Q2 2022 Greenlane Holdings Inc Earnings Call
[music].
Good morning, and welcome to today's call to discuss Green Lane Holdings second quarter 2022 financial results.
A press release detailing the financial results for the quarter ended June 30th 2022 was distributed earlier. This morning and is available on the Investor Relations section of the Green Lane website at Investor Day.
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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 day.
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On the call today are Nick Kovacevich, Chief Executive Officer, Darcy Diet, Chief Accounting Officer, and Craig Snyder President.
Before we begin Green lane would like to remind listeners that today's prepared remarks may contain forward looking statements and management may make additional forward looking statements in response to the questions received.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
These statements are based on current expectations of the company's management and involve inherent risks and uncertainties and other factors discussed in today's press release.
This call also contains time sensitive information that speaks only as of the date of this live broadcast August 16th 2022.
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 for the year ended December 31st 2021, and quarterly report on Form 10-Q for the three months ended June 30th.
2022, previously filed with the S E C.
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 REIT.
Of new information or future events.
During today's call Green Lane management May discuss non-GAAP financial measures included adjusted gross margin adjusted SG&A and adjusted EBITDA.
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 the company's web site at Investor <unk> T and L N Dot com.
I would now like to turn the call over to Mr. Nick Novakovich, Chief Executive Officer of Green Lane. Please go ahead Nick.
Hello, everyone and thank you for attending our second quarter 2022 earnings call.
Been extremely busy here at Green light over the past several months.
Our team has done a tremendous job executing on key initiatives, while navigating a challenging macro environment on multiple fronts, including the continued global supply chain headwinds record inflation cannabis marketplace pricing compression.
And negative sentiment in both the cannabis and broader capital markets.
What are the best positioned Green Lane to meet these challenges and thrive when these headwinds finally subside we have taken action to properly fund the company and reduce costs considerably while accelerating our timetable to shift the business into much higher margin and higher value segments.
Our recent accomplishments include raising $5 $4 million through a registered direct offering in June and selling our interest in bi for $5 $3 million in July which in turn allowed us to repay $8 million in short term debt shortly.
Shortly after doing so we were able to secure an asset based loan for $15 million from an institutional lender.
Which will provide the company with non dilutive financing to help support our working capital needs as we make progress on our overall plan to become the Premier How's the brands business and the ancillary candidates marketplace.
While appropriately funny, but company was our priority over the last several months, we remain committed to reducing our overall operating cost to sustainable levels.
Once again, our team made great progress on several key cost cutting initiatives, including exiting and eliminating ongoing expenses associated with six of our operating facilities in the United States and Europe .
Here, we streamlined our operating and retail footprint, which allows us to achieve over $900000 of annualized cost savings.
Furthermore, we also restructured a long standing arrangement with one of our key vendors to free up meaningful working capital and eliminate approximately $500000 of annual expenses.
We also continue to make progress on discontinuing selling and distributing lower margin third party brands and Tony previously reserved inventory back into cash.
In fact, we have sold over $2 million of previously reserved inventory since we announced our plan to do so back in March.
We also completed our strategic SKU rationalization project and created our new go forward combined product catalog, which is available online at Greenway Dot com.
Another notable accomplishment in recent months includes the implementation of our compliant B to B Pack Act shipping program through USPS, where we remain one of the only companies to our knowledge in the cannabis industry to actually receive exemption.
Is it easy to be compliant in their hefty costs to do things the right way, but we believe this will be a huge advantage for green light in the future.
<unk> enforcement of regulations will eventually catch up to competition operating in violation of packed Act rules.
While we are proud of the accomplishments thus far we remain focused on transforming <unk> into a highly profitable and highly valuable consumer how's the brands business, our longtime stated goal.
In order to efficiently complete this transition and properly capitalize the future business. We have made the strategic decision to try to further monetize our existing packaging business by listing this portion of business for sale, our packaging business is a great business, but not necessarily aligned to our future house of brands.
Strategy in addition.
Given our current market capitalization, we believe there exists a unique opportunity to unlock more value with a strategic transaction and bring in substantial cash through a disposition of this segment that currently isn't represented in our public share price.
Sitting in the packaging business will not only allow us to focus on our consumer business further capitalize our growth plan, but also will allow for further warehouse consolidation, resulting estimated savings in excess of $5 million annually.
I have a personal interest in this process, having cofounded Cushman shuttle in 2010, we painstakingly developed a world class packaging operation and closely partnered with top tier operators over the years.
We'll lead the sales process, which should provide a unique value proposition for current players in the cannabis space looking to expand their market share or for traditional packaging companies looking to establish a foothold in the growing cannabis industry.
As I mentioned before we have made significant strides in capitalizing the business and reducing cost and we believe we have identified the remaining initiatives required to complete our full transition to a much leaner more lucrative consumer business model.
Accordingly, we are also realigning the C suite to support our strategic initiatives effective immediately Craig Snyder has been promoted from Chief commercial officer to President and will take over day to day operations of the business.
We believe this decision will strengthen our ability to utilize an experienced senior leader with extensive experience in both cannabis and consumer businesses to execute on becoming the premier house of brands business and the ancillary cannabis marketplace.
In addition, Mr. Snyder's promotion also allows us to further streamline our organization and recognize additional cost savings.
Before I welcome Craig on to the earnings call I want to say a sincere. Thank you to our chief operating officer, Mr. Rodrigo de Oliveira.
Who will be stepping down as CEO at the end of September Rodrigo was essential to restructuring Costco holdings in 2020, when the company adjusted its business model and cut costs to move from losing over $5 million of adjusted EBITDA per quarter to achieving our goal of positive quarterly adjusted EBITDA several quarters later.
Also during his time at Green line following the merger with Costco Rodrigo is applied a similar strategy to reduce costs and consolidate operations streamline the organization and ultimately put the business in a position to be a profitable house of brands.
With our future model now in sight. The time has come for Rodrigo to stepped out and provide further reductions in overhead.
Once again I want to sincerely. Thank Rodrigo for all of his unwavering passion work ethics and leadership over the years.
Thank you.
And with that I'd like to pass the call to Craig Snyder, our new President to talk about the future vision of Green line as a consumer business.
Welcome Craig.
Thanks, Nick first off I'm honored and excited to accept the role of President of this organization at this exciting and critical time in Green lights transformation.
One of the key principles I have emphasized since joining green Lane in March is the need to make the company a more scalable leverage bolt and durable business.
I believe we are making progress towards these goals.
We are focused this year in solidifying our foundation into one that can be leveraged as we grow and scale first Green Lane will lead and innovate with our brands and our products. We have a world class product team that has developed a vision for our house owned brands and an exciting product pipeline with innovative products.
Starting to launch in the second half of this year.
Second we are focused on utilizing technology to increase efficiency and performance of sales.
We are in the final phase of beta testing on our new <unk> portal set.
Set to officially launched nationwide in the coming weeks.
Finally, we are focusing ourselves to more scalable customer channels.
We're enhancing our e-commerce footprint.
Launching relevant products in a global way utilizing these highly scalable channels. In addition, we are focusing our enterprise sales efforts on the largest channels in the marketplace, including vertically integrated msos several with over 100 retail locations and traditional.
C stores, including franchises with hundreds if not thousands of physical locations.
There is much work still ahead with the milestones we've achieved to date.
And with the early successes, we are seeing in key areas make me feel very confident for the future of this company.
Thank you Craig.
Now back to the quarter itself in the second quarter, we achieved just shy of $40 million in sales up 15% year over year, but down sequentially from $46 5 million last quarter.
The increase year over year can be attributed to the Greenland Cush-cush merger, which took place in Q3 of 2021 the.
The decrease from Q1 2022 can be attributed to several factors first off many operators in our industry have experienced the slowdown this year occur.
Accordingly, the top Msos are relatively flat, while smaller operators are generally down year over year due in part to the broader consumer spending pullback, which has caused a retrenchment and a focus on tighter management of working capital.
As a result, we have tightened our credit policies and focused our efforts on the larger publicly traded more stable clientele.
In our opinion investor sentiment as bad as it's ever been in our industry as reflected in broadly deteriorating equity prices.
We must be even more prudent today.
Which means we are actively forgoing revenue generating opportunities that don't satisfy our risk threshold with a view towards improving the quality of our revenue.
And credit of our clientele.
Well it may be painful to pass on potential sale. We have worked extremely hard to properly capitalize our business and we believe it's simply not worth the risk to jeopardize our progress.
Lastly, these efforts by our team over the previous months have been nothing short of heroic and I could not be more thankful and appreciative of the green line team.
This has required a concerted effort from every part of our organization, which may have temporarily detracted from our normal focus on sales.
So although it certainly contributed to our shortfall in Q2, we understand these critical initiatives should be onetime in nature and the bulk of them are now behind us, allowing us as an organization to ramp up the intensity of our sales efforts moving forward.
The shortfall on topline had other impacts on our P&L as well.
Our adjusted margins compressed slightly from Q1 to 23, 4% in Q2, and our adjusted EBITDA loss increased by almost $300000. Despite reducing our total operating expenses by approximately $2 $4 million from Q1 'twenty.
22 to Q2 2022.
In light of sales not meeting our expectations. We are removing our previously issued guidance of achieving positive adjusted EBITDA by Q3 2022.
However, we do continue to expect cost reductions to materialize over the next two quarters due to our recent efforts. We are modifying our Q3 2022, adjusted SG&A guidance range up to $16 million to $18 million now, which will be down from nearly $19 5 million in Q2 2022.
While we are disappointed in the revenue shortfall, we believe we understand the root causes behind it and our strategy and plans do remain on track.
We will continue to reduce expenses and rationalize our cost structure improve our core business by utilizing scalable and leverages, both technologies and ramp our sales efforts with the right customers and the right products segments.
We continue to believe Green Lane is one of the best position players in the cannabis industry as it picks and shovels provider listed on the NASDAQ and we want to capitalize on this once in a generation opportunity of cannabis legalization not only here in the U S but globally.
Now I will turn the call over to Dash Dale our Chief accounting officer to provide more financial details on the Q2 earnings.
Thanks, Nick I'm excited to discuss the details of Q2, 2022, and I'd like to Echo the sentiments with regards to our efforts to navigate through the challenges we faced in the second quarter of 2022.
Revenue for the second quarter was $39 9 million up $5.2 million or 15% versus the prior year.
The increase reflects incremental revenues associated with the push going major offset partially by lower CPE revenues, primarily driven by the strategic move away from lower margin third party brands and a reduction in in house brand sales.
Gross margins for the quarter was $20 three compared with $26. One during the first quarter of 2020 was.
The decrease was attributable in part to inventory write downs in the second quarter of 2022 as well as the introduction of lower overall margins associated with Chris <unk> related brands.
SG&A increased by $5 4 million to $19 4 million compared with the second quarter 2021, principally because of an increase in salaries and wages of $3 $3 million related to the kruszka imager and $1 8 million a reversal of a previously recorded gain associated with it.
That indemnification.
Our basic and diluted net loss was $2 27 per share for the quarter compared to a net loss of $3 23 per share during the second quarter of 2021, and a net loss of $5 57 per share versus a loss of $9 <unk> per share for the corresponding.
Year to date periods.
Adjusted EBITDA loss was $5 8 million during the quarter versus a loss of $3 7 million for the second quarter of 2021.
And $11 1 million for the first half of 2022, compared with a loss of $8 $9 million for the corresponding period in 2021.
Cash balances were $9 1 million as of June 32022, net cash used in operating activities was $13 7 million knee.
Net cash used in investment activities with one 2 million.
Net cash generated from financing activities was $11 1 million driven primarily by the proceeds from a $5 $4 million registered direct offering and the proceeds from the company's ATM program.
Overall, the company used $3 7 million in cash versus $18 8 million in the prior year and the difference largely attributable to proceeds from financing.
As of June 32022, the company reported working capital consisting of current assets.
Liabilities of $44 8 million working capital of $53 8 million as of June 32021.
The team continued to manage liquidity effectively and during Q3 successfully secured a $15 million asset based facility from an institutional Linda on favorable terms. The company also successfully repaid an $8 million bridge facility enfold using existing resources.
And funds raised from the aforementioned registered direct offering and the previously reported sale of our interest in <unk>.
Looking to the company's balance sheet, the company significantly reduced third party inventory and when the deposits by $13 1 million in the first half of 2022.
We transitioned away from some lower margin third party brands and the associated working capital requirements.
The company also sold $2 million of inventory.
We're a company wide program to recruit previously written off inventory and minimized facility footprint and general and reduced storage costs.
I'd like to turn the call back over to Mr. Nick <unk>, Our Chief Executive Officer of Greenlight for his closing remarks.
Please go ahead Matt.
Thank you Doug.
Forward your closing remarks, I'll turn it over to the operator to open up the line for Q&A.
Ladies and 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.
We ask that while posing your question. Please pickup your handset listening on speaker phone.
<unk> optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Vivien <unk> laser please announce your affiliation and pose your question.
Good morning. This is Harrison vivas on for Vivien today.
So just in terms of the pivot away from packaging. So it makes sense to be stepping away from packaging and we appreciate the desire to lean into the higher margin owned brands, which of course has been a priority for Greenland for some time.
But I think provides an ice have always been pointed out to be nicely margin accretive. So what was the decision to divest from.
From those businesses entirely liquidity driven as it is it is it safe to say that there were no alternatives.
Circumstances.
So thanks for the question.
Look I think.
Obviously, we're in a position where if opportunistic things arise we have to consider them, but our planet.
It's always been to focus on the high margin owned brands ice is still in the portfolio as as da Vinci.
We're really excited about a brand that we're launching relaunching called grew.
And we have our higher standards brand as well we have our licensed brands.
With Marley natural and with K Herring Keith Herring.
And then we have our partner brands that we distribute and so we are going to lean into some partner brands. Obviously, the <unk> relationship is extremely important.
And we've got some some good stuff growing with them.
But we're going to.
Continuing to be focused on our home brands growing those organically.
Complementing them with the partner brands all of this is in our new investor deck as well you can kind of see you all of our brands now as survives.
That is a brand that we.
We really did like in the portfolio, but given the structure remember that was the joint venture.
Arrangement.
It was it was a bit complicated.
And there are other partners involved in.
There was a deal that came about that made a lot of sense at the multiple that we got revives.
At the time about six X what our current multiple was in the cap in the public markets and the deal was all cash cash upfront. So again something like that we have to take a look at it when it's highly accretive.
But for the most part we do want to stick with our portfolio of our own brands on the consumer side.
We leveraged the sale of our packaging business.
That should provide substantial capital to really invest in and further grow our own brands.
As was planned so I think we're getting to the right place.
Maybe there was a.
Again, a little bit of.
Tough decision there was lives, but it just made sense given the circumstances and the multiple.
Okay. Okay that makes sense. Thank you. Thank you Nick.
Kind of shifting gears to profitability.
I understand that Youre <unk> your profit targets are appropriately been removed as part of Europe as part of the pivot here.
But we think it might be helpful to provide just a little bit more color about how youre thinking about achieving adjusted EBITDA profitability going forward.
Maybe more specifics in terms of the scale you need to achieve.
And the new business as well as the associated margin profile, you expect to see.
Thanks.
Yes, Thank you and look I think are.
Our message was.
Our message was pretty clear on the call here right.
We're disappointed in the revenue that we achieved for the quarter.
But we laid out.
Specific reasons as to why the revenue was short.
But we're not in a position where we want to.
B Super bullish on hitting that revenue number.
Which would lead to the profitability right, we had plan for cost reductions and certain revenues and margins to achieve the profitability in Q3, those revenues didn't show up in Q2, and so we don't want to.
Put ourselves out there with the conditions, we are seeing that we're going to be able to achieve the revenue numbers that we needed.
And we're doing something different now right now we're looking at selling the packaging business, which is going to dramatically reduce our costs and is going to put us in a position where we don't need.
The revenue to be where we originally thought it needed to be to be profitable, but we're working on those new clients.
We will be able to provide guidance when that comes together, but we're a little cautious with the market conditions like we talked about seeing some of the operators.
Struggling to pay bills.
Commonplace across other ancillary publicly traded companies that have given similar feedback right.
It's hard to collect right now in an industry thats pretty cash starved.
And that's why we're not going to keep doing things that don't work right, we've already been pivoting toward.
The higher value accounts, the msos the C stores.
And we're going to continue to do that we're going to continue to leverage direct to consumer online sales through marketplaces.
And derisk some of those elements that exist.
In the cannabis market broadly, but also more specifically in a lot of the legacy markets that are experiencing more price compression. So we're going to be smart about how we approach profitability it's still.
The number one goal right getting this business profitable.
And we're going to take significant costs out of the business with this new strategy and that's really going to allow us to lean into our higher margin products and achieve profitability with far less revenue. So again more to come on that but you kind of get what we're doing here.
We've only got two levers to play with right you got the revenue and margin and you've got the costs.
We're doing a great job cutting costs.
Now we are realigning our plan on the revenue margin.
Exiting one of our business units and ultimately deliver up a formula that gets us exactly where we need to go again.
Again, we just don't have direct line of sight into that timing as we sit today.
Okay. Okay. That's helpful.
Last one for me just two.
Do you mind speaking to what Youre seeing in terms of the broader M&A landscape I know, it's early days for the sale of the packaging business, but.
I was curious just in terms of the context of Av.
Youre divestiture of the vibes business I guess, what are you seeing in terms of buyers in general appetite for M&A right now thanks.
Yes, I mean look it's no secret that the industry is capital starved right and so theres not a lot of cash buyers in the industry. Now we were fortunate with fives right and Thats why that deal made sense.
But when you see a lot of folks with assets for sale, especially on the <unk> side that aren't able to get.
Meaningful amounts of cash upfront and now we have a big advantage here with our decision to sell our packaging business.
Because theres certainly an ample pool of buyers and many of them with balance sheets significantly larger than the majority vast majority of players in cannabis right. So we're talking about traditional packaging providers looking to get a foothold into the cannabis industry everybody knows even though.
The industry is going through.
Some of the dynamics that we talked about.
Central is.
Remit as remain gigantic right. This industry is going to continue to grow more states are going to legalize eventually it's going to be federally legal eventually it's going to be legal around the globe and so if you're a traditional packaging company and you've yet to crack the code right. We don't see a lot of them in the industry today competing over over the business there.
So we're competing over.
What a perfect opportunity to get in deep.
With the.
The transaction that picks up intellectual property and proprietary products and an extensive customer base, including some of the most desirable names in the industry right.
In addition to that there is.
Players that are.
Cannabis focus.
They do have cash that are private equity backed and things like that so.
What's unique about our packaging business is we do have a much broader pool of buyers and again people that will have cash.
To procure this business unit and then we can put that cash to work.
On the consumer side, which is which is ripe with opportunity.
As we've talked about I mean, msos are getting significant scale on their dispensaries and have yet to.
Streamline consolidate and unify their purchasing on the ancillary side so that opportunity is.
Is alive and well as it's ever been and we're really geared up to capitalize on it and again, we just want to make sure. We have the proper foundation in place and we have the proper balance sheet that we can support those investments and go win those.
Those huge opportunities, which are going to pay long term dividends to our company. If we go get at the time is now and that's why we're having to make some strategic decisions to ensure that we can capitalize on that opportunity.
Thank you Nick I'll jump back in the queue.
Thank you.
Your next question for today is coming from Aaron Grey. Please announce your affiliation then pose your question.
Hi, Aaron Grey with Alliance Global partners. Thank you for the questions.
<unk>.
So I just wanted to talk a little bit with CPG strategy. So right. I know you asked the question in terms of the vibes divestiture, but just on the go forward strategy, specifically the right channels right. So in the last call.
Amazon Some D C stores as well kind of shifting away it seemed like from some of the legacy had shops.
So I just wanted to see how that view is now with some of the recent changes that you've made.
And maybe some updates you could get particularly on the Amazon front would be really helpful. With now you are looking to divest the packaging business as well as what the 5% that was big on the <unk> storefront there that'd be helpful. Thanks.
Yeah, I mean actually Craig is with me. So he can kind of give an update on the Amazon stuff, but to your question on the channels right.
Look I think.
Again in the cannabis industry, you have to be cautious about.
Any operators that don't have scale or high margin business right now in this current environment right, they're relying on outside capital.
There is risk to that and we don't want to inherit that risk at Greenland right. So we've got to be more careful about how.
How we invest in certain customers right procuring custom branded inventory and extending credit terms.
We have to be.
Sure that.
The risk.
It's worth the reward right.
Right now.
We're on the cautious side.
And so where do we pivot right, we pivot to the customers that are very stable and sound and secured in the cannabis industry. That's the msos private and public but publicly traded Msos certainly R. R.
Shape than the rest of the industry.
And then on the.
Traditional site C stores specialty retailers.
And these folks have scale, so we will get much bigger purchases.
And it will.
Challenging in this environment with freight and all of this stuff so.
People that are ordering bulk of those are that's going to be more accretive for us and for our margins in our operations and then we're going to continue to service smoke shops in head shops, we're going to working on our transactional side of our business.
You talked about the <unk> portal.
Launching in the coming weeks, we want to create.
Transactions debt.
Happens seamlessly and even if those are smaller there'll be accretive because we don't have a lot of human touch involved right. So building up the transactional side using technology.
Just for our <unk> orders for smaller accounts.
Smoke shops in head shops.
It's an important initiative and again, we've made tremendous progress, but that also that whole e-commerce side.
As direct to consumer and using marketplaces, like Amazon and I'll, let Craig kind of further expand upon.
The progress there and what the future strategy is.
Yes. So thank you Nick so on Amazon very unique strategy, where we're really pursuing to protect our brands and to do that were involved in the transparency program and the transparency program would allow us.
To be the only provider to sell our brands on Amazon. It provides for a unique sticker on the box and allows us to control the buy box and also control the pricing and make sure. We don't have rogue sellers in undercutting our products on Amazon.
It allows us to control all the advertising and be part of the Prime program with FDA, there's probably a little over 30% of our products today that we believe will be accepted and will be able to use an FPGA on the U S side and as you know globally, it's slightly different than the big five over in Europe . They are.
To do things like vaporizers.
That makes it very unique but we're at the first stages of our program there, which is really protect the brand through their transparency program.
And then being able to scale the brands.
Through the buy box through FBA.
And through their inventory programs.
And we hope to have really a global reach into roughly 14 Amazon marketplaces.
By the end of the year this year with transparency with the buy box and that we can advertise into as well. So that's been a major initiative.
Two really worked on <unk>.
The transparency program in place. So we can protect all our brands control the pricing you control the buy box and we've made very good progress there to date.
One other thing to add here.
Craig is also leading product innovation right and so we have a strategy of launching our own products that we think are going to be do really well in the market with strong margins and we can actually gear products that we're launching to be Amazon type products right Amazon as Craig mentioned doesn't accept everything in the U S.
So we can actually control, our fade, a little bit, thereby ensuring that we have products that fit the platform. When we're building our product innovation pipeline.
Alright, great. Thanks for that color. That's all really helpful. There and then second question for me you talked about.
Some of the discounting of or discontinuing I'm, sorry of low margin brands and you've talked about that for.
For a couple of quarters now so I just wanted to see where you guys were in terms of what inning youre in in terms of discontinuing those skus are there additional low margin skus.
That shouldnt be discontinuing going forward as we're continuing to see this you know.
And the overall marketplace right now having two.
Move up the level of Skus that youre looking to discontinue than you might've. When you initially started down this venture so any help in terms of where you stand on the discontinuing that skews it would be really helpful. Thanks.
Yes.
Great progress. We finally got the full catalog bill. The catalog is now available online green Dot com GNL and dot com, you'll see the catalog right there.
The first comeback combined catalog that we've launched since the merger because we spent a lot of time going through that SKU rationalization process and it is complete so we feel really good about the catalog we have.
Do we still have some of those views right.
Probably.
A few million dollars worth of inventory.
We've discontinued and we will continue to sell those through.
Through normal course.
Some items, we may choose to discount and blow out.
But we.
It won't be buying new items that have been discontinued now that we've got this catalog complete and you should only see that.
Kind of improve right on the backend with inventory reductions.
Getting to better inventory velocity is we're only restocking items that we know.
Our strong mover. So it was it was a good exercise we ended up.
It was it was more than an 80 20 rule right. We ended up eliminating 90 plus percent of our Skus and retaining 90 plus percent of our revenue.
So it just made a lot of sense.
And but it wasn't it wasn't easy and we had that we had to really make some tough decisions as well, but we got to a catalog that we love and we're excited that we can now kind of progressed to the next phase and start launching new products.
The compliment the set that we already have your catalog today.
Okay, great. Thanks for the detail and I'll jump back in the queue.
Thanks, Eric I appreciate it.
Your next question is coming from Andrew Bond. Please announce your affiliation then pose your question.
Hi, Good morning. This is Andrew bond on the line for Owen Bennett with Jefferies. Thank you for taking our questions.
I wanted to get an idea of how overall, hey morning, Nick I wanted to get an idea of how overall margins could perform if we assume no packaging business I don't know if you could give what margins were for packaging this quarter or whether the business ex packaging would have been EBITDA positive, but any color you could provide on how greenlee may have performed this SKU or could perform ex pack.
<unk> would be helpful. Thank you.
Yeah.
Thanks for the question and look we don't have the specific exact detailed numbers showing the business without the packaging right, but we can talk at a high level.
Right now packaging is taking up well over 50% of our storage space.
Even though it only represents on average around 20% of our revenue. So these products are bulkier right they take up more storage.
Also a significant amount of freight cost incurred importing these goods in from overseas right again, because they take up a lot of space.
And shipping is very expensive.
During this time as it has been throughout Covid.
So we're going to free up meaningful costs.
Half.
Obviously.
Different different positions that are more focused on packaging that we can refocus into other areas of our business.
So you get a lot of cost savings directly with packaging.
Not as higher margin.
It was because of all the additional.
Great challenges and supply chain challenges that we're seeing material cost and things like that.
But it's decent margins so look it's a good business.
It's up a lot of space to tighten up a lot of working capital and if we can reduce our overall footprint, we're going to get meaningful cost savings.
We've estimated early here that we think we can reduce over $5 million annually, just in and warehousing costs.
By exiting this business.
So we'll end up getting a more detailed.
Kind of numbers around it but right now we just know at a high level.
The cost reductions, we're going to receive and the efficiencies we're going to receive from exiting this business is going to put us in a significantly better position to achieve profitability, but it's also combined with success on the consumer side right we have to.
We have to execute on our plan we have to get.
The new products launched at a higher margin we have to grow the sales on that side of the business and.
And getting the team we're focused on that.
It's probably going to give us our best chance of success right. So there's sort of an intrinsic benefit from this strategic move as well is that we'll get the entire team.
Aligned around very clear and specific goals.
With growing the consumer business and.
I think the results of that are going to be very impactful. So we're excited to get this underway, obviously, it's going to take a little bit of time to run the process.
There is strong interest in this packaging business.
We already have had a few casual conversations around it but we haven't officially launched our process. So we wanted to get it out in the open today.
I understand why we're making this decision.
Again, if we could keep the whole business together.
Right that was the original plan, but the market.
As challenging and this is a great opportunity for us to capitalize the business in a non dilutive way, we don't think that the value of our packaging business is priced into our market cap and where the stocks trading today.
You have a unique opportunity here to really unlock that value.
And redeploy that capital into areas that are.
Garner much more significant returns over the next few years right.
That's exciting.
And we're moving through it.
But look I think.
Yes.
As we evaluate the combined business will be able to.
Kind of give more clear direction on.
What the what the profile is going to look like from a from a revenue and expense standpoint as.
As we move forward in the process and we exited this business so stay tuned and again. Thank you for the question.
Okay. Thanks, that's helpful detail, Nick Thank you and then shifting to Greenland owned brands, even if just at a high level are you able to give more color around the puts and takes of the sales performance of owned brands. Specifically, if there were certain brands that contributed to the sales decline or whether there were certain brands that maybe outperformed thank you.
Yeah look I think.
Our consumer business.
What what underperformed as a whole during during the quarter and I think again that was due to the.
The factors that we that we laid out it was also.
Just due to the fact that the team's busy kind of cleaning up some of the legacy items, whether it's inventory or whether it's discontinued inventory.
When we get our full slate of products, which starts now with the launch of the new catalog.
Team can get really focused around.
Not only.
The smaller catalog, but within the catalog.
The owned brand products and the new products that we're launching.
So look I think for the quarter.
We were down across the board.
Obviously, we did the transaction with with vibes prior to the quarter end.
So we lost a little bit there but.
Our own brands.
They're continuing to perform.
In line with what the rest of the portfolio and we've got to put more emphasis on them so that their growth.
It is growing.
Growing at a at a faster clip than the rest of the portfolio that that's something that we need to do as an organization. So.
Look we are excited about group as I mentioned.
We have a lot of products launching on that brand but.
That wasn't we didn't have anything in the market in Q2 that started here in Q3, and we had higher standards. We had ice we had da Vinci ice sales remained consistent.
Da Vinci is a premium product right. So I think a little bit of that was a little bit of the softness in da Vinci can be tied to the pullback in consumer spending.
And we've got some new products launching that will help.
Build lower cost options for consumers on da Vinci, but it is a premium product. It's one of the best pay prices on the market and.
Higher standards continues to move along.
Got you.
We've got a we've got to get some more inventory right and part of it is getting rid of the old inventory, bringing in the new inventory.
We're getting to a place where we can really grow these.
Consumer brands that we own.
But again across the board as they were all a little bit soft in Q2.
Thanks for the detail I'll pass it on.
Thank you.
Your next question for today is coming from Glenn Mattson. Please announce your affiliation then pose your question.
Yeah, Glenn Mattson from Ladenburg, Thanks for taking the questions first of all.
On the.
On the effort to kind of talk about moving up the chain in terms of selling to better customers to top tier msos like you said.
That was a major effort that was kind of talked about when the merger was announced and the idea being that there are relationships that push ahead and that you'd be able to leverage those relationships to get into the msos.
I didn't know if that hasn't really had gotten traction yet or whatever but can you just talk about why and Apple.
Your enterprise sales force will be able to accomplish that goal and perhaps.
It didn't happen.
Under the previous plan.
Yeah, Hey, Glenn and thanks for tuning in and I. Appreciate the question. So you know look we're obviously disappointed and you know how long it's taken to get meaningful traction on the cross selling.
Part of it's due to external factors and just the reality of how these msos are operating.
It's also just due to.
US needing to get.
Some of our foundation in order of specifically on the technology side right, so starting with and I'll touch on that in more detail here, but starting with the.
Kind of marketplace dynamics right.
Msos are also very focused on.
Their initiatives right now which include cost reductions.
Expansions into some of the new markets like New Jersey, and as they've been focused in everybody's a little bit resource constrained. Some of these conversations which are happening and we're getting traction behind the scenes has just taken longer right. This is a.
<unk> for Msos, who right now as we sit.
Don't do a lot of central.
Consolidated purchasing for their consumer products right. They don't have a uniform.
A lineup that exists across all of their retail storefronts right. Those are the conversations we're having it's.
It's resonating really well.
They understand the value proposition of consolidating their spend leveraging their scale to get cost down having uniform formally putting in some of the merchandise displays that we have that can actually increase the <unk>.
<unk> at the store level and again, we've got a program that we intend to roll out and we're getting close so we're excited to announce those when they come.
But one of the things that we need it again talking about internally in building. Our foundation is our ability to transact online through the BW corridor.
Did a system integration earlier in this year.
Now.
We're set to launch the portal again in the coming weeks, so youll see that announcement.
And that'll give store managers.
The ability to go online and procure the products. So the way we see it working is.
And <unk>, our organization can have central buying where.
Where they have price transparency.
And they can essentially purchase or provide.
Excuse that fit within.
Their vision for merchandising.
And Green Lane will either.
Except the purchase order and put the goods aside or have a program where we have.
<unk>.
Our net term sort of arrangement, but allow the corporation or the organization to kind of determine what is in scope and what they want to purchase and negotiate the pricing. So they can use their scale, but then using technology allow the individual store owners to make the rig.
Quest for goods, whether they are purchasing or not they can essentially say hey, we need. This many items at this one store and then greenlight can make the shipment so rolling our program out like just nationally with a large NSO with everything that greenlight has going on and everything that the msos have had going on.
Has taken longer than we would've liked but we are making that progress and we're going to get to where we want to go. So great question, Glenn we understand.
The expectation that these things would happen quicker.
We're disappointed that they haven't happened as quick as we'd like but the good news is we are making progress and we are going to get there.
Great one more for me I, just had kind of get them centrally mindset around the Sip.
Yeah.
You know when I think about the two businesses I think about the brands. The house brands thing is more of a.
Potentially more volatile in other words that it's like kind of his space, where if you get a couple of products that really start working well you can really.
Revenue ramp, but I'm not sure that those brands are necessarily.
Have a lot of longevity per se, whereas on the packaging side that seems like it's going to do well.
Is it right to the kinds of hotels and horizon industry. So just.
Color on why you chose to sell the packaging business as opposed to.
And keep the consumer business and.
And perhaps it had something to do with the valuation in that and how much the packaging business could be worth in relation to the overall company or or or just kind of some more thoughts on the strategic.
Thanks.
Yeah.
Youre right in the sense that.
The consumer business is going to be.
A little bit more transactional whereas the.
Industrial business in the packaging business.
It's going to be more reoccurring right because for every every sale.
The job right and.
Whereas on the consumer side Theres, a lot of ways to consume cannabis things like papers are going to be more of a razor blade type model, but.
The da Vinci dryer vaporizer at a $300 price point is.
He is going to be a little bit more onetime in nature now we can make the consumer business.
More predictable and more reoccurring through the enterprise relationships and the dynamics that I just spoke about.
Ordinary with Msos partnering with C stores getting our merchandise.
Merchandise display sets into these locations, which were doing right now with C stores for example, and we've seen when we get.
Those sets in the stores that the.
Consistency and the velocity of the Reorders of the products, which go into the display sets increases were also seen C stores that purchase that had one display setup.
Asking for another one right wanting to put it.
One at each register right. That's a very good sign for us and so we will make that business more.
More reoccurring in nature.
More and more predictable.
And Amazon marketplace sites will help do that for us as well so we're going to get there with the consumer business.
Now lifestyle of the packaging business.
Again, we're in a position where we feel that the.
The future of this company is best suited being a consumer business, especially being a publicly traded company. The multiples just aren't as good on a packaging business or an industrial style business right.
So we want to move into the consumer we think it is ripe for opportunity as I mentioned sort of the dynamics around procurement with multistate operators as they expand the retail footprint.
We think that there's huge opportunity globally ahead of cannabis legalization right because even though.
Our industrial products are more tied to regulated cannabis markets or consumer products.
Are utilized and nonregulated cannabis markets because consumption is occurring right and so consumers need consumption devices and things like rolling papers, regardless.
<unk>.
The market has a license.
Regulated outlet right.
And so we see countries.
Countries in Europe , legalizing and decriminalizing.
Probably going to take them several years to rollout highly regulated retail program well fine we can still sell our devices right. So we've got a huge opportunity there as well with the consumer side. So deciding that that's really where we want to go again.
Again, we need to get focus, especially in this environment right. We just don't have the resources to do everything.
So we have to pick a lane.
Again, we think the consumer opportunity is much bigger and especially for a publicly traded company a way to create more value in our business.
And then the other rationale the packaging business has a bigger pool of buyers at this current moment right a lot of folks looking to buy.
The consumer business would be more industry type folks well industry is capital start, whereas the packaging business. We have a pool of buyers that are not correlated to the cannabis industry per se.
So we can unlock a much wider audience.
That is maybe already at significant scale globally with their packaging business, but do not yet have appropriate exposure to this exciting growth industry right and this is a perfect opportunity for them to get that through a transaction. So we believe that we can monetize that business better.
Especially for cash because cash is king right now.
And the other thing is the cost reductions right. We think we can run our consumer business.
Much more lean and efficiently.
Then we can run our industrial business in our packaging business today right. So in an environment, where it's all about managing costs and all about achieving profitability.
We look at our consumer business is being able to operate.
Lower fixed costs and being able to sell on higher margins, which is which is ultimately the recipe to profitability right. So there's a lot of reasons why we strategically decided to sell this particular business unit.
And again I think it fits with the.
The themes that we've highlighted pre and post merger.
So it is all aligned with sort of the macro vision for greenlight, although ideally we could keep everything together.
We've determined that that's not a recipe for success in this current climate and.
The public markets have also dictated that right. The valuation that's put on our total business is also telling us.
Not to keep this entire business together, it's telling us that we should look to strategically transact. This packaging business. So we're listening.
To that as well and factoring that into our decision making.
Okay. Thanks for all that color next take care.
Thank you.
Your next question for today is coming from Scott Fortune. Please announce your affiliation and pose your question.
Hey, Good morning. This is Nick on for Scott from Roth Capital Partners. First question for me is just looking for an update on the sourcing side, you announced the 500000 and cost savings.
Just wondering if you've seen any other low hanging fruit or opportunities with suppliers to kind of lower cost. Despite the supply chain bottlenecks out there and just kind of color around your cohort sourcing strategy. Thank you.
Yeah.
Thanks for the question look I think.
So it's been a focus of ours since COVID-19 two to diversify our sourcing out of China and in particular out of Asia, right and some of that.
The rationale is because tariffs some of the rationale.
<unk> is just in terms of diversification, but a lot of the rationale.
Cost right because freight is a huge part of costs right now in this climate and so we've been onshoring some of the products, we've been diversifying our vendor base we've restructured.
Some of our deals to be able to procure product state side. So for example, with.
<unk> bites for example, right now.
Whereas we used to have to deal with imports.
The new owners will be selling to a state side right. So it dramatically reduces lead times.
It improves our cash conversion cycle.
So that's really been an emphasis and focus and we have made solid progress and a lot of areas and intend to continue.
To look for ways to unlock value.
Pricing again, that's something where we've got a unique opportunity with new product innovation right. So as we look to design new products.
We're gonna look to design them in a very cost efficient way knowing that if we can produce newly designed products at a lower cost that's going to enhance our gross margin and we are very focused on bringing high gross margin revenue into this business. So we've got the opportunity to kind of do.
New sourcing.
Bid it out get a lower cost find it find a supplier thats, maybe diversified into a strategic region.
And procure goods potentially without tariff as well so we've got a fresh start on any new products.
And we've tried to restructure some of the old relationships to make those more efficient as well.
Got it I appreciate that color and then last one for me just on your future kind of in house mix expectations. After divesting parts here do you have an updated target range for kind of longer term inhouse mix now I think initially it was around 22% to 28% for 2022, but the environment kind of changed here. So just your outlook on the in house.
Thank you.
Yeah, I mean look I think.
If we look at if we look at Q2.
I don't have the exact percentage in front of me, but it seems it looks like again sales were in the 25% range of.
Total brands were at warehouse brands.
We do want to get that higher rate I think we want to get that over 50% of our.
Consumer profile right, we still we're still going to sell to see sell products, which as you know as big revenue for us.
So let's let's.
Not factor those into the equation, what's not factor in the packaging, because we're exiting that business or.
Or the energy, which is a business that we intend to keep and.
It has low operating costs and in decent margins.
So if you're just looking at our consumer business.
And you can look at our new Investor deck, you can see the brands that we own and the licensed brands.
That we operate.
Those brands in total again coming in probably closer to 25% last quarter.
We wanted to get those.
We want to get those up to 50% right of the overall portfolio and by Q1 of next year right I think that that should be our gold out if we sell a lot of more partner brands and we can achieve it it's not the worst thing we can get everything growing.
We're still going to be happy, but yeah, I mean, we'd like to get our house brands to be a majority of our consumer sales.
That's the goal and then we can truly be a house of brands right right now it's still early days on that strategy, we're going to get there but.
But we'd like to eclipse that 50% Mark I think that would be a meaningful milestone for us and if we can do it by Q1 or Q2 of next year I think we'd be happy with that achievement.
But we also aren't going to say no if people want to buy more of our partner brands right.
It's a good thing too for.
For Greenlight, if we're seeing growth in all areas.
Best thing for Green line took a step back in Q2, we explained the reasons as to why.
Get the team hyper focused now on the new strategy.
Understanding that the packaging business is going away at some point.
And that should lead to growth in our house brands and growth across our consumer business as a whole.
Got it that's it for me.
Thanks for the color.
Alright, Thanks, a lot.
There are no further questions in queue I would now like to turn the floor back over to Nick for any closing remarks.
Thank you I appreciate everybody dialing in.
Especially if youre on the West Coast I know it's early.
This was a big announcement for us obviously.
I'm kind of taking taking.
I'll look at the market and the landscape and understanding strategically how to best position Green Lane for that long term value again as I mentioned in the in the prepared remarks green.
Green Lane is in an enviable position still right. We're listed on the NASDAQ.
We're a leader in the categories that we play.
We still have a extremely huge opportunity that we can capitalize on with the consumer products and with the house of brands and.
There's really not a lot of folks doing that especially that are publicly traded Reits. So that is a great position to be and we are weathering significant headwinds as we have been now for several years.
But we've proven that we can navigate those we can come up with.
Our creative and strategic ways.
To capitalize this business in a non dilutive way and we've demonstrated that we.
We've shown that we can make hard decisions when it comes to cost reductions we've seen that we can make.
Strategic decisions when it comes to focus and how we can free up capital and we're doing that once again here with the announcement of the sale of our packaging business.
So hopefully people have confidence that the green lane can navigate the difficult environment continue to keep our strategic positioning.
For when the headwinds subside and when hopefully tailwind do come into this industry.
And then youre going to see.
Explosive growth rate when that happens.
So we're continuing to stay the course.
We feel again, we've got a bright future.
We see the light at the end of the tunnel here right and we're gonna rallied the team around that and so the last thing I'd like to say again is it just a huge thank you to the Green Lane team. This team worked extremely hard last quarter I couldn't be more proud of the accomplishments. If you look at everything that we accomplished we laid a lot of it out in the press release talked about it.
On the earnings call here.
You'd be happy to accomplish this list of things within within a within a half of a year or within a full year. We did it all within basically a quarter right and and the team had to grind it out to do it.
Now.
Did that cause us to take our focus off of sales a little bit yeah, I mentioned that but.
But these are one time things and we checked a lot of them off the list.
In the recent months and now we can really get back focused on ourselves and focus on our sales in our key areas. So again couldn't be more thankful for the efforts from the team there.
They really showed up we got a lot done still work to do obviously, but we're excited about the future and we're excited about the potential for this business and the potential.
To create a significant.
Cash transaction for our packaging business, which will only fund.
Further transition into where we want to be as a house of brands.
I look forward to updating everybody as we continued to progress.
Again, thank you for your time today and wish everybody a great day, and a great rest of the week tiers.
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.
Okay.