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spk01: 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 30, 2022, was distributed earlier this morning, and is available on the Investor Relations section of the Green Lane website at investor.gnln.com. 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.gnln.com. On the call today are Nick Kovacevic, Chief Executive Officer, Darsh Daya, 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 16, 2022. Factors that could cause Green Lane's results to differ materially are set forth in today's press release and in Green Lane's annual report on Form 10-K for the year ended December 31, 2021, and quarterly report on Form 10-Q for the three months ended June 30, 2022, previously filed with the SEC. Any forward-looking statements made today on this call are based on assumptions as of today, and Green Lane assumes no obligation to update these statements as a result of new information or future events. During today's call, Green Lane management may discuss non-GAAP financial measures included adjusted gross margin, adjusted SG&A, and adjusted EBITDA. GreenLane 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 website at investor.gnln.com. I would now like to turn the call over to Mr. Nick Kovacevic, Chief Executive Officer of GreenLane. Please go ahead, Nick.
spk06: Hello, everyone, and thank you for attending our second quarter 2022 earnings call. We've been extremely busy here at Greenlane 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. In order to best position Greenlane 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. The recent accomplishments include raising $5.4 million through a registered direct offering in June and selling our interest in Vibes for $5.3 million in July, which in turn allowed us to repay $8 million in short-term debt, 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 house of brands business in the ancillary cannabis marketplace. While properly funding the company was our priority over the last several months, we remain committed to reducing our overall operating costs 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 $900,000 of annualized cost savings. Furthermore, We also restructured a longstanding arrangement with one of our key vendors to free up meaningful working capital and eliminate approximately $500,000 of annual expenses. We also continue to make progress on discontinuing selling and distributing lower margin third-party brands and turning 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 greenlane.com. Another notable accomplishment in recent months includes the implementation of our compliant B2B PACT Act shipping program through USPS, where we remain one of the only companies to our knowledge in the cannabis industry to actually receive this exemption. It isn't easy to be compliant, and there are hefty costs to do things the right way, but we believe this will be a huge advantage for GreenLane in the future as enforcement of regulations will eventually catch up to competition operating in violation of PACT Act rules. While we are proud of the accomplishments thus far, we remain focused on transforming GreenLane into a highly profitable and highly valuable consumer house of 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. Exiting 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 in estimated savings in excess of $5 million annually. I have a personal interest in this process. Having co-founded Kush Bottles in 2010, we painstakingly developed a world-class packaging operation and closely partnered with top-tier operators over the years. I will 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 costs, 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 in the ancillary cannabis marketplace. In addition, Mr. Snyder's promotion will also allows us to further streamline our organization and recognize additional cost savings. Before I welcome Craig onto 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 COO at the end of September. Rodrigo was essential to restructuring Cushco 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 GreenLane following the merger with Cushco, Rodrigo has applied a similar strategy to reduce costs, 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 step down and provide further reductions in overhead. Once again, I want to sincerely thank Rodrigo for all of his unwavering passion, work ethic, 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 GreenLane as a consumer business. Welcome, Craig. Thank you.
spk04: 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 GreenLane's transformation. One of the key principles I have emphasized since joining GreenLane in March is the need to make the company a more scalable, leverageable, and durable business. I believe we are making progress toward these goals. We have focused this year in solidifying our foundation into one that can be leveraged as we grow and scale. First, GreenLane 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 B2B portal, set to officially launch nationwide in the coming weeks. Finally, we are focusing our sales to more scalable customer channels. We are 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, but the milestones we have achieved to date, combined with the early successes we are seeing in key areas, make me feel very confident for the future of this company.
spk06: 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 could be attributed to the Greenland-Kushco merger, which took place in Q3 of 2021. The decrease from Q1 2022 could be attributed to several factors. First off, many operators in our industry have experienced a slowdown this year. 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 with 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 foregoing 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. While it may be painful to pass on potential sales, 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 GreenLane 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 one time 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 top line 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 $300,000, despite reducing our total operating expenses by approximately $2.4 million from Q1 2022 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 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 leverageable technologies, and ramp our sales efforts with the right customers and the right product segments. We continue to believe GreenLane is one of the best position players in the cannabis industry. As a 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 Dea, our Chief Accounting Officer, to provide more financial details on the Q2 earnings.
spk11: 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. Revenues for the second quarter were $39.9 million, up $5.2 million, or 15% versus the prior year. The increase reflects incremental revenues associated with the CUSCO merger, offset partially by lower CPG 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 were 20.3 compared with 26.1 during the first quarter of 2021. 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 Cushco-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 $3.2 million related to the Crisco merger and $1.8 million, a reversal of a previously recorded gain associated with the VAT indemnification asset. 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 $9.07 per share for the corresponding year-to-date period. 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 30, 2022. Net cash used in operating activities was $13.7 million. Net cash used in investment activities was $1.2 million, and 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 30th, 2022, The company reported working capital consisting of current assets, their current liabilities of $44.8 million versus working capital of $53.8 million as of June 30, 2021. The team continued to manage liquidity effectively and during Q3 successfully secured a $15 million asset-based facility from an institutional lender on favorable terms. The company also successfully repaid an $8 million bridge facility in full using existing resources and funds raised from the aforementioned registered direct offering and the previously reported sale of our interest in vibes. Looking to the company's balance sheet, the company significantly reduced third-party inventory and vendor deposits by $13.1 million in the first half of 2022. as we transition away from select lower-margin third-party brands and the associated working capital requirements. The company also sold $2 million of E&O inventory under a company-wide program to recruit previously written-off inventory and minimize its facility footprint in general and reduce storage costs. I'd like to turn the call back over to Mr. Nick Kovakovich, our Chief Executive Officer of Greenlink, for his closing remarks. Please go ahead, Nick.
spk08: Thank you, Dash.
spk06: Before we do closing remarks, I'll turn it over to the operator to open up the line for Q&A.
spk01: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Vivian Acer. Please announce your affiliation and pose your question.
spk09: Great. Good morning. This is Harrison Vivas on for Vivian today.
spk10: 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 it. to higher margin-owned brands, which, of course, have been a priority for Greenland for some time. But I think vibes and ice have always been pointed out to be nicely margin-accretive. So was the decision to divest from those businesses entirely liquidity-driven? Is it safe to say that there were no alternatives under the circumstances?
spk06: Hi, Harrison. Thanks for the question. You know, look, I think... Obviously, we're in a position where, you know, if opportunistic things arise, we have to consider them. But our plan has always been to focus on the high margin, own brands. ICE is still in the portfolio, as is DaVinci. We're really excited about a brand that we're launching, relaunching, called Groove. And we have our higher standards brand as well. We have our licensed brands with Marley Natural and with Kay Herring, Keith Herring. And then we have our partner brands that we distribute. And so, you know, we are going to lean into some partner brands. Obviously, the C-cell relationship is extremely important, and we've got some good stuff brewing with them. But we're going to, you know, continue to be focused on our own 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 all of our brands. Now, as to Vibes, that is a brand that we – really did like in the portfolio. But given the structure, remember that was a joint venture arrangement, you know, it was a bit complicated and there were other partners involved. And there was a deal that came about that made a lot of sense, right? The multiple that we got for Vibes was at the time about 6X what our current multiple was in the public markets. And the deal was all cash, cash upfront. You know, 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. And if we leverage 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, you know, I think we're getting to the right place. You know, maybe there was, you know, again, a little bit of – Tough decision there with vibes, but it just made sense given the circumstances and the multiple.
spk09: Okay, that makes sense. Thank you, Nick.
spk10: And just kind of shifting gears to profitability, understand that your three key profit targets have appropriately been removed as part of the pivot here. But we think it might be helpful if you provide just a little bit more color about how you're thinking about achieving adjusted profitability going forward. maybe more specifics in terms of the scale you need to achieve, you know, in the new business as well as the associated margin profile you expect to see. Thanks.
spk06: Yeah, thank you. And, look, I think, you know, our message was, you know, our message was, you know, pretty clear on the call here, right? We were disappointed in the revenue that we achieved for the quarter, but we laid out, you know, very specific reasons as to why the revenue was short. But we're not in a position where we want to be super bullish on hitting that revenue number, which would lead to the profitability, right? We had planned 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're 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 plans, and we'll be able to provide guidance when that comes together. But we're a little cautious with the market conditions, right? Like we talked about, seeing some of the operator's struggling to pay bills. And it's commonplace across other ancillary publicly traded companies that have given similar feedback, right? It's hard to collect right now in an industry that's 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 de-risk 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. We're going to be smart about how we approach profitability. It's still the number one goal, getting this business profitable. 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. You know, we've only got two levers to play with, right? You've got the revenue and margin, and you've got the cost. We're doing a great job cutting costs, and now we're realigning our plan on the revenue and margin exiting one of our business units and ultimately going to deliver up a formula that gets us exactly where we need to go. Again, we just don't have direct line of sight into that timing as we sit today.
spk09: Okay. Okay. That's helpful. And that makes sense.
spk10: Last one for me, just Nick, do you mind speaking to what you're seeing in terms of the broader M&A landscape? I know it's early days for the sale of the packing business, but I guess curious just in terms of the context of the you know, your divestiture of the Vibes business, I guess, you know, what are you seeing in terms of buyers and general appetite for M&A right now? Thanks.
spk06: Yeah, I mean, look, it's no secret that the industry is capital starved, right? And so there's not a lot of cash buyers in the industry. Now, we were fortunate with Vibes, right? And that's why that deal made sense. But you see a lot of folks with assets for sale, especially on the plant touching side, you know, that aren't able to get meaningful amounts of cash up front. Now, we have a big advantage here with our decision to sell our packaging business. Why? Because there's certainly an ample pool of buyers, and many of them with balance sheets significantly larger than the 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, the potential has remained gigantic. 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, we don't see a lot of them in the industry today competing over the business that we're competing over. What a perfect opportunity. right to get in deep uh with you know a transaction that that picks up intellectual property and proprietary products and you know an extensive customer base including you know some of the most desirable names in the industry right uh in addition to that you know there's players that are you know cannabis focused um that do have cash that are you know 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 ripe with opportunity. As we've talked about, I mean, MSOs are getting significant scale on their dispensaries and have yet to streamline their consolidate and unify their purchasing on the ancillary side. So that opportunity is as 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 huge opportunities, which are going to pay a long-term dividends to our company if we go get it. 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.
spk08: Thank you, Nick. I'll jump back at the queue. Thank you.
spk01: Your next question for today is coming from Aaron Gray. Please announce your affiliations and pose your question.
spk03: Hi, Aaron Gray with Alliance Global Partners. Thank you for the questions. So I just want to talk a little bit with the CPG strategy. So I know you answered the question in terms of the vibes, divestiture, but just on the go-forward strategy specifically related to channels. So in the last call, you talked about Amazon, some C stores as well, kind of shifting away, it seemed like, from some of the legacy head shops. So I just want to see how that view is now with some of the recent changes that you've made. and maybe some updates you could give, particularly on the Amazon front, would be really helpful with now you're looking to divest a actually big business as well as with the Vibes, which I know was big on the C-store front there. So that would be helpful. Thanks.
spk06: Yeah. Actually, Craig is with me, so he can kind of give an update on the Amazon stuff. But, you know, to your question on the channels, right, you know, look, I think, again, in the cannabis industry, you have to be cautious about, You know, any operators that don't have scale or, you know, high-margin business right now in this current environment, right, they're relying on outside capital. There's 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 we invest in certain customers, right, procuring custom-branded inventory and, you know, extending credit terms. We have to be, you know, sure that the risk – is worth the reward right and and right now um you know we're on the cautious side um and so where do we pivot right we pivot to the customers that you know are very stable and and sound and secure and in the cannabis industry um that's the msos uh private and public but you know publicly traded msos certainly are in are in shape than the rest of the industry uh and then on the uh, traditional side, uh, C stores, uh, specialty retailers. And, you know, these folks have scale, so we will get much bigger purchases. Um, and, and it'll, you know, it's, it's, it's challenging in this environment with freight and all this stuff. So, uh, people that are ordering bulk, um, those are, that's going to be more creative for us and for our margins and our operations. And then, um, you know, we're going to continue to service smoke shops and head shops. You know, we're going to, uh, look working on our transactional side of our business. You know, we, Craig talked about the B2B portal that's launching in the coming weeks. We want to create transactions that happen seamlessly, and even if those are smaller, they'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 B2B orders for smaller accounts, smoke shops and head shops, that's an important initiative. And, again, we've made tremendous progress. But that also, that whole e-commerce side, is direct-to-consumer and using marketplaces like Amazon. I'll let Craig kind of further expand upon, you know, the progress there and what the future strategy is.
spk04: Yeah, so thank you, Nick. So on Amazon, very unique strategy. We're, you know, we're really pursuing to protect our brands. And to do that, we're involved in the transparency program. And the transparency program would allow us to be the only provider to sell our brands online. 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 and allows us to control all the advertising and be part of the prime programs with FBA. There's probably a little over 30% of our products today that we believe will be accepted and will be able to use on FBA on the U.S. side. And as you know, globally, it's slightly different. The big five over in Europe, they are able to do things like vaporizers that make it very unique. But we're at the first stages of our program there, which is really protect the brand through their transparency program. Then be 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 to really work on getting the transparency program in place so we can protect all our brands, control the pricing, and control the buy box, and we've made very good progress there to date.
spk06: One other thing to add, Aaron, you know, Craig is also leading product innovation, right? And so we have a strategy of launching our own products that we think are going to 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 fate a little bit there by ensuring that we have products that fit the platform and when we're building our product innovation pipeline.
spk03: All right, great. Thanks for that, Cole. That's really helpful there. And then second question for me, you talked about, you know, some of the discounting of, or discontinuing, I'm sorry, of low-margin brands, and you've talked about that for a couple quarters now. So I just want to, you know, see where you guys were in terms of, you know, what ending you're in in terms of discontinuing, you know, those SKUs or their additional low-margin SKUs that you're going to be discontinuing going forward. As we're continuing to see this pressure in the overall marketplace, are you now having to move up the level of SKUs that you're looking to discontinue than you might have when you initially started down this venture? Any help in terms of where you stand on the discontinuing of SKUs would be really helpful. Thanks.
spk06: Yes, and we've made great progress. We finally got the full catalog built. The catalog is now available online, greenlane.com, gnln.com. You'll see the catalog right there. It's the first 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. We still have some of those SKUs, right? Probably, you know, a few million dollars worth of inventory that, you know, we've discontinued. And we'll continue to sell those through normal course. Some items we may choose to discount and blow out. But, you know, we won't be buying new items that have been discontinued now that we've got this catalog complete. And you should only see that, you know, kind of improve right on the back end with inventory reductions and getting to better inventory velocity as we're, you know, only restocking items that we know are strong movers. So, you know, it was a good exercise. We ended up, you know, 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, but it wasn't easy. 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 progress to the next phase and start launching new products that complement the set that we already have here in the catalog today.
spk08: Okay, great. Thanks for the detail. I'll jump back to the queue. Thanks, Aaron. Appreciate it.
spk01: Your next question is coming from Andrew Bond. Please announce your affiliation, then pose your question.
spk02: 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 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 X packaging would have been EBITDA positive, but any color you could provide on how GreenLane may have performed this queue or could perform X packaging would be helpful. Thank you.
spk06: Yeah, thanks for the question. And look, we don't have the specific, you know, exact detailed numbers, you know, showing the business without the packaging, right? But we can talk at a high level. You know, right now, packaging is taking up well over 50% of our storage space, even though it only represents, you know, on average around 20% of our revenue. So these products are bulkier, right? They take up more storage. There's also a significant amount of freight costs incurred importing these goods in from overseas, right? Again, because they take up a lot of space. And shipping is very expensive still, you know, during this time as it has been, you know, throughout COVID. So we're going to free up meaningful costs. We have obviously, you know, different positions that are more focused on packaging that we can refocus into other areas of our business. So, you know, you get a lot of cost savings directly with packaging. You know, it's not as high a margin as it was because of, you know, all the additional, you know, freight challenges and supply chain challenges that we're seeing, material costs and things like that. But it's decent margin. So, look, it's a good business, but it ties up a lot of space. It ties 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 could reduce over $5 million annually just in warehousing costs by exiting this business. So we'll end up getting 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, you know, we have to execute on our plan. We have to get the new products launched that are higher margin. We have to grow the sales on that side of the business. And getting the team more focused on that is 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, you know, the entire team you know, aligned around very clear and specific goals with growing the consumer business. And, you know, I think the results of that are going to be very impactful. So, you know, we're excited to get this underway. Obviously, it's going to take a little bit of time to run the process. You know, there's strong interest in this packaging business. 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. People understand, you know, why we're making this decision. You know, again, if we could keep the whole business together, we would, right? That was the original plan. But the market is 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 where the stock's trading today. So, you know, you have a unique opportunity here to really unlock that value and redeploy that capital into areas that are going to garner much more significant returns over the next few years, right? And that's exciting. And we're moving to it. But, you know, look, I think as we evaluate the combined business, you know, we'll be able to kind of give more clear direction on what the profile is going to look like from a revenue and expense standpoint. as we move forward in the process and we exit this business. So stay tuned, and again, thank you for the question.
spk02: Okay, thanks. That's helpful detail, Nick. Thank you. And then shifting to GreenLane-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.
spk06: Yeah, look, I think our consumer business, you know, was underperformed as a whole during the quarter. And I think, again, that was due to, you know, the factors that we laid out. It was also just due to the fact that the team's busy kind of, you know, cleaning up some of the legacy items, whether it's E&O inventory or whether it's discontinued inventory. And when we get, you know, our full slate of products, which starts now with the launch of the new catalog, the team can get really focused around, you know, not only, you know, the smaller catalog, but within the catalog, you know, the own brand products and the new products that we're launching. So, you know, look, I think for the quarter, you know, we were down across the board. Obviously, we did the transaction with Vibes prior to the quarter end, so we lost a little bit there. But, you know, our own brands – They're continuing to perform in line with the rest of the portfolio, and we've got to put more emphasis on them so that their growth is growing at a faster clip than the rest of the portfolio. That's something that we need to do as an organization. So, look, we're excited about Groove, as I mentioned. We have a lot of products launching on that brand, but we didn't have anything in the market in Q2. That's starting here in Q3. And we had higher standards. We had ICE. We had DaVinci. You know, ICE sales remained consistent. DaVinci is a premium product, right? So I think a little bit of that was a little bit of the softness in DaVinci can be tied to the pullback in consumer spending. And we've got some new products launching that will help kind of build lower cost options for consumers on DaVinci. But it is, you know, a premium product. It's one of the best vaporizers on the market. And, you know, higher standards continues to move along. We've got, you know, 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. So we're getting to a place where we can really grow these consumer brands that we own. But, again, across the board, they were all a little bit soft in Q2. Thank you.
spk08: Thanks for the detail. I'll pass it on. Thank you.
spk01: Your next question for today is coming from Glenn Mattson. Please announce your affiliation, then pose your question.
spk07: Hi, Glenn Mattson from Lattenburg. Thanks for taking the questions. First of all, on the effort to kind of talk about moving up the chain in terms of selling to better businesses, 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 were relationships that Cush had and that you'd be able to like leverage those relationships to get into the MSOs. And I don't know if that hasn't really gotten traction yet or whatever, but can you just talk about why now your enterprise sales force will be able to accomplish that goal when perhaps, you know, it didn't happen in the, you know, under the previous plan?
spk06: Yeah. Hey, Glenn, and thanks for tuning in and appreciate the question. So, you know, look, we're obviously disappointed in, 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. Some of it's also just due to us needing to, you know, get some of our foundation in order, specifically on the technology side, right? So, starting with and I'll touch on that in more detail here, but starting with the, you know, kind of marketplace dynamics, right? The MSOs are also very focused on, you know, their initiatives right now, which include, you know, cost reductions, you know, expansions into some of the new markets like New Jersey. And, you know, as they've been focused and everybody's a little bit resource constrained, some of these conversations which are happening and we're getting traction behind the scenes have just taken longer. This is a shift for MSOs who, right now as we sit, don't do a lot of central consolidated purchasing for their consumer products. They don't have a uniform lineup that exists across all of their retail storefronts. Those are the conversations we're having. It's resonating really well. They understand the value propositions. of consolidating their spend, leveraging their scale to get costs down, having uniformity, putting in some of the merchandise display sets that we have that can actually increase the monetization at the store level. And, you know, again, we've got programs 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 needed, again, talking about internally and building our foundation, is our ability to transact online through the B2B portal. Again, we did a system integration earlier in this year. Now we're set to launch the portal again in the coming weeks, so you'll see that announcement. And that will give store managers the ability to go online and procure the products. So the way we see it working is, you know, an MSO or an organization can have central buying opportunities where they have price transparency and they can essentially purchase or provide SKUs that fit within, you know, their vision for merchandising. And GreenLane will either, you know, accept the purchase order and put the goods to the side or, you know, have a program where we have, you know, a net term sort of arrangement. But it, 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 request for goods. Whether they're purchasing or not, they can essentially say, hey, we need this many items at this one store, and then Greenland can make the shipment. So rolling a program out like this nationally is with a large MSO, with everything that Green Lane has going on and everything that the MSOs have had going on, has taken longer than we would have 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, you know, the expectation that, you know, these things would happen quicker. You know, 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.
spk07: Great. One more for me. I just kind of get a sense of the mindset around the – you know, when I think about the two businesses, I think about the brands, the house brands thing as more of a, you know, potentially more volatile. In other words, that it's like kind of hit-based where if you get a couple products that really start working well, you can really, you know, see a revenue ramp. I'm not sure that those brands are necessarily – um, have a lot of longevity per se, whereas on the packaging side, that seems like a business is going to do well, you know, as it rides the kind of coattails of a rising industry. So just, um, color on why you chose to sell the packaging business as opposed to, you know, and keep the consumer business. And perhaps it has something to do with the valuation and the, and the, and the, how much the packaging business could be worth in relation to the overall company or, or, or just kind of some, some more thoughts on the strategic, uh,
spk06: Yeah, you know, you're right in the sense that the consumer business is going to be a little bit more transactional, whereas the industrial business and the packaging business is going to be more reoccurring, right? Because for every sale, you know, you need a jar, right? And, you know, whereas on the consumer side, you know, there's a lot of ways to consume cannabis. Things like papers are going to be more of a razor blade type model. But, you know, the DaVinci dryer vaporizer, you know, at a $300 price point is going to be a little bit more one time 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. partnering with MSOs, partnering with C-Stores, getting our merchandise display sets into these locations, which we're 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. We're also seeing C-Stores that purchased, you know, that had one display set up, asking for another one, wanting to put one at each register. That's a very good sign for us. And so we will make that business more reoccurring in nature, more predictable. And Amazon and marketplace sites will help do that for us as well. So we're going to get there with the consumer business. Now, why sell the packaging business? Again, we're in a position where we feel that 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's ripe for opportunity, as I mentioned, sort of the dynamics around procurement with multi-state operators as they expand their retail footprint. We think that there's huge opportunity globally ahead of cannabis legalization, right? Because even though you know, our industrial products are more tied to regulated cannabis markets. Our consumer products are utilized in non-regulated cannabis markets because consumption is occurring, right? And so consumers need consumption devices and, you know, things like rolling papers, regardless of, you know, if the market has a licensed regulated outlet, right? And so we see countries in Europe legalizing and decriminalizing, you know, Probably going to take them several years to roll out a 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, you know, again, we need to get focused, 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 is 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 stars. 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. 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, right, because cash is king right now. And, you know, the other thing is the cost reductions, right? We think we can run our consumer business much more lean and efficiently than we can run our industrial business and 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 as being able to operate on lower fixed costs and being able to sell on higher margins, which is ultimately the recipe to profitability, right? So there's a lot of reasons why we've strategically decided to sell this particular business unit. And again, I think it fits with the themes that we've highlighted pre and post merger. So it is all aligned with sort of the macro vision for GreenLake, although ideally, you know, we could keep everything together. You know, we've determined that, you know, that's not a recipe for success in this current climate. And, you know, 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.
spk08: Okay. Thanks for all that color, Nick. Take care. Thank you.
spk01: Your next question for today is coming from Dot Fortune. Please announce your affiliation, then pose your question.
spk05: Hey, good morning. This is Nick on for Scott from Roth Capital Partners. First question for me, just looking for an update on the sourcing side. You announced the $500,000 in cost savings. I was just wondering if you've seen any other low-hanging fruit or opportunities with suppliers to kind of lower costs despite the supply chain bottlenecks out there and just kind of color around your go-forward sourcing strategy. Thank you.
spk06: Yeah. Thanks for the question. Look, I think, you know, it's been a focus of ours since COVID to diversify our sourcing out of China and in particular out of Asia, right? And some of that, you know, some of the rationale is because of tariffs. Some of the rationale is is just in terms of diversification. But a lot of the rationale is cost, right? Because freight is a huge part of cost right now in this climate. And so we've been on-shoring some of the products. We've been diversifying our vendor base. We've restructured some of our deals to be able to procure products stateside. So, for example, with Vibes, for example, right now, whereas we used to have to deal with M-Corts, the new owners will be selling to us stateside, right? So it dramatically reduces lead times. It improves our cash conversion cycle. So that's really been an emphasis and a focus, and we have made solid progress in a lot of areas and intend to continue to look for ways to unlock value. Pricing, again, that's something where, you know, we've got a unique opportunity with new product innovation, right? So as we look to design new products, We're going to 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, you know, new sourcing, you know, bid it out. get a lower cost, find a supplier that may be 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.
spk05: Got it. I appreciate that, Collar. And then last one for me, just on your future kind of in-house mix expectations after divesting vibes here, do you have an updated target range for kind of longer-term in-house mix now? I think initially it was around 22% to 28% for 2022, but the environment's kind of changed here. So just your outlook on the in-house mix would be helpful. Thank you.
spk06: Yeah, I mean, look, I think, you know, if we look at Q2, I don't have the exact percentage in front of me, but it looks like, you know, again, sales, we're in the 25% range of total brands. We're house brands. We do want to get that higher, right? I think we want to get that over 50% of our consumer profile, right? We're still going to sell to C-cell products, which, as you know, is big revenue for us. So let's not factor those into the equation. Let's not factor in the packaging because we're exiting that business or the energy, which is a business that we intend to keep and has low operating costs and decent margins. So if you're just looking at our consumer business, you know, 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 want 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 goal. Now, if we sell a lot of more partner brands and we can't achieve it, it's not the worst thing. All right. If 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 we'd like to eclipse that 50% mark. I think that would be a meaningful milestone for us. And, If we could do it by Q1 or Q2 of next year, I think we'd be happy with that achievement. But, you know, we also aren't going to say no if people want to buy more of our partner brands, right? That's a good thing, too, for GreenLane. If we're seeing growth in all areas, you know, that's the best thing for GreenLane. Took a step back in Q2. We explained the reasons as to why. And we're going to get the team hyper-focused now on the new strategy and 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.
spk08: Got it. That's it for me. Thanks for the call. All right. Thanks a lot.
spk01: There are no further questions in queue. I would like to turn the floor back over to Nick for any closing remarks.
spk06: Thank you. Appreciate everybody dialing in, especially if you're on the West Coast. I know it's early. This was a big announcement for us, obviously, kind of taking a look at the market and the landscape and understanding strategically how to best position GreenLane for that long-term value. Again, as I mentioned in the prepared remarks, GreenLane 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 an extremely huge opportunity that we can capitalize on with the consumer products and with the house of brands. There's really not a lot of folks doing that, especially that are publicly traded. That is a great position to be in. 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 creative and strategic ways to capitalize this business in a non-dilutive way. And we've demonstrated that. 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 Green Lane can navigate the difficult environment, continue to keep our strategic positioning for when the headwinds subside and when hopefully tailwinds do come into this industry. And then you're going to see explosive growth, right, 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 going to rally the team around that. And so the last thing I'd like to say, again, is just a, 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. I mean, you'd be happy to accomplish this list of things within a half of a year or within a full year. We did it all within basically a quarter, right? And the team had to grind it out to do it. Now, You know, did that cause us to take our focus off the sales a little bit? Yeah, I mentioned that. 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 our sales and focus on our sales in our key areas. So, again, couldn't be more thankful for the efforts from the team. 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 for to create a significant cash transaction for our packaging business, which will only fund our further transition into where we want to be as a house of brands. Look forward to updating everybody as we continue to progress. And again, thank you for your time today. Wish everybody a great day and a great rest of the week. Cheers.
spk01: 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.
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