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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
001-38875
(Commission file number)
Greenlane Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware83-0806637
State or other jurisdiction of
incorporation or organization
(I.R.S. Employer
Identification No.)

1095 Broken Sound Parkway,Suite 300
Boca Raton, FL33487
(Address of principal executive offices)(Zip Code)
(877) 292-7660
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.01 par value per shareGNLNNasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
Accelerated filer
£
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  ☒
As of June 4, 2020, Greenlane Holdings, Inc. had 11,623,181 shares of Class A common stock outstanding, 4,533,329 shares of Class B common stock outstanding and 77,791,218 shares of Class C common stock outstanding.




EXPLANATORY NOTE

Greenlane Holdings, Inc. (the "Company," "we," "our," or "us") is filing this Quarterly Report on Form 10-Q for the period ended March 31, 2020 (this "Form 10-Q") in reliance upon the relief set forth in the Order (the "Order") issued by the Securities and Exchange Commission (the "SEC") on March 25, 2020 (Release No. 34-88465) under Section 36 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Order provides conditional relief to public companies that are unable to timely comply with certain filing obligations as a result of the novel coronavirus ("COVID-19") pandemic. The Order provides that a registrant subject to the reporting requirement of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such registrant, is exempt from any requirement to file materials with the SEC under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(f), 15(d) and Regulation 13A, Regulations 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, if certain conditions are satisfied, including that such materials be filed with the SEC no later than 45 days after the original due date.

This Form 10-Q could not be filed within the time period specified under the Exchange Act, absent the relief available under the Order, due to process disruptions directly related to the COVID-19 pandemic. In particular, the current remote work environment caused by the COVID-19 pandemic has resulted in disruptions in our ability to complete our remaining accounting and internal review processes and provide our independent public registered accounting firm with timely access to our original books and records to complete their review procedures in a timely manner. Substantially all of our accounting staff working on our Form 10-Q and all members of the independent public registered accounting firm are now exclusively working remotely, which has made it more difficult for us to complete this Form 10-Q in a timely fashion. Pursuant to the requirements of the Order, we filed a Form 8-K with the SEC on May 12, 2020 indicating our intention to rely upon the Order with respect to the filing of this Form 10-Q, which would have otherwise been required to have been filed by May 15, 2020. This Form 10-Q is being filed within the 45-day extension period provided by the Order.



TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GREENLANE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share amounts)
March 31,
2020
December 31,
2019
ASSETS(Unaudited)
Current assets
Cash$43,650  $47,773  
Accounts receivable, net of allowance of $926 and $936 at March 31, 2020 and December 31, 2019, respectively
6,513  8,091  
Inventories, net42,965  43,060  
Vendor deposits9,261  11,120  
Other current assets2,518  4,924  
Total current assets104,907  114,968  
Property and equipment, net13,850  13,165  
Intangible assets, net6,107  6,301  
Goodwill2,933  11,982  
Operating lease right-of-use assets4,402  4,695  
Other assets2,078  2,091  
Total assets$134,277  $153,202  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$10,896  $11,310  
Accrued expenses and other current liabilities8,489  10,600  
Customer deposits2,583  3,152  
Current portion of operating leases1,218  1,084  
Current portion of finance leases116  116  
Total current liabilities23,302  26,262  
Notes payable, less current portion and debt issuance costs, net7,976  8,018  
Operating leases, less current portion3,454  3,844  
Finance leases, less current portion164  194  
Other liabilities1,016  620  
Total long-term liabilities12,610  12,676  
Total liabilities35,912  38,938  
Commitments and contingencies (Note 6)
Stockholders’ Equity
Preferred stock, $0.0001 par value, 10,000 shares authorized, none issued and outstanding
    
Class A common stock, $0.01 par value per share, 125,000 shares authorized; 10,479 shares issued and 10,292 shares outstanding as of March 31, 2020; 9,999 shares issued and 9,812 shares outstanding as of December 31, 2019
103  98  
Class B common stock, $0.0001 par value per share, 10,000 shares authorized; 5,870 and 5,975 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
1  1  
Class C Common stock, $0.0001 par value per share, 100,000 shares authorized; 77,791 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
8  8  
Additional paid-in capital33,891  32,108  
Accumulated deficit(14,188) (9,727) 
Accumulated other comprehensive loss(339) (72) 
Total stockholders’ equity attributable to Greenlane Holdings, Inc.
19,476  22,416  
Non-controlling interest78,889  91,848  
Total stockholders’ equity98,365  114,264  
Total liabilities and stockholders’ equity$134,277  $153,202  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1


GREENLANE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share amounts)
Three months ended
March 31,
20202019
Net sales$33,868  $49,898  
Cost of sales26,539  40,911  
Gross profit7,329  8,987  
Operating expenses:
Salaries, benefits and payroll taxes6,614  8,082  
General and administrative8,659  5,384  
Goodwill impairment charge8,996    
Depreciation and amortization710  684  
Total operating expenses24,979  14,150  
Loss from operations(17,650) (5,163) 
Other income (expense), net:
Change in fair value of convertible notes  (12,063) 
Interest expense(110) (602) 
Other income, net940  176  
Total other income (expense), net830  (12,489) 
Loss before income taxes(16,820) (17,652) 
(Benefit from) provision for income taxes(81) 12  
Net loss(16,739) (17,664) 
Less: Net loss attributable to non-controlling interest
(12,278)   
Net loss attributable to Greenlane Holdings, Inc.
$(4,461) $(17,664) 
Net loss attributable to Class A common stock per share - basic and diluted (1)
$(0.43) $  
Weighted-average shares of Class A common stock outstanding - basic and diluted (1)
10,455    
Other comprehensive (loss) income:
Foreign currency translation adjustments(627) 28  
Unrealized loss on derivative instrument(493)   
Comprehensive loss
(17,859) (17,636) 
Less: comprehensive loss attributable to non-controlling interest
(13,131)   
Comprehensive loss attributable to Greenlane Holdings, Inc.
$(4,728) $(17,636) 
(1)Basic and diluted net loss per share of Class A common stock is presented only for the period after our organizational transactions. See "Note 1—Business Operations and Organization" for a description of the organizational transactions. See "Note 8—Stockholders' Equity" for the calculation of net loss per share.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2


GREENLANE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CLASS B UNITS AND STOCKHOLDERS’ EQUITY / MEMBERS’ DEFICIT
(Unaudited)
(in thousands)

Redeemable
Class B
Units
Members’
Deficit
Class A
Common Stock
Class B
Common Stock
Class C
Common Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Non-
Controlling
Interest
Total
Stockholders’
Equity /
Members’
Deficit
SharesAmountSharesAmountSharesAmount
Balance, December 31, 2019$  $  9,812  $98  5,975  $1  77,791  $8  $32,108  $(9,727) $(72) $91,848  $114,264  
Net loss—  —  —  —  —  —  —  —  —  (4,461) —  (12,278) (16,739) 
Equity-based compensation—  —  —  —  —  —  —  —  64  —  —  206  270  
Issuance of Class A common stock for the acquisition of Conscious Wholesale—  —  480  5  —  —  —  —  1,496  —  —  —  1,501  
Cancellation of Class B common stock due to equity-based compensation award forfeitures—  —  —  —  (105) —  —  —  223  —  —  (223) —  
Joint venture consolidation—  —  —  —  —  —  —  —  —  —  —  189  189  
Other comprehensive loss—  —  —  —  —  —  —  —  —  —  (267) (853) (1,120) 
Balance, March 31, 2020$  $  10,292  $103  5,870  $1  77,791  $8  $33,891  $(14,188) $(339) $78,889  $98,365  
Redeemable
Class B
Units
Members’
Deficit
Class A
Common Stock
Class B
Common Stock
Class C
Common Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Non-
Controlling
Interest
Total
Stockholders’
Equity /
Members’
Deficit
SharesAmountSharesAmountSharesAmount
Balance, December 31, 2018$10,033  $(10,773)   $    $    $  $  $  $(286) $  $(11,059) 
Activity prior to the initial public offering and related organizational transactions:
Issuance of redeemable Class B units, net of issuance costs6,514  —  —  —  —  —  —  —  —  —  —  —  —  
Redemption of Class A and redeemable Class B units(416) (2,602) —  —  —  —  —  —  —  —  —  —  (2,602) 
Equity-based compensation2,304  191  —  —  —  —  —  —  —  —  —  —  191  
Net loss(3,045) (14,619) —  —  —  —  —  —  —  —  —  —  (14,619) 
Member distributions—  (21) —  —  —  —  —  —  —  —  —  —  (21) 
Other comprehensive income—  —  —  —  —  —  —  —  —  —  28  —  28  
Balance, March 31, 2019$15,390  $(27,824)   $    $    $  $  $  $(258) $  $(28,082) 





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


GREENLANE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months ended March 31,
20202019
Cash flows from operating activities:
Net loss (including amounts attributable to non-controlling interest)$(16,739) $(17,664) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization710  684  
Debt issuance costs on convertible notes  422  
Equity-based compensation expense270  2,851  
Goodwill impairment charge8,996    
Change in fair value of contingent consideration(615)   
Change in fair value of convertible notes  12,063  
Change in provision for doubtful accounts18  603  
Change in provision for slow moving or obsolete inventory(117) 81  
Other64  12  
Changes in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable1,560  (2,647) 
Vendor deposits2,056  1,659  
Inventories212  (6,652) 
Deferred offering costs  (582) 
Other current assets2,324  (720) 
Accounts payable(414) 1,963  
Accrued expenses1,258  1,208  
Customer deposits(680) (542) 
Net cash used in operating activities(1,097) (7,261) 
Cash flows from investing activities:
(Purchase consideration paid for) cash acquired from acquisitions(1,272) 91  
Purchases of property and equipment, net(990) (509) 
Purchase of intangible assets, net  (54) 
Investment in equity securities  (500) 
Net cash used in investing activities(2,262) (972) 
Cash flows from financing activities:
Proceeds from issuance of convertible notes  8,050  
Payment of debt issuance costs - convertible notes  (1,590) 
Proceeds from - line of credit, net  325  
Redemption of Class A and Class B units of Greenlane Holdings, LLC  (3,019) 
Other(149) (125) 
Net cash (used in) provided by financing activities(149) 3,641  
Effects of exchange rate changes on cash(615) 28  
Net decrease in cash(4,123) (4,564) 
Cash, as of beginning of the period47,773  7,341  
Cash, as of end of the period$43,650  $2,777  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$409  $178  
Lease liabilities arising from obtaining operating lease right-of-use assets$331  $2,411  
Non-cash investing activities and financing activities:
Redeemable Class B Units issued for acquisition of a subsidiary, net of issuance costs$  $6,514  
Shares of Class A common stock issued for acquisition of Conscious Wholesale$1,501  $  
Deferred offering costs included in accounts payable and accrued expenses$  $2,068  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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GREENLANE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BUSINESS OPERATIONS AND ORGANIZATION
Organization
Greenlane Holdings, Inc. (“Greenlane” and, collectively with the Operating Company (as defined below) and its consolidated subsidiaries, the “Company”, "we", "us", and "our") was formed as a Delaware corporation on May 2, 2018. We are a holding company that was formed for the purpose of completing an underwritten initial public offering (“IPO”) of shares of our Class A common stock (as defined below) and other related Transactions (as defined below) in order to carry on the business of Greenlane Holdings, LLC (the “Operating Company”). The Operating Company was organized under the laws of the state of Delaware on September 1, 2015, and is based in Boca Raton, Florida. Unless the context otherwise requires, references to the “Company” refer to us, and our consolidated subsidiaries, including the Operating Company.
As a result of the IPO and the Transactions described below, we became the sole manager of the Operating Company and our principal asset is Common Units of the Operating Company (“Common Units”). As the sole manager of the Operating Company, we operate and control all of the business and affairs of the Operating Company, and we conduct our business through the Operating Company and its subsidiaries. We have a board of directors and executive officers, but no employees. All of our assets are held and all of the employees are employed by the Operating Company.
We merchandise vaporizers 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.
Although we have a minority economic interest in the Operating Company, we have the sole voting interest in, and control the management of, the Operating Company, and we have the obligation to absorb losses of, and receive benefits from, the Operating Company, that could be significant. We determined that, as a result of the Transactions described below, the Operating Company is a variable interest entity (“VIE”) and that we are the primary beneficiary of the Operating Company. Accordingly, pursuant to the VIE accounting model, beginning in the fiscal quarter ended June 30, 2019, we consolidated the Operating Company in our consolidated financial statements and reported a non-controlling interest related to the Common Units held by the members of the Operating Company (other than the Common Units held by us) on our consolidated financial statements.
The Operating Company has been determined to be our predecessor for accounting purposes and, accordingly, the consolidated financial statements for periods prior to the IPO and the related Transactions have been adjusted to combine the previously separate entities for presentation purposes. Amounts for the period from January 1, 2019 through March 31, 2019 presented in the condensed consolidated financial statements and notes to the condensed financial statements herein represent the historical operations of the Operating Company, and amounts for the period from January 1, 2020 through March 31, 2020 reflect our consolidated operations.
Initial Public Offering and Organizational Transactions
On April 23, 2019, we completed our IPO of shares of Class A common stock at a public offering price of $17.00 per share. Our sale of Class A common stock generated aggregate net proceeds of approximately $79.5 million, after deducting the underwriting discounts and commissions and offering expenses paid by us. We contributed all of the net proceeds to the Operating Company in exchange for a number of Common Units equal to the number of shares of our Class A common stock sold by us in the IPO at a price per Common Unit equal to the IPO price per share of Class A common stock. After giving effect to the IPO and the related Transactions, we owned approximately 23.9% of the Operating Company’s outstanding Common Units.
In connection with the closing of the IPO, Greenlane and the Operating Company consummated the following organizational transactions (collectively, the “Transactions”):
● The Operating Company adopted and approved the Third Amended and Restated Operating Agreement of the Operating Company (the “Operating Agreement”), which converted each member’s existing membership interests in the Operating Company into Common Units, including unvested profits interests into unvested Common Units, and appointed us as the sole manager of the Operating Company;
● We amended and restated our certificate of incorporation to, among other things, provide for Class A common stock, Class B common stock and Class C common stock;
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● We issued, for nominal consideration, one share of our Class B common stock to our non-founder members for each Common Unit they owned, and issued, for nominal consideration, three shares of Class C common stock to our founder members for each Common Unit they owned;
● We issued 3,547,776 shares of our Class A common stock upon conversion of the convertible notes at a settlement price equal to 80% of the IPO price;
● We issued 1,200,000 shares of our Class A common stock to our members upon exchange of an equal number of Common Units, which shares were sold by the members as selling stockholders in the IPO, including 450,000 shares issued pursuant to the partial exercise of the underwriters’ option to purchase additional shares;
● We issued and sold 5,250,000 shares of our Class A common stock to the purchasers in the IPO, and used all of the net proceeds received from the IPO to acquire Common Units from the Operating Company at a purchase price per Common Unit equal to the IPO price per share of our Class A common stock, less underwriting discounts and commissions;
● The members of the Operating Company continue to own their Common Units not exchanged for the shares of our Class A common stock sold by them as selling stockholders in the IPO. Common Units are redeemable, subject to contractual restrictions, at the election of such members for newly-issued shares of our Class A common stock on a one-to-one basis (and their shares of our Class B common stock or our Class C common stock, as the case may be, will be canceled on a one-to-one basis in the case of our Class B common stock or three-to-one basis in the case of our Class C common stock upon any such issuance). We have the option to instead make a cash payment equal to a volume weighted average market price of one share of our Class A common stock for each Common Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Operating Agreement. Our decision to make a cash payment upon a member’s redemption election will be made by our independent directors (within the meaning of the Nasdaq Marketplace Rules) who are disinterested in such proposed redemption; and
● We entered into (i) a Tax Receivable Agreement (the “TRA”) with the Operating Company and the Operating Company’s members and (ii) a Registration Rights (the “Registration Rights Agreement”) with the Operating Company’s members.
Our corporate structure following the IPO, as described above, is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure allows the members of the Operating Company to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the IPO. One of these benefits is that future taxable income of the Operating Company that is allocated to its members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the Operating Company entity level. Additionally, because the members may redeem their Common Units for shares of our Class A common stock on a one-for-one basis, or at our option, for cash, the Up-C structure also provides the members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded.
We will receive the same benefits as the Operating Company's members because of our ownership of Common Units in an entity treated as a partnership, or “pass-through” entity, for income tax purposes. As additional Common Units from the Operating Company’s members are redeemed under the mechanism described above, we will obtain a step-up in tax basis in our share of the Operating Company’s assets. This step-up in tax basis will provide us with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to us. We entered into the TRA with the Operating Company and each of the Operating Company’s members, which provides for the payment by us to the Operating Company’s members of 85% of the amount of tax benefits, if any, that we may actually realize (or in some cases, are deemed to realize) as a result of (i) increases in tax basis resulting from the redemption of Common Units and (ii) certain other tax benefits attributable to payments made under the TRA.
As a result of the completion of the Transactions, including the IPO, our amended and restated certificate of incorporation and the Operating Agreement require that (i) we at all times maintain a ratio of one Common Unit owned by us for each share of our Class A common stock issued by us (subject to certain exceptions), and (ii) the Operating Company at all times maintains (x) a one-to-one ratio between the number of shares of our Class A common stock issued by us and the number of Common Units owned by us, (y) a one-to-one ratio between the number of shares of our Class B common stock owned by the non-founder members of the Operating Company and the number of Common Units owned by the non-founder members of the Operating Company, and (z) a three-to-one ratio between the number of shares of our Class C common stock owned by the founder members of the Operating Company and their affiliates and the number of Common Units owned by the founder members of the Operating Company and their affiliates.
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The following table sets forth the economic and voting interests of our common stock holders as of the date of this Form 10-Q:

Class of Common Stock (ownership)
Total Shares (1)
Class A Shares (as converted) (2)
Economic Ownership in the Operating Company (3)
Voting Interest in Greenlane (4)
Economic Interest in Greenlane (5)
Class A10,291,878  10,291,878  24.5 %11.0 %100.0 %
Class B (non-founder members)5,869,778  5,869,778  13.9 %6.2 % %
Class C (founder members)77,791,218  25,930,406  61.6 %82.8 % %
Total93,952,874  42,092,062  100.0%100.0%100.0 %
(1) Represents the total number of outstanding shares for each class of common stock as of March 31, 2020.
(2) Represents the number of shares of Class A common stock that would be outstanding assuming the exchange of all outstanding shares of Class B common stock and Class C common stock upon redemption of all related Common Units. Shares of Class B common stock and Class C common stock, as the case may be, would be canceled, without consideration, on a one-to-one basis in the case of Class B common stock and a three-to-one basis in the case of Class C common stock, pursuant to the terms and subject to the conditions of the Operating Agreement.
(3) Represents the indirect economic interest in the Operating Company through the holders' ownership of common stock.
(4) Represents the aggregate voting interest in us through the holders' ownership of Common Stock. Each share of Class A common stock, Class B common stock and Class C common stock entitles its holder to one vote per share on all matters submitted to a vote of our stockholders.
(5) Represents the aggregate economic interest in us through the holders' ownership of Class A common stock.

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. The condensed consolidated results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other future annual or interim period. Certain reclassifications have been made to prior year amounts or balances to conform to the presentation adopted in the current year.

Use of Estimates

Conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. U.S. GAAP requires us to make estimates and judgments in several areas. Such areas include, but are not limited to: the collectibility of accounts receivable; the allowance for slow-moving or obsolete inventory; the realizability of deferred tax assets; the fair value of goodwill; the fair value of contingent consideration arrangements; the useful lives of intangibles assets and property and equipment; our loss contingencies, including our TRA liability; and the valuation and assumptions underlying equity-based compensation. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

The COVID-19 pandemic, declared by the World Health Organization in March 2020, has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns and adversely impact our results of operations. Since the implementation of "stay at home" orders, there has been a significant decline in sales to smoke shops, vape shops, and similar independent retailers that comprise a large portion of our customer base. Many of these customers are closed as a result of the "stay at home" orders and it is possible that some of these customers may close permanently as a result of business lost during the pandemic. We expect uncertainties around our key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements.

Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired accounted for by the acquisition method of accounting. Goodwill is tested for impairment annually, or when events or changes in circumstances indicate it is more likely than not that the carrying amount is not recoverable.
Estimating the fair value of a reporting unit for goodwill impairment is highly sensitive to changes in projections and assumptions. Ultimately, potential changes in these assumptions may impact the estimated fair value of a reporting unit and result in an impairment if the fair value of such reporting unit is less than its carrying value.
Due to recent 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 our United States reporting unit was determined to be below its carrying value, which resulted in a $9.0 million goodwill impairment charge for the three months ended March 31, 2020. This impairment charge resulted from the impacts of COVID-19 on our current and forecasted wholesale revenues and the restrictions on certain products we sell imposed by the Federal Drug Administrations's ("FDA") Enforcement Priorities for Electronic Nicotine Delivery Systems ("ENDS") and Other Deemed Products on the Market Without Premarket Authorization ("ENDS Enforcement Guidance"), which resulted in changes to our estimates and assumptions of the expected future cash flows of the United States reporting unit. Changes in the carrying amount of our goodwill by reporting unit for the three months ended March 31, 2020 were as follows:

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(in thousands)U.S.CanadaEuropeTotal
Balance at December 31, 2019$8,996  $  $2,986  $11,982  
Goodwill impairment charge(8,996)     (8,996) 
Foreign currency translation adjustment    (53) (53) 
Balance at March 31, 2020$  $  $2,933  $2,933  
We will continue to monitor the significant global economic uncertainty as a result of the COVID-19 pandemic, including its duration and severity, the extent of its disruption on our operations, and the changes in our mitigation strategies, which may lead to additional impairment charges in future reporting periods.
Revenue Recognition

Revenue is recognized when customers obtain control of goods and services promised by us. Revenue is measured based on the amount of consideration that we expect to receive in exchange for those goods or services, reduced by promotional discounts and estimates for return allowances and refunds. Taxes collected from customers for remittance to governmental authorities are excluded from net sales.

We generate revenue primarily from the sale of finished products to customers, whereby each product unit represents a single performance obligation. We recognize revenue from product sales when the customer has obtained control of the products, which is either at point of sale or delivery to the customer, depending upon the specific terms and conditions of the arrangement. We provide no warranty on products sold. Product warranty is provided by the manufacturers.

During the three months ended March 31, 2020, we entered into a limited number of bill-and-hold arrangements. Each bill-and-hold arrangement is reviewed and revenue is recognized only when certain criteria have been met: (i) the customer has requested delayed delivery and storage of the products by us, in exchange for a storage fee, because they want to secure a supply of the products but lacks storage space, (ii) the risk of ownership has passed to the customer, (iii) the products are segregated from our other inventory items held for sale, (iv) the products are ready for shipment to the customer, and (v) the products are customized and thus we do not have the ability to use the products or direct them to another customer. During the three months ended March 31, 2020, we recorded $0.8 million of revenue under bill-and-hold arrangements. We did not recognize any revenue under bill-and-hold arrangements during the three months ended March 31, 2019. Storage fees charged to customers for bill-and-hold arrangements are recognized as invoiced. Such fees were not significant for the three months ended March 31, 2020.

Our product offerings include premium, patented, child-resistant packaging, closed-system vaporization solutions and custom-branded retail products. For these product offerings, we generally receive a deposit from the customer (generally 50% of the total order cost, but the amount can vary by customer contract), when an order is placed by a customer. We typically complete these orders within six weeks to three months from the date of order, depending on the complexity of the customization and the size of the order. See “Note 7—Supplemental Financial Statement Information.”

We estimate product returns based on historical experience and record them as a refund liability that reduces the net sales for the period. We analyze actual historical returns, current economic trends and changes in order volume when evaluating the adequacy of our sales returns allowance in any reporting period. Our liability for returns is included within "Accrued expenses and other current liabilities" in our condensed consolidated balance sheets and was approximately $0.7 million and $0.6 million at March 31, 2020 and December 31, 2019, respectively. The recoverable cost of merchandise estimated to be returned by customers is included within "Other current assets" in our condensed consolidated balance sheets and was approximately $0.3 million as of March 31, 2020 and December 31, 2019.

Our performance obligations for services are satisfied when the services are rendered within the arranged service period. Total service revenue is not material and accounted for less than 0.1% of revenues for the three months ended March 31, 2020 and 2019.

We elected to account for shipping and handling expenses that occur after the customer has obtained control of products as a fulfillment activity in cost of sales. Shipping and handling fees charged to customers are included in net sales upon completion of our performance obligations. We apply the practical expedient provided for by ASC 606 by not adjusting the transaction price for significant financing components for periods less than one year. We also apply the practical expedient provided for by ASC 606 based upon which we generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within "Salaries, benefits and payroll tax expenses" in the condensed consolidated statements of operations and comprehensive loss.


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No single customer represented more than 10% of our net sales for the three months ended March 31, 2020 and 2019. No single customer represented more than 10% of the accounts receivable balance as of March 31, 2020 and December 31, 2019.
Federal Drug Administration's ENDS Enforcement Guidance
In January 2020, the FDA issued ENDS Enforcement Guidance, which outlines the FDA's intent to prioritize enforcement against flavored, cartridge-based ENDS products (except tobacco or menthol flavored products), all other ENDS products for which the manufacturer has failed to take adequate measures to prevent access to minors, and any ENDS products targeted to minors or whose marketing is likely to promote usage by minors. The FDA also intends to prioritize any ENDS products offered for sale after September 9, 2020 for which the manufacturer has not submitted a premarket application. The FDA is not necessarily bound by these enforcement priorities, and could take action against other products as warranted by changing circumstances.
The ENDS Enforcement Guidance had the effect of prohibiting the sale of certain products we sell in the United States, including mint-flavored products from JUUL Labs and other flavored ENDS, starting February 2020. Products impacted by the ENDS Enforcement Guidance represented less than 0.1% of our net sales for the three months ended March 31, 2020 and approximately 13.2% of our net sales for the three months ended March 31, 2019.
While we have been compliant with and expect to remain in compliance with the ENDS Enforcement Guidance, further actions and developments of FDA's guidance and actions could adversely affect our sales of ENDS products and may have a material adverse effect on our business, results of operations and financial condition.
Recently Adopted Accounting Guidance
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard prospectively beginning January 1, 2020. Adoption of this new standard did not impact our consolidated financial statements as we did not incur any such costs as contemplated by this update during the first quarter of 2020.
Recently Issued Accounting Guidance Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The standard requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale securities and requires estimated credit losses to be recorded as allowances rather than as reductions to the amortized cost of the securities. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022 for filers that are eligible to be smaller reporting companies under the SEC's definition. Early adoption is permitted. We do not believe the adoption of this new guidance will have a material impact on our consolidated financial statements and disclosures.
In December 2019, the FASB issued No. ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This update will be effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We are currently assessing the impact, if any, the guidance will have on our consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. This update will be effective for interim and annual periods beginning after December 31, 2020, with early adoption permitted. We are currently assessing the impact, if any, the guidance will have on our consolidated financial statements.




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NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Measured on a Recurring Basis

The carrying amounts for certain of our financial instruments, including cash, accounts receivable, accounts payable and certain accrued expenses and other assets and liabilities, approximate fair value due to the short-term nature of these instruments. Our financial instruments measured at fair value on a recurring basis were as follows at the dates indicated:
Condensed Consolidated
Balance Sheet Caption
Fair Value at March 31, 2020
(in thousands)Level 1Level 2Level 3Total
Liabilities:
Interest rate swap contractOther long-term liabilities$  $699  $  $699  
Contingent considerationAccrued expenses and other current liabilities    922  922  
Total Liabilities$  $699  $922  $1,621  

Condensed Consolidated
Balance Sheet Caption
Fair Value at December 31, 2019
(in thousands)Level 1Level 2Level 3Total
Liabilities:
Interest rate swap contractOther long-term liabilities$  $206  $  $206  
Contingent considerationAccrued expenses and other current liabilities    1,568  1,568  
Total Liabilities$  $206  $1,568  $1,774  

There were no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy during the three months ended March 31, 2020.

Derivative Instrument and Hedging Activity
On July 11, 2019, we entered into an interest rate swap contract to manage our risk associated with the interest rate fluctuations on our floating rate Real Estate Note. The counterparty to this instrument is a reputable financial institution. The interest rate swap contract is entered into for periods consistent with the related underlying exposure and does not constitute a position independent of this exposure. Our interest rate swap contract was designated as a cash flow hedge at the inception date, and is reflected at its fair value in our condensed consolidated balance sheet. The fair value of our interest rate swap liability is determined based on the present value of expected future cash flows. Since our interest rate swap value is based on the LIBOR forward curve and credit default swap rates, which are observable at commonly quoted intervals for the full term of the swap, it is considered a Level 2 measurement.

Details of the outstanding swap contract as of March 31, 2020, which is a pay fixed and receive floating contract, are as follows:

Swap MaturityNotional Value
(in thousands)
Pay Fixed RateReceive Floating RateFloating Rate
Reset Terms
October 1, 2025$8,255  2.07750 %One-Month LIBORMonthly

We performed an initial qualitative assessment of hedge effectiveness using the hypothetical derivative method in the period in which the hedging transaction was entered, as the critical terms of the hypothetical derivative and the hedging instrument were the same. On a quarterly basis, we perform a qualitative analysis for quarterly prospective and retrospective assessments of hedge effectiveness. The unrealized loss on the derivative instrument is included within "Other comprehensive loss" in our condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2020. There was no measure of hedge ineffectiveness and no reclassifications from other comprehensive loss into interest expense for the three months ended March 31, 2020.





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Contingent Consideration

Each period we revalue our contingent consideration obligations associated with business acquisitions to their fair value. Additional purchase price payments ranging from $0 to $3.3 million are contingent upon the achievement of certain operational and financial targets measured through December 31, 2020. The estimate of the fair value of contingent consideration is determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs not observable in the market, such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of the acquired business over the earn-out period, and therefore represents a Level 3 measurement. Significant increases or decreases in these inputs could result in a significantly lower or higher fair value measurement of the contingent consideration liability. During the three months ended March 31, 2020, we recognized a gain from the fair value adjustment of contingent consideration of approximately $0.6 million. The fair value adjustment was largely attributed to changes in forecasted revenues and gross profits for our European operating segment over the remainder of 2020, primarily due to impacts of the COVID-19 pandemic. Changes in the fair value of contingent consideration are included within "Other income (expense), net" in our condensed consolidated statements of operations and comprehensive loss.

A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 is as follows:
(in thousands)Conscious Wholesale Contingent Consideration
Balance at December 31, 2019$1,568  
Foreign currency translation adjustments(31) 
Gains from fair value adjustments included in results of operations(615) 
Balance at March 31, 2020$922  

Investment in Equity Securities

Our investment in equity securities consists of a 1.49% ownership interest in Airgraft Inc. We determined that our ownership does not provide us with significant influence over the operations of this investee. Accordingly, we account for our investment in this entity as equity securities. Airgraft Inc. is a private entity and its equity securities do not have a readily determinable fair value. We elected to measure this security under the measurement alternative election at cost minus impairment, if any, and adjust the security to fair value when an observable price change can be identified; thus, the investment in equity securities constitutes a Level 3 investment, measured on a non-recurring basis. There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy during the three months ended March 31, 2020.

During the three months ended March 31, 2020, we did not identify any fair value adjustments using observable price changes in orderly transactions for an identical or similar investment of the same issuer. At March 31, 2020 and December 31, 2019, the carrying value of this investment was approximately $2.0 million, which included a fair value adjustment of $1.5 million based on an observable price change recognized during the year ended December 31, 2019.





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NOTE 4. LEASES
Greenlane as a Lessee
As of March 31, 2020, we had 14 facilities financed under operating leases consisting of warehouses, regional offices, and retail stores, with lease term expirations between 2020 and 2026. Lease terms are generally three years to nine years for warehouses, office space and retail store locations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Beginning January 2020, we began taking steps to optimize our distribution network, transitioning to a more centralized model with fewer, larger, highly automated facilities in the U.S. See "Note 12—Subsequent Events" for additional developments regarding lease amendments and terminations.
During the three months ended March 31, 2020, we entered into new operating lease agreements for a new retail store location in Barcelona, Spain and for office space in Biarritz, France, and we permanently closed our Ponce City Market retail store. We recorded approximately $0.4 million in impairment charges related to the Ponce City Market retail store closure, including $0.3 million related to right-of-use asset impairments and $0.1 million related to impairments of leasehold improvements, offset by the derecognition of the associated operating lease liability of approximately $0.3 million, included within "general and administrative expenses" in our condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2020.
The following table provides details of our future minimum lease payments under finance lease liabilities and operating lease liabilities recorded in our condensed consolidated balance sheet as of March 31, 2020. The table below does not include commitments that are contingent on events or other factors that are currently uncertain or unknown.
Finance
Leases
Operating LeasesTotal Finance and Operating Lease Obligations
(in thousands)
Remainder of 2020$