GrowGeneration Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023. We caution readers regarding certain forward-looking statements, within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, in the following discussion and elsewhere in this report. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. We disclaim any obligation to update forward looking statements, except as required by law. OVERVIEW GrowGeneration Corp. (together with all of its direct and indirect wholly-owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014. GrowGeneration is the largest chain of hydroponic garden centers in the United States and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, and other products for hydroponic gardening. GrowGeneration also owns and operates an e-commerce platform, www.growgeneration.com, MMI, a benching, vertical racking and storage solutions business, HRG, a horticultural products sales representative and distributor organization, and proprietary brands across multiple product categories, from lighting to nutrients and additives to environmental control systems. Our business is driven by a wide selection of products, facility design services, solutions driven staff, and pick, pack and ship distribution and fulfillment capabilities. GrowGeneration carries and sells thousands of products, including nutrients, growing media, lighting, environmental control systems, vertical benching, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are capable of growing and maximizing yield and quality of a wide range of plants. Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Harvest Company scissors, and more. GrowGeneration also provides facility design services to commercial growers. As of September 30, 2023, we employed approximately 425 employees, a majority of whom have been branded by us as “Grow Pros”, and our operations span over 855,000 square feet of retail and warehouse space. Markets and Business Segments Our target customer segments include the commercial growers in the plant-based medicine market, the craft grower, and vertical and urban farmers who grow organic herbs, fruits, and vegetables. Additionally, we sell products from our distribution and other segment to wholesalers, resellers, and retailers. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields and quality, regardless of the season or weather conditions. The Company has three primary reportable segments, including retail operations, e-commerce, and distribution and other. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, and selling and general administrative expenses within each segment. Certain general and administrative expenses, such as administrative and management expenses, salaries and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses, and technology costs, are allocated to our segments based on revenue and are reflected in the enterprise results. 22 Competitive Advantages The markets in which we sell our products are highly competitive. Our key competitors include many local and national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, and online product resellers and large online marketplaces such as Amazon and eBay. Our industry is highly fragmented, with hundreds of other hydroponic retailers throughout the U.S. by management's estimates. Notwithstanding the foregoing, we are the largest chain of hydroponic garden centers in the U.S. by management's estimates, and our pricing, inventory and product availability and overall customer service provide us the ability to compete in our industry. In addition, as we continue to increase the scope of our operations, including both retail and distribution, we expect to be able to continue to purchase inventory at lower volume prices, which we expect will enable us to price competitively and deliver the products that our customers are seeking. The Company competes by delivering a one-stop shopping experience that includes the widest selection of hydroponics products, end-to-end solutions for all types of cultivation environments, in-store sales and product support, direct manufacturer pricing, and industry-leading expertise and customer service. Growth Strategy GrowGeneration expects to pursue growth through expansion of its commercial sales and distribution capabilities to sell more product to commercial cultivators for large grow operations and independent retail garden centers for resale, as well as by promoting and expanding its portfolio of proprietary brands to increase its market share, product offerings, and profitability. A secondary component of the Company's growth strategy is to expand the number of our retail garden centers in the U.S., especially in markets where we do not already have a physical presence or where our existing physical presence is limited. R ESULTS OF OPERATIONS Comparison of the three months ended September 30, 2023 and 2022 Net Sales Net sales for the three months ended September 30, 2023 was approximately $55.7 million, compared to $70.9 million for the three months ended September 30, 2022, a decrease of approximately $15.2 million or 21.4%. The decrease was primarily attributed to a decrease of approximately $6.8 million related to same store sales, which represented an approximate 14.4% decrease year over year. Overall sales in our retail segment declined from $47.9 million for the three months ended September 30, 2022 to $41.4 million for the same period in 2023. Net sales from the distribution and other segment decreased to $11.5 million for the three months ended September 30, 2023, compared to $19.8 million for the three months ended September 30, 2022. E-commerce sales were relatively flat from $3.1 million for the three months ended September 30, 2022, to $2.8 million for the same period in 2023. Cost of Sales Cost of sales for the three months ended September 30, 2023 was approximately $39.5 million, compared to approximately $52.5 million for the three months ended September 30, 2022, a decrease of approximately $13.0 million or 24.8%. The decrease in cost of sales was primarily due to the 21.4% decrease in sales comparing the three months ended September 30, 2023 to the three months ended September 30, 2022. Gross Profit Gross profit was approximately $16.2 million for the three months ended September 30, 2023, compared to approximately $18.3 million for the three months ended September 30, 2022, a decrease of approximately $2.1 million or 11.7%. The decrease in gross profit is primarily related to the 21.4% decrease in net sales comparing the three months ended September 30, 2023 to the three months ended September 30, 2022. Gross profit as a percentage of net sales was 29.1% for the three months ended September 30, 2023, compared to 25.9% for the three months ended September 30, 2022. Gross profit in our retail segment increased from $10.4 million for the three months ended September 30, 2022, to $10.7 million for the same period in 2023. Gross profit from the distribution and other segment net sales decreased to $4.6 million for the three months ended September 30, 2023, compared to $7.2 million for the three months ended September 30, 2022. Gross profit from our e-commerce segment was $0.9 million for the three months ended September 30, 2023, compared to $0.8 million for the three months ended September 30, 2022. 23 Operating Expenses Operating expenses are comprised of store operations, selling, general, and administrative, bad debt expense, and depreciation and amortization. Operating costs were approximately $24.5 million for the three months ended September 30, 2023 and approximately $26.4 million for the three months ended September 30, 2022, a decrease of approximately $1.9 million or 7.3%. The decrease in operating expenses is primarily attributable to decreases in both store operations and selling, general, and administrative expenses partially offset by an increase in deprecation and amortization. Store operating costs were approximately $11.9 million for the three months ended September 30, 2023, compared to $13.6 million for the three months ended September 30, 2022, a decrease of $1.7 million or 12.2%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations. Total corporate overhead, which is comprised of selling, general, and administrative expense, bad debt expense, and depreciation and amortization expense, was approximately $12.6 million for the three months ended September 30, 2023, compared to $12.8 million for the three months ended September 30, 2022, a decrease of $0.3 million or 2.2%. Selling, general, and administrative costs were approximately $7.6 million for the three months ended September 30, 2023, compared to approximately $8.8 million for the three months ended September 30, 2022. Salaries expense decreased to $3.2 million for the three months ended September 30, 2023, from $4.0 million for the same period in 2022. General and administrative expenses decreased to $2.9 million for the three months ended September 30, 2023, from $3.6 million for the same period in 2022. Other Income/Expense Total other income was approximately $1.0 million for the three months ended September 30, 2023, compared to income of $0.2 million for the three months ended September 30, 2022. This increase is primarily attributable to income from marketable securities and an increase in sublease income. Segment Operating Income Operating loss in our retail segment decreased from $23.7 million to an operating loss of $7.6 million. The operating loss for our e-commerce segment decreased from $2.8 million for the three months ended September 30, 2022 to a loss of $0.8 million for the same period in 2023. Operating income in the distribution and other segment other decreased to income of less than $0.1 million in the three months ended September 30, 2023, compared to an income of $18.4 million in the three months ended September 30, 2022. Income Taxes There was no income tax benefit for the three months ended September 30, 2023, compared to income tax benefit of $0.7 million for the three months ended September 30, 2022. Net Income Net loss for the three months ended September 30, 2023 was approximately $7.3 million, compared to net loss of approximately $7.2 million for the three months ended September 30, 2022, an decrease of approximately $0.1 million. Comparison of the nine months ended September 30, 2023 and 2022 Net Sales Net sales for the nine months ended September 30, 2023 was approximately $176.4 million, compared to $223.7 million for the nine months ended September 30, 2022, a decrease of approximately $47.3 million or 21.1%. The decrease was primarily attributed to a decrease of approximately $36.6 million related to same store sales, which represented an approximate 22.9% decrease year over year. Overall sales in our retail segment declined from $167.6 million for the nine months ended September 30, 2022, to $127.7 million for the same period in 2023. Net sales from the distribution and other segment sales decreased to $39.0 million for the nine months ended September 30, 2023 compared to $44.1 million for the nine months ended September 30, 2022. E-commerce sales decreased from $12.0 million for the nine months ended September 30, 2022, to $9.8 million for the same period in 2023. 24 Cost of Sales Cost of sales for the nine months ended September 30, 2023 was approximately $126.8 million, compared to approximately $163.0 million for the nine months ended September 30, 2022, a decrease of approximately $36.2 million or 22.2%. The decrease in cost of sales was primarily due to the 21.1% decrease in sales comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022. Gross Profit Gross profit was approximately $49.6 million for the nine months ended September 30, 2023, compared to approximately $60.7 million for the nine months ended September 30, 2022, a decrease of approximately $11.1 million or 18.3%. The decrease in gross profit is primarily related to the 21.1% decrease in net sales comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022. Gross profit as a percentage of net sales was 28.1% for the nine months ended September 30, 2023, compared to 27.1% for the nine months ended September 30, 2022. Gross profit in our retail segment declined from $41.4 million for the nine months ended September 30, 2022, to $33.0 million for the same period in 2023. Gross profit from the distribution and other net sales decreased to $14.0 million for the nine months ended September 30, 2023, compared to $16.0 million for the nine months ended September 30, 2022. Gross profit from our e-commerce segment was $2.6 million for the nine months ended September 30, 2023, compared to $3.3 million for the nine months ended September 30, 2022. Operating Expenses Operating expenses are comprised of store operations, selling, general, and administrative, bad debt expense, impairment loss, and depreciation and amortization. Operating costs were approximately $72.2 million for the nine months ended September 30, 2023 and approximately $212.8 million for the nine months ended September 30, 2022, a decrease of approximately $140.6 million or 66.1%. The decrease in operating expenses is primarily attributable to a $127.8 million impairment loss recognized in the prior year. Store operating costs were approximately $37.2 million for the nine months ended September 30, 2023, compared to $41.9 million for the nine months ended September 30, 2022, a decrease of $4.7 million or 11.3%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations. Total corporate overhead, which is comprised of selling, general, and administrative expense, bad debt expense, and depreciation and amortization expense, was approximately $35.1 million for the nine months ended September 30, 2023, compared to $43.1 million for the nine months ended September 30, 2022, a decrease of $8.0 million or 18.6%. Selling, general, and administrative costs were approximately $21.9 million for the nine months ended September 30, 2023, compared to approximately $28.2 million for the nine months ended September 30, 2022. Salaries expense decreased to $10.1 million for the nine months ended September 30, 2023, from $14.7 million for the same period in 2022. General and administrative expenses decreased to $9.2 million for the nine months ended September 30, 2023, from $11.3 million for the same period in 2022. Other Income/Expense Total other income was approximately $3.5 million for the nine months ended September 30, 2023, compared to $0.7 million for the nine months ended September 30, 2022. This increase is primarily attributable to income from marketable securities and an increase in sublease income. Segment Operating Income Operating loss in our retail segment decreased from $137.9 million for the nine months ended September 30, 2022 to an operating loss of $21.2 million for the nine months ended September 30, 2023he operating loss for our e-commerce segment decreased from $11.9 million for the nine months ended September 30, 2022 to a loss of $1.7 million for the same period in 2023. Operating income in the distribution and other segment increased to income of $0.3 million in the nine months ended September 30, 2023, compared to a loss of $2.3 million in the nine months ended September 30, 2022. 25 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. Net Income Net loss for the nine months ended September 30, 2023 was approximately $19.2 million, compared to net loss of approximately $148.8 million for the nine months ended September 30, 2022, an increase of approximately $129.6 million. Operating Activities Net cash provided by operating activities for the nine months ended September 30, 2023 was approximately $2.8 million, compared to $9.9 million for the nine months ended September 30, 2022. The Company continued to decrease inventory and other assets, partially offset by reductions to customer deposits and payroll and payroll tax liabilities. Investing Activities Net cash used by investing activities was approximately $11.2 million for the nine months ended September 30, 2023, compared to cash provided by investing activities of approximately $21.4 million for the nine months ended September 30, 2022. Investing activities in 2023 were primarily attributable to investment of excess cash into marketable securities of $85.8 million, partially offset by maturity of marketable securities of $83.4 million. The Company also had purchases property, plant, and equipment of $6.0 million, which was primarily related to the implementation and design of a new enterprise resource planning software system, and business acquisitions of $3.1 million. Investing activities for the nine months ended September 30, 2022 were primarily related to maturities of marketable securities of $39.8 million, partially offset by store acquisitions of $6.8 million and the purchase of property, plant, and equipment related to the design of a new enterprise resource planning software system of $11.6 million. Financing Activities Net cash used in financing activities for the nine months ended September 30, 2023 was approximately $0.2 million and was primarily attributable to common stock withheld for employee payroll taxes. Net cash used by financing activities for the nine months ended September 30, 2022 was $1.5 million and was primarily attributable to stock withheld to cover payroll taxes. Use of Non-GAAP Financial Information The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, U.S. GAAP and may be different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles. 26 Set forth below is a reconciliation of Adjusted EBITDA to net income (loss): Three Months Ended September 30, 2023 2022 (000) (000) Net income (loss) $ (7,349) $ (7,202) Income taxes — (718) Interest income — (143) Interest expense 1 3 Depreciation, and amortization 4,721 3,875 EBITDA $ (2,627) $ (4,185) Share based compensation (option compensation, warrant compensation, stock issued for services) 938 1,291 Impairment, restructuring, and other charges 717 — Fixed asset disposal 64 165 Adjusted EBITDA $ (908) $ (2,729) Adjusted EBITDA per share, basic $ (0.01) $ (0.04) Adjusted EBITDA per share, diluted $ (0.01) $ (0.04) Nine Months Ended September 30, 2023 2022 (000) (000) Net income (loss) $ (19,182) $ (148,758) Income taxes 93 (2,637) Interest income — (190) Interest expense 6 16 Depreciation, and amortization 12,477 13,164 EBITDA $ (6,606) $ (138,405) Impairment, restructuring, and other charges 2,215 127,831 Share based compensation (option compensation, warrant compensation, stock issued for services) 2,452 3,980 Fixed asset disposal 85 81 Adjusted EBITDA $ (1,854) $ (6,513) Adjusted EBITDA per share, basic $ (0.03) $ (0.11) Adjusted EBITDA per share, diluted $ (0.03) $ (0.11) Liquidity and Capital Resources As of September 30, 2023, we had working capital of approximately $123.4 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $11.5 million. The decrease in working capital from December 31, 2022 to September 30, 2023 was due primarily to a decrease in cash and marketable securities and income taxes receivable and an increase in current liabilities. At September 30, 2023, we had cash and cash equivalents of approximately $31.4 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital. We may need additional financing through equity offerings and/or debt financings in the future to continue to expand our business consistent with our growth strategies. To date, we have financed our operations through the issuance and sale of common stock, convertible notes, and warrants. 27 Critical Accounting Policies, Judgements, and Estimates For a summary of the Company’s critical accounting policies, judgements, and estimates, please refer to Item 7 of our Form 10-K for the year ended December 31, 2022. Off Balance-Sheet Arrangements We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a summary of the Company’s quantitative and qualitative disclosures about market risk, please refer to Item 7A of our Form 10-K for the year ended December 31, 2022.