GrowGeneration Corp.
11/12/2024 | Press release | Distributed by Public on 11/12/2024 16:13
Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)
grwg-20240930
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Quarter Ended: September 30, 2024
OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
|
Commission File Number: 333-207889
GROWGENERATION CORP.
(Exact name of registrant as specified in its charter)
| Colorado | 46-5008129 | |
|
(State of other jurisdiction of incorporation) |
(IRS Employer ID No.) |
5619 DTC Parkway, Suite 900
Greenwood Village, Colorado 80111
(Address of principal executive offices)
(800) 935-8420
(Issuer's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | GRWG | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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, a 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 | ☐ | Smaller reporting company | ☐ |
| Non-accelerated filer | ☐ | Emerging growth company | ☐ |
| Accelerated filer | ☒ |
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 6, 2024 there were 59,244,518 shares of the registrant's common stock issued and outstanding.
TABLE OF CONTENTS
| Page No. | ||
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PART I FINANCIAL INFORMATION
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Item 1.
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Financial Statements (Unaudited)
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1
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Condensed Consolidated Balance Sheets
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1
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Condensed Consolidated Statements of Operations
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2
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Condensed Consolidated Statements of Stockholders' Equity
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3
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Condensed Consolidated Statements of Cash Flows
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5
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Notes to Condensed Consolidated Financial Statements
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6
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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19
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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29
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Item 4.
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Controls and Procedures
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29
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PART II OTHER INFORMATION
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Item 1.
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Legal Proceedings
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33
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Item 1A.
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Risk Factors
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33
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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33
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Item 3.
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Defaults Upon Senior Securities
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33
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Item 4.
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Mine Safety Disclosures
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33
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Item 5.
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Other Information
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33
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Item 6.
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Exhibits
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34
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Signatures
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35
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i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except shares)
|
September 30, 2024 |
December 31, 2023 |
|||
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 27,436 | $ | 29,757 |
| Marketable securities | 27,787 | 35,212 | ||
|
Accounts receivable, net of allowance for credit losses of $1,800 and $1,363 at September 30, 2024 and December 31, 2023, respectively
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10,324 | 8,895 | ||
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Notes receivable, current, net of allowance for credit losses of $- and $1,732 at September 30, 2024 and December 31, 2023, respectively
|
1,106 | 193 | ||
| Inventory | 48,025 | 64,905 | ||
| Prepaid income taxes | 201 | 516 | ||
| Prepaid and other current assets | 7,688 | 7,973 | ||
| Total current assets | 122,567 | 147,451 | ||
| Property and equipment, net | 21,119 | 27,052 | ||
| Operating leases right-of-use assets, net | 36,453 | 39,933 | ||
| Notes receivable, long-term | - | 106 | ||
| Intangible assets, net | 11,152 | 16,180 | ||
| Goodwill | 7,525 | 7,525 | ||
| Other assets | 823 | 843 | ||
| TOTAL ASSETS | $ | 199,639 | $ | 239,090 |
| LIABILITIES & STOCKHOLDERS' EQUITY | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 8,183 | $ | 11,666 |
| Accrued liabilities | 2,536 | 2,530 | ||
| Payroll and payroll tax liabilities | 2,354 | 2,169 | ||
| Customer deposits | 2,631 | 5,359 | ||
| Sales tax payable | 1,310 | 1,185 | ||
| Current maturities of operating lease liabilities | 7,523 | 8,021 | ||
| Total current liabilities | 24,537 | 30,930 | ||
| Operating lease liabilities, net of current maturities | 31,620 | 34,448 | ||
| Other long-term liabilities | 317 | 317 | ||
| Total liabilities | 56,474 | 65,695 | ||
|
Commitments and contingencies (Note 13)
|
||||
| Stockholders' equity: | ||||
|
Common stock; $0.001 par value; 100,000,000 shares authorized, 59,242,200 and 61,483,762 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
|
59 | 61 | ||
| Additional paid-in capital | 375,407 | 373,433 | ||
| Accumulated deficit | (232,301) | (200,099) | ||
| Total stockholders' equity | 143,165 | 173,395 | ||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 199,639 | $ | 239,090 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
1
GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net sales | $ | 50,006 | $ | 55,678 | $ | 151,430 | $ | 176,430 |
| Cost of sales (exclusive of depreciation and amortization shown below) | 39,196 | 39,490 | 113,835 | 126,816 | ||||
| Gross profit | 10,810 | 16,188 | 37,595 | 49,614 | ||||
| Operating expenses: | ||||||||
| Store operations and other operational expenses | 10,032 | 11,658 | 30,876 | 36,288 | ||||
| Selling, general, and administrative | 7,405 | 7,582 | 22,417 | 21,923 | ||||
| Estimated credit losses (recoveries) | 272 | 257 | (210) | 681 | ||||
| Depreciation and amortization | 4,972 | 4,721 | 12,329 | 12,477 | ||||
| Impairment loss | 220 | - | 220 | - | ||||
| Total operating expenses | 22,901 | 24,218 | 65,632 | 71,369 | ||||
| Loss from operations | (12,091) | (8,030) | (28,037) | (21,755) | ||||
| Other income (expense): | ||||||||
| Other (expense) income | (50) | (23) | (13) | 786 | ||||
| Interest income | 663 | 705 | 2,002 | 1,886 | ||||
| Interest expense | - | (1) | (70) | (6) | ||||
| Total other income | 613 | 681 | 1,919 | 2,666 | ||||
| Net loss before taxes | (11,478) | (7,349) | (26,118) | (19,089) | ||||
| Benefit (provision) for income taxes | 43 | - | (50) | (93) | ||||
| Net loss | $ | (11,435) | $ | (7,349) | $ | (26,168) | $ | (19,182) |
| Net loss per share, basic | $ | (0.19) | $ | (0.12) | $ | (0.43) | $ | (0.31) |
| Net loss per share, diluted | $ | (0.19) | $ | (0.12) | $ | (0.43) | $ | (0.31) |
| Weighted average shares outstanding, basic | 59,268 | 61,272 | 60,479 | 61,127 | ||||
| Weighted average shares outstanding, diluted | 59,268 | 61,272 | 60,479 | 61,127 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands)
| Common Stock | Treasury Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders' Equity |
||||||||
| Shares | Amount | Shares | Amount | |||||||||
| Balances, December 31, 2023 | 61,484 | $ | 61 | - | $ | - | $ | 373,433 | $ | (200,099) | $ | 173,395 |
| Common stock issued for share-based compensation | 23 | 1 | - | - | - | - | 1 | |||||
| Common stock withheld for employee payroll taxes | - | - | - | - | (29) | - | (29) | |||||
| Share-based compensation | - | - | - | - | 778 | - | 778 | |||||
| Net loss | - | - | - | - | - | (8,837) | (8,837) | |||||
| Balances, March 31, 2024 | 61,507 | $ | 62 | - | $ | - | $ | 374,182 | $ | (208,936) | $ | 165,308 |
| Common stock issued for share-based compensation | 181 | - | - | - | - | - | - | |||||
| Common stock withheld for employee payroll taxes | - | - | - | - | (99) | - | (99) | |||||
| Share-based compensation | - | - | - | - | 654 | - | 654 | |||||
| Repurchase of common stock | - | - | (1,739) | (4,190) | - | - | (4,190) | |||||
| Cancellation of common stock | (800) | (1) | 800 | 1,874 | - | (1,873) | - | |||||
| Net loss | - | - | - | - | - | (5,896) | (5,896) | |||||
| Balances, June 30, 2024 | 60,888 | $ | 61 | (939) | $ | (2,316) | $ | 374,737 | $ | (216,705) | $ | 155,777 |
| Common stock issued for share based compensation | 71 | - | - | - | - | - | - | |||||
| Common stock withheld for employee payroll taxes | - | - | - | - | (2) | - | (2) | |||||
| Share-based compensation | - | - | - | - | 672 | - | 672 | |||||
| Repurchase of common stock | - | - | (778) | (1,847) | - | - | (1,847) | |||||
| Cancellation of common stock | (1,717) | (2) | 1,717 | 4,163 | - | (4,161) | - | |||||
| Net loss | - | - | - | - | - | (11,435) | (11,435) | |||||
| Balances, September 30, 2024 | 59,242 | $ | 59 | - | $ | - | $ | 375,407 | $ | (232,301) | $ | 143,165 |
3
| Common Stock | Treasury Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders' Equity |
||||||||
| Shares | Amount | Shares | Amount | |||||||||
| Balances, December 31, 2022 | 61,010 | $ | 61 | - | $ | - | $ | 369,938 | $ | (153,603) | $ | 216,396 |
| Common stock issued for share-based compensation | 25 | - | - | - | - | - | - | |||||
| Common stock withheld for employee payroll taxes | - | - | - | - | (70) | - | (70) | |||||
| Share-based compensation | - | - | - | - | 511 | - | 511 | |||||
| Net loss | - | - | - | - | - | (6,134) | (6,134) | |||||
| Balances, March 31, 2023 | 61,035 | $ | 61 | - | $ | - | $ | 370,379 | $ | (159,737) | $ | 210,703 |
| Common stock issued for share-based compensation | 159 | - | - | - | - | - | - | |||||
| Common stock withheld for employee payroll taxes | - | - | - | - | (105) | - | (105) | |||||
| Share-based compensation | - | - | - | - | 816 | - | 816 | |||||
| Non-cash repurchase of liability awards | - | - | - | - | 653 | - | 653 | |||||
| Liability redemption associated with business acquisition | 35 | - | - | - | 120 | - | 120 | |||||
| Net loss | - | - | - | - | - | (5,699) | (5,699) | |||||
| Balances, June 30, 2023 | 61,229 | $ | 61 | - | $ | - | $ | 371,863 | $ | (165,436) | $ | 206,488 |
| Common stock issued for share-based compensation | 80 | - | - | - | - | - | - | |||||
| Common stock withheld for employee payroll taxes | - | - | - | - | (12) | - | (12) | |||||
| Share-based compensation | - | - | - | - | 938 | - | 938 | |||||
| Net loss | - | - | - | - | - | (7,349) | (7,349) | |||||
| Balances, September 30, 2023 | 61,309 | $ | 61 | - | $ | - | $ | 372,789 | $ | (172,785) | $ | 200,065 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Cash flows from operating activities: | ||||
| Net loss | $ | (26,168) | $ | (19,182) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||
| Depreciation and amortization | 12,329 | 12,477 | ||
| Share-based compensation | 2,104 | 2,452 | ||
| Estimated credit (recoveries) losses | (210) | 681 | ||
| Loss on asset disposition | 440 | 85 | ||
| Change in value of marketable securities | (1,041) | (981) | ||
| Impairment loss on operating lease right-of-use assets | 220 | - | ||
| Changes in operating assets and liabilities: | ||||
| Accounts and notes receivable | (2,026) | 518 | ||
| Inventory | 16,827 | 2,691 | ||
| Prepaid expenses and other assets | 619 | (510) | ||
| Accounts payable and accrued liabilities | (3,488) | 6,352 | ||
| Operating leases | (61) | 88 | ||
| Payroll and payroll tax liabilities | 185 | (2,644) | ||
| Customer deposits | (2,728) | 588 | ||
| Sales tax payable | 125 | 162 | ||
| Net cash and cash equivalents (used in) provided by operating activities | (2,873) | 2,777 | ||
| Cash flows from investing activities: | ||||
| Acquisitions, net of cash acquired | - | (3,050) | ||
| Purchase of marketable securities | (41,878) | (85,768) | ||
| Maturities of marketable securities | 50,344 | 83,398 | ||
| Purchase of property and equipment | (1,880) | (5,995) | ||
| Proceeds from disposals of assets | 131 | 235 | ||
| Net cash and cash equivalents provided by (used in) investing activities | 6,717 | (11,180) | ||
| Cash flows from financing activities: | ||||
| Principal payments on long term debt | - | (50) | ||
| Common stock withheld for employee payroll taxes | (129) | (187) | ||
| Common stock repurchased | (6,036) | - | ||
| Net cash and cash equivalents used in financing activities | (6,165) | (237) | ||
| Net decrease in cash and cash equivalents | (2,321) | (8,640) | ||
| Cash and cash equivalents at the beginning of period | 29,757 | 40,054 | ||
| Cash and cash equivalents at the end of period | $ | 27,436 | $ | 31,414 |
| Supplemental cash flow disclosures and non-cash investing and financing transactions: | ||||
| Cash paid for interest | $ | 70 | $ | 6 |
| Cash paid for income taxes | $ | 44 | $ | 93 |
| Right-of use assets obtained in exchange for new or modified operating lease liabilities | $ | 3,506 | $ | 4,173 |
| Cancellation of common stock | $ | 6,036 | $ | - |
| Purchase of property and equipment accrued in accounts payable | $ | 11 | $ | 355 |
| Non-cash repurchase of liability awards | $ | - | $ | 653 |
| Liability redemption associated with business acquisition | $ | - | $ | 120 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
1. GENERAL
GrowGeneration Corp. (together with its direct and indirect wholly-owned subsidiaries, collectively "GrowGeneration" or the "Company") was incorporated in Colorado in 2014. Since then, GrowGeneration has grown from a small chain of specialty retail hydroponic and organic garden centers to a multifaceted business with diverse assets. Today, GrowGeneration operates two major lines of business: its Cultivation and Gardening segment, composed of the Company's hydroponic and organic gardening business; and its Storage Solutions segment, composed of the Company's benching, racking, and storage solutions business.
As of September 30, 2024, GrowGeneration has 31 retail locations across 12 states in the U.S. The Company also operates an online superstore for cultivators at growgeneration.com, as well as a wholesale business for resellers, HRG Distribution, and a benching, racking, and storage solutions business, Mobile Media or MMI.
Basis of Presentation
The accompanying interim 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 the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 ("2023 Form 10-K"). There were no significant changes to the Company's significant accounting policies as disclosed in the 2023 Form 10-K. The results reported in these unaudited Condensed Consolidated Financial Statements are not necessarily indicative of results for the full fiscal year.
All amounts included in the accompanying footnotes to the Condensed Consolidated Financial Statements, except per share data, are in thousands (000).
Reclassifications
Certain amounts in the prior period Condensed Consolidated Financial Statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported net loss within the Condensed Consolidated Statements of Operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.
2. RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, the Financial Accounting Standard Board ("FASB") or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update ("ASU"). The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. In addition to the accounting pronouncements discussed below, no other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material effect on the Company's consolidated financial statements or disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures ("ASU 2023-07"), which requires an enhanced disclosure of segments on an annual and interim basis, including the title of the chief operating decision maker, significant segment expenses, and the composition of other segment items for each segment's reported profit. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods
6
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
within fiscal years beginning after December 15, 2024. Early adoption is permitted, and adoption of ASU 2023-07 should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of this standard and will adopt this guidance in the fourth quarter of 2024 to provide additional disclosures as required.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures("ASU 2023-09"), expanding the disclosures requirement for income taxes primarily by requiring more detailed disclosure for income taxes paid and the effective tax rate reconciliation. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and adoption of ASU 2023-09 can be applied prospectively or retrospectively. The Company is currently evaluating the impact of this standard.
3. FAIR VALUE MEASUREMENTS
Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
•Level 1-Quoted prices in active markets for identical assets or liabilities.
•Level 2-Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
•Level 3-Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the outstanding balance net of reserves for expected credit loss. The marketable securities are classified as available-for-sale and are carried at fair value based on quoted market prices. Changes in fair value of marketable securities, principally derived from accretion of discounts, were $0.3 million and $1.0 million for the three and nine months ended September 30, 2024, respectively, and were $0.5 million and $1.0 million for the three and nine months ended September 30, 2023. Changes in fair value of marketable securities are included in Interest income on the Condensed Consolidated Statements of Operations.
| Level |
September 30, 2024 |
December 31, 2023 |
|||
| Cash equivalents | 1 | $ | 17,583 | $ | 17,300 |
| Marketable securities | 2 | $ | 27,787 | $ | 35,212 |
4. REVENUE RECOGNITION
Disaggregation of Revenues
Net sales are disaggregated by the Company's segments, which represent its principal lines of business, as well as by major product line, including proprietary brands, non-proprietary brands, and commercial fixtures, and by product type, including consumable and durable products. Refer to Note 15, Segments, for disaggregated revenue disclosures.
7
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Contract Assets and Liabilities
Depending on the timing of when title of product transfers to a customer and when a customer makes payments for such product, the Company recognizes an accounts receivable (contract asset) or a customer deposit (contract liability). The opening and closing balances of the Company's accounts receivables and customer deposits were as follows:
| Accounts Receivable, Net | Customer Deposits | |||
| Opening balance, January 1, 2024 | $ | 8,895 | $ | 5,359 |
|
Closing balance, September 30, 2024
|
10,324 | 2,631 | ||
| Increase (decrease) | $ | 1,429 | $ | (2,728) |
| Opening balance, January 1, 2023 | $ | 8,336 | $ | 4,338 |
|
Closing balance, September 30, 2023
|
8,351 | 4,926 | ||
| Increase | $ | 15 | $ | 588 |
Of the total amount of customer deposit liability as of January 1, 2024, $4.4 million was reported as revenue during the nine months ended September 30, 2024. Of the total amount of customer deposit liability as of January 1, 2023, $2.9 million was reported as revenue during the nine months ended September 30, 2023.
Notes receivable at September 30, 2024 and December 31, 2023 were as follows:
|
September 30, 2024 |
December 31, 2023 |
|||
| Notes receivable | $ | 1,106 | $ | 2,031 |
| Allowance for credit losses | - | (1,732) | ||
| Notes receivable, net | $ | 1,106 | $ | 299 |
The following table summarizes changes in notes receivable balances that have been deemed impaired.
|
September 30, 2024 |
December 31, 2023 |
|||
| Notes receivable | $ | - | $ | 1,732 |
| Allowance for credit losses | - | (1,732) | ||
| Notes receivable, net | $ | - | $ | - |
During the nine months ended September 30, 2024, the Company received a $0.3 million settlement related to a $1.5 million note receivable, which had been fully reserved as of December 31, 2023. Refer to Note 13, Commitment and Contingencies, for additional information regarding the settlement.
8
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2024 and December 31, 2023 consisted of the following:
|
September 30, 2024 |
December 31, 2023 |
|||
| Vehicles | $ | 2,524 | $ | 2,558 |
| Building and land | 2,121 | 2,121 | ||
| Leasehold improvements | 12,049 | 11,920 | ||
| Furniture, fixtures and equipment | 13,059 | 14,364 | ||
| Capitalized software | 16,250 | 16,085 | ||
| Construction-in-progress | 468 | - | ||
| Total property and equipment, gross | 46,471 | 47,048 | ||
| Accumulated depreciation and amortization | (25,352) | (19,996) | ||
| Property and equipment, net | $ | 21,119 | $ | 27,052 |
Depreciation and amortization expense related to property and equipment was $3.3 million and $7.3 million for the three and nine months ended September 30, 2024, respectively. Depreciation and amortization expense related to property and equipment was $2.5 million and $5.8 million for the three and nine months ended September 30, 2023, respectively. In conjunction with the Company's restructuring activities as discussed in Note 16, Restructuring, the Company reassessed and shortened the estimated useful life of certain capitalized software assets, which resulted in a $1.5 million increase to depreciation and amortization expense related to property and equipment in the three and nine months ended September 30, 2024. Refer to Note 16, Restructuring, for additional information on the restructuring activities.
6. GOODWILL AND INTANGIBLE ASSETS
The carrying value of goodwill by segment was as follows:
| Cultivation and Gardening | Storage Solutions | Total | ||||
| Balance as of December 31, 2023 | $ | 5,920 | $ | 1,605 | $ | 7,525 |
| Balance as of September 30, 2024 | $ | 5,920 | $ | 1,605 | $ | 7,525 |
Accumulated impairment for goodwill was $125.9 million as of September 30, 2024 and December 31, 2023.
The changes in intangible assets by segment for the nine months ended September 30, 2024 were as follows:
| Cultivation and Gardening | Storage Solutions | Total | ||||
| Balance as of December 31, 2023 | $ | 13,501 | $ | 2,679 | $ | 16,180 |
| Amortization | (4,442) | (586) | (5,028) | |||
| Balance as of September 30, 2024 | $ | 9,059 | $ | 2,093 | $ | 11,152 |
9
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Intangible assets on the Condensed Consolidated Balance Sheets consisted of the following:
| September 30, 2024 | December 31, 2023 | |||||||||||
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||
| Trade names | $ | 28,198 | $ | (20,572) | $ | 7,626 | $ | 28,198 | $ | (16,488) | $ | 11,710 |
| Patents, trademarks | 69 | (69) | - | 69 | (69) | - | ||||||
| Customer relationships | 13,192 | (9,693) | 3,499 | 13,192 | (8,813) | 4,379 | ||||||
| Non-competes | 864 | (837) | 27 | 864 | (773) | 91 | ||||||
| Intellectual property | 1,136 | (1,136) | - | 1,136 | (1,136) | - | ||||||
| Total | $ | 43,459 | $ | (32,307) | $ | 11,152 | $ | 43,459 | $ | (27,279) | $ | 16,180 |
Amortization expense was $1.7 million and $5.0 million for the three and nine months ended September 30, 2024, respectively. Amortization expense was $2.2 million and $6.9 million for the three and nine months ended September 30, 2023, respectively.
Future amortization expense as of September 30, 2024 was as follows:
| 2024 (remainder of the year) | $ | 1,677 |
| 2025 | 6,339 | |
| 2026 | 2,231 | |
| 2027 | 799 | |
| 2028 | 82 | |
| Thereafter | 24 | |
| Total | $ | 11,152 |
7. INCOME TAXES
For the nine months ended September 30, 2024, the effective tax rate was 0.2%, compared to 0.4% for the nine months ended September 30, 2023. The effective tax rate for each of the nine months ended September 30, 2024 and 2023 was lower than the U.S. federal statutory rate of 21.0% primarily due to the Company's valuation allowance against deferred tax assets. As of September 30, 2024, the Company concluded that its deferred tax assets are not expected to be realizable, based on positive and negative evidence, therefore it has assigned a full valuation allowance against them.
8. LEASES
The right-of-use assets and corresponding liabilities related to the Company's operating leases were as follows:
|
September 30, 2024 |
December 31, 2023 |
|||
| Operating leases right-of-use assets | $ | 36,453 | $ | 39,933 |
| Current maturities of operating lease liability | $ | 7,523 | $ | 8,021 |
| Operating lease liability, net of current maturities | 31,620 | 34,448 | ||
| Total lease liability | $ | 39,143 | $ | 42,469 |
10
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
The weighted-average remaining lease terms and weighted-average discount rates for operating leases were as follows:
| September 30, | ||||
| 2024 | 2023 | |||
| Weighted average remaining lease term | 5.7 years | 6.1 years | ||
| Weighted average discount rate | 6.2 | % | 6.0 | % |
Lease expense is recorded within the Company's Condensed Consolidated Statements of Operations based upon the nature of the operating lease right-of-use assets. Where assets are used to directly serve our customers, such as retail locations and distribution centers, lease costs are recorded in Store operations and other operational expenses. Facilities and assets which serve management and support functions are expensed through Selling, general, and administrative.
The Company's subleases generally do not relieve it of its primary obligations under the corresponding head lease. As a result, the Company accounts for the head lease based on the original assessment at inception. Additionally, the Company determines if the sublease arrangement is either a sales-type, direct financing, or operating lease at inception. The Company's subleases are all operating leases related to the sublease of a closed retail location. The Company recognizes sublease income within Store operations and other operational expenses.
If the total remaining lease cost on the head lease for the term of the sublease is greater than the anticipated sublease income, the right-of-use asset is assessed for impairment. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. In conjunction with the Company's restructuring activities as discussed in Note 16, Restructuring, the Company assessed and impaired the right-of-use assets of certain closed retail locations, which resulted in an impairment loss of $0.2 million in the three and nine months ended September 30, 2024. Refer to Note 16, Restructuring, for additional information on the restructuring activities.
The components of lease costs were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Operating lease costs | $ | 2,441 | $ | 2,738 | $ | 7,535 | $ | 8,434 |
| Variable lease costs | 641 | 176 | 1,656 | 1,466 | ||||
| Short-term lease costs | 102 | 98 | 295 | 241 | ||||
| Sublease income | (276) | (272) | (827) | (877) | ||||
| Total operating lease costs | $ | 2,908 | $ | 2,740 | $ | 8,659 | $ | 9,264 |
Future maturities of the Company's operating lease liabilities and receipts from subleases as of September 30, 2024 were as follows:
| Lease Payments | Sublease Receipts | |||
| 2024 (remainder of the year) | $ | 2,458 | $ | (204) |
| 2025 | 9,525 | (1,187) | ||
| 2026 | 8,315 | (1,222) | ||
| 2027 | 6,491 | (1,257) | ||
| 2028 | 6,022 | (1,294) | ||
| Thereafter | 13,595 | (2,801) | ||
| Total lease payments (receipts) | 46,406 | (7,965) | ||
| Less: imputed interest | (7,263) | |||
|
Operating lease liability as of September 30, 2024
|
$ | 39,143 |
11
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Supplemental and other information related to leases was as follows:
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flow from operating leases | $ | 7,574 | $ | 8,321 |
9. EARNINGS PER SHARE
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive loss per share computation for the three months ended September 30, 2024 and 2023:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net loss | $ | (11,435) | $ | (7,349) | $ | (26,168) | $ | (19,182) |
| Weighted average shares outstanding, basic | 59,268 | 61,272 | 60,479 | 61,127 | ||||
| Effect of dilutive outstanding restricted stock units, stock options, and warrants | - | - | - | - | ||||
| Adjusted weighted average shares outstanding, dilutive | 59,268 | 61,272 | 60,479 | 61,127 | ||||
| Basic loss per share | $ | (0.19) | $ | (0.12) | $ | (0.43) | $ | (0.31) |
| Dilutive loss per share | $ | (0.19) | $ | (0.12) | $ | (0.43) | $ | (0.31) |
Diluted loss per share calculations for the three and nine months ended September 30, 2024 excluded 0.7 million and 0.8 million of non-vested restricted stock units, respectively. In addition, for each of the three and nine months ended September 30, 2024, 0.5 million shares of common stock issuable upon exercise of stock options were excluded that would have been anti-dilutive. Diluted loss per share calculations for the three and nine months ended September 30, 2023 excluded 1.1 million and 1.0 million shares of non-vested restricted stock units, respectively. In addition, for each of the three and nine months ended September 30, 2023, 0.6 million shares of common stock issuable upon exercise of stock options, and 33 thousand shares of common stock issuable upon exercise of the stock purchase warrants were excluded that would have been anti-dilutive.
10. SHARE-BASED PAYMENTS
The Company maintains long-term incentive plans for employees, non-employee members of its Board of Directors (the "Board"), and consultants. The plans allow the Company to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, common stock warrants, or a combination of awards (collectively, "share-based awards").
The Company accounts for share-based payments through the measurement and recognition of compensation expense for share-based awards made to employees, non-employee members of the Board, and consultants of the Company, including stock options and restricted stock units. The Company recorded share-based compensation expense of $0.7 million and $2.1 million in the three and nine months ended September 30, 2024, respectively, and $0.9 million and $2.5 million for the three and nine months ended September 30, 2023, respectively.
Restricted Stock Units
The Company issues restricted stock units to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest annually or biannually over threeto four years following the date of grant, subject to the employee's continuing employment as of that date. Restricted stock units are valued using the market value on the grant date.
12
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Restricted stock unit activity for the nine months ended September 30, 2024 is presented in the following table:
| Units | Weighted Average Grant Date Fair Value | ||
|
Nonvested as of December 31, 2023
|
904,834 | $ | 5.23 |
| Granted | 672,375 | $ | 2.29 |
| Vested | (329,417) | $ | 5.52 |
| Forfeited | (108,250) | $ | 4.05 |
|
Nonvested as of September 30, 2024
|
1,139,542 | $ | 3.53 |
As of September 30, 2024, the Company had approximately $2.7 million of unrecognized share-based compensation related to restricted stock units, which are expected to be recognized over a weighted average period of approximately 1.9 years.
Stock Options
Stock option activity for the nine months ended September 30, 2024 is presented in the following table:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Weighted Average Grant Date Fair Value | |||
|
Outstanding as of December 31, 2023
|
577,998 | $ | 4.01 | 0.95 | $ | 2.25 |
| Granted | - | - | - | - | ||
| Exercised | - | - | - | - | ||
| Forfeited or expired | (129,832) | 3.65 | - | 2.20 | ||
|
Outstanding as of September 30, 2024
|
448,166 | $ | 4.11 | 0.25 | $ | 2.26 |
|
Vested and exercisable as of September 30, 2024
|
448,166 | $ | 4.11 | 0.25 | $ | 2.26 |
Liability Awards
In August 2022, the Company issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480, Distinguishing Liabilities from Equity, and ASC 718, Compensation-Stock Compensation. These awards entitled the employees to receive an equity award with a specified dollar value of common stock on future dates ranging from June 15, 2023, through June 15, 2025. The awards generally vested over three years subject to the employee's continued employment.
On June 15, 2023, the three employees subject to these awards entered into new employment agreements which superseded the prior agreements and removed the liability awards from their compensation package. In accordance with ASC 718-20-35-2A through 718-20-35-9, these awards were evaluated and accounted for as modified awards. In the nine months ended September 30, 2023, the liability of $0.7 million was relieved to additional paid-in capital and no awards were outstanding as of September 30, 2024 and December 31, 2023.
11. STOCKHOLDERS' EQUITY
On March 20, 2024, the Board authorized a share repurchase program, whereby the Company could repurchase up to $6.0 million worth of its common stock in open market transactions pursuant to Rule 10b-18 of the Exchange Act and a 10b5-1 trading plan. The program began on April 1, 2024. This share repurchase program was intended to enhance long-term shareholder value. The program did not obligate the Company to acquire any specific number of shares or to acquire any shares over any specific period of time. The timing and amount of any repurchases was dependent upon factors such as the stock price, trading volumes, market conditions, and regulatory requirements. The stock repurchase program could be amended, suspended, or discontinued at any time by the Company.
13
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
During the three and nine months ended September 30, 2024, respectively, the Company repurchased 0.8 million and 2.5 million shares of common stock at an average price of $2.36 and $2.38 per share exclusive of incremental direct costs. As of September 30, 2024, the Company completed all purchases available under the stock repurchase program. The Company recognized the common stock repurchased as treasury stock at the amount paid to repurchase its shares, including the incremental direct costs to repurchase the common stock, as a reduction to stockholders' equity on the Condensed Consolidated Balance Sheets.
The Company retired 1.7 million and 2.5 million shares of treasury stock under the share repurchase program in the three and nine months ended September 30, 2024, respectively. The shares were returned to the status of authorized but unissued shares. The retirement of treasury stock is recognized as a deduction from common stock for the shares' par value and any excess cost over par value is recognized as a deduction from retained earnings. Treasury stock is retired on a first in, first out basis.
12. ACQUISITIONS
The Company's acquisition strategy has been primarily to acquire (i) well-established, profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence; and (ii) proprietary brands.
Acquisitions during the ninemonths ended September 30, 2024
The Company had no acquisitions during the nine months ended September 30, 2024.
Acquisitions during the ninemonths ended September 30, 2023
On May 23, 2023, the Company purchased substantially all of the assets of Southside Garden Supply ("SGS"), a two-store chain of indoor/outdoor garden centers in Alaska. The total consideration for the purchase of the SGS assets was approximately $2.0 million, including $1.9 million in cash and an indemnity holdback of $0.1 million. The SGS asset acquisition also included acquired goodwill of approximately $0.6 million, which represented the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. SGS was included in the Company's Cultivation and Gardening segment.
Additionally, the Company made other, individually immaterial acquisitions during the nine months ended September 30, 2023. Total consideration for these purchases was approximately $1.2 million, including $1.1 million paid in cash and indemnity holdbacks of less than $0.1 million. These individually immaterial acquisitions also included aggregate acquired goodwill of approximately $0.3 million, which represented the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. These acquisitions were included in the Company's Cultivation and Gardening segment.
The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2023.
| SGS | Other | Total | ||||
| Inventory | $ | 720 | $ | 867 | $ | 1,587 |
| Prepaids and other current assets | 292 | 1 | 293 | |||
| Furniture and equipment | - | 47 | 47 | |||
| Operating lease right-of-use asset | 612 | 620 | 1,232 | |||
| Operating lease liability | (612) | (620) | (1,232) | |||
| Customer relationships | 440 | - | 440 | |||
| Goodwill | 577 | 253 | 830 | |||
| Total | $ | 2,029 | $ | 1,168 | $ | 3,197 |
The table below represents the consideration paid for the net assets acquired in business combinations during 2023.
| SGS | Other | Total | ||||
| Cash | $ | 1,922 | $ | 1,128 | $ | 3,050 |
| Indemnity holdback | 107 | 40 | 147 | |||
| Total | $ | 2,029 | $ | 1,168 | $ | 3,197 |
14
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
13. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company has been, and may again become involved in legal proceedings arising in the ordinary course of its business, including the initiation and defense of proceedings related to contract and employment disputes. It is the Company's opinion that these claims individually and in the aggregate are not expected to have a material adverse effect on its financial condition, results of operations or cash flows.
In December 2021, the Company was sued in the U.S. District Court for the Southern District of Texas related to a Promissory Note & Asset Acquisition Rights Option ("Note & Option") with TGC Systems, LLC ("Total Grow"). The case was dismissed and the parties submitted the matter to arbitration pursuant to the arbitration clause of the Note & Option. Among other claims, Total Grow alleged that the Company was liable to Total Grow for failing to consummate the acquisition of Total Grow by the Company. The Company asserted counterclaims for repayment of $1.5 million in principal loaned by the Company to Total Grow pursuant to the Note & Option, plus interest and certain costs. In July 2023, the arbitrator rendered an arbitration award denying all of Total Grow's claims and defenses and awarding the Company more than $2.0 million in total, consisting of principal, interest, and certain costs. Total Grow voluntarily filed for bankruptcy in October 2023. In February 2024, the Company received $0.3 million from the bankruptcy proceedings, which it recorded as a recovery on the $1.5 million Note & Option. The remainder of the Note & Option, which were fully reserved, were written off during the nine months ended September 30, 2024.
There can be no assurance that future developments related to pending claims or claims filed in the future, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material effect on the Company's financial condition, results of operations or cash flows. The Company believes that its assessment of contingencies is reasonable and that the related accruals, in the aggregate, are adequate; however, there can be no assurance that the final resolution of these matters will not have a material effect on the Company's financial condition, results of operations or cash flows.
Indemnifications
In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of September 30, 2024, the Company did not have any liabilities associated with indemnities.
In addition, the Company, as permitted under Colorado law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, in each case, as amended to date, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company's request in such capacity. The duration of these indemnifications varies. The Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.
14. RELATED PARTIES
The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner. The firm provides certain legal services. Amounts paid to that firm in total were $0.1 million and $0.2 million for the three and nine months ended September 30, 2024, respectively, and were immaterial for the three and nine months ended September 30, 2023. As of September 30, 2024 and December 31, 2023, there was an immaterial amount outstanding due to the firm.
15
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
15. SEGMENTS
During the fourth quarter of 2023, the Company realigned its operating and reportable segments to correspond with changes to its operating model, management structure, and internal reporting and to better align with how the chief operating decision maker ("CODM") makes operating decisions, allocates resources, and assesses performance. Accordingly, the Company identified two operating segments, each its own reportable segment, based on its major lines of business: the Cultivation and Gardening segment, composed of the Company's hydroponic and organic gardening business; and the Storage Solutions segment, composed of the Company's benching, racking, and storage solutions business. Comparative prior period disclosures have been recast to conform to the current segment presentation.
In addition to sales by operating segment, which represent the Company's principal lines of business, the CODM evaluates the Company's operations by regularly reviewing sales by major product line, including proprietary brands, non-proprietary brands, and commercial fixtures, and by product type, including consumable and durable products. During the first quarter of 2024, the Company reviewed and reclassified certain item level designations as consumable or durable products. Comparative prior period disclosures have been recast to conform to the current presentation.
Disaggregated revenue by segment is presented in the following tables:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| Net sales | 2024 | 2023 | 2024 | 2023 | ||||
| Cultivation and Gardening | ||||||||
| Proprietary brand sales | $ | 9,856 | $ | 9,304 | $ | 29,513 | $ | 27,631 |
| Non-proprietary brand sales | 31,521 | 38,731 | 101,082 | 125,082 | ||||
| Total Cultivation and Gardening | 41,377 | 48,035 | 130,595 | 152,713 | ||||
| Storage Solutions | ||||||||
| Commercial fixture sales | 8,629 | 7,643 | 20,835 | 23,717 | ||||
| Total Storage Solutions | 8,629 | 7,643 | 20,835 | 23,717 | ||||
| Total | $ | 50,006 | $ | 55,678 | $ | 151,430 | $ | 176,430 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| Net sales | 2024 | 2023 | 2024 | 2023 | ||||
| Cultivation and Gardening | ||||||||
| Consumables | $ | 30,338 | $ | 35,319 | $ | 94,196 | $ | 106,401 |
| Durables | 11,039 | 12,716 | 36,399 | $ | 46,312 | |||
| Total Cultivation and Gardening | 41,377 | 48,035 | 130,595 | $ | 152,713 | |||
| Storage Solutions | ||||||||
| Durables | 8,629 | 7,643 | 20,835 | $ | 23,717 | |||
| Total Storage Solutions | 8,629 | 7,643 | 20,835 | $ | 23,717 | |||
| Total | $ | 50,006 | $ | 55,678 | $ | 151,430 | $ | 176,430 |
16
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Selected information by segment is presented in the following tables:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net sales | ||||||||
| Cultivation and Gardening | $ | 41,377 | $ | 48,035 | $ | 130,595 | $ | 152,713 |
| Storage Solutions | 8,629 | 7,643 | 20,835 | 23,717 | ||||
| Total net sales | 50,006 | 55,678 | 151,430 | 176,430 | ||||
| Gross profit | ||||||||
| Cultivation and Gardening | 7,170 | 12,644 | 28,431 | 39,210 | ||||
| Storage Solutions | 3,640 | 3,544 | 9,164 | 10,404 | ||||
| Total gross profit | 10,810 | 16,188 | 37,595 | 49,614 | ||||
| Segment operating (loss) profit | ||||||||
| Cultivation and Gardening | (1,548) | 2,306 | 1,525 | 6,574 | ||||
| Storage Solutions | 2,326 | 2,224 | 5,194 | 6,752 | ||||
| Total segment operating profit | 778 | 4,530 | 6,719 | 13,326 | ||||
| Corporate expenses | ||||||||
| Selling, general, and administrative | 7,405 | 7,582 | 22,417 | 21,923 | ||||
| Estimated credit losses (recoveries) | 272 | 257 | (210) | 681 | ||||
| Depreciation and amortization | 4,972 | 4,721 | 12,329 | 12,477 | ||||
| Impairment loss | 220 | - | 220 | - | ||||
| Loss from operations | $ | (12,091) | $ | (8,030) | $ | (28,037) | $ | (21,755) |
The Company does not evaluate segments by assets as it is not practical and does not inform any of its decision making processes. The CODM neither reviews nor requests this information.
16. RESTRUCTURING
On July 22, 2024, the Company announced a strategic restructuring plan focused on long-term profitability and advancing growth initiatives in key areas of its Gardening and Cultivation segment such as its proprietary brands, commercial sales, and e-commerce business. The restructuring plan primarily includes reductions in cost structure by closing and consolidating twelve redundant or underperforming retail locations, workforce reductions, and other operational improvements in inventory management, sales and marketing, and administrative activities.
The Company's restructuring and restructuring related charges consists of inventory disposal costs, retail location closure costs including related contract termination costs and fixed asset disposals, employee termination benefits, asset impairments including the impairment of operating lease right-of-use assets, and other associated costs.
17
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Since the restructuring activities were announced in July 2024, the Company incurred aggregate restructuring and restructuring-related costs of $2.1 million, presented on the Condensed Consolidated Statements of Operations in the three and nine months ended September 30, 2024 as follows:
| Restructuring | ||
| Cultivation and Gardening segment: | ||
|
Cost of sales(1)
|
$ | 1,039 |
| Gross profit | (1,039) | |
|
Store operations and other operational expenses (2)
|
658 | |
| Segment operating loss | (1,697) | |
| Corporate expenses: | ||
|
Selling, general, and administrative (3)
|
88 | |
|
Impairment loss (4)
|
220 | |
|
Other expense (5)
|
50 | |
| Total restructuring and restructuring related charges | $ | (2,055) |
|
(1)Includes inventory disposal costs
|
||
|
(2)Costs consist of retail location closure costs and employee termination benefits
|
||
|
(3)Includes employee termination benefits and other associated costs
|
||
|
(4)Consists of asset impairments for operating lease right-of-use assets
|
||
|
(5)Includes non-operating losses related to retail location closures
|
In conjunction with the Company's restructuring activities related to operational and administrative improvements, the Company reassessed and shortened the estimated useful life of certain capitalized software assets, which resulted in an $1.5 million increase to depreciation and amortization expense related to property and equipment in the three and nine months ended September 30, 2024. Additionally, certain facilities costs related to closed retail locations for which the Company is pursuing sublease arrangements will be paid over the remaining terms which extend through 2032.
The liabilities associated with restructuring costs are included in Accrued liabilities and Payroll and payroll tax liabilities on the Condensed Consolidated Balance Sheets. Activities related to liabilities incurred under the restructuring plan are as follows:
| Retail Location Closures | Termination Benefits | Other Associated Costs | Total | |||||
| Balance as of January 1, 2024 | $ | - | $ | - | $ | - | $ | - |
| Additions | 556 | 211 | 29 | 796 | ||||
| Payments and other adjustments | (404) | (73) | (29) | (506) | ||||
| Balance as of September 30, 2024 | $ | 152 | $ | 138 | $ | - | $ | 290 |
Overall, the Company expects to incur a total of approximately $2.4 million in restructuring and restructuring-related costs, including the $2.1 million previously incurred. The remainder of the expected charges primarily relate to corporate operational and administrative contract terminations and other associated costs. The Company expects that these restructuring activities will be substantially completed by the end of the first quarter of 2025.
18
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 our Condensed Consolidated Financial Statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 13, 2024. We caution readers that this Quarterly Report of GrowGeneration Corp. on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. Forward-looking statements generally can be identified through the use of words such as "guidance," "outlook," "projected," "may," "likely," "anticipates," "believes," "expects," "estimates," "plans," "intends," "objectives," and similar expressions. These statements reflect management's best judgment based on factors known at the time of such statements. Actual events or results may differ materially from those discussed herein. The forward-looking statements contained in this report have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements. The assumptions used for purposes of the forward-looking statements contained in this report represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements, except as required by federal securities laws. There may be additional risks, uncertainties, and other factors that we do not currently view as material or that are not necessarily known.
OVERVIEW
GrowGeneration Corp. (together with all of its direct and indirect wholly owned subsidiaries, collectively "GrowGeneration" or the "Company") was incorporated in Colorado in 2014. Since then, GrowGeneration has grown from a small chain of specialty retail hydroponic and organic garden centers to a multifaceted business with diverse assets. Today, GrowGeneration operates two major lines of business: its Cultivation and Gardening segment, composed of the Company's hydroponic and organic gardening business; and its Storage Solutions segment, composed of the Company's benching, racking, and storage solutions business.
MARKETS AND BUSINESS SEGMENTS
During the fourth quarter of 2023, we realigned our operating and reportable segments to correspond with changes to our operating model, management structure, and internal reporting and to better align with how the chief operating decision maker makes operating decisions, allocates resources, and assesses performance. Accordingly, we identified two operating segments, each its own reportable segment, based on our major lines of business: the Cultivation and Gardening segment and the Storage Solutions segment. Comparative prior period disclosures have been recast to conform to the current segment presentation.
We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, and store operations and other operational expenses within each segment. Selling, general, and administrative expenses, such as administrative and management expenses, salaries, and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses, and technology costs, are not allocated to specific segments and are reflected in the enterprise results.
Cultivation and Gardening Segment
We are a leading developer, marketer, retailer, and distributor of products for both indoor and outdoor hydroponic and organic gardening. Our main business strategy within the hydroponic and organic gardening sector has been to consolidate assets within the fragmented hydroponics industry to leverage efficiencies of a centralized organization.
We sell a variety of hydroponic and organic gardening related products, including nutrients, additives, growing media, lighting, environmental control systems, and other products for indoor and outdoor cultivation. Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, Ion lights, The Harvest Company, and more, the development and expansion of which are a key component of the Company's growth strategy. Our target customers include commercial and craft growers, as well as home growers, in the plant-based medicine market, and commercial and home gardeners who grow organic herbs, fruits, and vegetables. Additionally, through our brand HRG Distribution, we distribute many of our products, including our proprietary
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products, to customers that are wholesalers, resellers, and retailers in the specialty retail hydroponic and organic gardening industry.
We make our products available to growers through a variety of channels, including hydroponic retail locations, a commercial sales teams serving commercial cultivators, an online platform for cultivators at growgeneration.com, and a wholesale business, HRG Distribution, that markets to resellers in both the hydroponic and traditional gardening markets. Management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 31 retail locations across 12 states as of September 30, 2024.
Storage Solutions Segment
Our Storage Solutions business, branded as "Mobile Media" or "MMI," provides customized storage solutions designed to enhance profitability, productivity, and efficiency for our customers by allowing them to save space and increase storage capacity. We cater to diverse markets with our products and services, including agriculture, retail, warehousing, office and administrative, food service, hospitality, golf and country clubs, and more. Our products include high-density mobile storage systems, static shelving, and other accessories such as desks, lockers, safes, and secured storage, offering a solution for every storage need. MMI also offers a wide variety of services, including site surveys, floor plan designs, capacity analysis, seismic calculations, permitting, and installation, in order to provide a comprehensive, turnkey solution for customers. Based in the Hudson Valley, New York, the MMI team has decades of experience successfully completing projects throughout the U.S., Canada, and Mexico.
Our target customers generally include small, mid-size, and large businesses seeking vertical space-saving solutions that are custom tailored to their space and brand in an effort to maximize storage capacity or gain space in their real estate footprint. Many of our customers are involved in the construction and design industries and include retailers, general contractors, and architects involved in new constructions and remodels for retail stores and fulfillment centers. Our customer base also includes the golf industry, specifically country clubs needing to store more club bags and optimize their existing space, as well as controlled environment agriculture (CEA) operators that cultivate indoors with vertical or rolling benching and racking.
Strategic Restructuring Plan
In July 2024, we announced a strategic restructuring plan focused on long-term profitability and advancing growth initiatives in key areas of our Gardening and Cultivation segment such as our proprietary brands, commercial sales, and e-commerce business. These restructuring plans have primarily included product development costs, digital transformation initiatives, reductions in cost structure by closing and consolidating 12 redundant or underperforming retail locations, in addition to the 7 retail locations closed in the first half of 2024, workforce reductions, and other operational improvements in inventory management, sales and marketing, and administrative activities.
Our restructuring and restructuring related charges consists of inventory disposal costs, retail location closure costs including related contract termination costs and fixed asset disposals, employee termination benefits, asset impairments including the impairment of operating lease right-of-use assets, and other associated costs.
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Since the restructuring activities were announced in July 2024, we have incurred aggregate restructuring and restructuring-related costs of $2.1 million, presented on the Condensed Consolidated Statements of Operations in the three and nine months ended September 30, 2024 as follows:
| Restructuring | ||
| Cultivation and Gardening segment: | ||
|
Cost of sales(1)
|
$ | 1,039 |
| Gross profit | (1,039) | |
|
Store operations and other operational expenses (2)
|
658 | |
| Segment operating loss | (1,697) | |
| Corporate expenses: | ||
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Selling, general, and administrative (3)
|
88 | |
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Impairment loss (4)
|
220 | |
|
Other expense (5)
|
50 | |
| Total restructuring and restructuring related charges | $ | (2,055) |
|
(1)Includes inventory disposal costs
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||
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(2)Costs consist of retail location closure costs including related contract termination costs and employee termination benefits
|
||
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(3)Includes employee termination benefits and other associated costs
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||
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(4)Consists of asset impairments for operating lease right-of-use assets
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||
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(5)Includes non-operating losses related to retail location closures
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In addition to the effect on cost of sales shown above related to inventory disposal costs, we estimate we incurred a $0.9 million loss in gross profit due to inventory discounts offered in conjunction with exiting the twelve retail locations. Also in conjunction with our restructuring activities to support operational and administrative improvements, we reassessed and shortened the estimated useful life of certain capitalized software assets, which resulted in an $1.5 million increase to depreciation and amortization expense related to property and equipment in the three and nine months ended September 30, 2024.
As of September 30, 2024, the outstanding restructuring liability was $0.3 million pertaining to employee termination benefits and contract terminations costs related to retail location closures, which we expect to pay before the end of the first quarter of 2025. However, certain facilities costs related to closed retail locations for which we are pursuing sublease arrangements will be paid over the remaining terms which extend through 2032 at the latest.
Overall, we expect to incur a total of approximately $2.4 million in restructuring and restructuring-related costs, including the $2.1 million previously incurred. The remainder of the expected charges primarily relate to corporate operational and administrative contract terminations and other associated costs. We expect that these restructuring activities will be substantially completed by the end of the first quarter of 2025 and will improve gross profit margin and profitability while generating annualized cost savings of approximately $12.0 million.
Refer to Note 16, Restructuring, of our Notes to Unaudited Condensed Consolidated Financial Statements in this report for additional information regarding restructuring activities.
Growth Strategy
GrowGeneration's main growth strategy has been to consolidate assets within the fragmented hydroponics industry to leverage efficiencies of a centralized organization. As a result, we have built a business that is driven by a wide selection of products, a strong portfolio of proprietary brands, a solutions-driven staff located in strategic markets around the country, and pick, pack, ship distribution and fulfillment capabilities.
Since our founding in 2014, GrowGeneration has acquired or opened numerous specialty hydroponic and organic gardening center locations. Management believes that GrowGeneration has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 31 retail locations across 12 states as of September 30, 2024. GrowGeneration has also acquired several other types of businesses within or complimentary to the hydroponic industry, such as online retailers, proprietary products, our distribution business, HRG, and our benching, racking, and storage solutions business, MMI. GrowGeneration
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regularly seeks and evaluates accretive acquisition opportunities with similar or complimentary businesses to those businesses it already operates.
Our main growth strategies for the Storage Solutions segment include expanding the types of customers and industries to which we sell our Storage Solutions products, including greater penetration in agriculture and golf and country clubs. In March 2024, we announced we had engaged Lake Street Capital to advise and assist in exploring strategic opportunities for our benching, racking, and storage solutions business.
COMPONENTS OF RESULTS OF OPERATIONS
Net Sales
We primarily generate net sales from the selling and distribution of proprietary and non-proprietary brand hydroponic and organic gardening products. In addition to our hydroponic and organic gardening product sales, we sell and install commercial fixtures through our benching, racking, and storage solutions business. Net sales reflect the amount of consideration that we expect to receive, which is derived from a list price reduced by variable consideration, including applicable sales discounts and estimated expected sales returns.
These sales vary by the type of product: consumables, such as nutrients, additives, growing media, and supplies that are subject to regular replenishment; and durables, such as lighting, environmental control systems, and storage solutions. Generally, in new markets where legalization of plant-based medicines is recent and licensors are starting new grow operations, there is an initial increase of durable product purchases for facility build-outs, which decrease over time as growers establish their operations. Thereafter, we tend to observe cultivators focus their purchasing patterns to consumables as the primary source of product need. In more mature markets, the sales patterns tend to favor higher percentages of consumable purchasing in comparison to emerging markets.
We assess the organic growth of our Cultivation and Gardening segment net sales on a same-store basis. We believe that our assessment on a same-store basis represents an important indicator of comparative financial results and provides relevant information to assess our performance. New and acquired stores become eligible for inclusion in the comparable store base if the store has been under our ownership for the entire period in the same-store base periods for which we are including the store. Closed stores become ineligible for inclusion in the comparable store base in the month in which operations cease.
Cost of Sales
Cost of sales includes cost of goods and shipping costs. Cost of goods consists of cost of merchandise, inbound freight, and other inventory-related costs, such as shrinkage costs and lower of cost or market adjustments. Occupancy expenses of our retail locations and distribution centers, which consist of payroll, rent, and other lease required costs, including common area maintenance and utilities, are included as a component of operating expenses within Store operations and other operational expenses in the Condensed Consolidated Statements of Operations.
Gross Profit
We calculate gross profit as net sales less cost of sales. Gross profit excludes depreciation and amortization, which are presented separately as a component of operating expenses in the Condensed Consolidated Statements of Operations. Our gross profit as a percentage of net sales, or gross profit margin, varies with our product mix, in particular the percentage of sales of proprietary brand products compared to non-proprietary brand products and of consumable products compared to durable products. Proprietary products typically have higher gross margins compared to non-proprietary products, and consumable products typically have higher gross margins compared to durable products.
Operating Expenses
Operating expenses are comprised of the following components: store operations and other operational expenses; selling, general, and administrative; estimated credit losses; depreciation and amortization; and impairment losses. Store operations and other operational expenses consist primarily of payroll, rent and utilities, and allocated corporate overhead costs. Selling, general, and administrative expenses consist of corporate salaries, stock-based compensation, advertising and promotions, travel and entertainment, professional fees, insurance, and other corporate administrative costs. Selling, general, and administrative expenses as a percentage of net sales typically does not increase commensurate with an increase in net sales. Our largest expenses are generally related to employee compensation and leases, which are primarily fixed and not variable. Our advertising and marketing expenses are largely controllable and variable depending on the particular market.
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RESULTS OF OPERATIONS
Comparison of the Unaudited Results for the Three Months Ended September 30, 2024 and 2023
The following table presents, for the periods indicated, selected information from our unaudited Condensed Consolidated financial results, including information presented as a percentage of net sales:
| Three Months Ended September 30, | ||||||||||||
| 2024 | 2023 | Year-to-Year Variance | ||||||||||
| Net sales | $ | 50,006 | 100.0 | % | $ | 55,678 | 100.0 | % | $ | (5,672) | (10.2) | % |
| Cost of sales | 39,196 | 78.4 | % | 39,490 | 70.9 | % | (294) | (0.7) | % | |||
| Gross profit | 10,810 | 21.6 | % | 16,188 | 29.1 | % | (5,378) | (33.2) | % | |||
| Operating expenses | 22,901 | 45.8 | % | 24,218 | 43.5 | % | (1,317) | (5.4) | % | |||
| Loss from operations | (12,091) | (24.2) | % | (8,030) | (14.4) | % | (4,061) | (50.6) | % | |||
| Other income | 613 | 1.2 | % | 681 | 1.2 | % | (68) | (10.0) | % | |||
| Net loss before taxes | (11,478) | (23.0) | % | (7,349) | (13.2) | % | (4,129) | (56.2) | % | |||
| Benefit for income taxes | 43 | 0.1 | % | - | - | % | 43 | * | ||||
| Net loss | $ | (11,435) | (22.9) | % | $ | (7,349) | (13.2) | % | $ | (4,086) | (55.6) | % |
| *Percentage is not meaningful. |
Net Sales
Net sales for the three months ended September 30, 2024 were $50.0 million, a decrease of $5.7 million or 10.2% as compared to net sales of $55.7 million for the three months ended September 30, 2023.
The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $41.4 million for the three months ended September 30, 2024 compared to $48.0 million for the three months ended September 30, 2023. This decrease in net sales was primarily due to the fiscal 2023 consolidation of 6 retail locations after September 30, 2023 as well as the closure of 19 retail locations to date in fiscal 2024, which include the 12 redundant or underperforming retail locations consolidated in conjunction with the restructuring plan. Additionally, we estimate that inventory sales discounts related to exiting the 12 restructuring retail locations contributed to reduced net sales of $0.9 million in the three months ended September 30, 2024. Same-store sales increased approximately 12.5%, primarily attributable to commercial sales growth, customer retention in markets where there were retail location closures and improvements in our e-commerce site sales volume. Proprietary brand sales as a percentage of Cultivation and Gardening net sales for the three months ended September 30, 2024 increased to 23.8% as compared to 19.4% for the three months ended September 30, 2023, largely driven by our strategic initiatives to increase sales volume with our expanded portfolio of proprietary brands and various proprietary product launches. The percentage of Cultivation and Gardening net sales related to consumable products remained relatively flat at 73.3% and 73.5% for the three months ended September 30, 2024 and 2023, respectively.
Additionally, net sales of commercial fixtures within our Storage Solutions segment increased to $8.6 million, or 12.9%, for the three months ended September 30, 2024 compared to $7.6 million for the three months ended September 30, 2023, primarily due to increased demand from retail customers.
Cost of Sales
Cost of sales for the three months ended September 30, 2024 was $39.2 million, a decrease of $0.3 million or 0.7% compared to $39.5 million for the three months ended September 30, 2023. The corresponding reduction in cost of sales as compared to the 10.2% decrease in net sales, as previously discussed, was largely offset by the additional $1.0 million of inventory disposal costs incurred as part of the restructuring plan as well as reduced inventory discounts from vendors in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.
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Gross Profit
Gross profit was $10.8 million for the three months ended September 30, 2024 compared to $16.2 million for the three months ended September 30, 2023, a decrease of $5.4 million or 33.2%. The decrease in gross profit was primarily related to the Gardening and Cultivation segment, which decreased $5.5 million, or 43.3%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, largely as a result of the decrease in sales volume due to store consolidations and the effects of the strategic restructuring plan, including the estimated $0.9 million in inventory sales discounts and the additional $1.0 million of inventory disposal costs incurred in the three months ended September 30, 2024. Gross profit from our Storage Solutions segment increased $0.1 million, or 2.7%, in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.
Gross profit margin was 21.6% for the three months ended September 30, 2024, a decrease of 750 basis points from a gross profit margin of 29.1% for the three months ended September 30, 2023. The decrease in gross profit margin was largely driven by the Gardening and Cultivation segment, which had a gross profit margin of 17.3% for the three months ended September 30, 2024 as compared to 26.3% for the three months ended September 30, 2023, due to the effects of the strategic restructuring plan, including the inventory disposal costs and inventory sales discounts, reduced inventory discounts from vendors, and continued industry pricing compression on distributed products.
Gross profit margin also decreased for the Storage Solutions segment to 42.2% in the three months ended September 30, 2024 from 46.4% in three months ended September 30, 2023, primarily driven by higher costs of inventory.
Operating Expenses
Operating expenses are comprised of store operations and other operational expenses, selling, general, and administrative, estimated credit losses, depreciation and amortization, and impairment loss. Operating expenses were $22.9 million for the three months ended September 30, 2024 and $24.2 million in the three months ended September 30, 2023, a decrease of $1.3 million or 5.4%.
Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were $10.0 million for the three months ended September 30, 2024, compared to $11.7 million for the three months ended September 30, 2023, a decrease of $1.6 million or 13.9%. The decrease in store operating costs was primarily due to the fiscal 2023 consolidation of 6 retail locations after September 30, 2023 as well as the 19 retail locations closed to date in fiscal 2024, including the 12 redundant or underperforming retail locations consolidated in conjunction with the restructuring plan. This decrease was partially offset by the additional $0.7 million of restructuring costs incurred in the three months ended September 30, 2024 related to exiting those retail locations and the related employee termination benefits.
Total corporate overhead, which is comprised of selling, general, and administrative expense, estimated credit losses, and depreciation and amortization expense, remained stable at $12.6 million for each of the three months ended September 30, 2024 and three months ended September 30, 2023. Selling, general, and administrative costs decreased by $0.2 million or 2.3% for the three months ended September 30, 2024 primarily as a result of decreased professional fees and corporate expenses and decreased share-based compensation. This decrease in selling, general, and administrative expense was partially offset by a net $0.3 million increase in depreciation and amortization expense in the three months ended September 30, 2024 compared to the three months ended September 30, 2023, which included increased depreciation and amortization expense related to property and equipment of approximately $0.8 million driven by the accelerated depreciation and amortization for certain capitalized software assets reassessed as part of our restructuring activities and decreased amortization expense of approximately $0.6 million related to intangible assets as a result of intangible asset impairments in fourth quarter of fiscal 2023.
In conjunction with our strategic restructuring activities, we assessed the right-of-use assets of certain closed retail locations for impairment when we anticipated the total remaining lease cost for the term to be greater than the anticipated sublease income, which resulted in an impairment loss of $0.2 million in the three months ended September 30, 2024.
Other Income (Expense)
Other income (expense) remained relatively flat at approximately $0.6 million and $0.7 million for the three months ended September 30, 2024 and September 30, 2023, respectively.
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Comparison of the Unaudited Results for the Nine Months Ended September 30, 2024 and 2023
| Nine Months Ended September 30, | ||||||||||||
| 2024 | 2023 | Year-to-Year Variance | ||||||||||
| Net sales | $ | 151,430 | 100.0 | % | $ | 176,430 | 100.0 | % | $ | (25,000) | (14.2) | % |
| Cost of sales | 113,835 | 75.2 | % | 126,816 | 71.9 | % | (12,981) | (10.2) | % | |||
| Gross profit | 37,595 | 24.8 | % | 49,614 | 28.1 | % | (12,019) | (24.2) | % | |||
| Operating expenses | 65,632 | 43.3 | % | 71,369 | 40.5 | % | (5,737) | (8.0) | % | |||
| Loss from operations | (28,037) | (18.5) | % | (21,755) | (12.3) | % | (6,282) | (28.9) | % | |||
| Other income | 1,919 | 1.3 | % | 2,666 | 1.5 | % | (747) | (28.0) | % | |||
| Net loss before taxes | (26,118) | (17.2) | % | (19,089) | (10.8) | % | (7,029) | (36.8) | % | |||
| Benefit (provision) for income taxes | (50) | - | % | (93) | (0.1) | % | 43 | (46.2) | % | |||
| Net loss | $ | (26,168) | (17.3) | % | $ | (19,182) | (10.9) | % | $ | (6,986) | (36.4) | % |
Net Sales
Net sales for the nine months ended September 30, 2024 were $151.4 million, a decrease of $25.0 million or 14.2% as compared to net sales of $176.4 million for the nine months ended September 30, 2023.
The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $130.6 million for the nine months ended September 30, 2024 compared to $152.7 million for the nine months ended September 30, 2023. This decrease in net sales was primarily due to the fiscal 2023 consolidation of 6 retail locations after September 30, 2023 as well as the closure of 19 retail locations to date in fiscal 2024, which include the 12 redundant or underperforming retail locations consolidated in conjunction with the restructuring plan. In addition to continued industry pricing compression on distributed products, we estimate that inventory sales discounts related to exiting the 12 restructuring retail locations contributed to reduced net sales of $0.9 million in the nine months ended September 30, 2024. Same-store sales increased approximately 0.8%, primarily attributable to commercial sales growth and customer retention in markets where there were retail location closures. Proprietary brand sales as a percentage of Cultivation and Gardening net sales for the nine months ended September 30, 2024 was 22.6% as compared to 18.1% for the nine months ended September 30, 2023, largely driven by our strategic initiatives to increase sales volume with our expanded portfolio of proprietary brands and various proprietary product launches. The percentage of Cultivation and Gardening net sales related to consumable products for the nine months ended September 30, 2024 was 72.1%, which was an increase from 69.7% for the nine months ended September 30, 2023. The increase in consumable sales as a percentage of net sales was driven mainly by increased brand adoption of proprietary growing media and nutrient products.
Additionally, net sales of commercial fixtures within our Storage Solutions segment decreased to $20.8 million for the nine months ended September 30, 2024 compared to $23.7 million for the nine months ended September 30, 2023, primarily due to a similar volume of projects with a decrease in average project size.
Cost of Sales
Cost of sales for the nine months ended September 30, 2024 was $113.8 million, a decrease of $13.0 million or 10.2% compared to $126.8 million for the nine months ended September 30, 2023. The corresponding reduction in cost of sales as compared to the 14.2% decrease in net sales, as previously discussed, was offset by the additional $1.0 million of inventory disposal costs incurred related to the restructuring plan as well as reduced inventory discounts from vendors and other non-recurring costs associated with store consolidations in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.
Gross Profit
Gross profit was $37.6 million for the nine months ended September 30, 2024 compared to $49.6 million for the nine months ended September 30, 2023, a decrease of $12.0 million or 24.2%. The decrease in gross profit is primarily related to the Gardening and Cultivation segment, which decreased $10.8 million, or 27.5%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, largely as a result of the decrease in sales volume due to store
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consolidations and the effects of the strategic restructuring plan, including the estimated $0.9 million in inventory sales discounts and the additional $1.0 million of inventory disposal costs incurred in the nine months ended September 30, 2024 as previously discussed. Additionally, gross profit from our Storage Solutions segment decreased $1.2 million, or 11.9%, in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by the decrease in revenue.
Gross profit margin was 24.8% for the nine months ended September 30, 2024, a decrease of 330 basis points from a gross profit margin of 28.1% for the nine months ended September 30, 2023. The decrease in gross profit margin was largely driven by the Gardening and Cultivation segment, which had a gross profit margin of 21.8% for the nine months ended September 30, 2024 as compared to 25.7% for the nine months ended September 30, 2023 due to the effects of the strategic restructuring plan, including the inventory disposal costs and inventory sales discounts, reduced inventory discounts from vendors, and continued industry pricing compression on distributed products.
The gross profit margin for the Storage Solutions segment remained relatively flat at 44.0% for the nine months ended September 30, 2024 as compared to 43.9% for the nine months ended September 30, 2023.
Operating Expenses
Operating expenses are comprised of store operations and other operational expenses, selling, general, and administrative, estimated credit losses, depreciation and amortization, and impairment loss. Operating expenses were $65.6 million for the nine months ended September 30, 2024 and $71.4 million for the nine months ended September 30, 2023, a decrease of $5.7 million or 8.0%.
Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were $30.9 million for the nine months ended September 30, 2024, compared to $36.3 million for the nine months ended September 30, 2023, a decrease of $5.4 million or 14.9%. The decrease in store operating costs was primarily due to the fiscal 2023 consolidation of 6 retail locations after September 30, 2023 as well as the 19 retail locations closed to date in fiscal 2024, including the 12 redundant or underperforming retail locations consolidated in conjunction with the restructuring plan. This decrease was partially offset by the additional $0.7 million of restructuring costs incurred the nine months ended September 30, 2024 related to exiting those retail locations and the related employee termination benefits. Additionally, as part of our 2023 charitable initiatives, we had approximately $0.4 million more charitable donations in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2024.
Total corporate overhead, which is comprised of selling, general, and administrative expense, estimated credit losses, and depreciation and amortization expense, decreased to $34.5 million for the nine months ended September 30, 2024 compared to $35.1 million for the nine months ended September 30, 2023, a decrease of $0.5 million or 1.6%. Selling, general, and administrative costs increased by $0.5 million or 2.3% for the nine months ended September 30, 2024 primarily as a result of one-time severances and related professional fees and increased marketing expenses related to various proprietary product launches. This increase was offset by the estimated credit recoveries of $0.2 million in the nine months ended September 30, 2024, primarily due to a $0.3 million settlement received in bankruptcy proceedings related to a note receivable, as compared to the estimated credit loss of $0.7 million in the nine months ended September 30, 2023. Additionally, the increase in selling, general, and administrative expense was offset by a net $0.1 million decrease in depreciation and amortization expense in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, which included increased depreciation and amortization expense related to property and equipment of approximately $1.5 million driven by the accelerated depreciation and amortization for certain capitalized software assets reassessed as part of our restructuring activities and decreased amortization expense related to intangible assets of approximately $1.6 million as a result of intangible asset impairments in fourth quarter of fiscal 2023.
In conjunction with our strategic restructuring activities, we assessed and impaired the right-of-use assets of certain closed retail locations for which we anticipated the total remaining lease cost for the term to be greater than the anticipated sublease income, which resulted in an impairment loss of $0.2 million in the nine months ended September 30, 2024.
Other Income (Expense)
Other income (expense) was $1.9 million for the nine months ended September 30, 2024 compared to $2.7 million for the nine months ended September 30, 2023. This decrease is primarily attributable to the $0.9 million gain recognized in the nine months ended September 30, 2023 related to a prior acquisition indemnity holdback.
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Use of Non-GAAP Financial Information
The following non-GAAP financial measures of EBITDA, Adjusted EBITDA, Adjusted Gross Profit, and Adjusted Gross Profit Margin are not in accordance with, or an alternative for, generally accepted accounting principles ("GAAP") and should be considered in addition to, and not as a substitute for, the most directly comparable GAAP financial measures. We believe these non-GAAP financial measures, when used in conjunction with their most directly comparable GAAP financial measures, net income (loss), gross profit, and gross profit margin, provide meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods, identify trends affecting our business, and project future performance. Management uses these non-GAAP financial measures for internal planning and reporting purposes, and we believe that these non-GAAP financial measures may be useful to investors in their assessment of our operating performance, our ability to generate cash, and valuation. In addition, these non-GAAP financial measures address questions routinely received from analysts and investors and, in order to ensure that all investors have access to the same data, we have determined that it is appropriate to make this data available to all investors. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-GAAP financial measures commonly used in our industry and should not be construed in isolation as substitutions to net income (loss) as indicators of operating performance or as alternatives to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). GrowGeneration defines EBITDA as net income (loss) before interest income, interest expense, income tax expense, depreciation and amortization, and Adjusted EBITDA as further adjusted to exclude certain items such as stock-based compensation, impairment losses, restructuring and corporate rationalization costs, and other non-core or non-recurring expenses and to include income from our marketable securities as these investments are part of our operational business strategy and increase the cash available to us.
Set forth below is a reconciliation of EBITDA and Adjusted EBITDA to net loss (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net loss | $ | (11,435) | $ | (7,349) | $ | (26,168) | $ | (19,182) |
| (Benefit) provision for income taxes | (43) | - | 50 | 93 | ||||
| Interest income | (663) | (705) | (2,002) | (1,886) | ||||
| Interest expense | - | 1 | 70 | 6 | ||||
| Depreciation and amortization | 4,972 | 4,721 | 12,329 | 12,477 | ||||
| EBITDA | $ | (7,169) | $ | (3,332) | $ | (15,721) | $ | (8,492) |
| Share-based compensation | 672 | 938 | 2,104 | 2,452 | ||||
| Investment income | 623 | 705 | 1,921 | 1,886 | ||||
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Impairment loss (1)
|
220 | - | 220 | - | ||||
|
Restructuring plan (2)
|
2,699 | - | 2,699 | - | ||||
|
Consolidation and other charges(3)
|
567 | 781 | 2,375 | 2,300 | ||||
| Adjusted EBITDA | $ | (2,388) | $ | (908) | $ | (6,402) | $ | (1,854) |
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(1)Impairment loss related to the restructuring plan for operating lease right-of-use assets impairments
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(2) Includes the $1.8 million incurred in the Condensed Consolidated Statements of Operations related to the restructuring plan as well as an estimated additional $0.9 million loss in gross profit due to inventory discounts offered in conjunction with the restructuring plan
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(3)Consists primarily of expenditures related to the activity of store and distribution consolidation and one-time severances outside of the restructuring plan announced July 2024
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Adjusted Gross Profit and Adjusted Gross Profit Margin
Adjusted Gross Profit and Adjusted Gross Profit Margin are non-GAAP financial measures commonly used in our industry and should not be construed in isolation as substitutions to gross profit or gross profit margin, defined as our gross profit as a percentage of net sales, as indicators of operating performance (each as determined in accordance with GAAP). GrowGeneration calculates Adjusted Gross Profit as gross profit adjusted to exclude the effects related to the strategic restructuring plan, and Adjusted Gross Profit Margin is calculated as Adjusted Gross Profit as a percentage of net sales.
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Set forth below is a reconciliation of Adjusted Gross Profit and Adjusted Gross Profit Margin to gross profit and gross profit margin (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net sales | $ | 50,006 | $ | 55,678 | $ | 151,430 | $ | 176,430 |
| Cost of sales | 39,196 | 39,490 | 113,835 | 126,816 | ||||
| Gross profit | $ | 10,810 | $ | 16,188 | $ | 37,595 | $ | 49,614 |
| Gross profit margin | 21.6 | % | 29.1 | % | 24.8 | % | 28.1 | % |
|
Restructuring plan(1)
|
$ | 1,903 | $ | - | $ | 1,903 | $ | - |
| Adjusted Gross Profit | $ | 12,713 | $ | 16,188 | $ | 39,498 | $ | 49,614 |
| Adjusted Gross Margin | 25.4 | % | 29.1 | % | 26.1 | % | 28.1 | % |
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(1) Includes the $1.0 million incurred in Cost of sales within the Condensed Consolidated Statements of Operations related to the restructuring plan as well as an estimated additional $0.9 million loss in gross profit due to inventory discounts offered in conjunction with the restructuring plan
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LIQUIDITY AND CAPITAL RESOURCES
Overview
As of September 30, 2024, we had working capital of $98.0 million compared to working capital of $116.5 million as of December 31, 2023, a decrease of $18.5 million. The decrease in working capital from December 31, 2023 to September 30, 2024 was due primarily to a net decrease in cash, cash equivalents, and marketable securities as a result of net cash used in operating activities as well as reductions in inventory and common stock repurchases.
As of September 30, 2024, we had cash, cash equivalents, and marketable securities of $55.2 million. Currently, we are not aware of any extraordinary demands, commitments, or uncertainties that would materially reduce our current working capital. Our material future cash requirements from contractual and other obligations relate primarily to our operating leases. Refer to Note 8, Leases, of the Condensed Consolidated Financial Statements for additional information regarding leases.
We may need additional financing through equity offerings and/or debt financings in the future to continue to expand our business consistent with our growth strategies. However, management believes that the Company is adequately funded to support current and future operations in the next twelve months. To date we have financed our operations through the issuance of common stock, convertible notes, and warrants, as well as cash generated from operations.
Share Repurchase Program
On March 20, 2024, the Board of Directors of GrowGeneration authorized a share repurchase program, whereby we could repurchase up to $6.0 million worth of our common stock in open market transactions pursuant to Rule 10b-18 of the Exchange Act and a 10b5-1 trading plan. The program began on April 1, 2024. This share repurchase program was intended to enhance long-term shareholder value. The program did not obligate us to acquire any specific number of shares or to acquire any shares over any specific period of time. The timing and amount of any repurchases was dependent upon factors such as the stock price, trading volumes, market conditions, and regulatory requirements. The stock repurchase program could be amended, suspended, or discontinued at any time by GrowGeneration. Except for the our generally applicable insider trading policies, we do not maintain any policies or procedures relating to purchases and sales of its securities by our officers and directors during a repurchase program.
During the three months ended September 30, 2024, we repurchased 0.8 million shares of common stock for $1.8 million, an average price of $2.36 per share. During the nine months ended September 30, 2024, we repurchased 2.5 million shares of common stock for $6.0 million, an average price of $2.38 per share. As of September 30, 2024, we had completed all purchases available under the stock repurchase program. We retired 1.7 million and 2.5 million shares of common stock repurchased under the program in the three and nine months ended September 30, 2024, respectively.
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Cash Flows
The following discussion sets forth the major sources and uses of cash for the nine months ended September 30, 2024 and 2023.
Operating Activities
Net cash and cash equivalents used in operating activities for the nine months ended September 30, 2024 was $2.9 million compared to net cash provided by operating activities of $2.8 million for the nine months ended September 30, 2023. The changes in operating cash were primarily driven by the increased net loss as previously discussed.
Investing Activities
Net cash and cash equivalents provided by investing activities for the nine months ended September 30, 2024 was $6.7 million compared to net cash used by investing activities of $11.2 million for the nine months ended September 30, 2023. Investing activities for the nine months ended September 30, 2024 were primarily attributable to investment of excess cash into marketable securities of $41.9 million, offset by maturity of marketable securities of $50.3 million. We also had purchases of property and equipment of $1.9 million during the nine months ended September 30, 2024. Investing activities for the nine months ended September 30, 2023 were primarily attributable to investment of excess cash into marketable securities of $85.8 million, offset by maturity of marketable securities of $83.4 million, and purchases of property and equipment of $6.0 million, which was primarily related to the implementation and design of a new enterprise resource planning software system.
Financing Activities
Net cash and cash equivalents used in financing activities for the nine months ended September 30, 2024 was $6.2 million, primarily attributable to common stock repurchased under our share repurchase program. Net cash and cash equivalents used in financing activities for the nine months ended September 30, 2023 was $0.2 million, related primarily to common stock withheld for employee payroll taxes.
Critical Accounting Policies, Judgements, and Estimates
For a summary of the Company's critical accounting policies, judgements, and estimates, please refer to Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.
Off Balance-Sheet Arrangements
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a summary of the Company's quantitative and qualitative disclosures about market risk, please refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, including the possibility of human error, the circumvention or overriding of controls, or fraud,
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no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected.
As of the period covered by this Quarterly Report on Form 10-Q, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Our management concluded that as of September 30, 2024, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting identified by management as of December 31, 2023 (described below). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
Material Weaknesses in Control Activities
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are controls and other procedures designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
As of September 30, 2024, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Our management concluded that as of September 30, 2024, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described below.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is a process designed by or under the supervision of the Company's Chief Executive Officer and Chief Financial Officer, and overseen by the Board of Directors, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes policies and procedures that:
•Pertain to the maintenance of records that, in reasonable detail, accurately, and fairly reflect the transactions and dispositions of the Company's assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's receipts and expenditures are being made only in accordance with the authorization of its management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company's Consolidated Financial Statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting using the criteria in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO Framework"). As a result of this evaluation, management concluded that the Company's internal control over financial reporting was not effective as of September 30, 2024 because of the material weaknesses in internal control over financial reporting discussed below.
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•Control Environment: The Company did not maintain an effective control environment based on the criteria established in the COSO framework, which resulted in deficiencies in principles associated with the control environment.
In addition, the following material weaknesses were previously identified and contributed to the material weakness in the control environment:
•Insufficient resources within the accounting and financial reporting department to review the accounting of complex financial reporting transactions including areas such as business combinations, share based compensation, and the related income tax reporting
•Ineffective controls over updating and distributing accounting policies and procedures across the organization.
The control environment material weaknesses contributed to other material weaknesses within our system of internal controls over financial reporting related to the following COSO components:
•Risk Assessment: The Company did not design and implement an effective risk assessment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the risk assessment component of the COSO framework.
•Information and Communication: The Company did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting.
•Monitoring Activities: The Company did not have effective monitoring activities to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness.
•Control Activities: As a consequence of the material weaknesses described above, internal control deficiencies related to the design and operation of process-level controls and general information technology controls were determined to be pervasive throughout the Company's financial reporting processes.
In addition, the following material weaknesses were previously identified and contributed to the material weakness in control activities:
•Inadequate information and technology general controls, including segregation of duties, change management, and user access, which were inadequate to support financial reporting applications and support automated controls and functionality.
•Inadequate controls over physical inventory counts.
•Inadequate controls over valuations, inclusive of appropriate valuation model inputs and appropriate forecasting for prospective financial information.
•Inadequate segregation of duties within human resources, manual journal entry posting processes, and various bank accounts of the Company to prevent and detect unauthorized transactions in a timely manner.
While these material weaknesses did not result in material misstatements of the Company's Condensed Consolidated Financial Statements as of and for the year ended December 31, 2023, and management does not believe that these material weaknesses resulted in material misstatements as of September 30, 2024, these material weaknesses create a reasonable possibility that a material misstatement of account balances or disclosures in annual or interim consolidated financial statements may not be prevented or detected in a timely manner.
The Company's independent registered public accounting firm, Grant Thornton LLP, which audited the 2023 consolidated financial statements included in the Form 10-K, has expressed an adverse opinion on the Company's internal control over financial reporting.
Remediation Plan and Status
Our management is committed to remediating identified control deficiencies (including both those that rise to the level of a material weakness and those that do not), fostering continuous improvement in our internal controls, and enhancing our overall internal controls environment.
We initiated many of our control remediation efforts in fiscal 2022, and these efforts have continued through 2024, including:
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•Engaged a third-party specialist CPA firm to consult with management in redesigning and documenting of our internal controls over financial reporting, including our entity-level controls, to be compliant with Sarbanes Oxley Act of 2002 ("SOX").
•Hired a dedicated controls compliance manager charged with monitoring and facilitating compliance with the Company's responsibilities under SOX in coordination with the third-party specialist.
•Implemented a global risk and compliance software to assist in monitoring and documenting compliance with SOX.
•Made significant progress related to our control design and assessment, including the identification of risks arising from inappropriate segregation of duties and fraud risks and the development of new controls and revised the design of existing controls to mitigate the aforementioned risks, inclusive of entity-level controls.
•For certain processes, developed new and revised existing process narratives and flowcharts and identified risks inherent to those processes.
•Conducted training sessions with control owners.
•Restructured or consolidated certain business functions to align more closely with effective business operation as well as to enable appropriate segregation of duties.
•Implemented new business systems, including an enterprise resource planning software system, to support information technology general controls, appropriate segregation of duties, appropriate journal entry posting processes, change management, and user access.
•Added personnel to the accounting and financial reporting department with technical accounting experience to act as internal resources for reviewing complex financial reporting transactions, including areas such as business combinations, share based compensation, and income tax reporting.
•Continue to engage third party specialists to assist management with complex financial transactions and valuations, including valuation model techniques and inputs such as forecasted, prospective financial information.
The following remaining activities are scheduled to occur during our fiscal year 2024 in support of issuing management's assessment of internal control over financial reporting as of December 31, 2024:
•Testing design and operating effectiveness of newly implemented controls across all financial reporting processes and information technology environments.
•Finalization of risk assessments, control design, and implementation of new and revised controls, inclusive of general information technology controls and entity-level controls, as necessary.
•Ongoing training with control owners.
•Developing effective communication plans to all parties responsible for remediation relating to, among other things, identification of deficiencies and recommendations for corrective actions.
•Providing periodic compliance reports to the Audit Committee of the Board of Directors.
Our management believes that these remediation actions, when fully implemented, will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. However, our remediation efforts are ongoing and additional remediation initiatives may be necessary. We will continue to implement and document the strengthening of existing and the development of new policies, procedures, and internal controls.
Remediation of the identified material weaknesses and strengthening our internal control environment has required and will continue to require a substantial effort throughout 2024. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
While we believe the steps taken to date and those planned for implementation will remediate the ineffectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our Consolidated Financial Statements are fairly stated in all material respects.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, except for the implementation of remediation plans to address the material weaknesses discussed above, during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
For a summary of the Company's risk factors, please refer to Item 9A of our Form 10-K for the year ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchase Program
On March 20, 2024, the Board of Directors of the Company authorized a share repurchase program, whereby the Company could repurchase up to $6.0 million worth of its common stock in open market transactions pursuant to Rule 10b-18 of the Exchange Act and a 10b5-1 trading plan. The program began on April 1, 2024. As of September 30, 2024, the Company completed all purchases available under the stock repurchase program.
The following table contains information for shares of common stock repurchased pursuant to the program during the three months ended September 30, 2024.
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be purchased Under the Plans or Programs | |||
| July 1 - July 31, 2024 | 778,525 | $ | 2.36 | 778,525 | $ | - |
| August 1 - August 31, 2024 | - | - | - | - | ||
| September 1 - September 30, 2024 | - | - | - | - | ||
| Total | 778,525 | $ | 2.36 | 778,525 | $ | - |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are included and filed with this report.
| Exhibit | Exhibit Description |
| 3.1 | |
| 3.2 | |
| 10.1 | |
| 10.2 | |
| 31.1 |
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
|
| 31.2 |
Rule 13a-14(a)/15d-14(a) certification of principal financial and accounting officer
|
| 32.1 |
Section 1350 certification of Chief Executive Officer*
|
| 32.2 |
Section 1350 certification of principal financial and accounting officer*
|
| 101 | Interactive Data Files |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Definition |
| * | Furnished and not filed. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 12, 2024.
| GrowGeneration Corp. | ||
| By: | /s/ Darren Lampert | |
|
Darren Lampert, Chief Executive Officer (Principal Executive Officer) |
||
| By: | /s/ Gregory Sanders | |
|
Gregory Sanders, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) |
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