What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 167 added, 101 removed, 191 unchanged (58% of the section changed)

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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.

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 June 30, 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.

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• our dependence on, and our ability to establish and maintain business relationships with, third-party suppliers and service suppliers;

• our ability to access capital;

• the competitive environment in which we operate;

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• 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 adapt to changes in consumer spending and general economic conditions, including the current inflationary environment;

• our ability to use or license certain trademarks;

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• 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”);

• any unfavorable scientific studies on the long-term health risks of vaporizers, electronic cigarettes, or cannabis or hemp-derived products, including CBD;

• failure of our information technology systems to support our current and growing business;

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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.

and the potential impact on freight costs arising from passing of the Prevent All Cigarette Trafficking Act (the “PACT Act”).

USPS PACT Act Exemption

On January 11, 2022, we announced via press release that the United States Postal Service (the “USPS”) had approved our application for a business and regulatory exemption to the PACT Act (with respect to the business and regulatory exemption granted by the USPS, the “PACT Act Exemption”), allowing us to ship vaporizers and accessories classified as electronic nicotine delivery systems (“ENDS”) products to other compliant businesses.

With this approval, over 97% of our total annual sales became eligible for shipment by freight, USPS and other major parcel carriers.

The PACT Act Exemption also enables us to partner with other businesses that ship ENDS products and had their supply chains disrupted by PACT Act compliance.

On June 24, 2022, we provided via press release an update on the progress of the PACT Act Exemption, following our successful implementation of the controls, processes and systems required by the USPS in connection with the shipment of ENDS products.

We expect the ability to fulfill ENDS orders with the USPS to allow us to reduce shipping costs, decrease fulfillment times and enhance the overall customer experience for approved wholesale customers.

Reverse Stock Split

On August 4, 2022, we filed the Certificate of Amendment, which effected the Reverse Stock Split of our Common Stock at 5:01 PM Eastern Time on August 9, 2022.

As a result of the Reverse Split, every 20 shares of Common Stock issued and outstanding were converted into one share of Common Stock.

We paid cash in lieu of fractional shares, and accordingly, no fractional shares were issued in connection with the Reverse Split.

The Reverse Stock Split did not change the par value of the Common Stock or the authorized number of shares of Common Stock.

All outstanding options, restricted stock awards, warrants and other securities entitling their holders to purchase or otherwise receive shares of our Common Stock have been adjusted as a result of the Reverse Stock Split, as required by the terms of each security.

The number of shares available to be awarded under the Equity Plan have also been appropriately adjusted.

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.

The 2022 Plan includes a recently completed reduction in force, reduction of its worldwide facility footprint, rationalization of its product offering, including the discontinuation of certain lower-margin third-party brands, disposition of non-core assets, a sale leaseback of the Company's headquarter building, increase of prices on select products, and the securing of an asset based loan to support working capital needs (with respect to the sale of the Company’s headquarters building, discontinuation and disposition of non-core and lower-margin inventory and securing an asset-backed loan, the “Liquidity Initiatives”).

On June 22, 2022, we provided an update on the Liquidity Initiatives, which our management believes can generate more than $30.0 million of liquidity on a non-dilutive basis by the end of 2022 if all measures are successful.

On August 9, 2022, we entered into an asset-based loan agreement which makes available to the Company a term loan of up to $15.0 million.

Additionally, we are in the process of selling non-core assets, which if sold together with our headquarters building listed for sale in May 2022 at the sales price anticipated by our management, is expected to generate an additional $10.0 million of liquidity.

Finally, we are working to sell our excess & obsolete (“E&O”) inventory of lower-margin, non-strategic products,

along with reducing our overall level of inventory on hand.

In May, we commenced our official E&O sales program internally and have since sold more than $2.0 million of previously reserved E&O inventory.

Our management anticipates that the proceeds from these E&O sales, combined with a general sell-down of other non-core third-party brand inventory, will generate more than $10.0 million in liquidity.

We can provide no assurances that our expectations with respect to the Liquidity Initiatives will come to fruition on the expected timeline, in the expected amounts or at all.

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.

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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.

As evidence of this, sales from nicotine products decreased to $0 of total net sales for the six months ended June 30, 2022 from $2.0 million, or 2.9% of total net sales for the same period in 2021.

In December 2019, a novel strain of coronavirus known as COVID-19 was reported in Wuhan, China.

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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

The following table presents operating results for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

June 30, Six Months Ended

% of Net sales Change % of Net sales Change

2022 2021 2022 2021 $ % 2022 2021 2022 2021 $ %

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Consolidated Results of Operations

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.

For the three months ended June 30, 2022, net sales were approximately $39.9 million, compared to approximately $34.7 million for the same period in 2021, representing an increase of $5.2 million, or 15.0%.

The increase was primarily due to the merger with KushCo in August 2021, which contributed $24.0 million in net sales in 2022.

Excluding KushCo's post-merger sales, net sales declined 54.2% to $15.9 million for the three months ended June 30, 2022 compared to $34.7 million for the same period in 2021.

Third-party consumer brand sales decreased $13.6 million compared to the same period in 2021 due to our strategy to focus on proprietary brands and business strategy to move away from lower margin third-party consumer brand sales.

Sales of Greenlane Brands decreased $4.3 million, or 45.7%, to $5.1 million for the three months ended June 30, 2022 from $9.5 million for the same period in 2021, driven largely by a decrease in Vibes and Pollen Gear sales.

For the six months ended June 30, 2022, net sales were approximately $86.5 million, compared to approximately $68.7 million for the same period in 2021, representing an increase of $17.7 million or 25.8%.

The increase was primarily due to the merger with KushCo in August 2021, which contributed $53.4 million in net sales in 2022.

Excluding KushCo's post-merger sales, net sales declined 50.5% to $34.0 million for the six months ended June 30, 2022 compared to $68.7 million for the same period in 2021.

The decrease is related to consumer goods sales for Greenlane Brands and third-party brands decreasing as a whole.

The Company is in process of implementing a business strategy to move away from lower margin third-party consumer brand sales and focus on Greenlane Brands with higher margins.

Sales were adversely impacted by ERP implementation efforts and the introduction of new CRM and B2B systems during the first half of the year.

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.

For the three months ended June 30, 2022, cost of sales increased by $6.2 million, or 24.0%, as compared to the same period in 2021.

The increase in cost of sales was attributable to incremental KushCo post-merger sales of $24.0 million, offset partially by a decrease in revenue of 54.2% excluding the impact of the KushCo merger.

Gross margin decreased to 20.3% for the three months ended June 30, 2022, compared to gross margin of 26.1% for the same period in 2021.

Excluding write-offs of damaged and obsolete inventory for the three months ended June 30, 2022 and three months ended June 30, 2021 of $1.4 million and $0.2 million, respectively, associated with post-merger and ongoing product rationalization initiatives, gross margins decreased 2.7% to 23.9% for the three months ended June 30, 2022, compared to 26.6% for the same period in 2021.

The decrease in margin is related to the addition of lower margin KushCo-related brands with sales of $24.0 million, and a 45.7% decrease in Greenlane Brands sales, which carry a higher margin profile.

For the six months ended June 30, 2022 cost of sales increase by $21.3 million, or 41.6%, as compared to the same period in 2021.

The increase in cost of sales attributable to post-merger KushCo revenues was $45.6 million, offset partially by a decrease associated with a revenue reduction of 52.8% excluding the impact of the KushCo merger.

Gross margin decreased to 16.3% for the six months ended June 30, 2022, compared to gross margin of 25.6% for the same period in 2021.

Excluding inventory write-offs of damaged and obsolete inventory for the six months ended June 30, 2022 and the six months ended June 30, 2021 of $6.8 million and $1.2 million respectively, associated with post-merger and ongoing product rationalization initiatives, gross margins decreased 3.2% to 24.2% for the six months ended June 30,2022, compared to 27.4% for the same period in 2021.

The decrease in margin is related to an increase in lower margin KushCo party brand sales with 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.

Salaries, benefits and payroll taxes expenses increased by approximately $3.2 million, or 57.9%, to $8.8 million for the three months ended June 30, 2022, compared to $5.6 million for the same period in 2021, primarily due to an increase related to the KushCo merger and an increase in severance of $0.8 million driven by the cost saving strategies that began in the prior quarter.

Salaries, benefits and payroll taxes expenses increased by approximately $6.9 million or 57.9% , to $18.9 million for the six months, compared to $12.0 million for the same period in 2021, primarily due to an increase related to the KushCo merger and an increase in severance of $1.7 million driven by the cost saving strategies that began in the prior quarter.

As we continue to closely monitor the evolving business landscape, including the impacts of COVID-19 and the regulatory and macro environment on our customers, vendors, and overall business performance, we remain committed to right-sizing our organization and introducing digital solutions while delivering on our strategy to recruit, train, promote and retain the most talented and success-driven personnel in the industry.

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.

General and administrative expenses increased by approximately $2.2 million, or 26.1%, for the three months ended June 30, 2022, compared to the same period in 2021.

This increase was primarily due to an increase of approximately $0.7 million in bad debt expense and an increase of $1.1 million related to a previous gain due to indemnification asset recovery related to VAT liability in 2021.

General and administrative expenses increased by approximately $4.3 million or 24.1%, for the six months, compared to the same period in 2021.

This increase was primarily due to an increase of approximately $1.3 million outbound freight cost due to the increase in sales, $1.0 million insurance expense, $0.6 million increase in bad debt expense with the majority related to a gain due to indemnification asset recovery related to VAT liability, $0.5 million of software expense cost associated to the ERP implementation and $0.7 million reduction to expense related to one-time write off adjustments recorded to prior year.

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.

Depreciation and amortization expense increased $1.7 million, or 265.9%, for the three months ended June 30, 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.

Depreciation and amortization expense increased $3.6 million, or 300.7%, for the six months ended June 30, 2022, compared to the same period in 2021.

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.

Interest expense increased approximately $0.1 million during the three months ended June 30, 2022.

The increase is primarily related to promissory notes for the Eyce and DaVinci acquisition and Bridge loan.

Interest expense increased approximately $0.9 million during the six months ended June 30, 2022.

The increase is primarily related to promissory notes for the Eyce and DaVinci acquisition and Bridge loan.

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.

Other income (expense), net, expense increased by approximately $0.4 million for the three months ended June 30, 2022, compared to the same period in 2021.

The change is primarily due to a loss related to the change in fair value of equity investments of $0.3 million.

Other income (expense), net, expense increased by approximately $0.8 million for the six months ended June 30, 2022, compared to the same period in 2021.

The change is primarily due to a loss related to the change in fair value of equity investments of $0.9 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.

As a result of the IPO and the related transactions completed in April 2019 (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.

As a partnership, the Operating Company is generally not subject to U.S.

federal and certain state and local income taxes, however, certain states in which the Operating Company does business impose state composite and/or withholding 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 Greenlane, on a pro-rata basis, in accordance with the terms of the Operating Agreement.

The Operating Company is also subject to taxes in foreign jurisdictions.

We are a corporation subject to U.S.

federal income taxes, in addition to state and local income taxes, based on our share of the Operating Company’s pass-through taxable income.

For the three and six months ended June 30, 2022 and 2021, respectively, the effective tax rate differed from the U.S.

federal statutory tax rate of 21% primarily due to the Operating Company's pass-through structure for U.S.

income tax purposes, the relative mix in earnings and losses in the U.S.

versus foreign tax jurisdictions, and the valuation allowance against the deferred tax asset.

Segment Operating Performance

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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.

The Industrial Goods segment focuses on serving the premier MSOs 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:

Three Months Ended March 31,

% of Total Net sales Change

The following table sets forth information by reportable segment for the three and six months ended June 30, 2022 and 2021, respectively:

Three Months Ended

June 30, Six Months Ended

% of Total Net sales Change % of Total Net sales Change

2022 2021 2022 2021 $ % 2022 2021 2022 2021 $ %

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Total net sales $ 39,916 $ 34,715 $ 86,450 $ 68,724

% of Segment Net sales Change

% of Segment Net sales Change % of Segment Net sales Change

Cost of sales:

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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.

For the three months ended June 30, 2022, our Consumer Goods operating segment reported net sales of approximately $15.9 million compared to approximately $30.0 million for the same period in 2021, representing a decrease of $14.1 million or 46.9%.

The year-over-year decrease represented a $4.3 million or 45.7% decrease in Greenlane Brands sales and a $13.6 million or 53.9% decrease in consumer third-party brand sales due to our strategy to focus on proprietary brands with higher margins and a $4.3 million or 45.7% decrease in Greenlane Brands sales.

For the six months ended June 30, 2022 our Consumer Goods operating segment reported net sales of approximately $33.1 million compared to approximately $60.5 million for the same period in 2021, representing a decrease of $27.5 million or 45.4%.

The year-over-year decrease is driven by a decrease in third-party and Greenlane brand sales.

For the three months ended June 30, 2022, cost of sales decreased by $9.8 million, or 24.0%, as compared to the same period in 2021.

The decrease in cost of sales was primarily due to the $19.3 aforementioned sales decrease of 46.9%.

For the six months ended June 30, 2022 cost of sales decreased by $19.4 million or 41.6% , as compared to the same period in 2021.

The decrease in cost of sales was primarily due to a $27.5 million or 45.4% decrease in sales compared to the same period in 2021.

Gross margin decreased to 19.3% for the three months ended June 30, 2022, compared to gross margin of approximately 21% for the same period in 2021.

The decrease is related to excess and obsolete inventory charges associated with inventory and product rationalization initiatives.

Gross margin decrease to 17.6% for the six months ended June 30, 2022, compared to gross margin of approximately 23% for the same period in 2021.

The decrease is related to excess and obsolete inventory charges associated with inventory and product rationalization initiatives.

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.

For the three months ended June 30, 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 $19.3 million or 405.3%.

The increase is directly related to net sales resulting from our merger with KushCo in August 2021.

For the six months ended June 30, 2022, our Industrial Goods operating segment reported net sales of approximately $53.4 million compared to approximately $8.2 million for the same period in 2021, representing an increase of $45.2 million or 550%.

The increase is directly related to the net sales resulting from our merger with KushCo in August 2021.

For the three months ended June 30, 2022, cost of sales increased by $15.9 million, or 523.4%, as compared to the same period in 202, due to the increase in sales.

For the six months ended June 30, 2022 cost of sales increased by $39.7 million or 713%, as compared to the same period in 2021, due to the increase in sales year-over-year.

Gross margin was approximately 21.0% for the three months ended June 30, 2022, compared to gross margin of approximately 35.9% for the same period in 2021, representing a 41.6% year over year decrease.

Excluding post-merger strategic product rationalization initiative charges of $0.9 million, gross margin was approximately 24.5% for the three months ended June 30, 2022, compared to gross margin of approximately 36.0% for the same period in 2021.

The year over year decrease in gross margin of approximately 11.5% is related to the sale of lower-margin KushCo related products.

Gross margin was approximately 15.3% million for the six months ended June 30, 2022, compared to gross margin of approximately 32.3% for the same period in 2021, representing a 53% year-over-year decrease.

Excluding post-merger strategic product rationalization initiative charges of $4.3 million, gross margin was approximately 23.4% for the six months ended June 30, 2022, compared to gross margin of approximately 32.3% for the same period in 2021.

The year-over-year decrease in gross margin of approximately 8.9% is related to the sale of lower-margin KushCo related products.

Net Sales by Geographic Regions

Three Months Ended March 31,

% of Net sales Change

Three Months Ended

June 30, Six Months Ended

% of Net sales Change % of Net sales Change

2022 2021 2022 2021 $ % 2022 2021 2022 2021 $ %

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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%.

For the three months ended June 30, 2022, our United States net sales were approximately $37.6 million, compared to approximately $30.7 million for the same period in 2021, representing an increase of $6.9 million, or 22.5%.

The year-over-year increase was primarily due to the merger with KushCo, which contributed $23.6 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.

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.

Excluding net sales contributed by KushCo, total net sales decreased by approximately $16.7 million, or 54.5%, to approximately $14.0 million for the three months ended June 30, 2022, compared to the same period in 2021.

The year-over-year decrease was principally due to a decrease in wholesale revenue of $8.3 million, and a decrease in consumer retail and marketplace revenue of $3.9 million.

For the six months ended June 30, 2022, out United States net sales were approximately $80.6 million, compared to approximately $59.4 million for the same period in 2021, representing an increase of $21.2 million, or 35.8%.

The year-over-year increase was primarily due to the merger with KushCo, which contributed $52.1 million in total net sales.

Excluding net sales contributed by KushCo, total net sales decreased by approximately $30.9 million, or 52%, to approximately $21.2 million for the six months ended June 30, 2022, compared to the same period in 2021.

The decrease was driven by a decrease in wholesale revenue and consumer e-commerce business.

For the three months ended June 30, 2022, our Canadian net sales were approximately $0.9 million, compared to approximately $1.4 million for the same period in 2021, representing a decrease of $0.5 million, or 38.1%.

The year-over-year decrease was primarily due to a $0.5 million decrease in wholesale revenue.

This was partially offset by $0.4 million in net sales contributed by KushCo.

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.

For the six months ended June 30, 2022, our Canadian net sales were approximately $2.7 million, compared to approximately $4.0 million for the same period in 2021, representing a decrease of $1.2 million, or 31.3%.

The year-over-year decrease was primarily due to a decrease in wholesale revenue offset by incremental sales contributed by KushCo.

For the three months ended June 30, 2022, our European net sales were approximately $1.4 million, compared to approximately $2.6 million for the same period in 2021, representing a decrease of $1.2 million or 44.8%.

This was primarily due to a $0.5 million, or (43.2)%, decrease in our B2B sales.

For the six months ended June 30, 2022, our European net sales were approximately $3.1 million, compared to approximately $5.4 million for the same period in 2021, representing a decrease of $2.3 million, or 42%.

This was primarily due to a decrease in wholesale 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.

We believe that our cash on hand 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.

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 and other equity issuances such as our June 2022 Offering.

As of June 30, 2022, we had approximately $9.1 million of cash, of which $1.0 million was held in foreign bank accounts, and approximately $44.8 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.

In December 2021, we entered into a Secured Promissory Note (the “December 2021 Note”), which was subsequently amended on June 30, 2022 (the “First Amendment”), with Aaron LoCascio, the Company’s former President and co-founder and a member of the Board, which provided for a loan of $8.0 million originally maturing on June 30, 2022.

Accrued interest at a rate of 15.0% was due monthly, and the principal amount was originally due in full in June 2022.

The First Amendment extended the maturity of the December 2021 Note to July 14, 2022.

The December 2021 Note was secured by a continuing security interest in all of our assets and properties whether then or thereafter existing or required, including our inventory and receivables (as defined under the Universal Commercial Code) and included negative covenants restricting our ability to incur further indebtedness and engage in certain asset dispositions until the earlier of the maturity date or the December 2021 Note being fully repaid.

On July 14, 2022, we entered into the Second Amendment to the December 2021 Note (the “Second Amendment” and together with the First Amendment, the "Bridge Loan"), which provided for the extension of the maturity date of the Bridge Note from July 14, 2022 to July 19, 2022.

In connection with the entry into the Second Amendment, we repaid $4.0 million of the aggregate principal amount due under the Bridge Loan on July 14, 2022, with the remainder due at maturity.

On July 19, 2022, we repaid the remaining balance on the Bridge Loan in full, and, as a result, all obligations under the Bridge Loan have been satisfied.

On June 27, 2022, we entered into a securities purchase agreement with an accredited investor, pursuant to which we agreed to issue and sell an aggregate of 585,000 shares of our Class A common stock, pre-funded warrants to purchase up to 495,000 shares of our Class A common stock (the “June 2022 Pre-Funded Warrants”) and warrants to purchase up to 1,080,000 shares of our Class A common stock (the “June 2022 Standard Warrants” and, together with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”), in a registered direct offering (the “June 2022 Offering”).

The shares of Class A common stock and June 2022 Warrants were sold in Units (the “June 2022 Units”), with each unit consisting of one share of Class A common stock or a June 2022 Pre-Funded Warrant and a June 2022 Standard Warrant to purchase one share of our Class A common stock.

The June 2022 Units were offered by the Company pursuant to the Shelf Registration Statement.

Subject to certain ownership limitations, the June 2022 Standard Warrants are exercisable for five years from the six-month anniversary of issuance at an exercise price equal to $5.00 per share of Class A common stock.

Each June 2022 Pre-Funded Warrant was exercisable for one share of Class A common stock at an exercise price of $0.002.

The June 2022 Offering generated gross proceeds of approximately $5.4 million and net proceeds to the Company of approximately $5.0 million.

All June 2022 Pre-Funded Warrants were exercised in July 2022, based upon which we issued an additional 495,000 shares of our Class A common stock, for de minimis net proceeds.

As described in "Note 13 - Subsequent Events," on July 19, 2022, we entered into the Sale Agreement with Portofino to sell the Company’s 50% stake in VIBES Holdings LLC for total consideration of $5.3 million in cash and on August 9, 2022, we entered into the Loan Agreement whereby the Lenders agreed to make available to the Company a term loan of up to $15.0 million.

See "Note 13 - Subsequent Events" for more information.

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.

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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 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 are in the process of establishing a payment plan (the “Payment Plan”) for the repayment of approximately $6.0 million in liabilities due to a third-party vendor (the “Vendor”) relating to previously purchased inventory.

In connection with our ongoing discussions with the Vendor, on July 18, 2022, we paid $1.0 million of the approximate $6.0 million balance due to the Vendor in cash and, during the period of July 26, 2022 through July 31, 2022, we returned approximately $1.3 million in inventory to the Vendor, which was accepted by the Vendor and will be credited against the remaining outstanding balance owed by us to the Vendor once the Vendor has confirmed the value of the returned inventory.

Currently, we expect to owe the Vendor approximately $3.5 million in remaining liabilities pending the Vendor’s confirmation of the value of the inventory returned to it.

We expect to enter into the Payment Plan to repay the remainder of the amount due to the Vendor in the amount of $200,000 in cash each week until the remainder of the liabilities due to the Vendor are repaid in full.

However, we can provide no assurances as to the timing of our entry into the Payment Plan, the final terms of the Payment Plan or that we will enter into the Payment Plan at all.

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.

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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.

Net proceeds from sales of our shares of Class A common stock under the ATM Program are expected to be used 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.

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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.

Since the launch of the ATM program in August 2021 and through June 30, 2022, we sold 972,624 shares of our Class A common stock under the ATM Program, which generated gross proceeds of approximately $12.7 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 $6.8 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.

Following the completion of the June 2022 Offering we are unable to issue additional shares of Class A common stock pursuant to the ATM Program or otherwise use the Shelf Registration Statement for a period of time due to the Nasdaq Exchange Cap, which will limit our liquidity options in the capital markets.

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.

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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.

As of June 30, 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.

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,

Six Months Ended June 30,

(in thousands) 2022 2021

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Net Cash Used in Operating Activities

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.

During the six months ended June 30, 2022, net cash used in operating activities of approximately $13.7 million consisted of (i) net loss of $33.2 million, offset by non-cash adjustments to net loss of approximately $6.8 million, including depreciation and amortization expense of approximately $4.8 million, stock-based compensation expense of approximately $1.6 million, and an offsetting reversal on the allowance of an indemnification receivable of approximately $1.8 million, and (ii) a $12.7 million decrease in working capital primarily driven by increases in accounts payable, accrued expenses and customer deposits of approximately $2.1 million, offset by increases in accounts receivable, inventories, vendor deposits and other current assets of approximately $10.6 million.

During the six months ended June 30, 2021, net cash used in operating activities of approximately $15.2 million consisted of (i) net loss of $13.6 million, offset by non-cash adjustments to net loss of approximately $0.6 million, including depreciation and amortization expense of approximately $1.2 million, stock-based compensation expense of approximately $1.0 million, and a reversal on the allowance of an indemnification receivable of approximately $1.7 million, and (ii) $2.2 million cash used in working capital primarily driven by decreases in accounts payable and accrued expenses of approximately $13.7 million, offset by decreases in accounts receivable, inventories, vendor deposits and other current assets of approximately $11.5 million, which included the collection of an indemnification asset of approximately $0.9 million, and the reduction of our VAT receivable balance upon the collection of a refund from the Dutch tax authorities of approximately $4.1 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.

During the six months ended June 30, 2022, net cash used in investing activities of approximately $1.2 million largely consisted of capital expenditures, including development costs for our new enterprise resource planning (ERP) system.

During the six months ended June 30, 2021, we used cash of approximately $3.6 million, consisting of $2.4 million for the acquisition of Eyce LLC and $1.5 million for capital expenditures, including development costs for our ERP system, offset partially by proceeds from the sale of assets held for sale of approximately $0.7 million.

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.

During the six months ended June 30, 2022, net cash provided by financing activities of approximately $11.1 million primarily consisted of cash proceeds of approximately $14.1 million from the issuance of Class A common stock through our ATM Program and the June 2022 Offering, offset primarily by approximately $2.0 million in payments on notes payable, finance lease obligations and other long-term liabilities, and approximately $0.9 million in payments of contingent consideration related to the Eyce LLC acquisition.

During the six months ended June 30, 2021, net cash used in financing activities primarily consisted of approximately $0.2 million in payments on other long-term liabilities, notes payable and finance lease obligations, $0.2 million in member distributions, offset by $0.1 million of cash proceeds from the exercise of stock options.

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.

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 beginning with the quarterly period ended March 31, 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis