Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other information included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly those under “Risk Factors.” Dollars in tabular format are presented in thousands, except per share data, or otherwise indicated.
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 and is the largest chain of hydroponic garden centers in North America 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 e-commerce platforms, www.growgeneration.com, Mobile Media, a vertical racking and storage solutions business, Horticultural Rep Group, a horticultural products sales representative and distributor organization, and Canopy Crop Management, CharCoir, and several other proprietary private-label brands across multiple product categories from LED lighting to nutrients and additives and environmental control systems for indoor cultivation.
MARKETS
GrowGeneration sells thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, vertical benching and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are designed and intended for growing a wide range of plants. In addition, vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other severe weather conditions and insect pests.
Our retail operations are driven by a wide selection of all hydroponic products, service and solutions driven staff and pick, pack and ship distribution and fulfillment capabilities. We employed approximately 702 employees as of December 31, 2021, a majority of them we have branded as “Grow Pros.” Currently, our operations span over 895,000 square feet of retail and warehouse space.
We operate our business through the following business units:
Retail
Currently, the Company owns and operates a chain of 62 hydroponic/gardening centers focused on serving growers and cultivators. Inclusive of commercial sales organizations selling directly to customers outside of the physical retail network. Some of our garden centers have multi-functions, with added capabilities that include warehousing, distribution and fulfillment for direct shipments of products to garden center locations, pick, pack and ship for our online platforms and direct fulfillment to our commercial customers.
E-Commerce/Omni Channel
Our digital strategy is focused on capturing the home, craft and commercial grower online. GrowGeneration.com offers over 10,000 hydroponic products, all curated by our product team. GrowGeneration.com offers customers the option to have their orders shipped directly to their locations, anywhere in North America.
Proprietary Brands and Private Label
In December 2020, GrowGeneration purchased the business of Canopy Crop Management Corp., the developer of the popular Power Si line of monosilicic acid products, a widely used nutrient additive for plants. On March 12, 2021, the Company purchased Char Coir, a line of premium coco pots, cubes and medium. We believe that expanding our private label offerings will have a positive impact on our margins and profitability in the near term. We use various trademarks and trade names in our private-label business, including Ion Lighting, Sunleaves powder nutrients and additive line, Optilime Bulbs, Blueprint controllers and timers, Growxcess pots and containers, Harvest Edge pruners, trellis and other gardening accessories, Durabreeze fans and dehumidifiers, and Drip Hydro nutrients. Both “GrowGeneration” and “Where the Pros Go to Grow” are trademarks used to brand and market our garden centers across North America.
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Competitive Advantages
As the largest chain of hydroponic garden centers by revenue and number of stores in the United States based on management’s estimates, we believe that we have the following core competitive advantages over our competitors:
• We offer a one-stop shopping experience to all types of growers by providing “selection, service, and solutions”;
• We provide end-to-end solutions for our commercial customers from capex built-out to consumables to nourish their plants;
• We have a knowledge-based sales team, all with horticultural experience;
• We offer the options to transact online, in store, or buy online and pick up;
• We consider ourselves to be a leader of the products we offer, from launching new technologies to the development of our private label products;
• We have a professional team for mergers and acquisitions and to acquire and open new locations and successfully add them to our company portfolio; and
• We offer a program of issuing credit to licensed commercial customers based on a credit evaluation process.
Growth Strategy - Store Acquisitions and New Store Openings
Core to our growth strategy is to expand the number of our retail garden centers throughout North America. In addition to the 13 states in which we are currently operating, we have identified new market opportunities in states that include Connecticut, Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi, Missouri and Virginia. The Company acquired 23 new locations in 2021 and expects to open many new stores in 2022.
Secondary to this growth strategy is the expansion of distribution and sales capabilities for products that the company owns, distributes, or represents to independent retail garden centers for resale.
RESULTS OF OPERATIONS
Revenue
Net revenues for the year ended December 31, 2021, were approximately $422.5 million, an increase of 118.5% over the year ended December 31, 2020, which were approximately $193.4 million. 2020 net revenue increased approximately 142.5% over the year ended December 31, 2019, which were approximately $79.7 million.
The increase in net revenues for the year ended December 31, 2021 compared to the year ended December 31, 2020 included an increase in same store sales of approximately $40.1 million which represented 24.4% growth year over year. Distributed sales were $17.1 million, from acquisitions of Power Si and Charcoir. E-commerce sales increased from $10.6 million, to $36.2 million, primarily attributable to $11.2 million growth in owned e-commerce sites and $14.4 million from the Agron acquisition.
The increase in 2020 revenues over 2019 is due to 1) the addition of 14 new retail stores opened or acquired during 2020 for which revenues were $24.8 million, 2) 11 stores opened or acquired at various times during 2019 that were open for all of 2020 which had an increase in revenues of $51 million, 3) same store sales which increased 63% comparing 2020 to 2019, which had an increase in revenues of approximately $28 million, 4) an increase in our e-commerce sales of $5.9 million, from 2019 to 2020 and 5) revenues of $300,000 from Canopy Crop Management/Power SI, acquired in later December 2020.
Cost of Sales
Cost of sales for the year ended December 31, 2021 increased approximately $161.9 million or 113.8% compared to the year ended December 31, 2020. The increase in cost of goods sold is primarily due to the 118.5% increase in sales.
Cost of sales for the year ended December 31, 2020 increased approximately $84.6 million or 146.5% compared to the year ended December 31, 2019. The increase in cost of goods sold was directly attributable to the 142.5% increase in revenues, as detailed above, comparing the year ended December 31, 2020 to 2019.
Gross profit was approximately $118.2 million for the year ended December 31, 2021, compared to approximately $51.0 million for the December 31, 2020, an increase of approximately $67.2 million or 131.6%. The increase in gross profit is primarily related to the 118.5% increase in revenues. Gross profit as a percentage of revenues was 28.0% for the year
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ended December 31, 2021, compared to 26.4% for 2020. The increase in the gross profit margin percentage is primarily due to higher increases in revenues from both private label products and distributed products which were 7.5% of revenues for 2021 and approximately 1.0% of revenues for 2020.
Gross profit for the year ended December 31, 2020 increased, approximately $29.0 million or 132.0% compared to the year ended December 31, 2019. Gross profit as a percentage of sales was 26.4% for the year ended December 31, 2020, compared to 27.6% for the year ended December 31, 2019.
Operating Expenses
Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $103.2 million for the year ended December 31, 2021 and approximately $42.6 million for the year ended December 31, 2020, an increase of approximately $60.6 million or 142.3%.
Operating expenses for the year ended December 31, 2020 increased approximately $22.2 million or 108.7% compared to the year ended December 31, 2019.
Store operating costs, primarily payroll, rent and utilities, and allocated corporate overhead costs, were approximately $49.7 million for the year ended December 31, 2021, compared to $18.7 million for the year ended December 31, 2020, an increase of $31.0 million or 165.7%. The increase in store operating costs was directly attributable to the 118.5% increase in revenues and the addition of 23 locations that were added during 2021. Pre-opening expenses for new stores opened during the period increased approximately $0.9 million during 2021.
During 2020, store operating costs increased approximately $8.6 million or 85.5% compared to the year ended December 31, 2019. The increase in store operating costs was directly attributable to 1) the addition of 14 new retail stores opened or acquired during 2020 and 2) 11 stores opened or acquired at various times during 2019 that were open for all of 2020. The addition of these stores, as discussed above, were the primary reasons for the increase in store operating costs. Store operating costs as a percentage of revenues were 9.7% for the year ended December 31, 2020, compared to 12.7% for the year ended December 31, 2019. Store operating costs were positively impacted by 1) the opening of new and acquired stores throughout 2020 which have lower percentage of operating costs to revenues due to their larger size and higher volume and 2) same store revenues increased 63% comparing the year ended December 31, 2020 to the year ended December 31, 2019, which also contributed significantly to lowering of the store operating costs as a percentage of revenues since the majority of store operating costs are fixed.
Total corporate overhead was approximately $53.5 million for the year ended December 31, 2021, compared to $23.9 million for the year ended December 31, 2020, an increase of $29.6 million or 124.0%. Selling, general, and administrative costs were approximately $40.9 million for the year ended December 31, 2021, compared to approximately $21.5 million for the year ended December 31, 2020. Salaries expense increased to $20.0 million from $8.6 million primarily due to an increase in corporate staff and general and administrative expenses increased to $14.3 million from $5.0 million to support expanding operations. These increases were partially offset by a decrease in share-based compensation to $6.6 million from $7.9 million primarily due to new executive compensation agreements effective January 1, 2020 that had front loaded vesting provisions for shares and options that were granted January 1, 2020 for which the remaining vesting was over a two-year period.
During 2020, total corporate overhead increased $13.6 million or 131.3% compared to the year ended December 31, 2019. Corporate overhead was 12.4% of revenue for the year ended December 31, 2020 and 13.0% for the year ended December 31, 2019. Corporate overhead, excluding non-cash share-based compensation and depreciation and amortization, was 8.3% of revenues compared to 9.8% of revenues for 2019 shows that non-cash expenses was a larger component of overhead cost in 2020 compared to 2019. Non-cash costs included in corporate overhead was 5.3% of revenues for 2020 compared to 4.4% of revenues for 2019. The increase in non-cash expenses in corporate overhead as a percentage of revenues for the year ended December 31, 2020 was primarily due to 1) the increase in non-cash share-based compensation from approximately $2.5 million for the year ended December 31, 2019 to approximately $7.9 million for the year ended December 31, 2020, an increase of $5.4 million and 2) the increase in depreciation and amortization from approximately $1.0 million for the year ended December 31, 2019 to approximately $2.4 million for the year ended December 31, 2020. The increase in non-cash share-based compensation was primarily the result of several new executive employment agreements which became effective January 1, 2020, which resulted in the vesting of common stock and common stock options at the start of the first quarter, as well as options issued in 2018 and 2019 for options vesting in 2020. The share-based awards associated with the new executive employment agreements resulted in approximately one-third of the award being recognized as an expense in the first three months of 2020, due to vesting, and the remaining two-thirds on the share-based awards are being recognized over a 24-month period commencing January 2020 and ending December 2021, based
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on shared based award vesting in future periods. The vesting of these shares and options was significantly higher in 2020 than they will be in the periods subsequent to 2020. The increase in depreciation and amortization is due to the significant increase in both depreciable assets and acquired intangible assets being amortized over their useful lives. Salaries as a percentage of revenues were 4.4% for 2020 and 4.5% for 2019. The increase in salaries expense from 2019 to 2020, which increased $5.0 million, from $3.6 million for the year ended December 31, 2019 to $8.6 million for the year ended December 31, 2020 was due primarily to the increase in corporate staff to support expanding store operations, including management, purchased store integrations, accounting and finance, information systems, purchasing and commercial revenues support staff. It should be noted that when we consummate a new acquisition, purchasing and back-office accounting functions are stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and centralized accounting and finance departments, thus delivering cost savings.
General and administrative expenses comprised mainly of marketing, travel & entertainment, professional fees and insurance, was approximately $5.0 million for the year ended December 31, 2020 and approximately $3.2 million for the year ended December 31, 2019, with a majority of the increase related to marketing, insurance (both property and casualty and director and officers liability insurance), professional and legal fees. The increase in professional and legal fees was due to the increase in acquisitions in 2020 and consulting fees for SOX 404 compliance. General and administrative costs as a percentage of revenue were 2.6% for the year ended December 31, 2020, and 4% for the year ended December 31, 2019.
Net Income
Net income for the year ended December 31, 2021 was approximately $12.8 million, compared to net income of approximately $5.3 million for the year ended December 31, 2020, an increase of approximately $7.5 million.
Net income for the year ended December 31, 2020 was approximately $5.3 million, compared to net income of approximately $1.3 million for the year ended December 31, 2019, an increase of $4.0 million. Net income for 2020 compared to 2019 was primarily impacted by a 142.5% increase in revenues, offset slightly by increased cost of goods sold of 146.5%. Store operating costs as a percentage of revenue was 9.7% in 2020, compared to 12.7% offsetting the increase in cost of goods sold.
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CONDENSED 2021, 2020, AND 2019 RESULTS OF OPERATIONS (in thousands except per share data)
For the Year Ended
December 31,
2021 2020 2019
Sales $ 422,489 $ 193,365 $ 79,734
Cost of Sales 304,248 142,317 57,729
Gross profit 118,241 51,048 22,005
Operating expenses 103,239 42,611 20,422
Income (loss) from operations 15,002 8,437 1,583
Other income (expense) 227 142 (261)
Pre-tax net income 15,229 8,579 1,322
Income taxes (2,443) (3,251) —
Net income $ 12,786 $ 5,328 $ 1,322
CONDENSED Q4 2021, Q4 2020, AND Q4 2019 RESULTS OF OPERATIONS
For the Quarter Ended
December 31,
2021 2020 2019
Sales $ 90,579 $ 61,925 $ 25,385
Cost of Sales $ 67,490 $ 45,979 $ 19,388
Gross profit 23,089 15,946 5,997
Operating expenses 30,106 13,304 7,069
Income (loss) from operations (7,017) 2,642 (1,072)
Other income (expense) (209) 164 54
Pre-tax net income (7,226) 2,806 (1,018)
Income taxes $ 3,126 $ (1,296) $ —
Net income (loss) $ (4,100) 1,510 (1,018)
Highlights of Results of Operations Comparing Q4 2021 to Q4 2020.
• Net revenues increased 46% to $90.6 million for fourth quarter 2021, compared to $61.9 million for the same period last year.
• Same-store sales at 26 locations open for the same period in 2020 and 2021 were $40.3 million in fourth quarter 2021, compared to $46.0 million in the same period last year, representing a 12.3% year-over-year decline.
• Gross profit margin for the fourth quarter 2021 was 25.5%, compared to 25.8% in the same period last year, a decrease of 30 basis points.
• GAAP net loss was $4.1 million or $(0.07) per share based on a diluted share count of 58.4 million, compared to net income of $1.5 million in the same period last year, or $0.03 per share on a diluted share count of 51.6 million.
• Adjusted EBITDA was a loss was $1.9 million for the fourth quarter 2021, versus earnings of $5.5 million in the same period last year.
• Private label and proprietary brand sales, inclusive of Power Si and Char Coir, were 7.5% of revenue in the fourth quarter of 2021 compared to 0.5% in the same period last year.
• E-commerce revenue, inclusive of Agron revenue, was $7.7 million, compared to $3.2 million in the same period last year.
• Cash and short-term securities as of December 31, 2021 was $81.2 million.
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Highlights of Results of Operations Comparing Q4 2020 to Q4 2019.
• Revenues in Q4 2020 were $62 million, an increase of 144% primarily the result of the addition of 14 stores in 2020 and an increase in same store sales of 58%
• Margins were 25.8% in Q4 2020 compared to 23.6% Q4 2019. Q4 2020 had lower write-offs from physical inventories, resulting in slightly higher margins.
• Operating cost, including both store operating costs and corporate overhead, decreased substantially as a percentage of revenue. Store operating costs were 10.0% of revenues for Q4 2020 compared to 10.8% for Q4 2019. The decrease is due to a 58% increase in same store sales which reduces stores operating costs as a percentage of revenues. Corporate overhead was 11.5% of revenues for Q4 2020 compared to 17.1% for Q4 2019, a decrease of 33%, and corporate overhead costs do not rise commensurate with the increase in revenues.
• Pre-tax net income was 4.5% of revenue for Q4 2020 compared to pre-tax net loss of 4.0% for Q4 2019. The increase in margin and the decrease in both store operating costs and corporate overhead as a percentage of revenues resulted in the pre-tax net income of 4.5% of revenue.
• Adjusted EBITDA was $5.5 million for Q4 2020 compared to $911 thousand for Q4 2019, an increase of 515%
Use of Non-GA AP 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, generally accepted accounting principles 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.
Set forth below is a reconciliation of Adjusted EBITDA to net income (in thousands except per share data):
Year ended December 31,
2021 2020 2019
Net Income $ 12,786 $ 5,328 $ 1,322
Income taxes 2,443 3,251 —
Interest 43 14 401
Depreciation and Amortization 12,600 2,436 1,045
EBITDA $ 27,872 $ 11,029 $ 2,768
Share based compensation (option compensation, warrant compensation, stock issued for services)
6,585 7,856 2,491
Adjusted EBITDA $ 34,457 $ 18,885 $ 5,259
Adjusted EBITDA per share, basic $ 0.58 $ 0.43 $ 0.16
Adjusted EBITDA per share, diluted $ 0.57 $ 0.41 $ 0.16
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2021, we had working capital of approximately $169.8 million, compared to working capital of approximately $222.9 million as of December 31, 2020, a decrease of approximately $53.1 million. The decrease in working capital from December 31, 2020 to December 31, 2021 was due primarily to business acquisitions completed during the year ended December 31, 2021 for which the cash consideration was approximately $80.8 million. This decrease in working capital related to business acquisitions was partially offset by an increase in inventory associated with more locations and our ability to leverage greater bulk purchasing due to our growth. At December 31, 2021, we had cash and cash equivalents of approximately $41.4 million and available for sale debt securities of $39.8 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital. Our core strategy
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continues to focus on expanding our geographic reach across the United States through organic growth and acquisitions. Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings, however our ability to do so on acceptable terms is uncertain. We believe that some of our store acquisitions and new store openings can come from cash flow from operations.
As of December 31, 2020, we had working capital of approximately $222.9 million, compared to working capital of approximately $29.0 million as of December 31, 2019, an increase of approximately $193.9 million. The increase in working capital from December 31, 2019 to December 31, 2020 was due primarily to the proceeds from the sale of common stock and exercise of warrants of $211.2 million. At December 31, 2020, we had cash and cash equivalents of approximately $177.9 million.
We anticipate that we will need additional financing in the future to continue to acquire and open new stores. To date we have financed our operations through the issuance of the sale of common stock, warrants and convertible debentures as discussed below.
Operating Activities
Net cash provided by operating activities for year ended December 31, 2021 was approximately $5.2 million compared to net cash used of $213 thousand for the year ended December 31, 2020. Cashed used in operations as a result of an inventory increase was primarily attributable to our additional store count. In addition, we have used our capital capabilities to secure production of product overseas through prepaid inventory purchase commitments with long lead times in advance of spring 2022 needs. Cash used in accounts and notes receivable decreases were primarily driven by increased revenues partially offset by the collection of notes receivable. Cash provided by the increase in accounts payable and accrued liabilities and customer deposits are attributable to our increased store count and related increase in cost of sales. The increase in payroll liability is primarily driven by increased headcount related to our increased operations.
Net cash used in operating activities for the year ended December 31, 2020 was approximately $213 thousand, compared to $3.3 million for the year ended December 31, 2019, a decrease of approximately $3.1 million. Cash provided by operating activities is driven by our net income and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets, share based compensation expense and changes in valuation allowances. Non-cash adjustments totaled approximately $11.1 million and approximately $4.0 million for the years ended December 31, 2020 and 2019, respectively, so non-cash adjustments had a greater positive impact on net cash used in operating activities for the year ended December 31, 2020 than the same period in 2019. Despite net income of approximately $5.3 million and non-cash adjustments of $11.1 million for 2020, these positive adjustments were offset by increases in inventory of $19.2 million, increases in trade accounts and notes receivable of $3.5 million and increases in prepaids and other current assets of $9.2 million. Despite net income of $1.3 million for the year ended December 31, 2019 and non-cash adjustments totaling $4.0 million, these positive adjustments were offset by increases in inventory of $9.5 million, increases in trade receivable of $3.8 million and increases in prepaids and other current assets of $2.1 million.
Investing Activities
Net cash used in investing activities was approximately $139.3 million for the year ended December 31, 2021 and approximately $45.8 million for the year ended December 31, 2020. Investing activities in 2021 were primarily attributable to acquisitions of $80.8 million, purchase of marketable securities of $75.0 million, and purchase of vehicles and store equipment of $18.7 million, partially offset by $35.2 million of marketable security maturities. Investing activities for the year ended December 31, 2020 were primarily related to store acquisitions of $41.4 million and the purchase of vehicles and store equipment of $3.4 million.
Net cash used in investing activities was approximately $45.8 million for the year ended December 31, 2020 and approximately $11.8 million for the year ended December 31, 2019. The increase in 2020 was due to the multiple asset acquisitions throughout 2020, 8 in total, in which we acquired inventory, fixed assets, goodwill and other intangibles of $41.4 million, and purchased vehicles and store equipment of approximately $3.4 million. During 2019, we acquired 8 new stores in which we purchased inventory, fixed assets, goodwill and other intangibles of $9.5 million and purchased vehicles and store equipment of approximately $2.2 million.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2021 was approximately $2.4 million and was primarily attributable to stock redemptions partially offset by the proceeds from the sales of common stock and exercise of
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warrants and options. Net cash provided by financing activities for the year ended December 31, 2020 was $211.0 million and was primarily from proceeds from the sale of common stock and exercise of warrants and options.
Net cash provided by financing activities for the year ended December 31, 2020 was approximately $211.0 million and represented proceeds from the sale of common stock and exercise of warrants and options, net of offering costs of $211.2 million. Net cash provided by financing activities for the year ended December 31, 2019 was approximately $13.5 million and was comprised of primarily proceeds from the sales of common stock and exercise of warrants and options.
2020 Offerings
On December 11, 2020, the Company consummated an underwritten public offering of 5,750,000 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase an additional 750,000 shares of common stock to cover over-allotments. The shares were sold at a public offering price of $30 per share, generating gross proceeds of $172.5 million, before deducting the underwriting discounts and commissions and other offering expenses. Net proceeds from the sales of common stock, net of all offering costs and expenses, was approximately $162.5 million.
On July 2, 2020, the Company consummated an underwritten public offering of 8,625,000 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase an additional 1,125,000 shares of common stock to cover over-allotments. The shares were sold at a public offering price of $5.60 per share, generating gross proceeds of $48.3 million, before deducting the underwriting discounts and commissions and other offering expenses. Net proceeds from the sales of common stock, net of all offering costs and expenses, was approximately $44.6 million.
2019 Offerings
On June 26, 2019, the Company completed a private placement of a total of 4,123,257 units of the Company’s securities at the price of $3.10 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Each unit consisted of (i) one share of common stock and (ii) one 3-year warrant, each entitling the holder to purchase one half share of common stock, at a price of $3.50 per share. The Company raised a total of $12.8 million from 19 accredited investors.
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.