Greenlane Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of certain financial instruments we have 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 liabilities measured at fair value on a recurring basis were as follows at December 31, 2019:


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

There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy. We did not have any assets or liabilities measured at fair value on a recurring basis at December 31, 2018.

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 the Company's 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 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 December 31, 2019, which is a pay fixed and receive floating contract, is as follows:

Swap Maturity

Notional Value
(in thousands)

Pay Fixed Rate

Receive Floating Rate

Floating Rate
Reset Terms

October 1, 2025

8,297

2.07750

One-Month LIBOR

Monthly

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 income (loss)" in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2019. There was no measure of hedge ineffectiveness and no reclassifications from other comprehensive loss into interest expense for the year December 31, 2019. We did not have any derivative instruments at December 31, 2018.

Contingent Consideration

For the Conscious Wholesale acquisition, additional purchase price payments ranging from $0 to $3.4 million are contingent upon the achievement of certain operational and financial targets measured through December 31, 2020. At the date of acquisition, we estimated the preliminary fair value of the contingent consideration to be approximately $1.6 million as discussed in "Note 3—Business Acquisitions". The estimate of the fair value of contingent consideration was 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 (higher) fair value measurement of the contingent consideration liability. Changes in the fair value of our contingent consideration from business combinations are included within "Other income, net" in our 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 year ended December 31, 2019 is as follows:


(in thousands)	Conscious Wholesale Contingent Consideration		Convertible Notes
Balance at December 31, 2018	$	—	$	40,200
Convertible notes issued in January 2019	—		8,050
Contingent consideration issued in September 2019	1,609		—
Total (gains) losses in fair value included in results of operations	(41)		12,063
Conversion of convertible debt to Class A common stock	—		$	(60,313)
Balance at December 31, 2019	$	1,568	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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