Greenlane IPO: 5 things to know about the closest thing to a U.S. cannabis company to go public on Nasdaq

Wholesaler supplies vaporizer products and more to pot stores and head shops

Greenlane Holdings Inc. plans to raise roughly $98 million through an initial public offering on the Nasdaq, which would arguably make it the closest thing to a U.S. cannabis company available for trade on a major U.S. exchange.

The Boca Raton, Florida, company sells cannabis vape hardware and accessories such as rolling papers and pipes to retail businesses and consumers across the U.S., Canada and elsewhere around the world. But its biggest business is wholesaling vape products from the likes of cannabis consumption hardware maker Pax Labs Inc., and its one-time subsidiary Juul Labs. Inc., which makes nicotine vape pens.

In short, Greenlane GNLN, +0.00%  supplies smoke shops. In an email, a spokesman described Greenlane as the first U.S.-based cannabis company to list on Nasdaq or a major U.S. exchange, but after MarketWatch published that statement in this article, he reached out to clarify that it should have described Greenlane as the first U.S.-based company operating in the cannabis industry to go public on a major exchange.

There are other cannabis-related U.S. companies that have made the leap. Innovative Industrial Properties Inc. IIPR, +0.80% a marijuana real-estate investment trust, is listed on the New York Stock Exchange, and Turning Point Brands Inc. TPB, +2.06% is also traded on the NYSE. Turning Point has historically been focused on tobacco products, but owns the Zig-Zag rolling papers brand and vaporizer products, and has signaled that it is pursuing products in Canada that are specifically designed for cannabis use while watching the U.S. closely.

Greenlane says it expects to sell about 5.3 million shares, with 4.7 million from the company and the rest from selling shareholders, at $14 to $16, raising up to $98.1 million, according to filings with the Securities and Exchange Commission. Lead underwriters Cowen & Co. and Canaccord Genuity have access to an additional 800,000 shares from selling shareholders. The company has applied to trade under the ticker symbol GNLN, and is expected to price shares and begin trading next week.

Here are five things to know about Greenlane.

Why this company is likely to be approved

In industry jargon, Greelane does not “touch the plant,” meaning it doesn’t grow, distribute or sell marijuana, and thus stays on the right side of federal drug trafficking and racketeering laws, among other criminal statutes. That’s critical because the senior exchanges in the U.S. have refused to allow companies that are involved with U.S. marijuana cultivation, distribution and sales to list their stock. Companies such as Tilray Inc. TLRY, -1.14% which went public on Nasdaq last year and NYSE-listed Aurora Cannabis Inc. ACB, +0.00% ACB, -0.17%  can do so because their recreational weed operations are located in Canada, where both adult recreational use and medical pot are allowed under federal law.

Another key factor is that the products Greelane does sell — the pipes, rolling papers, vapes, and vape accessories — also don’t violate federal drug paraphernalia laws. Those paraphernalia laws contain provisions for products that can be used for tobacco and nicotine consumption and for state and local laws that authorize people to have and sell the sorts of accessories Greelane sells. Even still, because the U.S. Customs and Border Protection agency has the authority to confiscate imports it believes break federal laws, it has led to issues with seizures from suppliers in the past, some of which have been successfully appealed.

Greenlane will be a controlled company with a complex, confusing stock structure

Once the company completes the IPO, co-founders Chief Executive Aaron LoCascio and Chief Strategy Officer Adam Schoenfeld will control roughly 80% of the company’s voting power and Greenlane will be considered a controlled company. As defined by Nasdaq, a controlled company is not required to have a board made up of a majority of independent directors or establish committees for compensation, nomination and corporate governance. In its filings, Greelane says that while it “intends” to fill the board with a majority of independent directors, the same might not be the case for the other committees, such as compensation.

Greenlane’s stock structure is complex. For the IPO, investors will gain access to the class A shares, which have a total voting interest of roughly 10%. But, the company also has granted class B shares to “non-founder members” which have a 6.3% voting stake and no economic interest. Finally, LoCascio and Schoenfeld will own class C stock, which has 83.6% of the company’s voting interest. After the offering, class A shareholders will own a 22.6% economic interest in the underlying assets of Greenlane Holdings LLC, the corporate entity that controls the company’s various operations.

There is not much information about the founders in the prospectus, despite their outsize control of the company. Greenlane says that LoCascio received an accounting degree from Valencia Community College in Florida and has run the company since its inception. Neither the filing nor Locasio’s LinkedIn page list any employment history before Greenlane. Schoenfeld has been a “managing member” of the company since 2007, when it was founded, and lists a bachelor’s in international business from Evergreen State College in Olympia, Washington. Greenlane declined to comment for this article while in a pre-IPO quiet period.

Revenue rivals large pot producers, for now

Unlike many of the world’s largest weed companies, Greenlane has already posted significant revenue numbers: sales nearly doubled in 2018 to $178.9 million from $88.3 million in 2017; $160.4 million in sales were in the U.S., with $15.6 million in Canada and $2.9 million in the rest of the world. Like many companies that sell through retail stores, Greenlane’s business is weighted to the holiday shopping season and it said in the filing documents that 35% of its 2018 sales were in the fourth quarter.

By comparison, the world’s largest pot company by market value, Canopy Growth Corp. CGC, +5.51% WEED, +5.35% banked fiscal 2018 sales of C$77.9 million ($58.7 million). But, for its most recent quarter, the first period to include recreational sales, Canopy Growth posted revenue of C$83 million.

Yet Greenlane’s sales have brought widening losses as it continues to grow operations in Canada and the U.S. Greenlane lost $5.9 million in 2018, compared with 2017 net income of $2.3 million. In its prospectus, Greenlane said that the average order size to other businesses was $1,270 and it had fulfilled 137,408 orders in 2018, though the order numbers include its sales directly to consumers.

The company had $7.3 million in cash as of the end of 2018 and in January of 2019 raised an additional $45.3 million through a convertible debt offering. In fiscal 2018, it posted cash flows of $5.3 million, up from $389,201 in the year-earlier period.

Small number of suppliers, thousands of customers

A substantial portion of the products Greenlane sells to retailers and consumers come from two companies: Pax and Juul. Juul, which produces nicotine vape pens, was a unit of Pax until it was spun out of the company in late 2017. In 2018, Pax’s various cannabis-related products supplied 15.6% of Greenlane sales in 2018, decreasing from nearly double that the year earlier. Juul is becoming a more important part of Greenlane’s business and in 2018 accounted for 37% of sales, up from 11.4% in 2017. Greenlane also sells products by Canopy Growth-owned Storz & Bickel.

The company said that it receives incentives such as discounts, credits and cooperative advertising, among other things, from some of its suppliers such as Pax. If those were to change, it could affect Greenlane’s business.

The company’s customer base is much larger than its supplier list. The company said that it sells to 6,600 businesses and that its top 10 accounts made up 13% of its sales, none of which are more than 2% overall.

Vapes and their various accessories make up 80% of Greenlane’s sales, a category which includes both nicotine vapes and cannabis-related devices. Parts and accessories such as carrying cases and batteries for consumption products are 8.8% of Greenlane’s sales. It also sells rolling papers, pipes, grinders, storage products and custom packaging.

The products are legal, but there are many regulatory issues

The U.S. Food and Drug Administration has said it is concerned with the growing popularity of nicotine vape products among youth and has conducted large-scale crackdowns across the U.S. aimed at curbing the sale of such products to minors — including the largest enforcement effort in the agency’s history. Juul was specifically targeted, and according to the prospectus, the FDA seized hundreds of pages of documents from Juul. As a result of Juul’s changes to its sales policies for, among other things, flavored nicotine products, Greenlane’s sales will be impacted — flavored product sales accounted for 16.2% of revenue in 2018.

Though the company has begun to sell CBD products, it’s unclear what exactly the FDA will allow for sale in the U.S. Currently, it has said food, health and cosmetic products with CBD are illegal without FDA approval.

Marijuana is also illegal under U.S. federal law and it’s uncertain how federal regulators will treat pot vaporizers in the future.