General
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, hemp-derived CBD, and liquid nicotine markets with an expansive customer base of more than 11,000 retail locations, including licensed cannabis dispensaries and smoke and vape shops. We have an established track record of partnering with brands through all stages of product lifecycle.
We are the partner of choice for many of the industry’s leading players including PAX Labs, JUUL Labs, Grenco Science, Firefly, DaVinci, Omura, Eyce, Santa Cruz Shredder, Sentia Wellness, Bloom Farms, Cookies and dozens of others. In addition to our partner brands, we have set out to develop a world-class portfolio of our own proprietary brands that we believe will, over time, deliver higher margins and create long-term value. Our house brands are comprised of child-resistant packaging
2
innovator Pollen Gear; VIBES rolling papers; the Marley Natural accessory line; the K. Haring Glass Collection; Aerospaced & Groove grinders; and Higher Standards, an upscale product line of glass and premium care and maintenance products. We also own and operate Vapor.com, an industry leading e-commerce platform which offers convenient, flexible shopping solutions directly to consumers. We strive to provide exceptional 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.
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 currently operate four distribution centers in the United States, two distribution centers in Canada, and one distribution center in Europe. Effective March 2020, we began taking steps to optimize our distribution network in the coming months, transitioning to a more centralized model with fewer, larger, highly automated facilities in the U.S. and open a new, streamlined, centrally-located facility, which will help the us reduce costs going forward. This consolidation will require fewer distribution center employees while also driving business improvement in multiple areas including inventory management, sales operations, and customer experience.
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 12— Segment Reporting", for more discussion regarding out segment reporting. Overall, total net sales generated by our United States operating segment accounted for approximately 86.6% and 91.7% of total consolidated net sales for the years ended December 31, 2019 and 2018, respectively. Total net sales generated by our Canadian operations accounted for approximately 12.0% and 8.3% of total consolidated net sales for the years ended December 31, 2019 and 2018, respectively. With our acquisition of Conscious Wholesale in September 2019 (see "Note 3—Business Acquisitions", under Item 8), we commenced operations of our European segment. Total net sales generated by this segment were 1.4% of total consolidated revenue in 2019. We expect revenue from this segment to increase within the next year as we continue to expand our foothold in Europe.
We market and sell our products in the business to business (“B2B”), supply and packaging (“S&P”), and business to consumer (“B2C”) areas of the marketplace. We have a diverse base of customers, and our top ten customers accounted for only 17.3% and 13.0% of our net sales for the years ended December 31, 2019 and 2018, respectively, with no single customer accounting for more than 3.0% of our net sales in both years. For each of the years ended December 31, 2019 and 2018, nine out of the top ten customers were categorized as B2B customers, with the other one being classified as an S&P customer. While we have recently commenced distribution of our products to a growing number of large national and regional retailers in Canada and Europe, 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. In addition, we believe our premium product lines, broad product portfolio and strategic distribution network position us well to meet the needs of our customers and ensure timely delivery of products.
For the year ended December 31, 2019, our B2B revenues represented approximately 78.1% of our net sales, our B2C revenues represented approximately 5.9% of our net sales, our S&P revenues represented approximately 10.8% of our net sales, and 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 5.2% of our net sales. For the year ended December 31, 2018, our B2B revenues represented approximately 79.5% of our net sales, our B2C revenues represented approximately 3.2% of our net sales, our S&P revenues represented approximately 9.9% of our net sales, and 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 7.4% of our net sales.
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 on April 23, 2019 and other related transactions 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. Refer to "Note 1—Business Operations and Organizations" within Item 8 for further information on the Company's organization and the IPO and related transactions. We are the sole manager of the Operating Company and, as of December 31, 2019, owned a 23.5% interest in the Operating Company.
Our Business Relating to the Cannabis Industry
The information included below is based on the most recent information available to the Company and, except as expressly stated below, does not give effect to the impact of the expanding outbreak of the novel coronavirus known as COVID-19, the impacts of which remain uncertain as of the date of this Form 10-K.
While we do not cultivate, distribute or dispense marijuana as that term is defined by the Controlled Substances Act, several of the products we distribute, such as vaporizers, pipes, rolling papers and storage solutions, can be used with marijuana or marijuana derivatives, as well as several other legal substances.
We believe the global cannabis industry is experiencing a transformation from a state of prohibition toward a state of legalization. We expect the number of states, countries and other jurisdictions implementing legalization legislation to continue to increase, which will create numerous and sizable opportunities for market participants, including us.
Global Landscape
A June 2019 report of Arcview Market Research and BDS Analytics, leading market research firms in the cannabis industry, estimated that spending in the global legal cannabis market was approximately $11 billion in 2018 and was estimated to reach $14.9 billion in 2019, representing growth of approximately 36%. The report projects that by 2024, spending in the global legal cannabis market will reach $40 billion, representing a compound annual growth rate of approximately 24% over the six-year period from 2018. Our experience and awareness of the markets in which we operate lead us to believe that demand for the types of products we distribute will grow in tandem with the industry.
The North American Cannabis Landscape
United States and Territories. Thirty-four states and the District of Columbia have legalized medical cannabis in some form and have a formal cannabis program. Eleven of these states, including the District of Columbia, have legalized cannabis for non-medical adult use with additional states, including New Jersey and New York, actively considering the legalization of cannabis for non-medical adult use. Fourteen additional states have legalized high-cannabidiol ("CBD"), low tetrahydrocannabinol ("THC") oils for a limited class of patients. Only three states continue to prohibit cannabis entirely. Notwithstanding the continued trend toward further state legalization, cannabis continues to be categorized as a Schedule I controlled substance under the Federal Controlled Substances Act (the “CSA”) and, accordingly, the cultivation, processing, distribution, sale and possession of cannabis violate federal law in the United States as discussed further in Item 1A under the heading “Risk Factors". Our business depends partly on continued purchases by businesses and individuals selling or using cannabis pursuant to state laws in the United States or Canadian and provincial laws.
We believe support for cannabis legalization in the United States is gaining momentum. According to an October 2019 poll by Gallup, public support for the legalization of cannabis in the United States has increased from approximately 12% in 1969 to approximately 66% in 2019.
The following map illustrates states that have fully legalized cannabis (for medical and recreational purposes), states that have partially legalized cannabis (for medical purposes only, including states that have legalized only low-THC cannabis derivatives), and states that have not legalized cannabis for medical or recreational purposes (as of January 4, 2020).
U.S. CBD Landscape
In December 2018, the Farm Bill was signed into law in the United States which specifically removed hemp from the definition of “marijuana” under the Controlled Substances Act. In addition, the Farm Bill designated hemp as an agricultural commodity and permits the lawful cultivation of hemp in all states and territories of the United States. Federal and state laws and regulations concerning the cultivation and sale of hemp and hemp-derived products (including CBD) continue to evolve.
Canada.
Legal access to dried cannabis for medical purposes was first allowed in Canada in 1999. The Cannabis Act (the “Cannabis Act”) currently governs the production, sale and distribution of medical cannabis and related oil extracts in Canada.
On April 13, 2017, the Government of Canada introduced Bill C-45, which proposed the enactment of the Cannabis Act to legalize and regulate access to cannabis. The Cannabis Act proposed a strict legal framework for controlling the production, distribution, sale and possession of medical and recreational adult-use cannabis in Canada. On June 21, 2018, the Government of Canada announced that Bill C-45 received Royal Assent. On July 11, 2018, the Government of Canada published the Cannabis Regulations under the Cannabis Act. The Cannabis Regulations provide more detail on the medical and recreational regulatory regimes for cannabis, including regarding licensing, security clearances and physical security requirements, product practices, outdoor growing, security, packaging and labelling, cannabis-containing drugs, document retention requirements, reporting and disclosure requirements, the new access to cannabis for medical purposes regime and industrial hemp. The majority of the Cannabis Act and the Cannabis Regulations came into force on October 17, 2018.
While the Cannabis Act provides for the regulation by the federal government of, among other things, the commercial cultivation and processing of cannabis for recreational purposes, it provides the provinces and territories of Canada with the authority to regulate in respect of the other aspects of recreational cannabis, such as distribution, sale, minimum age requirements, places where cannabis can be consumed, and a range of other matters.
The governments of every Canadian province and territory have implemented regulatory regimes for the distribution and sale of cannabis for recreational purposes. Most provinces and territories have announced a minimum age of 19 years old, except for Québec and Alberta, where the minimum age will be 18. Certain provinces, such as Ontario, have legislation in place that restricts the packaging of vapor products and the manner in which vapor products are displayed or promoted in stores.
The European Cannabis Landscape
Europe’s population is larger than that of the U.S. and Canadian markets combined, suggesting the potential of a very significant market. Prohibition Partners, a London-based strategic consultancy firm, estimated in 2019 that the European legal
cannabis market would be worth $0.3 billion in 2020, growing to $2.5 billion in 2024, representing a 69% compound annual growth rate.
Currently, Germany, Italy, Austria, Czech Republic, Finland, Portugal, Poland, Spain, the Netherlands, Denmark, Greece, Croatia, Macedonia, Poland and Turkey, Malta, Luxembourg, Cyprus, France, the U.K and Ireland allow cannabis use for medicinal purposes, with some of those countries operating pilot programs. However, it has been widely reported that other countries are considering following suit.
Product Information
Consumers of cannabis, herbs, flavored compounds, aromatherapy oils and nicotine are likely going to require the types of products we distribute, including vaporizers, pipes, rolling papers and packaging. We believe we distribute the “picks & shovels” for these rapidly-growing industries.
Inhalation Delivery Methods
There are two prevalent types of inhalation methods for cannabis and nicotine: combustion and vaporization. Vaporizers are devices that heat materials to temperatures below the point of combustion, extracting the flavors, aromas and effects of dry herbs and concentrates in the form of vapor. Measured by revenue, vaporizers are our largest product category. During the years ended December 31, 2019 and 2018, the vaporizers and components category, which is comprised of desktops, portables and pens, and vaporizer parts and accessories, generated approximately 76.0% and 83.1%, respectively, of our net sales.