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Item 7. Management’s Discussion and Analysis

2024-03-13 compared with 2023-03-16 · 185 added, 183 removed, 41 unchanged (90% of the section changed)

4 unchanged sentences

GrowGeneration Corp.

(together with all of its direct and indirect wholly owned subsidiaries, collectively “GrowGeneration” or the “Company”), incorporated in Colorado in 2014, is the largest chain of specialty retail hydroponic and organic garden centers in the U.S.

and is a leading marketer and distributor of products for both indoor and outdoor hydroponic and organic gardening.

The Company also engages in the distribution of private label products and commercial benching.

Currently, GrowGeneration has 60 retail locations across 16 states in the U.S.

We also operate an online superstore for cultivators at growgeneration.com, as well as a wholesale business for resellers, HRG Distribution.

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 can be used for growing a wide range of plants.

Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, and more.

GrowGeneration also provides facility design services to commercial growers.

We employ approximately 455 employees, a majority of them we have branded as “Grow Pros”.

Currently, our operations span over 946,000 square feet of retail and warehouse space.

(together with all of its direct and indirect wholly owned subsidiaries, collectively "GrowGeneration" or the "Company") was incorporated in Colorado in 2014.

Since then, GrowGeneration has grown from a small chain of specialty retail hydroponic and organic garden centers to a multifaceted business with diverse assets.

Today, GrowGeneration operates two major lines of business:

its Cultivation and Gardening segment, composed of the Company's hydroponic and organic gardening business;

and its Storage Solutions segment, composed of the Company's benching, racking, and storage solutions business.

MARKETS AND BUSINESS SEGMENTS

Our target customer segments include commercial and craft growers in the plant-based medicine market, as well as vertical and urban farmers who grow organic herbs, fruits and vegetables.

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.

Our commercial benching business customers also include retailers and other businesses.

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 operate our business through the following business segments:

The core of our business strategy is to operate the largest chain of retail garden centers in the U.S.

The hydroponic retail landscape is fragmented, which allows us to acquire “best of breed” hydroponic retail operations and leverage efficiencies of a centralized organization.

During 2022, the Company acquired or opened 5 new locations and expanded its physical retail presence into 4 new states.

Our plan is to continue to acquire, open and operate garden centers and related businesses throughout the U.S.

However, in light of persistent difficult market conditions, the Company also closed 8 underperforming retail locations in 2022 and may consider additional store consolidation in 2023.

Some of our garden centers have multi-functions, with added capabilities that include warehousing, distribution and fulfillment for our online platforms and direct fulfillment to our commercial customers.

Our retail segment also includes our commercial sales organization, which is focused on selling products and services, including end-to-end solutions, for large commercial cultivators outside of the physical retail network.

When a 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 and sizes of products.

We offer commercial customers volume pricing, terms and financing.

• E-Commerce :

Our digital strategy is primarily focused on capturing the home, craft and commercial grower online.

GrowGeneration.com offers thousands of hydroponic products, all curated by our product team.

GrowGeneration.com offers customers the option to have their orders shipped directly to their locations, anywhere in North America.

GrowGeneration also sells its products through its distribution website, HRGdist.com, and online marketplaces such as Amazon and Walmart.

• Distribution and other:

In December 2020, GrowGeneration purchased the business of Canopy Crop Management Corp., the developer of the popular PowerSi line of monosilicic acid products, a widely used nutrient additive for plants.

In March 2021, the Company purchased Charcoir, a line of premium coco pots, cubes and medium.

In December 2021, the Company purchased the assets of Mobile Media, Inc.

("MMI"), a mobile shelving and storage solutions developer and manufacturer.

In February 2022, the Company purchased the assets of Horticultural Rep Group, Inc.

("HRG"), a specialty marketing and sales organization of horticultural products.

The Company is in the process of combining the operations and management of these non-retail enterprises.

The products these companies provide are integrated into our retail, e-commerce, and direct sales activities and we receive incremental revenue from the sale of these products.

We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, selling and general administrative expenses within each segment.

Certain general and administrative expenses, such as administrative and management expenses, salaries and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses and technology costs, are not allocated to the specific segments and are reflected in the enterprise results.

During the fourth quarter of 2023, we realigned our operating and reportable segments to correspond with changes to our operating model, management structure, and internal reporting and to better align with how the chief operating decision maker makes operating decisions, allocates resources, and assesses performance.

Accordingly, we identified two operating segments, each its own reportable segment, based on our major lines of business:

the Cultivation and Gardening segment and the Storage Solutions segment.

Comparative prior period disclosures in this Annual Report on Form 10-K have been recast to conform to the current segment presentation.

We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, and store operations and other operational expenses within each segment.

Selling, general, and administrative expenses, such as administrative and management expenses, salaries, and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses, and technology costs, are not allocated to specific segments and are reflected in the enterprise results.

Cultivation and Gardening Segment

We are a leading developer, marketer, retailer, and distributor of products for both indoor and outdoor hydroponic and organic gardening.

Our main business strategy within the hydroponic and organic gardening sector has been to consolidate assets within the fragmented hydroponics industry to leverage efficiencies of a centralized organization.

We sell a variety of hydroponic and organic gardening related products, including nutrients, additives, growing media, lighting, environmental control systems, and other products for indoor and outdoor cultivation.

Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, Ion lights, The Harvest Company, and more, the development and expansion of which are a key component of the Company's growth strategy.

Our target customers include commercial and craft growers, as well as home growers, in the plant-based medicine market, and commercial and home gardeners who grow organic herbs, fruits, and vegetables.

Additionally, through our brand HRG Distribution, we distribute many of our products, including our proprietary products, to customers that are wholesalers, resellers, and retailers in the specialty retail hydroponic and organic gardening industry.

We make our products available to growers through a variety of channels, including hydroponic retail locations, a commercial sales teams serving commercial cultivators, an online platform for cultivators at growgeneration.com, and a wholesale business, HRG Distribution, that markets to resellers in both the hydroponic and traditional gardening markets.

Management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 50 retail locations across 18 states as of December 31, 2023.

Storage Solutions Segment

Our Storage Solutions business, branded as "Mobile Media" or "MMI," provides customized storage solutions designed to enhance profitability, productivity, and efficiency for our customers by allowing them to save space and increase storage capacity.

We cater to diverse markets with our products and services, including agriculture, retail, warehousing, office and administrative, food service, hospitality, golf and country clubs, and more.

Our products include high-density mobile

storage systems, static shelving, and other accessories such as desks, lockers, safes, and secured storage, offering a solution for every storage need.

MMI also offers a wide variety of services, including site surveys, floor plan designs, capacity analysis, seismic calculations, permitting, and installation, in order to provide a comprehensive, turnkey solution for customers.

Based in the Hudson Valley, New York, the MMI team has decades of experience successfully completing projects throughout the U.S., Canada, and Mexico.

Our target customers generally include small, mid-size, and large businesses seeking vertical space-saving solutions that are custom tailored to their space and brand in an effort to maximize storage capacity or gain space in their real estate footprint.

Many of our customers are involved in the construction and design industries and include retailers, general contractors, and architects involved in new constructions and remodels for retail stores and fulfillment centers.

Our customer base also includes the golf industry, specifically country clubs needing to store more club bags and optimize their existing space, as well as controlled environment agriculture (CEA) operators that cultivate indoors with vertical or rolling benching and racking.

GROWTH STRATEGIES

Core to our growth strategy is to expand the number of our retail garden centers in the U.S., especially in markets where we do not already have a physical presence, or where our existing physical presence is limited.

GrowGeneration's main growth strategy has been to consolidate assets within the fragmented hydroponics industry to leverage efficiencies of a centralized organization.

As a result, we have built a business that is driven by a wide selection of products, a strong portfolio of proprietary brands, a solutions-driven staff located in strategic markets around the country, and pick, pack, ship distribution and fulfillment capabilities.

Since its founding in 2014, GrowGeneration has acquired or opened numerous specialty hydroponic and organic gardening center locations.

Today, management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 50 retail locations across 18 states as of December 31, 2023.

During 2023, the Company acquired or opened 5 new locations and expanded its physical retail presence into 2 new states.

Our plan is to continue to acquire, open and operate garden centers.

However, in light of difficult market conditions that persisted throughout the year, the Company also closed 8 underperforming retail locations in 2022 and may consider additional store consolidation in 2023.

GrowGeneration will also pursue growth through expansion of its commercial sales and distribution capabilities to sell more product to commercial cultivators for large grow operations and independent retail garden centers for resale, as well as by promoting and expanding its portfolio of proprietary brands to increase its market share, product offerings and profitability.

RESULTS OF OPERATIONS

Net sales for the year ended December 31, 2022 were approximately $278.2 million, a decrease of 34.2% over the year ended December 31, 2021, which was approximately $422.5 million.

2021 net revenue increased approximately 118.5% over the year ended December 31, 2020, which was approximately $193.4 million.

The decrease in net revenues for the year ended December 31, 2022 compared to the year ended December 31, 2021 is due to a decrease of approximately $178.0 million in same store sales, which represented a 51.6% decrease year-over-year, which is primarily attributable to the downturn in the business cycle for cannabis cultivators, resulting in less supply and equipment purchasing.

Overall sales in our retail segment declined from $369.2 million to $205.5 million and overall sales in our e-commerce segment declined from $36.2 million to $15.1 million year over year.

These declines were partially offset by an increase in sales from our distribution and other segment from $17.1 million for the year ended December 31, 2021 compared to $57.6 million for the year ended December 31, 2022 due to the acquisitions of HRG and MMI.

The increase in 2021 revenues over 2020 is due to an increase in same store sales of approximately $40.1 million, which represented 24.4% growth year-over-year.

Distributed sales in 2021 were $17.1 million from acquisitions of Power Si and Charcoir.

E-commerce sales increased from $10.6 million in 2020 to $36.2 million in 2021 primarily attributable to $11.2 million growth in owned e-commerce sites and $14.4 million from the Agron acquisition.

Our plan is to continue to acquire, open, and operate garden centers in markets where we do not already have a physical presence or where our existing physical presence is limited.

However, in light of difficult market conditions that persisted throughout the year, the Company also reduced redundancies in cost structure by closing and consolidating 14 retail locations in 2023, where we were generally able to serve the same customer base through a single location.

To date in 2024, the Company further closed and consolidated 3 additional stores and may consider additional store consolidations in the future.

GrowGeneration has also acquired several other types of businesses within or complimentary to the hydroponic industry, such as online retailers, proprietary products, our distribution business, HRG, and our benching, racking, and storage solutions business, MMI.

Currently, the Company's main growth strategies for its Cultivation and Gardening segment include expanding its commercial sales to sell more product to commercial cultivators for large grow operations, expanding its distribution capabilities to sell more product to independent retail garden centers and other resellers for resale, establishing itself in new markets where it believes regulation related to cannabis reform is progressing, especially with the potential cannabis rescheduling by the federal government, and expanding and promoting its portfolio of proprietary brands to increase its market share, product offerings, and profitability.

The Company's main growth strategies for its Storage Solutions segment include expanding the types of customers and industries to which we sell our products, including greater penetration in agriculture and golf and country clubs.

In addition, the Company regularly seeks and evaluates accretive acquisition opportunities with similar or complimentary businesses to those businesses it already operates.

For further detail on all acquisitions please see Note 12, Acquisitions, of the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K ("Consolidated Financial Statements").

COMPONENTS OF RESULTS OF OPERATIONS

We primarily generate net sales from the selling and distribution of proprietary and non-proprietary brand hydroponic and organic gardening products.

I n addition to our hydroponic and organic gardening product sales, we sell and install commercial fixtures through our benching, racking, and storage solutions business .

Net sales reflect the amount of

consideration that we expect to receive, which is derived from a list price reduced by variable consideration, including applicable sales discounts and estimated expected sales returns.

These sales vary by the type of product:

consumables, such as nutrients, additives, growing media, and supplies that are subject to regular replenishment, and durables, such as lighting, environmental control systems, and storage solutions.

Generally, in new markets where legalization of plant-based medicines is recent and licensors are starting new grow operations, there is a higher volume of durable product purchases for facility build-outs compared to purchases of recurring consumable products.

In more mature markets, there are generally more purchases of consumables than durables.

We assess the organic growth of our Cultivation and Gardening segment net sales on a same-store basis.

We believe that our assessment on a same-store basis represents an important indicator of comparative financial results and provides relevant information to assess our performance.

New and acquired stores become eligible for inclusion in the comparable store base if the store has been under our ownership for the entire period in the same-store base periods for which we are including the store.

Closed stores become ineligible for inclusion in the comparable store base in the month in which operations cease.

Cost of Sales

Cost of sales for the year ended December 31, 2022 decreased approximately $96.3 million or 31.7% compared to the year ended December 31, 2021.

The decrease in cost of sales is primarily due to the 34.2% decrease in sales.

Cost of sales for the year ended December 31, 2021 increased approximately $161.9 million or 113.8% compared to the year ended December 31, 2020.

The increase in cost of sales was directly attributable to the 118.5% increase in revenues, as detailed above, comparing the year ended December 31, 2021 to 2020.

Gross profit was approximately $70.3 million for the year ended December 31, 2022, compared to approximately $118.2 million for the December 31, 2021, a decrease of approximately $48.0 million or 40.6%.

The decrease in gross profit is primarily related to the 34.2% decrease in revenues.

Gross profit as a percentage of revenues was 25.3% for the year ended December 31, 2022, compared to 28.0% for 2021.

The decrease in the gross profit margin percentage is primarily due to increased freight costs as well as higher levels of product discounting in the retail segment.

Gross profit for the year ended December 31, 2021 increased approximately $67.2 million or 131.6% compared to the year ended December 31, 2020.

Gross profit as a percentage of sales was 28.0% for the year ended December 31, 2021, compared to 26.4% for the year ended December 31, 2020.

Cost of sales includes cost of goods and shipping costs.

Cost of goods consists of cost of merchandise, inbound freight, and other inventory-related costs, such as shrinkage costs and lower of cost or market adjustments.

Occupancy expenses of our retail locations and distribution centers, which consist of payroll, rent, and other lease required costs, including common area maintenance and utilities, are included as a component of operating expenses within Store operations and other operational expenses in the Consolidated Statements of Operations.

We calculate gross profit as net sales less cost of sales.

Gross profit excludes depreciation and amortization, which are presented separately as a component of operating expenses in the Consolidated Statements of Operations.

Our gross profit as a percentage of net sales, or gross profit margin, varies with our product mix, in particular the percentage of sales of proprietary brand products compared to non-proprietary brand products and of consumable products compared to durable products.

Proprietary products typically have higher gross margins compared to non-proprietary products, and consumable products typically have higher gross margins compared to durable products.

Operating Expenses

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

Operating costs were approximately $238.1 million for the year ended December 31, 2022 and approximately $103.2 million for the year ended December 31, 2021, an increase of approximately $134.9 million or 130.7%.

The increase in operating expenses is primarily attributable to the impairment loss of $127.8 million recorded during 2022, which was primarily attributable to the decline in the Company's market capitalization below net assets in addition to the Company's declining performance.

Operating expenses for the year ended December 31, 2021 increased approximately $60.6 million or 142.3% compared to the year ended December 31, 2020.

Store operating costs, primarily payroll, rent and utilities, and allocated corporate overhead costs, were approximately $54.7 million for the year ended December 31, 2022, compared to $49.7 million for the year ended December 31, 2021, an increase of $4.9 million or 9.9%.

The increase in store operating costs was directly attributable to the addition of 23 locations that were added during 2021.

During 2021, store operating costs increased approximately $31.0 million or 165.7% compared to the year ended December 31, 2020.

The increase in store operating costs was directly attributable to the 118.5% increase in revenues and the addition of 23 locations that were added during 2021.

Pre-opening expenses for new stores opened during the period increased approximately $0.9 million during 2021.

Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately $55.6 million for the year ended December 31, 2022, compared to $53.5 million for the year ended December 31, 2021, an increase of $2.1 million or 4.0%.

Selling, general, and administrative costs were approximately $36.8 million for the year ended December 31, 2022, compared to approximately $39.5 million for the year ended December 31, 2021.

Salaries expense decreased to $18.4 million for the year ended December 31, 2022 from $20.0 million for the year ended December 31, 2021.

General and administrative expenses increased to $14.5 million from $14.3 million.

During 2021, total corporate overhead was approximately $53.5 million for the year ended December 31, 2021, compared to $23.9 million for the year ended December 31, 2020, an increase of $29.6 million or 124.0%.

Selling, general, and administrative costs were approximately $40.9 million for the year ended December 31, 2021, compared to approximately $21.5 million for the year ended December 31, 2020.

Salaries expense increased to $20.0 million from $8.6 million primarily due to an increase in corporate staff and general and administrative expenses increased to $14.3 million from $5.0 million to support expanding operations.

These increases were partially offset by a decrease in share-based compensation to $6.6 million from $7.9 million primarily due to new executive compensation agreements effective January 1, 2020 that had front loaded vesting provisions for shares and options that were granted January 1, 2020 for which the remaining vesting was over a two-year period.

Impairment loss was approximately $127.8 million for the year ended December 31, 2022 following impairment testing of goodwill and intangible assets performed in the second quarter as a result of the Company’s market capitalization falling below total net assets.

In addition, financial performance continued to weaken during the quarter for which testing was performed.

Refer to Critical Accounting Policies, Judgments, and Estimates and Note 6, Goodwill and Intangible Assets , of the notes to the consolidated financial statements for additional information.

Net Income (Loss)

Net loss for the year ended December 31, 2022 was approximately $163.7 million, compared to net income of approximately $12.8 million for the year ended December 31, 2021, a decrease of approximately $176.5 million.

Net income for the year ended December 31, 2021 was approximately $12.8 million, compared to net income of approximately $5.3 million for the year ended December 31, 2020, an increase of $7.5 million.

Net income for 2021 compared to 2020 was primarily impacted by a 118.5% increase in revenues, offset slightly by increased cost of goods sold of 113.8%.

Store operating costs as a percentage of revenue was 11.8% in 2021, compared to 9.7% offsetting the increase in cost of sales.

CONDENSED 2022, 2021, AND 2020 RESULTS OF OPERATIONS (in thousands)

For the Year Ended

2022 2021 2020

Sales, net $ 278,166 $ 422,489 $ 193,365

Operating expenses are comprised of the following components:

store operations and other operational expenses;

selling, general, and administrative;

estimated credit losses;

depreciation and amortization;

and impairment losses.

Store operations and other operational expenses consist primarily of payroll, rent and utilities, and allocated corporate overhead costs.

Selling, general, and administrative expenses consist of corporate salaries, stock-based compensation, advertising and promotions, travel and entertainment, professional fees, insurance, and other corporate administrative costs.

Selling, general, and administrative expenses as a percentage of net sales typically does not increase commensurate with an increase in net sales.

Our largest expenses are generally related to employee compensation and leases, which are primarily fixed and not variable.

Our advertising and marketing expenses are largely controllable and variable depending on the particular market.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 is presented below.

A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023.

Condensed Results of Operations for the Years Ended December 31, 2023 and 2022

The following table presents, for the periods indicated, selected information from our consolidated financial results, including information presented as a percentage of net sales:

For the Years Ended December 31,

2023 2022 Year-to-Year Variance

Net sales $ 225,882 100.0 % $ 278,166 100.0 % $ (52,284) (18.8) %

Cost of sales 164,624 72.9 % 207,903 74.7 % (43,279) (20.8) %

3 unchanged sentences

Other income (expense) 3,380 1.5 % 1,243 0.4 % 2,137 171.9 %

Pre-tax net income (loss) (166,632) 15,229 8,579

Income taxes 2,885 (2,443) (3,251)

Net income (loss) before taxes (46,464) (20.6) % (166,632) (59.9) % 120,168 (72.1) %

Benefit (provision) for income taxes (32) — % 2,885 1.0 % (2,917) (101.1) %

Net income (loss) $ (46,496) (20.6) % $ (163,747) (58.9) % $ 117,251 (71.6) %

Use of Non-GA AP Financial Information

The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods.

The Company uses these non-GAAP measures for internal planning and reporting purposes.

These non-GAAP measures are not in accordance with, or an alternative for,

generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.

Set forth below is a reconciliation of Adjusted EBITDA to net income (loss) (in thousands except per share data):

Net sales for the year ended December 31, 2023 were approximately $225.9 million, a decrease of 18.8% as compared to net sales of approximately $278.2 million for the year ended December 31, 2022.

The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $194.5 million for the year ended December 31, 2023 and $245.7 million for the year ended December 31, 2022.

This decrease in net sales was primarily due to the closure of 14 retail locations during 2023 as well as a decrease of approximately $37.9 million, or 19.3%, in same store sales, which is primarily attributable to continued pressure on the cannabis industry generally.

The percentage of net sales related to consumable products for the year ended December 31, 2023 was approximately 61.7%, which was an increase from 57.9% for the year ended December 31, 2022.

The increase in consumable sales as a percentage of net sales was driven by increased brand adoption of proprietary growing media and nutrient products, and was also offset by a lower total revenue base.

Proprietary brand sales as a percentage of net sales increased to 16.1% for the year ended December 31, 2023 as compared to 13.3% for the year ended December 31, 2022, driven by our strategic initiatives to increase sales volume with our expanded portfolio of proprietary brands and products.

Overall sales of commercial fixtures within our Storage Solutions segment remained relatively flat year-over-year, declining slightly from $32.5 million for the year ended December 31, 2022 to $31.4 million for the year ended December 31, 2023.

Cost of Sales

Cost of sales for the year ended December 31, 2023 decreased approximately $43.3 million or 20.8% compared to the year ended December 31, 2022.

The decrease in cost of sales was primarily due to the 18.8% decrease in sales as previously discussed.

The decrease was also partially driven by the inventory discounts and reductions taken during the second half of the year ended December 31, 2022, which did not occur in the current year.

Gross profit was approximately $61.3 million for the year ended December 31, 2023 compared to approximately $70.3 million for the December 31, 2022, a decrease of approximately $9.0 million, or 12.8%.

The decrease in gross profit was primarily related to the Gardening and Cultivation segment, which decreased 19.4% for the year ended December 31, 2023 as compared to the year ended December 31, 2022, largely as a result of the decrease in sales volume due to store closures and continued pressure on the cannabis industry as discussed above.

The decrease was partially offset by a $2.4 million gross profit increase for the Storage Solutions segment for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Gross profit margin was 27.1% for the year ended December 31, 2023, an increase of 180 basis points from a gross profit margin of 25.3% for the year ended December 31, 2022.

The increase was primarily attributable to an 890 basis point gross profit margin improvement for the Storage Solutions segment as well as a 50 basis point gross profit margin improvement

for the Cultivation and Gardening segment, which was largely driven by the proportional increase of proprietary brand sales to non-proprietary brand sales and less inventory discounts and reductions in the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Operating Expenses

Operating expenses are comprised of store operations and other operational expenses, selling, general, and administrative, estimated credit losses, impairment loss, and depreciation and amortization.

Operating expenses were approximately $111.1 million for the year ended December 31, 2023 and approximately $238.1 million for the year ended December 31, 2022, a decrease of approximately $127.0 million or 53.3%.

Approximately $112.2 million of the decrease in operating expenses related to impairment losses, which were $15.7 million for the year ended December 31, 2023 as compared to $127.8 million for the year ended December 31, 2022, and were predominately related to our goodwill and intangible assets.

Refer to the discussion within Critical Accounting Policies and Estimates section as well as Note 6, Goodwill and Intangible Assets, of the Consolidated Financial Statements for additional information regarding our impairment losses.

Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were approximately $48.1 million for the year ended December 31, 2023 as compared to $54.7 million for the year ended December 31, 2022, a decrease of $6.6 million or 12.1%.

The decrease in store operating costs was primarily attributable to the closure of 14 retail locations during 2023.

Total corporate overhead, which is comprised of selling, general, and administrative, estimated credit losses, and depreciation and amortization, was approximately $47.4 million for the year ended December 31, 2023 as compared to $55.6 million for the year ended December 31, 2022, a decrease of $8.3 million or 14.9%.

The decrease in corporate overhead was primarily due to the $7.0 million year-over-year reduction in selling, general, and administrative costs, largely driven by a decrease in corporate payroll related expenses to $13.5 million for the year ended December 31, 2023 from $18.4 million for the year ended December 31, 2022.

Other reductions in selling, general, and administrative costs were attributable to our cost rationalization initiatives during 2023.

Other Income (Expense)

Other income (expense) for the year ended December 31, 2023 was approximately $3.4 million, an increase of $2.1 million, as compared to other income (expense) of approximately $1.2 million for the year ended December 31, 2022, primarily driven by the increased investment income from our marketable securities.

Net Income (Loss)

Net loss for the year ended December 31, 2023 was approximately $46.5 million, compared to approximately $163.7 million for the year ended December 31, 2022, an increase of approximately $117.3 million, primarily driven by the decrease of impairment losses by $112.2 million as discussed above.

Use of Non-GAAP Financial Information

EBITDA and Adjusted EBITDA are non-GAAP financial measures commonly used in our industry and should not be construed in isolation as substitutions to net income (loss) as indicators of operating performance or as alternatives to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP).

GrowGeneration defines EBITDA as net income (loss) before interest income, interest expense, income tax expense, depreciation and amortization, and Adjusted EBITDA as further adjusted to exclude certain items such as stock-based compensation, impairment losses, restructuring and corporate rationalization costs, and other non-core or non-recurring expenses and to include income from our marketable securities as these investments are part of our operational business strategy and increase the cash available to us.

We believe these non-GAAP measures, when used in conjunction with net income (loss), provide meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods.

Management uses these non-GAAP measures for internal planning and reporting purposes.

These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

We believe that these non-GAAP financial measures may be useful to investors in their assessment of our operating performance and valuation.

In addition, these non-GAAP financial measures address questions routinely received from analysts and investors and, in order to ensure that all investors have access to the same data, we have determined that it is appropriate to make this data available to all investors.

Set forth below is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) (in thousands):

Year ended December 31,

1 unchanged sentence

Net income (loss) $ (46,496) $ (163,747) $ 12,786

Income taxes (2,885) 2,443 3,251

Benefit (provision) for income taxes 32 (2,885) 2,443

Interest income (2,696) (580) (486)

2 unchanged sentences

EBITDA $ (32,456) $ (150,059) $ 27,386

Share-based compensation 3,171 4,967 6,585

Investment income 2,696 — —

Impairment loss 15,659 127,831 —

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

Restructuring and other charges (1)

5,376 568 197

Fixed asset disposal 568 197 —

Adjusted EBITDA $ (5,554) $ (16,693) $ 34,168

Adjusted EBITDA per share, basic $ (0.27) $ 0.58 $ 0.43

Adjusted EBITDA per share, diluted $ (0.27) $ 0.57 $ 0.41

(1) Consists primarily of expenditures related to the activity of store and distribution consolidation and one-time severances

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2023, we had working capital of approximately $116.5 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $18.4 million.

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

As of December 31, 2022, we had cash and cash equivalents of $40.1 million.

Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital.

Our core strategy continues to focus on expanding our geographic reach across the United States and building our store and brand portfolio through organic growth and acquisitions.

We believe that some of our acquisitions and new store openings can come from cash flow from operations.

As of December 31, 2021, we had working capital of approximately $169.8 million, compared to working capital of approximately $229.0 million as of December 31, 2020, a decrease of approximately $53.1 million.

The decrease in working capital from December 31, 2020 to December 31, 2021 was due primarily to business acquisitions completed during the year ended December 31, 2021 for which the cash consideration was approximately $80.8 million.

This decrease in working capital related to business acquisitions was partially offset by an increase in inventory associated with more locations and our ability to leverage greater bulk purchasing due to our growth.

At December 31, 2021, we had cash and cash equivalents of approximately $41.4 million and available for sale debt securities of $39.8 million.

We currently do not anticipate any immediate need for additional financing.

Management believes that the Company is currently adequately funded to support current and and future operations.

We will evaluate the need for additional financing in the future to continue to grow our business, including through acquisitions.

To date we have financed our operations through the sale of newly issued common stock, warrants and convertible debentures as discussed below.

The decrease in working capital from December 31, 2022 to December 31, 2023 was due primarily to a decrease in inventory and cash and cash equivalents, partially offset by a decrease in current liabilities.

As of December 31, 2023, we had cash, cash equivalents, and marketable securities of $65.0 million.

Currently, we are not aware of any extraordinary demands, commitments, or uncertainties that would materially reduce our current working capital.

Our material future cash requirements from contractual and other obligations relate primarily to our operating leases.

Refer to Note 8, Leases, of the Consolidated Financial Statements for additional information regarding leases.

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.

However, management believes that the Company is adequately funded to support current and future operations in the next twelve months.

To date we have financed our operations through the issuance of common stock, convertible notes, and warrants, as well as cash generated from operations.

The following discussion sets forth the major sources and uses of cash for the year ended December 31, 2023 and December 31, 2022.

A discussion regarding the major sources and uses of cash for the year ended December 31, 2021 can

be found under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023.

Operating Activities

Net cash provided by operating activities for year ended December 31, 2022 was approximately $11.9 million, compared to $5.2 million for the year ended December 31, 2021.

The Company reduced prepaid inventory by $10.3 million in the

current year as well as inventory by $32.9 million, partially offset by payments for accounts payable, accrued payroll, and a reduction in customer deposits.

Net cash provided by operating activities for year ended December 31, 2021 was approximately $5.2 million, compared to net cash used of $213 thousand for the year ended December 31, 2020.

Cash used in operations as a result of an inventory increase was primarily attributable to our additional store count.

In addition, we used our capital capabilities to secure production of product overseas through prepaid inventory purchase commitments with long lead times in advance of spring 2022 needs.

Cash used in accounts and notes receivable decreases were primarily driven by increased revenues partially offset by the collection of notes receivable.

Cash provided by the increase in accounts payable and accrued liabilities and customer deposits are attributable to our increased store count and related increase in cost of sales.

The increase in payroll liability is primarily driven by increased headcount related to our increased operations.

Net cash and cash equivalents provided by operating activities for the year ended December 31, 2023 was approximately $1.4 million, compared to $11.9 million for the year ended December 31, 2022.

The changes in operating cash were primarily driven by our continued efforts to decrease inventory and an increase in customer deposits, partially offset by reductions to accounts payable, payroll, and payroll tax liabilities.

Investing Activities

Net cash provided by investing activities was approximately $11.6 million for the year ended December 31, 2022 compared to cash used of approximately $139.3 million for the year ended December 31, 2021.

Investing activities in 2022 were primarily attributable to acquisitions of $7.2 million, purchase of marketable securities of $38.7 million, and purchase of vehicles and store equipment of $12.9 million, partially offset by $46.6 million of marketable security maturities.

Investing activities for the year ended December 31, 2021 were primarily related to store acquisitions of $80.8 million and the purchase of vehicles and store equipment of $18.7 million.

Net cash used in investing activities was approximately $139.3 million for the year ended December 31, 2021 and approximately $45.8 million for the year ended December 31, 2020.

Investing activities in 2021 were primarily attributable to acquisitions of $80.8 million, purchase of marketable securities of $75.0 million, and purchase of vehicles and store equipment of $18.7 million, partially offset by $35.2 million of marketable security maturities.

Investing activities for the year ended December 31, 2020 were primarily related to store acquisitions of $41.4 million and the purchase of vehicles and store equipment of $3.4 million.

Net cash and cash equivalents used in investing activities was approximately $11.4 million for the year ended December 31, 2023 compared to approximately $11.6 million for the year ended December 31, 2022.

Investing activities for the year ended December 31, 2023 were primarily attributable to investment of excess cash into marketable securities of $98.7 million, partially offset by maturity of marketable securities of $96.8 million.

We also had purchases of property and equipment of $6.7 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 year ended December 31, 2022 were primarily related to maturities of marketable securities of $46.6 million, partially offset by investment of excess cash into marketable securities of $38.7 million, acquisitions of $7.2 million, and the purchase of property and equipment primarily related to the design of a new enterprise resource planning software system of $12.9 million.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2022 was approximately $1.7 million and was primarily attributable to stock withheld to cover payroll taxes.

Net cash provided by financing activities for the year ended December 31, 2021 was $2.4 million and was primarily attributable to stock redemptions partially offset by the proceeds from the sale of common stock and exercise of warrants and options.

Net cash provided by financing activities for the year ended December 31, 2020 was $211.0 million and was primarily from proceeds from the sale of common stock and exercise of warrants and options.

2020 Offerings

On December 11, 2020, the Company consummated an underwritten public offering of 5,750,000 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase an additional 750,000 shares of common stock to cover over-allotments.

The shares were sold at a public offering price of $30 per share, generating gross proceeds of $172.5 million, before deducting the underwriting discounts and commissions and other offering expenses.

Net proceeds from the sales of common stock, net of all offering costs and expenses, was approximately $162.5 million.

On July 2, 2020, the Company consummated an underwritten public offering of 8,625,000 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase an additional 1,125,000 shares of common stock to cover over-allotments.

The shares were sold at a public offering price of $5.60 per share, generating gross proceeds of $48.3 million, before deducting the underwriting discounts and commissions and other offering expenses.

Net proceeds from the sales of common stock, net of all offering costs and expenses, was approximately $44.6 million.

Net cash and cash equivalents used in financing activities for the year ended December 31, 2023 and December 31, 2022 was approximately $0.3 million and $1.7 million, respectively, and was primarily attributable to common stock withheld to cover employee payroll taxes.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, and expense and related disclosures.

On an ongoing basis, management bases and evaluates estimates on historical experience and on various other market-specific and other relevant assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ significantly from those estimates.

We believe the following critical policies reflect the more significant judgments and estimates used in preparation of the consolidated financial statements.

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 assesses 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 assessment for its reporting units using a fair value method based on management's judgements and assumptions or third-party valuations.

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

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

generally accepted accounting principles requires management to make estimates and judgments regarding matters that are uncertain and susceptible to change that affect the reported amounts of assets, liabilities, revenue, and expense.

Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions.

Management regularly reviews the estimates and assumptions used in the preparation of the financial statements for reasonableness and adequacy based on historical experience and various other market-specific and other relevant assumptions.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Consolidated Financial Statements and should be read in conjunction with this discussion.

However, the following discussion pertains to accounting policies we believe reflect the more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our financial condition, results of operations and cash flows to those of other companies.

Goodwill Impairment

Goodwill represents the excess purchase price over the fair value of identifiable assets acquired and liabilities assumed in connection with acquisitions in accordance to ASC 805, Business Combinations .

Goodwill is not amortized but instead is tested for impairment at the reporting unit level at least annually, or more frequently if indicators of impairment exist.

We perform our goodwill impairment assessment for each of our four reporting units that have goodwill.

Effective the fourth quarter of 2023 and prospectively, we performed our required annual goodwill impairment test as of December 1 rather than on December 31, which was the previous practice.

We assess goodwill using either a qualitative or quantitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The qualitative assessment evaluates factors including macro-economic conditions, industry-specific and company-specific considerations, legal and regulatory environments, and historical performance.

If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed.

Otherwise, no further assessment is required.

Additionally, an

election can be made to bypass the qualitative assessment and proceed directly to performing a quantitative goodwill impairment assessment for a reporting unit.

The quantitative approach compares the estimated fair value of the reporting unit, including goodwill, to its carrying amount.

We perform a quantitative impairment assessment for its reporting units using a fair value method based on management's judgements and assumptions or third-party valuations.

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.

We determined fair value using the income approach, where estimated future cash flows are discounted to present value at an appropriate rate of return.

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.

These calculations contain uncertainties as they require management to make assumptions about market comparables, future cash flows, and appropriate discount rates 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.

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 assessment and the our 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 6, Goodwill and Intangible Assets , of the notes to the consolidated financial statements for additional information.

The Company assesses intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable.

In performing our assessment for recoverability of amortizable intangible assets, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition.

If the sum of the expected future undiscounted cash flows from intangible assets is less than the carrying amount of the asset, an impairment loss is recognized.

A considerable amount of management judgement 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 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.

For the goodwill impairment test performed on December 1, 2023, we completed a quantitative goodwill impairment assessment for each reporting unit.

As a result of changes to the business and future projections, we identified a $9.3 million impairment related to goodwill.

Additionally, for the year ended December 31, 2022, we recorded a goodwill impairment loss of $116.7 million.

Refer to Note 6, Goodwill and Intangible Assets, of the Consolidated Financial Statements.

Recoverability of Long-Lived Assets

We review the recoverability of our long-lived assets, including property and equipment, operating leases right-of-use assets, and intangible assets, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable.

The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations.

If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value.

The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.

The estimated fair values of the assets are measured using an income approach, which utilizes forecasted discounted cash flows.

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, 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 6, Goodwill and Intangible Assets , of the notes to the consolidated financial statements for additional information.

Other Significant Accounting Policies

Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed above, are also critical to understanding the consolidated financial statements.

The notes to consolidated financial statements included in this Annual Report on Form 10-K contain additional information related to our accounting policies, including recent accounting pronouncements, and should be read in conjunction with this discussion.

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.

During the fourth quarter of 2023, we quantitatively evaluated the recoverability of our long-lived assets, including our finite-lived intangible assets, for impairment in conjunction with our annual goodwill impairment assessment.

As a result, we identified a $6.2 million impairment related to our finite-lived intangible assets.

Additionally, we identified a $0.1 million impairment related to our operating lease right-of-use assets for the year ended December 31, 2023.

For the year ended December 31, 2022, we recorded an impairment loss of $11.2 million related to our finite-lived intangible assets.

Refer to Note 6, Goodwill and Intangible Assets, of the Consolidated Financial Statements.

RECENTLY ACCOUNTING PRONOUNCEMENTS

Refer to Note 3, Recent Accounting Pronouncements, of the Consolidated Financial Statements for information regarding recently issued accounting standards.

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-K

Item 7. Management’s Discussion and Analysis