GrowGeneration Corp 10-Q for FY2023 Q2
GrowGeneration Corp. (GRWG)
10-Q
2023-08-08
For: 2023-06-30
View Original
Added on
April 09, 2026
About this 10-Q
GrowGeneration Corp filed this 10-Q on August 8, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $63.93M
- down 10.1% from $71.09M a year earlier
- Net loss
- $5.7M
- compared with a net loss of $136.38M a year earlier
- Diluted EPS
- -$0.09
- compared with -$2.24 a year earlier
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: June 30, 2023
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
(Exact name of registrant as specified in its charter)
| (State of other jurisdiction of incorporation) | (IRS Employer ID No.) | |||||||
(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 | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 | ☐ | ☒ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2023 there were 61,231,786 shares of the registrant’s common stock issued and outstanding.
TABLE OF CONTENTS
| Page No. | ||||||||
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROWGENERATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares and per share amounts)
| June 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
Accounts receivable, net of allowance for credit losses of $ | |||||||||||
Notes receivable, current, net of allowance for credit losses of $ | |||||||||||
| Inventory | |||||||||||
| Prepaid income taxes | |||||||||||
| Prepaids and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating leases right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Payroll and payroll tax liabilities | |||||||||||
| Customer deposits | |||||||||||
| Sales tax payable | |||||||||||
| Current maturities of lease liability | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Operating lease liability, net of current maturities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock; $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings (deficit) | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
1
GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except shares and per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization shown below) | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Store operations and other operational expenses | ||||||||||||||||||||||||||
| Selling, general, and administrative | ||||||||||||||||||||||||||
| Bad debt expense | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Impairment loss | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Income (Loss) from operations | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Total non-operating income (expense), net | ||||||||||||||||||||||||||
| Net income (loss) before taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Benefit (provision) for income taxes | ( | ( | ||||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Net income (loss) per share, basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Net income (loss) per share, diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Weighted average shares outstanding, basic | ||||||||||||||||||||||||||
| Weighted average shares outstanding, diluted | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
(in thousands, except shares and per share amounts)
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balances, March 31, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Common stock issued for share based compensation | — | — | — | — | |||||||||||||||||||||||||
| Common stock withheld for employee payroll taxes | — | — | ( | — | ( | ||||||||||||||||||||||||
| Share based compensation | — | — | — | ||||||||||||||||||||||||||
| Noncash repurchase of liability awards | — | $ | — | $ | $ | — | $ | ||||||||||||||||||||||
| Liability redemption associated with business acquisition | $ | — | $ | $ | — | $ | |||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balances, March 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Common stock issued for share-based compensation | — | — | — | — | |||||||||||||||||||||||||
| Common stock withheld for employee payroll taxes | — | — | ( | — | ( | ||||||||||||||||||||||||
| Share based compensation | — | — | — | ||||||||||||||||||||||||||
| Common stock issued upon cashless exercise of options | — | — | — | — | |||||||||||||||||||||||||
| Common stock issued upon cashless exercise of warrants | — | — | — | — | |||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
3
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balances, December 31, 2022 | ( | $ | |||||||||||||||||||||||||||
| Common stock issued for share based compensation | — | — | — | $ | — | ||||||||||||||||||||||||
| Common stock withheld for employee payroll taxes | — | — | ( | — | $ | ( | |||||||||||||||||||||||
| Share based compensation | — | — | — | $ | |||||||||||||||||||||||||
| Noncash repurchase of liabilty awards | — | — | — | $ | |||||||||||||||||||||||||
| Liability redemption associated with business acquisition | — | — | $ | ||||||||||||||||||||||||||
| Net income (loss) | — | $ | — | $ | — | $ | ( | $ | ( | ||||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Common stock issued in connection with business combination | — | ||||||||||||||||||||||||||||
| Common stock issued for share-based compensation | — | — | — | — | |||||||||||||||||||||||||
| Common stock withheld for employee payroll taxes | — | — | ( | — | ( | ||||||||||||||||||||||||
| Share based compensation | — | — | — | ||||||||||||||||||||||||||
| Common stock issued upon cashless exercise of options | — | — | — | — | |||||||||||||||||||||||||
| Common stock issued upon cashless exercise of warrants | — | — | — | — | |||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except shares and per share amounts)
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Bad debt expense, net of recoveries | |||||||||||
| Gain (loss) on asset disposition | |||||||||||
| Impairment loss | |||||||||||
| Deferred taxes | ( | ||||||||||
| Changes in operating assets and liabilities (net of the effect of acquisitions): | |||||||||||
| Accounts and notes receivable | ( | ||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Operating leases | |||||||||||
| Payroll and payroll tax liabilities | ( | ( | |||||||||
| Customer deposits | ( | ( | |||||||||
| Sales tax payable | ( | ||||||||||
| Net cash provided by (used in) operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Purchase of marketable securities | ( | ||||||||||
| Maturities from marketable securities | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Disposal of assets | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Principal payments on long term debt | ( | ( | |||||||||
| Common stock withheld for employee payroll taxes | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ( | |||||||||
| Net change | ( | ||||||||||
| Cash and cash equivalents at the beginning of period | |||||||||||
| Cash and cash equivalents at the end of period | $ | $ | |||||||||
| Supplemental disclosures of non-cash activities: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Common stock issued for business combination | $ | $ | |||||||||
| Right of use assets acquired under new operating leases | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
GrowGeneration Corp.
Notes To Condensed Consolidated Financial Statements
June 30, 2023
(Unaudited)
1.GENERAL
GrowGeneration Corp. (together with its direct and indirect wholly owned subsidiaries, collectively “GrowGeneration” or the “Company”) is a leading marketer and distributor of nutrients, growing media, lighting, benching and racking, environmental control systems, and other products for both indoor and outdoor hydroponic and organic gardening, including proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Durabreeze fans, and more. Incorporated in Colorado in 2014, GrowGeneration is the largest chain of specialty retail hydroponic and organic garden centers in the U.S. As of June 30, 2023, GrowGeneration has 62 retail locations across 18 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, MMI. GrowGeneration also provides facility design services to commercial growers.
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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”). There were no significant changes to our significant accounting policies as disclosed in our 2022 Form 10-K. The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.
All amounts included in the accompanying footnotes to the consolidated financial statements, except share and per share data, are in thousands (000).
Reclassifications
Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net income.
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions 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.
6
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
2.FAIR VALUE MEASUREMENTS
Fair Value Measurements
Fair value is defined as the exchange price that would be received for 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, available for sale securities, 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 and is reviewed for impairment at least annually. The fair value of impaired notes receivable is determined based on estimated future payments discounted back to present value using the notes' effective interest rate.
| Level | June 30, 2023 | December 31, 2022 | |||||||||||||||
| Cash equivalents | 1 | $ | $ | ||||||||||||||
| Marketable securities | 2 | $ | $ | ||||||||||||||
7
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
3.RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.
In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326),” changing the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required previously by the other-than-temporary impairment model. The ASU applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities, net investments in leases, and off-balance sheet credit exposures. ASU No. 2016-13 was effective January 1, 2020. The Company has adopted this standard effective January 1, 2023. The adoption of this standard primarily applied to the valuation of the Company’s accounts receivable. Based on the composition of the Company’s accounts receivable, investment portfolio, and other financial assets, including current market conditions and historical credit loss activity, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of June 30, 2023, using the expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of the standard.
4.REVENUE RECOGNITION
Disaggregation of Revenues
Sales are disaggregated by our segments, which represent our principal lines of business, as well as by our private label products versus distributed brands, or by commercial fixture revenue. See Note 13, Segments, for disaggregated revenue by segment.
The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:
| Receivables | Customer Deposit Liability | ||||||||||
| Opening balance, January 1, 2023 | $ | $ | |||||||||
Closing balance, June 30, 2023 | |||||||||||
| Increase (decrease) | $ | ( | $ | ( | |||||||
| Opening balance, January 1, 2022 | $ | $ | |||||||||
Closing balance, June 30, 2022 | |||||||||||
| Increase (decrease) | $ | $ | ( | ||||||||
Of the total amount of customer deposit liability as of January 1, 2023, $2.9 million was reported as revenue during the six months ended June 30, 2023. Of the total amount of customer deposit liability as of January 1, 2022, $11.1 million was reported as revenue during the six months ended June 30, 2022.
8
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
5.PROPERTY AND EQUIPMENT
| June 30, 2023 | December 31, 2022 | ||||||||||
| Vehicles | $ | $ | |||||||||
| Building | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture, fixtures and equipment | |||||||||||
| Capitalized software | |||||||||||
| Construction-in-progress | |||||||||||
| Total property and equipment, gross | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense for the three and six months ended June 30, 2023 was $1.6 million and $3.3 million. Depreciation expense for the three and six months ended June 30, 2022 was $2.0 million and $3.7 million.
9
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
6. GOODWILL AND INTANGIBLE ASSETS
The Company performs its goodwill impairment testing annually during the fourth quarter, or more frequently if events or if circumstances were to occur that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill. The adjusted carrying amount of goodwill shall be its new accounting basis.
During the second quarter of 2022, the Company’s market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which was contrary to prior experience. Management reassessed business performance expectations following persistent adverse developments in equity markets, deterioration in the environment in which we operate, inflation, lower than expected sales, and an increase in operating expenses. These indicators, in the aggregate, required impairment testing for finite-lived intangible assets at the asset group level and goodwill at the reporting unit level.
Under ASC 360, we performed a cash recoverability test on the following intangible assets: customer relationships, trade name, and non-compete. The carrying amounts of any assets that are not within the scope of ASC 360-10, other than goodwill, were adjusted for impairment, as necessary, prior to testing long-lived assets and goodwill. The Company recognized impairment losses as disclosed in the table below.
For goodwill impairment testing purposes, the Company determined four reporting units, three of which were subject to a quantitative assessment. We determined fair value using the income approach, where estimated future returns are discounted to present value at an appropriate rate of return. The Company completed its interim goodwill impairment test as of June 30, 2022 and recognized impairment losses as disclosed in the table below. There were no goodwill impairments recognized during the six months ended June 30, 2023.
The changes in goodwill are as follows:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Balance, beginning of period | $ | $ | |||||||||
| Goodwill additions and measurement period adjustments | |||||||||||
| Impairment | ( | ||||||||||
| Balance, end of period | $ | $ | |||||||||
The goodwill balance and impairment by segment are as follows:
| Retail | E-commerce | Distribution | Total | |||||||||||
| Gross carrying value at December 31, 2021 | $ | $ | $ | $ | ||||||||||
| Acquisitions & measurement period adjustments | ( | |||||||||||||
| Gross carrying value at December 31, 2022 | ||||||||||||||
| Acquisitions & measurement period adjustments | ||||||||||||||
| Gross carrying value, at June 30, 2023 | $ | $ | $ | $ | ||||||||||
| Accumulated impairment losses at December 31, 2021 | $ | $ | $ | $ | ||||||||||
| Impairment | ( | ( | ( | ( | ||||||||||
| Accumulated impairment losses at December 31, 2022 | ( | ( | ( | ( | ||||||||||
| Impairment | ||||||||||||||
Accumulated impairment losses at June 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Net carrying value at December 31, 2022 | $ | $ | $ | $ | ||||||||||
Net carrying value at June 30, 2023 | $ | $ | $ | $ | ||||||||||
10
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
A summary of intangible assets is as follows:
| Weighted-Average | ||||||||
| Amortization Period | ||||||||
| of Intangible Assets | ||||||||
| as of June 30, 2023 | ||||||||
| (in years) | ||||||||
| Trade names | ||||||||
| Patents | ||||||||
| Customer relationships | ||||||||
| Non-competes | ||||||||
| Intellectual property | ||||||||
| Total | ||||||||
Intangible assets consist of the following:
| June 30, 2023 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Trade names | $ | $ | ( | $ | |||||||||||||
| Patents | ( | ||||||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Non-competes | ( | ||||||||||||||||
| Intellectual property | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Trade names | $ | $ | ( | $ | ||||||||||||||||
| Patents | ( | |||||||||||||||||||
| Customer relationships | ( | |||||||||||||||||||
| Non-competes | ( | |||||||||||||||||||
| Intellectual property | ( | |||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
11
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
Intangibles and impairment by segment are as follows:
| Retail | E-commerce | Distribution | Total | |||||||||||
| Gross carrying value at December 31, 2021 | $ | $ | $ | $ | ||||||||||
| Acquisitions & measurement period adjustments | ||||||||||||||
| Gross carrying value at December 31, 2022 | ||||||||||||||
| Acquisitions & measurement period adjustments | ||||||||||||||
| Gross carrying value at June 30, 2023 | $ | $ | $ | $ | ||||||||||
| Accumulated amortization at December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Amortization | ( | ( | ( | ( | ||||||||||
| Accumulated amortization at December 31, 2022 | ( | ( | ( | ( | ||||||||||
| Amortization | ( | ( | ( | ( | ||||||||||
| Accumulated amortization at June 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Accumulated impairment losses at December 31, 2021 | $ | $ | $ | $ | ||||||||||
| Impairments | ( | ( | ( | |||||||||||
| Accumulated impairment losses at December 31, 2022 | ( | ( | ( | |||||||||||
| Impairments | ||||||||||||||
| Accumulated impairment losses June 30, 2023 | $ | ( | $ | ( | $ | $ | ( | |||||||
| Net carrying value at December 31, 2022 | $ | $ | $ | $ | ||||||||||
| Net carrying value June 30, 2023 | $ | $ | $ | $ | ||||||||||
Amortization expense for the three and six months ended June 30, 2023 was $2.4 million and $4.6 million. Amortization expense for the three and six months ended June 30, 2022 was $2.8 million and $5.6 million.
Future amortization expense is as follows:
| 2023, remainder | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
7. INCOME TAXES
12
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
8. LEASES
We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1 to 10 years, most of which include options to extend the leases for additional 3 to 5-year periods. Generally, the lease term is the minimum of the non-cancellable period of the lease or the lease term inclusive of reasonably certain renewal periods.
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of remaining lease payments over the lease term. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term.
We have elected the practical expedient to account for lease and non-lease components as a single component for our entire population of leases.
Short-term disclosures include only those leases with a term greater than one month and less than or equal to 12 months, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less that do not include an option to purchase the underlying asset that we are reasonably certain to exercise are not recorded on the balance sheet.
Lease expense is recorded within our consolidated statements of operations based upon the nature of the assets. Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in “store operating costs.” Facilities and assets which serve management and support functions are expensed through general and administrative expenses.
| June 30, 2023 | December 31, 2022 | ||||||||||
| Right of use assets, operating lease assets | $ | $ | |||||||||
| Current lease liability | $ | $ | |||||||||
| Non-current lease liability | |||||||||||
| Total lease liability | $ | $ | |||||||||
| June 30, 2023 | June 30, 2022 | ||||||||||
| Weighted average remaining lease term | |||||||||||
| Weighted average discount rate | % | % | |||||||||
| Three Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating lease costs | $ | $ | |||||||||
| Variable lease costs | |||||||||||
| Short-term lease costs | |||||||||||
| Total operating lease costs | $ | $ | |||||||||
13
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating lease costs | $ | $ | |||||||||
| Variable lease costs | |||||||||||
| Short-term lease costs | |||||||||||
| Total operating lease costs | $ | $ | |||||||||
The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2023:
| 2023 (remainder of the year) | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: Imputed interest | ( | ||||
Lease Liability at June 30, 2023 | $ | ||||
9. SHARE BASED PAYMENTS
The Company maintains long-term incentive plans for employees, non-employee members of our Board of Directors, and consultants. The plans allow us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, 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 and directors of the Company, including stock options and restricted shares. The Company also issues share-based awards in the form of common stock warrants to non-employees.
The following table presents share-based award expense for the three and six months ended June 30, 2023 and 2022:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Restricted stock | $ | $ | $ | $ | |||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Warrants | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
As of June 30, 2023, the Company had approximately $5.4 million of unamortized share-based compensation for option awards and restricted stock awards, which are expected to be recognized over a weighted average period of approximately 3.1 years.
Restricted Stock
The Company issues shares of restricted stock to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest on the first, second, third, or fourth anniversary of the date of grant, subject to the employee’s continuing employment as of that date. Restricted stock is valued using market value on the grant date.
14
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
Restricted stock activity for the six months ended June 30, 2023 is presented in the following table:
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
Nonvested, December 31, 2022 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
Nonvested, June 30, 2023 | $ | ||||||||||
The table below summarizes all option activity under all plans during the six months ended June 30, 2023:
| Options | Shares | Weighted - Average Exercise Price | Weighted - Average Remaining Contractual Term | Weighted - Average Grant Date Fair Value | ||||||||||||||||||||||
Outstanding at December 31, 2022 | $ | $ | ||||||||||||||||||||||||
| Granted | — | |||||||||||||||||||||||||
| Exercised | — | |||||||||||||||||||||||||
| Forfeited or expired | — | |||||||||||||||||||||||||
Outstanding at June 30, 2023 | $ | $ | ||||||||||||||||||||||||
Vested at June 30, 2023 | $ | $ | ||||||||||||||||||||||||
A summary of the status of the Company’s outstanding stock purchase warrants for the six months ended June 30, 2023 is as follows:
| Warrants | Weighted Average Exercise Price | ||||||||||
Outstanding at December 31, 2022 | $ | ||||||||||
| Issued | |||||||||||
| Exercised | |||||||||||
| Forfeited | |||||||||||
Outstanding at June 30, 2023 | $ | ||||||||||
Liability Awards
In August 2022, the Company issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480-10-25 and ASC 718-10-25. 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. The liability of $0.7 million was relieved to additional paid-in capital and the incremental expense of $0.1 million will be recognized over the remaining term of the modified awards.
15
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
10. EARNINGS (LOSS) PER SHARE
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for the three and six months ended June 30, 2023 and 2022:
| Three Months Ended | |||||||||||
| June 30, 2023 | June 30, 2022 | ||||||||||
| Net income (loss) | $ | ( | $ | ( | |||||||
| Weighted average shares outstanding, basic | |||||||||||
| Effect of dilution | |||||||||||
| Adjusted weighted average shares outstanding, dilutive | |||||||||||
| Basic earnings (loss) per share | $ | ( | $ | ( | |||||||
| Dilutive earnings (loss) per share | $ | ( | $ | ( | |||||||
| Six Months Ended | |||||||||||
| June 30, 2023 | June 30, 2022 | ||||||||||
| Net income (loss) | $ | ( | $ | ( | |||||||
| Weighted average shares outstanding, basic | |||||||||||
| Effect of dilution | |||||||||||
| Adjusted weighted average shares outstanding, dilutive | |||||||||||
| Basic earnings (loss) per share | $ | ( | $ | ( | |||||||
| Dilutive earnings (loss) per share | $ | ( | $ | ( | |||||||
The following potentially outstanding restricted stock and stock options were excluded from the computation of diluted earnings per share because the effect would have been antidilutive:
| Three Months Ended | |||||||||||
| June 30, 2023 | June 30, 2022 | ||||||||||
| Restricted stock | |||||||||||
| Stock options | |||||||||||
| Total | |||||||||||
| Six Months Ended | |||||||||||
| June 30, 2023 | June 30, 2022 | ||||||||||
| Restricted stock | |||||||||||
| Stock options | |||||||||||
| Total | |||||||||||
16
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
11. ACQUISITIONS
Our acquisition strategy is 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 and private label brands. The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying Condensed Consolidated Balance Sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of purchase price was based upon the preliminary valuation, and the Company's estimates and assumptions are subject to change within the measurement period as valuations are finalized, not to exceed one year from the acquisition date. The Company has made adjustments to the preliminary valuations of the acquisitions based on valuation analyses prepared by independent third-party valuation consultants. There have been no measurement period adjustments during the current year. During the six months ended June 30, 2022, our measurement period adjustments included increasing goodwill by $1.3 million offset with intangible assets. As a result of these measurement period adjustments, we made an insignificant reduction in amortization expense. All acquisition costs are expensed as incurred and recorded in general and administrative expenses in the Condensed Consolidated Statements of Operations.
Acquisitions during the six months ended June 30, 2023
On May 23, 2023, the Company purchased substantially all of the assets of Southside Garden Supply ("Alaska"), a two-store chain of indoor/outdoor garden centers. The total consideration for the purchase of the Alaska assets was approximately $2.0 million, including $1.9 million in cash and an indemnity holdback of $0.1 million. The Alaska asset acquisition also included acquired goodwill of approximately $0.6 million, which represents the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. Alaska is included in our Retail segment.
Additionally, the Company made other, individually immaterial acquisitions during the six months ended June 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 represents the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. These acquisitions are included in our Retail segment.
17
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
The table below represents the allocation of the purchase price to the acquired net assets during the six months ended June 30, 2023.
| Alaska | Other | Total | ||||||||||||||||||||||||||||||
| Inventory | $ | $ | $ | |||||||||||||||||||||||||||||
| Prepaids and other current assets | ||||||||||||||||||||||||||||||||
| Furniture and equipment | ||||||||||||||||||||||||||||||||
| Operating lease right of use asset | ||||||||||||||||||||||||||||||||
| Operating lease liability | ( | ( | ( | |||||||||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||||||||
The table below represents the consideration paid for the net assets acquired in business combinations during the six months ended June 30, 2023.
| Alaska | Other | Total | ||||||||||||||||||||||||||||||
| Cash | $ | $ | $ | |||||||||||||||||||||||||||||
| Indemnity holdback | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||||||||
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the Condensed Consolidated Statement of Operations for the six months ended June 30, 2023.
| Alaska | Other | Total | ||||||||||||||||||||||||||||||
| Acquisition date | ||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | |||||||||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
The following represents the pro forma Condensed Consolidated Statement of Operations as if the acquisition had been included in the consolidated results of the Company for the entire period for the three and six months ended June 30, 2023, and June 30, 2022.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | ( | ( | ||||||||||||||||||||||||||||
Acquisitions during 2022
On February 1, 2022, the Company purchased all of the assets of Horticultural Rep Group, Inc. ("HRG"), a specialty marketing and sales organization of horticultural products based in Ogden, Utah. The total consideration for the purchase of the assets of HRG was approximately $13.4 million, including $6.8 million in cash and common stock valued at $5.7 million. The Asset Purchase Agreement also provides for an indemnity holdback to be settled in common stock of the Company valued at $0.9 million. Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. HRG is included in our Distribution and other segment.
18
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
The table below represents the allocation of the purchase price to the acquired net assets during the six months ended June 30, 2022.
| HRG | ||||||||||||||||||||||||||
| Inventory | $ | |||||||||||||||||||||||||
| Prepaids and other current assets | ||||||||||||||||||||||||||
| Furniture and equipment | ||||||||||||||||||||||||||
| Operating lease right of use asset | ||||||||||||||||||||||||||
| Operating lease liability | ( | |||||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||
| Trademark | ||||||||||||||||||||||||||
| Non-compete | ||||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||
| Total | $ | |||||||||||||||||||||||||
The table below represents the consideration paid for the net assets acquired in business combinations during the six months ended June 30, 2022.
| HRG | |||||
| Cash | $ | ||||
| Indemnity stock holdback | |||||
| Common stock | |||||
| Total | $ | ||||
The following table discloses the date of the acquisition noted above and the revenue and earnings included in the Condensed Consolidated Statement of Operations for the six months ended June 30, 2022. Revenue and earnings amounts include other proprietary brands now being included under HRG for operations.
| HRG | |||||
| Acquisition date | |||||
| Revenue | $ | ||||
| Net Income (loss) | $ | ||||
The following represents the pro forma Condensed Consolidated Statement of Operations as if the acquisition had been included in the consolidated results of the Company for the entire period for the three and six months ended June 30, 2022.
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||||
| Revenue | $ | $ | ||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | ||||||||||||||||
19
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
12. COMMITMENTS AND CONTINGENCIES
Legal Matters
We are involved in lawsuits and claims which arise in the normal course of our business, including the initiation and defense of proceedings related to contract and employment disputes. In our opinion, these claims individually and in the aggregate are not expected to have a material adverse effect on our 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 based on promissory estoppel and breach of contract for failing to consummate the acquisition of Total Grow by the Company. The Company counterclaimed for repayment of $1.5 million principal plus interest loaned by the Company to Total Grow pursuant to the Note & Option. The Company accrued a reserve of $1.5 million against the Note & Option. As discussed in Note 14, Subsequent Events, on July 26, 2023, the arbitrator denied all of Total Grow's claims and defenses, determined that the Company prevailed in its counterclaim, and awarded the Company an award in full settlement of the matter.
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. We believe that our 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 our 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 June 30, 2023, 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.
13. SEGMENTS
The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. Shared services and other corporate costs are allocated to an individual segment based on that segment's profitability.
Retail – The core of our business strategy is to operate the largest chain of retail garden centers in the U.S. The hydroponic retail landscape is fragmented, which allows us to acquire “best of breed” hydroponic retail operations and leverage efficiencies of a centralized organization. Some of our garden centers have multi-functions, with added capabilities that include warehousing, distribution, and fulfillment for our online platforms and direct fulfillment to our commercial customers.
Our retail segment also includes our commercial sales organization, which is focused on selling products and services, including end-to-end solutions, for large commercial cultivators outside of the physical retail network. When commercial customers gain new cultivation licenses, they need lighting, benching, environmental control systems, irrigation, fertigation, and other products to outfit their facilities. Existing facilities also need consumable products for operations, as well as equipment updates from time to time. Commercial customers typically purchase large dollar amounts, quantities, and sizes of products. We offer commercial customers volume pricing, terms, and financing.
E-commerce – Our digital strategy is primarily focused on capturing the home, craft, and commercial grower online. GrowGeneration.com offers thousands of hydroponic products, all curated by our product team. GrowGeneration.com offers
20
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
customers the option to have their orders shipped directly to their locations, anywhere in North America. GrowGeneration also sells its products through its distribution website, HRGdist.com, and online marketplaces such as Amazon and Walmart.
Distribution and other – In December 2020, GrowGeneration purchased the business of Canopy Crop Management Corp., the developer of the popular PowerSi line of monosilicic acid products, a widely used nutrient additive for plants. In March 2021, the Company purchased Charcoir, a line of premium coco pots, cubes and medium. In December 2021, the Company purchased the assets of Mobile Media, Inc. ("MMI"), a mobile shelving and storage solutions developer and manufacturer. In February 2022, the Company purchased the assets of Horticultural Rep Group, Inc. ("HRG"), a specialty marketing and sales organization specializing in horticultural products. The Company is in the process of combining the operations and management of these non-retail enterprises. The products these companies provide are integrated into our retail, e-commerce, and direct sales activities, and we receive incremental revenue from the sale of these products.
Disaggregated revenue by segment is presented in the following table:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Sales, net | |||||||||||||||||
| Retail | |||||||||||||||||
| Private label sales | $ | $ | $ | $ | |||||||||||||
| Non-private label sales | |||||||||||||||||
| Total retail | |||||||||||||||||
| E-Commerce | |||||||||||||||||
| Private label sales | |||||||||||||||||
| Non-private label sales | |||||||||||||||||
| Total e-commerce | |||||||||||||||||
| Distribution and other | |||||||||||||||||
| Private label sales | |||||||||||||||||
| Non-private label sales | |||||||||||||||||
| Commercial fixture sales | |||||||||||||||||
| Total distribution and other | |||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||
Selected information by segment is presented in the following tables:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| Net sales | ||||||||||||||
| Retail | $ | $ | $ | $ | ||||||||||
| E-Commerce | ||||||||||||||
| Distribution and other | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
21
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2023
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| Gross profit | ||||||||||||||
| Retail | $ | $ | $ | $ | ||||||||||
| E-Commerce | ||||||||||||||
| Distribution and other | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| Income (Loss) from operations | ||||||||||||||
| Retail | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| E-Commerce | ( | ( | ( | ( | ||||||||||
| Distribution and other | ( | ( | ||||||||||||
| Total | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
14. SUBSEQUENT EVENTS
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 based on promissory estoppel and breach of contract for failing to consummate the acquisition of Total Grow by the Company. The Company counterclaimed for repayment of $1.5 million principal plus interest loaned by the Company to Total Grow pursuant to the Note & Option.
On July 26, 2023, the arbitrator denied all of Total Grow’s claims and defenses, determined that the Company prevailed in its counterclaim, and granted the Company an award of $1.5 million, with interest at the rate of 8 % compounded annually beginning on March 15, 2021 until paid in full, and certain other costs. The Award is in full settlement of all claims and counterclaims related to the matter.
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our 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, 2022 filed with the SEC on March 16, 2023. We caution readers regarding certain forward-looking statements, within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, in the following discussion and elsewhere in this report. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. We disclaim any obligation to update forward looking statements, except as required by law.
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. GrowGeneration is the largest chain of hydroponic garden centers in the United States and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, and accessories for hydroponic gardening. GrowGeneration also owns and operates an e-commerce platform, www.growgeneration.com, Mobile Media, a vertical racking and storage solutions business, Horticultural Rep Group, a horticultural products sales representative and distributor organization, and proprietary brands across multiple product categories, from lighting to nutrients and additives to environmental control systems.
Our business is driven by a wide selection of products, facility design services, solutions driven staff, and pick, pack and ship distribution and fulfillment capabilities. GrowGeneration carries and sells thousands of products, including nutrients, growing media, lighting, environmental control systems, vertical benching, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are capable of growing and maximizing yield and quality of a wide range of plants. Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Durabreeze fans, and more. GrowGeneration also provides facility design services to commercial growers. As of June 30, 2023, we employed approximately 481 employees, a majority of whom have been branded by us as “Grow Pros”, and our operations span over 953,000 square feet of retail and warehouse space.
Markets and Business Segments
Our target customer segments include the commercial growers in the plant-based medicine market, the craft grower, and vertical and urban farmers who grow organic herbs, fruits, and vegetables. Additionally, we sell products from our distribution and other segment to wholesalers, resellers, and retailers. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields and quality, regardless of the season or weather conditions.
The Company has three primary reportable segments, including retail operations, e-commerce, and all other. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources.
We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, and selling and general administrative expenses within each segment. Certain 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 the specific segments and are reflected in the enterprise results.
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Competitive Advantages
The markets in which we sell our products are highly competitive. Our key competitors include many local and national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, and online product resellers and large online marketplaces such as Amazon and eBay. Our industry is highly fragmented, with around 1,000 hydroponic retailers throughout the U.S. by management's estimates.
Notwithstanding the foregoing, we are the largest chain of hydroponic garden centers in the U.S. by management's estimates, and our pricing, inventory and product availability, and overall customer service provide us the ability to compete in our industry. In addition, as we continue to increase the scope of our operations, including both retail and distribution, we expect to be able to continue to purchase inventory at lower volume prices, which we expect will enable us to price competitively and deliver the products that our customers are seeking. The Company competes by delivering a one-stop shopping experience that includes the widest selection of hydroponics products, end-to-end solutions for all types of cultivation environments, in-store sales and product support, direct manufacturer pricing, and industry-leading expertise and customer service.
Growth Strategy
Core to our growth strategy is to expand the number of our retail garden centers in the U.S., especially in markets where we do not already have a physical presence or where our existing physical presence is limited. During the first six months of 2023, the Company acquired 5 new locations and expanded into two new states. Our plan is to continue to acquire, open, and operate garden centers.
GrowGeneration will also pursue growth through expansion of its commercial sales and distribution capabilities to sell more product to commercial cultivators for large grow operations and independent retail garden centers for resale, as well as by promoting and expanding its portfolio of proprietary brands to increase its market share, product offerings, and profitability.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2023 and 2022
Net Sales
Net sales for the three months ended June 30, 2023 was approximately $63.9 million, compared to $71.1 million for the three months ended June 30, 2022, a decrease of approximately $7.2 million or 10.1%. The decrease was primarily attributed to a decrease of approximately $7.9 million related to same store sales, which represented an approximate 15.1% decrease year over year. Overall sales in our retail segment declined from $55.4 million for the three months ended June 30, 2022 to $46.9 million for the same period in 2023. Distributed sales increased to $13.3 million for the three months ended June 30, 2023, compared to $12.0 million for the three months ended June 30, 2022. E-commerce sales were relatively flat from $3.7 million for the three months ended June 30, 2022, to $3.7 million for the same period in 2023.
Cost of Sales
Cost of sales for the three months ended June 30, 2023 was approximately $46.8 million, compared to approximately $50.9 million for the three months ended June 30, 2022, a decrease of approximately $4.1 million or 8.0%. The decrease in cost of sales was primarily due to the 10.1% decrease in sales comparing the three months ended June 30, 2023 to the three months ended June 30, 2022.
Gross Profit
Gross profit was approximately $17.1 million for the three months ended June 30, 2023, compared to approximately $20.2 million for the three months ended June 30, 2022, a decrease of approximately $3.1 million or 15.3%. The decrease in gross profit is primarily related to the 10.1% decrease in net sales comparing the three months ended June 30, 2023 to the three months ended June 30, 2022. Gross profit as a percentage of net sales was 26.8% for the three months ended June 30, 2023, compared to 28.5% for the three months ended June 30, 2022. Gross profit in our retail segment declined from $15.6 million for the three months ended June 30, 2022, to $11.5 million for the same period in 2023. Gross profit from distributed sales increased to $4.8 million for the three months ended June 30, 2023, compared to $3.9 million for the three months ended June 30, 2022. Gross profit from our e-commerce segment was $0.8 million for the three months ended June 30, 2023, compared to $0.7 million for the three months ended June 30, 2022.
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Operating Expenses
Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $23.7 million for the three months ended June 30, 2023 and approximately $157.0 million for the three months ended June 30, 2022, a decrease of approximately $133.3 million or 85%. The decrease in operating expenses is primarily attributable the impairment loss of $127.8 million recorded during the three months ended June 30, 2022.
Store operating costs were approximately $12.3 million for the three months ended June 30, 2023, compared to $13.8 million for the three months ended June 30, 2022, a decrease of $1.5 million or 11%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.
Total corporate overhead, which is comprised of selling, general, and administrative expense and depreciation and amortization expense, was approximately $11.4 million for the three months ended June 30, 2023, compared to $15.4 million for the three months ended June 30, 2022, a decrease of $4.0 million or 26%. Selling, general, and administrative costs were approximately $7.5 million for the three months ended June 30, 2023, compared to approximately $9.8 million for the three months ended June 30, 2022. Salaries expense decreased to $3.4 million for the three months ended June 30, 2023, from $5.4 million for the same period in 2022. General and administrative expenses decreased to $3.2 million for the three months ended June 30, 2023, from $4.1 million for the same period in 2022.
Other Income/Expense
Total other income was approximately $1.0 million for the three months ended June 30, 2023, compared to expense of $0.1 million for the three months ended June 30, 2022. This increase is primarily attributable to interest income driven from capital investments.
Segment Operating Income
Operating loss in our retail segment dropped from $107.1 million to an operating loss of $6.5 million. The operating loss for our e-commerce segment decreased from $8.6 million for the three months ended June 30, 2022 to a loss of $0.4 million for the same period in 2023. Operating income in the distribution and other segment other increases to a loss of $0.4 million in the three months ended June 30, 2023, compared to a loss of of $21.1 million in the three months ended June 30, 2022.
Income Taxes
Income tax benefit was $0.1 million for the three months ended June 30, 2023, compared to income tax expense of $0.3 million for the three months ended June 30, 2022. The effective tax rate for the six months ended June 30, 2023 is lower than the U.S. federal statutory rate of 21.0%, which is also primarily due to the Company recording a valuation allowance against deferred tax assets. The Company has evaluated positive and negative evidence and has concluded that its deferred tax assets are not expected to be realizable and has recorded a valuation allowance in the current period.
Net Income
Net loss for the three months ended June 30, 2023 was approximately $5.7 million, compared to net loss of approximately $136.4 million for the three months ended June 30, 2022, an increase of approximately $130.7 million.
Comparison of the six months ended June 30, 2023 and 2022
Net Sales
Net sales for the six months ended June 30, 2023 was approximately $120.8 million, compared to $152.9 million for the six months ended June 30, 2022, a decrease of approximately $32.1 million or 21%. The decrease was primarily attributed to a decrease of approximately $29.7 million related to same store sales, which represented an approximate 26.5% decrease year over year. Overall sales in our retail segment declined from $119.7 million for the six months ended June 30, 2022, to $86.3 million for the same period in 2023. Distributed sales increased to $27.4 million for the six months ended June 30, 2023 compared to $24.2 million for the six months ended June 30, 2022. E-commerce sales decreased from $9.0 million for the six months ended June 30, 2022, to $7.0 million for the same period in 2023.
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Cost of Sales
Cost of sales for the six months ended June 30, 2023 was approximately $87.3 million, compared to approximately $110.5 million for the six months ended June 30, 2022, a decrease of approximately $23.2 million or 21%. The decrease in cost of sales was primarily due to the 21% decrease in sales comparing the six months ended June 30, 2023 to the six months ended June 30, 2022.
Gross Profit
Gross profit was approximately $33.4 million for the six months ended June 30, 2023, compared to approximately $42.4 million for the six months ended June 30, 2022, a decrease of approximately $8.9 million or 21%. The decrease in gross profit is primarily related to the 21% decrease in net sales comparing the six months ended June 30, 2023 to the six months ended June 30, 2022. Gross profit as a percentage of net sales was 27.7% for the six months ended June 30, 2023, compared to 27.7% for the six months ended June 30, 2022. Gross profit in our retail segment declined from $31.1 million for the six months ended June 30, 2022, to $22.3 million for the same period in 2023. Gross profit from distributed sales increased to $9.5 million for the six months ended June 30, 2023, compared to $8.8 million for the six months ended June 30, 2022. Gross profit from our e-commerce segment was $1.7 million for the six months ended June 30, 2023, compared to $2.5 million for the six months ended June 30, 2022.
Operating Expenses
Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $47.8 million for the six months ended June 30, 2023 and approximately $186.4 million for the six months ended June 30, 2022, a decrease of approximately $138.6 million or 74%. The decrease in operating expenses is primarily attributable to a $127.8 million impairment loss recognized in the prior year.
Store operating costs were approximately $25.2 million for the six months ended June 30, 2023, compared to $28.3 million for the six months ended June 30, 2022, a decrease of $3.1 million or 11%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.
Total corporate overhead, which is comprised of selling, general, and administrative expense and depreciation and amortization expense, was approximately $22.5 million for the six months ended June 30, 2023, compared to $30.3 million for the six months ended June 30, 2022, a decrease of $7.7 million or 26%. Selling, general, and administrative costs were approximately $14.3 million for the six months ended June 30, 2023, compared to approximately $19.4 million for the six months ended June 30, 2022. Salaries expense decreased to $6.9 million for the six months ended June 30, 2023, from $10.6 million for the same period in 2022. General and administrative expenses decreased to $6.4 million for the six months ended June 30, 2023, from $7.7 million for the same period in 2022.
Other Income/Expense
Total other income was approximately $2.6 million for the six months ended June 30, 2023, compared to expense of $0.5 million for the six months ended June 30, 2022. This increase is primarily attributable to income generated from capital investments.
Segment Operating Income
Operating loss in our retail segment decreased from $114.3 million to an operating loss of $13.6 million. The operating loss for our e-commerce segment decreased from $9.0 million for the six months ended June 30, 2022 to a loss of $0.9 million for the same period in 2023. Operating income in the distribution and other segment decreased to income of $0.2 million in the six months ended June 30, 2023, compared to income of $20.7 million in the six months ended June 30, 2022.
Income Taxes
Income tax expense was $0.1 million for the six months ended June 30, 2023, compared to income tax benefit of $1.9 million for the six months ended June 30, 2022. The effective tax rate for the six months ended June 30, 2023 is lower than the U.S. federal statutory rate of 21.0%, which is also primarily due to the Company recording a valuation allowance against deferred tax assets. The Company has evaluated positive and negative evidence and has concluded that its deferred tax assets are not expected to be realizable and has recorded a valuation allowance in the current period.
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Net Income
Net loss for the six months ended June 30, 2023 was approximately $11.8 million, compared to net loss of approximately $141.6 million for the six months ended June 30, 2022, an increase of approximately $129.7 million.
Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2023 was approximately $7.4 million, compared to $1.6 million used for the six months ended June 30, 2022. The Company continued to decrease inventory and improve on receivable collection, partially offset by reductions to customer deposits and payroll and payroll tax liabilities.
Net cash used by investing activities was approximately $17.6 million for the six months ended June 30, 2023, compared to cash provided by investing activities of approximately $14.2 million for the six months ended June 30, 2022. Investing activities in 2023 were primarily attributable to investment of excess cash into marketable securities of $51.7 million, partially offset by maturity of marketable securities of $42.6 million. The Company also had vehicle and store equipment purchases of $5.5 million and business acquisitions of $3.2 million. Investing activities for the six months ended June 30, 2022 were primarily related to maturities of marketable securities of $29.8 million, partially offset by store acquisitions of $6.8 million and the purchase of vehicles and store equipment to support new store operations of $8.8 million.
Net cash used in financing activities for the six months ended June 30, 2023 was approximately $0.2 million and was primarily attributable to common stock withheld for employee payroll taxes. Net cash used by financing activities for the six months ended June 30, 2022 was $1.5 million and was primarily attributable to stock withheld to cover payroll taxes.
Use of Non-GAAP Financial Information
The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, U.S. GAAP and may be different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.
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Set forth below is a reconciliation of Adjusted EBITDA to net income (loss):
| Three Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (000) | (000) | ||||||||||
| Net income (loss) | $ | (5,699) | $ | (136,379) | |||||||
| Income taxes | 93 | (283) | |||||||||
| Interest income | — | (45) | |||||||||
| Interest expense | 431 | 10 | |||||||||
| Depreciation, and amortization | 3,824 | 4,783 | |||||||||
| EBITDA | $ | (1,351) | $ | (131,914) | |||||||
| Impairment loss | — | 127,831 | |||||||||
| Share based compensation (option compensation, warrant compensation, stock issued for services) | 947 | 1,106 | |||||||||
| Restructuring charges | 1,220 | — | |||||||||
| Fixed asset disposal | 40 | (12) | |||||||||
| Adjusted EBITDA | $ | 856 | $ | (2,989) | |||||||
| Adjusted EBITDA per share, basic | $ | 0.01 | $ | (0.05) | |||||||
| Adjusted EBITDA per share, diluted | $ | 0.01 | $ | (0.05) | |||||||
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (000) | (000) | ||||||||||
| Net income (loss) | $ | (11,833) | $ | (141,556) | |||||||
| Income taxes | 93 | (1,919) | |||||||||
| Interest income | — | (47) | |||||||||
| Interest expense | 5 | 13 | |||||||||
| Depreciation, and amortization | 7,756 | 9,289 | |||||||||
| EBITDA | $ | (3,979) | $ | (134,220) | |||||||
| Impairment loss | — | 127,831 | |||||||||
| Share based compensation (option compensation, warrant compensation, stock issued for services) | 1,514 | 2,689 | |||||||||
| Restructuring charges | 1,498 | — | |||||||||
| Fixed asset disposal | 21 | (84) | |||||||||
| Adjusted EBITDA | $ | (946) | $ | (3,784) | |||||||
| Adjusted EBITDA per share, basic | $ | (0.02) | $ | (0.06) | |||||||
| Adjusted EBITDA per share, diluted | $ | (0.02) | $ | (0.06) | |||||||
Liquidity and Capital Resources
As of June 30, 2023, we had working capital of approximately $126.2 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $8.7 million. The decrease in working capital from December 31, 2022 to June 30, 2023 was due primarily to a decrease in accounts receivable and income taxes receivable, partially offset by an increase in current liabilities. At June 30, 2023, we had cash and cash equivalents of approximately $29.6 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States and building our store and brand portfolio through organic growth and acquisitions. We believe that some of our store acquisitions and new store openings can come from cash flow from operations.
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We anticipate that we may need additional financing through equity offerings and/or debt financings in the future to continue to acquire and open new stores and related businesses. To date, we have financed our operations through the issuance and sale of common stock, convertible notes, and warrants.
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 Form 10-K for the year ended December 31, 2022.
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 Form 10-K for the year ended December 31, 2022.
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, 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 June 30, 2023, 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, 2021 (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 December 31, 2022, 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
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June 30, 2023, 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 June 30, 2023 because of the material weaknesses in internal control over financial reporting discussed below.
•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.
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•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 consolidated financial statements as of and for the year ended December 31, 2022, 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 2022 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.
Through the full year of 2023, the Company initiated and will continue efforts toward implementation of certain steps in its remediation plan, including:
•Engaged a third-party CPA firm to assist with the redesign of the Sarbanes-Oxley program inclusive of entity-level controls.
•Created and staffed a controls compliance analyst charged with monitoring and facilitating compliance with the Company’s responsibilities under the Sarbanes Oxley Act of 2002 (“SOX”).
•Implemented a global risk and compliance software to assist in monitoring and documenting compliance with SOX.
•For certain processes, developed new and revised existing process narratives and identified risks inherent to those processes.
•Developed new controls and revised the design of existing controls for a significant number of relevant key controls to mitigate the aforementioned risks, inclusive of general information technology controls and entity-level controls.
•Certain business functions have been restructured or consolidated to align more closely with effective business operation as well as to enable appropriate segregation of duties.
The following remaining activities are scheduled to occur in the first half of 2023 in anticipation of conducting management’s testing that will begin in the first half of 2023 in support of issuing management’s assessment of internal control over financial reporting as of December 31, 2023:
•Conduct initial organization-wide training sessions with all control owners.
•Implementation of new business systems to support information technology general controls.
•Completion of the identification of risks arising from inappropriate segregation of duties and fraud risks.
•Completion of risk assessment and control design for the remaining populations of processes and controls.
•Implementation of controls across all financial reporting processes and information technology environments.
•Development of effective communication plans relating to, among other things, identification of deficiencies and recommendations for corrective actions. These plans will apply to all parties responsible for remediation.
•Implement periodic compliance reports are made to the Nominating and Governance Committee of the Board of Directors.
•Ongoing training with control owners, as necessary.
•Ongoing migration of certain components of a legacy information technology system onto a common information technology environment, including risk assessment, control design and implementation of new and revised controls.
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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. Our remediation efforts are ongoing and additional remediation initiatives may be necessary. We will continue our initiatives to implement and document the strengthening of existing, and development of new policies, procedures, and internal controls.
Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2023. 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, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 12, 2022, the Company purchased certain assets from V&W Ag Consulting, LLC (“VW”). The total consideration for the purchase was common stock of the Company worth approximately $0.3 million, including an indemnity holdback of common stock worth approximately $0.1 million. 35,000 shares of common stock for the indemnity holdback payment were issued on June 1, 2023. These shares were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of SEC Rule 10b5–1(c) or any “non-Rule 10b5–1 trading arrangement,” as defined in Item 408(c) of Regulation S-K
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ITEM 6. EXHIBITS
The following exhibits are included and filed with this report.
| Exhibit | Exhibit Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 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. | |||||||
34
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 August 8, 2023.
| 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) | ||||||||
35
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Darren Lampert, certify that:
1. I have reviewed this Form 10-Q for the fiscal quarter ended June 30, 2023 of GrowGeneration Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.
August 8, 2023
| By: | /s/ Darren Lampert | |||||||
| Darren Lampert, Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory Sanders, certify that:
1. I have reviewed this Form 10-Q for the fiscal quarter ended June 30, 2023 of GrowGeneration Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.
August 8, 2023
| By: | /s/ Gregory Sanders | |||||||
| Gregory Sanders, Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q of GrowGeneration Corp. (the “Company”) for the fiscal quarter ended June 30, 2023, I, Darren Lampert, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
1. Such Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Quarterly Report on Form 10-Q for the fiscal quarter June 30, 2023, fairly presents, in all material respects, the financial condition and results of operations of GrowGeneration Corp.
August 8, 2023
| By: | /s/ Darren Lampert | |||||||
| Darren Lampert, Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q of GrowGeneration Corp. (the “Company”) for the fiscal quarter ended June 30, 2023, I, Gregory Sanders, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
1. Such Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023, fairly presents, in all material respects, the financial condition and results of operations of GrowGeneration Corp.
August 8, 2023
| By: | /s/ Gregory Sanders | |||||||
| Gregory Sanders, Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||