Greenlane Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of Greenlane Holdings, Inc. and its consolidated subsidiaries (“Greenlane” and, collectively with the Operating Company and its consolidated subsidiaries, the “Company”, "we", "us" and "our") for the quarterly period ended March 31, 2022 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes of Greenlane Holdings, Inc. for the year ended December 31, 2021, which are included in our Annual Report on Form 10-K. Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation : • the impacts of the novel coronavirus ("COVID-19") pandemic and measures intended to prevent or mitigate its spread, and our ability to accurately assess and predict such impacts on our results of operations, financial condition, acquisition and disposition activities, and growth opportunities; • statements regarding our growth and other strategies, results of operations or liquidity; 24 • statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; • statements regarding our industry; • statements of management’s goals and objectives; • statements regarding laws, regulations, and policies relevant to our business; • projections of revenue, earnings, capital structure and other financial items; • assumptions underlying statements regarding us or our business; and • other similar expressions concerning matters that are not historical facts. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Factors that might cause such a difference include those discussed in our filings with the SEC, under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "2021 Annual Report") and in other documents that we file from time to time with the Securities and Exchange Commission (the "SEC"). Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. These risks include, but are not limited to, those listed below and those discussed in greater detail in Part I, Item 1A of the 2021 Annual Report under the heading “Risk Factors." • our strategy, outlook and growth prospects; • general economic trends and trends in the industry and markets in which we operate; • public heath crises, including the COVID-19 pandemic; • our dependence on, and our ability to establish and maintain business relationships with, third-party suppliers and service suppliers; • the competitive environment in which we operate; • our vulnerability to third-party transportation risks; • the impact of governmental laws and regulations and the outcomes of regulatory or agency proceedings; • our ability to accurately estimate demand for our products and maintain appropriate levels of inventory; • our ability to maintain or improve our operating margins and meet sales expectations; • our ability to adapt to changes in consumer spending and general economic conditions; • our ability to use or license certain trademarks; • our ability to maintain consumer brand recognition and loyalty of our products; • our and our customers’ ability to establish or maintain banking relationships; • fluctuations in U.S. federal, state, local and foreign tax obligation and changes in tariffs; • our ability to address product defects; • our exposure to potential various claims, lawsuits and administrative proceedings; • contamination of, or damage to, our products; • any unfavorable scientific studies on the long-term health risks of vaporizers, electronic cigarettes, or cannabis or hemp-derived products, including cannabidiol (“CBD”); • failure of our information technology systems to support our current and growing business; • our ability to prevent and recover from Internet security breaches; • our ability to generate adequate cash from our existing business to support our growth; • our ability to raise capital on favorable terms, or at all, to support the continued growth of the business; • our ability to protect our intellectual property rights; • our dependence on continued market acceptance of our products by consumers; • our sensitivity to global economic conditions and international trade issues; • our ability to comply with certain environmental, health and safety regulations; • our ability to successfully identify and complete strategic acquisitions; • natural disasters, adverse weather conditions, operating hazards, environmental incidents and labor disputes; • increased costs as a result of being a public company; and 25 • our failure to maintain adequate internal controls over financial reporting. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. Overview Founded in 2005, Greenlane is the premier global platform for the development and distribution of premium cannabis accessories, child-resistant packaging, vape solutions, and lifestyle products. In August 2021, we completed our transformational merger with KushCo, creating the leading ancillary cannabis company and house of brands. The combined company serves a diverse and expansive customer base with more than 8,500 retail locations, which includes many of the leading multi-state-operators and licensed producers, the top smoke shops in the United States, and millions of consumers globally. In addition to enhancing our financial size and scale, along with creating an optimized platform with significant potential revenue and cost saving synergies, the merger strengthened our best-in-class proprietary owned brands and exclusive third-party brand offerings. We have been developing a world-class portfolio of our own proprietary brands (the "Greenlane Brands") that we believe will, over time, deliver higher margins and create long-term value for our customers and shareholders. Our Greenlane Brands are comprised of child-resistant packaging innovator Pollen Gear; VIBES rolling papers; the Marley Natural accessory line; the K. Haring Glass Collection accessory line; Aerospaced & Groove grinders; Cookies lifestyle line; and Higher Standards, which is both an upscale product line and an innovative retail experience with flagship stores at New York City’s famed Chelsea Market and the iconic Malibu Village in California. During 2021, we have taken significant strides to grow our brand portfolio including with the March acquisition of substantially all of the assets of Eyce LLC and more recently, the November acquisition of substantially all of the assets of Organicix LLC dba DaVinci Tech. Furthermore, as a pioneer in the ancillary cannabis space, Greenlane is the partner of choice for many of the industry's leading MSOs, LPs, and brands, including PAX Labs, Grenco Science, Storz & Bickel, Firefly, Santa Cruz Shredder, Cookies, and CCELL. We merchandise vaporizers, packaging, and other products in the United States, Canada, and Europe and we distribute to retailers through wholesale operations and to consumers through e-commerce activities and our retail stores. We operate distribution centers in the United States, Canada, and Europe. With the completion of the distribution center consolidation and the merger with KushCo, we have established a lean and scalable distribution network that leverages a mix of leased warehoused spaces in California and Massachusetts along with third-party logistics ("3PL") locations in the U.S., Canada, and Europe. Many of our products are sourced from suppliers who may use their own third-party manufacturers, and our product costs and gross margins may be impacted by the product mix we sell in any given period. Furthermore, legacy Greenlane and legacy KushCo margins are significantly different, due to their respective customer bases, product mix and types of transactions. Legacy KushCo revenue is comprised of a stable customer base of wholesale and business to business customers, resulting in a lower-volume of transactions with a higher average transaction price and lower margin sales. Conversely, legacy Greenlane sales are comprised of business to business, retail and e-commerce sales that consist of a higher volume of transactions with lower average prices and higher margins. Gross margin, or gross profit as a percentage of net sales, has been and will continue to be affected by a variety of factors, including the average mark-up over the cost of our products; the mix of products sold; purchasing efficiencies; the level of sales for certain third-party brands, which carry contractual profit sharing obligations; and the potential impact on freight costs arising from passing of the PACT Act amendments. 2022 Plan On March 10, 2022, the Company announced via press release its 2022 Plan to reduced its cost structure, increase liquidity, and accelerate its path to profitability. The 2022 Plan includes a recently completed reduction in force, reduction of facility footprints worldwide, a sale leaseback of the Company's headquarter building, disposition of non-core assets, discontinuation of lower-margin third-party brands, increase of prices on select products, and the securing of an asset based loan that will support working capital needs. 26 Management believes that the 2022 Plan will significantly reduce costs, help accelerate the Company's path to profitability, support the growth of the business in a non-dilutive manner, and allow the Company to reinvest capital into its highest margin and highest growth potential product lines, such as its Greenlane Brands. Discontinuation of Nicotine Sales and Increased Focus on Greenlane Brands Over the course of 2021, we reduced our reliance on lower-margin third-party nicotine brands and increased our focus on our Greenlane Brands, as part of our strategy to scale our portfolio of proprietary brands to build the leading house of brands in the ancillary cannabis industry. As evidence of this, sales from nicotine products decreased to $0 of total net sales for the three months ended March 31, 2022 from $1.7 million, or 5.1% of total net sales for the same period in 2021. We intend to keep lower-margin third-party nicotine brands eliminated entirely over the course of 2022. COVID-19 In December 2019, a novel strain of coronavirus known as COVID-19 was reported in Wuhan, China. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. Since the outbreak of COVID-19, we have closely monitored developments and operated with the health and safety of our employees as the Company's top priority. Although the impact of the COVID-19 pandemic has not had a significant adverse impact on our operations, we cannot reasonably estimate the length or severity of this pandemic on the macroeconomic environment which we operate in. Accordingly, the extent to which the COVID-19 pandemic will impact our financial condition or results of operations will depend on future developments, such as the duration and intensity of the pandemic, the effectiveness of COVID-19 vaccines and booster shots, and the overall impact on our customers, employees, vendors, and operations. Results of Operations The following table presents operating results for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, % of Net sales Change 2022 2021 2022 2021 $ % Net sales $ 46,534 $ 34,009 100.0 % 100.0 % $ 12,525 36.8 % Cost of sales 40,566 25,454 87.2 % 74.8 % 15,112 59.4 % Gross profit 5,968 8,555 12.8 % 25.2 % (2,587) (30.2) % Operating expenses: Salaries, benefits and payroll taxes 10,061 6,370 21.6 % 18.7 % 3,691 57.9 % General and administrative 11,715 9,581 25.2 % 28.2 % 2,134 22.3 % Depreciation and amortization 2,403 544 5.2 % 1.6 % 1,859 341.7 % Total operating expenses 24,179 16,495 52.0 % 48.5 % 7,684 46.6 % Loss from operations (18,211) (7,940) (39.2) % (23.3) % (10,271) 129.4 % Other income (expense), net: Interest expense (406) (116) (0.9) % (0.3) % (290) 250.0 % Other income (expense), net (54) 324 (0.1) % 1.0 % (378) (116.7) % Total other expense, net (460) 208 (1.0) % 0.6 % (668) * Loss before income taxes (18,671) (7,732) (40.2) % (22.8) % (10,939) 141.5 % Provision for (benefit from) income taxes 78 (18) 0.2 % (0.1) % 96 (533.3) % Net loss (18,749) (7,714) (40.4) % (22.8) % (11,035) 143.1 % Net loss attributable to non-controlling interest (3,417) (3,458) (7.3) % (10.2) % 41 (1.2) % Net loss attributable to Greenlane Holdings, Inc. $ (15,332) $ (4,256) (33.1) % (12.5) % $ (11,076) 260.2 % *Not meaningful Consolidated Results of Operations Net Sales 27 For the three months ended March 31, 2022, net sales were approximately $46.5 million, compared to approximately $34.0 million for the same period in 2021, representing an increase of $12.5 million, or 36.8%. The year-over-year increase was primarily due to the merger with KushCo, which contributed $28.4 million in net sales. Excluding KushCo's post-merger sales, net sales declined 46.8% to $18.1 million for the three months ended March 31, 2022 compared to $34.0 million for the same period in 2021. Although we aim to concentrate on Greenlane Brands, these sales decreased $3.1 million, or 34.0%, to $6.0 million for the three months ended March 31, 2022 from $9.0 million for the same period in 2021, driven largely by a decrease in third-party brand sales of 48.6% due to our strategy to focus on proprietary brands, and also interruptions due to our ERP implementation. Cost of Sales and Gross Margin For the three months ended March 31, 2022, cost of sales increased by $15.1 million, or 59.4%, as compared to the same period in 2021. The increase in cost of sales was primarily due to the impact of the KushCo merger of $26.2 million, offset by a decrease in revenue of 46.8% excluding the impact of the KushCo merger. Gross margin decreased to 12.8% for the three months ended March 31, 2022, compared to gross margin of 25.2% for the same period in 2021. Excluding inventory write-offs of damaged and obsolete inventory for the three months ended March 31, 2022 and March 31, 2021 of $5.8 million and $1.0 million, respectively, associated with post-merger and ongoing product rationalization initiatives, gross margins decreased 2.9% to 25.3% for the three months ended March 31, 2022, compared to 28.1% for the same period in 2021. The decrease in margin is related to an increase in lower margin KushCo-related sales of $28.4 million, and a 34.0% decrease in Greenlane Brands sales, which carry a higher margin profile than 3rd-party brand sales with a lower margin profile. Salaries, Benefits and Payroll Taxes Salaries, benefits and payroll taxes expenses increased by approximately $3.7 million, or 57.9%, to $10.1 million for the three months ended March 31, 2022, compared to $6.4 million for the same period in 2021, primarily due to an increase related to the KushCo merger, an increase in severance of $0.6 million and an increase in stock compensation of $0.4 million, offset by a salaries and payroll taxes decrease related to a reduction in force we completed in March 2022, which we expect to result in approximately $8.0 million in annualized cash compensation cost savings. This reduction in force is a part of our aforementioned 2022 Plan to reduce our cost structure, increase liquidity and accelerate our path to profitability. As we continue to closely monitor the evolving business landscape, including the impacts of COVID-19 on our customers, vendors, and overall business performance, we remain focused on identifying cost-saving opportunities while delivering on our strategy to recruit, train, promote and retain the most talented and success-driven personnel in the industry. In light of the KushCo merger, management is continuing to explore opportunities in 2022 to further reduce salary and other operating expenses. General and Administrative Expenses General and administrative expenses increased by approximately $2.1 million, or 22.3%, for the three months ended March 31, 2022, compared to the same period in 2021. This increase was primarily due to an increase of approximately $1.1 million in professional fees related to our ERP system implementation; an increase of $0.3 million in insurance expense primarily driven by directors and officers insurance premiums increase; an increase of $1.3 million related to the addition of KushCo facilities; and $0.3 million in third party logistics fees related to the addition of a KushCo 3PL Canada facility; an increase of $0.7 million in outbound shipping driven by an increase in sales contributed by the KushCo merger; an increase in other G&A expense of $0.4 million; offset by a decrease of $1.0 million in legal and accounting fees driven by decreased M&A activity and a $1.1 million decrease in bad debt expense with the majority related to a gain of $1.8 million due to indemnification asset recovery related to VAT liability offset by additional bad debt expense of $0.6 million. Depreciation and Amortization Expense Depreciation and amortization expense increased $1.9 million, or 341.7%, for the three months ended March 31, 2022, compared to the same period in 2021. The increase is primarily related to the additional depreciation and amortization expense related to assets acquired in conjunction with the KushCo merger, as well as the Eyce and DaVinci business acquisitions. Other Income (Expense), Net Interest expense. Interest expense consists of interest incurred on our Real Estate Note, promissory notes related to the Eyce and DaVinci acquisitions, and Bridge loan. We also experienced an increase of interest expense of approximately $0.3 million during the three months ended March 31, 2022, due to the addition of promissory notes related to the Eyce and DaVinci acquisitions and the Secured Promissory Note (the "Bridge Loan") with a related party during 2021. 28 Other expense, net. Other income (expense), net, decreased by approximately $0.4 million for the three months ended March 31, 2022, compared to the same period in 2021. The change is primarily due a loss related to the change in fair value of equity investment of $0.3 million. Provision for (Benefit from) Income Taxes As a result of the IPO and the related transactions (described further in "Note 1—Business Operations and Organizations" of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q), we own a portion of the Common Units of the Operating Company, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, the Operating Company is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by the Operating Company is passed through to, and included in the taxable income or loss of, its members, including us, in accordance with the terms of the Operating Agreement. We are subject to federal income taxes, in addition to state and local income taxes with respect to our allocable share of the Operating Company’s taxable income or loss. As discussed above, prior to the consummation of the IPO, the provision for income taxes included only income taxes on income from the Operating Company’s Canadian subsidiary, based upon an estimated annual effective tax rate of approximately 26.5%. After the consummation of the IPO, Greenlane became subject to U.S. federal, state and local income taxes with respect to Greenlane’s allocable share of the Operating Company’s taxable income or loss. Furthermore, after completing the Conscious Wholesale acquisition in September 2019, the Operating Company became subject to Dutch income taxes on income from its Netherlands-based subsidiary, based upon an estimated effective tax rate of approximately 25.0%. As of March 31, 2022 and December 31, 2021, management performed an assessment of the realizability of our deferred tax assets based upon which management determined that it is not more likely than not that the results of operations will generate sufficient taxable income to realize portions of the net operating loss benefits. Consequently, we established a full valuation allowance against our deferred tax assets, and reflected a carrying balance of $0 as of March 31, 2022 and December 31, 2021, respectively. In the event that management determines that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance will be made, which would reduce the provision for income taxes. The provision for and benefit from income taxes for the three months ended March 31, 2022 and 2021, respectively, relates to taxes in foreign jurisdictions, including Canada and the Netherlands. Segment Operating Performance Following the completion of the KushCo merger in late August 2021, we reassessed our operating segments based on our new organizational structure. Based on this assessment, we determined we had the following two operating segments beginning with the fourth quarter of 2021, which are the same as our reportable segments: (1) Consumer Goods, which largely comprises Greenlane's legacy operations across the United States, Canada, and Europe, and (2) Industrial Goods, which largely comprises KushCo's legacy operations. These changes in operating segments align with how we manage our business beginning with the fourth quarter of 2021. The Consumer Goods segment focuses on serving consumers across wholesale, retail and e-commerce operations—through both our proprietary brands, including Eyce, DaVinci, VIBES, Marley Natural, Keith Haring, and Higher Standards, as well as lifestyle products and accessories from leading brands, like PAX, Storz and Bickel, Grenco Science, and many more. The Consumer Goods segment forms a central part of our growth strategy, especially as it relates to scaling our own portfolio of higher-margin proprietary owned brands. The Industrial Goods segment focuses on serving the premier brands, operators, and retailers through our wholesale operations by providing ancillary products essential to their growth, such as customizable packaging and supply products and vaporization solutions offering which includes CCELL branded products. Our CODM allocates resources to and assesses the performance of our two operating segments based on the operating segments' net sales and gross profit. The following table sets forth information by reportable segment for the three months ended March 31, 2022 and 2021: 29 Three Months Ended March 31, % of Total Net sales Change 2022 2021 2022 2021 $ % Net sales: Consumer Goods $ 17,141 $ 30,544 36.8 % 89.8 % $ (13,403) (43.9) % Industrial Goods 29,393 3,465 63.2 % 10.2 % 25,928 748.3 % Total net sales $ 46,534 $ 34,009 % of Segment Net sales Change Cost of sales: 2022 2021 2022 2021 $ % Consumer Goods $ 14,319 $ 22,934 83.5 % 75.1 % $ (8,615) (37.6) % Industrial Goods 26,247 2,520 89.3 % 72.7 % 23,727 941.5 % Total cost of sales $ 40,566 $ 25,454 Gross profit: Consumer Goods $ 2,822 $ 7,610 16.5 % 24.9 % $ (4,788) (62.9) % Industrial Goods 3,146 945 10.7 % 27.3 % 2,201 232.9 % Total gross profit $ 5,968 $ 8,555 Consumer Goods For the three months ended March 31, 2022, our Consumer Goods operating segment reported net sales of approximately $17.1 million compared to approximately $30.5 million for the same period in 2021, representing a decrease of $13.4 million or 43.9%. The year-over-year decrease represented a $1.6 million or 23.6% decrease in Greenlane Brands sales and a $11.8 million or 38.8% decrease in third-party brand sales due to our strategy to focus on proprietary brands, and also interruptions due to our ERP implementation. For the three months ended March 31, 2022, cost of sales decreased by $8.6 million, or 37.6%, as compared to the same period in 2021. The decrease in cost of sales was primarily due to the 43.9% decrease in Consumer Goods net sales. Gross margin decreased to 16.5% for the three months ended March 31, 2022, compared to gross margin of approximately 24.9% for the same period in 2021. Excluding post-merger strategic product rationalization initiative charges of $1.9 million, gross margin was approximately 27.4% for the three months ended March 31, 2022, compared to gross margin of approximately 24.6%, excluding damaged and obsolete charges of $1.0 million, for the same period in 2021. This increase was largely due to the decrease in lower margin third-party brand sales. Industrial Goods For the three months ended March 31, 2022, our Industrial Goods operating segment reported net sales of approximately $29.4 million compared to approximately $3.5 million for the same period in 2021, representing an increase of $25.9 million or 748.3%. The increase is directly related to net sales of approximately $28.4 million contributed by our merger with KushCo, partially offset by a $1.5 million, or 61.6%, decrease in Pollen Gear revenue. For the three months ended March 31, 2022, cost of sales increased by $23.7 million, or 941.5%, as compared to the same period in 2020. The increase is directly related to cost of sales of approximately $26.2 million contributed by our merger with KushCo. Gross margin was approximately 10.7% for the three months ended March 31, 2022, compared to gross margin of approximately 27.3% for the same period in 2021, representing 54.3% year over year decrease. Excluding post-merger strategic product rationalization initiative charges of $3.8 million, gross margin was approximately 23.8% for the three months ended March 31, 2022, compared to gross margin of approximately 27.3% for the same period in 2021. The year over year decrease in gross margin of approximately 1.7% is related to the sale of lower-margin KushCo-related products. Net Sales by Geographic Regions 30 Three Months Ended March 31, % of Net sales Change 2022 2021 2022 2021 $ % Net sales: United States $ 42,991 $ 28,667 92.4 % 84.3 % $ 14,324 50.0 % Canada $ 1,855 $ 2,561 4.0 % 7.5 % (706) (27.6) % Europe $ 1,688 $ 2,781 3.6 % 8.2 % (1,093) (39.3) % Total net sales $ 46,534 $ 34,009 100.0 % 100.0 % $ 12,525 36.8 % United States For the three months ended March 31, 2022, our United States net sales were approximately $43.0 million, compared to approximately $28.7 million for the same period in 2021, representing an increase of $14.3 million, or 50.0%. The year-over-year increase was primarily due to the merger with KushCo, which contributed $28.4 million in total net sales. Excluding net sales contributed by KushCo, total net sales decreased by approximately $14.1 million, or 49.2%, to approximately $14.6 million for the three months ended March 31, 2022, compared to the same period in 2021. The year-over-year decrease was primarily due to a decrease in wholesale revenue of $8.7 million, and a decrease in consumer retail revenue of $2.8 million. Canada For the three months ended March 31, 2022, our Canadian net sales were approximately $1.9 million, compared to approximately $2.6 million for the same period in 2021, representing a decrease of $0.7 million, or 27.6%. The year-over-year decrease was primarily due to a $1.2 million decrease in wholesale revenue and a $0.8 million decrease in nicotine sales as part of our strategic shift away from low margin sales. This was partially offset by $1.0 million in net sales contributed by KushCo. Europe For the three months ended March 31, 2022, our European net sales were approximately $1.7 million, compared to approximately $2.8 million for the same period in 2021, representing a decrease of $1.1 million or 39.3%. This was primarily due to a $0.7 million, or 62.3%, decrease in third-party marketplace website sales and a $0.5 million, or 40.3%,, decrease in our B2B sales. Liquidity and Capital Resources We believe that our cash on hand, combined with our ability to access the capital markets, will be sufficient to fund our working capital and capital expenditure requirements, as well as our debt repayments and other liquidity requirements associated with our existing operations, for at least the next 12 months. Our primary requirements for liquidity and capital are working capital, debt service related to recent acquisitions and general corporate needs. Our primary sources of liquidity are our cash on hand and the cash flow that we generate from our operations, as well as proceeds from our ATM Program. As of March 31, 2022, we had approximately $5.9 million of cash, of which $0.8 million was held in foreign bank accounts, and approximately $41.7 million of working capital, which is calculated as total current assets minus total current liabilities, as compared to approximately $12.9 million of cash, of which $0.7 million was held in foreign bank accounts, and approximately $53.8 million of working capital as of December 31, 2021. The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls; however, these balances are generally available to fund the ordinary business operations of our foreign subsidiaries without legal or other restrictions. In December 2021, we entered into a Secured Promissory Note with Aaron LoCascio, our co-founder, former Chief Executive Officer and President, and a current director of the Company, in which Mr. LoCascio provided us with a bridge loan in the principal amount of $8.0 million (the “Bridge Loan”). The Bridge Loan accrues interest at a rate of 15.0% per annum, which is due monthly, and the principal amount is due in full in June 2022. We are actively working to obtain financing to repay the Bridge Loan on or before its maturity date. However, we can provide no assurances that we will be able to obtain financing on attractive terms or at all in order to be able to repay or refinance the Bridge Loan, and we may be required to issue equity at on unattractive terms and at dilutive prices in order to be able to repay the Bridge Loan. We are in the process of securing an asset backed loan to assist us with working capital needs. We can provide no assurances as to the timing of our entry into this loan, the final terms of the loan or that we will enter into it at all. However, we do not expect the covenants under any asset backed loan agreement to permit us to use the proceeds of such loan to refinance or repay the Bridge Loan. If we are unable to repay or refinance the Bridge Loan, we may be unable to obtain an asset-backed loan until the co llateral securing the Bridge Loan has been released and the lenders of such asset-backed loan can obtain a first-lien security interest in such collateral. 31 On October 1, 2018, one of the Operating Company’s wholly-owned subsidiaries closed on the purchase of a building for $10.0 million, which serves as our corporate headquarters. The purchase was financed through a real estate term note (the “Real Estate Note”) in the principal amount of $8.5 million, with one of the Operating Company’s wholly-owned subsidiaries as the borrower and Fifth Third Bank as the lender. Principal amounts plus any accrued interest at a rate of LIBOR plus 2.39% are due monthly. Our obligations under the Real Estate Note are secured by a mortgage on the property. We are seeking to enter into a sale lease-back transaction with respect to our corporate headquarters, at which point we would repay the Real Estate Note, and use the net proceeds from the sale for working capital purposes. We have an effective shelf registration statement on Form S-3 (the "Shelf Registration Statement") and may opportunistically conduct securities offerings from time to time in order to meet our liquidity needs. The Shelf Registration Statement registers shares of our Class A common stock, preferred stock, $0.0001 par value per share (the "preferred stock"), depository shares representing our preferred stock, warrants to purchase shares of our Class A common stock, preferred stock or depository shares, and rights to purchase shares of our Class A common stock or preferred stock that may be issued by us in a maximum aggregate amount of up to $200 million. In August 2021, we filed a prospectus supplement and established an "at-the-market" equity offering program (the "ATM Program") that provides for the sale of shares of our Class A common stock having an aggregate offering price of up to $50 million, from time to time. Net proceeds from sales of our shares of Class A common stock under the ATM Program are expected to be used to fund potential business acquisitions and for working capital and general corporate purposes. However, we may be unable to access the capital markets because of current market volatility and the performance of our stock price. On March 31, 2022, the date on which our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "2021 Annual Report") was filed with the SEC, the Shelf Registration Statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3 ("Instruction I.B.6") because our public float was less than $75 million. For so long as our public float is less than $75 million, the aggregate market value of securities sold by us under the Shelf Registration Statement (including our ATM Program) pursuant to Instruction I.B.6 during any twelve consecutive months may not exceed one-third of our public float. Since the launch of the ATM program and through March 31, 2022, we sold 13,535,970 shares of our Class A common stock under the ATM Program, which generated gross proceeds of approximately $10.4 million. In light of our low cash position, we have been forced to sell stock under our ATM program at prices that may not otherwise be attractive and are dilutive. We have offered $0.3 million in securities pursuant to Instruction I.B.6 in the twelve calendar months preceding the date of filing of this Quarterly Report on Form 10-Q. Our future liquidity needs may also include payments in respect of the redemption rights of the Common Units held by its members that may be exercised from time to time (should we elect to exchange such Common Units for a cash payment), payments under the TRA and state and federal taxes to the extent not sheltered by our tax assets, including those arising as a result of purchases, redemptions or exchanges of Common Units for Class A common stock. Although the actual timing and amount of any payments that may be made under the TRA will vary, the payments that we will be required to make to the members may be significant. Any payments made by us to the members under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us or to the Operating Company and, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore may accelerate payments due under the TRA. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all. As of March 31, 2022, we did not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Cash Flows The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q: Three Months Ended March 31, (in thousands) 2022 2021 Net cash used in operating activities $ (12,023) $ (15,257) Net cash used in investing activities (709) (2,822) Net cash provided by (used in) financing activities 5,674 (104) Net Cash Used in Operating Activities 32 During the three months ended March 31, 2022, net cash used in operating activities of approximately $12.0 million consisted of (i) net loss of $18.7 million, offset by non-cash adjustments to net loss of approximately $1.8 million, including stock-based compensation expense of approximately $0.9 million, depreciation and amortization expense of approximately $2.4 million, and an offsetting reversal on the allowance of an indemnification receivable of approximately $1.8 million, and (ii) a $4.9 million decrease in working capital primarily driven by increases in accounts payable, accrued expenses and customer deposits of approximately $9.5 million, offset by increases in accounts receivable, inventories, vendor deposits and other current assets of approximately $4.6 million. During the three months ended March 31, 2021, net cash used in operating activities of approximately $15.3 million consisted of (i) net loss of $7.7 million, offset by non-cash adjustments to net loss of approximately $0.6 million, including stock-based compensation expense of approximately $0.5 million, depreciation and amortization expense of approximately $0.5 million, and a reversal on the allowance of an indemnification receivable of approximately $0.6 million, and (ii) $8.1 million cash used in working capital primarily driven by decreases in accounts payable and accrued expenses of approximately $12.4 million, an increase in customer deposits of approximately $0.5 million, offset by decreases in accounts receivable, inventories, vendor deposits and other current assets of approximately $3.8 million. Net Cash Used in Investing Activities During the three months ended March 31, 2022, net cash used in investing activities of approximately $0.7 million largely consisted of capital expenditures, including development costs for our new enterprise resource planning system. During the three months ended March 31, 2021, we used approximately $0.4 million of cash for capital expenditures, including development costs for our new enterprise resource planning system. Additionally, we used approximately $2.4 million of cash for the acquisition of Eyce LLC. Net Cash Provided by (Used in) Financing Activities During the three months ended March 2022, net cash provided by financing activities of approximately $5.7 million primarily consisted of cash proceeds of approximately $6.8 million from the issuance of Class A common stock through our ATM Program, offset primarily by approximately $1.0 million in payments on notes payable, finance lease obligations and other long-term liabilities. During the three months ended March 31, 2021, net cash used in financing activities primarily consisted of approximately $0.1 million in payments on notes payable, finance lease obligations, and other long-term liabilities. Critical Accounting Policies and Estimates See Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2021. Also see "Note 2 - Summary of Significant Accounting Policies" within Part I, Item 1 of this Form 10-Q for a discussion of the voluntary accounting principle change made during the quarterly period ended March 31, 2022. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required.