GrowGeneration Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS GROWGENERATION CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except shares and per share amounts) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 31,414 $ 40,054 Marketable securities 35,203 31,852 Accounts receivable, net of allowance for credit losses of $ 1.1 million and $ 0.7 million at September 30, 2023 and December 31, 2022 8,351 8,336 Notes receivable, current, net of allowance for credit losses of $ 1.7 million and $ 1.3 million at September 30, 2023 and December 31, 2022 — 1,214 Inventory 75,987 77,091 Prepaid income taxes 477 5,679 Prepaids and other current assets 12,383 6,455 Total current assets 163,815 170,681 Property and equipment, net 28,946 28,669 Operating leases right-of-use assets 42,316 46,433 Intangible assets, net 24,466 30,878 Goodwill 16,808 15,978 Other assets 880 803 TOTAL ASSETS $ 277,231 $ 293,442 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 20,219 $ 15,728 Accrued liabilities 3,413 1,535 Payroll and payroll tax liabilities 2,027 4,671 Customer deposits 4,926 4,338 Sales tax payable 1,503 1,341 Current maturities of lease liability 8,374 8,131 Current portion of long-term debt — 50 Total current liabilities 40,462 35,794 Commitments and contingencies (Note 12) Operating lease liability, net of current maturities 36,387 40,659 Other long-term liabilities 317 593 Total liabilities 77,166 77,046 Stockholders’ equity: Common stock; $ 0.001 par value; 100,000,000 shares authorized, 61,309,456 and 61,010,155 shares issued and outstanding as of September 30, 2023 and December 31, 2022 61 61 Additional paid-in capital 372,789 369,938 Retained earnings (deficit) ( 172,785 ) ( 153,603 ) Total stockholders’ equity 200,065 216,396 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 277,231 $ 293,442 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 per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales $ 55,678 $ 70,850 $ 176,430 $ 223,710 Cost of sales (exclusive of depreciation and amortization shown below) 39,490 52,516 126,816 163,009 Gross profit 16,188 18,334 49,614 60,701 Operating expenses: Store operations and other operational expenses 11,930 13,585 37,165 41,884 Selling, general, and administrative 7,582 8,796 21,923 28,164 Bad debt expense 257 172 681 1,774 Depreciation and amortization 4,721 3,875 12,477 13,164 Impairment loss — — — 127,831 Total operating expenses 24,490 26,428 72,246 212,817 Income (Loss) from operations ( 8,302 ) ( 8,094 ) ( 22,632 ) ( 152,116 ) Other income (expense): Other income (expense) 954 34 3,549 547 Interest income — 143 — 190 Interest expense ( 1 ) ( 3 ) ( 6 ) ( 16 ) Total non-operating income (expense), net 953 174 3,543 721 Net income (loss) before taxes ( 7,349 ) ( 7,920 ) ( 19,089 ) ( 151,395 ) Benefit (provision) for income taxes — 718 ( 93 ) 2,637 Net income (loss) $ ( 7,349 ) $ ( 7,202 ) $ ( 19,182 ) $ ( 148,758 ) Net income (loss) per share, basic $ ( 0.12 ) $ ( 0.12 ) $ ( 0.31 ) $ ( 2.45 ) Net income (loss) per share, diluted $ ( 0.12 ) $ ( 0.12 ) $ ( 0.31 ) $ ( 2.45 ) Weighted average shares outstanding, basic 61,272 60,855 61,127 60,771 Weighted average shares outstanding, diluted 61,272 60,855 61,127 60,771 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 GROWGENERATION CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders’ Equity Shares Amount Balances, June 30, 2023 61,229 $ 61 $ 371,863 $ ( 165,436 ) $ 206,488 Common stock issued for share based compensation 80 — — — — Common stock withheld for employee payroll taxes — — ( 12 ) — ( 12 ) Share based compensation — — 938 — 938 Net income (loss) — — — ( 7,349 ) ( 7,349 ) Balances, September 30, 2023 61,309 $ 61 $ 372,789 $ ( 172,785 ) $ 200,065 Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders’ Equity Shares Amount Balances, June 30, 2022 60,782 $ 61 $ 368,077 $ ( 131,412 ) $ 236,726 Common stock issued for share-based compensation 78 — — — — Common stock withheld for employee payroll taxes — — ( 17 ) — ( 17 ) Share based compensation — — 1,104 — 1,104 Net income (loss) — — — ( 7,202 ) ( 7,202 ) Balances, September 30, 2022 60,860 $ 61 $ 369,164 $ ( 138,614 ) $ 230,611 3 Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders’ Equity Shares Amount Balances, December 31, 2022 61,010 $ 61 $ 369,938 $ ( 153,603 ) $ 216,396 Common stock issued for share based compensation 264 — — — — Common stock withheld for employee payroll taxes — — ( 187 ) — ( 187 ) Share based compensation — — 2,265 — 2,265 Noncash repurchase of liability awards — — 653 — 653 Liability redemption associated with business acquisition 35 — 120 — 120 Net income (loss) — — — ( 19,182 ) ( 19,182 ) Balances, September 30, 2023 61,309 $ 61 $ 372,789 $ ( 172,785 ) $ 200,065 Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders’ Equity Shares Amount Balances, December 31, 2021 59,929 $ 60 $ 361,087 $ 10,144 $ 371,291 Common stock issued in connection with business combination 650 1 5,749 — 5,750 Common stock issued for share-based compensation 255 — — — — Common stock withheld for employee payroll taxes — — ( 1,465 ) — ( 1,465 ) Share based compensation — — 3,793 — 3,793 Common stock issued upon cashless exercise of options 12 — — — — Common stock issued upon cashless exercise of warrants 14 — — — — Net income (loss) — — — ( 148,758 ) ( 148,758 ) Balances, September 30, 2022 60,860 $ 61 $ 369,164 $ ( 138,614 ) $ 230,611 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) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 19,182 ) $ ( 148,758 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 12,477 13,164 Stock-based compensation expense 2,452 3,980 Bad debt expense 681 1,774 (Gain) loss on asset disposition 85 629 Impairment loss — 127,831 Deferred taxes — ( 2,166 ) Change in value of marketable securities ( 981 ) — Changes in operating assets and liabilities (net of the effect of acquisitions): Accounts and notes receivable 518 ( 4,987 ) Inventory 2,691 20,622 Prepaid expenses and other assets ( 510 ) 10,718 Accounts payable and accrued liabilities 6,352 ( 2,405 ) Operating leases 88 374 Payroll and payroll tax liabilities ( 2,644 ) ( 3,046 ) Customer deposits 588 ( 7,538 ) Sales tax payable 162 ( 322 ) Net cash provided by (used in) operating activities 2,777 9,870 Cash flows from investing activities: Acquisitions, net of cash acquired ( 3,050 ) ( 6,806 ) Purchase of marketable securities ( 85,768 ) — Maturities from marketable securities 83,398 39,793 Purchase of property and equipment ( 5,995 ) ( 11,635 ) Disposal of assets 235 — Net cash provided by (used in) investing activities ( 11,180 ) 21,352 Cash flows from financing activities: Principal payments on long term debt ( 50 ) ( 69 ) Common stock withheld for employee payroll taxes ( 187 ) ( 1,465 ) Net cash provided by (used in) financing activities ( 237 ) ( 1,534 ) Net change ( 8,640 ) 29,688 Cash and cash equivalents at the beginning of period 40,054 41,372 Cash and cash equivalents at the end of period $ 31,414 $ 71,060 Supplemental disclosures of non-cash activities: Cash paid for interest $ 6 $ 16 Cash paid for income taxes $ 93 $ — Common stock issued for business combination $ — $ 5,750 Right-of-use assets acquired under new operating leases $ 4,173 $ 6,221 Indemnity holdback from business acquisitions $ — $ 875 Noncash repurchase of liability awards $ 653 $ — Liability redemption associated with business acquisition $ 120 $ — Purchase of property and equipment accrued in accounts payable $ 355 $ — The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 5 GrowGeneration Corp. Notes To Condensed Consolidated Financial Statements September 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, Harvest Company scissors, 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 September 30, 2023, GrowGeneration has 56 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, Horticultural Rep Group ("HRG"), and a benching, racking, and storage solutions business, Mobile Media ("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 the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”). There were no significant changes to the Company's significant accounting policies as disclosed in our 2022 Form 10-K. The results reported in these unaudited Condensed Consolidated Financial Statements are not necessarily indicative of results for the full fiscal year. All amounts included in the accompanying footnotes to the consolidated financial statements, except per share data, are in thousands (000). 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 September 30, 2023 2. FAIR VALUE MEASUREMENTS Fair Value Measurements Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The carrying amounts of cash and cash equivalents, accounts receivable, available for sale securities, accounts payable, and all other current liabilities approximate fair values due to their short-term nature. Changes in fair value of marketable securities, principally derived from accretion of discounts, was $ 0.5 million and $ 1.0 million for the three and nine months ended September 30, 2023, and included in Other income (expense) on the Condensed Consolidated Statements of Operations. The fair value of notes receivable approximates the outstanding balance net of reserves for expected credit loss. Level September 30, 2023 December 31, 2022 Cash equivalents 1 $ 16,560 $ 25,087 Marketable securities 2 $ 35,203 $ 31,852 7 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 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”). The Company has implemented all new accounting pronouncements that are in effect and that may impact our financial statements. In addition to the accounting pronouncement discussed below, no other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material effect on the Company’s consolidated financial statements or disclosures. Recently Adopted Accounting Pronouncements 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 based upon a company’s historical credit loss experience, adjusted for asset-specific risk characteristics, current economic conditions, and reasonable forecasts, 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, and the Company adopted this standard effective January 1, 2023. The adoption of this standard primarily applied to the valuation of the Company’s accounts receivable. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures, and the Company’s estimate of expected credit losses as of January 1, 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 Net sales are disaggregated by the Company's segments, which represent its principal lines of business, as well as by the type of good or service, including sales of private label products, non-private label products or distributed brands, and sales of commercial fixtures. See Note 13, Segments , for disaggregated revenue by segment. Contract Assets and Liabilities The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows: Accounts Receivable, Net Customer Deposits Opening balance, January 1, 2023 $ 8,336 $ 4,338 Closing balance, September 30, 2023 8,351 4,926 Increase (decrease) $ 15 $ 588 Opening balance, January 1, 2022 $ 5,741 $ 11,686 Closing balance, September 30, 2022 10,147 5,390 Increase (decrease) $ 4,406 $ ( 6,296 ) Of the total amount of customer deposit liability as of January 1, 2023, $ 2.9 million was reported as revenue during the nine months ended September 30, 2023. Of the total amount of customer deposit liability as of January 1, 2022, $ 11.1 million was reported as revenue during the nine months ended September 30, 2022. 8 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 5. PROPERTY AND EQUIPMENT September 30, 2023 December 31, 2022 Vehicles $ 2,596 $ 2,176 Building and land 2,121 2,121 Leasehold improvements 12,268 12,562 Furniture, fixtures and equipment 14,951 13,195 Capitalized software 16,085 2,644 Construction-in-progress — 9,569 Total property and equipment, gross 48,021 42,267 Accumulated depreciation ( 19,075 ) ( 13,598 ) Property and equipment, net $ 28,946 $ 28,669 Depreciation expense for the three and nine months ended September 30, 2023 was $ 2.5 million and $ 5.8 million. Depreciation expense for the three and nine months ended September 30, 2022 was $ 1.7 million and $ 5.4 million. 9 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 6. GOODWILL AND INTANGIBLE ASSETS The changes in goodwill are as follows: September 30, 2023 December 31, 2022 Balance, beginning of period $ 15,978 $ 125,401 Goodwill additions and measurement period adjustments 830 7,234 Impairment — ( 116,657 ) Balance, end of period $ 16,808 $ 15,978 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 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 as of June 30, 2022. As a result, the Company performed a cash recoverability test on the following finite-lived intangible assets: customer relationships, trade names, and non-competes. For goodwill impairment testing purposes, the Company identified four reporting units, of which three were subject to a quantitative assessment. The Company determined the fair value of its reporting units using the income approach, where estimated future returns are discounted to present value at an appropriate rate of return. The Company recognized impairment losses for related to its finite-lived intangibles and goodwill on June 30, 2022 as disclosed in the table below. There were no goodwill or finite-lived intangible impairments recognized during the nine months ended September 30, 2023. The goodwill balance and impairment by segment are as follows: Retail E-commerce Distribution Total Gross carrying value at December 31, 2021 $ 101,811 $ 11,659 $ 11,931 $ 125,401 Acquisitions & measurement period adjustments 1,418 ( 341 ) 6,157 7,234 Gross carrying value at December 31, 2022 103,229 11,318 18,088 132,635 Acquisitions & measurement period adjustments 830 — — 830 Gross carrying value, at September 30, 2023 $ 104,059 $ 11,318 $ 18,088 $ 133,465 Accumulated impairment losses at December 31, 2021 $ — $ — $ — $ — Impairment ( 103,094 ) ( 9,848 ) ( 3,715 ) ( 116,657 ) Accumulated impairment losses at December 31, 2022 ( 103,094 ) ( 9,848 ) ( 3,715 ) ( 116,657 ) Impairment — — — — Accumulated impairment losses at September 30, 2023 $ ( 103,094 ) $ ( 9,848 ) $ ( 3,715 ) $ ( 116,657 ) Net carrying value at December 31, 2022 $ 135 $ 1,470 $ 14,373 $ 15,978 Net carrying value at September 30, 2023 $ 965 $ 1,470 $ 14,373 $ 16,808 10 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 A summary of intangible assets is as follows: Weighted-Average Amortization Period of Intangible Assets as of September 30, 2023 (in years) Trade names 2.47 Patents 2.34 Customer relationships 3.86 Non-competes 0.59 Intellectual property 2.42 Total 2.98 Intangible assets consist of the following: September 30, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 29,062 $ ( 15,066 ) $ 13,996 Patents 100 ( 67 ) 33 Customer relationships 17,542 ( 8,308 ) 9,234 Non-competes 932 ( 727 ) 205 Intellectual property 2,065 ( 1,067 ) 998 Total $ 49,701 $ ( 25,235 ) $ 24,466 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 29,062 $ ( 10,517 ) $ 18,545 Patents 100 ( 56 ) 44 Customer relationships 17,102 ( 6,501 ) 10,601 Non-competes 932 ( 551 ) 381 Intellectual property 2,065 ( 758 ) 1,307 Total $ 49,261 $ ( 18,383 ) $ 30,878 11 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 Intangibles and impairment by segment are as follows: Retail E-commerce Distribution Total Gross carrying value at December 31, 2021 $ 37,825 $ 2,501 $ 16,698 $ 57,024 Acquisitions & measurement period adjustments 229 — 3,182 3,411 Gross carrying value at December 31, 2022 38,054 2,501 19,880 60,435 Acquisitions & measurement period adjustments 440 — — 440 Gross carrying value at September 30, 2023 $ 38,494 $ 2,501 $ 19,880 $ 60,875 Accumulated amortization at December 31, 2021 $ ( 6,285 ) $ ( 354 ) $ ( 1,983 ) $ ( 8,622 ) Amortization ( 5,721 ) ( 460 ) ( 3,580 ) ( 9,761 ) Accumulated amortization at December 31, 2022 ( 12,006 ) ( 814 ) ( 5,563 ) ( 18,383 ) Amortization ( 3,793 ) ( 335 ) ( 2,724 ) ( 6,852 ) Accumulated amortization at September 30, 2023 $ ( 15,799 ) $ ( 1,149 ) $ ( 8,287 ) $ ( 25,235 ) Accumulated impairment losses at December 31, 2021 $ — $ — $ — $ — Impairments ( 11,079 ) ( 95 ) — ( 11,174 ) Accumulated impairment losses at December 31, 2022 ( 11,079 ) ( 95 ) — ( 11,174 ) Impairments — — — — Accumulated impairment losses September 30, 2023 $ ( 11,079 ) $ ( 95 ) $ — $ ( 11,174 ) Net carrying value at December 31, 2022 $ 14,969 $ 1,592 $ 14,317 $ 30,878 Net carrying value September 30, 2023 $ 11,616 $ 1,257 $ 11,593 $ 24,466 Amortization expense for the three and nine months ended September 30, 2023 was $ 2.2 million and $ 6.9 million. Amortization expense for the three and nine months ended September 30, 2022 was $ 2.2 million and $ 7.7 million. Future amortization expense as of September 30, 2023 is as follows: 2023, remainder $ 2,229 2024 8,799 2025 8,426 2026 3,663 2027 1,217 Thereafter 132 Total $ 24,466 7. INCOME TAXES For the nine months ended September 30, 2023, the effective tax rate was ( 0.42 )%, compared to 1.74 % for the nine months ended September 30, 2022. The effective tax rate for each of the nine months ended September 30, 2023 and 2022 is lower than the U.S. federal statutory rate of 21.0% primarily due to the Company’s valuation allowance against deferred tax assets. As of September 30, 2023, the Company concluded that its deferred tax assets are not expected to be realizable, based on positive and negative evidence, therefore it has assigned a full valuation allowance against them. 12 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 8. LEASES The right-of-use assets and corresponding liabilities related to the Company's operating leases are as follow: September 30, 2023 December 31, 2022 Operating leases right-of-use assets $ 42,316 $ 46,433 Current maturities of lease liability $ 8,374 $ 8,131 Operating lease liability, net of current maturities 36,387 40,659 Total lease liability $ 44,761 $ 48,790 The weighted-average remaining lease terms and weighted-average discount rates for operating leases were as follows: September 30, 2023 September 30, 2022 Weighted average remaining lease term 6.07 years 6.68 years Weighted average discount rate 6.0 % 5.5 % Lease expense is recorded within the Company’s Condensed Consolidated Statements of Operations based upon the nature of the operating lease right-of-use assets. Where assets are used to directly serve our customers, such as retail locations and distribution centers, lease costs are recorded in Store operations and other operational expenses. Facilities and assets which serve management and support functions are expensed through Selling, general, and administrative. Additionally, the Company recorded sublease income of $ 0.3 million and $ 0.9 million for the three and nine months ended September 30, 2023, respectively, within Other income (expense) related to the sublease of a closed retail location. The components of lease expense are as follows: Three Months Ended September 30, 2023 2022 Operating lease costs $ 2,738 $ 2,615 Variable lease costs 176 664 Short-term lease costs 98 69 Total operating lease costs $ 3,012 $ 3,348 Nine Months Ended September 30, 2023 2022 Operating lease costs $ 8,434 $ 8,060 Variable lease costs 1,466 2,004 Short-term lease costs 241 306 Total operating lease costs $ 10,141 $ 10,370 13 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 Future maturities of the Company’s operating lease liabilities as of September 30, 2023 : 2023 (remainder of the year) $ 2,797 2024 10,519 2025 9,694 2026 7,844 2027 5,446 Thereafter 17,065 Total lease payments 53,365 Less: Imputed interest ( 8,604 ) Lease Liability at September 30, 2023 $ 44,761 Supplemental and other information related to leases was as follows: Nine Months Ended September 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 8,321 $ 7,692 9. SHARE BASED PAYMENTS The Company maintains long-term incentive plans for employees, non-employee members of its 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 nine months ended September 30, 2023 and 2022: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Restricted stock $ 938 $ 951 $ 2,452 $ 2,902 Stock options — — — 59 Warrants — 340 — 1,019 Total $ 938 $ 1,291 $ 2,452 $ 3,980 As of September 30, 2023, the Company had approximately $ 4.5 million of unamortized share-based compensation for share based awards, which are expected to be recognized over a weighted average period of approximately 1.9 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 September 30, 2023 Restricted stock activity for the nine months ended September 30, 2023 is presented in the following table: Shares Weighted Average Grant Date Fair Value Nonvested, December 31, 2022 614,875 $ 9.41 Granted 1,110,000 $ 3.77 Vested ( 305,167 ) $ 5.77 Forfeited ( 345,750 ) $ 7.01 Nonvested, September 30, 2023 1,073,958 $ 5.42 The table below summarizes all option activity under all plans during the nine months ended September 30, 2023: Options Shares Weighted - Average Exercise Price Weighted - Average Remaining Contractual Term Weighted - Average Grant Date Fair Value Outstanding at December 31, 2022 604,498 $ 3.97 1.87 $ 2.24 Granted — — — — Exercised ( 20,000 ) 3.50 — — Forfeited or expired — — — — Outstanding at September 30, 2023 584,498 $ 3.99 1.17 $ 2.24 Vested at September 30, 2023 584,498 $ 3.99 1.17 $ 2.24 A summary of the status of the Company’s outstanding stock purchase warrants for the nine months ended September 30, 2023 is as follows: Warrants Weighted Average Exercise Price Outstanding at December 31, 2022 32,500 $ 10.61 Issued — — Exercised — — Forfeited ( 32,500 ) $ 10.61 Outstanding at September 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 September 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 nine months ended September 30, 2023 and 2022: Three Months Ended September 30, 2023 September 30, 2022 Net income (loss) $ ( 7,349 ) $ ( 7,202 ) Weighted average shares outstanding, basic 61,272 60,855 Effect of dilution — — Adjusted weighted average shares outstanding, dilutive 61,272 60,855 Basic earnings (loss) per share $ ( 0.12 ) $ ( 0.12 ) Dilutive earnings (loss) per share $ ( 0.12 ) $ ( 0.12 ) Nine Months Ended September 30, 2023 September 30, 2022 Net income (loss) $ ( 19,182 ) $ ( 148,758 ) Weighted average shares outstanding, basic 61,127 60,771 Effect of dilution — — Adjusted weighted average shares outstanding, dilutive 61,127 60,771 Basic earnings (loss) per share $ ( 0.31 ) $ ( 2.45 ) Dilutive earnings (loss) per share $ ( 0.31 ) $ ( 2.45 ) Diluted earnings per share calculations for each of three and nine month ended September 30, 2023 excluded 1.1 million shares of common stock issuable upon exercise of stock options and 0.6 million of non-vested restricted stock that would have been anti-dilutive. Diluted earnings per share calculations for each of three and nine month ended September 30, 2022 excluded 0.6 million shares of common stock issuable upon exercise of stock options, 0.7 million of non-vested restricted stock, and 0.3 million of shares of common stock issuable upon exercise of the stock purchase warrants that would have been anti-dilutive. 11. ACQUISITIONS The Company's 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 nine months ended September 30, 2022, measurement period adjustments included increasing goodwill by $ 1.3 million offset with intangible assets, which resulted in an insignificant reduction in amortization expense. All acquisition costs are expensed as incurred and recorded in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations. Acquisitions during the nine months ended September 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. 16 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 Additionally, the Company made other, individually immaterial acquisitions during the nine months ended September 30, 2023. Total consideration for these purchases was approximately $ 1.2 million, including $ 1.1 million paid in cash and indemnity holdbacks of less than $ 0.1 million. These individually immaterial acquisitions also included aggregate acquired goodwill of approximately $ 0.3 million, which 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. The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2023. Alaska Other Total Inventory $ 720 $ 867 $ 1,587 Prepaids and other current assets 292 1 293 Furniture and equipment — 47 47 Operating lease right-of-use asset 630 648 1,278 Operating lease liability ( 630 ) ( 648 ) ( 1,278 ) Customer relationships 440 — 440 Goodwill 577 253 830 Total $ 2,029 $ 1,168 $ 3,197 The table below represents the consideration paid for the net assets acquired in business combinations during the nine months ended September 30, 2023. Alaska Other Total Cash $ 1,922 $ 1,128 $ 3,050 Indemnity holdback 107 40 147 Total $ 2,029 $ 1,168 $ 3,197 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 nine months ended September 30, 2023. Alaska Other Total Acquisition date May 23, 2023 Net sales $ 1,127 $ 2,044 $ 3,171 Net income (loss) $ ( 52 ) $ ( 17 ) $ ( 69 ) The following represents the pro forma Condensed Consolidated Statement of Operations as if the acquisitions had been included in the consolidated results of the Company for the entire period for the three and nine months ended September 30, 2023, and 2022. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales $ 55,499 $ 74,747 $ 178,465 228,915 Net income (loss) $ ( 7,726 ) $ ( 7,193 ) $ ( 19,217 ) ( 148,863 ) 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 provided 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. 17 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2022. HRG Inventory $ 4,170 Prepaids and other current assets 76 Furniture and equipment 148 Operating lease right-of-use asset 666 Operating lease liability ( 666 ) Customer relationships 2,430 Trademark 496 Non-compete 255 Goodwill 5,816 Total $ 13,391 The table below represents the consideration paid for the net assets acquired in business combinations during the nine months ended September 30, 2022. HRG Cash $ 6,806 Indemnity stock holdback 875 Common stock 5,710 Total $ 13,391 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 nine months ended September 30, 2022. Revenue and earnings amounts include other proprietary brands now being included under HRG for operations. HRG Acquisition date February 1, 2022 Net sales $ 13,474 Net Income (loss) $ ( 209 ) 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 nine months ended September 30, 2022. Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Net sales $ 80,901 $ 235,443 Net income (loss) $ ( 135,514 ) $ ( 149,316 ) 18 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 12. COMMITMENTS AND CONTINGENCIES Legal Matters The Company is involved in lawsuits and claims that arise in the normal course of business, including the initiation and defense of proceedings related to contract and employment disputes. In the Company's opinion, these claims individually and in the aggregate are not expected to have a material adverse effect on its financial condition, results of operations, or cash flows. In December 2021, the Company was sued in the U.S. District Court for the Southern District of Texas related to a Promissory Note & Asset Acquisition Rights Option (“Note & Option”) with TGC Systems, LLC (“Total Grow”). The case was dismissed and the parties submitted the matter to arbitration pursuant to the arbitration clause of the Note & Option. Among other claims, Total Grow alleged that the Company was liable to Total Grow 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. 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. The Company is in the process of attempting to collect the arbitration award from Total Grow. There can be no assurance that future developments related to pending claims or claims filed in the future, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material effect on the Company’s financial condition, results of operations, or cash flows. The Company believes that its assessment of contingencies is reasonable and that the related accruals, in the aggregate, are adequate; however, there can be no assurance that the final resolution of these matters will not have a material effect on the Company's financial condition, results of operations, or cash flows. Indemnifications In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of September 30, 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 the Company's business strategy is to operate the largest chain of retail garden centers in the U.S. The hydroponic retail landscape is fragmented, which has allowed 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 the Company's online platforms and commercial customers. The retail segment also includes the Company's 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. The Company offers commercial customers volume pricing, terms, and financing. E-commerce – The Company's digital strategy is primarily focused on capturing the home, craft, and commercial grower online. GrowGeneration.com offers thousands of hydroponic products, all curated by the Company's product team. 19 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 GrowGeneration.com offers 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., a mobile shelving and storage solutions developer and manufacturer. In February 2022, the Company purchased the assets of Horticultural Rep Group, Inc., a specialty marketing and sales organization specializing in horticultural products. These products are integrated into the Company's retail, e-commerce, and direct sales activities, and it receive incremental revenue from their sale. Disaggregated revenue by segment is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales Retail Private label sales $ 6,797 $ 6,381 $ 20,598 $ 19,477 Non-private label sales 34,600 41,567 107,117 148,121 Total retail 41,397 47,948 127,715 167,598 E-Commerce Private label sales 553 253 1,214 953 Non-private label sales 2,207 2,820 8,541 11,083 Total e-commerce 2,760 3,073 9,755 12,036 Distribution and other Private label sales 1,954 2,244 5,819 8,244 Non-private label sales 1,924 3,150 9,424 11,097 Commercial fixture sales 7,643 14,435 23,717 24,735 Total distribution and other 11,521 19,829 38,960 44,076 Total net sales $ 55,678 $ 70,850 $ 176,430 $ 223,710 20 GrowGeneration Corp. Notes To Unaudited Condensed Consolidated Financial Statements September 30, 2023 Selected information by segment is presented in the following tables: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales Retail $ 41,397 $ 47,948 $ 127,715 $ 167,598 E-Commerce 2,760 3,073 9,755 12,036 Distribution and other 11,521 19,829 38,960 44,076 Total net sales $ 55,678 $ 70,850 $ 176,430 $ 223,710 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Gross profit Retail $ 10,747 $ 10,354 $ 33,005 $ 41,448 E-Commerce 885 826 2,566 3,280 Distribution and other 4,556 7,154 14,043 15,973 Total gross profit $ 16,188 $ 18,334 $ 49,614 $ 60,701 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Income (Loss) from operations Retail $ ( 7,584 ) $ ( 23,653 ) $ ( 21,206 ) $ ( 137,939 ) E-Commerce ( 754 ) ( 2,830 ) ( 1,682 ) ( 11,869 ) Distribution and other 36 18,389 256 ( 2,308 ) Total income (loss) from operations $ ( 8,302 ) $ ( 8,094 ) $ ( 22,632 ) $ ( 152,116 ) 21