Greenlane Holdings, Inc. (GNLN) Q1 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to today’s conference call to discuss Greenlane Holdings First Quarter 2022 Financial Results. A press release detailing the financial results for the quarter ended March 31, 2022, was distributed earlier this morning and is available on the Investor Relations section of the Greenlane 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 Kovacevich, Chief Executive Officer; Bill Mote, outgoing Chief Financial Officer; and Darsh Dahya, Chief Accounting Officer. Before we begin, Greenlane 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 on them. These statements are based on current expectations of the company’s management and involve inherent risks and uncertainties and other factors discussed in today’s press release. This call also contains time-sensitive information that speaks only as of the date of this live broadcast, May 17, 2022. Factors that could cause Greenlane’s results to differ materially are set forth in today’s press release and in Greenlane’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 March 31, 2022, previously filed with the SEC. Any forward-looking statements made today on this call are based on assumptions as of today, and Greenlane assumes no obligation to update these statements as a result of new information or future events. During today’s call, Greenlane management may discuss non-GAAP financial measures, including 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 Kovacevich, Chief Executive Officer of Greenlane. Please go ahead, Nick.

Thank you, operator, and good morning, everyone. I’d like to thank you all for joining us today to hear the latest about Greenlane. Over the past couple of months a lot has been going on in the broader capital markets and geopolitical landscape, and even more so here at our company as we continue to execute on our 2022 plan to reduce our cost structure, increase liquidity, and accelerate our path to profitability. I’ll start today’s call by first providing a high level overview of our results for the first quarter. Then, I will turn to some of our more recent developments and how we believe these will help us achieve our stated goal of positive adjusted EBITDA by Q3 of this year. And after that, I’ll do a more comprehensive review of our financial results before we then open it up for Q&A. But before we get started, I wanted to spend a quick moment thanking Bill Mote for all of his contributions to Greenlane over the last couple of years, especially as we successfully integrated our merger with KushCo. As we announced in our 10-Q yesterday, Bill will be stepping down from his role as Chief Financial Officer to pursue other opportunities. And we all wish him nothing but the best in the next chapter of his career. Our new Chief Accounting Officer, Darsh Dahya, will be filling in and will lead many of Greenlane’s principal financial activities, including accounting and controllership, financial reporting, financial planning and analysis, tax and treasury. Darsh has a compelling blend of accounting and finance expertise and brings valuable and unique experience in the highly-nuanced cannabis industry, having transformed the financial reporting process and infrastructure at Medmen over the past four years. We’re really excited by what Darsh brings to the table and are thrilled to see him already hitting the ground running, rolling up his sleeves these past couple of weeks to help with preparing our Q1 financial reporting. Darsh will join me in the Q&A to help answer any questions. But before I jump into the rest of my prepared remarks, I wanted to quickly pass the call over to Bill for some brief final comments.

Thanks, Nick and hello, everyone. It’s been an absolute pleasure to serve as Greenlane’s CFO these past couple of years, and I am extremely proud of what the team has been able to accomplish in such a short timeframe. I’m optimistic about the company’s future, especially as it moves closer towards profitability and generating incremental value for shareholders. I wish the company nothing but the best and remain a big supporter on the sidelines as the company grows in its next stage of evolution.

Thank you, Bill. We wish you all the best in your future endeavors. So with that, let’s jump right into Slide 3 of the supplemental earnings slides which you can find on our IR website if you haven’t downloaded them already. As a reminder, the results I’ll be reviewing for you this morning can be found in our earnings release that is available on EDGAR and in the Investor Relations section of our website at investor.gmln.com. Net sales for the quarter grew 37% year-over-year to $46.5 million. The increase was primarily driven by the KushCo merger. But if you exclude KushCo’s post-merger sales, revenue actually declined 47% to $18.1 million compared to $34 million for the same period in 2021. A big part of this decrease is explained by our strategic shift away from non-core third party brands in favor of our higher margin Greenlane brands. In fact, third party brand sales for the quarter decreased 49% as we continue to shift away from these lower quality sales that are no longer part of our core strategy. As I mentioned on our last call, we expect a decline in total revenue from discontinuing some of these third-party brand relationships. But we believe the overall quality and margin profile of the revenue that we will be generating going forward will be far more favorable and sustainable. Sales of our Greenlane brands were down 34% to $6 million compared to $9 million for Q1 2021. The decrease was mainly due to our ERP system implementation, which caused interruptions in our consumer business and in our ability to accept and fulfill customer orders. Although we expect to fully transition to this new ERP by the end of 2022, these interruptions materially impacted revenue for the first quarter with some orders slipping into the second quarter. I’ve said it many times before that growing our brands remains a key focus of ours as it helps expand our strategic moat, expand our gross margins, increase our revenue and increase our profitability. To that end, we’re excited that we have announced last week a partnership with Universal Distribution to distribute our products in Latin America. Latin America represents a promising new emerging market for us. And given that we are not subject to the same global trade restrictions as our plant-touching peers we can actually ship our products worldwide in an asset-light manner, enabling us to scale faster and wider and ultimately build our brand ahead of legalization in these markets. Gross margins for the quarter were 12.8%, down from 25.2% in Q1 last year, with the decrease being driven by write offs of obsolete inventory related to our post-merger and ongoing product rationalization initiatives. If you exclude these write-offs, adjusted gross margins were 25.3% in the quarter, compared to 28.1% for the same period in 2021. The decrease there is related to an increase in lower margin KushCo-related sales and a decrease in Greenlane brand sales, which of course carry a higher margin profile than third-party brand sales. As we continue to shift away from lower margin brand and focus on our higher margin Greenlane brands, we believe this should help us preserve and actually increase our gross margins over time. With that brief overview of the quarter, let’s now turn to Slide 4, which outlines our 2022 strategic plan. I shared a great amount of detail on this slide in our last earnings call, but suffice to say, we remain on track to achieve positive adjusted EBITDA by Q3 of this year and we are making meaningful progress in generating liquidity in excess of $30 million to help bridge this gap into profitability. Starting with the first part, we completed our reduction in force back in March, which we expect will help us generate approximately $8 million in annualized cash compensation savings. We did see some severance expenses show up during the quarter, but now we are largely past that and this should pave the way for a lower operating cost structure going forward. We’re also in the process of further reducing our facility footprint and making additional changes to the business to bring our adjusted SG&A which excludes depreciation and amortization down to between roughly $14 million to $16 million by Q3 of this year and that’s compared to $26.6 million that we reported in Q3 of last year. With a 25% gross margin target, we expect this operating cost range to be sufficient to achieve positive adjusted EBITDA and we look forward to providing more updates on this front as they materialize. Until we get to this goal, conserving and building on our current cash levels is of the utmost highest importance. To that effect, we are making great headway in generating liquidity from non-dilutive sources, starting with selling our headquarters building. We’ve already received offers in what is currently a very hot Florida commercial real estate market and we look forward to hopefully finalizing a deal here in the near-term. We also have begun discontinuing many of our other non-core assets and discontinuing some of our non-core strategic, lower margin third-party branded products that are no longer core to our business. Finally, we expect to complete in Q2 our process of finding adequate asset-based loan that can support our working capital needs. We’re confident that if all of these measures are successful that we can generate in excess of $30 million of non-dilutive capital, which we estimate will be enough to get us to positive adjusted EBITDA and hopefully beyond as the equity capital markets continue to languish amid rising interest rates and inflation, the devastating geopolitical and humanitarian situation in Ukraine, and additional supply disruptions caused by China’s recent COVID lockdowns. Turning now to Slide 5, sales in our consumer goods segment totaled $17.1 million for Q1 2022, compared to $30.5 million in Q1 2021. The decrease was primarily due to a decrease in third party brand sales, as well as the aforementioned order and fulfillment interruptions from the ERP migration. Sales in our industrial goods segment totaled $29.4 million for Q1 2022, compared to $3.5 million in Q1 2021. The increase was due to the merger with KushCo. Net sales of the Greenlane brand decreased 34% to $6 million for the quarter. SG&A for Q1 2022 increased to $24.2 million compared to $16.5 million in Q1 2021, primarily due to the KushCo merger and due to an increase in stock compensation expense, severance costs and fees for our ERP implementation. On an adjusted basis, which excludes depreciation and amortization, SG&A for Q1 2022 totaled $21.8 million compared to $16 million in Q1 2021. Net loss for Q1 2022 was $18.7 million compared to $7.7 million in Q1 2021. Adjusted EBITDA was negative $5.3 million in Q1 2022 compared to negative $5.2 million in Q1 2021. We ended the quarter with $5.9 million in cash and working capital of $41.7 million compared to $53.8 million as of December 31, 2021. We are continuing to be judicious with our cash position and have the ability to opportunistically raise capital under our ATM program. However, we are being very thoughtful about how we use our balance sheet to fund our growth initiatives. And we believe our 2022 plan will not only help us achieve positive adjusted EBITDA in Q3 of this year, but also help us generate sufficient liquidity to support the business as we transition into profitability. And with that, I will now turn the call over to the operator and open it up for Q&A.

Thank you very much. [Operator Instructions] Thank you. Your first question is coming from Vivien Azer of Cowen. Vivien, please ask your question.

Good. Thanks a lot for taking the question. This is Harrison Vivas on for Vivien. Just first on the ERP implementation, can you quantify the specific impact that it had on the agreement branded sales? And did it affect any specific brand more than others? And then I guess how much of those sales you would expect to recover in the second quarter? So, if you could just kind of talk more about the impact of that implementation? Thanks.

Yes. So, the implementation was disruptive. Unfortunately, we did have to move ERP systems completely and we had to complete it within the deadline that was not our decision to do so, but we were forced to. And so we had to do it quickly. And unfortunately that meant that the system was down for a longer than expected. So it took quite a big chunk out of our January sales to start the year. But the good news is we were able to complete that integration and get the system smoothly running over the course of the quarter. And now we are in a position to gain back some of the sales as you mentioned. And we expect that when we do the final part of our integration later this year, that it will be significantly smoother now that we have gone through it and we’ve built the right teams, the right processes and we have the historical experience with the new systems. So we don’t want to expect this situation to continue to come around and NIP at our sales. This is sort of a one-time thing. And yes, unfortunately with the consumer products, sometimes if you are unable to complete a transaction to a customer, they will go somewhere else to find that. So, some of those sales are obviously lost, but we believe that some of them will be recaptured just over time from some of our enterprise clients and ultimately, the key now is to make sure it’s smooth sailing going forward.

Okay, that’s helpful. And then I guess just kind of shifting gears to the partnership with Universal. I guess, just given the rationalization in things that you are doing given the reduction in headcount that you are kind of taking on and all that’s going on in the business, I guess can you talk about why now is the right time to pursue a LatAm strategy? And then I guess can you also talk about how you will go about this partnership and how does it actually impact sales? How are we going to roll it out over the next few quarters? Thank you.

Yes. No, that’s a great question. And I think one – it highlights one of the key advantages that we have at Greenlane being an ancillary provider. So we are going to be really smart about how we attack international markets. We’re not going to be investing into infrastructure in these markets. The good news is we don’t need to. So we are going to be focused on building our brands primarily domestically. But given our brands have high quality proprietary products, meaningful brand value and traction with consumers, there is appetite for these brands globally. So maybe in the past, we would have made that investment ourselves and put boots on the ground in these international markets. Under our new strategy we’re not going to be doing that. We are going to find partners that are fully capable, that are fully funded, that are able to just buy in bulk quantity the products from Greenlane and be able to then leverage their own sales force and their own infrastructure in these international markets to gain traction with these brands and penetrate the retail customer and the end consumer directly. So our costs and our investment in this partnership is going to be extremely light. Outside of the investment we are already making in our brands and in our branded products which complements our core business here in the U.S. So that’s how we’re able to enter into an agreement like this and know that we’re going to be – we’re not going to be taking much needed resources from our base country here and allocating them there. We’re going to leverage their resources and their partnership to do the heavy lifting and this is a model that’s extremely scalable. It’s something we can replicate in a lot of these emerging markets, something that’s certainly asset-light, as I mentioned. And there is other demand from other distributors that are interested in these types of deals. So you can expect to see more deals like this coming from Greenlane. We’ve also talked about how we’re going to be leveraging major global platforms like Amazon, eBay, potentially Walmart to help distribute our products as well. So again, in the future, it’s going to be about working smarter, leveraging infrastructure that’s already in existence and being able to bolt on top of it in a very asset-light, cost-light manner. Now, our core business, we’re going to continue to make bigger investments that will be limited more to the domestic U.S., where we have obviously a huge opportunity with our industrial goods that is yet to be materializing in some of these foreign markets, right? We need regulation and legalization before that part of our business shows up. But on our consumer side, perfect opportunity to get ahead of the curve, get out there into these international markets without a big investment on our behalf and still be able to reap those benefits and essentially front run what is going to be, at some point, a gigantic legal cannabis market.

Great. Okay. I will pass it on. Thanks.

Thank you.

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

Hi, good morning and thank you for the questions. First question for me – Hey, how is it going? During some channel checks recently around New Jersey with [indiscernible] sales, saw a good amount of Greenlane branded products and third-party products that you guys distribute on display on the floor as well as countertops. I know that was a big initiative that you guys had with the merger with KushKo kind of leveraging the two relationships. So love to get an update of the progress. Seems to be going well in the early days of that. And also just in terms of new adult use markets, just talking with a lot of the staff and expenses, they noted a big uptick in the number of accessory sales. So how important you think it is for you to be at the forefront of new retail stores opening up with new adult use sales? How you’re looking to then target new retail licenses as they are getting awarded in New Jersey as well as other markets that are coming online such as New York and Connecticut, just to go along with that initiative. Thank you.

Aaron, great question and I’m glad you were able to see some of our products in those New Jersey dispensaries as they were lighting up into the first days of adult use. So look, I think it’s a key part of our strategy, a lot of work to be done. We’re just getting started. But we have all the pieces to this puzzle, right? We have relationships with the large MSOs that control majority of the retail, especially in the limited license states. We have the product set. It’s a comprehensive product set, I mean for a dispensary client, we could be their sole ancillary provider for all the things that they would need. They could of course supplement that with one or two other providers. But we do have the wide range of offering to be a meaningful, if not complete solution for these dispensaries. This is not the case with our traditional channel, smoke shop and head shop, right? You go to a smoke shop and head shop, there is thousands and thousands of SKUs. There is SKUs that Greenlane doesn’t carry, any Greenlane wanted to try carry all the SKUs in a smoke shop and head shop, it’d be impossible. But that’s going to be a very different product mix than you’re going to see in a retail dispensary. Alright, in a retail dispensary, a dispensary channel doesn’t need to carry five or six different brands of rolling papers. No, they just need to have all of the different relevant form factors, whether it’s cones, whether it’s rice paper, hemp paper. Those are things that Greenlane has within our VIBES portfolio alone. So you’re not going to see a need for so much SKU proliferation in these retail channels, which makes it even more attractive channel for Greenlane to hopefully be able to own. So, we are super excited, we’re going to leverage those relationships but we plan to do this more in an enterprise way. I think historically we’ve sold to these clients more on an ad-hoc basis. We’ve sold to – the good news is we’ve sold to most of the MSOs, a vast majority, and we continue to sell. But it’s not a comprehensive enterprise solution yet. And that’s what we’re having discussions with leading MSOs about right now is really solving this or providing the solution for them to not only address the problem but also to capitalize on an opportunity. I think smart retailers are understanding that ancillary products are a great additional value add for their customer now that retail storefronts, especially in some markets, are getting more competitive. It’s a great way to differentiate. It’s a great way to drive incremental spend. If somebody spends $100, they are likely to be able to spend another $5 on accessories, right or $10 on accessories, so great opportunity there, especially with tourists, right? They need something to consume cannabis with and they might go after some of the cheaper price point items. Or if you are going with a heavy user, they may discover a vaporizer product that’s better fit for their consumption needs. So we think that again, being able to instead of just be transactional and say, hey, Greenlane has products. When you need them, buy them from us. We want to be more of an enterprise solution where we can work with these retailers and say, how do we best merchandise your store? How do we best optimize your ability to drive that incremental revenue and to create that value add for your customer? And it’s not going to be the same in every market. So being a national player, having that data, having that lens or having that network that we do, that’s really our differentiator. Not to mention our complete product portfolio that we just don’t see out there in the market that anyone else has with our extent of our brands that we offer. We’re going to be leveraging all that. So this will be a little bit of a longer sales cycle. And ultimately, it’s going to be something that becomes extremely sticky if we’re able to land these enterprise type relationships with master supply agreements. In some cases, we’re tucking these into existing master supply agreements that we have with MSOs for our industrial goods. And then in terms of servicing the more independent retail channel for social equity licenses and things like that, what we want to do, again, being smarter is build that into automated systems. So we have our B2B portal that we’ve been in beta testing since the ERP integration in Q1. And we’re expecting to be able to launch that live to our customer base here any day now, and this is going to allow smaller customers to transact themselves through our portal. It doesn’t tie up nearly the same amount of resources into Greenlane, makes that a much more efficient transaction. And so, we want to have self-service solutions for the small retailers and we want to have enterprise solutions for the larger chain. And we really want to capture a majority of this market. So, we’re super excited. Again, it was a long-winded answer, but great question, Aaron, and I’m glad you got a glimpse of it and it should only get more robust from here.

Thanks for the details, it’s really helpful. And then second question for me, just moving up north to Canada – I know a lot more focus is on the U.S. now but could you just remind us where you see the Canadian market right now in terms of where it fits for the Greenlane, particularly because it’s still a very competitive market? You talked about lower margin products there historically so is that still one where you’re looking to maybe shift away focus right now, especially as you look to be a little more asset-light and focus on profitability. Thanks.

Yes. Another good question. We are going to look to streamline our Canadian activities. One of the things about owning our own consumer brands is we can leverage the help of other distributors or sub-distributors that already have relationships in the market. There is certainly enough margin to go around when we own our own brands and we produce our own goods. So, we kind of do that in Canada on the consumer side. But we are seeing in Canada, which is very – I would say, it’s expected, but it’s interesting to see it materializing because we’ve been talking about this for quite some time. But we are seeing a gigantic migration from smoke shops and head shops to LCRs, licensed cannabis retailers, right? And why is that showing up so profound in Canada versus some of the markets here in the U.S.? And the reason is it’s still very early here in the U.S. a lot of these limited license states. These stores are more focused on selling cannabis. They are getting great margins still on their cannabis products and competition is very light. And so the market has not yet adopted a wholesale or whole scale of ancillary offerings in money markets in the U.S. Now, however in Canada it’s highly competitive as you know. Margins of cannabis have come way down. So smart retailers have really embraced the ancillary products which is what we offer with our consumer goods. And they are looking for ways to offset the margin degradation of cannabis with these products that have typically Keystone-type margins, which is like a double up for the retailer. They buy a pipe for $10. They sell it for $20. And then they also want to differentiate from competition, right? You go to a market like Toronto. There is a dispensary on every corner. How do you become the dispensary of choice? Well, if you’re the one-stop shop where someone can go and buy their cannabis and their papers and their pipes and their vaporizers, that’s a competitive advantage. So we see Canada really embracing this. Again, for Greenlane, we want to be able to streamline. We want to get our self-service portal open in Canada, which is scheduled in the coming months. We also want to be able to leverage sub distributors. So we want to really do less with more. We want to do more with less infrastructure, right? That’s our key here. So we see opportunity there on the consumer side. On the industrial side, it’s been tough. You guys know, obviously everybody’s seen the market. There is massive facility closures left and right from the LPs. There is layoffs left and right. And these are the companies that also simultaneously need to invest in hardware to build their vape brand, packaging, child-resistant packaging. They are going to be very cost conscious at the moment, right? Normally, these companies would spend the extra money to go with the CCELL products that’s best-in-class. They might not be in a position to do that right at this moment, same with packaging, a lot of the unique custom proprietary designs are being traded – down traded for give me the cheapest option available. So Canada on the brand side, on the cultivation side it’s a bit of a survival mode up there. And so again, in that market, not to say we can’t make sales and we don’t make sales because we do, but we’re not going to be as focused there, right? We’re going to be more focused in the market that’s growing, which is the U.S., where companies actually do have the capital to invest more heavily and are at this size and scale and volume where they need a solution like CCELL that is such – has such capacity and high quality in their manufacturing. So, we’re there. We expect that to continue to be top in the near-term on the industrial side. We’re more focused on taking advantage of Canada on the consumer side at the moment and really focus our industrial goods still with the U.S. MSOs.

Alright. Great. Makes sense. Thanks for the color. I will jump back in the queue.

Thanks, Aaron. I appreciate it.

Thank you. Our next question is coming from Scott Fortune of ROTH Capital Partners. Scott, over to you.

Good morning, and thank you for the questions. You mentioned a little bit kind of sales channel mix, but can you provide a little more color on the smoke shops channel as far as that as a sales channel? And with the cuts that you’ve made on the sales force, focused on third-party and supplying those channels, how do you look at the channel mix going forward, especially in light with the smoke shop channel as you mentioned a lot of focus on the MSOs going forward here?

Yes. Hey, Scott. Good morning, I appreciate you dial-in in early. I know you are West Coast like us. Look, I think the reality is, we’re going through a transition. As you guys can see, with the total business, with what we’re doing here, cost cutting, rightsizing, streamlining our go-to-market approach internationally and domestically trying to use technology tools versus people and ultimately pivoting the business into more higher margin goods. So that’s a bit of a transition we’re going through as a company. It’s also a transition that we are going through with our customer base. So as you mentioned, smoke shops and head shops have historically driven the bulk of our consumer goods business, and it still does today. So that’s still a very big channel for us. We have started using sub-distributors a lot as well, but they are accessing those channels too. So it’s been a bit complementary to the same end channel, which is smoke shops and head shops. So a lot of our business is tied up there. So we’re simultaneously going to continue to work those channels because they have historically been our bread and butter and it’s an avenue that Greenlane plays well. However we’d like to move a lot of that purchasing, especially for the smaller mom and pop retail owners to a digital platform, right, again, using technology instead of manpower. And that transition is underway. Like I mentioned, the portal is set to turn to the customer side any day now as we’ve been in beta testing on the Greenlane side, working on all the kinks over the last couple of months. So we’re going to continue to service that channel. We want to do it in the most efficient manner possible. And then we’re simultaneously really taking our eye toward the future channels. Wayne Gretzky said we want to skate where the puck is going, right? And where we see that going is more to where there is higher consumer traffic, right. As cannabis moves out of the shadows, folks are not going to – or in our opinion, no longer need to go to a separate smoke shop or head shop that was kind of built as an alternative channel because none of the traditional channels were open to carrying these products. So what are these traditional channels? Well, we talked a lot about the retail – cannabis retail store. Again, when there was no cannabis retail store and everybody was transacting with their dealer on the corner of their house, well, he’s not going to be carrying around a bunch of ancillary products or pipes or whatever. So they do need to travel to that smoke shop and head shop. Well, once they can go to a retail store or even a delivery service, licensed delivery service to buy their goods, they can hopefully then also be able to get their ancillary product needs met at that same point of transaction. So we really focus there. We’re also focused on T stores. This is a channel that has historically benefited from the tobacco consumer. That consumer is dying literally and figuratively and we know that these T stores are finding an interest in what’s next. And that’s the millennial consumer who is more aligned with cannabis consumption. So rather than using an old tobacco brand like Zig-Zag, for example, that’s associated with the nicotine tobacco industry, the millennial consumer is more inclined to buy VIBES, that’s a cannabis consumer, cannabis rolling paper brand, right? And so being able to take advantage of that opportunity and look, there is products that they have historically not carried, like pipes, spoon pipes, one hitter’s, dugouts, we’ve got the silicone line with ICE, it’s doing very well with C-stores. So we see that as a great opportunity and they are not going to carry everything. Again, our premium DaVinci dryer vaporizer is $300 price point. That’s not an item for a C-store, but there is going to be a lot of volume transacted at C-stores. It’s really an opportunity to be a first mover and to give them a new slate of products to replace what they have historically benefited from that incremental spend on the tobacco side that’s slowing down these days and be able to accelerate them into a new category. We’re also super excited about Amazon and we’ve talked about that a lot. And Amazon in the U.S. is still pretty restrictive. We can’t sell our full catalog. There is a lot within our catalog, we can sell here in the U.S., and we’re expecting to launch our comprehensive Amazon strategy here very soon. We have been in the background building out all the data materials, ad campaigns, all the stuff that we need to do to launch. And in Europe, for example, they allow a much broader swap of our catalog. Virtually all of our products can be sold over there. So Amazon is great because we can leverage that globally again without putting significant infrastructure or resources. And again, these are channels that - what most people go online to buy stuff from Amazon. Why weren’t you buying your grinders and your papers from Amazon, because you didn’t think they carried it, right? You’re used to going to - happen to go to smoke shop and head shop. Well, as you see, these products are now more available on Amazon just like consumers have changed their behavior with virtually all other brick-and-mortar and they are now buying more online and buying more on Amazon, we expect the same to occur for our ancillary products as cannabis becomes more normalized and de-stigmatized. So we’re very focused on these kind of new – again, where the puck’s going channels but not to say we’re not going to continue to monetize our existing smoke shop and head shop channels, especially if we can do it in a more efficient way.

Thanks for those details. That’s helpful. And then real quick thinking about your business pace compared relative to the MSOs and broad look at what’s happened here, obviously slower 1Q, but we’re seeing seasonal pick up in March and April and many of these MSOs are looking for stronger second half growth here. How are you seeing the retail store pace now? Now that New Jersey is on board, as these new states are coming on board kind of what’s the order level from the MSOs or what are you hearing from your MSOs partners as kind of an outlook here into the second quarter already here and going forward?

Yes. I mean look, I think everybody is trying to scramble and get ahead of every opportunity. We know New Jersey was a big one. So we’re seeing obviously that show up in our – in the forecasting and demand planning that the MSOs are doing with us on their industrial goods, right? That’s obviously much more critical. If they don’t have jars, they don’t sell flower in New Jersey, right? If they don’t have vape pen cartridges, they don’t sell vape pen. Now they’d like to have fully stocked retail store with papers, lighters, grinders, all of that. But if they are out of one of those items or they don’t have the complete offering, it’s not the end of the world. Consumers are still walking in, consumers still buying cannabis. So it’s a little bit different on both sides of our business. So we’re seeing – we’re getting more visibility on our industrial side than we are necessarily on the consumer side. We are seeing a little bit of a pickup with that channel on the consumer side, but we want these to be more comprehensive agreements, the enterprise type sales. So we don’t have much that we can report on that other than anecdotally. For example, one new MSO, not new – an MSO that we hadn’t done much historically with on the consumer side but we have on the industrial side, they bought I think, $400,000 worth of grinders, right? So you can just kind of see the scale that an MSO that owns 100 doors or whatever can buy versus the small shops and head shops that maybe have a couple of storefronts and are buying grinders across multiple vendors. This is, again, why we’re investing so much in these channels. So again, just anecdotal stuff at this point, but we expect to be able to have more comprehensive and substantive data that we can report on a go-forward basis as this starts to heat up.

Makes sense, strategically focusing on that commercial or [indiscernible]. That’s it for me. I will jump back in queue, thanks.

Thanks, Scott. I appreciate it.

Thank you. Your next question is coming from Glenn Mattson of Ladenburg. Glenn, please ask you question.

Yes. Thanks for taking the question. Perhaps you touched on this and I didn’t catch it or whatever, but just thought I’d so sorry if it’s a repeat. But you talked about kind of January sales being hurt by the ERP implementation and stuff. And I just wanted to get a sense of – it’s not clear if that would be made up or not because like you said, sometimes you miss those sales if you missed your window or whatever. But can you just give us a general sense as like the back half of the quarter bounced back to more normal levels and then particularly like into April? Is that how you characterize the current environment?

Yes. Certainly, January is the worst month and a little bit of rebound in February and then March. April was a strong month for us just given 420. We are going through a lot of changes at Greenlane, so ERP was obviously a very big one that had a material impact, but there is other changes that are – make it hard for us at this very moment to kind of forecast, given that we are reducing SKUs, blowing out all the inventory. We have made some changes with personnel as you guys know. So, it’s hard for us. We would like to be able to give better visibility and guidance and we plan to, but part of that is making sure that we have a business model that is more predictable and we are leveraging contracts. We are leveraging larger customers that we can forecast better, and we are leveraging automated tools so we can transact more efficiently. So, we are going to – in terms of your question specifically on the revenue, some of that is gone, certainly some of that showed up in later months, March and then April. And ultimately some of it’s about the sell through. So, when this product sells through we are hoping to get bigger buys, but again very hard to forecast right now on a go forward basis.

Right. And then when you talk about profitability in the third quarter, on adjusted EBITDA basis, can you and I know you are not looking to give guidance I guess, but just the general sense of a ballpark range of what kind of revenue level you need to be at and what kind of gross margin level? And then I don’t know if you have thoughts yet on kind of like – there is a lot going on with the gross margin, so a lot of shifting between the integration of cushion and the – getting rid of the kind of lower margin stuff. So, just like a general sense of where you think gross margin will be when all of this plays out, maybe in 18 months or 24 months or something like that?

Yes. So, if you look at our obviously there was some one-time inventory things. If you look at our adjusted gross margin coming in at 25.3%, we called out the mix shift, and in Q1 specifically, it was more skewed toward our industrial goods, just given the fact that the consumer was impacted by the ERP migration, right. So, even – so with that, we were still over 25% on adjusted – on an adjusted basis – on a normalized basis. So, you can expect that to be sort of the floor that we are targeting. And really, we believe the margins should be in the high-20s. Our goal is really to get those to 30%, certainly by Q1 of next year. So, that’s going to be what we are working on over the course of this year as we have margin enhancement initiatives that involve how we structure our pricing, various pass-throughs and surcharges to offset some of the heavy freight costs. And then, of course, the broader mix shift to higher margin Greenlane owned brands. So, we are very confident there in terms of modeling for profitability. We know the one thing that we can’t control more so than anything else is our costs. And we have just simply had far too high of costs at this business. If you look at Q1 of 2021, for example, we had $16.5 million of SG&A and that’s more than almost double our gross profit. If you go into this year, we are at a similar ratio. I mean again, Q1 is when we did our rightsizing, when we took a lot of restructuring charges and severance charges. And so we have guided that we believe we can be down to $15 million in Q3 sort of that $14 million to $16 million range. And that would mean that we would either need to do $60 million in sales at a 25% gross margin or some number lower than $60 million of quarterly sales at a higher gross margin if we are able to get a few extra incremental margin points. So, you are right there, again $46.5 million this quarter, but we did $55 million in Q4 prior to the ERP and some of those disruptions. So, we are right there. Again, we have got work to do. We are very focused on building out certain channels that we believe are going to have the most long-term value. So, we want to balance short-term and long-term, but we really do want to get this business profitable ASAP. We believe we can deliver on positive adjusted EBITDA in the back half of this year consistently. So, that’s how we would get there essentially in terms of the numbers. And hopefully, we can drive revenue growth, although we are expecting revenue to be lighter just given the fact that we discontinued certain products. We still think we can get easily over that sort of $50 million threshold. If we can get up to $60 million that’s where you would only need a 25% gross margin to deliver on a breakeven quarter. And we will plan to grow the margins as well and potentially hit as low as possible on that SG&A range.

Great. Alright. That’s it for me. Thanks for the color.

Thanks. I appreciate it.

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

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

Thanks Andrew.

So, with some of the macroeconomic factors you touched on at the top of the call, just wanted to get your thoughts on some potential consumer headwinds you might be seeing specifically related to your consumer business. So, are you seeing a more challenged consumer this year related to your business? And do you see any particular risk specifically around sales from some of your more durable products like pipes and devices like Eyce or DaVinci versus something like a rolling paper with Eyce? Thank you.

Yes. Great question. Given all of the things that have happened internally, it’s hard for us to know the impact that consumer spending alone has had on Greenlane sales. One thing we can look at is our websites that are geared more direct-to-consumer. Those are certainly down, certainly significantly from the COVID stimulus days, right in 2020 and even into 2021. So, we could read into that a little bit. I think what’s probably interesting data to look at and I haven’t to be honest, digested it fully is, sales of our lower price point items, some of the items that are just going to be more consistent. They go into like a C-store, for example, and that would be VIBES, that would be Eyce. Those silicone products, especially the smaller hand pipes and spoon pipes, come at a very nice price point. I would imagine the volume there has been more stable versus the higher end stuff, right. So, the ultra-high end, we sell Volcano vaporizers from Storz & Bickel. We sell the PAX products, we sell the Grenco products, and which are a little bit of a lower price point. We also sell our own DaVinci dryer vaporizer, which is top of the market in terms of price and quality. So, I would imagine that where we are probably taking more of the front of this hit with the consumer discretionary spending being challenged in this current environment. But I regret to say I haven’t fully digested the data, and a bit of that is a little hard given all the other changes we have had at the company, but something we will certainly be looking into more as we progress and seeing how that impacts our business.

Yes. Fair enough. And just quick follow up to that, within your strategic measures on Slide 4, could you tell us which products or which brands specifically you are planning to raise pricing on? Is this more related to some consumer products or industrial side of the business? Any color around that would be helpful. Thank you.

Yes. No, it is around both sides of the business. When it comes to consumer brands we are working with still some partner brands such as PAX, Grenco, Storz & Bickel, as I mentioned. And we are going to continue to sell through some of the other third-party brands that we have historically carried because we still have inventory in stock. But the idea is once we sell out of that inventory, we won’t be re-buying a lot of those goods because we are going to be more selective about the partners we work with. We do have much stronger margins on our Greenlane brands, so we are less concerned about incremental price increases there, but we have worked with some of the third-party brands to offer some price increases, which we have. And then also just things like covering, shipping and stuff that we have done historically, we look for ways to offset that and add incremental margin. On the industrial side, we have worked with clients that we have master supply agreements with. We have been able to reach terms to increase some of those prices. In some instances, as a shipping surcharge, in some instances, this is the general material increase, so it varies. And then of course the stock products that we sell were obviously in more control. And so we are looking at a couple things, cash flow is key. We are charging more deposits than we have historically because cash is tied up longer, right. In this current environment it’s just taking longer to produce goods and get them shipped over. So, even though that doesn’t necessarily affect margin, it does help cash flow. And then we also have again, freight surcharges and tariff surcharges that we can play with. And we are monitoring everything. As we get cost savings we want to be mindful of that. And we don’t want to overcharge our customers especially on the industrial side. We always have to be very price competitive, but we also want to do what’s fair, right. And through a lot of the pandemic, we ate the brunt of the additional expense with freight and with tariff. And I think our partners that we work with especially at scale have understood that investment we have made and understand that hey, if it’s temporary, fine, we will bear the brunt and we will get back to normal. But this is kind of the new normal at this point, right. So, I think they are understanding and we have seen that show up in some of those negotiations.

Great. Thank you, Nick. Very helpful color. I will pass it on.

No problem. Thanks.

Thank you very much. Your next question is coming from Pulkit Sabharwal of Canaccord Genuity. Pulkit, please ask your question.

Hi. Good morning. Most of my questions have already been answered, but just a couple of clarifications on my end. So, you talked about the ERP implementation and the impact in Q1. Now that I understood that this is – the system is now up and fully running, are there any more components left to be implemented going forward?

Yes. Good question. So, the system was on-boarded in January and began transacting the system in mid-January. But it was very clunky, right. And so we have been able to make improvements throughout. We have been able to fix bugs. We have been able to make sure that the data is flowing properly. And throughout most of this time, our sales team was ordering – was entering orders into the back end of the system, essentially into the financial ops side of the system, which would be like entering orders into QuickBooks. So, it just like take – it’s fairly manual, right, it takes a little bit more time. So, I was saying, on average, our staff was taking 20 minutes to 30 minutes to enter an order into the system, which is not ideal, especially as you are dealing with a lot of small mom and pop type customers and some of the parts of our business with the smoke shops and head shops. So, what we were able to do throughout is launch our CRM tool, which – we have CRM where the customer data is, but it did not have a properly functioning order entry feature. So, building the order entry feature, getting that dialed in, getting that beta tested, that occurred throughout Q1 as well and into Q2. And we are pleased to have been able to launch that, which dramatically reduces the amount of time it takes a rep to enter an order, goes from 20 minutes to 30 minutes down to call it 5 minutes, right. And, that just got live here recently. So, you could see a big improvement with that change. And then the last piece which I will talk about is the self-serve portal. So, if we – we have been testing that internally. We are about to flip that externally any day now and allow our customers to put their own order in. And so that takes your time of order entry down again from five minutes, internally having one of our people do it to basically no time, right, zero minutes, because the time has been put on the customers to do their own order entry, right. So, you can kind of see how we are progressively getting better and more efficient with our system. So, to answer your question, the system has been live and we have been transacting, but these incremental improvements do make a very big deal. And there is work that’s been done, and there is still a little bit more work to do before we have this exactly where we want it to be.

Okay. That’s very helpful. And just in terms of the impact on Q2, so essentially, this is going to be the order backlog that you guys are going through as opposed to any more implementation associated things, right?

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

Okay. Perfect. And then, just one last clarification in terms of the SG&A reductions and the headcount reductions that you mentioned in the press release and talked about earlier. Are there any left to be implemented over the course of Q2 or the remainder of the year, or if that’s more or less it?

Sorry. You said any more ERP integrations?

No, I just meant the headcount reduction, sorry.

Oh, headcount reductions. Yes. Look, I think we have got to continue to monitor our situation, again, controlling what we can control. If the sales are there as we like them to be, then we are in a great position. If the sales remain a little softer than we would like to be, then we need to take a little bit more incremental cost reduction. Now, the good news is we are not going to have to do this in the form of layoffs. We have natural attrition, as does every company, especially in this environment, with the change in hiring and the remote working. I just saw – read an article yesterday, it’s called the – they call it now the Forever Resignation versus the Great Resignation. So, I think we have forever changed, right. And companies will have higher attrition rates than normal for the foreseeable future, maybe forever, as the job market is more available to employees because they can work from anywhere, right. And that means that for a company that needs to reduce costs, you simply just don’t backfill, right. So, we are going to be mindful. And if, sales don’t grow at the rate that we expect them to, then we are not going to be backfilling a lot of these positions and taking the incremental cost savings there. But in terms of the bulk of the heavy lifting, the large layoffs, anything like that, we did what we needed to do in Q1. As most of the analysts know on this call, we like to work very fast. We are even a bit disappointed that it took us so long from the merger to kind of align on the new business plan completely. And some of that’s due to the market continuing to change and the further deterioration of cannabis equities in 2022, which nobody was expecting, people are expecting a rebound. But we made all the adjustments as quick as we could and we did. We implemented our plan starting in March. The plan is well-underway and we don’t expect anything material to be added to that rightsizing cost reduction plan that we implemented.

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

No problem.

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

Okay. Thank you guys all for joining today, especially on the West Coast, I know it’s early, but this is, again, one more quarter where you see a big transformation with the Greenlane business. We do really expect the business to normalize from here on out. We are very confident in our guidance on SG&A and our ability to get the business profitable this year, which we think is paramount in this climate. And we are less focused on revenue for revenue sake, but really getting the right revenue into the right channels that strategically position us for the long-term. And doing it with the right product mix that can deliver on the right margin profile for where our business needs to be today. So, we appreciate you all being along for the journey and along for the ride. We look forward to giving you future updates and hope everybody has a great rest of your day-to-day and look forward to seeing you in a few months. Thank you.

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