Description

Price Target: US$22.00

Executive Summary:

        Greenlane is a publicly listed wholesaler of vaporization (vaping) products and accessories in Cannabis and E-cigarettes/nicotine. The Company has also recently started distributing CBD products. The legal CBD industry is expected to grow to US$22B by 2022 (source) and the vaping industry could be worth US$47B by 2025 (source), which could open up significant growth opportunities for Greenlane because of its extensive distribution network. We believe Greenlane is a BUY because of the following reasons:

Investment Thesis

1. Established Supply Chain and B2B platform Built for Scalability and Growth
2. Unparalleled Relationships and Exclusive Agreements with the Largest Players in the Space (some of which include Pax Labs, JUUL, Storz & Bickel and Grenco Sciences)
3. A Growth Story with Strong Financials
4. Successful & Compliant Platform Built for Future Growth
5. Greenlane Provides Exposure to a National Cannabis Footprint Prior to Any Federal Legalizations
6. Cannabis Industry as a Major Driving Force for Growth with The Industry Expected to Grow to US$60B by 2022
7. Exposure to a Federally Legal and Growing CBD Market
8. Core Segment of Vaporization/E-Cigarette Set to Experience Significant Growth
9. Experienced Management with an Eye for Value Added Acquisitions

In summary, Greenlane has established itself as a leader in the space while normal lines of distribution have remained sidelined on cannabis and cannabis related products, which ultimately afford Greenlane a clear first mover advantage.  This is further corroborated by the fact that Greenlane works primarily with JUUL, Pax Labs and Storz and Bickel. The reason this is important is rudimentary – Greenlane provides the best distribution platform for leading accessory brands to gain scale and access doors.

Description:

        Greenlane Holdings is a distributor of vaporization (vaping) products and accessories in the US and Canada. The company was founded in 2005 as Warehouse Goods by the current CEO, Aaron LoCasio and CSO, Adam Schoenfeld selling Storz & Bickel vaporizers and soon established VapeWorld.com in 2007, opening their B2C channels. Furthermore, Greenlane recently listed on the NASDAQ, pricing 6 million shares at US$17.00 and successfully raising US$102M. Currently, the company drives revenue through the following five channels: Wholesale/B2B, E-Commerce & Retail, Supply & Packaging, Channel & Drop Ship Services, along with the company’s own House Brands.

Exhibit: 1

1. Established Supply Chain and B2B Platform Built for Scalability and Growth

Greenlane’s B2B distribution business is the company’s main revenue driver, accounting for 79.5% of sales. The company currently supplies 7,000 independent and regional chains with over 10,000 retail locations their customers. Greenlane has six strategically placed distribution centers that provide full North American coverage and can reach over 90% of its B2B customers in the region via ground shipping in 1-2 days. The company also provides its customers with a comprehensive catalog of products and carries over 5,000+ SKUs. From 2017 to 2018, the company doubled its parcels shipped from 250K to 438K while simultaneously increasing average order size from US$808 to US$1,270.

As the company looks to take advantage of the emerging cannabis industry, its distribution platform will be a key selling point for obtaining suppliers and customers. The company’s distribution centers are placed near key cannabis markets on both the East and West Coasts such as California, Colorado, Michigan and Florida. Having access to these markets allows the company to gain more suppliers which in turn increases their catalog size and allows Greenlane to give their customers a “one-stop” shop experience. Greenlane’s distribution network is extensive and provides the company tremendous opportunities for growth.

Exhibit: 2

2. Unparalleled Relationships and Exclusive Agreements with Pax Labs, JUUL, Storz & Bickel and Grenco Sciences

Greenlane’s management has an uncanny ability to identify and secure partnerships early – some of the company’s early counterparties are now major consumer brands. For example, one of their biggest and earliest brands, is a German company called “Storz & Bickel” who was an early mover in developing the “Volcano Line” of vaporizers which has proven to be a great hit with consumers. The founders captured this trend early and became exclusive distributors of these products.

Another successful partnership for the company is Grenco Sciences, a line of portable vaporizers. The product is ubiquitous in rap culture with rappers such as Wiz Khalifa to Snoop Dogg endorsing the brand.

Finally, one of Greenlane’s biggest and most successful partnerships has been with JUUL and Pax Labs. JUUL’s popularity exploded in 2018, with its market share going from 24% to 75% in the e-cigarette market (source). Pax Labs was recently valued at US$1.7B by investors such as Tiger Global (source). Furthermore, in 2018, JUUL generated US$65.5M in sales for Greenlane or 36.5 % of revenues. Similarly, Pax Labs accounted for 15.6% of revenues, bringing in US$27.9M in sales. Obtaining such key partnerships early has allowed Greenlane to leverage the success of these brands while growing their own brand and relationships with retailers and customers around the country. Altria Group estimates the current market for e-cigarette and tobacco heating products to be US$23B (source). Not only will these previous partnerships provide future growth opportunities, they show management’s ability to pick the right partners and brands which will be key as the company enters the CBD and cannabis market

3. A Growth Story with Strong Financials

Greenlane is a company with a strong financial foundation. The company’s revenue almost doubled from CY2017 to CY2018, going from US$88.3M to US$178.9M. While KushCo, the company’s closest peer, also exhibited similar growth, Greenlane showed better fiscal control over its operating expenses which were only 21% of revenue in 2018, up from 20% in 2017. For comparison, KushCo’s operating expenses grew from 31% of revenue in 2017 to 62% of revenues in 2018. For an emerging company, being able to control expenses in the face of high growth stands out as a sign of good operational and fiscal management.

While maintaining better financial health than its competitor, the company trades at a discount to peers on most metrics. KushCo currently trades at 4.7x LTM revenue vs 3.2x for Greenlane. Greenlane also trades at a discount on EBITDA basis as KushCo trades at 54.3x 2020 EBITDA vs 42.5x for Greenlane.

Exhibit: 3

4. Successful & Compliant Platform Built for Future Growth

Greenlane recently became one of the only Nasdaq listed companies with direct exposure to the US cannabis industry. Since Greenlane is not plant touching, they are fully compliant with federal laws thus allowing them to list on the NASDAQ which many other U.S. based companies cannot currently do until the STATES Act or SAFE Act is passed.

5. Greenlane Provides Exposure to a National Cannabis Footprint Prior to Any Federal Legalizations

Since Greenlane is not plant touching and is fully compliant with all laws, they can operate on a nation-wide level. This is significant because as mentioned earlier Greenlane already has an extensive distribution network setup across North America and if cannabis ever becomes legal on a federal level in the US, Greenlane will be in the perfect position to capitalize as they already have a distribution network in place.

6. Cannabis Industry as a Major Driving Force for Growth with The Industry Expected to Grow to US$60B by 2022

Although there is not an exact agenda regarding when cannabis will be legalized federally in the US, the trend seems to be moving in a positive direction – it is now a question of when rather than if. Consider the following:

1)      The STATES Act is Back in Congress

•  If passed, the bill will allow states to determine their own policies on cannabi
•  President Trump has said he will “probably end up supporting it (STATES Act)".
• Although this will not legalize the drug nationally, it is a step in the right direction to resolve disputes between state and federal law

2)      66% of Americans Support Legalizing Marijuana (source)

• Strong public support for legalizing marijuana can translate into more states warming up to the idea of cannabis legalization

Currently 11 states have legalized recreational marijuana and 23 states have legalized medical marijuana, with several other states including Texas, Alabama, Georgia and Missouri expected to vote on the subject.  

Exhibit: 4

7. Exposure to a Federally Legal and Growing CBD Market

Sales for Greenlane’s CBD platform are only expected to increase as the CBD industry grows from US$591M in 2018 to US$22B by 2022 according to The Brightfield Group’s estimates (source). This increase in expected sales can be partly attributed to the passing of the Farm Bill in 2018 which made the manufacturing, distributing, and sale of hemp-derived CBD federally legal in the US. This is significant because large retailers such as CVS and Walgreens are beginning to sell CBD products in their stores and as popularity increases, we expect to see larger supply agreements that Greenlane can benefit from.

North America

The outlook on the CBD market is great news for Greenlane as they will be able to capitalize on the forecasted growth of the industry and potentially become the gatekeeper of CBD products in North America. Greenlane has already entered the CBD market through exclusive distribution agreements with major brands, such as Select and Mary’s Nutritional in February along with an agreement with SLANG Worldwide that was made official at the start of May. It is evident that Greelane has the capabilities to push CBD through their distribution channels and they reported that they had tremendously positive responses with their current CBD products are and “very bullish on CBD.” It is expected that Greenlane will continue to build their CBD portfolio and take advantage of their current platform to become a leading distributor of CBD products as they did with vaporization products and accessories.

International

Furthermore, Greenlane recently mentioned that they are also bullish on introducing CBD into international markets. Although North America is Greenlane’s primary focus right now, they do sell and ship a limited number of products globally to Europe, Australia, and parts of South America and have acknowledged the growth potential internationally (especially in Europe). As a result, they have started to lay a foundation so that they can eventually “open their own distribution centers, acquire existing international distributors and partner with local operators,” thus allowing them to capture more market share and realize long term gains.

8. Core Segment of Vaporization/E-Cigarette Set to Experience Significant Growth

Greenlane’s Q1 2019 revenue was up $6.6M year over year, driven by: an increase of US$2.7M of sales related to e-cigarette products and an increase of US$1.0M of sales related to vaporizers and vaporizer accessory products. Furthermore, with more individuals switching from combustion products (such as traditional cigarettes) to vaporizers and more people beginning to recreationally vape, the global e-cigarette and vaping market is expected to reach US$47B by 2025 (source).  As a result, Greenlane will likely see a steady stream of increased revenue from this part of their business because, in addition to already being the leader in the space, Greenlane is pursuing strategic actions to capture a bigger piece of the market. For instance, the company launched Vapor.com in April 2019 thus enhancing their e-commerce capabilities and reach. So far, the site has been “very successful,” and Greenlane is going to redirect traffic from their other web properties to Vapor.com while simultaneously engaging in offline marketing initiatives such as promoting the site at cannabis events across the country.

9. Expansion of House Brands to Further Drive Margins

In addition to distributing brands created by their partners, Greenlane also has their own “house brands” which made up 5.25% of sales in 2018 and have higher margins of 40%+ compared to the company-wide rate of ~20%. This will be a major growth driver because Greenlane is constantly looking for opportunities to introduce products through their proprietary brands when they see fit and the rise of CBD will surely allow for more proprietary products to be introduced; analysts predict house sales to make up around 20% of sales in the next few years.

Exhibit: 5

10. Experienced Management with an Eye for Value-Added Acquisitions

Greenlane recently acquired one of their competitors, Better Life Holdings which distributes products under the name VaporNation. In addition, Greenlane also acquired Pollen Gear LLC, a designer of child-resistant packing and storage products. Both acquisitions have been promising so far. VaporNation has increased the company’s e-commerce and fulfillment capabilities thus increasing sales. PollenGear was a strategic acquisition for two reasons: first, it has allowed Greenlane to expand their portfolio and increase margins by vertically integrating their supply and packaging division. Secondly, the acquisition includes PollenGear’s industrial design team that is expected to spearhead the design of many new products that will ultimately help drive an increase in house sales.

Strategic acquisitions like VaporNation and PollenGear are the direct result of Greenlane’s experienced management team which we expect to pursue additional value enhancing acquisitions in the future, therefore allowing the company to diversify their product offerings and increase their market share.

Valuation

We believe at the current price levels that Greenlane is undervalued and presents significant upside based on our target price of US$22.00, a 40% upside from the current price. In our projections we assumed that the explosive growth in the top 4 suppliers, will stabilize and slow down to mid-single digits in 2019 and then eventually pick up into the high single digits and low teens for 2020. This will occur because flavor ban in the US will be countered by Canada scaling up. The acquistion of Pollen Gear and the emerging CBD business will support further revenue growth. We predict base case revenues of US$209M and US$282M in 2019 and 2020 respectively. We have applied a target multiple of 3.0x 2020 Revenue for our valuation target. We believe this business will trade at a premium to Kush Bottle because of its superior distribution platform and expansion into CBD but at a discount to vertically integrated cannabis and CBD companies, which currently trade at an average of 3.7x 2020 Revenue. We have a downside case of US$17.00 and an upside case of US$27.50.

Exhibit: 6

Exhibit: 7

Highlights from 1Q19 Earnings Results

Greenlane reported Q1 revenues of US$49.9M, up from US$43.3M in Q1 2018. The company also reported an adjusted EBITDA of (US$0.8M) compared to a gain of $2.7M in Q1 2018. Gross margin US$9M or 18.0 % of revenue versus a margin of 20.9% in Q1 2018. The decline was primarily because of sales promotion changes with a key supplier. JUUL represented US$19.1M or 38.2% of the company’s revenue, up slightly from last year, despite JUUL mostly pulling out flavored products in the US. However flavored products found success in Canada and sales were better than expected.  The company also started distributing CBD products in late February with an exclusive agreement to ship Mary’s Nutritionals and Select CBD. Greenlane is also looking towards Europe and then potentially South America for expansion through value-added acquisitions. Pollen Gear, drove house brands to 5.25 % of total revenue, showing management’s ability to integrate value-added acquisitions into the company’s platform  

Risks

• As JUUL and Pax Labs account for significant portions of Greenlane's revenues, they pose a partnership risk for the company
  • They might be able to pressure Greenlane into contractual terms that are not favorable (2010-present)

• While the outlook of legalization across America looks promising there is still uncertainty surrounding regulations

• New laws may be put in place at the federal or state level that could negatively impact Greenlane’s B2B customers. These regulations include higher age restrictions, enhanced scrutiny on age verification, or production limitation

• The CBD landscape remains uncertain and any new or changing laws could lead to adverse effects on Greenlane’s CBD segment

Catalyst

• The introduction of Vapor.com means more e-commerce sales and a greater online presence
• Future M&A and exclusive partnerships
• Industry is set to grow significantly
• There is opportunity internationally and more importantly in the United States.