What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 156 added, 272 removed, 121 unchanged (78% 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 September 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.

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, 2023 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, 2022, which are included in our Annual Report on Form 10-K.

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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;

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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").

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, 2022 (the "2022 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.

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• our strategy, outlook, and growth prospects;

• general economic trends and trends in the industry and markets in which we operate;

• our limited liquidity and our ability to successfully execute our strategic initiatives to improve our liquidity position;

• 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;

• our ability to access capital;

• 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;

• general economic trends, trends in the industry, and the competitive markets in which we operate;

• 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, including high inflation and increasing interest rates;

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

• 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, including the current inflationary environment;

• our ability to use or license certain trademarks;

• our ability to adapt to changes in consumer spending and general economic conditions;

• our ability to maintain consumer brand recognition and loyalty of our products;

• our ability to protect our intellectual property rights and use or license certain trademarks;

• our ability to successfully identify and complete strategic acquisitions and/or dispositions;

• our ability to address product defects and contamination of, or damage to, our products;

• our exposure to potential various claims, lawsuits, and administrative proceedings;

• our and our customers’ ability to establish or maintain banking relationships;

• the impact of governmental laws and regulations and the outcomes of regulatory or agency proceedings;

• 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 CBD;

federal, state, local, and foreign tax obligations and changes in tariffs;

• any unfavorable scientific studies on the long-term health risks of vaporizers, electronic cigarettes, or cannabis and 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;

• the onset of an economic recession in the United States or other countries, including the impact of the ongoing war in Ukraine, and their impact on the economy generally;

• natural disasters, adverse weather conditions, operating hazards, environmental incidents and labor disputes;

• public heath crises;

• the potential delisting of our Class A common stock from the Nasdaq;

• increased costs as a result of being a public company;

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Consequently, you should not place undue reliance on forward-looking statements.

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.

Founded in 2005, Greenlane is the premier global platform for the development and distribution of premium cannabis accessories, vape devices, and lifestyle products.

In 2021, we completed several transformative acquisitions including the acquisition of two proprietary house brands, EYCE (“Eyce”) and DaVinci (“DaVinci”), along with a larger merger with KushCo Holdings, adding a significant industrial line of business to the Greenlane platform.

These acquisitions strengthened our leading position as a consumer ancillary products house-of-brands business by adding two established brands to our portfolio (Eyce and DaVinci), and significantly expanded our customer network, bringing strategic relationships with leading cannabis multi-state-operators (“MSOs”), cannabis single-state operators (“SSOs”), and Canadian licensed-producers (“LPs”).

Greenlane is a leading ancillary cannabis company, providing a wide array of consumer ancillary products and industrial ancillary products to thousands of cannabis producers, processors, brands, and retailers (“Cannabis Operators”), in addition to specialty retailers, smoke shops and head shops, convenience stores, and consumers directly through our own proprietary web stores and large online marketplaces such as Amazon.

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;

the Marley Natural accessory line;

Haring Glass Collection accessory line;

Aerospaced grinders;

Cookies lifestyle line;

and Higher Standards, which is both an upscale product line and an innovative retail experience with a flagship store in New York City’s famed Chelsea Market.

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.

We also completed development of our newest product line, Groove, an expansive collection of reliable ancillary cannabis products officially launched in October of this year.

At a more affordable price point, we are excited to attract a broader customer range with options for consumers of all budgets.

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 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 Prevent All Cigarette Trafficking Act (the “PACT Act”).

Our wholly-owned Greenlane Brands includes our recently launched a more affordable product line – Groove, innovative silicone pipes and accessories – Eyce, best-in-class premium vaporizer brand – DaVinci, premium smoke shop and ancillary product brand – Higher Standards, and child-resistant packaging brand - Pollen Gear.

We also have category exclusive licenses for the premium Marley Natural branded products, as well as the K.Haring Glass Collection.

The Greenlane Brands, along with a curated set of third-party products, are offered to customers through our proprietary, owned and operated e-commerce platforms which include Vapor.com, Vaposhop.com, DaVinciVaporizer.com, PuffItUp.com, HigherStandards.com, EyceMolds.com and MarleyNaturalShop.com.

These platforms allow us to reach customers directly with helpful resources and a seamless purchasing experience.

We merchandise vaporizers, packaging, and other ancillary products in the United States, Canada, Europe and Latin America.

We distribute products to retailers through wholesale operations and distribute products to consumers through e-commerce activities and our flagship Higher Standards store in New York City's famed Chelsea Market.

We operate our own distribution centers in the United States, while also utilizing third-party logistics ("3PL") locations in the United States, Canada, and Europe.

We have made tremendous progress consolidating and streamlining our warehouse and distribution operations following our acquisitions in 2021, and we look forward to further optimization of our footprint in 2023.

We manage our business in two different, but complementary, business segments.

The first is the Consumer Goods segment, which focuses on serving consumers across wholesale, retail and e-commerce operations—offering both our Greenlane Brands as well as ancillary products and accessories from select leading third-party brands, such as Storz and Bickel, Grenco Science, PAX, Cookies and more.

This segment forms a central part of our growth strategy, especially as it relates to scaling our own portfolio of higher-margin proprietary owned brands.

In addition to our Consumer Goods segment, we have our Industrial Goods segment, which focuses on serving Cannabis Operators by providing ancillary products essential to their daily operations and growth, such as packaging and vaporization solutions, including our Greenlane Brand Pollen Gear.

Refer to "Note 12— Segment Reporting" within Item 1 to this Quarterly Report on Form 10-Q for additional information on our reportable segments.

Plan to Accelerate Path to Profitability and Capitalize the Business

In today’s economic environment, not to mention the environment of the cannabis industry itself, the key focus for many companies is profitability.

At Greenlane, we are hyper focused on getting our business profitable and well-capitalized for long-term sustainability.

We have been working hard to right-size our business, focus on core areas, and reduce our overall cost structure while improving our margins in an effort to be profitable in 2023.

In April 2023, we successfully entered into two strategic partnerships which management believes will help significantly reduce our overall cost structure, enhance our margins and further support our faciliti es consolidation initiatives while also servicing and providing solutions to our customers.

First, we entered into a strategic partnership (the “MJ Packaging Partnership”) with A&A Global Imports d/b/a MarijuanaPackaging.com (“MJ Pack”), a leading provider of packaging solutions to the cannabis industry.

As part of the MJ Packaging Partnership, we will no longer purchase additional packaging inventory and MJ Pack will become our strategic partner to continue providing and enhancing packaging solutions for our customers.

As a result of the MJ Packaging Partnership, we are no longer seeking a purchaser for our packaging division.

Second, we entered into a strategic partnership with an affiliate of one our existing vape suppliers (“Vape Partner”) to service certain key customers with vaporizer goods and services (the “Vape Partnership”).

As part of the Vape Partnership, we will introduce our Vape Partner to to certain key customers, assist with the promotion and the sale of certain vaporizer goods and services, and help coordinate the logistics, storage and distribution of such vaporizer products.

If our Vape Partner and key customer(s) enter into a direct relationship, the customers would directly purchase vaporizer goods and services, which we currently sell them, directly from our Vape Partner and we would no longer need to purchase such vape inventory on behalf of such key customer(s).

In exchange we would earn quarterly and annual commission payments from our strategic partners.

While the strategic partnerships may result in a decrease in top line revenue for these packaging and vape products these partnerships combined with some of our other restructuring initiatives, should allow us to reduce our overall cost-structure and enhance our margins, and convert millions of dollars of existing inventory back into cash, thereby improving our balance sheet.

We have successfully renegotiated supplier partnership terms and are continuing to improve working capital arrangements with suppliers.

We have made progress consolidating and streamlining our office, warehouse, and distribution operations footprint.

We reduced our salaries, benefits and payroll taxes expenses by approximately 46.6%, for the three months ended March 31, 2023, compared to the same period for 2022 to reduce costs.

Finally, we are actively selling our excess & obsolete (“E&O”) inventory of lower-margin, non-strategic products, along with reducing our overall level of inventory on hand.

In May 2022, we commenced our official E&O sales program internally and have since sold more than $5.8 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.

Management believes that our various strategic initiatives will reduce costs, help accelerate the our path to profitability, help support the growth of the business, and allow us to reinvest capital into our highest margin product lines, such as our Greenlane Brands, launch new products such as our Groove product line, and improve our e-commerce and B2B technological platforms.

Notwithstanding the liquidity plans discussed above, we were required to obtain additional capital through the sale of Class A common stock and warrants in a public offering that closed in October 2022 and filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in February 2023 seeking to register the offering of up to $8 million in units, which has not yet become effective.

The October 2022 Offering was completed and the February 2023 Form S-1 was filed, in order to meet short term funding needs, and we are still seeking to execute our strategic and other liquidity initiatives.

USPS PACT Act Exemption

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2022 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.

On August 4, 2022, we filed a Certificate of Amendment (the “Certificate of Amendment”) to our amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which effected a one-for-20 reverse stock split (the “2022 Reverse Stock Split”) of our issued and outstanding shares of Class A common stock and Class B common stock (collectively, the “Common Stock”) at 5:01 PM Eastern Time on August 9, 2022.

As a result of the 2022 Reverse Stock 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 2022 Reverse Stock Split.

The 2022 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, we announced our strategic plan (the “2022 Plan”) to reduce our cost structure, increase liquidity and accelerate our path to profitability.

The 2022 Plan includes a recently completed reduction in force, reduction of facility footprints worldwide, a sale leaseback of our headquarters building, disposition of non-core assets, discontinuation of lower-margin third-party brands, increase of prices on select products and securing an asset-based loan that will support our 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 July 19, 2022, Warehouse Goods entered into that certain Membership Interest Purchase Agreement and supporting documents to sell our 50% stake in VIBES Holdings LLC for total consideration of $4.6 million in cash.

Additionally, on August 9, 2022, we entered into an asset-based loan pursuant to that certain Loan and Security Agreement, dated as of August 8, 2022 (the “Loan Agreement”), by and among the Company, certain subsidiaries of the Company as guarantors, the parties thereto from time to time as lenders (the “Lenders”), and WhiteHawk Capital Partners LP, as the agent for the Lenders.

As described in the Loan Agreement, the Lenders agreed to make available to us a term loan of up to $15.0 million on the terms and conditions set forth therein and the other Financing Agreements (as defined therein).

Subsequently, on August 16, 2022, 1095 Broken Sound Pwky entered into a Purchase and Sale Agreement with a third-party whereby 1095 Broken Sound agreed to sell a certain parcel of real estate including our headquarters building in Boca Raton, Florida for total consideration of $9.95 million, and on September 22, 2022 we closed on the sale.

We expect to remain in our current headquarters space at 1095 Broken Sound Parkway, Suite 300 in Boca Raton, Florida through the end of November 2022, at which point we will transition our headquarters to Suite 100.

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 2022, we commenced our official E&O sales program internally and have since sold more than $2.7 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.

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.

Notwithstanding the 2022 Plan, we were required to obtain additional capital through the sale of common stock and warrants in a public offering that closed in October 2022.

See Note 9 — October 2022 Offering.

This offering was completed in order to meet short term funding needs, and we are still seeking to execute our 2022 Plan and other liquidity initiatives.

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 nine months ended September 30, 2022 from $0.1 million, or 0.3% 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.

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.

The number of shares available to be awarded under our Second Amended and Restated 2019 Equity Incentive Plan have also been appropriately adjusted.

See "Note 10 — Compensation Plans" for more information.

All share and per share amounts in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 have been retroactively adjusted for all periods presented to give effect to the 2022 Reverse Stock Split.

Proposed 2023 Reverse Stock Split

On April 11 , 2023, the Board unanimously approved and declared advisable, and recommended that our stockholders (including holders of Series A Preferred Stock) approve at the 2023 Annual Meeting the adoption of the 2023 Amendment to effect a reverse stock split of our Common Stock at any whole number between, and inclusive of, one-for-five to one-for-fifteen.

Approval of the Proposed 2023 Reverse Stock Split the 2023 Annual Meeting will grant the Board the authority, but not the obligation, to file the 2023 Amendment to effect the Proposed 2023 Reverse Stock Split no later than November 20, 2023, with the exact ratio and timing of the Proposed 2023 Reverse Stock Split to be determined at the discretion of the Board.

The exact split ratio selected by the Board will be publicly announced prior to the effectiveness of the Proposed 2023 Reserve Stock Split.

For additional information about the 2023 Annual Meeting and the Proposed 2023 Reverse Stock Split, please see the Company's Definitive Proxy Statement filed with the SEC on April 27, 2023.

Results of Operations

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

Three Months Ended

September 30, Nine Months Ended

September 30,

% of Net sales Change % of Net sales Change

The following table presents operating results for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

% of Net sales Change

2023 2022 2023 2022 $ %

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General and administrative 7,677 11,715 32.0 % 25.2 % (4,038) (34.5) %

Goodwill and indefinite-lived intangibles impairment charge 66,760 — 232.8 % — % 66,760 66,760 — 58.0 % — % 66,760 — %

Depreciation and amortization 1,992 2,403 8.3 % 5.2 % (411) (17.1) %

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Consolidated Results of Operations

For the three months ended September 30, 2022, net sales were approximately $28.7 million, compared to approximately $41.3 million for the same period in 2021, representing a decrease of $12.6 million, or 30.6%.

The decrease was partially offset by the merger with KushCo in August 2021, which contributed $20.1 million in net sales in 2022 compared to $12.6 million for prior year, which only included September 2021 activity.

Excluding KushCo's post-merger sales, net sales decreased 70.2% to $8.6 million for the three months ended September 30, 2022 compared to $28.7 million for the same period in 2021.

Third-party consumer brand sales decreased $14.3 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 $3.6 million, or 54.7%, to $3.0 million for the three months ended September 30, 2022 from $6.6 million for the same period in 2021, driven largely by a decrease in Vibes due to the sale of Greenlane's interest in the business, a decrease in Eyce and Aerospaced sales, partially offset by an increase in DaVinci.

For the nine months ended September 30, 2022, net sales were approximately $115.1 million, compared to approximately $110.0 million for the same period in 2021, representing an increase of $5.1 million or 4.6%.

The increase was primarily due to the merger with KushCo in August 2021, which contributed $73.5 million in net sales in 2022 versus $12.6 million for prior year, which only included September 2021 activity..

Excluding KushCo's post-merger sales, net sales declined 51% to $41.6 million for the nine months ended September 30, 2022 compared to $85.2 million for the same period in 2021.

The decrease year over year is related to Industrial Pollen Gear $5.4 million and consumer goods sales for Greenlane Brands $7.6 million and third-party brands decreasing $27.9 million 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.

Revenue was negatively impacted by Greenlane's selling it's interest in the Vibes business during the current quarter.

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

For the three months ended March 31, 2023, net sales were approximately $24.0 million, compared to approximately $46.5 million for the same period in 2022, representing a decrease of $22.6 million, or 48.5%.

Industrial segment decreased 44% and Consumer segment decreased 55%.

The year-over-year decrease in net sales was due to a major restructuring effort and shift in strategy to focus on in-house brands that carry a higher margin profile while rationalizing out third-party brand offerings, which generated top line revenue with lower margins.

The Company is focused on profitable revenue and as a result top line revenue has significantly been reduced.

Net sales were also affected by the sale of the Company's minority interest in the Vibes brand during 2022 and the Company's announcement of its intention to sell its packaging business, which adversely affected sales.

Concurrently, the Company has focused on right-sizing the business during the fiscal year ended December 31, 2022 to reduce sales and marketing costs and reduce or eliminate certain administrative functions.

Cost of Sales and Gross Margin

For the three months ended September 30, 2022, cost of sales decreased by $16.1 million, or 40.5%, as compared to the same period in 2021.

The decrease in cost of sales was attributable to a decrease in revenue.

Gross margin increased to 17.3% for the three months ended September 30, 2022, compared to gross margin of 3.6% for the same period in 2021.

Excluding write-offs of damaged and obsolete inventory for the three months ended September 30, 2022 and 2021 of $1.0 million and $7.6 million, respectively, associated with post-merger and ongoing product rationalization initiatives, gross margins decreased 1.1% to 20.8% for the three months ended September 30, 2022, compared to 22.0% for the same period in 2021.

The increase in margin is related to a 71.9% decline in third-party brand sales, which carry a lower margin profile.

For the nine months ended September 30, 2022 cost of sales increased by $5.2 million, or 5.7%, as compared to the same period in 2021.

The increase is related to the increase in sales year over year of 4.6%.

Gross margin decreased to 16.5% for the nine months ended September 30, 2022, compared to gross margin of 17.4% for the same period in 2021.

Excluding inventory write-offs of damaged and obsolete inventory for the nine months ended September 30, 2022 and 2021, respectively, of $7.8 million and $7.6 million respectively, associated with post-merger and ongoing product rationalization initiatives, gross margins decreased 1.1% to 20.8% for the nine months ended September 30, 2022, compared to 22.0% for the same period in 2021.

Excluding damaged and obsolete negative impact margins remained relatively flat year over year.

For the three months ended March 31, 2023, cost of sales decreased by $22.1 million, or 54.5%, as compared to the same period in 2022.

The decrease in the cost of sales is driven by the 48.5% decrease in revenue in addition to a $5.8 million decrease in damaged and obsolete inventory write-offs.

Gross margin increased to 23.0% for the three months ended March 31, 2023, compared to gross margin of 13% for the same period in 2022.

Excluding inventory write-offs of damaged and obsolete inventory for the three months ended March 31, 2022 of $5.8 million compared to $0 for three months ended March 31, 2023 gross margins decreased 2.3% to 23.0% for the three months ended March 31, 2023, compared to 25.3% for the same period in 2022.

Salaries, Benefits and Payroll Taxes

Salaries, benefits and payroll taxes expenses decreased by approximately $4.2 million, or 37.5%, to $7.0 million for the three months ended September 30, 2022, compared to $11.2 million for the same period in 2021, primarily due to a decrease in stock compensation of $3.4 million related to the acceleration of vesting options due to the KushCo merger.

Salaries, benefits and payroll taxes expenses increased by approximately $2.7 million or 11.8% , to $25.9 million for the the nine months ended September 30, 2022, compared to $23.2 million for the same period in 2021, primarily due to an increase related to the KushCo merger, partially offset by a $2.7 million decrease in stock compensation.

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.

Salaries, benefits and payroll taxes expenses decreased by approximately $4.7 million, or 46.6%, to $5.4 million for the three months ended March 31, 2023, compared to $10.1 million for the same period in 2022.

The decrease is related to the reduction in workforce since the beginning of 2022 to right-size the business and focus on profitability.

As we continue to closely monitor the evolving business landscape, 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.

General and Administrative Expenses

General and administrative expenses decreased by approximately $8.2 million, or 49.1%, for the three months ended September 30, 2022, compared to the same period in 2021.

This decrease was primarily due to an decrease of approximately $5.0 million in marketing expense, $1.3 million in professional fees and $1.8 million in prepaid inventory write-off for the prior year.

Also contributing to the decrease was the gain on the sale of the Vibes business interest $2.1 million, Boca Florida real estate sale $0.8M offset by an increase in bad debt expense of $0.8 million year over year and fixed asset sale loss of $0.7 million.

General and administrative expenses decreased by approximately $3.9 million or 11.3%, for the nine months ended September 30, 2022, compared to the same period in 2021.

This decrease was primarily due to a $3.5 million reduction in professional fees related to the KushCo merger.

Additionally, merchant fees decreased $1.3 million due to a decline in consumer revenue, insurance decreased $1.3 million due to a one-time D&O insurance payment related to the KushCo merger in the prior year, marketing expenses decreased $0.6 million, and restructuring expenses decreased $0.6 million.

These declines were partially offset by a $2.2 million increase in bad debt, $1.9 million increase in facilities, and $0.8 million increase in outbound shipping driven by the KushCo merger.

Also contributing to the decrease was the gain on the sale of the Vibes business interest of $2.1 million, and then Boca Raton, Florida real estate sale of $0.8M offset by a loss of $0.7 million related to a fixed asset sale.

Goodwill and Indefinite-Lived Intangibles Impairment Charge

We incurred a goodwill and indefinite-lived intangibles impairment charge of approximately $66.8 million during the three months ended September 30, 2022, compared to no such impairment charge for the comparable period in 2021.

This impairment charge was due to declining business and declining enterprise value.

We incurred a goodwill and indefinite-lived intangibles impairment charge of approximately $66.8 million during the nine months ended September 30, 2022, compared to no such impairment charge for the comparable period in 2021.

This impairment charge was due to declining business and declining enterprise value.

General and administrative expenses decreased by approximately $4.0 million, or 34.5%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease is related to major restructuring effort by the Company to reduce cost and right-size the business.

Compared with the first quarter of 2022, the Company experienced decreases in professional and outside services by $2.2 million, facility expenses by $1.4 million, outbound freight by $0.7 million, other G&A by $0.6 million, marketing by $0.3 million, taxes and licenses by $0.3 million, and general insurance by $0.2 million;

offset partially by an increase in software expense $0.2 million and bad debt expense of $1.5 million related to a reversal of $1.8 million VAT liability reserve due to an indemnification receivable recorded during the three months ended March 31, 2022.

Excluding the reversal of the $1.8 million reserve allowance, general and administrative expenses decreased $5.7 million or 50% for the three months ended March 31, 2023 compared to the prior year comparable period.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $0.9 million, or 77.1%, for the nine months ended September 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, the Eyce and DaVinci business acquisitions, and the ERP implementation.

Depreciation and amortization expense increased $4.5 million, or 188.3%, for the nine months ended September 30, 2022, compared to the same period in 2021.

Depreciation and amortization expense decreased $0.4 million, or 17.1%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease is related to a major restructuring effort to reduce cost and right-size the business resulting in the sale and disposal of assets related to reducing our warehousing and office footprint.

Other Income (Expense), Net

Interest expense.

Interest expense increased approximately $0.8 million during the three months ended September 30, 2022.

The increase is primarily related to the new ABL facility and promissory notes for the Eyce and DaVinci acquisition.

Interest expense decreased approximately $1.2 million during the nine months ended September 30, 2022.

The increase is primarily related to the new ABL facility and promissory notes for the Eyce and DaVinci acquisition.

Interest expense increased approximately $0.4 million for the three months ended March 31, 2023 compared to the same period in 2022.

The increase is primarily related to the new Asset-Based Loan the Company closed during Q3 2022.

Other expense, net.

Other income (expense), net, expense increased by approximately $2.1 million million for the three months ended September 30, 2022, compared to the same period in 2021.

The change is primarily due to a gain related to the change in fair value of contingent consideration of $1.0 million related to the DaVinci acquisition.

Other income (expense), net, expense increased by approximately $1.3 million for the nine months ended September 30, 2022, compared to the same period in 2021.

The change is primarily due to a gain related to the change in fair value of contingent consideration of $1.0 million related to the DaVinci acquisition.

Provision for (Benefit from) Income Taxes

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 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 nine months ended September 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.

Other income (expense), net, improved by approximately $0.1 million for the three months ended March 31, 2023, compared to the same period in 2022.

The change is primarily due a loss related to the change in fair value of equity investment of $0.3 million recorded during the three months ended March 31, 2022.

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.

Based on this assessment, we determined we had two operating segments as of December 31, 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 as of the first quarter of 2023.

The Consumer Goods segment focuses on serving consumers across wholesale, retail and e-commerce operations—through both our proprietary brands, including Eyce, DaVinci, Marley Natural, Keith Haring, and Higher Standards, as well as lifestyle products and accessories from leading brands, like 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 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.

The Industrial Goods segment focuses on serving the premier cannabis brands, operators, and retailers through our wholesale operations by providing ancillary products essential to their growth, such as customizable packaging and supply products, which includes our Greenlane Brand Pollen Gear 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 and nine months ended September 30, 2022 and 2021, respectively:

Three Months Ended

September 30, Nine Months Ended

September 30,

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

The following table sets forth information by reportable segment for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

% of Total Net sales Change

2023 2022 2023 2022 $ %

2 unchanged sentences

Total net sales $ 23,959 $ 46,534 100.0 % 100.0 % $ (22,575) (48.5) %

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

% of Segment Net sales Change

Cost of sales:

8 unchanged sentences

Consumer Goods

For the three months ended September 30, 2022, our Consumer Goods operating segment reported net sales of approximately $8.6 million compared to approximately $24.7 million for the same period in 2021, representing a decrease of $16.2 million or 65.4%.

The year-over-year decrease represented a $5.6 million or 63.2% decrease in Greenlane Brands sales and a $14.3 million or 71.9% decrease in consumer third-party brand sales due to our strategy to focus on proprietary brands with higher margins.

The company has also sold Greenlane's interest in the Vibes business impacting sales negatively.

For the nine months ended September 30, 2022, our Consumer Goods operating segment reported net sales of approximately $41.6 million compared to approximately $85.2 million for the same period in 2021, representing a decrease of $43.6 million or 51.2%.

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

The company has also sold Greenlane's interest in the Vibes business impacting sales negatively.

For the three months ended September 30, 2022, cost of sales decreased by $15.3 million, or 65.8%, as compared to the same period in 2021.

The decrease in cost of sales was primarily due to the $16.2 million aforementioned sales decrease of 65.4%.

For the nine months ended September 30, 2022, cost of sales decreased by $33.7 million or 49.0% , as compared to the same period in 2021.

The decrease in cost of sales was primarily due to a $43.6 million or 51.2% decrease in sales compared to the same period in 2021.

Gross margin increased 1.2% to 7.3% for the three months ended September 30, 2022, compared to gross margin of approximately 6.1% for the same period in 2021.

The low margins in both years are related to excess and obsolete inventory charges associated with inventory and product rationalization initiatives.

Excluding these D&O charges of $0.8 million, gross margin was approximately 17.0% for the three months ended September 30, 2022, compared to gross margin of approximately 23.5% for the same period in 2021 which incurred $4.3 million of D&O write-offs.

Gross margin decreased 3.7% to 15.6% for the nine months ended September 30, 2022, compared to gross margin of approximately 19.3% for the same period in 2021.

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

Excluding these D&O charges of $3.4 million, gross margin was approximately 23.7% for the nine months ended September 30, 2022, compared to gross margin of approximately 25.8% for the same period in 2021 which incurred $5.5 million of D&O write-offs.

For the three months ended March 31, 2023, our Consumer Goods operating segment reported net sales of approximately $7.8 million compared to approximately $17.1 million for the same period in 2022, representing a decrease of $9.3 million or 54.4%.

The year-over-year decrease was due to a major restructuring effort by the company to right-size the business during fiscal year 2022 to reduce sales and marketing costs to align with gross profit, sale of the Company's minority interest in Vibes brand and a major shift in strategy to focus on in-house brands that have a higher margin profile and rationalized third-party brand offering generating top line revenue with lower margins.

For the three months ended March 31, 2023, the cost of sales decreased by $8.8 million, or 61.4%, as compared to the same period in 2022.

The decrease in the cost of sales was primarily due to the 54.4% decrease in the net sales of Consumer Goods.

The gross margin decreased to 29.3% for the three months ended March 31, 2023, compared to a gross margin of approximately 16.5% for the same period in 2022.

Excluding damaged and obsolete charges of $1.9 million for the three months ended March 31, 2022, the gross margin was approximately 27.4% for the three months ended March 31, 2022, compared to a gross margin of approximately 29.3%, for the three months ended March 31, 2023.

Industrial Goods

For the three months ended September 30, 2022, our Industrial Goods operating segment reported net sales of approximately $20.1 million compared to approximately $16.6 million for the same period in 2021, representing an increase of $3.5 million or 21.2%.

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

For the nine months ended September 30, 2022, our Industrial Goods operating segment reported net sales of approximately $73.5 million compared to approximately $24.8 million for the same period in 2021, representing an increase of $48.7 million or 196.4%.

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

For the three months ended September 30, 2022, cost of sales decreased by $0.8 million, or 5.1%, as compared to the same period in 2021, due to the increase in sales.

For the nine months ended September 30, 2022, cost of sales increased by $38.8 million or 175.0%, as compared to the same period in 2021, due to the increase in sales year-over-year.

Gross margin was approximately 21.6% for the three months ended September 30, 2022, compared to gross margin of approximately (0.1)% for the same period in 2021, representing a 15017.7% year-over-year increase.

Excluding post-merger strategic product rationalization initiative charges of $0.2 million, gross margin was approximately 22.4% for the three months ended September 30, 2022, compared to gross margin of approximately 17.8% for the same period in 2021 excluding post-merger strategic product rationalization charge of $3.0 million.

The year over year increase in gross margin of approximately 4.6% is related to the sale of higher-margin KushCo related products.

Gross margin was approximately 17.0% million for the nine months ended September 30, 2022, compared to gross margin of approximately 10.6% for the same period in 2021, representing a 60.7% year-over-year increase.

Excluding post-merger strategic product rationalization initiative charges of $4.7 million, gross margin was approximately 23.4% for the nine months ended September 30, 2022, compared to gross margin of approximately 22.6% for the same period in 2021 excluding post-merger strategic product rationalization charge of $3.0 million.

The year-over-year increase in gross margin of approximately 0.8% is related to the sale of higher-margin KushCo related products.

For the three months ended March 31, 2023, our Industrial Goods operating segment reported net sales of approximately $16.1 million compared to approximately $29.4 million for the same period in 2022, representing a decrease of $13.2 million or 45.1%.

The year-over-year decrease was due to a major restructuring effort by the company to rightsize the business during fiscal year 2022 to reduce the sales and marketing costs to align with the gross profit and the announcement to sell the Company's packaging business interrupting sales.

For the three months ended March 31, 2023, the cost of sales increased by $13.3 million, or 50.8%, as compared to the same period in 2022.

The decrease in the cost of sales was primarily due to the 45.1% decrease in the net sales of the Industrial Goods.

The gross margin was approximately 20.0% for the three months ended March 31, 2023, compared to a gross margin of approximately 10.7% for the same period in 2022.

Excluding damaged and obsolete charges of $5.8 million for the three months ended March 31, 2022, the gross margin was approximately 25.3% for the three months ended March 31, 2022, compared to a gross margin of approximately 20% for the three months ended March 31, 2023.

Net Sales by Geographic Regions

Three Months Ended

September 30, Nine Months Ended

September 30,

% of Net sales Change % of Net sales Change

Three Months Ended March 31,

% of Net sales Change

2023 2022 2023 2022 $ %

4 unchanged sentences

United States

For the three months ended September 30, 2022, our United States net sales were approximately $25.8 million, compared to approximately $37.5 million for the same period in 2021, representing a decrease of $11.7 million, or 31.2%.

The year-over-year decrease was primarily reduced by the impact of the KushCo merger, which contributed $20.1 million in total net sales.

Excluding net sales contributed by KushCo, total net sales decreased by approximately $20.1 million, or 70.2%, to approximately $8.6 million for the three months ended September 30, 2022, compared to the same period in 2021.

over-year decrease was principally due to a decrease in wholesale revenue of $10.0 million, and a decrease in consumer retail and marketplace revenue of $4.2 million.

For the nine months ended September 30, 2022, our United States net sales were approximately $106.4 million, compared to approximately $96.9 million for the same period in 2021, representing an increase of $9.5 million, or 9.9%.

The year-over-year increase was primarily due to the merger with KushCo, which contributed $70.9 million in total net sales.

Excluding net sales contributed by KushCo, total net sales decreased by approximately $37.5 million, or 106.6%, to approximately $35.1 million for the nine months ended September 30, 2022, compared to the same period in 2021.

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

For the three months ended September 30, 2022, our Canadian net sales were approximately $1.5 million, compared to approximately $1.0 million for the same period in 2021, representing an increase of $0.6 million, or 57.1%.

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

This was partially offset by a $0.4 million decrease in consumer revenue.

For the nine months ended September 30, 2022, our Canadian net sales were approximately $4.3 million, compared to approximately $5.0 million for the same period in 2021, representing a decrease of $0.7 million, or 13.8%.

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 September 30, 2022, our European net sales were approximately $1.3 million, compared to approximately $2.8 million for the same period in 2021, representing a decrease of $1.5 million or 52.8%.

This was primarily due to a $0.9 million, or 65.2%, decrease in our e-commerce sales.

For the nine months ended September 30, 2022, our European net sales were approximately $4.5 million, compared to approximately $8.2 million for the same period in 2021, representing a decrease of $3.8 million, or 45.7%.

This was primarily due to a decrease in wholesale sales.

For the three months ended March 31, 2023, our net sales in the United States was approximately $22.4 million, compared to approximately $43.0 million for the same period in 2022, representing a decrease of $20.6 million, or 47.9%.

The year-over-year decrease in net sales was due to a major restructuring effort and shift in strategy to focus on in-house brands that carry a higher margin profile while rationalizing out third-party brand offerings which generated top line revenue with lower margins.

The Company is focused on profitable revenue and as a result top line revenue has significantly been reduced.

Concurrently, the Company has focused on right-sizing the business during the fiscal year ended December 31, 2022 to reduce sales and marketing costs and to reduce or eliminate certain administrative functions.

For the three months ended March 31, 2023, our Canadian net sales were approximately $0.3 million, compared to approximately $1.9 million for the same period in 2022, representing a decrease of $1.5 million, or 83.5%.

The decrease is related to a reduction in sales and marketing spend.

The company is currently evaluating distribution and sales channels into Canada.

For the three months ended March 31, 2023, our European net sales were approximately $1.3 million, compared to approximately $1.7 million for the same period in 2022, representing a decrease of $0.4 million or 25.3%.

The decrease in net sales was due primarily to major restructuring efforts to improve the profitability of our European operations.

Liquidity and Capital Resources

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.

We believe that our cash on hand, combined with cash from operations and 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 other equity issuances such as our June 2022 and August 2022 offerings.

As of September 30, 2022, 2022, we had approximately $8.0 million of cash, of which $1.0 million was held in foreign bank accounts, and approximately $39.4 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 (as defined below).

As of March 31, 2023, we had approximately $5.9 million of cash, of which $0.4 million was held in foreign bank accounts, and approximately $25.7 million of working capital, which is calculated as total current assets minus total current liabilities, as compared to approximately $6.5 million of cash, of which $0.8 million was held in foreign bank accounts, and approximately $41.0 million of working capital as of December 31, 2022.

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.

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.

On March 10, 2022, we announced the 2022 Plan to reduce our cost structure, increase liquidity and accelerate our path to profitability.

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”).

Please see "Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Overview — 2022 Plan" for more information.

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 $4.6 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.

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.

On September 22, 2022 (the “Closing Date”), 1095 Broken Sound consummated the previously disclosed transactions contemplated by that certain Purchase and Sale Agreement, dated as of August 16, 2022, by and between 1095 Broken Sound and ASC Capital LLC (the “Purchaser”) whereby 1095 Broken Sound agreed to sell a certain parcel of real estate including the our headquarters building to the Purchaser for total consideration of $9.95 million in cash (collectively, the “HQ Transaction”).

On the Closing Date, the Company used the proceeds from the HQ Transaction to repay the remainder of the Real Estate Note in full.

The remaining proceeds will be used for general corporate purposes.

On July 19, 2022, Warehouse Goods LLC ("Warehouse Goods"), a wholly owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement and supporting documents (collectively, the “Sale Agreement”), to sell the Company’s 50% stake in VIBES Holdings LLC for total consideration of $4.6 million in cash and on August 9, 2022, we entered into an asset-based loan agreement dated as of August 8, 2022 (the “Loan Agreement”), which makes available to the Company a term loan of up to $15.0 million.

On October 13, 2022, we entered into the Settlement Agreement with the Vendor for the repayment of the Remaining Liabilities due to the Vendor relating to previously purchased inventory.

As previously disclosed and in connection with the our ongoing discussions with the Vendor, on July 18, 2022, we paid $1.0 million of the approximately $6.0 million balance due to the Vendor in cash and during the period of July 26, 2022 through July 31, 2022, returned approximately $1.1 million in inventory to the Vendor, which was accepted by the Vendor and was credited against the remaining outstanding balance owed by us to the Vendor.

The Settlement Agreement provides for a payment plan pursuant to which the we have agreed to repay the Remaining Liabilities in weekly installments commencing on October 14, 2022.

Pursuant to the terms of the Settlement Agreement, the Remaining Liabilities will be repaid in full on December 9, 2022.

On October 24, 2022, Warehouse Goods sold 38,839 shares of High Tide common stock for total consideration of approximately $0.05 million.

On October 27, 2022, we entered into securities purchase agreements with certain investors, pursuant to which we agreed to issue and sell an aggregate of 6,955,555 shares of our Class A common stock, 1,377,780 October 2022 Pre-Funded Warrants and 16,666,670 October 2022 Standard Warrants.

Each October 2022 Unit consisted of one share of Class A common stock or a October 2022 Pre-Funded Warrant and two October 2022 Standard Warrants to purchase one share of our Class A common stock.

The October 2022 Units were offered pursuant to the S-1 Registration Statement.

The October 2022 Standard Warrants are exercisable immediately at an exercise price equal to $0.90 per share of Class A common stock for a period of seven years.

Each October 2022 Pre-Funded Warrant is exercisable immediately with no expiration date for one share of Class A common stock at an exercise price of $0.0001.

The October 2022 Offering generated gross proceeds of approximately $7.5 million and net proceeds to the Company of approximately $6.8 million.

For more information regarding the October 2022 Offering, please see "Note 13 - Subsequent Events."

On November 3, 2022, Merger Sub Gotham 2 sold its interest in XS Financial to certain purchasers for total consideration of approximately $0.65 million, minus certain fees.

On the same day, we also entered into the Lease Termination Agreement, which provided for the termination of our lease at 6261 Katella Avenue in Cypress, California.

Pursuant to the terms of the Lease Termination Agreement, we agreed to pay a fee of approximately $0.46 million as an early termination fee in consideration for the Landlord's agreement to terminate all of our remaining obligations under the Cypress lease.

We expect the Lease Termination to result in approximately $1.7 million in savings, although we can provide no assurances as to the total amount of savings realized from the Lease Termination.

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.

We have an effective shelf registration statement on Form S-3 (the "Shelf Registration Statement");

however, for so long as our public float is less than $75 million, our ability to utilize the Shelf Registration to raise capital is limited as further set forth in the paragraph below.

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 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.

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 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 in August 2021 and through September 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.

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 12 consecutive months may not exceed one-third of our public float.

Since the launch of the ATM program in August 2021 and through December 31, 2022, we sold shares of our Class A common stock which generated gross proceeds of approximately $12.7 million and we paid fees to the sales agent of approximately $0.4 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 $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 restrictions under Instruction I.B.6 to Form S-3, 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.

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.

We have sold $2.2 million in securities pursuant to Instruction I.B.6 in the 12 calendar months preceding the date of filing of this Quarterly Report on Form 10-Q.

Following the completion of the June 2022 Offering (as defined below) 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 restrictions under Instruction I.B.6 to Form S-3, which will limit our liquidity options in the capital markets for a period of time.

On February 3, 2023, we filed a Registration Statement on Form S-1 (the "February 2023 S-1") seeking to register the public offering of up to $8.0 million in units, which has not yet become effective.

We can provide no assurances as to whether the February 2023 S-1 will become effective, or whether we will undertake this public offering following the filing of this Quarterly Report on Form 10-Q.

On February 16, 2023, two of our wholly owned subsidiaries, Warehouse Goods LLC and Kim International LLC, entered into an agreement with a third-party institutional investor pursuant to which the investor purchased, for approximately $4.9 million in cash, an economic participation interest, at a discount, in all of our rights to payment from the United States Internal Revenue Service with respect to the employee retention credits filed by us under the Employee Retention Credit program.

Our opinions concerning liquidity are based on currently available information.

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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 September 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.

As of March 31, 2023, 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:

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

Net cash used in operating activities $ (22,488) $ (32,028)

Net cash provided by (used in) investing activities 12,500 (14,256)

Net cash provided by financing activities 7,535 28,871

Net Cash Used in Operating Activities

During the nine months ended September 30, 2022, net cash used in operating activities of approximately $22.5 million consisted of (i) net loss of $112.4 million, offset by non-cash adjustments to net loss of approximately $74.3 million, and (ii) a $15.7 million decrease in working capital primarily driven by increases in accounts payable, accrued expenses and customer deposits of approximately $9.9 million, offset by increases in accounts receivable, inventories, vendor deposits and other current assets of approximately $25.6 million.

During the nine months ended September 30, 2021, net cash used in operating activities of approximately $32.0 million consisted of (i) net loss of $42.3 million, offset by non-cash adjustments to net loss of approximately $7.1 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 Provided by (Used in) Investing Activities

During the nine months ended September 30, 2022, net cash provided by investing activities of approximately $12.5 million largely consisted of proceeds from the same of assets held for sale of $9.6 million and proceeds from the sales of our interests in VIBES of $4.6 million, offset by cash used for development costs for our new enterprise resource planning (ERP) system of $1.7 million.

During the nine months ended September 30, 2021, net cash used in investing activities of approximately $14.3 million consisted of (i) approximately $12.3 million of cash used for the acquisition of Eyce and KushCo, net of cash acquired, (ii) $2.3 million for capital expenditures, including development costs for our new enterprise resource planning system, and (iii) $0.3 million of cash for the purchase of intangible assets, offset by proceeds from the sale of assets held for sale of approximately $0.7 million.

Net Cash Provided by Financing Activities

During the nine months ended September 30, 2022, net cash provided by financing activities of approximately $7.5 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 $2.8 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 nine months ended September 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.

Net cash provided by (used in) operating activities $ 1,883 $ (12,023)

Net cash used in investing activities (176) (709)

Net cash provided by (used in) financing activities (8,189) 5,674

Net Cash Provided by (Used) in Operating Activities

During the three months ended March 31, 2023, net cash provided by operating activities of approximately $1.9 million consisted of (i) net loss of $10.2 million, offset by non-cash adjustments to net loss of approximately $2.4 million, including depreciation and amortization expense of approximately $2.0 million and stock based compensation expense of $0.2 million, and (ii) a $9.7 million decrease in working capital primarily driven by decreases in inventories, vendor deposits and other current assets of approximately $9.0 million, including cash collections of approximately $4.9 million related to ERC sales, and increases in accounts payable and accrued expenses of approximately $2.9 million, offset partially by a $1.4 million increase in accounts receivable and a $0.8 million decrease in customer deposits.

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 depreciation and amortization expense of approximately $2.4 million, stock-based compensation expense of approximately $0.9 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 decreases in

vendor deposits aggregating to approximately $16.6 million, offset by increases in accounts receivable, inventories, other current assets, and decreases in customer deposits aggregating to approximately $11.7 million.

Net Cash Used in Investing Activities

During the three months ended March 31, 2023, net cash used in investing activities of approximately $0.2 million consisted primarily of capital expenditures.

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 ERP system.

Net Cash Provided by (Used in) Financing Activities

During the three months ended March 31, 2023, net cash used in financing activities of approximately $8.2 million consisted of repayments of the Asset-Based Loan of approximately $6.5 million, payments on the Eyce and DaVinci promissory notes of approximately $0.9 million, and Asset-Based Loan costs incurred of approximately $0.8 million.

During the three months ended March 31, 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.

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, 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