Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.1
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
As a result of the IPO and the related transactions completed in April 2019, we owned 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.

Effective on December 31, 2022, the Operating Company became wholly owned by us. As a result, the Operating Company’s tax status was converted from a partnership to a disregarded entity. Starting in 2023, 100% of the Operating Company’s US income and expenses will be included in our US and state tax returns.

The Company's United States and foreign operations components of income (loss) from continuing operations before income taxes are as follows:
For the year ended December 31,
(in thousands) 2022 2021
United States $ (117,755) $ (51,109)
Foreign $ (8,116) $ (2,304)
Total $ (125,871) $ (53,413)
Income Tax Expense
The income tax (benefit) expense for the years ended December 31, 2022 and 2021 consisted of the following:
For the year ended December 31, 2022 For the year ended December 31, 2021
(in thousands) Federal Foreign State Total Federal Foreign State Total
Current tax (benefit) expense
Current year $ —  $ (13) $ —  $ (13) $ —  $ (10) $ 20  $ 10 
Total current year —  (13) —  (13) —  (10) 20  10 
Deferred tax (benefit) expense
Current year (20,552) (2,029) (6,816) (29,397) (6,624) (636) (2,211) (9,471)
Change in valuation allowance 25,944  2,029  9,971  37,944  30,255  636  12,095  42,986 
Change in tax rate 72  —  (344) (272) 101  —  (479) (378)
Tax conversion of Operating Company 2,990  —  1,022  4,012  —  —  —  — 
Up-C consolidation (10,097) —  (3,440) (13,537) (5,733) —  (1,901) (7,634)
KushCo merger 1,643  —  (393) 1,250  (17,999) —  (7,504) (25,503)
Total deferred tax (benefit) expense —  —  —  —  —  —  —  — 
Income tax (benefit) expense $ —  $ (13) $ —  $ (13) $ —  $ (10) $ 20  $ 10 
A reconciliation of the income tax (benefit) 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) 2022 2021
Expected federal income tax (benefit) expense at statutory rate $ (26,433) $ (11,216)
State tax expense, net of federal benefit (5,813) (2,125)
Loss attributable to non-controlling interests 2,121  3,475 
Change in valuation allowance 37,944  42,986 
Tax conversion of Operating Company 4,012  — 
Up-C consolidation (13,537) (7,634)
KushCo merger 1,250  (25,503)
Other, net 443  27 
Income tax (benefit) expense $ (13) $ 10 
Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities were as follows:
As of December 31,
(in thousands) 2022 2021
Deferred tax assets:
Goodwill and other intangible assets $ 23,901  $ 16,285 
Inventory 5,858  — 
Allowance for doubtful accounts 833  — 
Operating lease liability 862  — 
Equity-based compensation 2,576  — 
Business interest carryforward 5,342  — 
Net operating loss carryforwards 57,136  44,424 
Other 576  4,351 
Total deferred tax assets 97,084  65,060 
Valuation allowance (96,042) (58,098)
Net deferred tax assets 1,042  6,962 
Deferred tax liability:
Fixed assets (227) — 
Right of use assets (815) — 
Basis difference in investment in the Operating Company —  (6,962)
Total deferred tax liabilities (1,042) (6,962)
Net deferred tax assets and liabilities $ —  $ — 

We had approximately $196.1 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 $197.9 million of State net operating loss carryforwards that begin expiring in 2038 and $15.5 million of Dutch and Canadian 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. 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. In addition, the deduction for business interest is limited to 30 percent of taxable income (the “Section 163(j) limitation”). The interest that is not deductible due this limitation is carried forward to subsequent years and subject to the next years Section 163(j) limitation. At December 31, 2022 we had $20.3 million of business interest carryforwards, which includes $17.6 million from the KushCo merger. The utilization of the business interest carryforward from the KushCo merger may be further limited by the application of the Section 382 rules.

During the years ended December 31, 2022 and 2021, respectively, 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, 2022 and 2021, 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 into 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, 2022, 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 – 2021.
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, 2022 and 2021.

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, 2022 and 2021, we did not make any payments, inclusive of interest, to members of the Operating Company pursuant to the TRA.