Greenlane Holdings, Inc. - Quarter Report: 2020 September (Form 10-Q)

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 September 30, 2020

☐ 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)


Delaware						83-0806637
State or other jurisdiction of incorporation or organization						(I.R.S. Employer Identification No.)


1095 Broken Sound Parkway,	Suite 300
Boca Raton,	FL	33487
(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 class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

GNLN

Nasdaq 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 November 13, 2020, Greenlane Holdings, Inc. had 13,072,416 shares of Class A common stock outstanding, 3,590,909 shares of Class B common stock outstanding and 76,489,218 shares of Class C common stock outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)			1
CONDENSED CONSOLIDATED BALANCE SHEETS			1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS			2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY			3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS			5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			35
ITEM 4. CONTROLS AND PROCEDURES			36
PART II. OTHER INFORMATION			37
ITEM 1. LEGAL PROCEEDINGS			37
ITEM 1A. RISK FACTORS			37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			37
ITEM 6. EXHIBITS			38
SIGNATURES			39

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

GREENLANE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value per share amounts)


	September 30, 2020		December 31, 2019
Assets	(Unaudited)
Current assets
Cash	$	39,993	$	47,773
Accounts receivable, net of allowance of $1,324 and $936 at September 30, 2020 and December 31, 2019, respectively	6,438		8,091
Inventories, net	36,919		43,060
Vendor deposits	8,775		11,120
Assets held for sale	1,177		—
Other current assets	8,924		4,924
Total current assets	102,226		114,968

Property and equipment, net	12,392		13,165
Intangible assets, net	5,930		6,301
Goodwill	3,128		11,982
Operating lease right-of-use assets	3,085		4,695
Other assets	2,053		2,091
Total assets	$	128,814	$	153,202

Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	17,963	$	11,310
Accrued expenses and other current liabilities	15,956		10,600
Customer deposits	2,593		3,152
Current portion of operating leases	725		1,084
Current portion of finance leases	208		116
Total current liabilities	37,445		26,262

Notes payable, less current portion and debt issuance costs, net	7,886		8,018
Operating leases, less current portion	2,708		3,844
Finance leases, less current portion	277		194
Other liabilities	1,038		620
Total long-term liabilities	11,909		12,676
Total liabilities	49,354		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; 13,072 shares issued and outstanding as of September 30, 2020; 9,999 shares issued and 9,812 shares outstanding as of December 31, 2019	131		98
Class B common stock, $0.0001 par value per share, 10,000 shares authorized; 3,591 and 5,975 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	1		1
Class C Common stock, $0.0001 par value per share, 100,000 shares authorized; 76,489 and 77,791 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	8		8
Additional paid-in capital	39,194		32,108
Accumulated deficit	(20,732)		(9,727)
Accumulated other comprehensive loss	(154)		(72)
Total stockholders’ equity attributable to Greenlane Holdings, Inc.	18,448		22,416
Non-controlling interest	61,012		91,848
Total stockholders’ equity	79,460		114,264
Total liabilities and stockholders’ equity	$	128,814	$	153,202

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

GREENLANE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net sales	$	35,764	$	44,886	$	102,032	$	147,770
Cost of sales	33,297		38,448		85,419		123,194
Gross profit	2,467		6,438		16,613		24,576
Operating expenses:
Salaries, benefits and payroll taxes	5,010		6,562		17,745		21,673
General and administrative	10,673		4,751		25,758		15,549
Goodwill impairment charge	—		—		8,996		—
Depreciation and amortization	599		650		1,959		1,980
Total operating expenses	16,282		11,963		54,458		39,202
Loss from operations	(13,815)		(5,525)		(37,845)		(14,626)
Other income (expense), net:
Change in fair value of convertible notes	—		—		—		(12,063)
Interest expense	(115)		(119)		(335)		(862)
Other income, net	357		7,746		1,483		8,670
Total other income (expense), net	242		7,627		1,148		(4,255)
(Loss) income before income taxes	(13,573)		2,102		(36,697)		(18,881)
Provision for income taxes	220		11,063		147		10,966
Net loss	(13,793)		(8,961)		(36,844)		(29,847)
Less: Net loss attributable to non-controlling interest	(9,300)		(2,563)		(25,839)		(4,016)
Net loss attributable to Greenlane Holdings, Inc.	$	(4,493)	$	(6,398)	$	(11,005)	$	(25,831)

Net loss attributable to Class A common stock per share - basic and diluted (Note 8)	$	(0.35)	$	(0.64)	$	(0.95)	$	(0.67)
Weighted-average shares of Class A common stock outstanding - basic and diluted (Note 8)	12,798		9,998		11,559		9,998

Other comprehensive income (loss):
Foreign currency translation adjustments	285		(13)		130		38
Unrealized gain (loss) on derivative instrument	35		(310)		(525)		(310)
Comprehensive loss	(13,473)		(9,284)		(37,239)		(30,119)
Less: Comprehensive loss attributable to non-controlling interest	(9,066)		(2,809)		(26,152)		(4,238)
Comprehensive loss attributable to Greenlane Holdings, Inc.	$	(4,407)	$	(6,475)	$	(11,087)	$	(25,881)

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

GREENLANE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands)


	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
	Shares	Amount		Shares	Amount		Shares	Amount
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
Net loss	—	—		—	—		—	—		—		(2,051)		—		(4,261)		(6,312)
Equity-based compensation	—	—		—	—		—	—		220		—		—		672		892
Issuance of Class A common stock for the acquisition of Conscious Wholesale	171	2		—	—		—	—		485		—		—		—		487
Cancellation of Class B common stock due to equity-based compensation award forfeitures	—	—		(6)	—		—	—		9		—		—		(9)		—
Exchanges of non-controlling interest for Class A common stock	2,140	21		(2,140)	—		—	—		3,896		—		—		(3,917)		—
Other comprehensive income	—	—		—	—		—	—		—		—		99		306		405
Balance, June 30, 2020	12,603	$	126	3,724	$	1	77,791	$	8	$	38,501	$	(16,239)	$	(240)	$	71,680	$	93,837
Net loss	—	—		—	—		—	—		—		(4,493)		—		(9,300)		(13,793)
Equity-based compensation	—	—		—	—		—	—		(298)		—		—		(682)		(980)
Issuance of Class A common stock	35	1		—	—		—	—		75		—		—		—		76
Cancellation of Class B common stock due to equity-based compensation award forfeitures	—	—		(133)	—		—	—		221		—		—		(221)		—
Exchanges of non-controlling interest for Class A common stock	434	4		—	—		(1,302)	—		695		—		—		(699)		—
Other comprehensive income	—	—		—	—		—	—		—		—		86		234		320
Balance, September 30, 2020	13,072	$	131	3,591	$	1	76,489	$	8	$	39,194	$	(20,732)	$	(154)	$	61,012	$	79,460

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

GREENLANE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(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
					Shares	Amount		Shares	Amount		Shares	Amount






Balance, December 31, 2018	$	10,033	$	(10,773)	—	$	—	—	$	—	—	$	—	$	—	$	—	$	(286)	$	—	$	(11,059)
Activity prior to the initial public offering and related organizational transactions (Note 1):
Issuance of redeemable Class B units, net of issuance costs	6,514		—		—	—		—	—		—	—		—		—		—		—		—
Redemption of Class A and Class B units	(416)		(2,602)		—	—		—	—		—	—		—		—		—		—		(2,602)
Equity-based compensation	2,304		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)
Net loss	(246)		(1,179)		—	—		—	—		—	—		—		—		—		—		(1,179)
Equity-based compensation	113		137		—	—		—	—		—	—		—		—		—		—		137
Member distributions	(76)		(801)		—	—		—	—		—	—		—		—		—		—		(801)
Other comprehensive income	—		—		—	—		—	—		—	—		—		—		(8)		—		(8)
Effects of the initial public offering and related organizational transactions (Note 1):
Effects of the organizational transactions	(15,181)		29,667		—	—		—	—		—	—		(114,094)		—		203		99,404		15,180
Issuance of Class A common stock in the IPO, net of underwriting discount	—		—		5,250	53		—	—		—	—		82,950		—		—		—		83,003
Issuance of Class A common stock to convertible notes holders	—		—		3,548	35		—	—		—	—		60,277		—		—		—		60,312
Issuance of Class A common to stock selling stockholders	—		—		750	8		(106)	—		(1,935)	—		(7)		—		—		—		1
Issuance of Class A common stock to underwriter upon exercise of overallotment option	—		—		450	4		(63)	—		(1,161)	—		(4)		—		—		—		—
Issuance of Class B common stock	—		—		—	—		6,157	1		—	—		(1)		—		—		—		—
Issuance of Class C common stock	—		—		—	—		—	—		80,887	8		(8)		—		—		—		—
Capitalization of initial public offering costs	—		—		—	—		—	—		—	—		(3,523)		—		—		—		(3,523)
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—		—		—	—		—	—		—	—		5,173		—		—		—		5,173
Joint venture consolidation	—		—		—	—		—	—		—	—		—		—		—		60		60
Activity subsequent to the initial public offering and related organizational transactions (Note 1):
Net loss	—		—		—	—		—	—		—	—		—		(343)		—		(1,453)		(1,796)
Equity-based compensation	—		—		—	—		—	—		—	—		709		—		—		1,122		1,831
Other comprehensive income	—		—		—	—		—	—		—	—		—		—		7		24		31
Balance June 30, 2019	—		—		9,998	100		5,988	1		77,791	8		31,472		(343)		(56)		99,157		130,339
Net loss	—		—		—	—		—	—		—	—		—		(6,398)		—		(2,563)		(8,961)
Equity-based compensation	—		—		—	—		—	—		—	—		360		—		—		1,148		1,508
Other comprehensive loss	—		—		—	—		—	—		—	—		—		—		(77)		(246)		(323)
Effects of the organizational transactions	—		—		—	—		—	—		—	—		297		—		—		(297)		—
Balance September 30, 2019	$	—	$	—	9,998	$	100	5,988	$	1	77,791	$	8	$	32,129	$	(6,741)	$	(133)	$	97,199	$	122,563

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

GREENLANE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net loss (including amounts attributable to non-controlling interest)	$	(36,844)	$	(29,847)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,959		1,980
Reversal of tax receivable agreement liability	—		(5,721)
Change in deferred tax asset, net	—		10,879
Equity-based compensation expense	182		6,083
Unrealized gain on equity investment	—		(1,537)
Goodwill impairment charge	8,996		—
Change in fair value of contingent consideration	(719)		—
Change in fair value of convertible notes	—		12,063
Change in provision for doubtful accounts	766		91
Loss on disposal of assets	569		—
Loss related to indemnification asset not probable of recovery	2,200		—
Other	242		37
Changes in operating assets and liabilities, net of the effects of acquisitions:
Decrease in accounts receivable	886		1,396
Decrease (increase) in inventories	6,140		(15,764)
Decrease (increase) in vendor deposits	2,543		(778)
Decrease (increase) in deferred offering costs	—		2,284
(Increase) in other current assets	(6,217)		(1,720)
Increase (decrease) in accounts payable	6,653		(13,182)
Increase in accrued expenses	9,558		465
(Decrease) in customer deposits	(670)		(272)
Net cash used in operating activities	(3,756)		(33,543)
Cash flows from investing activities:
Purchase consideration paid for acquisitions, net of cash acquired	(1,841)		(1,283)
Purchases of property and equipment, net	(1,438)		(1,268)
Purchase of intangible assets	(300)		(58)
Investment in equity securities	—		(500)
Net cash used in investing activities	(3,579)		(3,109)
Cash flows from financing activities:
Proceeds from issuance of convertible notes	—		8,050
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting costs	—		83,003
Payment of debt issuance costs - convertible notes	—		(1,734)
Deferred offering costs paid	—		(3,523)
Redemption of Class A and Class B units of Greenlane Holdings, LLC	—		(3,019)
Member distributions	—		(897)
Other	(310)		(187)
Net cash (used in) provided by financing activities	(310)		81,693
Effects of exchange rate changes on cash	(135)		158
Net (decrease) increase in cash	(7,780)		45,199
Cash, as of beginning of the period	47,773		7,341
Cash, as of end of the period	$	39,993	$	52,540

Supplemental disclosures of cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,193	$	547
Lease liabilities arising from obtaining finance lease assets	$	272	$	88
Lease liabilities arising from obtaining operating lease right-of-use assets	$	331	$	2,973
Non-cash investing and financing activities:
Conversion of convertible debt to Class A common stock	$	—	$	60,313
Redeemable Class B Units issued for acquisition of a subsidiary, net of issuance costs	$	—	$	6,664
Shares of Class A common stock issued for acquisition of Conscious Wholesale	$	1,988	$	—
Exchanges of non-controlling interest for Class A common stock	$	(4,616)	$	—

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

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 April 22, 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 April 23, 2019 through September 30, 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.

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;

● 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 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;

● 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 also 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 IPO. 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 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 85.0% 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) the step-up in tax basis in our share of the Operating Company's assets resulting from the redemption of Common Units under the mechanism described above 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.

The following table sets forth the economic and voting interests of our common stock holders as of September 30, 2020:


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 A	13,072,416	13,072,416	31.0	%	14.0	%	100.0	%
Class B (non-founder members)	3,590,909	3,590,909	8.5	%	3.9	%	—	%
Class C (founder members)	76,489,218	25,496,406	60.5	%	82.1	%	—	%
Total	93,152,543	42,159,731	100.0	%	100.0%		100.0	%


(1) Represents the total number of outstanding shares for each class of common stock as of September 30, 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.

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 and nine months ended September 30, 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 collectability 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.

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") a global 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.

Assets Held for Sale

We generally consider assets to be held for sale when (i) we commit to a plan to sell the assets, (ii) the assets are available for immediate sale in their present condition, (iii) we have initiated an active program to locate a buyer and other actions required to complete the plan to sell the assets, (iv) consummation of the planned sale transaction is probable, (v) the assets are being actively marketed for sale at a price that is reasonable in relation to their current fair value, (vi) the transaction is expected to qualify for recognition as a completed sale, within one year, and (vii) significant changes to or withdrawal of the plan is unlikely. Following the classification of any depreciable assets within a disposal group as held for sale, we discontinue depreciating the asset and write down the asset to the lower of carrying value or fair market value less cost to sell, if needed. As described in Note 4—Leases and Note 7—Supplemental Financial Statement Information, we have taken actions that have caused certain property and equipment and right-of-use assets to meet the relevant criteria for classification and reporting as held for sale.

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 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 during the first quarter of 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 Administration'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.

No additional impairment charges were recognized during the third quarter of 2020. 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.

Changes in the carrying amount of our goodwill by reporting unit for the nine months ended September 30, 2020 were as follows:


(in thousands)	U.S.		Canada		Europe		Total
Balance at December 31, 2019	$	8,996	$	—	$	2,986	$	11,982
Goodwill impairment charge	(8,996)		—		—		(8,996)
Foreign currency translation adjustment	—		—		142		142
Balance at September 30, 2020	$	—	$	—	$	3,128	$	3,128

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 upon shipment from one of our fulfillment centers or upon delivery to the customer, depending upon the specific terms and conditions of the arrangement, or at the point of sale for our retail store sales. We provide no warranty on products sold. Product warranty is provided by the manufacturers.

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 and nine months ended September 30, 2020 and 2019.

Beginning with the first quarter of 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 lack 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 and nine months ended September 30, 2020, we recorded $0.5 million and $1.5 million of revenue under bill-and-hold arrangements, respectively. We did not recognize any revenue under bill-and-hold arrangements during the three and nine months ended September 30, 2019. Storage fees charged to customers for bill-and-hold arrangements are recognized as invoiced. Such fees were not significant for the three and nine months ended September 30, 2020.

For certain product offerings such as premium, patented, child-resistant packaging, closed-system vaporization solutions and custom-branded retail products, 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 one 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” for a summary of changes to our customer deposits liability balance during the nine months ended September 30, 2020.

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, which is included within "Accrued expenses and other current liabilities" in our condensed consolidated balance sheets, was approximately $0.7 million and $0.6 million at September 30, 2020 and December 31, 2019, respectively. The recoverable cost of merchandise estimated to be returned by customers, which is included within "Other current assets" in our condensed consolidated balance sheets, was approximately $0.2 million and $0.3 million as of September 30, 2020 and December 31, 2019, respectively.

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 by ASC 606 based upon which we generally expense sales commissions when incurred because the amortization period is one year or less. Sales commissions are recorded within "Salaries, benefits and payroll tax expenses" in the condensed consolidated statements of operations and comprehensive loss.

No single customer represented more than 10% of our net sales for the three and nine months ended September 30, 2020 and 2019. We had one customer that represented approximately 10.7% of our accounts receivable balance as of September 30, 2020. No other customer represented more than 10% of our accounts receivable balance as of September 30, 2020 and December 31, 2019.

Federal Drug Administration's ENDS Enforcement Guidance and Premarket Tobacco Product Applications

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. Additionally, the deadline for ENDS manufacturers to submit Premarket Tobacco Product Applications ("PMTA") was September 9, 2020. The FDA also intends to prioritize any ENDS products offered for sale after September 9, 2020 for which the manufacturer has not submitted a PMTA. The FDA is not necessarily bound by these enforcement priorities, and it has recently taken actions against other products and may take additional actions against other products as warranted by circumstances.

The ENDS Enforcement Guidance had the effect of prohibiting the sale of certain products 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 and nine months ended September 30, 2020 and approximately 19.7% and 17.2% of our net sales for the three and nine months ended September 30, 2019, respectively.

During the nine months ended September 30, 2020 and 2019, we sold products for which the manufacturers have not submitted a PMTA to the FDA by September 9, 2020. Sales of these products represented approximately 0.4% and 0.8% of our net sales for the nine months ended September 30, 2020 and 2019, respectively.

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 could adversely affect our sales of ENDS products and may have a material adverse effect on our business, results of operations and financial condition.

Value Added Taxes

During the third quarter of 2020, as part of a global tax strategy review, we determined that our European subsidiaries based in the Netherlands, which we acquired on September 30, 2019, had historically collected and remitted value added tax ("VAT") payments, which related to direct-to-consumer sales to other European Union ("EU") member states, directly to the Dutch tax authorities. Accordingly, we performed an analysis of the VAT overpayments to the Dutch tax authorities, which we expect will be refunded to us, and VAT payable to other EU member states, including potential fines and penalties. Based on this analysis, we recorded a VAT payable of approximately $7.6 million within "Accrued expenses and other current liabilities" and VAT receivable of approximately $4.5 million within "Other current assets", in our condensed consolidated balance sheet as of September 30, 2020.

Pursuant to the purchase and sale agreement by which we acquired our European subsidiaries, the sellers are required to indemnify us against certain specified matters and losses, including any and all liabilities, claims, penalties and costs incurred or sustained by us in connection with non-compliance with tax laws in relation to activities of the sellers. The indemnity is limited to an amount equal to the purchase price under the purchase and sale agreement. Furthermore, we are the beneficiary to a bank guarantee in the amount of approximately $0.9 million for claims for which we are entitled to indemnification under the purchase and sale agreement. The bank guarantee has an expiration date of October 1, 2021. Accordingly, as of September 30, 2020, we recognized an indemnification asset of approximately $0.9 million within "Other current assets" using the loss recovery model, as management believes that amounts covered by the bank guarantee are probable of recovery.

Management intends to pursue recovery of all additional losses from the sellers to the full extent of the indemnification provisions of the purchase and sale agreement, however, the collectability of such additional indemnification amounts may be subject to litigation and may be affected by the credit risk of indemnifying parties, and are therefore subject to significant uncertainties as to the amount and timing of recovery. Therefore, during the three months ended September 30, 2020, we recognized a charge of approximately $2.2 million within general and administrative expenses in our condensed consolidated statements of operations and comprehensive loss, which represents the difference between the VAT payable and the VAT receivable and indemnification asset recorded as of September 30, 2020.

We establish VAT receivables in jurisdictions where VAT paid exceeds VAT collected and are recoverable through the filing of refund claims. Our VAT receivable balance as of September 30, 2020 relates to refund claims with the Dutch tax authorities. We intend to voluntarily disclose VAT owed to the relevant tax authorities in the EU member states and believe in doing so we will reduce our liability for penalties and interest. Nonetheless, we may incur expenses in future periods related to such matters, including litigation costs and other expenses to defend our position. The outcome of such matters is inherently unpredictable and subject to significant uncertainties.

Refer to "Note 6—Commitments and Contingencies" for additional discussion regarding our contingencies.

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 have a material impact on the Company's condensed consolidated financial statements.

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 15, 2020, with early adoption permitted. We are currently assessing the impact, if any, the guidance will have on our consolidated financial statements.

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 September 30, 2020
(in thousands)		Level 1		Level 2		Level 3		Total
Liabilities:
Interest rate swap contract	Other long-term liabilities	$	—	$	731	$	—	$	731
Contingent consideration	Accrued expenses and other current liabilities	—		—		—		—
Total Liabilities		$	—	$	731	$	—	$	731


	Condensed 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 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 and nine months ended September 30, 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 sheets. 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 September 30, 2020, which is a "pay-fixed and receive-floating" contract, are as follows:

Swap Maturity

Notional Value
(in thousands)

Pay-Fixed Rate

Receive-Floating Rate

Floating Rate
Reset Terms

October 1, 2025

8,170

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. Quarterly, we perform a qualitative analysis for prospective and retrospective assessments of hedge effectiveness. The unrealized loss on the derivative instrument is included within "Other comprehensive loss" in our condensed consolidated statements of operations and comprehensive loss. There was no measure of hedge ineffectiveness and no reclassifications from other comprehensive loss into interest expense for the three and nine months ended September 30, 2020.

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 $2.6 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 nine months ended September 30, 2020, we recognized a gain from the fair value adjustment of contingent consideration of approximately $0.7 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 driven primarily by the 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 nine months ended September 30, 2020 is as follows:


(in thousands)	Conscious Wholesale Contingent Consideration
Balance at December 31, 2019	$	1,568
Foreign currency translation adjustments	(14)
Payments for contingent consideration	(835)
Gains from fair value adjustments included in results of operations	(719)
Balance at September 30, 2020	$	—

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 and nine months ended September 30, 2020.

During the three and nine months ended September 30, 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 September 30, 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.

NOTE 4. LEASES

Greenlane as a Lessee

As of September 30, 2020, we had 12 facilities financed under operating leases consisting of warehouses, offices, and retail stores, with lease term expirations between 2020 and 2026. Lease terms are generally three 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 streamlined distribution center network with fewer, centrally-located, highly automated facilities. In March 2020, we entered into a new operating lease agreement for a new retail store location in Barcelona, Spain and we permanently closed our Ponce City Market retail store. In May 2020, we closed our Delta, B.C, Canada distribution center, and in June 2020 we terminated the lease agreements for our Torrance, California distribution center and Toronto, Canada office location. Additionally, we closed our Jacksonville, Florida distribution center in the third quarter of 2020. During the second quarter of 2020, we entered into service agreements with two third-party logistics facilities located in Hebron, Kentucky and Delta, B.C., Canada, both of which serve as replacement facilities to the distribution centers we have closed.

In August 2020, we initiated the process of seeking a third-party to assume our Jacksonville, Florida distribution center lease. Accordingly, our United States operating segment recorded approximately $0.4 million of right-of-use assets held for sale within "assets held for sale" and approximately $0.4 million of liabilities held for sale within "accrued expenses and other current liabilities" as of September 30, 2020. We expect to transfer the right-of-use asset and corresponding operating lease liability by the third quarter of 2021.

During the nine months ended September 30, 2020, we recorded approximately $1.7 million in charges related to the closures above, including $1.3 million related to right-of-use asset impairments, $0.1 million related to impairments of leasehold improvements, and a lease cancellation fee of approximately $0.3 million. These charges were offset by the derecognition of the associated operating lease liabilities of approximately $1.4 million, recorded within "general and administrative expenses" in our condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2020.

The following table provides details of our future minimum lease payments under finance and operating lease liabilities recorded in our condensed consolidated balance sheet as of September 30, 2020. The table below does not include commitments that are contingent on events or other factors that are currently uncertain or unknown.


(in thousands)	Finance Leases		Operating Leases		Total
Remainder of 2020	$	54	$	215	$	269
2021	207		867		1,074
2022	145		965		1,110
2023	81		922		1,003
2024	4		627		631
Thereafter	—		245		245
Total minimum lease payments	491		3,841		4,332
Less: imputed interest	6		408		414
Present value of minimum lease payments	485		3,433		3,918
Less: current portion	208		725		933
Long-term portion	$	277	$	2,708	$	2,985

Rent expense under operating leases was approximately $0.3 million and $1.2 million for the three and nine months ended September 30, 2020 and approximately $0.3 million and $0.6 million for the three and nine months ended September 30, 2019, respectively.

The majority of our finance lease obligations relate to leased warehouse equipment. Payments under our finance lease agreements are fixed for terms ranging from three to five years. We recorded approximately $0.4 million and $0.3 million, respectively, of finance lease assets, net within "property and equipment, net" as of September 30, 2020 and December 31, 2019, and the related liabilities within "current portion of finance leases" and "finance leases, less current portion" in our condensed consolidated balance sheets.

The following expenses related to our finance and operating leases were included in "general and administrative expenses" within our condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2020 and 2019:


	Nine Months Ended September 30,
(in thousands)	2020		2019
Finance lease costs
Amortization of leased assets	$	93	$	96
Interest of lease liabilities	14		36
Operating lease costs
Operating lease cost	1,093		604
Variable lease cost	219		280
Total lease costs	$	1,419	$	1,016

The table below presents lease-related terms and discount rates as of September 30, 2020:


	September 30, 2020
Weighted average remaining lease terms
Operating leases	4.1 years
Finance leases	2.7 years
Weighted average discount rate
Operating leases	4.9	%
Finance leases	4.2	%

Greenlane as a Lessor

As of September 30, 2020, we had four operating leases for office space leased to third-party tenants in our corporate headquarters building in Boca Raton, Florida. Rental income of approximately $0.1 million and $0.5 million for the three and nine months ended September 30, 2020 and 2019, respectively, was included within “other income, net” in our condensed consolidated statements of operations and comprehensive loss.

The following table represents the maturity analysis of undiscounted cash flows related to lease payments, which we expect to receive from our existing operating lease agreements with tenants:


Rental Income	(in thousands)
Remainder of 2020	$	139
2021	621
2022	154
2023	99
2024	77
Thereafter	53
Total	$	1,143

NOTE 5. LONG TERM DEBT

Our long-term debt, excluding operating and finance lease liabilities, consisted of the following amounts at the dates indicated:


(in thousands)	September 30, 2020		December 31, 2019
3.0% note payable for a four-year loan for the purchase of a truck	$	—	$	18
Real Estate Note	8,170		8,297
	8,170		8,315
Less unamortized debt issuance costs	(104)		(119)
Less current portion of long-term debt	(180)		(178)
Long-term debt, net, excluding operating leases and finance leases	$	7,886	$	8,018

Line of Credit

On April 5, 2019, the Operating Company, as the borrower, entered into a second amendment to the first amended and restated credit agreement, dated October 1, 2018 (the “line of credit”) with Fifth Third Bank, for a $15.0 million revolving credit loan with a maturity date of August 23, 2020. In August 2020, the maturity date of the line of credit was further extended to November 30, 2020. This line of credit will not be renewed past November 30, 2020, and we are currently evaluating our future banking relationships. We have not drawn on this line of credit in 2019 or 2020. Interest on the principal balance outstanding on the line of credit is due monthly at a rate of LIBOR plus 3.50% per annum provided that no default has occurred. The Operating Company’s obligations under the line of credit are guaranteed by Jacoby & Co. Inc. (an affiliated entity of our Chief Executive Officer and Chief Strategy Officer) and all of our operating subsidiaries, and are collateralized by our accounts receivable, inventory, property and equipment, deposit accounts, intangibles and other assets. The line of credit borrowing base is 80% of eligible accounts receivable plus 50% of eligible inventory. The line of credit requires that we maintain a fixed charge coverage ratio of no less than 1.25, to be calculated on a quarterly basis on the last day of each calendar quarter. As of September 30, 2020, we were in compliance with the line of credit covenants. There were no borrowings outstanding on our line of credit at September 30, 2020 and December 31, 2019.

Real Estate Note

In October 2018, one of the Operating Company’s wholly-owned subsidiaries financed the purchase of a building which serves as our corporate headquarters through a real estate term note (the “Real Estate Note”) in the principal amount of $8.5 million. Principal payments plus accrued interest at a rate of LIBOR plus 2.39% are due monthly. Our obligations under the Real Estate Note are secured by a mortgage on the property. The Real Estate Note is subject to an interest rate swap contract, see "Note 3—Fair Value of Financial Instruments."

Convertible Notes

In December 2018, the Operating Company issued an aggregate of $40.2 million in convertible promissory notes (the “convertible notes”) and received net cash proceeds of $38.9 million. In January 2019, the Operating Company issued an additional $8.1 million in convertible notes and received net cash proceeds of $6.5 million. During the three months ended March 31, 2019, we recognized debt issuance costs of $0.4 million associated with the issuance of January 2019 convertible notes within "interest expense," and we also recognized an expense related to the change in fair value of the convertible notes of $12.1 million within "other income (expense), net" in our condensed consolidated statement of operations and comprehensive loss. The convertible notes did not accrue interest. In April 2019, in connection with the closing of our IPO, we issued 3,547,776 shares of our Class A common stock to the holders of the convertible notes upon conversion of the convertible notes of the Operating Company at a settlement price equal to 80% of the IPO price per share. There were no convertible notes outstanding at September 30, 2020 or December 31, 2019.

NOTE 6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In the ordinary course of business, we are involved in various legal proceedings involving a variety of matters. We do not believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.

On August 2, 2019, a purported stockholder of the Company filed a purported class action lawsuit against the Company, officers and directors of the Company, and the underwriters for related to the Company’s initial public offering. The complaint alleges, among other things, that the Company’s registration statement related to its initial public offering contained untrue statements of material fact and, or omitted to state material facts necessary to make the statements in the registration statement not misleading, in violation of Sections 11, 12 and 15 of the Securities Act of 1933, as amended. Since August 2, 2019 four

additional purported class action lawsuits have been filed making substantially similar allegations. At this time, the class has not been certified and the Company cannot estimate the amount of damages (if any) being sought by the plaintiffs.

Three of the complaints alleging violations of securities laws as described above were filed against the Company in the Circuit Court of the Fifteenth Judicial Circuit for Palm Beach County, Florida. These cases have been consolidated under the caption In re Greenlane Holdings, Inc. Securities Litigation (Case No. 50-2019-CA-010026). The plaintiffs filed an amended complaint on December 9, 2019 and the Company filed a motion to dismiss on February 7, 2020. A ruling on the motion to dismiss is pending.

Two of the complaints alleging violations of securities laws as described above were filed against the Company in the United States District Court for the Southern District of Florida. These cases have been consolidated under the caption In re Greenlane Holdings, Inc. Securities Litigation (Case No. 19-CV-81259). The plaintiffs filed an amended complaint on March 6, 2020 and the Company filed a motion to dismiss on March 20, 2020. A ruling on the motion to dismiss is pending.

We can provide no assurances as to the outcome of these lawsuits or as to the costs associated with them. However, we believe the claims are without merit and intend to vigorously defend ourselves.

See "Note 10—Incomes Taxes" for information regarding income tax contingencies.

Other Contingencies

We are potentially subject to claims related to various non-income taxes (such as sales, value added, consumption, and similar taxes) from various tax authorities, including in jurisdictions in which we already collect and remit such taxes. If the relevant taxing authorities were successfully to pursue these claims, we could be subject to significant additional tax liabilities.

NOTE 7. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Accrued Expenses and Other Current Liabilities

The following table summarizes the composition of accrued expenses and other current liabilities as of the dates indicated:


(in thousands)	September 30, 2020		December 31, 2019
Accrued expenses and other current liabilities:
Payroll related including bonus	$	2,244	$	1,314
Contingent consideration	—		1,568
VAT payable	7,591		—
Accrued marketing fees and royalties	677		304
Refund liability	721		622
Liabilities held for sale	392		—
Accrued purchase price consideration for business acquisition	—		3,029
Current portion of long-term debt	180		178
Other	4,151		3,585
	$	15,956	$	10,600

Customer Deposits

For certain product offerings such as 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 orders related to customer deposits within one to three months from the date of order, depending on the complexity of the customization and the size of the order. Changes in our customer deposits liability balance during the nine months ended September 30, 2020 were as follows:


(in thousands)	Customer Deposits
Balance as of December 31, 2019	$	3,152
Increases due to deposits received, net of other adjustments	7,353
Revenue recognized	(7,912)
Balance as of September 30, 2020	$	2,593

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss for the periods presented were as follows:


(in thousands)	Foreign Currency Translation		Unrealized Loss on Derivative Instrument		Total
Balance at December 31, 2019	$	(22)	$	(50)	$	(72)
Other comprehensive income (loss)	130		(525)		(395)

Less: Other comprehensive (income) loss attributable to non-controlling interest	(87)		400		313
Balance at September 30, 2020	$	21	$	(175)	$	(154)


(in thousands)	Foreign Currency Translation		Unrealized Loss on Derivative Instrument		Total
Balance at December 31, 2018	$	(286)	$	—	$	(286)
Other comprehensive income (loss)	38		(310)		(272)
Effects of the reorganization transactions	203		—		203
Less: Other comprehensive (income) loss attributable to non-controlling interest	(14)		236		(24)
Balance at September 30, 2019	$	(59)	$	(74)	$	(133)

Supplier Concentration

We have three major vendors whose products accounted for an aggregate of approximately 40.7% and 36.0% our total net sales and 40.5% and 33.9% of our total purchases for the three and nine months ended September 30, 2020, respectively, and an aggregate of approximately 62.3% and 61.2% of our total net sales and 53.4% and 50.4% of our total purchases for the three and nine months ended September 30, 2019, respectively. We expect to maintain our existing relationships with these vendors.

Assets Held for Sale

During the three months ended September 30, 2020, we performed a review of our property and equipment held at our distribution centers, corporate headquarters, and retail locations for disposal or sale in connection with our transformation plan. As a result of this review, we made the decision to commit to a formal plan to sell machinery that was to be used by our United States operating segment, which was determined to no longer be needed as part of our supply and packaging customization processes. Accordingly, we determined that this machinery met the criteria to be reclassified as held for sale as of September 30, 2020.

An asset group classified as held for sale is reflected at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the assets exceeds its estimated fair value, a loss is recognized. Due to the reclassification as held for sale of this supply and packaging machinery, we recognized an impairment charge of approximately $0.2 million for the three months ended September 30, 2020, which was included within "general and administrative expenses" in our condensed consolidated statements of operations and comprehensive loss. We recorded approximately $0.8 million of machinery held for sale within "Assets Held for Sale" as of September 30, 2020. We are actively seeking a buyer and expect to complete the sale of the machinery by the third quarter of 2021.

NOTE 8. STOCKHOLDERS’ EQUITY

Class A Common Stock Repurchase Program

In November 2019, our Board of Directors approved a stock repurchase program authorizing up to $5.0 million in repurchases of our outstanding shares of Class A common stock. Under the program, we may repurchase shares in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. We may periodically repurchase shares in open market transactions, directly or indirectly, in block purchases and in privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the share repurchase program will be determined by management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of our Class A common stock, corporate considerations, our working capital and investment requirements, general market and economic conditions, and legal requirements. The share repurchase program does not obligate us to repurchase any common stock and may be modified, discontinued, or suspended at any time. Shares of Class A common stock repurchased under the program are subsequently retired. There were no share repurchases under the program during the three and nine months ended September 30, 2020.

Non-Controlling Interest

As discussed in “Note 1—Business Operations and Organization,” we consolidate the financial results of the Operating Company and report a non-controlling interest related to the Common Units held by non-controlling interest holders on our consolidated financial statements. As of September 30, 2020, we owned 31.0% of the economic interests in the Operating Company, with the remaining 69.0% of the economic interests owned by non-controlling interest holders. The non-controlling interest on the accompanying consolidated statements of operations and comprehensive loss represents the portion of the loss attributable to the economic interest in the Operating Company held by the non-controlling holders of Common Units calculated based on the weighted average non-controlling interests’ ownership during the periods presented.

Net Loss Per Share

Basic net loss per share of Class A common stock is computed by dividing net loss attributable to Greenlane by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted net loss per share of Class A common stock is computed by dividing net loss attributable to Greenlane by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.

Prior to the amendment and restatement of the Operating Company’s LLC Agreement on April 17, 2019 in connection with the IPO, the Operating Company’s membership interests were defined solely as percentage interests as the LLC Agreement did not define a number of membership units outstanding or authorized. As a result, the basic and diluted net loss per share for the three and nine months ended September 30, 2019 includes only the period from the IPO on April 23 through September 30, 2019.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share of Class A common stock is as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator:
Net loss	$	(13,793)	$	(8,961)	$	(36,844)	$	(10,757)
Less: Net loss attributable to non-controlling interests	(9,300)		(2,563)		(25,839)		(4,016)
Net loss attributable to Class A common stockholders	$	(4,493)	$	(6,398)	$	(11,005)	$	(6,741)
Denominator:
Weighted average shares of Class A common stock outstanding	12,798		9,998		11,559		9,998
Net loss per share of Class A common stock - basic and diluted	$	(0.35)	$	(0.64)	$	(0.95)	$	(0.67)

For the three and nine months ended September 30, 2020, 3,590,909 shares of Class B common stock, 76,489,218 shares of Class C common stock and 1,356,781 stock options were excluded from the weighted-average in the computation of diluted net loss per share of Class A common stock because the effect would have been anti-dilutive.

For the three and nine months ended September 30, 2019, 5,988,485 shares of Class B common stock, 77,791,218 shares of Class C common stock and 632,847 stock options were excluded from the weighted-average in the computation of diluted net loss per share of Class A common stock because the effect would have been anti-dilutive.

Shares of our Class B common stock and Class C common stock do not share in our earnings or losses and are therefore not participating securities. As such, separate calculations of basic and diluted net loss per share for each of our Class B common stock and Class C common stock under the two-class method have not been presented.

NOTE 9. COMPENSATION PLANS

2019 Equity Incentive Plan

On April 17, 2019, we adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides eligible participants with compensation opportunities in the form of cash and equity incentive awards. The 2019 Plan is designed to enhance our ability to attract, retain and motivate our employees, directors, and executive officers, and incentivizes them to increase our long-term growth and equity value in alignment with the interests of our stockholders. Under the 2019 Plan, we may grant up to 5,000,000 stock options and other equity-based awards to employees, directors and executive officers.

During the three months ended September 30, 2020, we issued 15,000 restricted shares of our Class A common stock to certain executive officers under the 2019 Plan. Compensation expense related to these restricted shares was immaterial for the three months ended September 30, 2020.

During the three and nine months ended September 30, 2020, we recorded compensation expense related to stock options of approximately $0.5 million and $1.2 million, respectively, which was included within "salaries, benefits and payroll taxes" in our condensed consolidated statement of operations and comprehensive loss. During the three and nine months ended September 30, 2019, we recorded compensation expense related to stock options of approximately $0.3 million and $0.6 million, respectively.

As of September 30, 2020, total unrecognized compensation expense related to unvested stock options was approximately $3.4 million, which is expected to be recognized over a weighted-average period of 3.4 years.

Common Units of the Operating Company Granted as Equity-Based Compensation

During the three months ended September 30, 2020, we recorded a net reversal of compensation expense related to Common Units of approximately $1.5 million, which was comprised of compensation expense of approximately $0.5 million offset by a reversal of compensation expense for actual forfeitures that occurred during the period of approximately $2.0 million. During the nine months ended September 30, 2020, we recorded a net reversal of compensation expense related to Common Units of approximately $1.0 million, which was comprised of compensation expense of approximately $1.7 million offset by a reversal of compensation expense for actual forfeitures that occurred during the period of approximately $2.7 million.

During the three and nine months ended September 30, 2019, we recorded compensation expense related to Common Units of approximately $1.2 million and $5.5 million, respectively. Compensation expense related to Common Units is included within "salaries, benefits, and payroll taxes" in our condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2020, total unrecognized compensation expense related to unvested Common Units was approximately $1.0 million, which is expected to be recognized over a weighted-average period of 1.9 years.

NOTE 10. INCOME TAXES

As a result of the IPO and the 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.

As of September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, 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. The provision for income taxes for the three and nine months ended September 30, 2020 and 2019, respectively, relates to taxes in foreign jurisdictions, including Canada and the Netherlands.

For the three and nine months ended September 30, 2020, the effective tax rate differed from the U.S. federal statutory tax rate of 21% primarily due to the Operating Company’s pass-through structure for U.S. income tax purposes, the relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, and the valuation allowance against the deferred tax asset.

For the three and nine months ended September 30, 2020, 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 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.

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 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 September 30, 2020 and December 31, 2019.

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 condensed consolidated statements of operations and comprehensive (loss) income.

During the three and nine months ended September 30, 2020, we did not make any payments, inclusive of interest, to members of the Operating Company pursuant to the TRA.

NOTE 11. SEGMENT REPORTING

We merchandise vaporizers and other products in the United States, Canada and Europe and we distribute to retailers through our wholesale operations and to consumers through e-commerce activities. We define our segments as those operations whose results our Chief Operating Decision Makers ("CODMs"), a committee comprised of our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), regularly review to analyze performance and allocate resources. Therefore, segment information is prepared on the same basis that management reviews financial information for operational decision-making purposes.

The reportable segments identified are our business activities for which discrete financial information is available and for which operating results are regularly reviewed by our CODMs. As of September 30, 2020, we have three reportable segments: (1) United States, (2) Canada and (3) Europe. The United States operating segment is comprised of our United States operations, the Canadian operating segment is comprised of our Canadian operations, and the European operating segment is comprised of our European operations, currently based in the Netherlands. Corporate and other activities which are not allocated to our reportable segments consist primarily of equity-based compensation expenses and other corporate overhead items. We sell similar products in each of our segments.

The table below provides information on revenues from external customers, intersegment revenues, and income (loss) before income taxes for our reportable segments for the three and nine months ended September 30, 2020 and 2019. We eliminate intersegment revenues in consolidation.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Revenue from external customers:
United States	$	28,984	$	38,597	$	82,482	$	129,017
Canada	4,447		6,289		12,362		18,753
Europe	2,333		—		7,188		—
Corporate and other	—		—		—		—
	$	35,764	$	44,886	$	102,032	$	147,770
Intercompany revenues:
United States	$	3,865	$	1,392	$	9,273	$	2,910
Canada	17		23		55		105
Europe	561		—		1,653		—
Corporate and other	—		—		—		—
	$	4,443	$	1,415	$	10,981	$	3,015
Income (loss) before income taxes:
United States	$	(10,757)	$	(2,716)	$	(27,353)	$	(4,967)
Canada	321		458		626		221
Europe	(3,187)		—		(4,320)		—
Corporate and other	50		4,360		(5,650)		(14,135)
	$	(13,573)	$	2,102	$	(36,697)	$	(18,881)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of Greenlane Holdings, Inc. and its consolidated subsidiaries (the “Company”) for the quarterly period ended September 30, 2020 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes of Greenlane Holdings, Inc. for the year ended December 31, 2019, which are included in our Annual Report on Form 10-K. The terms “we,” “our” and “us” as used herein refer to the Operating Company and its consolidated subsidiaries prior to the Transactions described in this Form 10-Q and to Greenlane Holdings, Inc. and its consolidated subsidiaries, including the Operating Company, following the Transactions.

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:

● the impacts of the novel coronavirus ("COVID-19") pandemic and measures intended to prevent or mitigate its spread, and our ability to accurately assess and predict such impacts on our results of operations, financial condition, acquisition and disposition activities, and growth opportunities;

● statements regarding our growth and other strategies, results of operations or liquidity;

● statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;

● statements regarding our industry;

● statements of management’s goals and objectives;

● statements regarding anticipated government regulations and policies;

● projections of revenue, earnings, capital structure and other financial items;

● assumptions underlying statements regarding us or our business; and

● other similar expressions concerning matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Factors that might cause such a difference include those discussed in our filings with the SEC, under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein. These statements should be considered only after carefully reading the risk factors and the other information in our Annual Report on Form 10-K for the year ended December 31, 2019 and this entire Quarterly Report on Form 10-Q.

Overview

We are one of the largest global sellers of premium cannabis accessories and liquid nicotine products in the world. We operate as a powerful house of brands, third-party brand accelerator and distribution platform for consumption devices and lifestyle brands serving the global cannabis and liquid nicotine markets with an expansive customer base of more than 7,000 retail locations, including licensed cannabis dispensaries, and smoke and vape shops. 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. We provide value-added customer support to complement our product offerings and help our customers operate and grow their businesses. We believe our market leadership, wide distribution network, broad product selection and extensive technical expertise provide us with significant competitive advantages and create a compelling value proposition for our customers and our suppliers. In addition, our premium product lines, broad product portfolio and strategically-located distribution centers position us well to meet the needs of our customers and ensure timely delivery of products.

We are the partner of choice for many of the industry’s leading players including PAX Labs, Grenco Science, Firefly, DaVinci, Eyce, Santa Cruz Shredder, Cookies, and dozens of others. We have also set out to develop a world-class portfolio of our own proprietary brands (the "Greenlane Brands") that we believe will, over time, deliver higher margins and create long-term value. Our Greenlane Brands are comprised of child-resistant packaging innovator Pollen Gear; VIBES rolling papers; the Marley Natural accessory line; the Keith Haring accessory line; Aerospaced & Groove grinders; and Higher Standards, which is both an upscale product line and an innovative retail experience with flagship stores at New York City’s famed Chelsea Market and a new location opened in January 2020 in the iconic Malibu Village in California. In May 2020, we opened a new Cookies branded retail store located in Barcelona, Spain. We also own and operate several industry-leading e-commerce platforms, including Vapor.com, Higherstandards.com, Aerospaced.com, Azarius.net and Vaposhop.com. These e-commerce platforms offer convenient, flexible shopping solutions directly to consumers.

We continue to be well-funded to execute upon our business transformation plans, with $40.0 million in cash as of September 30, 2020, compared to $47.8 million in cash as of December 31, 2019.

We operate distribution centers in the United States, Canada, and Europe. Starting in the first quarter of 2020, we began taking steps to optimize our distribution network, by consolidating several of our U.S.based distribution centers to a more centralized model with fewer, larger, highly-automated facilities, which will help us reduce costs and improve service levels going forward. This consolidated distribution center model requires fewer distribution center employees and, we expect it will enable us to drive business improvement in multiple areas, including inventory management, sales operations, and customer experience. We closed our distribution centers in Schenectady, New York and Delta, B.C., Canada in May 2020. In June 2020, we terminated the lease agreements for our Torrance, California distribution center and Toronto, Canada office location. In August 2020, closed our Jacksonville distribution center. During the second quarter of 2020, we entered into service agreements with two 3PL facilities located in Hebron, Kentucky and Delta, B.C., Canada, both of which serve as replacement facilities to the distribution centers we have closed.

During the third quarter of 2020, we closed our Jacksonville distribution center, and performed an analysis of inventory on hand at each distribution center to be transferred to our Hebron, Kentucky 3PL facility. From this analysis, we recorded approximately $3.2 million in inventory write-offs and adjustments to lower of cost or net realizable value related to slow-selling products. These reductions in slow-selling inventory are consistent with the goals of our transformation initiative, as the warehouse space saved from liquidating these products will be allocated to products with higher margin opportunities and higher marketability. Additionally, the adjustments of inventory to lower of cost or net realizable value are expected to improve inventory turnover and lead to positive cash flows in 2021.

We have three distinct operating segments, which include our United States operations, our Canadian operations, and our European operations. These operating segments also represent our reportable segments. Refer to "Note 11— Segment Reporting", for more discussion regarding our segment reporting. See "Result of Operations" below for a breakdown of our net sales by operating segment. We expect revenue for our Europe operating segment to increase over the next reporting periods as we continue to expand our foothold in Europe.

We market and sell our products in the business to business (“B2B”), business to consumer (“B2C”) and supply and packaging (“S&P”) areas of the marketplace. We have a diverse base of customers, and our top ten customers accounted for only 14.1% and 11.1% of our net sales for the three and nine months ended September 30, 2020, respectively, with no single customer accounting for more than 3.1% and 2.1% of our net sales for the three and nine months ended September 30, 2020, respectively. While we distribute products to several large national and regional retailers in Canada, our typical B2B customer is an independent retailer operating in a single market. Our sales teams interact regularly with customers as most of them have frequent restocking needs. We believe our high-touch customer service model strengthens relationships, builds loyalty and drives repeat business. During the third quarter of 2020, our B2B, B2C and S&P revenues represented approximately 63.2%,

12.6% and 11.5% of net sales, respectively, compared to 80.6%, 3.2%, and 9.8% of net sales, respectively, during the same period in 2019. Channel and drop-ship revenues derived from the sales and shipment of our products to the customers of third-party website operators and providing other services to our customers represented approximately 12.6% of our net sales during the third quarter of 2020, compared to 6.4% during the same period in 2019.

For the three and nine months ended September 30, 2020, our net sales were lower than for the same period in 2019 largely due to the FDA's restriction on the sale of certain products, primarily mint-flavored JUUL products, and our deliberate decision to proactively move away from low margin sales, which historically included JUUL product discounts. We reduced our sales of JUUL products to $3.3 million, or 9.2% of net sales for the third quarter of 2020, compared to $20.2 million, or 45% of net sales for the third quarter of 2019. As we look ahead to the key drivers of growth in our business, we continue to be focused on the higher margin parts of the business that will better position us for the long-term, through continued investment in growing our Greenlane Brands, the supply and packaging revenue stream, and our direct-to-consumer businesses. Our portfolio of Greenlane Brands accounted for $5.6 million, or 15.5%, of net sales for the third quarter of 2020, compared to $3.4 million, or 7.5%, for the third quarter in 2019 . Our Greenlane Brand sales for the third quarter of 2020 were largely driven by sales of our Pollen Gear and Vibes Greenlane Brands, which amounted to $2.7 million and $1.3 million, respectively.

In December 2019, a novel strain of coronavirus known as COVID-19 was reported in Wuhan, China. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. In response to the COVID-19 pandemic, many state and local governments throughout the United States began issuing "stay at home" orders directing the closure of non-essential businesses and directing citizens to remain home unless they are conducting essential business or other prescribed activities. Similar orders have proliferated in Canada and Europe. Prior to the impact of the COVID-19 pandemic, we had anticipated returning to cash-flow positive operations by the fourth quarter of 2020. While we are continuing to work towards this goal, the timing of this goal has shifted to 2021, and may continue to shift depending on how long the current environment remains.

Based on our role as a supplier to essential businesses, including licensed cannabis businesses and an e-commerce distributor, our distribution centers have not had significant impacts to their operations resulting from the COVID-19 pandemic. While certain distribution centers in the United States were permanently closed as part of our transformation plan, these closures were planned prior to the COVID-19 pandemic to migrate to a more centralized model. We implemented protective measures for our distribution center employees, including social distancing measures, which limited the number of employees present during work shifts. To compensate for the reduced number of employees present during work shifts, we extended distribution center operating hours in order to sustain timely fulfillment of sales orders. With respect to our corporate offices, we have implemented several measures in response to the COVID-19 pandemic, including encouraging remote work for our employees in our U.S. and European offices. We are also in the process of evaluating modifications to our "work from home" policy and are considering moving certain limited positions to permanent "work from home" arrangements to reduce the capacity of our offices and to enable required distancing guidelines.

With states reopening across the country, our B2B revenue has begun to normalize from the decreases we experienced at the beginning of the second quarter due to the pandemic. Specifically, our September 2020 B2B revenues were approximately $7.8 million compared to approximately $4.2 million for April 2020, representing an increase of approximately 85.6% in monthly revenue. From the standpoint of our B2C revenue stream, we resumed operations of our Higher Standards store at Malibu Village in California on July 11, 2020 and our Higher Standards store at Chelsea Market in New York on July 14, 2020, both in a limited capacity, as permitted by local regulations and public health guidelines. Our Amsterdam retail location has remained open, in a limited capacity, since the onset of the pandemic in March 2020. While we have not experienced notable difficulties in collecting our outstanding accounts receivable due to COVID-19, we are continuing to monitor the impact of the pandemic on our customers, including their ability to remain in business and to make payments to us in the ordinary course of business.

Our e-commerce revenue for the nine months ended September 30, 2020 increased by $8.3 million, or 160%, compared to the same period in the prior year. The addition of the Azarius and Vaposhop domains through the Conscious Wholesale acquisition prior to the COVID-19 pandemic, combined with our well-established Vapor.com domain, allowed us to mitigate the reduction in sales through our other revenue channels with e-commerce revenues. Online channels accounted for approximately $4.3 million and $13.4 million in net sales for the three and nine months ended September 30, 2020, respectively, and we expect to continue to capitalize on newly acquired e-commerce customers in future periods.

With respect to our purchasing activities, our Greenlane Brands revenue channel continues to experience supply chain challenges, which were expected given the pressure that the COVID-19 pandemic has placed on our operations. We have not experienced notable impacts to our other supply channels as a whole since the outbreak of the COVID-19 pandemic, including as it relates to our overseas vendors and suppliers. However, we are continuing to monitor the pandemic's effect on our vendors and our ability to source our inventory, and are continuously evaluating adjustments to our purchasing to meet any anticipated changes in demand and product availability.

While we believe the measures we implemented in the first and second quarters of 2020 have minimized the COVID-19 pandemic's impact to our business, we cannot reasonably estimate the length or severity of this pandemic, or whether the measures we have taken or may take in the future will be sufficient to mitigate any future adverse impacts of the pandemic. We expect that the COVID-19 pandemic will continue to negatively impact our financial condition and results of operations, however, the extent of the impact of the pandemic will depend on certain developments that remain uncertain and cannot be predicted as of the date of this Form 10-Q.

Regulatory Developments

Our operating results and prospects will be impacted, directly and indirectly, by regulatory developments at the local, state, and federal levels. Certain changes in local, state, national, and international laws and regulations, such as increased legalization of cannabis, create significant opportunities for our business. However, other changes to laws and regulations result in restrictions on which products we are permitted to sell and the manner in which we market our products, increased taxation of our products, and negative changes to the public perceptions of our products, among other effects.

We believe the continuing trend of states’ legalization of medicinal and adult-use cannabis is likely to contribute to an increase in the demand for many of our products. In the 2020 election, voters approved ballot initiatives legalizing adult-use cannabis in New Jersey, Arizona, Montana and South Dakota. Voters also approved initiatives legalizing medical marijuana in Mississippi and South Dakota. However, we can provide no assurances that additional states will legalize cannabis.

Recently, the identification of many cases of e-cigarette or vaping product use associated lung injury (“EVALI”) has led to significant scrutiny of e-cigarette and other vaporization products. According to the Centers for Disease Control and Prevention ("CDC"), most of the patients with EVALI reported a history of using vaporization products containing tetrahydrocannabinol ("THC"). The CDC has reported that products containing THC, particularly those obtained from informal sources (e.g., illicit dealers), are linked to most of the incidents involving EVALI. The CDC has recommended, among other things, that consumers not use vaping products containing THC and not purchase vaping products from unlicensed sellers. While the CDC has not definitively identified the cause(s) of EVALI, on November 5, 2019, it published findings that 48 of 51 fluid samples collected from the lungs of patients with EVALI contained vitamin E acetate. We do not sell vitamin E acetate or any products containing vitamin E acetate. Additionally, certain academic studies and news reports have suggested that smoking or vaping may increase the risk of complications for individuals who contract COVID-19. EVALI, COVID-19 and other public health concerns could contribute to negative perceptions of vaping and smoking, which in turn could lead consumers to avoid certain of our products, which would materially and adversely affect our results of operations.

In response to health concerns and concerns about people under the age of eighteen using vaping products, several localities, states, and the federal government have enacted measures restricting the sale of certain types of vaping products. For example, on December 20, 2019, legislation was signed into law that raised the federal minimum age of sale for tobacco products from 18 to 21. As another example, on January 2, 2020, the United States Food and Drug Administration ("FDA") announced a new policy prioritizing enforcement against certain unauthorized flavored e-cigarette products that appeal to minors, including fruit and mint flavors, as well as of any other products that are targeted to minors. More recently, as discussed above, the FDA announced its intention to take enforcement measures related to ENDS products offered for sale after September 9, 2020 for which the manufacturer has not submitted a PMTA. Additionally, some state, provincial, and local governments have enacted or plan to enact laws and regulations that restrict the sale of certain types of vaping products. For example, several states and localities have implemented bans on certain flavored vaping products in an effort to reduce the appeal of such products to minors and some localities have banned the sale of nicotine vaping products entirely. Other states, including Arkansas, Maine, Utah, and Vermont have banned the sale of vaporizers direct to consumers through mail. These new vaping laws are rapidly shifting and, in some instances, have been repealed or narrowed as the result of successful legal challenges. Laws banning certain vaping products or restricting the manner in which they may be sold have taken effect or will soon take effect in Arkansas, Massachusetts, New York, New Jersey, Maryland, Rhode Island, Vermont, Utah and Maine among other jurisdictions. Taken together, these federal, state, and provincial restrictions on vaping products materially and adversely affect our revenues. The ultimate impact of these policy developments will depend upon, among other things, the types and quantities of products we sell that are encompassed by each ban, the success of legal challenges to the bans, our suppliers' actions to adapt to actual and potential regulatory changes, and our ability to provide alternative products.

In addition, 27 states and the District of Columbia have recently adopted laws imposing taxes on liquid nicotine. Additionally, at least eleven states have adopted laws imposing taxes on vaporizers. These taxes will result in increased prices to end consumers, which may adversely impact the demand for our products. We expect these taxes would impact our competitors similarly, assuming their compliance with applicable laws.

Critical Accounting Policies and Estimates

See Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2019.

The impact of COVID-19 continues to unfold and remains uncertain. As a result, many of our estimates and assumptions, such as those used in determining the allowance for slow-moving or obsolete inventory, the accounts receivable allowance for doubtful accounts, the valuation of goodwill, and the valuation of contingent consideration required increased judgment and carried a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates and assumptions may change materially in future periods.

Results of Operations

The following table presents our operating results (unaudited):


	Three Months Ended September 30,										Nine Months Ended September 30,
							% of net sales										% of net sales
($ in thousands)	2020		2019		% Change		2020		2019		2020		2019		% Change		2020		2019
Net sales:
United States	$	28,984	$	38,597	(24.9)	%	81.0	%	86.0	%	$	82,482	$	129,017	(36.1)	%	80.8	%	87.3	%
Canada	4,447		6,289		(29.3)	%	12.5	%	14.0	%	12,362		18,753		(34.1)	%	12.1	%	12.7	%
Europe	2,333		—		—	%	6.5	%	—	%	7,188		—		*		7.1	%	—	%
Total net sales	35,764		44,886		(20.3)	%	100.0	%	100.0	%	102,032		147,770		(31.0)	%	100.0	%	100.0	%
Cost of sales	33,297		38,448		(13.4)	%	93.1	%	85.7	%	85,419		123,194		(30.7)	%	83.7	%	83.4	%
Gross profit	2,467		6,438		(61.7)	%	6.9	%	14.3	%	16,613		24,576		(32.4)	%	16.3	%	16.6	%

Operating expenses:
Salaries, benefits and payroll taxes	5,010		6,562		(23.7)	%	14.0	%	14.6	%	17,745		21,673		(18.1)	%	17.4	%	14.7	%
General and administrative	10,673		4,751		124.6	%	29.8	%	10.6	%	25,758		15,549		65.7	%	25.2	%	10.5	%
Goodwill impairment charge	—		—		*		—	%	—	%	8,996		—		*		8.8	%	—	%
Depreciation and amortization	599		650		(7.8)	%	1.7	%	1.4	%	1,959		1,980		(1.1)	%	1.9	%	1.3	%
Total operating expenses	16,282		11,963		36.1	%	45.5	%	26.6	%	54,458		39,202		38.9	%	53.3	%	26.5	%
Loss from operations	(13,815)		(5,525)		150.0	%	(38.6)	%	(12.3)	%	(37,845)		(14,626)		158.8	%	34.4	%	(10.0)	%

Other income (expense), net:
Change in fair value of convertible notes	—		—		*		—	%	—	%	—		(12,063)		*		—	%	(8.2)	%
Interest expense	(115)		(119)		(3.4)	%	(0.3)	%	(0.3)	%	(335)		(862)		(61.1)	%	(0.3)	%	(0.6)	%
Other income, net	357		7,746		(95.4)	%	1.0	%	17.3	%	1,483		8,670		(82.9)	%	1.5	%	5.9	%
Total other income (expense), net	242		7,627		(96.8)	%	0.7	%	17.0	%	1,148		(4,255)		(127.0)	%	1.1	%	(2.9)	%
(Loss) income before income taxes	(13,573)		2,102		(745.7)	%	(37.9)	%	4.7	%	(36,697)		(18,881)		94.4	%	(36.1)	%	(12.8)	%
Provision for income taxes	220		11,063		(98.0)	%	0.6	%	24.6	%	147		10,966		(98.7)	%	0.1	%	7.4	%
Net loss	(13,793)		(8,961)		53.9	%	(38.5)	%	(20.0)	%	(36,844)		(29,847)		23.4	%	(36.1)	%	(20.2)	%
Net loss attributable to non-controlling interest	(9,300)		(2,563)		262.9	%	(26.0)	%	(5.7)	%	(25,839)		(4,016)		*		(25.3)	%	(2.7)	%
Net loss attributable to Greenlane Holdings, Inc.	$	(4,493)	$	(6,398)	(29.8)	%	(12.5)	%	(14.3)	%	$	(11,005)	$	(25,831)	(57.4)	%	(10.8)	%	(17.5)	%

*Not meaningful

Net Sales

United States

Revenues in the United States for the three months ended September 30, 2020 were approximately $29.0 million, compared to approximately $38.6 million in the same period in 2019, representing a decrease of $9.6 million, or 24.9%, primarily due to the ban on flavored vape pods implemented by the U.S. Food and Drug Administration effective January 1, 2020, our decision to discontinue sales of lower-margin JUUL products, and minor disturbances to our B2B revenue channel from COVID-19 driven store closures, which were partially offset by increased e-commerce revenues. As a result, we had no revenues from mint and other flavored pods in the three months ended September 30, 2020, compared to approximately $8.8 million in revenues from mint-flavored pods and other flavored pods generated in the United States during the third quarter of 2019. Additionally, our sales of JUUL products (excluding flavored pods) in the United States decreased by approximately $7.6 million, from $7.7 million during the three months ended September 30, 2019 to approximately $0.1 million during the three months ended September 30, 2020. These reductions in revenue were partially offset by increased domestic sales of our higher-margin Greenlane Brands, which were approximately $5.2 million for the three months ended September 30, 2020, compared to approximately $3.1 million in the same period in 2019, representing an increase of $2.1 million, or 65.6%.

Revenues in the United States for the nine months ended September 30, 2020 were approximately $82.5 million, compared to approximately $129.0 million in the same period in 2019, representing a decrease of $46.5 million, or 36.1% primarily due to the reasons described above and disturbances to our revenue channels from COVID-19. Approximately $0.03 million in revenues from mint-flavored pods and other flavored pods was generated in the United States during the nine months ended September 30, 2020, compared to $25.3 million in the same period of 2019. Additionally, our sales of JUUL products (excluding flavored pods) in the United States decreased by $18.4 million, from $18.7 million during the nine months ended September 30, 2019 to approximately $0.3 million during the nine months ended September 30, 2020. These reductions in revenue were partially offset by increased domestic sales of our higher-margin Greenlane Brands, which were approximately $15.5 million for the nine months ended September 30, 2020, compared to approximately $10.6 million in the same period in 2019, representing an increase of $4.8 million, or 45.9%.

Canada

Revenues in Canada for the three months ended September 30, 2020 were approximately $4.4 million, compared to approximately $6.3 million in the same period in 2019, representing a decrease of $1.8 million, or 29.3%, primarily due to shifts in the Canadian regulatory environment and COVID-19. Specifically, the legalization of cannabis in Canada in October 2018 led to a surge of revenues in the third quarter of 2019, whereas difficulties caused by the COVID-19 pandemic and regulatory uncertainty surrounding the future of JUUL and other e-cigarette products in Canada led to a reduction in revenues in the third quarter of 2020.

Revenues in Canada for the nine months ended September 30, 2020 were approximately, $12.4 million, compared to approximately $18.8 million in the same period in 2019, representing a decrease of $6.4 million or 34.1%, primarily due to the reasons described above.

Europe

As a result of our acquisition of Conscious Wholesale on September 30, 2019, we began operating in the Netherlands and expanded our reach to European countries. This acquisition resulted in the establishment of our European segment, which generated revenues of approximately $2.3 million and $7.2 million during the three and nine months ended September 30, 2020, respectively.

Cost of Sales and Gross Margin

Cost of sales decreased approximately $5.2 million, or 13.4%, in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to the decrease of approximately $12.7 million, or 33.7%, in costs of merchandise expense, from approximately $37.8 million in the three months ended September 30, 2019, to approximately $25.1 million in the three months ended September 30, 2020. This decrease was partially offset by a $6.5 million increase to non-merchandise cost of sales in the three months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in volume purchase rebates for JUUL caused by the decrease in JUUL business. Additionally, we incurred costs of sales of approximately $3.2 million in connection with write-offs and lower of cost or net realizable value adjustments of our inventory during the three months ended September 30, 2020. These adjustments were made by management as part of a strategic initiative to free-up warehouse space for products with higher margins and higher marketability, and to reduce the average costs for certain slow moving inventory items. We anticipate these actions will position this inventory for higher turnover during the holiday season, and assist in generating positive cash flows in the fourth quarter of 2020.

Gross margin, or gross profit as a percentage of net sales, has been and will continue to be affected and fluctuate based upon a variety of factors, including the average mark-up over cost of our products, the mix of products sold and purchasing efficiencies. Our products are sourced from suppliers who may use their own third-party manufacturers. Our product costs and gross margins may be impacted by the product mix we sell in any given period. For example, our vaporizer products tend to have a higher product cost and lower gross margins than our grinder products.

We reported a gross margin of 6.9% for the third quarter of 2020, compared to 14.3% for the third quarter of 2019, which is attributable primarily to an increase in cost of sales incurred in connection with lower of cost or net realizable value inventory adjustments incurred during the third quarter of 2020, which were made in connection with management's product rationalization initiative to liquidate certain product offerings and improve inventory turnover. Specifically, management's product rationalization resulted in the incurrence of approximately $3.2 million in cost of sales, which diluted the gross margin for the three months ended September 30, 2020, representing a reduction in gross margin of approximately 9.0%. This decrease to gross margin was partially offset by a decrease in JUUL sales, as we continued in our transformation initiative to reduce our concentration in JUUL products and focus on higher margin products, such as our Greenlane Brands.

Cost of sales decreased approximately $37.8 million, or 30.7%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to the decrease of approximately $49.3 million, or 40.9%, in costs of merchandise expense, from approximately $120.5 million in the nine months ended September 30, 2019, to approximately $71.2 million in the nine months ended September 30, 2020. This decrease was partially offset by a $11.2 million increase to non-merchandise cost of sales in the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in volume purchase rebates for JUUL caused by the decrease in JUUL business.

Operating Expenses

Salaries, Benefits and Payroll Taxes

Salaries, benefits and payroll taxes in the three months ended September 30, 2020 decreased approximately $1.6 million, or 23.7%, compared to the same period in 2019, primarily due to a decrease in stock compensation expense of $2.5 million. Specifically, we recognized a net reversal of stock compensation expense of approximately $1.0 million during the three months ended September 30, 2020, primarily due to actual forfeitures of unvested equity awards held by former officers, as compared to approximately $1.5 million of stock compensation expense for the same period in 2019. This decrease in stock compensation expense was offset by increases of approximately $0.7 million in employee wages and $0.2 million in medical and workers' compensation insurance for the three months ended September 30, 2020, as compared to the same period in 2019.

Salaries, benefits and payroll taxes in the nine months ended September 30, 2020 decreased approximately $3.9 million, or 18.1%, compared to the same period in 2019, primarily due to a decrease in stock compensation expense of $5.9 million. Specifically, we recognized approximately $0.2 million of stock compensation expense in the nine months ended September 30, 2020, compared to approximately $6.1 million of expense in the nine months ended 2019. The decrease in stock compensation expense was offset by increases of approximately $1.5 million in employee wages, $0.2 million in 401(k) expenses, and $0.2 million in medical and worker's compensation insurance for the nine months ended September 30, 2020, as compared to the same period of 2019.

As part of our transformation initiative, we reduced our workforce by an aggregate of 77 employees in February, March, and April 2020. The impact of these reductions in force resulted in a reduction in our salaries, benefits and payroll tax expenses of approximately $1.0 million and $1.9 million for the three and nine months ended September 30, 2020, respectively. We anticipate additional annual savings of approximately $3.8 million attributable to these personnel reduction efforts going forward.

As we continue to execute our transformation plan and closely monitor the evolving COVID-19 landscape, we remain focused on identifying cost-saving opportunities while delivering on our strategy to recruit, train, promote and retain the most talented and success-driven personnel in the industry. Management is continuing to explore opportunities in the fourth quarter of 2020 to further reduce its salary expenses and other operating expenses by continuing to execute on its transformation plan. In October 2020, we reduced our North American workforce by an additional 16 employees. As a result of this personnel reduction, we experienced a reduction in stock compensation expense of $0.3 million during the fourth quarter of 2020 and anticipate annualized savings of approximately $1.7 million going forward, not inclusive of payroll and other taxes.

General and Administrative Expenses

General and administrative expenses increased approximately $5.9 million, or 124.6%, in the three months ended September 30, 2020 as compared to the same period in 2019. This increase was primarily due to a loss of approximately $2.2 million related to a portion of an indemnification asset which was not probable of recovery. The remaining increase in general and administrative expenses is due to approximately $0.9 million in subcontractor fees related to consultation services in connect design and implementation of the new ERP project, and the temporary staffing solutions to assist in the consolidation of our distribution centers; an increase of $1.0 million in third party logistic expenses related to additional expenses incurred as

we transition our distribution centers to our new 3PL facilities in Kentucky and Canada; an increase of approximately $0.8 million in allowances for uncollectible vendor deposits incurred in connection with management's strategic initiative to improve inventory turnover; an increase of approximately $0.5 million in restructuring costs related to the severance payments related to two former executives and other individuals that were terminated as part of our transformation plan; and an increase of approximately $0.2 million related to a loss recognized during the three months ended September 30, 2020, representing the excess in carrying value over fair market value of an asset classified as held for sale during the period.

General and administrative expenses increased approximately $10.2 million, or 65.7%, in the nine months ended September 30, 2020 as compared to the same period in 2019. This increase was primarily due to a loss of approximately $2.2 million related to an indemnification asset which was not probable of recovery; approximately $1.7 million in additional accounting fees associated with the change in auditors in Q3 2019 as well as due diligence related to acquisition targets in late 2019 and early 2020; an increase of approximately $2.2 million in subcontractor fees; an increase of $1.2 million incurred as we transition our distribution centers to our new 3PL facilities in Kentucky and Canada; an increase of approximately $0.9 million related to increases in rent and facilities expense and web-based software expenses; and an increase of approximately $0.8 million in allowances for uncollectible vendor deposits incurred in connection with management's strategic initiative to improve inventory turnover and an increase of approximately $0.9 million in severance related costs associated with our restructuring plan.

Goodwill Impairment Charge

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 the United States reporting unit was determined to be below its carrying value, which resulted in a $9.0 million goodwill impairment charge.

Depreciation and Amortization Expenses

Depreciation and amortization expense remained consistent for the three and nine months ended September 30, 2020, as compared to the same periods in 2019, with a slight decrease in 2020 related to the disposition of fixed assets in connection with our distribution center consolidation initiative.

Other Income (Expense), Net

Other income (expense), net decreased by approximately $7.4 million for the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a gain of approximately $7.2 million recognized in the prior year, consisting of a gain of approximately $5.7 million resulting from the reversal of the tax receivable agreement ("TRA") liability and an unrealized gain of $1.5 million on our equity securities investment in Airgraft Inc.

Other income (expense), net, increased by approximately $5.4 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due a change in the fair value of our convertible notes payable during the nine months ended September 30, 2019, which resulted in an expense of approximately $12.1 million in the nine months ended September 30, 2019, with no corresponding expense in 2020. This increase in 2019 was offset by gain of approximately $7.2 recognized in the nine months ended September 30, 2019, resulting from the reversal of the TRA liability, as well as an unrealized gain of $1.5 million recognized on our equity securities investment in Airgraft Inc. We also experienced a reduction of interest expense of approximately $0.5 million during the nine months ended September 30, 2020, primarily due to the absence of debt issuance costs that were reflected in the nine months ended September 30, 2019.

Provision for Income Taxes

As a result of the IPO and the related transactions (defined in "Note 1—Business Operations and Organization" of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q), 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 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 us, in accordance with the terms of the Operating Agreement. We are subject to federal income taxes, in addition to state and local income taxes with respect to our allocable share of the Operating Company’s taxable income or loss.

Prior to the consummation of our IPO in April 2019, the provision for income taxes included only income taxes on income from the Operating Company’s Canadian subsidiary, based upon an estimated annual effective tax rate of approximately 15.0%. After the consummation of the IPO, we became subject to U.S. federal, state and local income taxes with respect to our allocable share of the Operating Company’s taxable income or loss. Furthermore, after completing the Conscious

Wholesale acquisition in September 2019, the Operating Company became subject to Dutch income taxes on income from its Netherlands-based subsidiary, based upon an estimated effective tax rate of approximately 25.0%.

During the third quarter of 2019, 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, thus reducing the carrying balance to $0. 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.

Key Metrics and Non-GAAP Financial Measures

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations, develop financial forecasts, and make strategic decisions:


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2020			2019			2020			2019
Net sales	$	35,764		$	44,886		$	102,032		$	147,770
Period-over-period change	(20.3)		%	3.0		%	(31.0)		%	16.0		%
Net cash used in operations	(1,343)			$	(14,772)		$	(3,756)		$	(33,543)
Adjusted net loss (1)	$	(6,852)		$	(7,453)		$	(18,370)		$	(10,525)
Adjusted EBITDA (1)	$	(6,275)		$	(3,367)		$	(17,150)		$	(5,809)

(1) Adjusted Net Loss and Adjusted EBITDA are non-GAAP financial measures. For the definitions and reconciliation of Adjusted Net Loss and Adjusted EBITDA to net loss, see “ Non-GAAP Financial Measures.”

Non-GAAP Financial Measures

We disclose Adjusted Net Loss and Adjusted EBITDA, which are non-GAAP performance measures, because management believes these metrics assist investors and analysts in assessing our overall operating performance and evaluating how well we are executing our business strategies. You should not consider Adjusted Net Loss or Adjusted EBITDA as alternatives to net loss, as determined in accordance with U.S. GAAP, as indicators of our operating performance. Adjusted Net Loss and Adjusted EBITDA have limitations as an analytical tool. Some of these limitations are:

•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;

•Adjusted EBITDA does not include interest expense, which has been a necessary element of our costs;

•Adjusted EBITDA does not reflect income tax payments we may be required to make;

•Adjusted EBITDA and Adjusted Net Loss do not reflect equity-based compensation;

•Adjusted EBITDA and Adjusted Net Loss do not reflect transaction and other costs which are generally incremental costs that result from an actual or planned transaction;

•Other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because Adjusted Net Loss and Adjusted EBITDA do not account for these items, these measures have material limitations as indicators of operating performance. Accordingly, management does not view Adjusted Net Loss or Adjusted EBITDA in isolation or as substitutes for measures calculated in accordance with U.S. GAAP.

The reconciliation of our Net Loss to Adjusted Net Loss for each of the periods indicated is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Net loss	$	(13,793)	$	(8,961)	$	(36,844)	$	(29,847)
Debt placement costs for convertible notes (1)	—		—		—		422
Transition to being a public company (2)	—		—		—		775
Equity-based compensation expense	(980)		1,508		182		6,062
Initial consulting costs related to ERP system implementation (3)	45		—		153		—
Restructuring expenses (4)	495		—		859		—
Due diligence costs related to acquisition target	—		—		903		—
Goodwill impairment charge	—		—		8,996		—
Adjustments related to product rationalization to increase inventory turnover of slow-selling products (5)	3,222		—		3,222		—
Inventory charges related to management's strategic initiative (5)	1,137		—		1,137		—
Allowances for vendor deposits incurred in connection with management's strategic initiative (5)	822		—		822		—
Loss related to indemnification asset not probable of recovery	2,200		—		2,200		—
Change in fair value of convertible notes	—		—		—		12,063
Adjusted net loss	$	(6,852)	$	(7,453)	$	(18,370)	$	(10,525)

(1)Debt placement costs related to the issuance of convertible notes in January 2019.

(2)Includes certain non-recurring fees and expenses primarily attributable to consulting fees and incremental audit and legal fees incurred in connection with our IPO.

(3)Includes non-recurring expenses related to the initial project design for our planned ERP system implementation.

(4)Includes primarily severance payments for employees terminated as part of our transformation plan.

(5)Includes certain non-recurring charges related to management's strategic initiative. These adjustments were incurred liquidate inventory on hand and on order, rationalize product offerings, improve inventory turnover of slow-selling products and vacate warehouse space for products with higher margin and marketability.

The reconciliation of our Net Loss to Adjusted EBITDA for each of the periods indicated is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Net loss	$	(13,793)	$	(8,961)	$	(36,844)	$	(29,847)
Other income, net (1)	(357)		(7,746)		(1,483)		(8,670)
Transition to being a public company (2)	—		—		—		775
Interest expense	115		119		335		862
Provision for income taxes	220		11,063		147		10,966
Depreciation and amortization	599		650		1,959		1,980
Equity-based compensation expense	(980)		1,508		182		6,062
Initial consulting costs related to ERP system implementation (3)	45		—		153		—
Restructuring expenses (4)	495		—		859		—
Due diligence costs related to acquisition target	—		—		903		—
Adjustments related to product rationalization to increase inventory turnover of slow-selling products (5)	3,222		—		3,222		—
One-time early termination fee on operating lease in connection with moving to a centralized distribution center model	—		—		262		—
Goodwill impairment charge	—		—		8,996		—
Inventory charges related to management's strategic initiative (5)	1,137		—		1,137		—
Allowances for vendor deposits incurred in connection with management's strategic initiative (5)	822		—		822		—
Loss related to indemnification asset not probable of recovery	2,200		—		2,200		—
Change in fair value of convertible notes	—		—		—		12,063
Adjusted EBITDA	$	(6,275)	$	(3,367)	$	(17,150)	$	(5,809)

(1)Includes rental and interest income, changes in the fair value of contingent consideration, unrealized gains on our equity security, a gain related to the adjustment of our TRA liability, and other miscellaneous income.

(2)Includes certain non-recurring fees and expenses primarily attributable to consulting fees and incremental audit and legal fees incurred in connection with our IPO.

(3)Includes non-recurring expenses related to the initial project design for our planned ERP system implementation.

(4)Includes primarily severance payments for employees terminated as part of our transformation plan.

Liquidity and Capital Resources

Our primary requirements for liquidity and capital are working capital, debt service and general corporate needs. Our primary sources of liquidity are our cash on hand and the cash flow that we generate from our operations. As of September 30, 2020, we had approximately $40.0 million of cash, of which $0.7 million was held in foreign bank accounts, and approximately $64.8 million of working capital, which is calculated as current assets minus current liabilities, compared with approximately $47.8 million of cash, of which $0.9 million was held in foreign bank accounts, and approximately $88.7 million of working capital as of December 31, 2019. The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls; however, these balances are generally available to fund the ordinary business operations of our foreign subsidiaries without legal or other restrictions.

On October 1, 2018, one of the Operating Company’s wholly-owned subsidiaries closed on the purchase of a building for $10.0 million, which serves as our corporate headquarters. The purchase was financed through a real estate term note (the “Real Estate Note”) in the principal amount of $8.5 million, with one of the Operating Company’s wholly-owned subsidiaries as the borrower and Fifth Third Bank as the lender. Principal amounts plus any accrued interest at a rate of LIBOR plus 2.39% are due monthly. Our obligations under the Real Estate Note are secured by a mortgage on the property.

Our future liquidity needs may also include payments in respect of the redemption rights of the Common Units held by its members that may be exercised from time to time (should we elect to exchange such Common Units for a cash payment), payments under the TRA and state and federal taxes to the extent not sheltered by our tax assets, including those arising as a result of purchases, redemptions or exchanges of Common Units for Class A common stock. Although the actual timing and amount of any payments that may be made under the TRA will vary, the payments that we will be required to make to the members may be significant. Any payments made by us to the members under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us or to the Operating Company and, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore may accelerate payments due under the TRA.

Despite decreases in gross profit for the three and nine moths ended September 30, 2020 and the uncertainty around the ongoing COVID-19 pandemic, we believe that our cash on hand will be sufficient to fund our working capital and capital expenditure requirements, as well as our debt repayments and other liquidity requirements associated with our existing operations, for at least the the next 12 months.

In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” in Item 1A of this Form 10-Q. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.

Cash Flows

The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q:


	Nine Months Ended September 30,
(in thousands)	2020		2019
Net cash used in operating activities	$	(3,756)	$	(33,543)
Net cash used in investing activities	(3,579)		(3,109)
Net cash (used in) provided by financing activities	(310)		81,693

Net Cash Used in Operating Activities

During the nine months ended September 30, 2020, net cash used in operating activities of approximately $3.8 million was a result of a net loss of $36.8 million offset by non-cash adjustments to net loss of approximately $14.2 million, including stock-based compensation expense of approximately $0.2 million, a loss related to an indemnification asset which was not probable of recovery of approximately $2.2 million, and a goodwill impairment charge of $9.0 million, and $18.9 million cash generated by working capital primarily driven by increases in accounts payable, inventories, and accrued expenses and decreases in other current assets and deferred offering costs.

During the nine months ended September 30, 2019, net cash used in operating activities of approximately $33.5 million was a result of a net loss of $29.8 million offset by non-cash adjustments to net loss of $23.9 million, and a $27.6 million increase in cash consumed by working capital primarily driven by an increase in accounts payable of approximately $25.3 million, accrued expenses of approximately $3.0 million, inventories of approximately $2.5 million, and payments of operating leases of approximately $0.5 million, offset primarily by decreases in accounts receivable, vendor deposits, deferred offering costs, and other current assets of approximately $5.7 million, $3.3 million, $2.3 million, and $1.1 million, respectively. Further, for the nine months ended September 30, 2019, we had non-cash expenses of approximately $23.9 million, including approximately $12.1 million related to the change in fair value of convertible notes, approximately $6.1 million related to equity-based compensation, approximately $10.9 million related to the valuation allowance established against our deferred tax asset, and approximately $2.0 million related to depreciation and amortization, primarily offset by approximately $1.5 million related to an unrealized gain on the equity securities investment and approximately $5.7 million related to the reversal of the tax receivable agreement liability.

Net Cash Used in Investing Activities

During the nine months ended September 30, 2020, we used approximately $1.4 million of cash for capital expenditures, including computer hardware and software to support our growth and development and machinery to support the operations of our supply and packaging revenue stream. Additionally, we used approximately $1.8 million of cash for the acquisition of Conscious Wholesale, and $0.3 million of cash for the acquisition of intangible assets.

During the nine months ended September 30, 2019, we used approximately $1.3 million of cash for capital expenditures, including computer hardware and software to support our growth and development, and to purchase warehouse supplies and equipment, including the build-out of our two retail locations. Additionally, during the nine months ended September 30, 2019, we completed the Pollen Gear LLC and Conscious Wholesale business acquisitions, for which we paid cash consideration of $2.2 million offset by net cash acquired of $0.9 million, which resulted in net cash used of approximately $1.3 million. We also made an investment in equity securities of an entity for approximately $0.5 million, which represents a 1.49% ownership interest in the entity.

Net Cash (Used in) Provided by Financing Activities

During the nine months ended September 30, 2020, net cash used in financing activities primarily consisted of approximately $0.3 million in payments on other long-term liabilities, notes payable and finance lease obligations.

During the nine months ended September 30, 2019, net cash provided by financing activities was primarily attributable to proceeds from the issuance of Class A common stock sold in the IPO, net of underwriting costs of approximately $83.0 million, and proceeds from the issuance of convertible notes of approximately $8.1 million, which was primarily offset in part by the redemption of limited liability company membership interests of approximately $3.0 million, payment of approximately $3.5 million of deferred offering costs related to the IPO, payment of approximately $1.7 million of debt issuance costs related to the convertible notes issued in December 2018 and January 2019, and approximately $0.9 million paid related to member distributions for the period.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, as of September 30, 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our quantitative and qualitative disclosures about market risk from those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" previously included in our Annual Report on Form 10-K for the year ended December 31, 2019.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Under the supervision and with the participation of management, including our Chief Executive Officer and our Principal Financial and Accounting Officer, we evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. Based upon their evaluation, our Chief Executive Officer and our Principal Financial and Accounting Officer concluded that, as of September 30, 2020, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019.

Remediation Plan and Status for the Material Weaknesses

As previously described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2019, we began implementing a remediation plan to address the material weaknesses identified in the fourth quarter of 2019, and our management continues to be actively engaged in the remediation efforts. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Among the previously reported design and operating deficiencies which contributed to material weaknesses in our control activities, management noted ineffective user access controls over certain IT systems to appropriately segregate duties and adequately restrict user access to financial applications and data to the appropriate personnel. While certain compensating control activities have been designed and implemented to mitigate the risks related to ineffective user access controls, we continue to evaluate whether these compensating control activities are expected to operate at a level of precision that would prevent or detect a misstatement that could be material.

As previously disclosed, in 2020, we began a multi-year implementation of a new enterprise resource planning (“ERP”) system, which will replace our existing core financial systems, and which we expect will be completed during 2021. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures, based upon which, management expects to focus its allocation of organizational resources to ensure the successful implementation of the new ERP system, including as it relates to designing and implementing effective control activities. Conversely, management expects that additional efforts related to re-designing user access roles and permissions in the existing ERP system, which is expected to be decommissioned in 2021, will be limited. Based on these considerations, and subject to management’s ongoing assessment, we cannot provide assurances that the previously reported material weaknesses related to ineffective user access controls will be considered remediated until we complete the implementation of our new ERP system.

Changes in Internal Control Over Financial Reporting

During the second quarter of 2020, we entered into service agreements with two third-party logistics facilities located in Hebron, Kentucky and Delta, B.C., Canada, both of which serve as replacement facilities to the distribution centers we have closed. In conjunction with this transition, we have adjusted our processes and designed and implemented controls related to our inventory management and order fulfillment. During the quarter ended September 30, 2020, we designed and implemented additional control activities related to inventory counts at the third-party logistics facilities. These changes in our internal control over financial reporting that occurred during the quarters ended June 30, 2020 and September 30, 2020 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As noted above, we are continuing our remediation efforts related to the material weaknesses in our internal control over financial reporting, including as it relates to controls over inventory counts and recording of inventory reserves. Any changes to our internal control of our internal reporting related to our transition to the third-party logistics, and the related controls, will be evaluated once the applicable controls operate for a sufficient period of time and management can conclude, through testing, that these controls are operating effectively.

In 2020, we began a multi-year implementation of a new ERP system, which will replace our existing core financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance the flow of financial information, improve data management and provide timely information to our management team. Changes to our general ledger and consolidated financial reporting are expected to take place in 2021. As the phased implementation of the new ERP system progresses, we may change our processes and procedures which, in turn, could result in changes to our internal control over financial reporting. As such changes occur, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings as of September 30, 2020, see Note 6 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

During the nine months ended September 30, 2020, we issued an aggregate of 650,604 shares of Class A common stock as a portion of the purchase consideration for the acquisition of a 100% interest ARI Logistics B.V. and Shavita B.V. (collectively, "Conscious Wholesale"), a leading European wholesaler and retailer of consumption accessories, vaporizers, and other high-quality products. The acquisition was completed in September 2019, as described in Item 8, Note 3 of our Annual Report on Form 10-K for the year ended December 31, 2019. These shares were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933.

During the nine months ended September 30, 2020, we issued an aggregate of 2,574,303 shares of Class A common stock in exchange for an equivalent number of shares of Class B common stock and Common Units of the Operating Company pursuant to the terms of our Amended and Restated Certificate of Incorporation and the Operating Company's Third Amended and Restated Operating Agreement. These shares were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933.

During the nine months ended September 30, 2020, we issued an aggregate of 20,631 shares of Class A common stock as a portion of consideration for the purchase of intangible assets. These shares were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933.

Use of Proceeds from Registered Securities

On April 23, 2019, we completed our IPO of 6,000,000 shares of Class A common stock, which was comprised of 5,250,000 shares of Class A common stock sold by Greenlane and 750,000 shares sold by certain selling stockholders, in each case at a public offering price of $17.00 per share. On April 29, 2019, the underwriters purchased an additional 450,000 shares of Class A common stock from selling stockholders pursuant to the partial exercise of their option to purchase additional shares in the IPO. We received aggregate net proceeds of approximately $79.5 million, after deducting the underwriting discounts and commissions and offering expenses. We used approximately $3.1 million of the proceeds from the IPO to fund a portion of the purchase price of the Conscious Wholesale business acquisition. We have used and intend to continue using the remainder of the net proceeds for working capital and general corporate purposes, including to fund possible investments in, and acquisitions of, complementary companies or their assets, businesses, partnerships, minority investments, products or technologies. However, we currently have no other commitments or agreements regarding any such acquisitions or investments. All shares were sold pursuant to a registration statement on Form S-1, as amended (File No. 333-230405), which was declared effective by the SEC on April 17, 2019. Cowen and Company, LLC and Canaccord Genuity LLC served as representatives of the several underwriters in the offering.

ITEM 6. EXHIBITS


Exhibit Number						Description

3.1						Amended and Restated Certificate of Incorporation of Greenlane Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to Greenlane’s Current Report on Form 8-K, filed April 25, 2019).
3.2						Second Amended and Restated By-Laws of Greenlane Holdings, Inc. (Incorporated by reference to Exhibit 3.2 to Greenlane’s Current Report on Form 8-K, filed April 25, 2019).
31.1*						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**						Certification of Chief Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.1*						Separation Agreement by and between Warehouse Goods LLC and Ethan Rudin, dated as of August 18, 2020 (Incorporated by reference to Greenlane's Current Report on Form 8-K /A , filed August 24, 2020).
10.2*						Indemnification Agreement by and between Greenlane Holdings, Inc. and each of its directors and officers listed on Schedule A thereto.
10.3*						Executive Employment Agreement by and between Warehouse Goods LLC and William Mote, dated as of August 19, 2020.
10.4*						Executive Employment Agreement by and between Warehouse Goods LLC and William Bine, dated as of August 25, 2020.
10.5*						Separation Agreement by and between Warehouse Goods LLC and Jay Scheiner, dated as of July 27 2020.
10.6*						Amended and Restated Employment Agreement by and between Warehouse Goods LLC and Douglas Fischer, dated as of September 9, 2020.
10.7*						Executive Employment Agreement by and between Warehouse Goods LLC and Michael Cellucci, dated as of September 28, 2020.
101.INS						XBRL Instance Document*
101.SCH						XBRL Taxonomy Extension Schema Document*
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB						XBRL Taxonomy Extension Label Linkbase Document*
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith.

** This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			GREENLANE HOLDINGS, INC.


Date: November 16, 2020	By:	/s/ William Mote
		Chief Financial Officer