months ended March 31, 2022 previously filed with the SEC.

Any forward looking statements made today on this call all based on assumptions as of today and Green line 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 gross margin adjusted SG&A and adjusted EBIT.

Green day and have included a reconciliation of these non-GAAP measures in today's press release, which is available in the Investor Relations section of the company's website at Investor <unk> G N L and dotcom.

I would now like to turn the call over to Mr. Nick Coe Vaskevitch Chief Executive Officer of Greenlight. Please go ahead Nick.

Thank you operator, and good morning, everyone.

I'd like to thank you all for joining us today to hear the latest about greenway.

Over the past couple of months a lot has been going on in the broader capital markets and geopolitical landscape and even more so here at our company as we continue to execute on our 2022 plan to reduce our cost structure increase liquidity and accelerate our path to profitability.

I'll start today's call by first providing a high level overview of our results for the first quarter.

Then I'll turn to some of our more recent development.

And how we believe these will help us achieve our stated goal of positive adjusted EBITDA by Q3 of this year.

And after that I'll do a more comprehensive review of our financial results before we then open it up for Q&A.

But before we get started I wanted to spend a quick moment thanking bill mote for all of his contributions to Green line over the last couple of years, especially as we successfully integrated our merger with Costco.

As we announced in our 10-Q yesterday Bill will be stepping down from his role as chief financial officer to pursue other opportunities and we all wish him nothing but the best in the next chapter of his career.

Our new Chief Accounting Officer.

Dyer will be filling in and will lead many of green lines principal financial activities, including accounting and controller ship financial report reporting financial planning and analysis tax and Treasury.

Dash has a compelling blend of accounting and finance expertise and brings valuable and unique experience and the highly nuanced cannabis industry, having transformed the financial reporting process and infrastructure at Mad men over the past four years.

We're really excited by what <unk> brings to the table and are thrilled to see him already hitting the ground running rolling up the sleeves. These past couple of weeks to help with preparing our Q1 financial reporting.

She will join me in the Q&A to help answer any questions, but before I jump into the rest of my prepared remarks I wanted to quickly pass the call over to Bill for some brief final comments.

Thanks, Nick and Hello, everyone.

It's been an absolute pleasure to serve as Green Lane CFO . These past couple of years.

And I am extremely proud of what the team has been able to accomplish in such a short timeframe I'm.

I'm optimistic about the company's future, especially as it moves closer towards profitability, while generating incremental value for shareholders I wish the company nothing but the best remain a big supporter on the sidelines as the company grows in its next stage of evolution.

Thank you Bill.

We wish you all the best in your future endeavors.

So with that let's jump right into slide three of the supplemental earnings slides, which you can find on our IR website. If you haven't downloaded them already as a reminder, the results I will be reviewing for you. This morning can be found in our earnings release that is available on Edgar.

And in the Investor Relations section of our website at Investor Dot Dot.

Dot com.

Net sales for the quarter grew 37% year over year to $46 5 million the increase was.

Was primarily driven by the Costco merger, but if you exclude <unk> post merger sale revenue actually declined 47% to $18 1 million compared to $34 million for the same period in 2021.

A big part of this decrease is explained by our strategic shift away from Noncore third party brands in favor of our higher margin Green Lane brands.

In fact third party brand sales for the quarter decreased 49% as we continue to shift away from these lower quality sales that are no longer part of our core strategy as I mentioned on our last call. We expect a decline in total revenue discontinuing. Some of these third party brand relationships, but we believe the overall.

Quality and margin profile of the revenue that we will be generating going forward will be far more favorable and sustainable.

Sales of our Green Lane brands were down 34% to $6 million compared to $9 million for Q1 2021. The decrease was mainly due to our ERP system implementation, which caused interruptions in our consumer business.

And our ability to accept and fulfill customer orders.

Though we expect to fully transition to this new ERP by the end of 2022. These interruptions materially impacted revenue for the first quarter with some orders slipping into the second quarter.

<unk> said it many times before that growing our brands remains a key focus of ours as it helps expand our strategic moat expand our gross margins increase our revenue and increase our profitability.

To that end.

We're excited that we have announced last week, our partnership with Universal distribution to distribute our products in Latin America, Latin America represents a promising new emerging market for us and given that we are not subject to the same global trade restrictions as our plant touching peers, we can actually ship our products worldwide and in <unk>.

Asset light manner, enabling us to scale faster and wider and ultimately build our brands ahead of legalization in these markets.

Gross margins for the quarter were 12, 8% down from 25, 2% in Q1 last year with the decrease being driven by write offs of obsolete inventory related to our post merger and ongoing product rationalization initiatives. If you exclude these write offs adjusted gross margins.

We're 25, 3% in the quarter compared to 28, 1% for the same period in 2021. The decrease there is related to an increase in lower margin <unk> related sales and a decrease in Green Lane brand sales, which of course carry a higher margin profile than third party brand sale.

Yes.

As we continue to shift away from lower margin brands and focus on our higher margin Green Lane brand. We believe this should help us preserve and actually increase our gross margins over time.

With that brief overview of the quarter lets now turn to slide four which outlines our 2022 strategic plan.

Shared a great amount of detail on this slide in our last earnings call, but suffice to say we remain on track to achieve positive adjusted EBITDA by Q3 of this year.

And we are making meaningful progress in generating liquidity in excess of $30 million to help bridge this gap into profitability.

Starting with the first part we completed a reduction in force back in March, which we expect will help us generate approximately $8 million in annualized cash compensation savings. We did see some severance expenses show up during the quarter, but now we are largely past that and this should pave the way for a lower operating.

Cost structure going forward.

Also in the process of further reducing our facility footprint and making additional changes to the business to bring our adjusted SG&A, which excludes depreciation and amortization down to between roughly $14 million to $16 million by Q3 of this year and thats compared to 26.

$6 million that we reported in Q3 of last year.

With a 25% gross margin target. We expect this operating cost range to be sufficient to achieve positive adjusted EBITDA and we look forward to providing more updates on this front as they materialize.

Until we get to this goal conserving and building on our current cash level is of the utmost highest importance.

To that effect, we are making great headway in generating liquidity from non dilutive sources, starting with selling our headquarters building. We have already received offers and what is currently a very hot Florida commercial real estate market and we look forward to hopefully finalizing a deal here in the near term.

We also have begun discontinuing many of our other non core assets and discontinuing some of our noncore strategic lower margin third party branded products that are no longer core to our business.

Finally, we expect to complete in Q2, our process of finding adequate asset based loan that can support our working capital needs were confident that if all of these measures are successful that we can generate in excess of $30 million of non dilutive capital, which we estimate.

Will be enough to get us to positive adjusted EBITDA and hopefully beyond as the equity capital markets continue to languish amid rising interest rates and inflation, the devastating geopolitical and monetary and situation in Ukraine and additional supply disruptions caused by China's recent COVID-19 lockdowns.

Turning now to slide five.

Sales in our consumer goods segment totaled $17 1 million for Q1 2022 compared to $35 million in Q1 2021. The decrease was primarily due to a decrease in third party brand sale as well as the aforementioned order and fulfillment interruptions from the ERP migration.

Sales in our industrial goods segment totaled $29 4 million for Q1 2022 compared to $3 5 million in Q1 2021, the increase was due to the merger with <unk>.

Net sales of the Green Lane brands decreased 34% to $6 million for the quarter.

SG&A for Q1, 2022 increased to $24 2 million compared to $16 $5 million in Q1, 2021, primarily due to the <unk> merger and due to an increase in stock compensation expense severance costs and fees for our ERP implementation.

Patients.

On an adjusted basis, which excludes depreciation and amortization.

SG&A for Q1, 2022 totaled $21 8 million compared to $16 million in Q1 2021.

Net loss for Q1, 2022 was $18 7 million compared to $7 7 million in Q1 2021.

Adjusted EBITDA was negative $5 $3 million in Q1, 2022 compared to negative $5 2 million in Q1 2021.

We ended the quarter with $5 9 million in cash and working capital of $41 $7 million compared to $53 8 million as of December 31, 2021.

We're continuing to be judicious with our cash position and have the ability to opportunistically raise capital under our ATM program.

However, we are being very thoughtful about how we use our balance sheet to fund our growth initiatives and we believe our 2022 plan will not only help us achieve positive adjusted EBITDA in Q3 of this year, but also help us to generate sufficient liquidity to support the business.

As we transition into profitability.

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

Thank you very much.

Gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.

I'll start while paving your question you. Please pickup your handset and Stephanie on a speaker phone to provide ultimate quantity. Please hold while we poll for questions.

Thank you. Your first question is coming from Vivien.

Cowen Vivian.

Please ask your question.

Great. Thanks, so much for taking the questions. This is Ross on for David.

Just firstly on the ERP implementation can you quantify that.

The specific impact of that how does the agreement branded sales.

And did it affect any specific brands more than others, and then I guess.

How much of those sales do you expect to recover.

In the second quarter. So if you could just kind of talk more about the impact of that implementation.

Yes, so the.

And thanks for the question the implementation.

Was disruptive.

Fortunately, we did have to move.

Systems complete.

Completely and we had completed within a within the deadline there was not.

It was not our decision to do so, but we were forced to.

And so we had to do it quickly and unfortunately that meant that the system was down for longer than expected.

So it took.

Quite a big chunk out of our January sales to start the year.

But the good news is we were able to complete that.

Gration and.

The system smoothly running.

Over the course of the quarter.

Now we are in a position to gain back some of the sales as you mentioned and we expect.

That.

When we do the final part of our integration later this year.

That it'll be significantly smoother.

Now that we've gone through it and we've built the right team the right processes.

We have the historical experience with the new system. So we don't we don't expect this.

Situation too to continue to come around and Nip it ourselves.

This is sort of a onetime thing.

And unfortunately.

With the consumer products, sometimes if you are unable to complete a transaction to a customer.

They'll go somewhere else define that so some of those sales.

Our obviously loss.

But we believe that.

Some of them will be will be recaptured.

Over time from some of our enterprise clients.

And ultimately the key now is to make sure it's smooth sailing going forward.

Okay. That's helpful. And then I guess, just kind of shifting gears to the.

Through the partnership with Universal.

Just given the rationalization that you're doing given the reduction in head count that youre kind of taking out and all that's going on in the business. I guess can you talk about why now is the right time to pursue a lab test strategy.

And then I guess can you also talk about.

How you will go about this partnership.

How does it.

Actually impact sales, how are we going to roll it out.

Over the next few quarters. Thank you.

Yeah, No. That's a great question and I think what it highlights one of the key advantages that we have at Green line being an ancillary provider.

So we're going to be really smart about how we had how we attack international markets.

We're not going to be investing into infrastructure in these markets.

The good news is we don't need to.

So we're going to be focused on building our brands primarily domestically but.

But given that our brands have.

High quality proprietary products.

Meaningful brand value and traction with consumers.

There is appetite for these brands globally.

So maybe in the past we would have made that invest in ourselves and put boots on the ground in these international markets.

Under our new strategy.

We're not going to be doing that we're going to find partners that are fully capable that are fully funded.

That are able to just buy in bulk quantity the products from greenway and be able to then leverage their own sales force and their own infrastructure in these international markets to gain traction with these brands and penetrate the retail.

Customer and the end consumer directly.

So our.

Costs in our investment.

And this partnership is going to be extremely light.

Outside of the investment we are already making in our brands and our branded products, which complements our core business here in the U S. So that's how we're able to enter into an agreement like this and know that we're going to be.

We're not going to be taking.

Much needed resources.

From from our.

Based country here in allocating them, there and we're going to leverage their resources and their partnership to do the heavy lifting and this is a model that is extremely scalable. It's something we can replicate in a lot of these emerging markets and it's something that's certainly asset light as I mentioned.

And theres other demand from other distributors that are interested in these types of deals. So you can expect to see more deals.

This coming from Green line, we've also talked about how we're going to be leveraging our major global platforms like Amazon ebay potentially Walmart to help distribute our products as well.

And so again in the future, it's going to be about working smarter.

Leveraging infrastructure that's already in existence.

And being able to bolt on top of it and a very asset light cost light manner.

Now our core business, where we're going to continue to make.

Bigger investments.

That'll be limited more to the domestic U S where.

Where we have obviously a huge opportunity with our industrial goods that has yet to be materializing in some of these foreign markets right, we need regulation and the utilization and before that part of our business shows up but on a consumer side perfect opportunity to get ahead of the curve get out there into these international markets without a big investment.

On our behalf.

And still be able to reap those benefits and essentially front run what is going to be at some point.

Gigantic legal cannabis market.

Great Okay understood I'll pass it on thanks.

Thank you.

Thank you very much. Your next question is coming from Aaron Grey of Alliance Global Partners. Please ask your question.

Hi, good morning, and thank you for the questions.

So a question for me Hey, How's it going.

During some channel checks recently around New Jersey, with let's start with Dolby sales saw a good amount of Green Lane branded products and third party products that you guys distribute on display on the floor as well as countertops.

I know that was a big initiative that you guys had with the merger with Costco kind of leveraging mature relationships.

So love to get an update of the progress seems to be going well in the early days of that and also.

In terms of new adult use market just talking with a lot of the staff expenses. They noted a big uptick in the number of accessory sales. So how important you think it is for you to be able to be at the forefront of new retail stores opening up with new adult use sales how are you looking to target.

New retail licenses as they're getting awarded in New Jersey as well as other markets that are coming online such as New York and Connecticut just to go along with that initiative. Thank you.

Yes, great question and I'm glad you were able to see some of our products and those new Jersey dispensaries as.

They were lighting up into the first days of adult use.

So look I think it's a key part of our strategy.

A lot of work to be done, we're just getting started but.

But we have.

All of the pieces to this puzzle right we have relationships.

With the large msos.

Control a majority of the retail, especially in a limited license states. We have the product set it's a comprehensive product set I mean for a dispensary client we could be their sole ancillary provider.

For all of the things that they would need they could of course supplement that with one or two other providers.

But we do have the wide range of offerings to be a meaningful if not a complete solution.

These dispensaries, which does not the case with our traditional channel smoke shop, and head shot or you go to a smoke shop, and hence shop there.

There's thousands and thousands of Skus there are skus that green line doesn't carry any of the Green line wanted to try to carry all the skus and a smoke shop in shop it'd be impossible.

But that's going to be a very different.

<unk> mix, then youre going to see in our retail dispensary alright.

Alright, and our retail dispensary.

A dispensary.

<unk> doesn't need to carry.

Five or six different brands of rolling papers.

You just need to have.

All of the different relevant form factors, whether its cones, whether it's rice paper hemp paper.

Those are the things that Green line has.

Within our <unk> portfolio alone.

So youre not going to see a need for as much SKU proliferation in these retail channels.

It makes it even more attractive channel for Green lane to hopefully be able to own.

So we're super excited and we're going to leverage those relationships, but we plan to do this more in an enterprise.

The way I think historically.

We've sold to these clients more on a AD hoc basis.

We've sold to the good news is we sold to most of the Msos.

A vast majority and we continue to sell but it's not a comprehensive enterprise solution, yet and Thats, what we are having discussions with leading msos about right now is really solving.

This or providing a solution for them.

To not only address the problem, but also to capitalize on an opportunity I think smart retailers or understanding.

Ancillary products are a great additional value add for their customer.

Now that <unk>.

Retail store fronts, especially in some markets are getting more competitive it's a great way to differentiate.

Great way to drive incremental spend again somebody spends $100 they are likely to be able to spend another $5 on accessories, right or $10 on accessories.

Great opportunity, there, especially with tourists right they need something to consume cannabis with and they might go after some of the cheaper price point items or if youre going with a heavy user they may discover a vaporizer product thats better fit for their consumption needs.

So we think that.

Again being able to instead of just be transactional and say hey, Greenlight has products when you need them buy them from us.

We want to be more of an <unk>.

Enterprise solution, where we can work with these retailers and say how do we best.

Merchandise your store, how do we best optimize your ability to drive that incremental revenue and to create that value add for your customer and it's not going to be the same in every market.

So being a national player having that data having that lens.

That network that we do that's really our differentiator not to mention our complete product portfolio that we just don't see out there in the market that anyone else has.

With our with our extent of our brands that we offer.

We're gonna be leveraging all of that so this will be a little bit of a longer sales cycle and ultimately it's going to be something that.

It becomes extremely sticky.

If we are able to land these enterprise type relationships with master supply agreements in some cases, we're talking these into existing master supply agreements that we have with msos for our industrial goods.

And then in terms of servicing the.

More independent retail channel.

For social equity licenses and things like that.

What we want to do again being smarter is build that into automated Sim.

System, So we have our <unk> portal.

That we've been in beta testing.

The ERP integration in Q1, and we're expecting to be able to launch that live to our customer base here any any day now and this is going to allow smaller customers to transact themselves through our portal it doesn't tie up.

Nearly about the same amount of resources and the Green line.

It makes it a much more efficient transaction and so we want to have self service solutions for the small retails retailers and we want to have enterprise solutions for the larger chain and we really want to capture a majority of this market. So we're super excited again that was a long winded answer, but great question Erinn and I'm glad you caught a glimpse of it and it <unk>.

Only get more robust from here.

No. Thanks for the detailed response that was really helpful.

Then second question from me just moved up North to Canada.

No no a lot more focus on the U S. Now, but could you just remind us where you see the Canadian market right now in terms of where it fits for the Green line.

Particularly because it's still a very competitive market you've talked about lower margin products. There. Historically, so is that still one where youre looking to maybe shift away focus right now, especially as you look to be a little more asset light and focus on profitability. Thanks.

Yeah. Another another good question, we are going to look to streamline our Canadian activities.

One of the things about owning our own consumer brands is we can leverage to help other distributors or sub distributors that already have relationships and market. There's certainly enough margin to go around when we own our own brands and we produce our own goods.

So we plan to do that in Canada on the consumer side.

But we are seeing in Canada, which is very.

I would say, it's expected, but it's interesting to see it materializing because we've been talking about this for quite some time, but we are seeing a gigantic migration.

From smoke shops in head shops too.

LCR is licensed cannabis retailers right and why is that showing up so profound in Canada versus the versus some of the markets here in the U S.

And the reason is this.

It's still very early here in the U S. A lot of these limited license states.

These stores are much more focused on selling cannabis theyre getting great margins still on their cannabis products.

And competition is very light.

And so the market has not yet adopted a wholesale or whole scale of.

Ancillary offerings in.

Money markets in the U S. Now hover in Canada, it's highly competitive as you know margins of cannabis have come way down.

So smart retailers have really embraced the ancillary products.

Which is what we offer with our consumer goods.

And they're looking for ways to offset.

The margin degradation of cannabis with these products that have typically Keystone type margins, which is like a double up for the retail they buy a pipe for 10, they solve for 'twenty.

And then they also want to differentiate from competition right you go to market like Toronto Theres, a dispensary on every corner.

How do you become the dispensary choice well if you are the one stop shop, where someone can go and buy their candidates and their papers and their pipes and they're vaporizer. That's a competitive advantage. So we see Canada really embracing this again for Green Lane.

We want to be able to streamline we want to get our self service portal opened in Canada, which is which is scheduled in the coming months. We also want to be able to leverage sub distributors. So we want to really do less with more pardon me, we want to do more with less infrastructure right. That's our T. Here. So we see opportunity there on the consumer side on the industrial side.

It's been tough.

You guys know obviously everybody has seen the market. There is massive facility closures left and right from the Lps Theres layoffs left and right.

And.

These are the companies that.

Also simultaneously you need to invest in.

Hardware to build the right brands packaging childhood packaging.

They're going to be very cost conscious at the moment right nor.

Normally these these companies would spend the extra money to go with the T cell product that's best in class.

There might not be in a position to do that right. At this moment same with packaging a lot of the unique custom proprietary design.

Are being traded down traded for give me the cheapest option available so Canada on the on the brand side on the cultivation side, it's a bit of a survival mode up there and so.

Again in that market not to say we can't.

<unk> sales and we don't make cells because we do.

We're not going to be as focused there right, we're going to be more focused.

And the market Thats growing which is the U S where companies actually do have the capital to invest more heavily and.

Or at this.

Size and scale and volume, where they need a solution like T cell that is.

Such.

As such capacity in high quality in there and they're manufacturing so.

Were there we expect that to continue to be tough in the near term on the industrial side, we're more focused on taking advantage of Canada on the consumer side at the moment and really focus our industrial goods still with the U S. Msos.

Alright, great makes sense. Thanks, a lot for the color I'll jump back in the queue.

Thanks, Ed I appreciate it.

Our next question is coming from Scott Fortune of Roth Capital Partners Scott.

Good morning.

And thank you for the questions you mentioned, a little bit kind of the sales channel mix, but can you provide a little more color on the smoke shops channel as far as that sales channel.

With the cuts that you've made on the sales force focus on third party and supplying those channels. How do you look at the channel mix going forward.

Especially in light with the.

Smoke smoke shop channel as you mentioned focus on going forward here.

Yeah, Hey, Scott. Good morning. Appreciate you dialing in early I know your west coast like Us.

Look I think the reality is.

We're going through a transition as you guys can see with total business.

With what we're doing here.

Cost cutting right sizing and streamlining our go to market approach internationally and <unk>.

Domestically I'm trying to use.

Technology tools versus people.

And ultimately pivoting the business into more higher margin goods. So that's a bit of a transition we're going through as a company.

It's also a transition that we're going through with our customer base. So.

So as you mentioned smoke shops in head shops.

Historically, driven the bulk of our consumer goods business and it still does today. So that's still a very big.

Channel for us.

Started using sub distributors, a lot as well, but they're accessing those channels too. So it's been a big complementary to the same in channel, which is smoke shops in shops.

So a lot of our business is tied up there. So we're simultaneously going to continue to.

Work those channels because they have historically been our bread and butter and it's an avenue that Green line plays well in however.

However, we'd like to move a lot of that.

Purchasing especially for the smaller mom and pop.

<unk> owners.

To a digital platform right again using technology instead of manpower.

And that transition is underway like I mentioned, the portal is set to turn to the customer side any.

Any day now as we've been in beta testing.

The Green line side.

Working out all the Kinks over the last couple of months.

So we're going to continue to service that channel and we want to do it in the most efficient manner possible.

And then we're simultaneously really taking our eye toward.

The future channels.

Wayne Gretzky said, you know, we want to skate, where the puck is going right and where we see that going is more.

To where there's higher consumer traffic right as cannabis moves out of.

The shadows.

Folks are not going to know a lot are in our opinion are no longer need to go to a separate.

Smoke shopper head shop that was kind of built.

As an alternative channel because none of the traditional channels were open to carrying these products. So what are these traditional channels well, we talked a lot about the retail cannabis retail store again, when there was no cannabis retail store and everybody was transacting with their with their dealer on the corner of their house.

Well he is not going to be carrying around a bunch of ancillary products or pipes or whatever.

So they do need to travel to that smoke shop in shop, well once they can go to a retail store or even a delivery service license delivery service to buy their goods.

They could hopefully then also be able to get their ancillary product needs met at that same point of transaction. So we really focus there. We're also focused on C stores.

This is a channel that has historically benefited from the tobacco consumer that consumer is dying literally and figuratively.

And we know that these C stores are finding an interest in what's next and that's the millennial consumer who is more aligned with cannabis consumption, so rather than using an old tobacco brand.

Like Zigzag for example.

That's associated with the nicotine tobacco industry.

The millennial consumer is more inclined to buy bonds.

The cannabis consumer cannabis rolling paper brand right. So.

So being able to take advantage of that opportunity and look there's products that they've historically not carry like.

Pipe spoon pipes, one hitters dugouts, we've got the silicone line with ice it's doing very well with C stores.

So we see that as a great opportunity I'm not going to carry everything again are.

Premium da Vinci dryer vaporizer is $300 price point.

That's not an item for C store, but theres going to be a lot of volume transacted at C stores.

It's really an opportunity to be a first mover and to give them a new slate of products to replace what they have historically.

Benefited from that incremental spend on the tobacco side Thats slowing down these days and be able to accelerate them into a new category.

We're also super excited about Amazon and we've talked about that a lot of Amazon in the U S.

It's still pretty restrictive we don't we can't sell our full catalog theres a lot within our catalog we can sell here in the U S and we're expecting to launch our comprehensive Amazon strategy here very soon we've been in the background.

Building out all the data materials pad campaigns, all the stuff that we need to do to launch.

And in Europe for example, they allow a much broader swath of our catalog virtually all of our products can be sold over there. So Amazon is great because we can leverage that globally again without putting significant infrastructure resources.

And again these are channels that.

Most people go online to buy stuff from Amazon.

Why werent you buying.

Your your grinders and your papers from Amazon.

Because you didn't think they carry right you used to go into having to go to smoke shop in shop will as you see these products are now more available on Amazon.

Just like.

Consumers have changed their behavior with virtually all of their brick and mortar and they're now buying more online and buy them on Amazon, we expect the same to occur for.

There are ancillary products as cannabis becomes more normalized and destigmatize. So we're very focused on these kind of new.

Again, where the puck is going channels, but not to say, we're not going to continue to monetize our existing smoke shop in shop channel, especially if we can do it in a more efficient way.

Thank you Kevin.

And then real quick.

Thinking about your business today.

<unk> relatively msos and broad look at what's happened, obviously slower one too because we can't seasonal pick up in March and April in many of these msos are looking for a stronger second half growth here. How are you seeing retail store pace now.

New Jersey done board seats are coming on board.

The order level from the Msos or what are you hearing from euro and those partners as kind of an outlook into the second quarter.

England corn.

Yeah, I mean look I think.

Everybody.

Trying to scramble and get ahead of every opportunity we know New Jersey was a big one so.

We're seeing obviously that show up in our forecasting and demand planning that.

The msos are doing with us on their industrial goods right. That's obviously much more critical.

Have jars, they don't sell flower and in New Jersey, right. If they don't have a pen or cartridges.

Cartridges, they don't sell they've been.

Now.

Like to have.

You know fully stocked retail store with papers motors grinders all of that.

But if they're out of one of those items are there. They don't have the complete offering and not the end of the world.

Tumors to walk in and consumers still buy in Canada.

So it's a little bit different.

On both sides of our business. So we're seeing we're getting more visibility on our industrial side than we are necessarily on the consumer side, we are seeing.

A little bit of a pickup with that channel on the consumer side, but we want these to be more comprehensive agreements on the <unk>.

Apprise type sales.

So we don't have much that we can report on that other than anecdotally.

For example, one new NSO.

Not have not new.

And MSR that we hadn't done much historically with on the consumer side, but.

But we have on the industrial side you know they bought.

I think $400000 worth of grinders right. So you can just kind of see the scale.

Debt and Msos that one.

100 doors or whatever.

Can buy in versus versus the smoke shops in head shops that you know.

Maybe you have a couple of storefronts.

We're buying grinders across multiple vendors.

This is again why we're investing so much in these channels. So again, just anecdotal stuff at this point, but we expect to be able to have more comprehensive and subsidence substantive data that we can report on a go forward basis as this starts to heat up.

Makes sense strategically focusing on the commercial or industrial challenge.

Good for me I'll jump back in the queue. Thanks.

Thanks, Scott appreciate it.

Thank you. Your next question is coming from Glenn Mattson of Ladenburg Glen. Please ask your question.

Yeah. Thanks for taking the question, perhaps you touched on this tonight and I didn't catch it or whatever but just thought I'd sorry, if it's a repeat but you talked about kind of January sales being hurt by the.

Our ERP implementation and stuff and I just wanted to get a sense of.

It's not clear if there'll be made up or not because like you said, sometimes you Miss those sales.

If you missed your window or whatever but could you just give us some general sense as like the back half of the quarter bounce back to more normal levels and then particularly like into April is that is that how you'd characterize the current environment.

Yeah, certainly January was the worst month and a little bit of a rebound in February and then March April is.

A strong month for us.

Just given for 'twenty.

We are going through a lot of changes that green line. So the ERP was was obviously a very big one that had a material impact but theres other changes.

That or make it hard for us at this very moment to kind of forecast given that we're reducing skus blowing out all the inventory we have.

<unk> made some changes with personnel as you guys know so.

It's hard for us, we'd like to be able to give better visibility and guidance and we plan to but part of that is making sure that we have.

Our business model that is more predictable and we're leveraging contracts, we're leveraging larger customers that we can forecast better.

And we're leveraging automated tools, so we can transact more efficiently.

So.

We're going to.

In terms of your question specifically on the revenue some of that has gone and certainly some of that.

<unk> and later later months March and April .

And ultimately some.

It's about the sell through so when this product sells through we're hoping to get bigger buys.

But again very hard to forecast right now on a go forward basis.

Right.

When you talk about profitability in the third quarter adjusted EBITDA basis can you.

And I know, you're not looking to give guidance I guess, but just a general sense of a ballpark range of what kind of revenue level, you need to be at and what kind of gross margin.

Level, and then I don't know if you have thoughts yet on kind of like you know theres a lot going on with the gross margin. So a lot of shifting between the integration of cushion.

Sure.

Getting rid of the kind of lower margin stuff. So just like the general sense of where you think gross margin will be when all of this plays out maybe in 2018 months or 24 months or something like that.

Yeah. So if you look at our obviously there was some onetime inventory things if you look at our adjusted gross margin coming in at 25, 3%.

We called out.

The mix shift.

And in Q1, specifically it was.

More.

Skewed toward our industrial goods, just given the fact that the.

The consumer was impacted by the ERP migration right.

So even so with that we were still over 25% of adjusted on an adjusted basis on a normalized basis.

So you can expect that to be sort of the floor that we're targeting and really we believe the margins should be in the high twenty's or.

Goal is really to get those to 30.

Certainly by Q1 of next year, so that's going to be what we're working on over the course of this year as we have margin enhancement initiatives.

That involved.

We structure, our pricing various pass throughs and surcharges.

Offset some of the heavy freight costs.

And then of course, the broader mix shift to higher margin Green Lane owned brands.

So.

We're very confident there in terms of modeling for profitability.

We know the one thing that we can control.

More so than anything else is our costs.

Just simply had are too high of costs at this business.

You look at.

Q1 of 2021 for example.

Ed.

$16 five.

SG&A.

And that's.

More than almost double our gross profit.

Go into this year were at a similar ratio and again Q1 is when we did our right sizing when we took a lot of restructuring charges and severance charges and so we've guided that we believe we can be down to 15.

In Q3, so about $14 million to $16 million range.

And that would need that would mean that we would either need to do.

$60 million in sales at a 25% gross margin or some number lower than $60 million of quarterly sales at a higher gross margin. If we're able to get a few extra incremental margin point. So we're right there.

Again $46 five this quarter, but we did $55 million in Q4.

Prior to the ERP and some of the disruption. So so were right. There again, we've got work to do.

We're very focused on.

Building out.

Certain channels that we believe are going to have the.

The most long term value. So we want to balance short term and long term.

We really do.

Want to get this business profitable Asap.

We believe we can deliver our positive adjusted EBITDA.

And you know in the back half of this year consistently so.

That's how we would get there essentially in terms of the numbers and.

Hopefully, we can drive revenue growth.

Although we are expecting revenue to be.

Lighter just given the fact that we have.

Discontinued certain products, we still think we can get easily over that.

Sort of.

$50 million threshold, if we can get up to 60.

That's where you would only need a 25% gross margin to deliver on a breakeven quarter.

And we plan to grow the margins as well and.

And potentially hit hit as low as possible on that SG&A range.

Great Alright, that's it for me thanks for the guidance.

Thanks I appreciate it.

Thank you. Your next question is coming from Andrew Bond of Jefferies Andrew over to you.

Hi, Good morning, Nick and Bill Andrew Bond on the line for Owen Bennett, Thanks for taking our questions.

Thanks, Andrew.

So with some of the macroeconomic factors you touched on at the top of the call just wanted to get your thoughts on some potential consumer headwinds you might be seeing specifically related to your consumer business.

No.

Are you seeing a more challenged consumer this year related to your business and do you see any particular risk specifically around sales from some of your more durable products like like pipes in devices like ice or da Vinci.

Versus something like a rolling paper with five thank you.

Yes, great Great question.

Given all of the things that have happened internally, it's hard for us to know the impact that.

Consumer spending alone has had on Green Lane sale. One thing we can look at is our website.

That are geared more direct to consumer those are certainly down.

Certainly significantly from the Covid stimulus days, right 2020, and even into 2021.

So we can read into that a little bit I think what's probably.

Interesting data to look at and I haven't to be honest digested it fully is.

Sales of our lower price point items.

Some of the items that.

No. We're just going to be more consistent go into like a C store for example, and that would be buyers that would be ice.

Silicone products, especially the smaller hand pipes and spoon pipes come at a very nice price point.

I would imagine the volume there has been more stable versus the higher end stuff right. So the ultra high end.

We sell volcano vaporizers from stores and vertical we sell.

The <unk> products, we sell the <unk> products, which are a little bit of a lower price point and we also sell our own da Vinci dryer vaporized, which is top of the market in terms of price and quality. So I would imagine that's where we're probably taking more of the front of this.

Hit with the consumer discretionary spending being challenged in this current environment, but I regret to say I haven't.

Fully digest, the data and a bit of that is a little hard given all of the other changes we've had at the company, but something we will certainly be looking into more as we progress and seeing how that impacts our business.

Yes, fair enough and just a quick follow up to that within your strategic measures on slide four could you could you tell us which products or which brand specifically you're planning to raise pricing on is this more related to some consumer products or industrial side of the business any color around that would be helpful. Thank you.

Yeah no. It is it is around both sides of the business when it comes to.

Consumer brands, we are working with still some partner brands, such as Pacs Graco Storz <unk> Bickel as I mentioned.

And we're.

We're going to continue to sell through some of the other third party brands.

That we have.

Historically carried because we still have inventory in stock, but the idea is once we sell out of that inventory.

We won't be re buying a lot of those goods.

Because we are going to be more selective about the partners we work with we.

We do have.

Much stronger margins are Green Lane brands.

So we're less concerned about incremental price increases there, but we've worked with some of the third party brands.

To offer some price increases, which we have.

And then also just things like covering shipping and stuff that we've done historically, we look for ways to offset that and add incremental margin on the industrial side.

We've worked with clients that we have master supply agreements with.

We've been able to reach terms two to increase some of those prices in some instances as a shipping surcharge.

In some instances it says the general material increase.

It varies.

Of course, the stock products that we sell where obviously you have more control and so we're looking at a couple of things I mean cash flow is key.

We're charging more deposits than we have historically.

Because cash is tied up longer right. In this current environment is just taking longer to produce goods and get them shipped over.

So even though that doesn't necessarily affect margins it does help cash flow.

And then we also have again freight surcharges and tariff surcharges that we can that we can play with and we're monitoring everything is as well.

We get cost savings, we want to be mindful of that.

And we don't want to overcharge your customers, especially on the industrial side, we always have to be very price competitive.

We also want to do what's fair right.

Through a lot of the pandemic.

We ate the brunt of the additional expense.

With freight and with tariff.

I think our.

Partners that we work with especially at scale have understood that investment, we've made and understand that hey, if it's temporary.

Fine, we'll bear that Brian and we'll get back to normal but this is kind of a new normal at this point right. So I think they are understanding and we've seen that show up in some of those negotiations.

Great. Thank you Nick very helpful color I'll pass it on.

No problem. Thanks.

Thank you very much. Your next question is coming from Phuket Sunbelt.

Canaccord Genuity.

Ask your question.

Hi, Good morning, most of my questions have already been answered, but just a couple of clarifications on my end. So you talked about the ERP implementation and the impact on Q1.

Now that I understood that this is the system is now up and fully running or are there any more components will have to be implemented going forward.

Yeah. Good good question so.

The system was on boarded.

In January and.

Began.

Transact in the system.

Mid January .

But it was very clunky right and so.

<unk> been able to make improvements throughout we've been able to fix bugs.

We've been able to make sure that.

The data is flowing properly and.

Throughout most of this time.

Our sales team was ordering was entering orders.

Into the backend of the system essentially into the financial ops side of the system.

Which would be like in turn orders into Quickbooks, where just like cakes.

Emmanuel right. It takes a little bit more time, so I was saying on average.

Our staff was taking 20 to 30 minutes to enter an order into the system, which is not ideal.

Especially as you're dealing with a lot of small.

Mom and pop type customers and some of the parts of our business.

With the smoke shops in head shops, so what we were able to do throughout his launch.

This launch our CRM tool, which we had we have CRM or the.

Customer data is but it did not have.

Properly functioning order entry feature so building the order entry feature getting that dialed in getting that beta tested that occurred throughout Q1, as well and into Q2.

And we're pleased to have been able to launch that which dramatically reduces the amount of time. It takes a rep to enter an order.

Goes from 20 to 30 minutes down to call it five minutes.

<unk>.

And you.

That just that just got live here recently, so you could see a big improvement with that change and then the last piece, which I've talked about is the self serve portal.

So if we we've been testing that internally.

About to flip that externally any day now.

And allow our customers to put their own order and and so that takes your.

Time of order entry down again from five minutes internally, having one of our people do it.

Basically no time right zero minutes.

Because of the time has been put on the customer to do their own order entry rate. So you can kind of see how we're progressing on getting.

Better and more efficient with our system.

So to answer your question you know the system has been live and we've been transacting, but these incremental improvements do make a very big deal.

There's work that's been done and there is still a little bit more work to do before we have this exactly where we want it to be.

Okay. That's very helpful and just in terms of the impact on Q2, so essentially you're just kind of be the order backlog that you guys are going through as opposed to anymore implementation.

The state of things right.

Yes exactly.

There's going to be a little bit of disruption to the business, but not nearly like it was in in Q1.

Okay Perfect and then just one last clarification in terms of the SG&A reductions on the head count reductions that you mentioned in the press release and talked about earlier are there any left to be implemented over the course of Q2 or the remainder of the air or if that's more or less it.

Sorry, you said anymore ERP integrations.

No I just meant the head count reduction sorry.

Oh head count head count reductions yet.

Look I think we got to continue to monitor our situation.

Again controlling what we can control.

If the sales are there.

We'd like them to be.

Then.

We're in a great position.

If sales remain a little softer than we'd like them to be then we need to take a little bit more incremental cost reduction and now the good news is we're not going to have to do this in the form of.

Layoffs.

We.

Have natural attrition as does every company, especially in this environment.

With with the change in hiring in.

The remote working.

I read an article yesterday is called the AR call. It now the forever resignation.

Versus the great resignation so.

We are forever changed right and companies will have higher attrition rates than normal for the foreseeable future maybe forever.

The job market is more available too.

Employees, because they can work from anywhere right and.

That means that.

For a company that needs to reduce costs, you simply just don't backfill right.

So we're gonna be mindful.

If sales don't don't grow at the rate that we expect them to.

We're not going to be back filling a lot of these positions and taking the instrument incremental cost savings there, but in terms of the bulk of the heavy lifting.

Large layoffs or anything like that.

We did what we needed to do in Q1.

As most of the analysts know on this call I mean, we like to work very fast.

We're even.

A bit disappointed that.

It took us so long from the merger to kind of align on the new business plan completely and some of that's due to the <unk>.

Continuing to change in that.

Further deterioration of cannabis equities and in 2022, which nobody was expecting people were expecting a rebound.

But we made all the adjustments as quick as we could.

We did we implemented our plan starting in March.

And the plan is well underway and we don't expect.

Anything material.

To be added to that.

<unk> cost reduction plan that we implemented.

Okay. That's very helpful. Thanks, a lot for the color.

No problem.

Thank you, ladies and gentlemen that now concludes the Q&A session I will hand back over to Nick for any closing remarks.

Okay. Thank you guys all for joining today.

Especially on the West Coast I know, it's early but you know.

This is again.

One more quarter, where you see a big transformation with the Green Lane business, we do really expect the business to normalize from here on out.

We're very confident in our guidance on SG&A and our ability to get the business profitable.

This year, which we think is paramount in this climate and we're less focused on revenue for revenue sake, but really getting the right revenue into the right channels that strategically position us for the long term.

And doing it with the right product mix that can deliver on the right margin profile for where our business needs to be today.

So we appreciate you all being along for the journey and along for the ride we look forward to giving you future updates and hope everybody has a great rest of your day to day and look forward to seeing you in a few months. Thank you.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.