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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-16 · 135 added, 46 removed, 74 unchanged (71% of the section changed)

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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 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 Power Si, 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.

(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 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 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 PowerSi, 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.

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.

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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 660 employees as of March 31, 2022, a majority of them we have branded as “Grow Pros.” Currently, our operations span over 1,022,000 square feet of retail and warehouse space.

We employed approximately 570 employees as of June 30, 2022, a majority of them we have branded as “Grow Pros.” Currently, our operations span over 958,000 square feet of retail and warehouse space.

The Company has three primary reportable segments including retail operations, e-commerce and all other.

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• We have a professional team for mergers and acquisitions, and to acquire and open new locations and successfully add them to our company portfolio.

Growth Strategy - Store Acquisitions and New Store Openings

Growth Strategy

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.

In addition to the 14 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, Missouri and Virginia.

The Company acquired 23 new locations in 2021 and expects to open additional 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.

R ESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2022 and 2021

Net revenue for the three months ended March 31, 2022 was approximately $81.8 million, compared to $90.0 million for the three months ended March 31, 2021, a decrease of approximately $8.3 million or 9%.

The decrease was attributed to a decrease of approximately $26.2 million related to same store sales, which represented 35.5% of the decrease year over year.

Comparison of the three months ended June 30, 2022 and 2021

Net revenue for the three months ended June 30, 2022 was approximately $71.1 million, compared to $125.9 million for the three months ended June 30, 2021, a decrease of approximately $54.8 million or 44%.

The decrease was attributed to a decrease of approximately $59.3 million related to same store sales, which represented a decrease of 56.9% year over year.

Overall sales in our retail segment declined from $108.9 million to $55.4 million.

Distributed sales were $12.0 million for the three months ended June 30, 2022, up 141% year-over-year.

E-commerce sales decreased from $12.0 million for the three months ended June 30, 2021 to $3.7 million for the three months ended June 30, 2022.

Cost of Goods Sold

Cost of goods sold for the three months ended June 30, 2022 was approximately $50.9 million, compared to approximately $90.2 million for the three months ended June 30, 2021, a decrease of approximately $39.3 million or 44%.

The decrease in cost of goods sold was primarily due to the 44% decrease in sales comparing the three months ended June 30, 2022 to the three months ended June 30, 2021.

Gross profit was approximately $20.2 million for the three months ended June 30, 2022, compared to approximately $35.7 million for the three months ended June 30, 2021, a decrease of approximately $15.5 million or 43%.

The decrease in gross profit is primarily related to the 44% decrease in revenues comparing the three months ended June 30, 2022 to the three months ended June 30, 2021.

Gross profit as a percentage of revenues was 28.5% for the three months ended June 30, 2022, compared to 28.4% for the three months ended June 30, 2021.

Gross profit in our retail segment declined from $30.6 million for the three months ended June 30, 2021 to $15.6 million for the same period in 2022.

Gross profit from distributed sales was $3.9 million for the three months ended June 30, 2022 up from $2.2 million for the same period in 2021.

Gross profit from e-commerce revenue was $0.7 million for the three 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 $157.0 million for the three months ended June 30, 2022 and approximately $26.1 million for the three months ended June 30, 2021, an increase of approximately $130.9 million or 502%.

The increase in operating

expenses is primarily attributable to the impairment loss of $127.8 million recorded during the three months ended June 30, 2022.

Store operating costs were approximately $13.8 million for the three months ended June 30, 2022, compared to $12.6 million for the three months ended June 30, 2021, an increase of $1.1 million or 9%.

The increase in store operating costs was directly attributable to the addition of 23 locations that were added during 2021, including seven stores that were added subsequent to June 30, 2021.

Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately $15.4 million for the three months ended June 30, 2022, compared to $13.5 million for the three months ended June 30, 2021, an increase of $2.0 million or 14%.

Selling, general, and administrative costs were approximately $10.6 million for the three months ended June 30, 2022, compared to approximately $10.6 million for the three months ended June 30, 2021.

Salaries expense decreased to $5.4 million from $5.6 million primarily due to a decrease in corporate staff.

General administrative expenses increased to $4.1 million for the three months ended June 30, 2022 from $3.0 million for the same period in 2021 to support expanding operations.

Impairment loss was approximately $127.8 million for the three months ended June 30, 2022 following goodwill impairment testing performed as a result of, the Company’s market capitalization falling below total net assets.

In addition, financial performance continued to weaken during the quarter.

Refer to Critical Accounting Policies, Judgements, and Estimates and Note 8, Goodwill and Intangible Assets.

Other Income/Expense

Total other income was approximately $0.1 million for the three months ended June 30, 2022, compared to expense of $24 thousand for the three months ended June 30, 2021.

This increase is primarily attributable to a gain recorded in the three months ended June 30, 2022 related to an earnout revaluation adjustment related to The Harvest Company acquisition.

Segment Operating Income

Operating income in our retail segment dropped from $8.6 million to an operating loss of $107.1 million as a result of impairment expense, lower sales volume, lower gross margins and higher expenses at existing stores combined with operating losses at seven stores not in operation in the same period in 2021, including acquired and new retail locations.

Operating income in our e-commerce segment declined from a loss of $15.0 thousand to a loss of $8.6 million, as a result of impairment expense, lower revenue and higher operating expenses as well as integration costs of Agron.IO that was consolidated with our core e-commerce webstore in the period.

Operating income in all other decreased to a loss of $21.1 million in the three months ended June 30, 2022 compared to income of $1.0 million in the three months ended June 30, 2021.

Income tax benefit was $0.3 million for the three months ended June 30, 2022, compared to income tax expense of $2.9 million for the three months ended June 30, 2021.

Effective tax rate is impacted by differences in timing of expenses for share based compensation, depreciation, amortization and the impact of 162(m) on deductible wages.

As such, the Company’s taxable income varies from reported income in a material way.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 loss for the three months ended June 30, 2022 was approximately $136.4 million, compared to net income of approximately $6.7 million for the three months ended June 30, 2021, a decrease of approximately $143.1 million.

Comparison of the six months ended June 30, 2022 and 2021

Net revenue for the six months ended June 30, 2022 was approximately $152.9 million, compared to $215.9 million for the six months ended June 30, 2021, a decrease of approximately $63.0 million or 29%.

The decrease was attributed to a decrease of approximately $85.5 million related to same store sales, which represented an approximate 48.0% decrease year over year.

Overall sales in our retail segment declined from $190.1 million for the six months ended June 30, 2021, to $119.7 million for the same period in 2022.

Distributed sales were $24.2 million.

E-commerce sales decreased from $6.0 million to $5.3 million.

E-commerce sales decreased from $17.9 million for the six months ended June 30, 2021, to $9.0 million for the same period in 2022.

Cost of Goods Sold

Cost of goods sold for the three months ended March 31, 2022 was approximately $59.6 million, compared to approximately $64.6 million for the three months ended March 31, 2021, a decrease of approximately $5.0 million or 8%.

The decrease in cost of goods sold was primarily due to the 9% decrease in sales comparing the three months ended March 31, 2022 to the three months ended March 31, 2021.

Gross profit was approximately $22.1 million for the three months ended March 31, 2022, compared to approximately $25.4 million for the three months ended March 31, 2021, a decrease of approximately $3.2 million or 13%.

The decrease in gross profit is primarily related to the 9% decrease in revenues comparing the three months ended March 31, 2022 to the three months ended March 31, 2021.

Gross profit as a percentage of revenues was 27.1% for the three months ended March 31, 2022, compared to 28.2% for the three months ended March 31, 2021.

Gross profit in our retail segment declined from $21.9 million to $15.5 million.

Gross profit from distributed sales was $4.9 million and was $1.7 million from e-commerce sales for the three months ended March 31, 2022.

Cost of goods sold for the six months ended June 30, 2022 was approximately $110.5 million, compared to approximately $154.8 million for the six months ended June 30, 2021, a decrease of approximately $44.3 million or 29%.

The decrease in cost of goods sold was primarily due to the 29% decrease in sales comparing the six months ended June 30, 2022 to the six months ended June 30, 2021.

Gross profit was approximately $42.4 million for the six months ended June 30, 2022, compared to approximately $61.1 million for the six months ended June 30, 2021, a decrease of approximately $18.7 million or 31%.

The decrease in gross profit is primarily related to the 29% decrease in revenues comparing the six months ended June 30, 2022 to the six months ended June 30, 2021.

Gross profit as a percentage of revenues was 27.7% for the six months ended June 30, 2022, compared to 28.3% for the six months ended June 30, 2021.

Gross profit in our retail segment declined from $52.5 million for the six months ended June 30, 2021, to $31.1 million for the same period in 2022.

Gross profit from distributed sales increased to $8.8 million for the six months ended June 30, 2022 compared to $3.7 million for the six months ended June 30, 2021.

Gross profit from our e-commerce segment was $2.5 million for the six months ended June 30, 2022 compared to $4.9 million for the six months ended June 30, 2021.

Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization.

Operating costs were approximately $29.4 million for the three months ended March 31, 2022 and approximately $17.6 million for the three months ended March 31, 2021, an increase of approximately $11.7 million or 66%.

Store operating costs were approximately $14.5 million for the three months ended March 31, 2022, compared to $8.2 million for the three months ended March 31, 2021, an increase of $6.4 million or 78%.

The increase in store operating costs was directly attributable to the addition of 23 locations that were added during 2021, including 16 stores that were added subsequent to March 31, 2021.

Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately $14.8 million for the three months ended March 31, 2022, compared to $9.5 million for the three months ended March 31, 2021, an increase of $5.4 million or 57%.

Selling, general, and administrative costs were approximately $10.3 million for the three months ended March 31, 2022, compared to approximately $7.4 million for the three months ended March 31, 2021.

Salaries expense increased to $5.2 million from $4.0 million primarily due to an increase in corporate staff.

General administrative expenses increased to $3.6 million from $2.1 million to support expanding operations.

Operating costs were approximately $186.4 million for the six months ended June 30, 2022 and approximately $43.7 million for the six months ended June 30, 2021, an increase of approximately $142.6 million or 326%.

The increase in operating expenses is primarily attributable to the impairment loss of $127.8 million recorded during the six months ended June 30, 2022.

Store operating costs were approximately $28.3 million for the six months ended June 30, 2022, compared to $20.8 million for the six months ended June 30, 2021, an increase of $7.5 million or 36%.

The increase in store operating costs was directly attributable to the addition of 23 locations that were added during 2021, including seven stores that were added subsequent to June 30, 2021.

Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately $30.3 million for the six months ended June 30, 2022, compared to $22.9 million for the six months ended June 30, 2021, an increase of $7.3 million or 32%.

Selling, general, and administrative costs were approximately $21.0 million for the six months ended June 30, 2022, compared to approximately $18.0 million for the six months ended June 30, 2021.

Salaries expense increased to $10.6 million for the six months ended June 30, 2022, from $9.6 million for the same period in 2021, primarily due to an increase in corporate staff.

General administrative expenses increased to $7.7 million for the six months ended June 30, 2022, from $5.1 million for the same period in 2021, to support expanding operations.

Impairment loss was approximately $127.8 million for the six months ended June 30, 2022 following goodwill impairment testing performed as a result of, the Company’s market capitalization falling below total net assets.

In addition, financial performance continued to weaken during the quarter.

Refer to Critical Accounting Policies, Judgements, and Estimates and Note 8, Goodwill and Intangible Assets.

Other Income/Expense

Total other income was approximately $0.4 million for the three months ended March 31, 2022, compared to expense of $36.0 thousand for the three months ended March 31, 2021.

This increase is primarily attributable to a gain recorded related to an earnout revaluation adjustment related to The Harvest Company acquisition.

Total other income was approximately $0.5 million for the six months ended June 30, 2022, compared to expense of $12.0 thousand for the six months ended June 30, 2021.

This increase is primarily attributable to a gain recorded during the six months ended June 30, 2022, related to an earnout revaluation adjustment related to The Harvest Company acquisition.

Segment Operating Income

Operating income in our retail segment dropped from $6.3 million to an operating loss of $7.2 million as a result of lower sales volume, lower gross margins and higher expenses at existing stores combined with operating losses at nine stores not in operation in the same period in 2021, including acquired and new retail locations.

Operating income in our e-commerce segment declined from $0.4 million to a loss of $0.4 million as a result of lower revenue and higher operating expenses as well as integration costs of Agron.IO that was consolidated with our core e-commerce webstore in the period.

Operating income in all other decreased to $0.4 million in the three months ended March 31, 2022 compared to $1.0 million in the three months ended March 31, 2021.

Increase in the operating income of the other segment was primarily attributable to the addition of HRG and MMI.

Income tax benefit was $1.6 million for the three months ended March 31, 2022, compared to income tax expense of $1.6 million for the three months ended March 31, 2021.

Operating income in our retail segment dropped from $14.9 million to an operating loss of $114.3 million as a result of lower sales volume and higher expenses at existing stores combined with operating losses at nine stores not in operation in the same period in 2021, including acquired and new retail locations.

Operating income in our e-commerce segment declined from $0.4 million for the six months ended June 30, 2021 to a loss of $9.0 million for the same period in 2022, as a result of lower revenue and higher operating expenses as well as integration costs of Agron.IO that was consolidated with our core e-commerce webstore in the six months ended June 30, 2022.

Operating income in all other decreased to a loss of $20.7 million in the six months ended June 30, 2022 compared to income of $2.0 million in the six months ended June 30, 2021.

Income tax benefit was $1.9 million for the six months ended June 30, 2022, compared to income tax expense of $4.5 million for the six months ended June 30, 2021.

Effective tax rate is impacted by differences in timing of expenses for share based compensation, depreciation, amortization and the impact of 162(m) on deductible wages.

As such, the Company’s taxable income varies from reported income in a material way.

Net loss for the three months ended March 31, 2022 was approximately $5.2 million, compared to net income of approximately $6.1 million for the three months ended March 31, 2021, a decrease of approximately $11.3 million.

Net loss for the six months ended June 30, 2022 was approximately $141.6 million, compared to net income of approximately $12.9 million for the six months ended June 30, 2021, a decrease of approximately $154.4 million.

Operating Activities

Net cash used by operating activities for three months ended March 31, 2022 was approximately $2.2 million compared to $0.7 million provided for the three months ended March 31, 2021.

The Company reduced prepaid inventory by $9.1 million in the quarter as well as retail store inventory by $3.8 million, which was more that offset by payments for accounts payable and deferred compensation, including annual cash bonuses.

Net cash provided by investing activities was approximately $9.5 million for the three months ended March 31, 2022 compared to cash used of approximately $82.7 million for the three months ended March 31, 2021.

Investing activities in 2022 were primarily attributable to acquisitions of $6.8 million and vehicles and store equipment purchases of $4.5 million partially offset by the maturity of marketable securities of $20.8 million.

Investing activities for the three months ended March 31, 2021 were primarily related to store acquisitions of $39.3 million, purchase of marketable securities of $41.1 million, the purchase of vehicles and store equipment to support new store operations of $1.7 million, and intangible assets of $0.7 million.

Net cash used in financing activities for the three months ended March 31, 2022 was approximately $1.4 million and was primarily attributable to stock redemptions.

Net cash used by financing activities for three months ended March 31, 2021 was $3.9 million and was primarily attributable to stock redemptions.

Net cash provided by operating activities for six months ended June 30, 2022 was approximately $1.6 million compared to $2.3 million provided for the six months ended June 30, 2021.

The Company reduced prepaid inventory by $8.5 million in the current year as well as inventory by $10.7 million, which was more that offset by payments for accounts payable and deferred compensation, including annual cash bonuses.

Net cash provided by investing activities was approximately $14.2 million for the six months ended June 30, 2022 compared to cash used of approximately $111.1 million for the six months ended June 30, 2021.

Investing activities in 2022 were primarily attributable to the maturity of marketable securities of $29.8 million partially offset by acquisitions of $6.8 million and vehicles and store equipment purchases of $8.8 million.

Investing activities for the six months ended June 30, 2021 were primarily related to store acquisitions of $48.0 million, purchase of marketable securities of $57.4 million, the purchase of vehicles and store equipment to support new store operations of $4.4 million, and intangible assets of $1.3 million.

Net cash used in financing activities for the six months ended June 30, 2022 was approximately $1.5 million and was primarily attributable to common stock withheld for employee payroll taxes.

Net cash used by financing activities for six months ended June 30, 2021 was $1.9 million and was primarily attributable to stock redemptions.

Use of Non-GAAP Financial Information

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Income taxes (283) 2,920

Interest 10 4

Depreciation and amortization 4,783 2,917

EBITDA $ (131,869) $ 12,554

Impairment loss 127,831 —

Share based compensation (option compensation, warrant compensation, stock issued for services) 1,106 1,914

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Adjusted EBITDA per share, diluted $ (0.05) $ 0.24

Six Months Ended

Net income $ (141,556) $ 12,860

Income taxes (1,919) 4,473

Interest 13 6

Depreciation, and amortization 9,289 4,971

EBITDA $ (134,173) $ 22,310

Impairment loss 127,831 —

Share based compensation (option compensation, warrant compensation, stock issued for services) 2,689 3,241

Adjusted EBITDA $ (3,653) $ 25,551

Adjusted EBITDA per share, basic $ (0.06) $ 0.44

Adjusted EBITDA per share, diluted $ (0.06) $ 0.43

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2022, we had working capital of approximately $157.9 million, compared to working capital of approximately $169.8 million as of December 31, 2021, a decrease of approximately $11.9 million.

The decrease in working capital from December 31, 2021 to March 31, 2022 was due primarily to a decrease in marketable securities, inventory and prepaid inventory partially offset by decreases in current liabilities.

At March 31, 2022, we had cash and cash equivalents of approximately $47.3 million and available for sale debt securities of $19.0 million.

As of June 30, 2022, we had working capital of approximately $150.0 million, compared to working capital of approximately $169.8 million as of December 31, 2021, a decrease of approximately $19.8 million.

The decrease in working capital from December 31, 2021 to June 30, 2022 was due primarily to a decrease in marketable securities, inventory and prepaid inventory partially offset by decreases in current liabilities.

At June 30, 2022, we had cash and cash equivalents of approximately $55.6 million and available for sale debt securities of $10.0 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 brand portfolio through organic growth and acquisitions.

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.

Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings.

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Item 8 of our Form 10-K for the year ended December 31, 2021 describes the significant accounting policies used in preparation of these consolidated financial statements.

We believe the following critical accounting policy and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change.

We believe the following critical accounting policy and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgement to account for highly uncertain matters or are susceptible to significant change.

In each of these areas, management makes estimates based on historical results, current trends and future projections.

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We estimate the fair value of these financial liabilities using Level 3 inputs that require the use of numerous assumptions, which may change based on the occurrence of future events and lead to increased or decreased operating income in future periods.

Estimating the fair value at an acquisition date and in subsequent periods involves significant judgments, including projecting the future financial performance of the acquired businesses.

Estimating the fair value at an acquisition date and in subsequent periods involves significant judgements, including projecting the future financial performance of the acquired businesses.

The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions.

Changes in the fair value of these financial liabilities are recorded in the Consolidated Statements of Operations within other income (expense).

Impairment of Goodwill and Intangible Assets

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired.

The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired.

The Company performs impairment reviews for its reporting units using a fair value method based on management's judgments and assumptions or third-party valuations.

For goodwill impairment testing purposes, the Company determined four reporting units, three of which were subject to a quantitative assessment.

The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.

In estimating the fair value, the Company uses the income approach in which discounted cash flow analyses are used to derive estimates of fair value of each reporting unit.

Multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics are also used in developing estimated fair values.

The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." These calculations contain uncertainties as they require management to make assumptions about market comparables, future cash flows and appropriate discount rates (based on weighted average cost of capital ranging from 13% to 16% at June 30, 2022) to reflect the risk inherent in the future cash flows and to derive a reasonable enterprise value and related premium.

The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape, including estimates of revenue based on production volumes over the foreseeable future and long-term growth rates, and operating margins based on historical trends and future cost containment activities.

A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on the results of the goodwill impairment test and on the Company's results of operations.

The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill.

The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value.

As a result of the tests, the Company recorded an impairment to goodwill during the second quarter of 2022.

Refer to Note 8, "Goodwill and Intangible Assets," of the notes to the condensed consolidated financial statements for additional information.

The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable.

The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.

If the undiscounted cash flows do not indicate the carrying amount of the

asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

Intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing as part of their asset group if events or changes in circumstances indicate that the asset might be impaired.

A considerable amount of management judgment and assumptions are required in performing the impairment tests.

During the second quarter of 2022, the Company concluded it had a triggering event.

The Company’s market capitalization fell below total net assets.

In addition, financial performance continued to weaken during the quarter, which is contrary to prior experience.

Management reassessed business performance expectations, following persistent adverse developments in equity markets, deterioration in the environment in which the Company operates, 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.

These impairments were measured either under an income approach utilizing forecasted discounted cash flows to determine fair values of the impaired assets.

These methods are consistent with the methods the Company employed in prior periods to value intangible assets.

The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement," and primarily consist of expected future operating margins and cash flows, weighted average cost of capital rates (13.3%), estimated salable values and third-party appraisal techniques such as market comparables.

To the extent that profitability declines as compared to forecasted profitability or if adverse changes occur to key assumptions or other fair value measurement inputs, further impairment of long-lived assets could occur in the future.

Refer to Note 8, "Goodwill and Intangible Assets," of the notes to the condensed consolidated financial statements for additional information.

OFF-BALANCE SHEET ARRANGEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis