GREENLANE HOLDINGS, INC. Overview
We are one of the largest global sellers of premium cannabis accessories and liquid nicotine products in the world. We operate as a powerful house of brands, third party brand accelerator and distribution platform for consumption devices and lifestyle brands. We have expanded our global reach, serving the global cannabis, hemp-derived CBD, and liquid nicotine markets with an expansive customer base, generating an average 6 orders per minute from over 1,100 licensed cannabis dispensaries, and 4,100 smoke and vape shops around the world. Over the course of 2020, we shifted away from a high-volume and low-margin sales mix to a lower-volume and higher-margin mix, with a focus on our Greenlane Brands. As evidence of this shift, sales from nicotine products decreased to 9.5% of total net sales from 39.9%, while Greenlane Brand sales increased to 16.5% of total net sales as for the year endedDecember 31, 2020 , from 8.3% of total net sales for the year endedDecember 31, 2019 . When including 2020 Eyce product sales, which were integrated into our Greenlane Brand products effectiveMarch 2, 2021 , our Greenlane Brand sales would have represented 19.7% of total net sales for the year endedDecember 31, 2020 . The increased focus on Greenlane Brand sales resulted in a year-over-year growth rate of approximately 49.2% for brands including Vibes Rolling Papers, Marley Natural,K. Haring Glass Collection and Higher Standards, and resulted in an increase in total Greenlane Brand sales of approximately$7.5 million . The significant growth rate was especially evident in the fourth quarter of 2020, wherein: •Greenlane Brand sales reached a record$6.3 million for the fourth quarter of 2020, or approximately 17.5% of total net sales for the fourth quarter of 2020; when including Eyce product sales, Greenlane Brands reached a record$7.8 million , or approximately 21.4% of total net sales for the fourth quarter of 2020, and •Vibes Rolling Papers, Marley Natural,K. Haring Glass Collection, and Aerospaced posted record quarterly sales figures with quarter-over-quarter growth of 53.6%, 68.3%, 73.1% and 24.5%, respectively. Given the emphasis on increased international market penetration, including the marketing of Vibes Rolling Papers inEurope , our recent acquisition ofEyce LLC , and an increasingly diverse product mix including the introduction of new house brands and product lines in the coming years, we believe our brands have the ability to reach customers across multiple markets and demographics. Coupled with recent strategic business arrangements, such as the launch of Canada.Vapor.com and the expansion of Vibes Rolling papers, we expect the growth trend to continue over the coming years. We have also restructured our commercial departments to allow us to have a more structured and focused approach as we prepare for category maturation. We have made significant investments into our management team by adding seasoned additions to the Sales, Marketing and E-Commerce departments at the Vice President level. Additionally, we have added a field sales department in boththe United States andCanada . We feel that this approach will ensure a stronger relationship and insights with our growing brick and mortar account base, as well the ability to develop merchandising solutions and final consumer engagement. InDecember 2019 , a novel strain of coronavirus known as COVID-19 was reported inWuhan, China . InMarch 2020 , theWorld 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. As of the current date listed on this filing, all of our retail locations are open (although they were closed for portions of 2020), and our B2B revenues have not seen any additional setbacks since the quarter endedJune 30, 2020 , with the third and fourth quarters reporting sales increases of 29.8% and 27.1% over the second quarter, respectively. Our corporate headquarters inBoca Raton, FL remains open; we implemented social distancing guidelines and continue to adhere to CDC guidelines and recommendations. 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 that of the date of this Form 10-K, include but not limited to the following: 47 -------------------------------------------------------------------------------- •the duration and intensity of the pandemic, as well as the timing and effectiveness of COVID-19 vaccines and treatments; •the impact on our customers, including their ability to remain in business and make payments to us in the ordinary course; •the impact on end-user demand for our products, including whether any scientific findings demonstrate smoking or vaping negatively impact health outcomes of individuals who contract COVID-19; •our ability to hold and attend employee and industry events; •our ability to operate our retail stores; •our employees' ability to work effectively in a remote work environment; •our ability to continue operating our distribution centers; •our ability to capitalize on any new consumer trends resulting from the pandemic; and •the pandemic's effect on our vendors.
Merger with KushCo
OnMarch 31, 2020 , we announced the entry into an Agreement and Plan of Merger with KushCo with respect to the KushCo Transaction. For more information, see "Note 13-Subsequent Events" of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience, outside advice from parties believed to be experts in such matters, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. See "Note 2-Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for a description the significant accounting policies and methods used in the preparation of our consolidated financial statements. Inventories Inventories, consisting of finished products, are primarily accounted for using the weighted-average method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to customers or liquidations. Assumptions about the future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.
Valuation of
Assets acquired and liabilities assumed in business combinations are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. Subsequent to acquisition, goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate it is more likely than not that the carrying amount of goodwill may not be recoverable. During the first quarter of 2020, we determined that the estimated fair value ofthe United States reporting unit was below its carrying value, and we recorded a goodwill impairment charge of approximately$9.0 million , which is included in the consolidated statement of operations and comprehensive loss for the year endedDecember 31, 2020 . Our annual assessment may consist of a qualitative or quantitative analysis to determine whether it is more likely than not that fair value exceeds the carrying value. When performing a qualitative analysis, the factors we consider include our share price, our projected financial performance, long-term financial plans, macroeconomic, industry and market conditions as well as the results of our most recently completed annual impairment test. When performing a quantitative analysis, we use a combination of an income approach, using discounted cash flow techniques, and market valuation methods, using the guideline public company method, and may weigh the outcomes of valuation approaches when estimating the fair value of each reporting unit. We then compare the fair value to its carrying amount to determine the amount of impairment, if any. If a reporting unit's fair value is less than its carrying amount, we record 48 -------------------------------------------------------------------------------- an impairment charge based on that difference, up to the amount of goodwill allocated to that reporting unit. Inputs and assumptions used to determine fair value are determined from a market participant view, which might be different than our specific views. The valuation process is complex and requires significant input and judgment. Market approaches depend on the availability of guideline companies and representative transactions. When using the income approach, complex and judgmental matters applicable to the valuation process include projections of future revenues, which are estimated after considering many factors such as historical results, market opportunity, pricing, and sales trajectories. The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances, changes in these assumptions could potentially lead to impairment. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. We believe that our estimates are consistent with the assumptions that market participants would use in their fair value determination.
Income Taxes and TRA Liability
We are subject toU.S. federal, state and foreign income taxes with respect to our allocable share of any taxable income or loss ofGreenlane Holdings, LLC and will be taxed at the prevailing corporate tax rates on such income. Significant judgment is required in determining our provision or benefit for income taxes and in evaluating uncertain tax positions. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets or deferred tax liabilities for the expected future tax consequences of events included in our financial statements.Greenlane Holdings, LLC is a limited liability company and is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a result, we are not liable forU.S. federal or state and local income taxes in most jurisdictions in which we operate, and the income, expenses, gains and losses are reported on the returns of our members.Greenlane Holdings, LLC is subject to Canadian, Dutch, andU.S. state and local income tax in certain jurisdictions in which it is not treated as a partnership for income tax purposes, and in which jurisdictions it pays an immaterial amount of taxes. In addition to tax expenses, we may incur expenses related to our operations and may be required to make payments under the Tax Receivable Agreement (the "TRA"), which could be significant. Pursuant to the Greenlane Operating Agreement,Greenlane Holdings, LLC will generally make pro rata tax distributions to its members in an amount sufficient to fund all or part of their tax obligations with respect to the taxable income ofGreenlane Holdings, LLC that is allocated to them and possibly in excess of such amount.
Legal Contingencies
In the ordinary course of business, we are involved in legal proceedings involving a variety of matters. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We evaluate the associated developments on a regular basis and accrue a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may incur a loss and the loss or range of loss can be estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements to the extent material. We review the developments in our contingencies that could affect the amount of the provisions that have been previously recorded, and the matters and related reasonably possible losses disclosed. We make adjustments to our provisions and changes to our disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine both the probability of loss and the estimated amount of loss. The outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected. See "Note 7-Commitments and Contingencies" of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information regarding these contingencies.
Recent Accounting Pronouncements
See "Note 2-Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
49
--------------------------------------------------------------------------------Results of Operations The following table presents operating results as a percentage of total net sales:
Year
Ended
% of Net sales Change
2020 2019 2020 2019 $ %
Net sales:
United States $ 112,543 $ 160,243 81.3 % 86.6 % $ (47,700) (29.8) %
Canada 15,457 22,120 11.2 % 12.0 % (6,663) (30.1) %
Europe 10,304 2,643 7.5 % 1.4 % 7,661 289.9 %
Total net sales 138,304 185,006 100.0 % 100.0 % (46,702) (25.2) %
Cost of sales 115,539 153,916 83.5 % 83.2 % (38,377) (24.9) %
Gross profit 22,765 31,090 16.5 % 16.8 % (8,325) (26.8) %
Operating expenses:
Salaries, benefits and payroll taxes 24,909 29,716 18.0 % 16.1 % (4,807) (16.2) %
General and administrative 35,315 23,593 25.5 % 12.8 % 11,722 49.7 %
Goodwill impairment charge 8,996 - 6.5 % - % 8,996 100.0 %
Depreciation and amortization 2,520 2,705 1.9 % 1.5 % (185) (6.8) %
Total operating expenses 71,740 56,014 51.9 % 30.4 % 15,726 28.1 %
Loss from operations (48,975) (24,924) (35.4) % (13.6) % (24,051) 96.5 %
Other income (expense), net:
Change in fair value of convertible
notes - (12,063) - % (6.5) % 12,063 (100.0) %
Interest expense (437) (975) (0.3) % (0.5) % 538 (55.2) %
Other income, net 1,902 9,073 1.4 % 4.9 % (7,171) (79.0) %
Total other expense, net 1,465 (3,965) 1.1 % (2.1) % 5,430 *
Loss before income taxes (47,510) (28,889) (34.3) % (15.7) % (18,621) 64.5 %
Provision for income taxes 194 10,935 0.1 % 5.9 % (10,741) (98.2) %
Net loss (47,704) (39,824) (34.4) % (21.6) % (7,880) 19.8 %
Net loss attributable to
non-controlling interest (33,187) (11,008) (24.0) % (6.0) % (22,179) 201.5 %
Net loss attributable to Greenlane
Holdings, Inc. $ (14,517) $ (28,816) (10.4) % (15.6) % $ 14,299 (49.6) %
*Not meaningful
Net Sales
United States
For the year ended December 31, 2020 , our United States operating segment
reported net sales of approximately $112.5 million , compared to approximately
$160.2 million for the year ended December 31, 2019 , representing a decrease of
$47.7 million , or 29.8%. The year-over-year decrease was primarily due to a
$54.3 million dollar decrease in nicotine product revenue as a result of the
January 2, 2020 U.S. Food and Drug Administration's ban on flavored vape pods,
which adversely impacted our B2B wholesale revenue channel, coupled with our
shift away from a high-volume, low-margin sales mix. This decrease in B2B
wholesale revenue was partially offset by an increase in the United States
e-commerce net sales of $6.5 million , or an 86.7% year-over-year growth. This
$6.5 million increase was primarily driven by an increase in Vapor.com's net
sales of approximately $2.6 million , or 87.9%, compared to the prior year, and
an aggregate increase in net sales our other websites, such as
Higherstandards.com, Marleynatural.com and Gpen.com, of approximately $3.9
million , or 84.6%.
Canada
For the year ended December 31, 2020 , our Canadian operating segment reported
net sales of approximately $15.5 million , compared to approximately $22.1
million for the year ended December 31, 2019 , representing a decrease of $6.7
million , or 30.1%, primarily due to regulatory restrictions on the sale of
flavored vape pods. Similar to the results in our United States operating
segment, the decrease in net sales in our Canadian operating segment was
entirely observed in our B2B
50
--------------------------------------------------------------------------------
wholesale operations, which reported a net sales decrease of approximately $6.7
million , or 34.8%. These impacts were the result of the aforementioned
regulatory restrictions, paired with temporary customer store closures resulting
from the onset of COVID-19, and the revocation of our PAX exclusivity agreement.
On October 27, 2020 , we launched Canada.Vapor.com, with the expectation of
expanding the results seen from Vapor.com in the United States . We believe that
expanding our E-commerce business will provide our Canadian operating segment
with higher-margin sales, as we are able to sell products at full retail
pricing. We expect to see long-term sustained growth in the customer base;
juxtaposing the explosive growth of its United States counterpart, Vapor.com, we
expect gradual but healthy and organic growth in Canada.Vapor.com.
Europe
For the year ended December 31, 2020 , after completing the first full year of
operations since our acquisition of Conscious Wholesale on September 30, 2019 ,
our European operations reported net sales of approximately $10.3 million .
Although our European operations endured significant challenges over the course
of the year, including a change in leadership personnel in Europe and
significant COVID-19 restrictions that adversely impacted retail and supply
chain operations, our European operating segment still produced promising
results, with record fourth quarter revenue and growth rates. Specifically, net
sales for the quarter ended December 31, 2020 were approximately $3.1 million ,
representing growth of approximately $0.8 million , or 32.4%, over the third
quarter of 2020. Additionally, total net sales for our European segment for the
last two quarters of 2020 increased by approximately $0.5 million , or 10.9%,
compared to the first two quarters of 2020.
Cost of Sales and Gross Margin
For the year ended December 31, 2020 , cost of sales decreased by $38.4 million ,
or 24.9%, as compared to the year ended December 31, 2019 . The decrease in cost
of sales was primarily due to an overall sales volume decrease of $47.7 million .
Refer to Item 7 - "Net Sales" above for additional information on sales volume.
This decrease was partially offset by an approximated $11.3 million , or 176.1%,
increase in non-merchandise cost of sales for the year ended December 31, 2020 ,
compared to the same period in 2019, primarily due to an increase in damaged and
obsolete inventory of approximately $3.2 million in the third quarter of 2020.
These charges were related to write-offs and lower of cost or net realizable
value adjustments, which were made by management as part of a strategic
initiative to free-up warehouse space for products with higher margins and
higher marketability, and to increase inventory turnover for certain slow-moving
products.
United States
For the year ended December 31, 2020 , gross margin was materially impacted by
significant damaged and obsolete inventory adjustments during the third quarter
of 2020 driven by management's strategic initiatives, mitigating margin
improvements from our shift to a lower-volume but higher-margin sales mix.
Accordingly, year-over-year gross margin for our United States operating segment
decreased to 15.7% for the year ended December 31, 2020 , down from approximately
16.7% for the year ended December 31, 2019 , representing a $9.1 million decrease
in gross profit. Excluding the aforementioned strategic inventory adjustments of
$3.2 million during the year ended December 31, 2020 , gross profit margin would
have increased to 18.5% for the year ended December 31, 2020 . There were no
equivalent adjustments during the year ended December 31, 2019 .
Canada
For the year ended December 31, 2020 , gross margin decreased to 15.2% in 2020
from 15.9% for the year ended December 31, 2019 , representing a $1.2 million
decrease in gross profit. Unlike our United States operating segment, our
Canadian operating segment's gross profit margin was not significantly impacted
by damaged and obsolete inventory adjustments. However, the gross margin for our
Canadian operating segment was hindered by a reduction sales from regulatory
restrictions of sales of nicotine products, which accounted for 42.0% of our
Canadian operating segment's total revenue for the year ended December 31, 2020
compared to 52.2% of total revenue for the year ended December 31, 2019 . The
market for these nicotine products has changed drastically, with competitive
pricing and discounts driven by the fear of both adverse market conditions
resulting from COVID-19 and increased regulation. We expect future shifts in
Canadian market away from nicotine products similar to the shifts observed in
the United States market during 2020, which will lead to substitution of these
low-margin, high-velocity products to high-margin, low-velocity products.
Europe
Through the acquisition of Conscious Wholesale during the third-quarter of 2019,
we began operations in the Netherlands and expanded our reach to other European
countries. For the year ended December 31, 2020 , our European operating
segment's gross margin of 26.8% contributed to approximately $2.8 million in
gross profit, representing approximately 12.1% of consolidated gross profit. For
the quarter ended December 31, 2020 , our European operating segment's gross
margin of 31.4% was relatively consistent with the prior quarter ended December
31, 2019 , in which we reported a gross margin of approximately 31.6%. Our
European operating segment's 2020 gross margin was driven by its B2C sales,
specifically e-commerce, which accounted for approximately $4.4 million , or
42.4%, of our European operating segment's net sales, compared to B2B revenues,
which represented $4.2 million , or 41.0%, of net sales. This shift was primarily
influenced by the
51
--------------------------------------------------------------------------------
impact of the COVID-19 pandemic; however, we expect to continue capitalizing on
the increase in our E-commerce sales, as these offer our business access to
retail pricing and the ability to double margins compared to those of B2B
wholesale transactions.
Operating Expenses
Salaries, Benefits and Payroll Taxes
Salaries, benefits and payroll taxes expenses decreased by approximately $4.8
million , or 16.2%, for the year ended December 31, 2020 , compared to the same
period in 2019, primarily due to a decrease in stock compensation expense of
approximately $7.1 million . Specifically, we recognized $0.9 million in stock
compensation expense during the year ended December 31, 2020 , which was
significantly reduced due to actual forfeitures of unvested equity awards held
by former officers, as compared to approximately $8.0 million of stock
compensation expense during the same period for 2019. This decrease in stock
compensation expense was offset by increases of approximately $1.4 million in
employee wages, primarily due to securing talent in several senior and executive
level roles during the year ended December 31, 2020 .
As part of our transformation initiative, we reduced our workforce by an
aggregate of 93 employees during the year ended December 31, 2020 , primarily in
Q1 2020 and Q3 2020. The impact of these reductions in force resulted in a
reduction in our salaries, benefits and payroll tax expenses of approximately
$3.5 million for the year ended December 31, 2020 . These personnel reduction
efforts will eliminate approximately $5.8 million of recurring salaries and
benefits charges annually.
As we continue to closely monitor the evolving business landscape, including the
impacts of COVID-19 on our customers, vendors, and overall business performance,
we remain focused on identifying cost-saving opportunities while delivering on
our strategy to recruit, train, promote and retain the most talented and
success-driven personnel in the industry. Management is continuing to explore
opportunities in 2021 to further reduce salary expenses and other operating
expenses.
General and Administrative Expenses
General and administrative expenses increased by approximately $11.7 million , or
49.7%, for the year ended December 31, 2020 , compared to the same period in
2019. This increase was primarily due to an increase of approximately
$2.0 million in subcontractor fees related to our enterprise resource planning
("ERP") system implementation and additional labor associated with the closing
and consolidation of our distribution centers; an increase of $2.5 million in
third party logistics costs, directly incurred as part of the transition of our
distribution centers to our new 3PL facilities in Kentucky and Canada ; a loss of
approximately $4.5 million related to an indemnification asset which was not
probable of recovery; approximately $1.3 million in additional accounting fees,
driven by a combination of incremental fees from the change in auditors in the
third quarter of 2019, whose fees were substantially higher than the
predecessor, and due diligence related to acquisition targets in late 2019 and
early 2020; an increase of approximately $1.2 million in severance related costs
associated with our restructuring plan during the period; and impairment charges
of approximately $0.4 million recorded during the year ended December 31, 2020 ,
related to assets classified as held-for-sale during the year. These increases
were offset by a decrease in marketing expenses of approximately $1.0 million ,
primarily driven by the decrease in trade show activity in fiscal 2020 in direct
response to COVID-19 lockdown and social distancing protocols during the period.
Impairment Charge
Due to market conditions and estimated adverse impacts from the COVID-19
pandemic, management concluded that a triggering event occurred in the first
quarter of 2020, requiring a quantitative impairment test of our goodwill for
our United States and Europe reporting units. Based on this assessment, we
concluded that the fair value of our Europe reporting unit exceeded its carrying
value and no impairment charge was required. However, the estimated fair value
of the United States reporting unit was determined to be below its carrying
value, which resulted in a $9.0 million goodwill impairment charge, recorded in
the first quarter of 2020. We did not recognize incremental impairment charges
to goodwill as a result of our annual impairment assessment as of December 31,
2020 .
Depreciation and Amortization Expenses
Depreciation and amortization expense remained relatively consistent for the
year ended December 31, 2020 , compared to the same period in 2019, only slightly
decreasing due to the disposition of fixed assets in connection with our
distribution center consolidation initiative in 2020.
Other Income (Expense), Net
Change in fair value of convertible notes.
We accounted for the convertible notes issued in December 2018 and January 2019
at fair value with changes in the fair value recognized in the consolidated
statement of operations and comprehensive loss as a component of other income
52
--------------------------------------------------------------------------------
(expense), net for the year ended December 31, 2019 . The convertible notes were
converted to shares of Class A common stock in conjunction with the completion
of the IPO in April 2019 . There were no changes in fair value of convertible
notes recognized during the year ended December 31, 2020 .
Interest expense.
Interest expense consists of interest incurred on our Real Estate Note, line of
credit and other debt obligations, as well as debt issuance costs related to the
convertible notes issued in December 2018 and January 2019 .
Other income, net.
Other income (expense), net, increased by approximately $5.4 million for the
year ended December 31, 2020 compared to the same period in 2019, primarily due
a change in the fair value of our convertible notes payable during the year
ended December 31, 2019 , which resulted in an expense of approximately
$12.1 million , with no corresponding expense in 2020. This increase in 2019 was
offset by a gain of approximately $7.2 million recognized in the year ended
December 31, 2019 , resulting from the reversal of the TRA liability, as well as
an unrealized gain of $1.5 million recognized on our equity securities
investment in Airgraft Inc. , in the same period. Additionally, we recognized a
gain from the fair value adjustment of contingent consideration of approximately
$0.7 million during the year ended December 31, 2020 , which was largely
attributed to changes in forecasted revenues and gross profits for our European
operating segment over the remainder of 2020, driven primarily by the impacts of
the COVID-19 pandemic. We also experienced a reduction of interest expense of
approximately $0.5 million during the year ended December 31, 2020 , due to the
absence of debt issuance costs that were reflected in the year ended December
31, 2019 .
Provision for Income Taxes
As a result of the IPO and the related transactions (defined in "Note 1-Business
Operations and Organizations" of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K), we own a portion of the Common
Units of the Operating Company , which is treated as a partnership for U.S.
federal and most applicable state and local income tax purposes. As a
partnership, the Operating Company is not subject to U.S. federal and certain
state and local income taxes. Any taxable income or loss generated by the
Operating Company is passed through to, and included in the taxable income or
loss of, its members, including us, in accordance with the terms of the
Operating Agreement. We are subject to federal income taxes, in addition to
state and local income taxes with respect to our allocable share of the
Operating Company's taxable income or loss.
As discussed above, prior to the consummation of the IPO, the provision for
income taxes included only income taxes on income from the Operating Company's
Canadian subsidiary, based upon an estimated annual effective tax rate of
approximately 15.0%. After the consummation of the IPO, Greenlane became subject
to U.S. federal, state and local income taxes with respect to Greenlane's
allocable share of the Operating Company's taxable income or loss. Furthermore,
after completing the Conscious Wholesale acquisition in September 2019 , the
Operating Company became subject to Dutch income taxes on income from its
Netherlands -based subsidiary, based upon an estimated effective tax rate of
approximately 25.0%.
During the third quarter of 2019, management performed an assessment of our
ability to realize our deferred tax assets based upon which management
determined that it is not more likely than not that our results of operations
will generate sufficient taxable income to realize portions of the net operating
loss benefits. Consequently, we established a full valuation allowance against
our deferred tax assets, thus reducing the carrying balance to $0 . In the event
that management determines that we would be able to realize our deferred tax
assets in the future in excess of their net recorded amount, an adjustment to
the valuation allowance will be made which would reduce the provision for income
taxes.
Key Metrics and Non-GAAP Financial Measures
We monitor the following key metrics to help us measure and evaluate the
effectiveness of our operations, develop financial forecasts, and make strategic
decisions:
For the year ended December 31,
($ in thousands) 2020 2019
Net sales $ 138,304 $ 185,006
Period-over-period change (25.2) % 3.4 %
Net cash used in operations $ (12,302) $ (36,903)
Adjusted net loss (1) $ (25,863) $ (18,544)
Adjusted EBITDA (1) $ (24,352) $ (13,424)
(1) Adjusted Net Loss and Adjusted EBITDA are non-GAAP financial measures. For
the definitions and reconciliation of Adjusted Net Loss and Adjusted EBITDA to
net loss, see " Non-GAAP Financial Measures."
53
--------------------------------------------------------------------------------
Non-GAAP Financial Measures
Adjusted Net Income (Loss) is defined as net loss before equity-based
compensation expense, changes in the fair value of our convertible notes, debt
placement costs for the convertible notes, and non-recurring expenses primarily
related to our transition to being a public company. The debt placement costs
related to the convertible notes issued in January 2019 are reported within the
"interest expense" line item in our consolidated statement of operations and
comprehensive loss for the years ended December 31, 2020 and 2019. Non-recurring
expenses related to our transition to being a public company, which are reported
within "general and administrative expenses" in our consolidated statements of
operations and comprehensive loss, represent fees and expenses primarily
attributable to consulting fees and incremental audit and legal fees.
Adjusted EBITDA is defined as net loss before interest expense, income tax
expense, depreciation and amortization expense, equity-based compensation
expense, other income, net (which includes a gain recognized on an equity
investment and a gain due to the adjustment of our TRA liability), changes in
fair value of our convertible notes, and non-recurring expenses primarily
related to our transition to being a public company. These non-recurring
expenses, which are reported within general and administrative expenses in our
consolidated statements of operations and comprehensive loss, represent fees and
expenses primarily attributable to consulting fees and incremental audit and
legal fees.
We disclose Adjusted Net Income (Loss) and Adjusted EBITDA, which are non-GAAP
performance measures, because management believes these metrics assist investors
and analysts in assessing our overall operating performance and evaluating how
well we are executing our business strategies. You should not consider Adjusted
Net Income (Loss) or Adjusted EBITDA as alternatives to net loss, as determined
in accordance with U.S. GAAP, as indicators of our operating performance.
Adjusted Net Income (Loss) and Adjusted EBITDA have limitations as an analytical
tool. Some of these limitations are:
•Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future and adjusted
EBITDA does not reflect capital expenditure requirements for such replacements
or for new capital expenditures;
•Adjusted EBITDA does not include interest expense, which has been a necessary
element of our costs;
•Adjusted EBITDA does not reflect income tax payments we may be required to
make;
•Adjusted EBITDA and Adjusted Net Loss do not reflect equity-based compensation;
•Adjusted EBITDA and Adjusted Net Loss do not reflect transaction and other
costs which are generally incremental costs that result from an actual or
planned transaction;
•Other companies, including companies in our industry, may calculate adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
Because Adjusted Net Income (Loss) and Adjusted EBITDA do not account for these
items, these measures have material limitations as indicators of operating
performance. Accordingly, management does not view Adjusted Net Income (Loss) or
Adjusted EBITDA in isolation or as substitutes for measures calculated in
accordance with U.S. GAAP.
The reconciliation of our net loss to Adjusted Net Income (Loss) is as follows:
Year ended December 31,
(in thousands) 2020 2019
Net loss $ (47,704) $ (39,824)
Debt placement costs for convertible notes (1) - 422
Transition to being a public company (2) - 775
Equity-based compensation expense 853 8,020
Initial consulting costs related to ERP system implementation (3)
215 - Restructuring expenses (4) 1,229 - Due diligence costs related to acquisition target 903 - Goodwill impairment charge 8,996 -
Adjustments related to the product rationalization to increase inventory turnover of slow-selling products
3,222 -
Obsolete inventory charges related to management's strategic initiative (5)
1,137 -
Allowances for uncollectible vendor deposits incurred in connection with management's strategic initiative (5)
822 -
Loss related to indemnification asset not probable of recovery 4,464 -
Change in fair value of convertible notes - 12,063
Adjusted net loss $ (25,863) $ (18,544) (1)Debt placement costs related to the issuance of convertible notes in
54
--------------------------------------------------------------------------------
(2)Includes certain non-recurring fees and expenses primarily attributable to
consulting fees and incremental audit and legal fees incurred in connection with
our IPO.
(3)Includes non-recurring expenses related to the initial project design for our
planned ERP system implementation.
(4)Includes primarily severance payments for employees terminated as part of our
transformation plan.
(5)Includes certain non-recurring charges related to management's strategic
initiative. These adjustments were incurred liquidate inventory on hand and on
order, rationalize product offerings, improve inventory turnover of slow-selling
products and vacate warehouse space for products with higher margin and
marketability.
55
--------------------------------------------------------------------------------The reconciliation of our net loss to Adjusted EBITDA is as follows:
Year ended December 31,
(in thousands) 2020 2019
Net loss $ (47,704) $ (39,824)
Other income, net (1) (1,902) (9,073)
Transition to being a public company (2) - 775
Interest expense 437 975
Provision for (benefit from) income taxes 194 10,935
Depreciation and amortization 2,520 2,705
Equity-based compensation expense 853 8,020
Initial consulting costs related to ERP system implementation (3)
215 -
Restructuring expenses (4) 1,229 -
Due diligence costs related to acquisition target 903 -
Adjustments related to product rationalization to increase inventory turnover of slow-selling products (5)
3,222 -
One-time early termination fee on operating lease in connection with moving to a centralized distribution center model
262 -
Goodwill impairment charge 8,996 -
Inventory charges related to management's strategic initiative(5)
1,137 -
Allowances for uncollectible vendor deposits incurred in connection with management's strategic initiative (5)
822 -
Loss related to indemnification asset not probable of recovery 4,464 -
Change in fair value of convertible notes - 12,063
Adjusted EBITDA $ (24,352) $ (13,424)
(1)Includes rental and interest income, changes in the fair value of contingent
consideration, and other miscellaneous income.
(2)Includes certain non-recurring fees and expenses primarily attributable to
consulting fees and incremental audit and legal fees incurred in connection with
our IPO.
(3)Includes non-recurring expenses related to the initial project design for our
planned ERP system implementation.
(4)Includes primarily severance payments for employees terminated as part of our
transformation plan.
(5)Includes certain non-recurring charges related to management's strategic
initiative. These adjustments were incurred liquidate inventory on hand and on
order, rationalize product offerings, improve inventory turnover of slow-selling
products and vacate warehouse space for products with higher margin and
marketability.
Liquidity and Capital Resources
Our primary requirements for liquidity and capital are working capital, debt
service and general corporate needs. Historically, these cash requirements have
been met through cash provided by operating activities and borrowings under our
revolving line of credit.
As of December 31, 2020 , we had approximately $30.4 million of cash, of which
$2.3 million was held in foreign bank accounts, and approximately $58.2 million
of working capital, which is calculated as current assets minus current
liabilities, compared with approximately $47.8 million of cash, of which $0.9
million was held in foreign bank accounts, and approximately $88.7 million of
working capital as of December 31, 2019 . 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 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.
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 (in the event we elect to exchange such Common Units for a
cash payment in lieu of shares of Class A common stock), 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
56
--------------------------------------------------------------------------------
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.
Despite decreases in gross profit for the year ended December 31, 2020 and the
uncertainty around the ongoing COVID-19 pandemic, 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 the next 12 months.
In addition, we may choose to raise additional funds at any time through equity
or debt financing arrangements, which may or may not be needed for additional
working capital, capital expenditures or other strategic investments. Our
opinions concerning liquidity are based on currently available information. To
the extent this information proves to be inaccurate, or if circumstances change,
future availability of trade credit or other sources of financing may be reduced
and our liquidity could be adversely affected. Our future capital requirements
and the adequacy of available funds will depend on many factors, including those
described in the section titled "Risk Factors" in Item 1A of this Form 10-K.
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.
Cash Flows
The following summary of cash flows for the periods indicated has been derived
from our consolidated financial statements included in Part II, Item 8 of this
Form 10-K:
Year Ended December 31,
(in thousands) 2020 2019
Net cash used in operating activities $ (12,302) $ (36,903)
Net cash used in investing activities (4,144) (3,732)
Net cash (used in) provided by financing activities (1,063)
80,979
Net Cash Used in Operating Activities During 2020, net cash used in operating activities of approximately$12.3 million was a result of a net loss of$47.7 million offset by non-cash adjustments to net loss of$17.7 million , and a$17.7 million increase in cash provided by working capital primarily driven by increases in our accrued expenses and accounts payable, and decreases in inventories offset by higher other current assets. During 2019, net cash used in operating activities of approximately$36.9 million was a result of a net loss of$39.8 million offset by non-cash adjustments to net loss of$28.0 million , and a$25.1 million increase in cash consumed by working capital primarily driven by an increase in our vendor deposits, inventories, and other current assets, and a decrease in accounts payable offset by higher accrued expenses.Net Cash Used in Investing Activities During 2020, we used approximately$4.1 million of cash for capital expenditures, including computer hardware and software to support our growth and development, and warehouse supplies and equipment, including the build-out of our two retail locations, and the purchase of a domain name and VIBES trademarks inEurope . During the year endedDecember 31, 2019 , we completed thePollen Gear LLC and Conscious Wholesale business acquisitions, for which we paid cash consideration of$2.1 million offset by net cash acquired of$0.9 million , which resulted in net cash used of approximately$1.2 million . We also made an investment in equity securities of an entity for approximately$0.5 million , which represents a 1.49% ownership interest in the entity.Net Cash (Used in) Provided by Financing Activities During the year endedDecember 31, 2020 , net cash used in financing activities primarily consisted of approximately$1.1 million in payments on other long-term liabilities, notes payable and finance lease obligations. During 2019, cash provided by financing activities was primarily attributable to net proceeds of approximately$79.5 million from the sale of Class A common stock in the IPO, and proceeds from the issuance of convertible notes of approximately Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our 57 --------------------------------------------------------------------------------
financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
© Edgar Online, source
