Good day, ladies and gentlemen, and thank you for standing by. Welcome to today's conference call to discuss Greenlane Holdings' Third Quarter Fiscal 2019 Financial Results. [Operator Instructions] Hosting today's conference will be Liz Zale, Sard Verbinnen. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Ms. Zale. Please go ahead, sir..

Thank you, Sherry. Good afternoon and welcome to Greenlane third quarter 2019 call. As a reminder a press release detailing the financial result for the quarter is available on the investor relations section of the Greenlane website. This call is being webcast and a replay will be available on the company's website for approximately 30 days.

On the call today are Aaron LoCascio, Chief Executive Officer; and Ethan Rudin, Chief Financial Officer. Before we begin, I'd like to remind everyone that Greenlane's prepared remarks may contain forward-looking statements and management may make additional forward-looking statements in response to your questions.

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, including those identified in the Risk Factors included in Greenlane's IPO prospectus dated April 17, 2019 and in today's press release.

This call also contains time sensitive information that is accurate only as of the date of this live broadcast, November 08, 2019. Greenlane assumes no obligation to update any forward-looking statements that may be made in today's release or call.

During today's call management will discuss non-GAAP financial measures including adjusted net income and adjusted EBITDA.

Management believes these financial measures can facilitate a more complete analysis and greater transparency in the Greenlane's ongoing results of operations, particularly when comparing underlying operating results from period to period. Greenlane has included a reconciliation of these non-GAAP financial measures in today's press release.

Now I will turn the call over to, Aaron LoCascio..

Thanks, Liz, and good afternoon, everyone. I will start with a briefly review our third quarter sales highlights, operating environment and business development activities, and then turn the call over to Ethan to discuss our financial results in more detail. After Ethan's comments we will open up the call for your questions.

Let me start by noting that our core business remains strong and we continue to make progress on the three pillars of our strategy. One, building our house brands. Two, growing our supply and packaging business. And three, strengthening our direct to consumer operations.

We are confident that these will be key drivers of our growth as we think about 2020 and beyond. Before I talk more about these growth drivers and a progress there, I want to directly address certain industry headwinds that impacted our sales this quarter.

Overall, revenues were up 3% year-over-year to 44.9 million, but decreased from the second quarter.

The unforeseen crisis of acute liquidating related health conditions, coupled with the lack of clarity around regulatory actions negatively affect our sales of JUUL and other vaporization related product and cause some B2B customers to reduce their orders.

As a result of these and other factors which Ethan will provide more context on shortly JUUL sales decreased sequentially from Q2. As a leading distributor of vaporization hardware any e-cigarettes we are of course very concerned about recent reports of acute health issues related to vaping.

Studies and investigations into vaping related illness are ongoing and no clear conclusions have been reached to date. We're closely monitoring the situation for additional developments.

I believe it is important to reiterate that Greenlane is dedicated to consumer safety and we have taken numerous steps to protect the health and safety of end users to ensure the quality and integrity of our products. As some of you may have seen we recently share some additional thoughts about this issue on our website.

I also want to be clear that one, while our products have not been directly linked to acute health issues, we do believe the impact on our sales is correlated with the associated reporting and uncertain regulatory environment and two, not all our products were impacted by the broader macro issues.

Our open system product like a volcano hybrid and next-generation product by [indiscernible] do not fall under most current regulatory bands, given that they are loaded directly by consumers as opposed to closed system vaporizers or consumers presales cartridges.

For now, we expect the concerns about vaping related illness and impact on vaping related product sales to continue to pressure sales over the near term.

We also note that the regulatory environment with regard to some of these products continues to remain unclear, with ongoing discussions at both the federal and state levels and some federal activity expected in the near future. And I'm sure you saw the announcement by JUUL yesterday that they are no longer selling mint flavor.

We believe some consumers may switch from mint to flavors traditionally known to smokers. That said, we are making a purposeful effort to actively reduce our JUUL concentration by eliminating aspect of this business that do not deliver on our margin expectations.

We expect JUUL will remain part of our portfolio but we're going to be deliberate about allocating our sales resources to focus on higher margin opportunities.

Ethan will talk more specifically about the impact of these developments on the business, but as we continue to focus on the three pillars that I mentioned above, I'm now more confident than ever that this strategy best positions us for long-term growth and success.

With all this in mind and turning back to our core business, which comprises a product outside of JUUL, impact during the third quarter, we make significant progress on driving our long-term growth strategy and diversification of our business model.

We invested in a variety of ongoing initiatives within our three pillars and we are well funded to continue to execute on our pipeline of growth opportunities. The first pillar of our growth is a focus on expanding and diversifying our portfolio of own brands. Overall sales at house brands are growing double digits year-over-year.

As an example for our vibs launch, sales have more than doubled over sequential quarters and that trend is expected to continue. Our aim is to continue to grow our house of brands and launch new innovative ones by leveraging our deep understanding of the market and our technical expertise in design and product development.

As many of you know we were pioneers in the industry and we can continue to be trendsetters and innovators as the market evolves.

Particularly, we see opportunities in the CBD space where we nearly doubled our sales between Q2 and Q3 and we are looking to capitalize on the $22 billion US CBD market opportunity created by the 2018 farm Bill and further develop a portfolio of CBD and health products.

This quarter, we have announced a great new distribution and partnership agreements with Bouquet, Cookies, Green Lotus, Sherbinskis and Shaboink. We also want to continue to partner with specialized cannabis production companies to develop our own ancillary products to benefit from the potential future decriminalization of cannabis in more US states.

With regard to supply and packaging our second growth pillar, we continue to develop our manufacturing and supply chain excellence and assigned several new distribution agreements to expand the strength of our platform, we launched an exclusive US and Canadian distribution partnership with Amorra [ph], the first of it's kind flower cartridge vaporizer offering a unique vaping experience of whole flower cannabis using next-generation heat-pump-burn [ph] and technology.

We have signed an agreement in the quarter for a sourcing office in Hong Kong which will bolster our supply chain and allow us to be geographically closer to contract manufacturers. In order to best control costs, quality and timeliness of deliveries to our network. We continue to focus on our flagship premium packaging brand following year.

Sales for the quarter has increased by 25% from the prior year period. The third pillar of our growth is direct to consumer, as we continue to leverage our high standards, retail stores and e-commerce platform vaporer.com to reach consumers.

We've entered into a lease agreement for higher standards third retail location in Malibu California and are expecting to sign a lease for one additional higher standards location by the end of the year, which will get a support from in stores in the US with more growth to come.

Vaporer.com, which we own and operate remains one of the most visited North American direct tumor e-commerce websites in the vaporization product and consumption accessories industry.

Throughout the quarter, we also continue to focus our international expansion of areas of our core business, we made significant strides with our acquisition of conscious wholesale, a leading European wholesaler and retailer of consumption, accessories, vaporizers and other high-quality products.

We view this as a launching pad to pursue more opportunities in Europe which we consider a high potential market. According to industry estimates Europe is forecast to have the world's largest legal and medical cannabis market by 2023.

The acquisition expands our focus geographically across 20 European markets through a multi-channel sales platform with approximately 700 points of retail distribution. This also gives us new ways to grow our higher margin house of brands portfolio.

We also have other opportunities in Europe, we now have access to the UK distribution facility and our partnership with NOUS that will bring higher standards branded and curated shop and shop [indiscernible]. Each of these individually and together create more avenues for Greenland to participate in the improving global landscape for cannabis.

We are keeping a close eye on Latin America for near-term opportunities. As discussed looking ahead to Q4 while we continue to see the same market dynamics at play, we're predominantly focused on driving growth in our higher margin business areas, which we expect to contribute to margin expansion in the long term.

While we of course continue to monitor the vaping situation and regulatory environment, I'm incredibly excited about our path forward and firmly believe that our continued focus on the three pillars to drive our core business best positions us for long-term sustainable growth.

With that, I'll now turn it over to Ethan to run through our third quarter financial results..

Thanks, Aaron and hello, everyone. Our Q3 2019 revenues increased year-over-year at 3% to $44.9 million. If we include the revenue of conscious wholesale on a pro forma basis, net sales would have been $47.3 million for the third quarter of 2019.

Positive drivers of revenue growth for the quarter, with a continued growth in popularity and availability of our top six products from our top product lines, as well as continued innovation from these brands, which collectively resulted in a 6.3% increase in net sales year-over-year.

We also had strong performance in Canada, where the expansion of the Canadian cannabis market drove a 100% year-over-year increase in sales for the quarter to $6.4 million.

Our total sales growth was impacted by a $2 million increase -- decrease, excuse me, in sales related to the vaporizers and vaporizer accessory products within the top six at brands. briefly As Aaron briefly touched on, in the third quarter, we were impacted by the industry headwinds related to consumer concerns around vaping-related illnesses.

As we look ahead to Q4, we anticipate a meaningfully negative impact on revenue due to the vaping regulatory environment or deliberate decision to proactively move away from low margin deals and limit discounts on JUUL and other products moving forward, and the discontinuation of sales of mint in the U. S. announced by JUUL yesterday.

In light of these impacts, we anticipate up to a 50% decline in our JUUL sales from Q3 2019. We expect these dynamics and deliberate business decisions to contribute to margin expansion going forward.

Gross profit for the third quarter of 2019 with $6.4 million resulting in a gross margin of 14.3%, including the contribution from conscious wholesale on a pro forma basis, gross profit would have been $7.6 million or 16.1% of revenue for the third quarter of 2019.

As we've noted, gross margin fluctuates based on a variety of factors, including the mix of products sold and volume purchase rebates. Our gross margin in the quarter was largely driven by JUUL sales, which comprised 45.4% of net sales.

Due to the nature and timing of JUUL purchase rebates, we experienced a disproportionately negative effect on our Q3 margin profile. As we look ahead to the key drivers of growth in our business, we're going to be focused on the higher margin parts of the business that will better position us for the long term.

The key to driving this gross margin profile is continued investment in growing our House brands, the supply and packaging business, and are direct to consumer businesses. On a standalone basis, these combined businesses are accretive to our current margin mix, and we expect their growth to provide an important tailwind for margin expansion.

Salaries, benefits, and payroll tax expenses for the third quarter increased $2.7 million year-over-year. As a percent of net sales, sales benefits, payroll taxes increased to 14.6% from 8.9% in the prior year quarter.

This increase is primarily due to the incremental personnel expenses of $1.2 million as we added 45 new employees to further expand our domestic sales and marketing efforts. We also recorded approximately $1.5 million in equity-based compensation expense.

General and administrative expenses relatively stable, up $0.5 million to $4.8 million or 10.6% of net sales, compared to 9.7% of revenues in the prior year.

These included an incremental $200,000 in marketing expenses and $100,000 increase each in insurance expenses, bank merchant fees, and computer hardware and software expenses Net loss for the third quarter 2019 was $9 million.

This was negatively impacted by $1.5 million of equity-based compensation, as previously mentioned, and $5.4 million attributable to the establishment of evaluation allowance against the deferred tax asset during the period. The overall loss was offset by a gain of $1.5 million recognized on an equity investment.

Pro forma net loss, including conscious wholesale would have been $8.4 million. Adjusted net loss for the third quarter was $7.5 million, compared to the adjusted net income of $20,000 in the third quarter of 2018. Adjusted EBITDA was a loss of $3.4 million in the third quarter, compared to a gain of approximately $900,000 for the same period in 2018.

We ended the quarter with $52.5 million in cash and approximately $100 million of working capital. Aaron previously referenced our acquisition efforts in his comments, and I want to build on that and reiterate on what I said last quarter.

While M&A continues to be a focus for us, and we rigorously consider all sorts of opportunities, including both on and transformational acquisition, we will always remain disciplined.

Just as a reminder, for our long term financial targets, we expect approximately 25% annual net revenue growth, average gross margins of 20% plus, and adjusted EBITDA margins of 10% plus. Before I turn the call over for Q&A, I want to touch upon the share repurchase authorization we announced.

Our Board has provided the authorization for the company to repurchase up to $5 million worth of shares. We're focused on striking the right balance between our capital allocation priorities of delivering value to shareholders in the near term versus investing in growth, strategic acquisitions to create long term value.

With that, I'll turn the call back to the operator and open it up for Q&A..

Thank you. [Operator Instructions] Our first question is from Vivien Azer with Cowen and Company, please proceed..

Hi, good morning.

So even I understand your commentary around gross margin volatility, but if I reflect back on some of our understanding of your gross margin profile last quarter, the way we were thinking about it was, you know, JUUL's like a 10% margin, the rest of the business is a 24%, and then we can, you know, use your revenue mix and get to the 17.3% that you reported last quarter.

That map doesn't seem to hold this quarter. Is there any incremental detail you can offer to help us think about modeling gross margin based on the evolution of your revenue mix, in particular, given your commentary around de-prioritizing JUUL a little bit? Thank you..

Yes. Thanks for the question, Vivien. I would say that obviously the quarter would intimate that there's been some margin degradation in the JUUL business, and I would say that over the quarter, the margin profile has been in the mid to high single digits..

Additionally, I'll also add to that, this is Aaron, that the nature and timing of the JUUL remix contributed in excess of 200 basis points to the margin decline..

Okay, that's great. Thank you for that. So it's encouraging that you guys, you know, are going to focus on higher margin opportunities, in reiterating your target for a 20% plus gross margin. How should we think about the timing of attaining that kind of targeted margin? Thank you..

Well, you know, I would say that in the last quarter, we had reiterated that when you remove JUUL from the margin profile blended of our entire gross margin, you know, you actually usurped those long term targets.

I would say that our continued focus, you know, on reducing that JUUL concentration and particularly self-selecting not to do the low margin part of the business should have us back there, hopefully in the coming quarters..

We've got our own estimate of what we think JUUL did in the quarter, but can you disclose what was JUUL versus non-JUUL revenue? Thanks..

So JUUL revenue for the quarter in total was $20.4 million..

Perfect. Thanks very much..

Our next question is from Glenn Mattson with Ladenburg Thalmann. Please proceed..

Hi, thanks for taking the call.

Curious a little bit on the conscious wholesale acquisition, you know, obviously you're expanding into Europe, you've talked about those plans in the past, but, is part of that -- is part of the idea there to distribute JUUL products and is there a large percentage of their business is of vaping and just give us kind of maybe some sense the background as to whether or not this news has traveled across the pond, you know, in this kind of negative vaping backdrop? Thanks..

So, a couple of things. Thanks for the question. Appreciate it. So we -- we have seen some of the concerns around vaping cross borders, in particular, in Canada, where we have a long term business. In Europe, where we're relatively new, we recently made this acquisition.

The conscious wholesale acquisition does not currently have any nicotine products within its portfolio. It's something that we will continue to evaluate as we go forward. Otherwise, their business is relatively analogous to our business, in terms of the products they sell.

They do sell a lot of open system vaporizers, which I will also comment that in light of or despite the fact of around the vaping concerns in the industry, the effect to the open system vaporization products has been limited, and we anticipate that trend to continue.

But really, this acquisition is a launching pad for us to expand our portfolio, namely of our high market house brands into more than 20 new markets in Europe..

Okay, great. I'll squeeze one more in on the retail store roll out. Can you give us outlook for what you're thinking about for next year and just the thought process as to how quickly you -- you think you'll be moving as far as opening new stores and how hard it is to find locations and just a background around that..

Sure, so New York and, you know, we have our New York location in Chelsea Market, which continues to perform very well. Ponce City, it's early days, we're excited for the holiday season, just opened up or about to open up, rather, I should say. The Malibu location, we're nearing a fourth location that we're not quite ready to disclose.

As we look towards next year, we aren't specifying the exact number of locations we're targeting. However, we have previously cited that, on average, typically around three stores per year. But we want to be very thoughtful around each individual location.

We want to study and learn from each individual location, the differences between how Chelsea market performs against Ponce City against Malibu and the various demographics.

But we have a great partner on the real estate front, Jamestown, which has a large number of real estate assets across the country, and we're evaluating a number of other potential locations for next year launches..

Great. Thanks Aaron, and that's it from me.

Our next question is from Scott Fortune with ROTH Capital Partners, please proceed..

Good morning. Thanks, guys.

Could you provide a little more color on Canada and kind of JUUL sales that's going on up there, and then the rollout kind from a timing standpoint, and what are you seeing the rollout in Canada looks like from a timing standpoint, here?.

Yes, thanks for the question. So, in terms of JUUL concentration in Canada, the split is about 80-20, 20% Canada, 80% US. Canada is still very early days, and as we mentioned in our prepared comments that, you know, we've doubled the business there. It's gone over $6 million from $3 million.

And what I would say is that we're very, very encouraged at the introduction of our house brands up there. Obviously, we're looking to increase our margin profile, and fortunately, the margin profile of JUUL sales in Canada is better than what we're doing in the US as it isn't this pervasive yet..

Okay, great.

And are you seeing any, kind of, delays or push back for the Cannabis 2.0 rollout or alternate timing expected probably, first quarter next year to release that, and receive some meaningful revenues from that side of things?.

Yes, as I said, you know that it's still such early days, and we have plenty of wood to chop that we don't see it slowing us down, although we do see delays in the broader market..

Okay.

And then real quick on the operation side, kind of, you know, with JUUL obviously not evolved truly there, but can you speak to me on the right sizing of kind of SG&A going forward and potential timing of getting adjusted to the EBITDA are positive from that standpoint?.

We're always in a state of reassessing our talent, thinking through, are we set up for growth for the future, and so, you know, all salaries have increased, a lot of it is figuring out, you know where to strategically place sales.

Thinking about how to do more specified sales targeting, so you know, at the end of the day, we will be rationalizing a bit of the workforce, but it's not at this stage anything that we're prepared to talk about in any sort of detail..

Okay, thanks for the color. I'll jump in the queue..

[Operator Instructions] Our next question is from Mike Grondahl with Northland Capital Markets. Please proceed..

Yes, guys, What one or two product categories are you kind of most confident that can kind of drive revenues incrementally in margin? How should we think about that going forward?.

Rather than -- rather than a product category, more, broadly speaking, we are and remain focused on our House brands. We've launched a number of various House brands. They typically have a much higher margin profile associated with them, much higher than our general long term margin target.

So as that business continues to grow, we expect that to have a disproportionately meaningful effect on our margin profile. In this quarter, we grew up to 7.7% of our total revenue and we expect to see double digits in the very near term..

Okay, is there a second area we should think about or watch or is that the main one?.

Well, there's really three areas of the business, doesn't relate to products, it's the House brands predominantly. Then we have our -- our business-to-consumer operations, which includes both our e-commerce properties, as well as our brick and mortar stores, Higher Standards.

And then the third pillar that we focus on that has a higher margin profile associated with it is our supply and packaging business, which is predominantly made up of our patented child resistant packaging, Pollen Gear, by virtue of our acquisition earlier -- earlier this year and some of our closed cartridge vapor systems.

Those three areas of our business all have much higher margin profiles associated with them, and frankly, even our B2B CPG category, which is selling the consumer packaged goods to our independent smoke shops and vape shops across the country, absent JUUL have a margin profile that's much more substantial than otherwise blended with JUUL..

How were e-commerce sales in the quarter?.

There was no material change to our performance on e-commerce sequentially, so there's nothing specific to report there, but it is a key focus area for us going forward that we will continue to make investment, essentially, it's a work in progress as we continue to invest in that segment of our business..

Okay, great. Thank you..

We have reached the end of the question-and-answer session. I would like to turn the conference back over to Aaron for closing remarks..

Thank you very much. I just wanted to say thank you for everyone's time today, and I look forward to seeing many of you in Boston in the coming days..

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation..