Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.1
Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
As a result of the IPO and the related transactions completed in April 2019, 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 generally 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 Greenlane, on a pro-rata basis, in accordance with the terms of the Operating Agreement. The Operating Company is also subject to taxes in foreign jurisdictions. We are a corporation subject to U.S. federal income taxes, in additional to state and local income taxes, based on our share of the Operating Company’s pass-through taxable income.
The Company's United States and foreign operations components of income (loss) before continuing operations before income taxes are as follows:
For the year ended December 31,
(in thousands) 2021 2020
United States $ (51,109) $ (40,668)
Foreign (2,304) (6,842)
Total $ (53,413) $ (47,510)
Income Tax Expense
The income tax expense for the years ended December 31, 2021 and 2020 consisted of the following:
For the year ended December 31, 2021 For the year ended December 31, 2020
(in thousands) Federal Foreign State Total Federal Foreign State Total
Current tax expense
Current year $ —  $ (10) $ 20  $ 10  $ 6  $ 188  $ —  $ 194 
Total current year —  (10) 20  10  6  188  —  194 
Deferred tax expense
Current year (6,624) (636) (2,211) (9,471) (2,278) (1,898) (657) (4,833)
Change in valuation allowance 30,255  636  12,095  42,986  2,397  1,898  776  5,071 
Change in tax rate 101  —  (479) (378) 28  —  (132) (104)
KushCo merger (23,732) —  (9,405) (33,137) (147) —  13  (134)
Total deferred —  —  —  —  —  —  —  — 
Income tax expense $ —  $ (10) $ 20  $ 10  $ 6  $ 188  $ —  $ 194 
A reconciliation of the income tax expense computed at the U.S. federal statutory income tax rate to the income tax expense recognized is as follows:
For the year ended December 31,
(in thousands) 2021 2020
Expected federal income tax (benefit) expense at statutory rate $ (11,216) $ (9,977)
State tax expense, net of federal benefit (2,125) (652)
Loss attributable to non-controlling interests 3,475  5,628 
Valuation allowance 10,293  5,290 
Other, net (417) (95)
Income tax expense $ 10  $ 194 
Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities were as follows:
As of December 31,
(in thousands) 2021 2020
Deferred tax assets:
Intangible assets $ 16,285  $ 9,197 
Basis difference in investment in the Operating Company —  742 
Net operating loss carryforwards 44,424  5,129 
Other 4,351  43 
Total deferred tax assets 65,060  15,111 
Valuation allowance (58,098) (15,111)
Net deferred tax assets 6,962  — 
Deferred tax liability:
Basis difference in investment in the Operating Company (6,962) — 
Net deferred tax assets and liabilities $ —  $ — 

We had approximately $155.8 million of Federal net operating loss carryforwards, of which approximately $9.8 million expire in 2038, and the remainder are not subject to expiration. Their utilization is limited to 80% of our future taxable income. We also had approximately $149.9 million of State net operating loss carryforwards that begin expiring in 2038 and $10.1 million of Dutch net operating loss carryforwards that begin expiring in 2026. Their utilization is limited to our future taxable income. We have not completed our evaluation of NOL utilization limitations under Internal Revenue Code, as amended (the “Code”) Section 382, change in ownership rules, but intend to complete this evaluation prior to the filing of our tax returns. Due to the fact that there is a full valuation allowance and losses being generated in the current year, any limitation based on the code would not have a material impact on the net deferred tax asset balance.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, made tax law changes to provide financial relief to companies as a result of the business impacts of COVID-19. Key income tax provisions of the CARES Act include changes in net operating loss carryback and carryforward rules, acceleration of alternative minimum tax credit recovery, increase in the net interest expense deduction limit and charitable contribution limit, and immediate write-off of qualified improvement property. The changes are not expected to have a significant impact on us. The Consolidation Appropriations Act of 2021, enacted on December 27, 2020, extended and enhanced COVID relief provisions of the CARES Act. The Company has evaluated the impact of the Consolidated Appropriation Act and determined that its impact is not material to the Company’s financial statements.
During the years ended December 31, 2021 and December 31, 2020, management performed an assessment of the realizability of our deferred tax assets based upon which management determined that it is not more likely than not that the 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, and reflected a carrying balance of $0 as of December 31, 2021 and 2020, respectively. 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.
We do not record U.S. income taxes on the undistributed earnings of our foreign subsidiaries, except for the Canadian subsidiary, based upon our intention to permanently reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the United States. In the event we are required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences.

Uncertain Tax Positions

For the year ended December 31, 2021, we did not have any unrecognized tax benefits as a result of tax positions taken during a prior period or during the current period. No interest or penalties have been recorded as a result of tax uncertainties. The Company is subject to audit examination for federal and state purposes for the years 2018 – 2020.

Tax Receivable Agreement (TRA)
We entered into the TRA with the Operating Company and each of the members that provides for the payment by the Operating Company to the members of 85% of the amount of tax benefits, if any, that we may actually realize (or in some circumstances are deemed to realize) as a result of (i) increases in tax basis resulting from any future redemptions of Common Units as described in “Note 1—Business Operations and Organization” and (ii) certain other tax benefits attributable to payments made under the TRA.
The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits. The Operating Company expects to benefit from the remaining 15% of any tax benefits that it may actually realize. The TRA payments are not conditioned upon any continued ownership interest in the Operating Company. The rights of each noncontrolling interest holder under the TRA are assignable to transferees of its interest in the Operating Company. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Operating Company generates each year and the applicable tax rate.

As noted above, we evaluated the realizability of the deferred tax assets resulting from the IPO and the related transactions completed in April 2019 and established a full valuation allowance against those benefits. As a result, we determined that the amount or timing of payments to noncontrolling interest holders under the TRA are no longer probable or reasonably estimable. Based on this assessment, our TRA liability was $0 as of December 31, 2021 and 2020.

If utilization of the deferred tax assets subject to the TRA becomes more likely than not in the future, we will record a liability related to the TRA, which would be recognized as expense within our consolidated statements of operations and comprehensive (loss) income.
During the years ended December 31, 2021 and 2020, we did not make any payments, inclusive of interest, to members of the Operating Company pursuant to the TRA.