Good day, ladies and gentlemen, and thank you for standing by. Welcome to today's Conference Call to discuss Greenlane Holdings' Fourth Quarter and Full Fiscal Year 2019 Financial Results. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up. Hosting today's conference will be Liz Zale with Sard Verbinnen. As a reminder, today's conference call is being recorded. And now I would like to turn the conference call over to Ms. Zale. Please go ahead, ma'am..

Thank you, Michelle. Good morning, everyone, and welcome to Greenlane’s fourth quarter and full year 2019 call. As a reminder, a press release detailing the financial results for the quarter and full year was distributed this morning and 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 through Monday April 6th. 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 and other factors discussed in today's press release. This call also contains time sensitive information that is accurate only as of the date of this live broadcast, March 30, 2020.

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 into 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 measures in today's press release.

And now I'll turn the call over to Aaron LoCascio..

Thanks, Liz, and good morning, everyone. We greatly appreciate your time and interest in Greenlane, especially as all of us navigate these unprecedented times.

During this call, I'll review our fourth quarter and full year sales highlights, operating environment and business development activities before turning the call over to Ethan to discuss our financial results in more detail. After Ethan’s comments, we will open the call for your questions.

Before we begin the discussion of our results, I want to take a moment to acknowledge the COVID-19 pandemic. Like many, we are closely monitoring the situation not only for the potential impact to our business, but importantly, how it may affect our employees, retail partners and consumers. First and foremost is the safety of all our stakeholders.

We are doing our best to ensure that everyone with Greenlane feels safe and remains healthy. Across our six global offices, the majority of our employees are now working remotely. We have also temporarily closed our retail outlets, including our three U.S.

Higher Standards locations, and our storefront in Amsterdam to minimize risk to our employees and our customers. Our distribution centers remain open as many governments have deemed cannabis businesses as essential.

We are following all guidelines from the CDC and local officials and taking measures to ensure the safety and comfort of those team members, including cleaning regularly throughout the day, using social distancing, and encouraging anyone feeling sick to stay home.

We are acutely monitoring our business for impacts caused by the outbreak and the situation remains very fluid.

As social distancing and shelter-in-place directives have become increasingly widespread across North America and Europe, we have experienced and continue to anticipate some negative pressure on our B2B sales as some of our retail partners such as smoke shops have temporarily closed to minimize COVID-19 risk to their stakeholders.

At the same time, we expect increases in our e-commerce business as consumers redirect their shopping online. Overall, we expect that we'll see some adverse impact to our business, although the duration, the impact remains difficult to assess at this time. Moving on to Q4 and fiscal year results, 2019 was a historic year for us.

We are proud of the progress we made in our first year as a public company, in particular, our ability to weather turbulent industry headwinds, both the changing regulatory environment and concerns regarding vaping.

But even more than navigating the rough waters of the cannabis and vaping industry, I am proud of the strategic business improvements we are undertaking to put Greenlane in the strongest position for the future. For example, we have proactively prioritized higher margin sales in the form of our house brands and products.

We've concentrated on identifying cost cutting opportunities and putting in place a thoughtful plan to leverage our scale to drive sustained long-term growth and profitability.

As a result of starting to execute on this priority, we saw a material improvement in our gross margin profile with gross margin up by 396 basis points from the third quarter and gross profit up by $400,000 or 6% over the same period despite a decrease in our fourth quarter revenue, which was down 17% to $37.2 million sequentially.

Further, we have successfully decreased our JUUL percentage of revenue from 45.4% of revenues in the third quarter to 15.9% in the fourth quarter. And although JUUL revenue decreased by $14.3 million, total revenue experienced less of a decline, down by only $7.7 million sequentially.

This represents substantial growth of $6.6 million in other key areas of our business. As we conducted this mix shift to higher margin products, we did so in a consumer centric manner. Notably in the third quarter, JUUL-only orders represented 13% of sales orders, but by the fourth quarter, these decreased to only 7% of sales orders.

Instead, 23% of sales orders in the fourth quarter included products from our house brands, up from 18% over sequential quarters. We plan to continue our firm strategy of being discerning around the JUUL sales we make, and we expect our JUUL percentage of revenue to remain consistent with that of Q4.

We also continue to expand and diversify our portfolio of owned brands by leveraging our deep understanding of the market and our technical expertise in design and product development. We expect own brands to become an increasingly larger part of our business and meaningfully contribute to revenue moving forward.

Overall, sales of house brands group represent 12% of fourth quarter revenues, up from 8% in the prior quarter. As an example, since our VIBES launch, sales have roughly doubled over sequential quarter, now with -- present at over 1,500 B2B customers and growing.

We continue to expand our direct-to-consumer business, leveraging our higher standards retail stores and e-commerce platform Vapor.com to reach consumers. Vapor.com experienced sustained growth over the sequential quarters, both in terms of daily store transaction and average basket size, which increased 30% and 7% respectively.

With a focus on aggressively and strategically cutting costs to keep the company on track to returning to positive cash flow, we set forth a plan to streamline our operations and focus resources on the most strategic opportunities and investments.

These decisions which we continued to execute on in the first quarter included eliminating 31 positions in our corporate offices. Additionally, we are taking steps to optimize our distribution network in the coming months, transitioning to a more centralized model with fewer, larger, highly automated facilities.

We plan to close four out of five total distribution facilities in the U.S. and add one new streamlined and centrally located facility, which will help the company reduce costs going forward.

This consolidation will require fewer distribution center employees while also driving its business improvement in multiple areas, including inventory management, sales operations, and customer experience.

During the time of macro level uncertainty, we do not take lightly the security of our strong cash position of $47.8 million as of December 31, 2019. We're taking strong measures to preserve this cash and use it responsibly to reinforce our growth during this challenging period for our economy.

We are confident that by successfully executing these measures, our strong cash position will be more than adequate to successfully take the company through our transformation process and lead us to being cash flow positive. Prior to the COVID-19 pandemic, we had anticipated becoming cash flow positive by the fourth quarter of 2020.

While we are continuing to work towards this goal, we expect the timing may shift depending on how long the current environment remains. I want to take a moment to review some other key highlights for the fourth quarter and full year. Revenue for the year was up 3.4% year-on-year, even in a year filled with unprecedented headwinds for the industry.

The crisis of acute liquid vaping related health conditions and related regulatory uncertainty continued to pressure fourth quarter sales. We believe that this quarter represents the trough in terms of impacts to our business from regulatory and health concerns around vaping.

In addition, we are confident that the changing mix in our business will help mitigate potential regulatory impacts in future quarters. On the international front, we completed the acquisition of Conscious Wholesale, establishing our platform to sales in Europe with an emphasis on our house brands portfolio.

We are since successfully integrating the business and we expect increasing momentum as we advance through 2020. In addition to our progress in Europe, our presence in Canada prior to their cannabis legalization drove strong sales, increasing 44% year-over-year to $22.8 million.

We continue to believe that being early in territories that legalize cannabis consumption for adults will result in sales growth beyond current projections. I'm proud of our work and results in a tough environment in 2019 and I'm incredibly excited by our path forward for long-term sustainable growth in 2020 and beyond.

With that, now, I'll turn the call over to Ethan to run through our fourth quarter and full year 2019 financial results. .

Thanks, Aaron, and hello, everyone. I want to add to Aaron’s appreciation for everybody joining during these volatile times, and I sincerely hope everyone is staying safe and healthy. Our Q4 '19 revenues decreased 28% year-over-year to $37.2 million.

This decrease was primarily driven by significant declines in sales related to our two largest brands JUUL and PAX.

This decrease was partially offset by increases in sales related to some of the company's other brands, primarily Storz & Bickel and other product launches, which in the aggregate resulted in net sales of approximately $2 million for the fourth quarter.

As Aaron mentioned, we delivered on our strategy to reduce JUUL concentration and focus on higher margin products resulting in a sequential margin improvement of 396 basis points from the third quarter.

While these changes represent a slowdown in our near-term revenue growth, we believe this is a very positive sign for our business as we move forward into 2020 and beyond. Gross profit for the fourth quarter of 2019 was $6.8 million, resulting in a gross margin of 18.3%.

During the fourth quarter of 2019, we implemented a gross margin floor on JUUL products, which lessened the impact on our gross profit. Salary, benefits, and payroll tax expenses for the fourth quarter decreased by $900,000 to $7.8 million compared to $8.7 million for the same period in 2018.

This decrease is largely due to the $4.1 million of equity-based compensation expense which we recognized in the fourth quarter of 2018 compared to the equity-based compensation of $1.7 million for the fourth quarter of '19.

General and administrative expenses increased by $2.4 million on a year-on-year basis to $8 million, primarily due to additional costs incurred in connection with our operations as a public company.

Net loss for the fourth quarter of 2019 was $9.4 million compared to $8.3 million for the prior year period, impacted primarily by higher cost of sales, investments in people and equipment, higher depreciation and amortization expenses.

Adjusted net loss for the fourth quarter of 2019 was $7.7 million compared to adjusted net loss of $4 million for the fourth quarter of 2018. Adjusted EBITDA was a loss of $7.3 million for the fourth quarter of 2019 compared to a loss of $700,000 for the same period of 2018. Now, I would like to share a few highlights of our full year 2019 results.

For the full fiscal year 2019, the company reported net sales of $185 million, an increase of 3.4% compared to $179 million in fiscal year 2018. Net sales in the United States decreased by 2.3% to $155 million, primarily attributed to industry headwinds and consumer concerns around vaping related health conditions.

Year-over-year, this made JUUL sales decline by 7%, while other vaping related products declined 13%. This was offset by a 24% increase in our core business and a revenue increase of 68% from our own brands. Gross profit was $31.4 million or 17% of net sales compared to $35.7 million or 20% of net sales for the prior year.

The decline in gross profit as a percentage of net sales on a year-over-year basis primary reflects fluctuations in factors including sales mix, purchasing efficiencies and average markup over the cost of products. Salaries, benefits and payroll tax expenses increased to $29.5 million or 15.9% of net sales.

This increase was primarily due to incremental personnel expenses of $6.6 million, and incremental equity-based compensation of $3.7 million as compared to 2018. General and administrative expenses increased $6 million to $23.6 million or 13% of net sales compared to 10% of revenues in the prior year.

These included increases in marketing expenses, subcontracted services, accounting expenses and professional fees related to our transition to becoming a public company.

Net loss for the year was $39 million compared to $5.9 million for 2018, impacted by the higher cost of sales, investments in people and equipment, higher depreciation and amortization expense, and the recognition of a full valuation allowance against our deferred tax asset offset by the reversal of the Tax Receivable Agreement liability.

Adjusted net loss for the year was $18.3 million compared to adjusted net loss of $800,000 in fiscal year 2018. Adjusted EBITDA was a loss of $13.1 million for the full year, compared to income of $4.1 million in the fiscal year 2018.

As a reminder, we ended the quarter with $47.8 million in cash and long-term liabilities of $12.7 million, compared to $7.3 million and $48.6 million respectively at December 31, 2018.

To provide some direction on how our performance has started for the year, in Q1 2020, we expect to achieve between $32 million and $33 million of revenue and gross margins in excess of 22%. With that, I'll turn the call back to the operator to open it up for Q&A..

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Vivien Azer with Cowen & Company. Please proceed with your question..

So it sounds like you guys are doing all the right things as it relates to COVID-19, in particular, shuttering of your stores. I was hoping if you could just contextualize like what percentage of sales of brick and mortar outlets represent for 2019 for the vapors? Thanks..

Hey, Vivien. So overall, I think the best way to give you some context here is that when we look towards our business-to-consumer segment, which comprises both our e-commerce stores, namely Vapor.com and our brick and mortar stores, they were anticipated to be as low-double-digit percentage of sales.

That being said, obviously, the revenue for brick and mortar now is effectively zero as we've shuttered those stores. But the increase in the e-commerce business has entirely offset the decrease in sales in the brick and mortar business. So overall, we anticipate our business-to-consumer segments to remain stable. .

Just thinking about the supply chain, have you guys experiencing disruption in particular for products that are being sourced from China and how are you going to deal that?.

So ahead of Chinese New Year, we actually went through a thoughtful exercise to make sure we had adequate inventory levels to carry us through the Chinese New Year prior to the impact of COVID-19. That inventory level was sufficient to sustain us through not just Chinese New Year, but sometime thereafter.

Our particular suppliers -- our international suppliers were actually seeing and have seen that as of a few weeks ago, they've returned to 75% to 100% capacity. So we do not anticipate any related impacts of COVID-19 on our international supply chain. That being said, Ethan did provide some flash numbers for Q1.

And some of that number was, in fact, impacted by supply chain issues, unrelated to COVID-19 from two of our largest suppliers..

I’ll ask one more and then hop back in the queue.

But in terms of your target to consolidate your distribution network, I mean is that even possible right now? Or is that kind of an aspirational plan when we get to kind of the all clear post COVID-19?.

No, it's absolutely possible even in this challenging environment, and we've been undertaking preparation for that for quite some time, and we anticipate that transition to take place in the second quarter..

Our next question comes from the lines of Derek Dley with Canaccord Genuity. Please proceed with your question..

Just in terms of your gross margin comments for both this quarter and for Q1.

So if exclude JUUL, which I'm assuming is still in that sort of low double-digit gross margin range, were you guys well above that 20% target of yours…?.

Yes. 100%. In fact, we anticipate this quarter coming in at north of 22%. And that's just based on a reduction of our JUUL concentration. So arguably, if we were to take it out of the portfolio entirely, our gross margin looks more like 25%, 26% range. And we've reported that in prior quarters and we view that as consistent.

Our margin on other goods away from JUUL are actually holding quite nicely and improving in some parts..

Just in terms of the acquisition in Europe of Conscious Wholesale, have you been ordered to move any of your house brands through that distribution network at this point or is that still to come?.

We've actually started to move some of our brands overseas, predominantly into the Netherlands where Conscious Wholesales is headquartered. We obviously had a lot of plans for other countries in Europe staying around Spannabis, which was supposed to be going on and was cancelled. So we're actually seeing traction picking up.

But given what's happening in the market today, we're being cautiously optimistic about what we do in Europe. .

Okay.

And then in terms of your commentary Ethan on being cash flow positive, likely a little bit later than the Q4 goal of 2020, can you just talk about some of your -- I'm assuming part of that is going to come from cost reductions, can you talk about some of your SG&A and cost reduction plans for 2020?.

It's a combination of things take us there. So, including a reduction in headcount, some of which we described in the call. We've also furloughed a number of employees amidst the COVID-19 pandemic, the DC consolidation impact, 50 FTEs, which does provide a material savings impact. But then beyond that, there are other components that we're looking at.

There is a consolidation of -- we're going through a very thoughtful merchandising and inventory analysis to make sure that we are focusing again on our highest margin products and eliminating a lot of SKUs that do not meaningfully contribute to our business, to focus on those higher margin products.

And then also we've been conducting just a merchandising pricing strategy, a tiered pricing strategies that will continue to improve the margin profile. So when taken in the aggregate, it's the combination of those factors that will take us to profitability in Q4 of 2020.

Again, in light of the COVID-19 pandemic, there's a level of uncertainty that's been added to the equation in terms of the timeliness of that -- for the timing of that but we remain very focused on returning to profitability as a core goal of this organization..

Thank you. Our next question comes from the line of Scott Fortune with ROTH Capital Partners. Please proceed with your questions. .

Can we focus on Pollen Gear kind of supply and packaging, can you call out certain base or in that growth, are we seeing larger MSOs or larger clients coming on board? And what's your take on kind of California and the smaller client markets and their liability from that standpoint?.

Yes, we've been very focused in our supply and packaging segment, which again largely consists of the child-resistant packaging. We have been focused predominantly on the larger customers for our packaging and for the closed cartridge vape systems. The smaller customers, there remains a strong opportunity with our CPG products.

But we are seeing -- still seeing strong demand from our large cultivators, producers and extractors, and anticipate -- we actually anticipate continued growth in that segment, even amidst the COVID-19 impact, as a lot of those businesses have been deemed essential by various governments..

And then a quick follow up on the hemp side of the business, can you call that out at all, what’s the progress there as you were looking to kind of offset the JUUL sales on that side? So how we look at the hemp side of the business looking out into 2020?.

We've invested a lot of time and effort in selecting the best brands in the hemp-based CBD area. So we continue to remain cautiously optimistic. That said, we haven't seen the sales velocity pick up the way we would like to. So again, it's a matter of just being more discerning around high margin products and SKU mixes within brands that work.

And so, again, one of those things we're not calling out independently, but something we continue to work on and as I say cautiously optimistic on hemp-based CBD. .

And very last question, congrats on the VIBES business, rolling strong, doubling. What are the trends there, are you seeing replacing competitors? Or you're adding -- you’re in over 1,500 doors.

Kind of step us through the continuing trends as you see the VIBES business moving through 2020?.

Yes. So we're incredibly excited by the growth that we're seeing in VIBES. Again, doubling over sequential quarters and that trend is continuing into Q1, and it's going to the -- making up a meaningful portion of our revenue going forward as we are currently projecting. In terms of market share, we definitely see it gaining market share.

Although the pie is much, much larger, there's a lot more room to grow there. It's very, very early innings which is one of the reasons why it makes us so excited by this particular opportunity. .

Our next question comes from the lines of Glenn Mattson, who is a Private Investor. Please proceed with your question..

Glenn Mattson from Ladenburg Thalmann. Thanks for taking the question. Yes, so I guess, the world is changing rapidly. You’re seeing a pickup in e-commerce, make up for the lack in retail stores. I guess I'm wondering about kind of the product mix.

Are you seeing people begin to get concerned about their income as baskets -- projecting maybe basket size kind of declines over time? There's been a lot of publicity about pickup in cannabis sales during this crisis.

But wonder how sustainable that is and [things], maybe just color on that please?.

So, a couple of things. Thanks for the question. Again, speaking in a little bit more detail about our individual segments, I described how our business-to-consumer segment overall remained stable, because the increase in e-commerce sale, which is offsetting the decrease in the brick and mortar sales.

Again, our supply and packaging sales, which is through our licensed producers, cultivators and extractors, the large scale cannabis companies remains very strong and stable and growing. I've been at the helm of this company for almost 15 years. I've also taken the company through the 2008 financial crisis.

So I don't anticipate that consumer purchasing patterns as it relates to cannabis will change through any increases in the unemployment, just from my experience historically. That being said, we also have few other segments I want to quickly touch on.

We have what we call our channel and drop ship, which is our online marketplaces business, which again is also very stable and strong. The one that we do see -- are starting to see some impacts on is our business-to-business consumer packaged goods segment.

This is the business where we account for all the sales of the JUUL, and PAX, Storz & Bickel as an example, Grenco Science, to our smoke shop customers. That's being impacted by the actual shelter-in-place orders taking place around the company in so much.

As the country is in shelter-in-place orders, we see a fairly direct correlation to our revenue declines in those particular areas. And some of that’s actually being offset by revenue increases in the states that are not under mandatory shelter-in-place orders.

But overall, we do expect that, that to have some amount of impact as we see this proliferation and prolonged shelter-in-place orders and the B2B business is about 60% of our overall -- our total overall sales..

And then perhaps one more -- and I guess the world has changed a lot just in the last couple of months.

So as your capital allocation strategy changes at all, as this is unfolded, do you have acquisition targets for 2020? And if so, what's to come out of that and ….?.

Thanks for the question, Glenn. Just speaking on M&A for three seconds, obviously with our stock valuation where it is, we're not all that eager to be deploying our equity to do acquisitions. But our pipeline has not changed.

We remain very opportunistic and active with targets and while maybe at certain juncture in time you pause to be reflective of your own business and you're internally focused, we are always thinking about that pipeline. We're always thinking about filling in white spaces in our product portfolio and also our global footprint.

So no, our appetite and curiosity and opportunistic lens has not changed..

[Operator Instructions]. Our next question comes from the line of Mike Grondahl with Northland Capital Markets. Please proceed with your question..

Two questions.

One, can you talk a little bit about the inventory balance at year-end? And then, secondly, some of your cost cut measures, the headcount reduction, the furloughs and consolidating the distribution warehouses, can you kind of give us a sense when those happened or when those are going to happen just so we can kind of think about it?.

Sure, Thanks, Mike.

So a couple of things, our inventory position at the end of the year, I don't know if you had a particular question about the inventory position, but it was a very strong inventory position, and I sort of think you -- the question you're looking for is, we believe it could be more than adequate to take us through any potential impacts to our supply chain that I was describing from Vivien's question.

The other important thing to note as we consolidate our distribution network, it would actually require less inventory overall. So we believe there to be an opportunity to actually convert inventory into cash and maintain lower levels of inventory, turnover inventory more times.

And, I'm sorry, what was your second question?.

It was just some of the timing of the cost reduction effort, the headcount, the furloughs and the warehouse. .

Yes. So, a lot of referral has already taken place predominantly in our company own brick-and-mortar stores that happened a couple of weeks ago. And then our DCs, again, there's about 50 full time employees that will be impacted as we transition to our consolidated distribution network towards the end of Q2..

Thank you. This concludes the question-and-answer period. I would now like to turn the call back over to Aaron LoCascio for final comments..

I just want to thank everyone again for joining Greenlane's fourth quarter and full year 2019 conference call. And as a reminder, a replay for this conference call will be available in approximately 2 hours on Greenlane's website in the Investor Relations section, and I look forward to speaking to everyone again soon. Thank you..

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