|9 Months Ended|
Sep. 30, 2021
|Business Combination and Asset Acquisition [Abstract]|
|Business Acquisitions||BUSINESS ACQUISITIONS
On March 2, 2021, we acquired substantially all the assets of Eyce LLC ("Eyce"), a designer and manufacturer of silicon pipes, bubblers, rigs, and other smoking and vaporization-related accessories and merchandise. We acquired Eyce to take advantage of expected synergies, which include increased margins from the direct integration of one of our top-selling product lines into our offerings of Greenlane Brands products (as defined below) and the enlistment of key talent in Eyce's founding owners.
We accounted for the Eyce acquisition as a business combination under the acquisition method under ASC Topic 805, Business Combinations. Eyce has been consolidated in our condensed consolidated financial statements commencing on March 2, 2021, the date of acquisition. The purchase price for the Eyce acquisition was allocated based on estimates of the fair value of net assets acquired at the acquisition date, with the excess allocated to goodwill. The total purchase consideration for the Eyce acquisition consisted of the following:
During the three and nine months ended September 30, 2021, we recognized approximately $0 and $0.3 million in Eyce acquisition-related costs, which were included within "general and administrative" expenses in our condensed consolidated statement of operations and comprehensive loss.
The contingent consideration arrangement requires us to make contingent payments based on the achievement of certain revenue and EBITDA performance targets for the years ending December 31, 2021 and 2022, as set forth in the acquisition agreement. We estimated the fair value of the contingent consideration by using a Monte Carlo simulation that includes significant unobservable inputs 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. As a result of additional information obtained about facts and circumstances that existed as of the acquisition date, we calculated an adjustment to the purchase price related to the estimated fair value of contingent consideration issued, and recorded a measurement period adjustment during the second quarter of 2021.
The following table summarizes the purchase price allocation and the estimated fair value of the net assets acquired at the date of acquisition as of September 30, 2021.
Goodwill generated from the Eyce acquisition is primarily related to the value we placed on expected business synergies. The assignment of goodwill recognized from this business combination to reporting units has not yet been completed as of the date of these financial statements. We anticipate that the goodwill recognized will be deductible for income tax purposes.
Merger with KushCo Holdings, Inc.
On August 31, 2021, we completed our previously announced merger with KushCo Holdings, Inc. ("KushCo"), pursuant to the terms of an Agreement and Plan of Merger, dated as of March, 31, 2021 (the "Merger Agreement"). Greenlane’s merger with KushCo creates the leading ancillary cannabis products and services company. The combined company serves a premier group of customers, which includes many of the leading MSOs and LPs, the top smoke shops in the United States, and millions of consumers globally.
Pursuant to the Merger Agreement, Merger Sub Gotham 1, LLC, our wholly owned subsidiary (“Merger Sub 1”), merged with KushCo (the “Initial Surviving Corporation”) (“Merger 1”) and then the Initial Surviving Corporation was merged with and into Merger Sub Gotham 2, LLC, our wholly owned subsidiary (“Merger Sub 2”), with Merger Sub 2 as the surviving limited liability company and a wholly owned subsidiary of Greenlane (“Merger 2,” and together with Merger 1, the “Mergers”).
At the effective time of the Mergers, each KushCo stockholder received 0.3016 shares of Class A common stock, as determined pursuant to the exchange ratio formula set forth in the Merger Agreement (the “Exchange Ratio”) for each share of KushCo’s common stock, $0.01 par value per share (“KushCo common stock”), issued and outstanding immediately prior to the effective time of the Mergers, with cash paid for any fractional shares that a KushCo stockholder would have otherwise been entitled to receive. Immediately following the Mergers, stockholders that held Greenlane common stock prior to the completion of the Mergers owned 51.9% and former KushCo stockholders owned 48.1% of the equity of the combined company on a fully diluted basis.
Pursuant to the Merger Agreement, immediately prior to the consummation of the Mergers, holders of Class C common stock received one-third of one share of Class B common stock for each share of Class C common stock held immediately prior to the closing of the mergers, and Greenlane adopted the A&R Charter, which eliminated Class C common stock as a class of Greenlane’s capital stock.
Treatment of KushCo Equity Awards
At the effective time of the Mergers, options to purchase shares of KushCo common stock (“KushCo options”) were treated as follows:
•Each KushCo option that was outstanding immediately prior to the Merger 1 effective time, whether or not then vested or exercisable (but after taking into account any acceleration or vesting as provided under the KushCo equity plan covering such option), was converted into an option to purchase, on the same terms and conditions that applied to such KushCo option immediately prior to the Merger 1 effective time, (A) that number of shares of Class A common stock, rounded down to the nearest whole share, determined by multiplying (1) the total number of KushCo shares subject to such KushCo option immediately prior to the Merger 1 effective time by (2) the Exchange Ratio, (B) at a per-share exercise price, rounded up to the nearest whole cent, determined by dividing (1) the exercise price per share covered by such KushCo option immediately prior to the Merger 1 effective time by (2) the Exchange Ratio;
•Greenlane assumed the sponsorship of the KushCo Holdings, Inc. 2016 Stock Incentive Plan covering such KushCo options (the “KushCo Equity Plan”), and all references to KushCo therein were deemed references to Greenlane and all references to shares of KushCo common stock therein were deemed references to Class A common stock; and
•Each KushCo restricted stock unit (a “KushCo RSU”) that was then held and remained outstanding immediately prior to the Merger 1 effective time accelerated and became vested in full in accordance with the terms of the KushCo equity plan covering such KushCo RSUs and each such KushCo RSU was immediately settled and treated in the same manner as shares of KushCo common stock in the Mergers.
Effect of Merger 1 on KushCo Warrants
Additionally, each warrant to purchase one or more shares of KushCo common stock (a “KushCo Warrant”), whether exercisable or not, was converted into a warrant to purchase Class A common stock. Greenlane assumed each such KushCo Warrant in accordance with its terms (the “Assumed Warrants”). With respect to the Assumed Warrants: (i) the Assumed Warrants are exercisable solely for shares of Class A common stock; (ii) the number of shares of Class A common stock subject to such Assumed Warrants is equal to the number of shares of KushCo common stock subject to such Assumed Warrants as of immediately prior to the effective time of Merger 1 multiplied by the Exchange Ratio, rounded up to the nearest whole share; and (iii) the per share exercise price under each such Assumed Warrant was adjusted by dividing the per share exercise price under such Assumed Warrant by the Exchange Ratio and rounding up to the nearest cent.
Estimated Purchase Consideration and Preliminary Purchase Price Allocation
We accounted for the KushCo acquisition as a business combination under the acquisition method under ASC Topic 805, Business Combinations. KushCo has been consolidated in our condensed consolidated financial statements commencing on August 31, 2021, the date of acquisition.
The initial accounting for the acquisition, including the purchase price allocation, is preliminary pending completion of the fair value analyses of the replacement warrants and replaced equity compensation awards, as well as pending completion of the fair value analyses of assets acquired and liabilities assumed.
We allocated the purchase price to the net identifiable tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets and liabilities was allocated to goodwill. We determined the preliminary estimated fair values after
review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and estimated made by management. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are preliminary based on management's estimates and assumptions and may be subject to change as additional information is received. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The total estimated purchase consideration for the KushCo acquisition consisted of the following:
(1) Based on approximately 48.8 million shares of Greenlane Class A common stock issued, multiplied by the closing price per share of Greenlane Class A common stock on Nasdaq on August 31, 2021, the acquisition date, of $2.54.
(2) Represents cash paid by Greenlane on the acquisition date to extinguish certain debt and other liabilities of KushCo, which were not legally assumed by Greenlane.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the preliminary purchase price allocation (in thousands):
Goodwill generated from the KushCo acquisition is primarily related to the value we placed on expected business synergies. The assignment of goodwill recognized from this business combination to reporting units has also not yet been completed as of the date of these financial statements. We anticipate that the goodwill recognized will be deductible for income tax purposes.
During the three and nine months ended September 30, 2021, we recognized transaction costs of approximately $4.5 million and $7.8 million in connection with the Mergers, consisting primarily of advisory, legal, valuation and accounting fees, which
were recorded in "general and administrative expenses" in the accompanying condensed consolidated statements of operations and comprehensive loss.
Supplemental Unaudited Pro Forma Financial Information
The following table presents pro forma results for the three and nine months ended September 30, 2021 and 2020 as if our acquisition of Eyce and the closing of the merger with KushCo had occurred on January 1, 2020, and Eyce and KushCo's results had been included in our consolidated results beginning on that date (in thousands):
The pro forma amounts have been calculated after applying our accounting policies to the financial statements of Eyce and KushCo and adjusting the combined results of Greenlane, Eyce and KushCo (a) to remove Eyce product sales to us and to remove the cost incurred by us related to products purchased from Eyce prior to the acquisition, and (b) to reflect the increased amortization expense that would have been charged assuming intangible assets identified in the acquisitions of Eyce and KushCo had been recorded on January 1, 2020.
The impact of the Eyce acquisition and the KushCo merger on the actual results reported by us in subsequent periods may differ significantly from that reflected in this pro forma information for a number of reasons, including but not limited to, non-achievement of the expected synergies from these combinations and changes in the regulatory environment. As a result, the pro forma information is not necessarily indicative of what our financial condition or results of operations would have been had the acquisitions been completed on the applicable date of this pro forma financial information. In addition, the pro forma financial information does not purport to project our future financial condition and results of operations.
Supplemental Information of Operating Results
"Net sales" in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2021 includes approximately $0.3 million to $0.5 million of net sales contributed by Eyce e-commerce and wholesale customers since the date of the acquisition. Eyce's operating activities have been integrated with an existing subsidiary of the Operating Company, and we owned Eyce inventory from purchases preceding the acquisition date. As such, the identification of post-acquisition "net loss" is impracticable for the three and nine months ended September 30, 2021."Net sales" and "net loss" in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2021 include approximately $12.6 million of net sales and approximately $6.7 million of net loss contributed by KushCo since the date of the acquisition.
The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable).
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef