GrowGeneration Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Reports of Independent Registered Public Accounting Firms (PCAOB ID 248 and 166 ) F- 2 to F- 6 Consolidated Balance Sheets as of December 31, 202 3 and 2 022 F- 7 Consolidated Statements of Operations for the Years Ended December 31, 202 3, 202 2 and 20 21 F- 8 Consolidated Statements of Equity for the Years Ended December 31, 202 3 , 2022 and 20 21 F- 9 Consolidated Statements of Cash Flows for Years Ended December 31, 202 3, 202 2 and 2021 F- 10 Notes to Consolidated Financial Statements F- 11 to F- 36 F-1 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders GrowGeneration Corp. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of GrowGeneration Corp. (a Colorado corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 13, 2024 expressed an adverse opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Consolidated Financial Statements - Impact of Internal Control over Financial Reporting As described in Management’s Report on Internal Control Over Financial Reporting, material weaknesses were identified as of December 31, 2023. The prevention, detection, and correction of material misstatements of the consolidated financial statements, is dependent, in part, on management (i) designing and maintaining an effective control environment, including maintaining sufficient resources within the accounting and financial reporting department to review complex financial reporting transactions; and updating and distributing accounting policies and procedures across the organization (ii) designing and implementing effective information and communication process to identify and assess the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting and (iii) designing and implementing effective process-level control activities and general information technology controls related to financial reporting processes. We identified the impact on our audit of the material weaknesses related to the control environment, information and communication, and control activities (“material weaknesses”), as further described in Management’s Report, as a critical audit matter. F-2 Table of Contents The principal consideration for our determination that the impact on our audit of the material weaknesses is a critical audit matter is that especially challenging auditor judgment was required in designing audit procedures and evaluating audit evidence due to the ineffective system of internal control over financial reporting, which affects substantially all consolidated financial statement account balances and disclosures. Our audit procedures related to the material weaknesses included the following, among others. a. We determined the nature and extent of audit procedures that are responsive to the identified material weaknesses and evaluated the evidence obtained from the procedures performed. b. We lowered the threshold used for investigating differences noted for recorded amounts. c. We selected larger sample sizes for tests of details. d. We substantively tested the accuracy and completeness of system-generated reports used in the audit and more extensively tested these reports. e. We increased the extent of supervision over the execution of audit procedures. /s/ Grant Thornton LLP We have served as the Company’s auditor since 2022. Denver, Colorado March 13, 2024 F-3 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders GrowGeneration Corp. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of GrowGeneration Corp. (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of material weaknesses described in the following paragraphs on the achievement of the objectives of control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. • Control Environment: The Company did not maintain an effective control environment based on the criteria established in the COSO framework, which resulted in deficiencies in principles associated with the control environment. In addition, the following material weaknesses were previously identified and contributed to the material weakness in the control environment: • Insufficient resources within the accounting and financial reporting department to review the accounting of complex financial reporting transactions including areas such as business combinations, share based compensation and the related income tax reporting. • Ineffective controls over updating and distributing accounting policies and procedures across the organization. The control environment material weaknesses contributed to other material weaknesses within the Company’s system of internal controls over financial reporting related to the following COSO components: • Risk Assessment: The Company did not design and implement an effective risk assessment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the risk assessment component of the COSO framework. • Information and Communication: The Company did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting. • Monitoring Activities: The Company did not have effective monitoring activities to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness. • Control Activities: As a consequence of the material weaknesses described above, internal control deficiencies related to the design and operation of process-level controls and general information technology controls were determined to be pervasive throughout the Company’s financial reporting processes. In addition, the following material weaknesses were previously identified and contributed to the material weakness in control activities: • Inadequate information and technology general controls, including segregation of duties, change management, and user access, which were inadequate to support financial reporting applications and support automated controls and functionality. • Inadequate controls over physical inventory counts. • Inadequate controls over valuations, inclusive of appropriate valuation model inputs and appropriate forecasting for prospective financial information. F-4 Table of Contents • Inadequate segregation of duties within human resources, manual journal entry posting processes, and various bank accounts of the Company to prevent and detect unauthorized transactions in a timely manner. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023. The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated March 13, 2024, which expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Grant Thornton LLP Denver, Colorado March 13, 2024 F-5 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of GrowGeneration Corp. Opinion on the Financial Statements We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of GrowGeneration Corp. (the “Company”) for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of the Company and its cash flows for the ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Plante & Moran, PLLC Denver, Colorado March 9, 2022, except for the effects of the change in segments described in Notes 2, 6, 12 and 14, as to which the date is March 13, 2024 We served as the Company’s auditor from 2020-2022. F-6 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except shares) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 29,757 $ 40,054 Marketable securities 35,212 31,852 Accounts receivable, net of allowance for credit losses of $ 1.4 million and $ 0.7 million at December 31, 2023 and 2022, respectively 8,895 8,336 Notes receivable, long-term, net of allowance for credit losses of $ 1.7 million and $ 1.3 million at December 31, 2023 and 2022, respectively 193 1,214 Inventory 64,905 77,091 Prepaid income taxes 516 5,679 Prepaid and other current assets 7,973 6,455 Total current assets 147,451 170,681 Property and equipment, net 27,052 28,669 Operating leases right-of-use assets, net 39,933 46,433 Notes receivable, long-term 106 — Intangible assets, net 16,180 30,878 Goodwill 7,525 15,978 Other assets 843 803 TOTAL ASSETS $ 239,090 $ 293,442 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 11,666 $ 15,728 Accrued liabilities 2,530 1,535 Payroll and payroll tax liabilities 2,169 4,671 Customer deposits 5,359 4,338 Sales tax payable 1,185 1,341 Current maturities of operating lease liability 8,021 8,131 Current portion of long-term debt — 50 Total current liabilities 30,930 35,794 Operating lease liability, net of current maturities 34,448 40,659 Other long-term liabilities 317 593 Total liabilities 65,695 77,046 Commitments and contingencies (Note 15) Stockholders’ Equity: Common stock; $ .001 par value; 100,000,000 shares authorized; 61,483,762 and 61,010,155 shares issued and outstanding as of December 31, 2023 and 2022, respectively 61 61 Additional paid-in capital 373,433 369,938 Retained earnings (deficit) ( 200,099 ) ( 153,603 ) Total stockholders’ equity 173,395 216,396 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 239,090 $ 293,442 The accompanying notes are an integral part of these audited Consolidated Financial Statements. F-7 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share) For the Years Ended December 31, 2023 2022 2021 Net sales $ 225,882 $ 278,166 $ 422,489 Cost of sales (exclusive of depreciation and amortization shown below) 164,624 207,903 304,248 Gross profit 61,258 70,263 118,241 Operating expenses: Store operations and other operational expenses 48,082 54,680 49,742 Selling, general, and administrative 29,799 36,758 39,469 Estimated credit losses 955 1,737 1,428 Depreciation and amortization 16,607 17,132 12,600 Impairment loss 15,659 127,831 — Total operating expenses 111,102 238,138 103,239 Income (loss) from operations ( 49,844 ) ( 167,875 ) 15,002 Other income (expense): Other income (expense) 781 684 ( 216 ) Interest income 2,696 580 486 Interest expense ( 97 ) ( 21 ) ( 43 ) Total other income (expense) 3,380 1,243 227 Net income (loss) before taxes ( 46,464 ) ( 166,632 ) 15,229 Benefit (provision) for income taxes ( 32 ) 2,885 ( 2,443 ) Net income (loss) $ ( 46,496 ) $ ( 163,747 ) $ 12,786 Net income (loss) per share, basic $ ( 0.76 ) $ ( 2.69 ) $ 0.22 Net income (loss) per share, diluted $ ( 0.76 ) $ ( 2.69 ) $ 0.21 Weighted average shares outstanding, basic 61,181 60,813 59,223 Weighted average shares outstanding, diluted 61,181 60,813 60,464 The accompanying notes are an integral part of these audited Consolidated Financial Statements. F-8 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders’ Equity Shares Amount Balances, December 31, 2020 57,152 $ 57 $ 319,582 $ ( 2,642 ) $ 316,997 Common stock issued upon warrant exercise 256 — 335 — 335 Common stock issued upon cashless exercise of warrants 657 1 ( 1 ) — — Common stock issued upon exercise of options 469 1 1,757 — 1,758 Common stock issued upon cashless exercise of options 325 — — — — Common stock issued in connection with business combinations 807 1 37,271 — 37,272 Common stock issued in connection with purchase of intangible assets 4 — 168 — 168 Common stock issued for share based compensation 204 — — — — Common stock issued for services 145 — 717 — 717 Common stock redeemed in litigation settlement ( 90 ) — — — — Share-based compensation — — 1,258 — 1,258 Net income (loss) — — — 12,786 12,786 Balances, December 31, 2021 59,929 $ 60 $ 361,087 $ 10,144 $ 371,291 Common stock issued in connection with business combinations 650 1 5,710 — 5,711 Adjustment for prior period acquisition — — 39 — 39 Common stock issued for share based compensation 339 — — — — Share-based compensation — — 4,514 — 4,514 Common stock withheld for employee payroll taxes — — ( 1,618 ) — ( 1,618 ) Common stock issued upon exercise of options 8 — 33 — 33 Common stock issued upon cashless exercise of options 20 — — — — Common stock issued upon cashless exercise of warrants 14 — — — — Common stock issued in connection with asset acquisition 50 — 173 — 173 Net income (loss) — — — ( 163,747 ) ( 163,747 ) Balances, December 31, 2022 61,010 $ 61 $ 369,938 $ ( 153,603 ) $ 216,396 Common stock issued for share based compensation 439 — — — — Common stock withheld for employee payroll taxes — — ( 263 ) — ( 263 ) Share-based compensation — — 2,985 — 2,985 Non-cash repurchase of liability awards — — 653 — 653 Liability redemption associated with business acquisition 35 — 120 — 120 Net income (loss) — — — ( 46,496 ) ( 46,496 ) Balances, December 31, 2023 61,484 $ 61 $ 373,433 $ ( 200,099 ) $ 173,395 The accompanying notes are an integral part of these audited Consolidated Financial Statements. F-9 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 46,496 ) $ ( 163,747 ) $ 12,786 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 16,607 17,132 12,600 Estimated credit losses 955 1,737 1,428 Share-based compensation 3,171 4,967 6,585 Impairment loss related to goodwill and intangible assets 15,526 127,831 — Impairment loss on operating lease right-of-use assets 133 — — Provision for deferred income taxes — ( 2,359 ) 1,609 Loss on disposal of fixed assets 218 568 198 Change in value of marketable securities ( 1,438 ) — — Changes in operating assets and liabilities (net of the effect of acquisitions): (Increase) decrease in: Accounts and notes receivable ( 300 ) ( 3,106 ) ( 1,896 ) Inventory 13,773 32,890 ( 34,690 ) Prepaid expenses and other assets 3,898 10,827 ( 9,937 ) Accounts payable and accrued liabilities ( 3,035 ) ( 3,359 ) 3,285 Operating leases 46 508 1,282 Customer deposits 1,021 ( 8,590 ) 6,362 Payroll and payroll tax liabilities ( 2,502 ) ( 2,769 ) 4,785 Sales taxes payable ( 156 ) ( 582 ) 762 Net cash and cash equivalents provided by (used in) operating activities 1,421 11,948 5,159 Cash flows from investing activities: Acquisitions, net of cash acquired ( 3,050 ) ( 7,230 ) ( 80,784 ) Purchase of property and equipment ( 6,698 ) ( 12,896 ) ( 18,740 ) Purchase of marketable securities ( 98,680 ) ( 38,692 ) ( 75,000 ) Maturities of marketable securities 96,758 46,633 35,207 Proceeds from disposals of assets 265 612 — Net cash and cash equivalents provided by (used in) investing activities ( 11,405 ) ( 11,573 ) ( 139,317 ) Cash flows from financing activities: Principal payments on long term debt ( 50 ) ( 108 ) ( 83 ) Common stock withheld for employee payroll taxes ( 263 ) ( 1,618 ) ( 4,391 ) Proceeds from the sales of common stock and exercise of warrants and options, net of expenses — 33 2,092 Net cash and cash equivalents (used in) provided by financing activities ( 313 ) ( 1,693 ) ( 2,382 ) Net increase (decrease) in cash and cash equivalents ( 10,297 ) ( 1,318 ) ( 136,540 ) Cash and cash equivalents at beginning of year 40,054 41,372 177,912 Cash and cash equivalents at end of year $ 29,757 $ 40,054 $ 41,372 Supplemental Information: Cash paid for interest $ 98 $ 21 $ 43 Cash paid for income taxes $ 93 $ — $ 6,072 Right to use assets acquired under new operating leases $ 4,289 $ 9,607 $ 32,875 Indemnity holdback from business acquisition $ — $ 875 $ — Non-cash repurchase of liability awards $ 653 $ — $ — Non-cash issuance of a note receivable $ 299 $ — $ — Common stock issued for business combinations $ — $ 5,710 $ 37,272 Liability redemption associated with business acquisition $ 120 $ — $ — Common stock issued for intangible assets $ — $ 173 $ 168 The accompanying notes are an integral part of these audited Consolidated Financial Statements. F-10 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS GrowGeneration Corp. (together with 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. As of December 31, 2023, GrowGeneration has 50 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, HRG Distribution, and a benching, racking, and storage solutions business, Mobile Media or MMI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation The Consolidated Financial Statements have been prepared under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 105-10, Generally Accepted Accounting Principles , in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The Consolidated Financial Statements include the accounts of GrowGeneration Corp. and its direct and indirect wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All amounts included in the accompanying notes to the Consolidated Financial Statements, except per share data, are in thousands (000). Reclassifications Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported Consolidated Statements of Operations. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that 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. Segment Reporting The Company continually monitors and reviews its segment reporting structure in accordance with authoritative guidance for changes in management's approach or changes in other facts and circumstances that might result in different segment reporting. During the fourth quarter of 2023, the Company realigned its operating and reportable segments to correspond with changes to its operating model, management structure, and internal reporting and to better align with how the chief operating decision maker ("CODM") makes operating decisions, allocates resources, and assesses performance. Accordingly, the Company identified two operating segments, each its own reportable segment, based on its major lines of business: the Cultivation and Gardening segment, composed of the Company's hydroponic and organic gardening business; and the Storage Solutions segment, composed of the Company's benching, racking, and storage solutions business. Comparative prior period disclosures have been recast to conform to the current segment presentation. Refer to Note 14, Segments, for additional information regarding the Company's reportable segments. F-11 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition The Company's revenue is primarily generated from sales of its hydroponic and organic gardening proprietary brand products and non-proprietary brand products through its retail locations, e-commerce platforms, wholesale distribution, and commercial sales organization. In addition to its hydroponic and organic gardening product sales, the Company sells and installs commercial fixtures through its benching, racking, and storage solutions business . The Company recognizes revenue when performance obligations under the terms of a contract with its customer are satisfied. Revenue is recognized at the point in time when the Company has satisfied its performance obligation and the customer has obtained control of the products or when services have been completed. In evaluating the timing of the transfer of control of products to customers, the Company considers several control indicators, including significant risks and rewards of products, the Company's right to payment, and the legal title of the products. Based on the assessment of control indicators, product sales are typically recognized when product is made available to the carrier or picked up by the customer. Promises related to product installation are considered a separate performance obligation from the product sale because the products can be used without customization or modification and the installation is not complex and can be performed by other vendors. Installation revenue is recognized upon completion of the installation services. Revenues are measured as the amount of consideration that the Company expects to receive, which is derived from a list price reduced by variable consideration, which includes applicable sales discounts and estimated expected sales returns. The majority of the Company's returns come from retail sales. Estimating future returns requires judgment based on current and historical trends, and actual returns may vary from management's estimates. Sales and other taxes collected concurrent with revenue producing activities are also excluded from revenue. The Company provides standard assurance type warranties that its products and installation services will comply with all agreed-upon specifications. No services beyond an assurance type warranty are provided to customers. Payment for goods and services sold by the Company is typically due upon satisfaction of the performance obligations. Under certain circumstances, the Company does provide goods and services to customers on a credit basis (see Accounts Receivable, Notes Receivable and Concentration of Credit Risk below). When the Company receives payment from customers before the customer obtains control of the merchandise or the service has been performed, the amount received is recorded as a customer deposit in the accompanying Consolidated Balance Sheets until the sale or service is complete. In accordance with ASC 606, Revenue from Contracts with Customers , the Company has elected the practical expedient to exclude the value of remaining performance obligations for contracts with an original term of one year or less and the practical expedient for shipping and handling costs. Shipping and handling costs incurred to deliver products to customers are accounted for as fulfillment activities, rather than a promised service, and as such are included in Cost of sales in the Consolidated Statements of Operations. Cost of Sales 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 the Company's 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 Store operations and other operational expenses on the Consolidated Statements of Operations. The Company does not consider these occupancy expenses to be part of the costs to bring its products to the finished condition and therefore records such costs as Store operations and other operational expenses rather than Cost of sales. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company's cash equivalents consist primarily of money market funds. Financial instruments that potentially expose the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not collateralized. The Company's policy is to place its cash and cash equivalents with high-quality financial institutions in order to limit the amount of credit exposure. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $ 250,000 . Additionally, certain cash equivalents maintained with investment institutions are insured by a combination of the Securities Investor Protection F-12 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Corporation ("SIPC") up to $ 500,000 , which includes a $ 250,000 limit for cash, and additional private insurance, which mitigates the Company's exposure. At December 31, 2023 and 2022, the Company had approximately $ 20.8 million and $ 34.3 million, respectively, in excess of the FDIC, SIPC, and other insurance limits. Marketable Securities Marketable securities investments primarily consist of fixed-income securities with short-term maturities, which are not actively traded by the Company. The marketable securities are classified as available-for-sale and are carried at fair value based on quoted market prices. Changes in fair value of marketable securities, principally derived from accretion of discounts, was $ 1.4 million for the year ended December 31, 2023 and immaterial for the years ended December 31, 2022 and 2021, and included in Interest income on the Consolidated Statements of Operations. Changes in fair value of marketable securities related to unrealized gains and losses were immaterial for the years ended December 31, 2023, 2022, and 2021. Accounts Receivable Accounts receivable consist primarily of trade receivables stated at the amount of consideration that the Company expects to collect from balances outstanding at period-end, net of allowances for credit losses. The Company estimates its allowance for credit losses and the related expected credit loss based upon the Company's historical credit loss experience and the age of the account adjusted for asset-specific risk characteristics, current economic conditions, relationship with the customer, and reasonable forecasts. Accounts receivable are written off or fully reserved when collection of amounts due is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, client cash flow difficulties, and ongoing service or billing disputes. Credit is generally extended on a short-term basis, thus current receivables do not bear interest. Interest on past due balances are subject to an interest charge of 1.5 % per month. Notes Receivable From time-to-time, the Company has executed notes receivables to third parties secured by collateral. Notes receivable generally have terms of 12 months to 18 months and bear interest from 6 to 12 % per annum. Generally, the underlying collateral is product or equipment financed by the note receivable. Notes receivable are stated at the amount the Company expects to collect from balances outstanding at period-end, net of allowances for credit losses. The Company estimates its allowance for credit losses and the related expected credit loss based upon the Company's historical credit loss experience and the age of the account adjusted for asset-specific risk characteristics, current economic conditions, relationship with the customer, and reasonable forecasts. A reserve for uncollectible notes receivable is established when collection of amounts due is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, client cash flow difficulties, and ongoing service or billing disputes. When management determines, after considering economic and business conditions and collection efforts, that an allowance for credit losses is necessary for a note receivable or collection of interest on the note is improbable, the accrual of interest on the instrument ceases. Any payment received on such non-accrual note receivable is recorded as interest income when the payment is received. Once payments of principal and interest are current, the Company resumes accruing interest on the note receivable. The Company periodically reviews the value of the underlying collateral for the note receivable and evaluates whether the value of the collateral continues to provide adequate security for the note. Should the value of the underlying collateral become less than the outstanding principal and interest, the Company will determine whether an allowance or impairment of the note receivable and related accrued interest is necessary. As of December 31, 2023 and 2022, the Company believes the value of the underlying collateral to be sufficient and in excess of the respective outstanding principal and accrued interest, net of recognized allowance for doubtful accounts. Concentration of Credit Risk The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and notes receivable. The Company is affected by general economic conditions in the U.S. To limit credit risk, management periodically reviews and evaluates the financial condition of customers and maintains an allowance for credit losses. As of December 31, 2023 and 2022, the Company does not believe that it has significant credit risk. F-13 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inventory Inventory consists predominantly of finished goods, including gardening supplies and materials, fixtures, and equipment, and is recorded at the lower of cost (weighted average cost method) or net realizable value. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of sales. During the years ended December 31, 2023, 2022, and 2021, the Company recorded $ 4.8 million, $ 7.8 million, and $ 5.3 million, respectively, to inventory write-downs due to shrink and obsolescence. Property and Equipment Property and equipment are recorded at cost, or at the allocated fair value for assets acquired in accordance with ASC 805, Business Combinations , and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining term of the lease or the useful life of the improvement. Renewals and betterment that materially extend the life of the asset are capitalized. With respect to constructed assets, all materials, direct labor, and contract services, as well as certain indirect costs, are capitalized. Expenditures for maintenance and repairs are charged against operations. Computer software development costs and website development costs are expensed as incurred, except for internal-use software or website development costs that qualify for capitalization in accordance with ASC 350, Intangibles—Goodwill and Other , and include certain employee related expenses, including salaries, bonuses, benefits, and share-based compensation expenses; costs of computer hardware and software; and costs incurred in developing features and functionality. The Company expenses costs incurred in the preliminary project and post-implementation stages of software development and capitalizes costs incurred in the application development stage and costs associated with significant enhancements to existing internal use software applications. Costs incurred related to less significant modifications and enhancements as well as maintenance are expensed as incurred. These capitalized software costs are amortized on a straight-line basis over an estimated useful life commencing when the software project is ready for its intended use. The general range of estimated useful lives for property and equipment are as follows: Estimated Lives Vehicles 5 years Buildings 20 - 30 years Furniture and fixtures 3 - 7 years Computers and equipment 3 - 5 years Capitalized software 3 - 8 years Leasehold improvements 5 years, not to exceed lease term The Company reviews for impairment indicators and recoverability of long-lived assets, including property and equipment, when circumstances indicate that the carrying value of the asset may not be recoverable. Refer to the Recoverability of long-lived assets significant accounting policy. Intangible Assets Intangible assets primarily include trade names, customer relationships, non-compete agreements, and intellectual property with finite lives identified in connection with acquisitions in accordance to ASC 805, Business Combinations . For each acquisition, the Company allocates the purchase price to the identifiable assets acquired and liabilities assumed, including intangible assets, based on estimated fair values. The Company determines the appropriate useful life of intangible assets by performing an analysis of cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives on a straight-line basis, which approximates the pattern in which the economic benefits associated with the asset are expected to be consumed. The estimated useful lives for trade names, customer relationships, non-compete agreements, and intellectual property are generally five to six years . F-14 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill 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. Goodwill is assessed 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 the Company determines 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. The quantitative approach compares the estimated fair value of the reporting unit, including goodwill, to its carrying amount. Impairment is indicated if the estimated fair value of the reporting unit is less than the carrying amount, and an impairment charge is recognized for the differential. Companies also have the unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. Effective the fourth quarter of 2023 and prospectively, the Company performed its required annual goodwill impairment test as of December 1 rather than on December 31, which was the Company's previous practice. This change represented a change in method of applying an accounting principle, and it was determined to be preferable as it more closely aligned the annual goodwill impairment assessment date with the Company's annual planning, forecasting, and budgeting processes. The change in accounting principle did not result in any, nor does the Company expect the change in accounting principle to result in any, delay, acceleration, or avoidance of an impairment cha rge. This change was not applied retrospectively, as it would be impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. For the goodwill impairment test performed on December 1, 2023, the Company completed a quantitative goodwill impairment assessment for each reporting unit. As a result of changes to the business and future projections, the Company identified a $ 9.3 million impairment related to its goodwill. Additionally, for the year ended December 31, 2022, the Company recorded a goodwill impairment loss of $ 116.7 million. These impairment losses related to goodwill are included in Impairment loss on the Consolidated Statements of Operations. Refer to Note 6, Goodwill and Intangible Assets, for additional information regarding the Company's impairment assessments. Recoverability of Long-Lived Assets The Company reviews the recoverability of 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. During the fourth quarter of 2023, the Company quantitatively evaluated the recoverability of its long-lived assets, including its finite-lived intangible assets, for impairment in conjunction with its annual goodwill impairment assessment. As a result, the Company identified a $ 6.2 million impairment related to its finite-lived intangible assets. Additionally, the Company identified a $ 0.1 million impairment related to its operating lease right-of-use assets for the year ended December 31, 2023. For the year ended December 31, 2022, the Company recorded an impairment loss of $ 11.2 million related to its finite-lived intangible assets. These impairment losses related to long-lived assets are included in Impairment loss on the Consolidated Statements of Operations. Refer to Note 6, Goodwill and Intangible Assets, for additional information regarding the Company's intangible asset impairment assessments. Leases Leases are accounted for in accordance with ASC 842, Leases . Contracts are evaluated to determine whether the arrangement contains a lease at inception. Leases are classified as either finance leases or operating leases based on criteria in ASC 842, Leases . The Company's operating leases primarily consist of real estate leases for its retail stores, distribution centers, warehouses, and offices. The Company does not have finance leases. F-15 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. The lease liabilities represent the present value of remaining lease payments over the lease term. The right-of-use assets represent the Company's right to use an underlying asset and are based upon the lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of right-of-use assets. The majority of the Company's leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments for those leases. The Company's incremental borrowing rate for a lease is the rate of interest it would pay to borrow on a collateralized basis over a similar term to the lease in a similar economic environment. The lease term includes the non-cancelable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The exercise of lease renewal options is at the Company's sole discretion. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term operating leases that have a lease term of one year or less and that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Short-term lease costs include expenses related to leases with terms greater than one month but less than 12 months, and the expense is recognized on a straight-line basis over the lease term. The Company has elected the practical expedient to account for lease and non-lease components as a single component for all leases. The Company monitors for triggering events or conditions that require a reassessment of its leases. When the reassessment requires a re-measurement of the lease liability, a corresponding adjustment is made to the carrying amount of the right-of-use asset. Additionally, the Company reviews for impairment indicators of its right-of-use assets and other long-lived assets as described in the Recoverability of long-lived assets significant accounting policy. 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 judgment. Accordingly, the degree of judgment 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. F-16 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the outstanding balance net of recognized allowance for doubtful accounts. Level December 31, 2023 December 31, 2022 Cash equivalents 1 $ 17,300 $ 25,087 Marketable securities 2 $ 35,212 $ 31,852 Business Combinations The Company accounts for acquisitions in accordance with ASC 805, Business Combinations . Assets acquired and liabilities assumed are recognized at their estimated fair values in accordance with ASC 820, Fair Value Measurements , as of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company's estimates and assumptions are subject to change as valuations are finalized within the measurement period, which cannot extend beyond one year from the acquisition date. Measurement period adjustments are recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date. The process for estimating fair values requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. Any changes to these estimates may have a material impact on the Company's operating results or financial position. All acquisition costs are expensed as incurred and recorded in Selling, general and administrative expense in the Consolidated Statements of Operations. Refer to Note 12, Acquisitions, for additional information regarding the Company's business combinations. Income Taxes The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes , which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized. To the extent that a determination was made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made. From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax, interest and penalty assessments by these taxing authorities. In determining the Company's income tax provision for financial reporting purposes, the Company establishes a reserve for uncertain income tax positions unless such positions are determined to be more likely than not of being sustained upon examination, based on their technical merits. The Company only recognizes tax benefits taken on the tax return that the Company believes are more likely than not of being sustained upon examination. There is considerable judgment involved in determining whether a position taken on the tax return is more likely than not of being sustained. The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated income tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest and penalties. The Company's policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of its income tax provision. Advertising The Company expenses advertising and promotional costs when incurred. Advertising and promotional expenses for the years ended December 31, 2023, 2022, and 2021 amounted to $ 1.8 million, $ 4.0 million, and $ 4.0 million, respectively. F-17 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings Per Share The Company computes net earnings per share under ASC 260-10, Earnings Per Share . Basic earnings or loss per share ("EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted average of all potentially dilutive shares of common stock that were outstanding during the periods presented. The treasury stock method is used in calculating diluted EPS for potentially dilutive stock options, restricted stock and common stock warrants, which assumes that any proceeds received from the exercise of in-the-money stock options, restricted stock and common stock warrants, would be used to purchase common shares at the average market price for the period. Share-Based Compensation The Company uses share-based compensation, including stock options, restricted stock units, and common stock warrants, to provide long-term performance incentives for its employees, non-employee members of its Board of Directors, and consultants. The Company records share-based compensation in accordance with ASC 718, Compensation-Stock Compensation . The Company estimates the fair value of stock options and common stock warrants on the grant date using the Black-Scholes option pricing model. The fair value of stock options and common stock warrants granted is recognized as an expense over the requisite service period. Share-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method and is included in Selling, general, and administrative expense in the Consolidated Statements of Operations. Forfeitures are recognized as they occur. The Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate used in the option pricing model is based on the U.S. Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company's stock price. These factors could change in the future, affecting the determination of share-based compensation expense in future periods. Periodically, the Company has issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480, Distinguishing Liabilities from Equity , and ASC 718, Compensation-Stock Compensation . These awards generally entitle the employees to receive a specified dollar value of common stock on future dates and vest over time subject to the employee's continued employment. The Company recognizes compensation expense for these awards over the requisite service period. Refer to Note 9, Share-Based Payments, for additional information regarding the Company's share-based compensation and share-based awards. 3. RECENT ACCOUNTING PRONOUNCEMENTS From time to time, the FASB or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification 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 its financial statements. In addition to the accounting pronouncements 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, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"), 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. ASU 2016-13 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 F-18 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS investments in leases, and off-balance sheet credit exposures. ASU 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 Retained earnings (deficit) in the Consolidated Balance Sheets on the adoption date of the standard. Recently Issued Accounting Pronouncements Not Yet Adopted In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280) ("ASU 2023-07"), which requires an enhanced disclosure of segments on an annual and interim basis, including the title of the chief operating decision maker, significant segment expenses, and the composition of other segment items for each segment's reported profit. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and adoption of ASU 2023-07 should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of this standard. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to income tax disclosures ("ASU 2023-09"), expanding the disclosures requirement for income taxes primarily by requiring more detailed disclosure for income taxes paid and the effective tax rate reconciliation. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and adoption of ASU 2023-09 can be applied prospectively or retrospectively. The Company is currently evaluating the impact of this standard. 4. REVENUE RECOGNITION Disaggregation of Revenues Sales are disaggregated by the Company's segments, which represent its principal lines of business, as well as by major product line, including proprietary brands, non-proprietary brands, and commercial fixtures, and by product type, including consumable and durable products. Refer to Note 14, Segments, for disaggregated revenue disclosures. Contract Assets and Liabilities Depending on the timing of when title of product transfers to a customer and when a customer makes payments for such product, the Company recognizes an accounts receivable (contract asset) or a customer deposit (contract liability). The opening and closing balances of the Company's accounts receivables and customer deposits are as follows: Accounts Receivable, Net Customer Deposits Opening balance, January 1, 2023 $ 8,336 $ 4,338 Closing balance, December 31, 2023 8,895 5,359 Increase (decrease) $ 559 $ 1,021 Opening balance, January 1, 2022 $ 5,741 $ 11,686 Closing balance, December 31, 2022 8,336 4,338 Increase (decrease) $ 2,595 $ ( 7,348 ) Of the total amount of customer deposits as of January 1, 2023, $ 3.4 million was reported as revenue during the year ended December 31, 2023. Of the total amount of customer deposits as of January 1, 2022, $ 11.1 million was reported as revenue during the year ended December 31, 2022. The Company also has notes receivable under longer term financing arrangements at interest rates typically ranging from 6 % to 12 % with repayment terms typically ranging for 12 to 18 months. F-19 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes receivable at December 31, 2023 and 2022 are as follows: December 31, 2023 2022 Notes receivable $ 2,031 $ 2,464 Allowance for credit losses ( 1,732 ) ( 1,250 ) Notes receivable, net $ 299 $ 1,214 The following table summarizes changes in notes receivable balances that have been deemed impaired. December 31, 2023 2022 Notes receivable $ 1,732 $ 1,500 Allowance for credit losses ( 1,732 ) ( 1,250 ) Notes receivable, net $ — 250 5. PROPERTY AND EQUIPMENT Property and equipment at December 31, 2023 and 2022 consists of the following: December 31, 2023 2022 Vehicles $ 2,558 $ 2,176 Buildings and land 2,121 2,121 Leasehold improvements 11,920 12,562 Furniture, fixtures and equipment 14,364 13,195 Capitalized software 16,085 2,644 Construction-in-progress — 9,569 Property and equipment, gross 47,048 42,267 Accumulated depreciation and amortization ( 19,996 ) ( 13,598 ) Property and equipment, net $ 27,052 $ 28,669 Depreciation and amortization expense related to property and equipment was $ 7.9 million, $ 7.2 million, and $ 3.7 million for the years ended December 31, 2023, 2022, and 2021, respectively. 6. GOODWILL AND INTANGIBLE ASSETS Effective the fourth quarter of 2023 and prospectively, the Company performed its required annual goodwill impairment test as of December 1 rather than on December 31, which was the Company's previous practice. This change represented a change in method of applying an accounting principle, and it was determined to be preferable as it more closely aligned the annual goodwill impairment assessment date with the Company's annual planning, forecasting, and budgeting processes. The change in accounting principle did not result in any, nor does the Company expect the change in accounting principle to result in any, delay, acceleration, or avoidance of an impairment cha rge. This change was not applied retrospectively, as it would be impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. For the goodwill impairment test performed on December 1, 2023, the Company completed a quantitative goodwill impairment assessment for each of its four reporting units. The fair value of each reporting unit was determined using the income approach, which discounts estimated future cash flows to present value using an appropriate rate of return. The estimated fair value of each reporting unit, including goodwill, was compared to its carrying amount, and, as a result of changes to the business and future projections, the Company identified a $ 9.3 million impairment related to its goodwill for the year ended December 31, 2023. F-20 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In conjunction with its annual goodwill impairment assessment on December 1, 2023, the Company quantitatively evaluated the recoverability of its long-lived assets, including its finite-lived intangible assets, for impairment. The recoverability assessment compared the carrying value of long-lived asset groups to their expected future pretax cash flows (undiscounted and without interest charges). If the undiscounted cash flows were less than the carrying values, an impairment loss was recognized for the difference between the estimated fair values using an income approach and the related carrying values. As a result, the Company identified a $ 6.2 million impairment for the year ended December 31, 2023 related to its finite-lived intangible assets, including trade names, patents, customer relationships, non-competes, and intellectual property. For the year ended December 31, 2022, the Company recorded a total impairment loss of $ 127.8 million related to goodwill and intangible assets. 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 recoverability test on the following finite-lived intangible assets: customer relationships, trade names, and non-competes. For goodwill impairment testing purposes, the Company determined three of its four reporting units required quantitative assessment as it was more likely than not that the fair value of those reporting units were less than their carrying values. The Company determined the fair value of its reporting units and finite-lived intangible assets using the income approach. The Company recognized an impairment losses of $ 11.2 million related to its finite-lived intangibles and $ 116.7 million related to goodwill on June 30, 2022. The changes in goodwill, including the impairments discussed above, by segment for the years ended December 31, 2023 and 2022 were as follows: Cultivation and Gardening Storage Solutions Total Balance at December 31, 2021 $ 124,199 $ 1,202 $ 125,401 Acquisitions and measurement period adjustments 6,831 403 7,234 Impairment ( 116,657 ) — ( 116,657 ) Balance at December 31, 2022 $ 14,373 $ 1,605 $ 15,978 Acquisitions 830 — 830 Impairment ( 9,283 ) — ( 9,283 ) Balance at December 31, 2023 $ 5,920 $ 1,605 $ 7,525 Accumulated impairment for goodwill was $ 125.9 million, $ 116.7 million, and zero as of December 31, 2023, 2022, and 2021, respectively. The changes in intangible assets, including the impairments discussed above, by segment for the years ended December 31, 2023 and 2022 were as follows: Cultivation and Gardening Storage Solutions Total Balance as of December 31, 2021 $ 44,161 $ 4,241 $ 48,402 Amortization ( 8,981 ) ( 781 ) ( 9,762 ) Acquisitions and measurement period adjustments 3,412 — 3,412 Impairment ( 11,174 ) — ( 11,174 ) Balance as of December 31, 2022 $ 27,418 $ 3,460 $ 30,878 Amortization ( 8,114 ) ( 781 ) ( 8,895 ) Acquisitions 440 — 440 Impairment ( 6,243 ) — ( 6,243 ) Balance as of December 31, 2023 $ 13,501 $ 2,679 $ 16,180 F-21 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible assets on the Company's Consolidated Balance Sheets consist of the following: December 31, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 28,198 $ ( 16,488 ) $ 11,710 $ 29,062 $ ( 10,517 ) $ 18,545 Patents, trademarks 69 ( 69 ) — 100 ( 56 ) 44 Customer relationships 13,192 ( 8,813 ) 4,379 17,102 ( 6,501 ) 10,601 Non-competes 864 ( 773 ) 91 932 ( 551 ) 381 Intellectual property 1,136 ( 1,136 ) — 2,065 ( 758 ) 1,307 Total $ 43,459 $ ( 27,279 ) $ 16,180 $ 49,261 $ ( 18,383 ) $ 30,878 The weighted-average remaining amortization period for intangible assets as of December 31, 2023 is as follows: Weighted-Average Amortization Period Trade names 2.21 years Customer relationships 3.83 years Non-competes 1.14 years Total 2.64 years Amortization expense for the years ended December 31, 2023, 2022, and 2021 was $ 8.7 million, $ 9.9 million, and $ 8.9 million respectively. Future amortization expense as of December 31, 2023 is as follows: 2024 $ 6,704 2025 6,339 2026 2,231 2027 799 2028 82 Thereafter 25 Total $ 16,180 7. INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 2023, 2022, and 2021 consisted of the following: Year Ended December 31, 2023 2022 2021 Current tax expense (benefit): Federal $ ( 115 ) $ ( 471 ) $ ( 115 ) State 147 ( 55 ) 949 Deferred tax (benefit): Federal — ( 2,179 ) 1,473 State — ( 180 ) 136 Valuation allowance — — — Provision (benefit) for income taxes $ 32 $ ( 2,885 ) $ 2,443 F-22 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that gave rise to the Company's deferred tax assets and liabilities as of December 31, 2023 and 2022 were as follows: December 31, 2023 2022 Deferred tax assets: Net operating losses and attributes carryovers $ 15,097 $ 7,655 Deferred right to use lease liabilities 10,874 12,200 Share-based compensation 1,249 1,177 Accumulated depreciation and amortization 30,101 27,288 Accruals and other 2,421 2,007 Total deferred tax assets 59,742 50,327 Deferred tax liabilities: Deferred right to use lease assets ( 10,224 ) ( 11,638 ) Total deferred tax liabilities ( 10,224 ) ( 11,638 ) Deferred tax asset (liability) 49,518 38,689 Valuation allowance ( 49,518 ) ( 38,689 ) Deferred tax asset (liability), net $ — $ — As of December 31, 2023, the Company had cumulative federal net operating losses of $ 58.6 million, which have an indefinite carryforward period. As of December 31, 2023 and 2022, the Company had cumulative state net operating loss carryforwards of $ 53.3 million and $ 28.0 million, respectively. State net operating loss carryforwards will begin to expire in calendar year 2035. Net operating loss carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. The Company has completed an analysis of any limitations on its tax attributes and has assigned a full valuation allowance against them as of December 31, 2023. A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows for the years ended December 31, 2023 and 2022, and 2021: Years Ended December 31, 2023 2022 2021 Federal statutory income tax rate 21 % 21 % 21 % State and local income taxes (net of federal tax benefit) 4 % 5 % 7 % Share-based compensation ( 1 ) % ( 1 ) % ( 8 ) % Return to provision adjustments — % — % ( 4 ) % Valuation allowance ( 24 ) % ( 23 ) % — % Effective income tax rate 0 % 2 % 16 % Uncertain Tax Benefits The Company has not identified any uncertain tax positions as of December 31, 2023. The Company recognizes interest and penalties accrued related to uncertain tax benefits in the income tax provision. There were no interest and penalties included in other long-term liabilities on the accompanying Consolidated Balance Sheets for years ended December 31, 2023 and 2022. The Company does not expect any significant changes in its unrecognized tax benefits within 12 months of the reporting date. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. No F-23 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS tax years for the Company are currently under examination by the IRS or state and local tax authorities for income tax purposes. Generally, the Company's 2020 through 2022 fiscal years remain open for examination and assessment. For various states, the examination and assessment remain open for 2019 through 2022. Years prior to 2019 remain open solely for purpose of examination of the Company's loss and credit carryforwards. 8. LEASES The right-of-use assets and corresponding liabilities related to the Company's operating leases are as follow: December 31, 2023 2022 Operating leases right-of-use assets, net $ 39,933 $ 46,433 Current maturities of operating lease liability $ 8,021 $ 8,131 Operating lease liability, net of current maturities 34,448 40,659 Total lease liability $ 42,469 $ 48,790 The weighted-average remaining lease terms and weighted-average discount rates for operating leases were as follows: December 31, 2023 2022 Weighted average remaining lease term 6.0 years 6.5 years Weighted average discount rate 6.1 % 5.8 % Lease expense is recorded within the Company's 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 that serve management and support functions are expensed through Selling, general, and administrative. Additionally, the Company recorded sublease income of $ 1.1 million and $ 0.1 million for the years ended December 31, 2023 and 2022, respectively, within Store operations and other operational expenses related to the sublease of a closed retail location. There was no sublease income for the year ended December 31, 2021. The Company also identified a $ 0.1 million impairment related to its operating lease right-of-use assets for the year ended December 31, 2023, which is included in Impairment loss on the Consolidated Statements of Operations. The components of lease expense are as follows: Year Ended December 31, 2023 2022 2021 Operating lease costs $ 11,248 $ 10,936 $ 8,205 Variable lease costs 2,559 2,428 2,130 Short-term lease costs 268 451 205 Total operating lease costs $ 14,075 $ 13,815 $ 10,540 F-24 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future maturities of the Company's operating lease liabilities as of December 31, 2023: 2024 $ 10,308 2025 9,577 2026 7,683 2027 5,608 2028 5,115 Thereafter 12,321 Total lease payments 50,612 Less: imputed interest ( 8,143 ) Operating lease liability at December 31, 2023 $ 42,469 Supplemental and other information related to leases is as follows: Year Ended December 31, 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 11,139 $ 10,328 $ 7,209 9. SHARE BASED PAYMENTS Equity Incentive Plans Overview The Company maintains two long-term incentive plans for employees, non-employee members of its Board of Directors (the "Board"), and consultants: the 2014 Equity Incentive Plan and the Amended and Restated 2018 Equity Incentive Plan. The plans allow the Company to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, common stock warrants, or a combination of awards (collectively, "share-based awards"). On March 6, 2014, the Board approved the 2014 Equity Incentive Plan ("2014 Plan") pursuant to which the Company may grant incentive, non-statutory options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock or cash awards to employees, non-employee members of the Board, consultants and other independent advisors who provide services to the Company. The maximum shares of common stock which may be issued over the term of the 2014 Plan shall not exceed 2,500,000 shares. Awards under the 2014 Plan are made by the Board or a committee designated by the Board. Options under the 2014 Plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company's common stock which is required to be issued at a price not less than 110 % of the fair market value on the day of the grant. Each option is exercisable at such time or times, during such period and for such numbers of shares shall be determined by the plan administrator. No option may be exercisable for more than ten years ( five years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant. On January 7, 2018, the Board adopted the 2018 Equity Incentive Plan (the "2018 Plan"), and on April 20, 2018, the shareholders approved the 2018 Plan. On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable thereunder from 2,500,000 to 5,000,000 , which amendment was approved by shareholders on May 11, 2020. The 2018 Plan is administered by the Board. The Board may grant options to purchase shares of common stock, stock appreciation rights, restricted stock units, restricted or unrestricted shares of common stock, performance shares, performance units, other cash-based awards and other share-based awards. The Board also has broad authority to determine the terms and conditions of each option or other kind of equity award, adopt, amend and rescind rules and regulations for the administration of the 2018 Plan and amend or modify outstanding options, grants and awards. No options, stock purchase rights or awards may be made under the 2018 Plan on or after the ten-year anniversary of the adoption of the 2018 Plan by the Board, but the 2018 Plan will continue thereafter while previously granted options, stock appreciation rights or awards remain subject to the 2018 Plan. Options granted under the 2018 Plan may be either "incentive stock options" that are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, F-25 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS as amended (the "Code") or "non-statutory stock options" that do not meet the requirements of Section 422 of the Code. The Board will determine the exercise price of options granted under the 2018 Plan. The exercise price of stock options may not be less than the fair market value, on the date of grant, per share of the Company's common stock issuable upon exercise of the option (or 110 % of fair market value in the case of incentive options granted to a 10% stockholder). No option may be exercisable for more than ten years ( five years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant. As of December 31, 2023, there were 0.3 million shares available for issuance under the 2014 Plan and 2018 Plan, collectively. Share-Based Compensation The Company accounts for share-based payments through the measurement and recognition of compensation expense for share-based awards made to employees, non-employee members of the Board, and consultants of the Company, including stock options, restricted stock, and common stock warrants. The following table presents share-based compensation expense for the years ended December 31, 2023, 2022, and 2021. December 31, 2023 2022 2021 Restricted stock $ 3,171 $ 3,889 $ 4,349 Stock options — 59 781 Common stock warrants — 1,019 1,455 Total $ 3,171 $ 4,967 $ 6,585 As of December 31, 2023, the Company had approximately $ 3.7 million of unamortized share-based compensation for share-based awards, which are expected to be recognized over a weighted average period of 2.5 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. Restricted stock activity for the years ended December 31, 2023 and 2022 is presented in the following table: Shares Weighted Average Grant Date Fair Value Nonvested, December 31, 2021 484 $ 20.19 Granted 1,044 8.85 Vested ( 399 ) 9.26 Forfeited ( 514 ) 18.73 Nonvested, December 31, 2022 615 $ 9.41 Granted 1,194 3.73 Vested ( 513 ) 5.73 Forfeited ( 391 ) 6.79 Nonvested, December 31, 2023 905 $ 5.23 F-26 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options The table below summarizes all option activity under all plans during the years ended December 31, 2023 and 2022: Options Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Weighted- Average Grant Date Fair Value Outstanding at December 31, 2021 906 $ 4.38 2.85 years $ 2.45 Granted — $ — $ — Exercised ( 55 ) $ 4.14 $ 2.22 Forfeited or expired ( 247 ) $ 5.36 $ 2.97 Outstanding at December 31, 2022 604 $ 3.97 1.87 years $ 2.24 Vested and exercisable at December 31, 2022 604 $ 3.97 1.87 years $ 2.24 Outstanding at December 31, 2022 604 $ 3.97 1.87 years $ 2.24 Granted — $ — $ — Exercised ( 20 ) $ 3.50 $ 2.21 Forfeited or expired ( 7 ) $ 2.25 $ 1.22 Outstanding at December 31, 2023 577 $ 4.01 0.95 years $ 2.25 Vested and exercisable at December 31, 2023 577 $ 4.01 0.95 years $ 2.25 The aggregate intrinsic value of stock options is calculated as the amount by which the fair value of the underlying stock exceeds the exercise price of the stock options. For the years ended December 31, 2023, 2022, and 2021, the aggregate intrinsic value of stock options outstanding, vested, and exercisable was less than $ 0.1 million, $ 0.1 million, and $ 7.9 million, respectively. Common Stock Warrants A summary of the status of the Company's outstanding common stock warrants for the years ended December 31, 2023 and 2022 is as follows: Warrants Weighted Average Exercise Price Outstanding December 31, 2021 331 $ 22.14 Issued — — Exercised ( 48 ) 3.50 Forfeited ( 250 ) $ 26.57 Outstanding December 31, 2022 33 $ 10.61 Issued — — Exercised — — Forfeited ( 33 ) $ 10.61 Outstanding December 31, 2023 — $ — On November 17, 2022, the Company settled 250,000 warrants for a cash payment of $ 10 thousand and 10,000 shares of common stock. F-27 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Liability Awards In August 2022, the Company issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480, Distinguishing Liabilities from Equity , and ASC 718, Compensation-Stock Compensation . 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. The expense related to liability-classified stock awards for the years ended December 31, 2023, 2022 and 2021 was $ 0.2 million, $ 0.5 million, and $ 0.7 million, respectively. As of December 31, 2023, the Company did not have any outstanding liability-classified stock awards. As of December 31, 2022, the aggregate face value of the outstanding liability-classified stock awards was $ 5.3 million. 10. EARNINGS 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 years ended December 31, 2023, 2022, and 2021. Year Ended December 31, 2023 2022 2021 Net income (loss) $ ( 46,496 ) $ ( 163,747 ) $ 12,786 Weighted average shares outstanding, basic 61,181 60,813 59,223 Effect of dilutive outstanding warrants and stock options — — 1,241 Weighted average shares outstanding, dilutive 61,181 60,813 60,464 Basic earnings (loss) per share $ ( 0.76 ) $ ( 2.69 ) $ 0.22 Diluted earnings (loss) per share $ ( 0.76 ) $ ( 2.69 ) $ 0.21 Diluted earnings per share calculations for the year ended December 31, 2023 excluded 0.6 million shares of common stock issuable upon exercise of stock options and 0.9 million shares of non-vested restricted stock that would have been anti-dilutive. Diluted earnings per share calculations for the year ended December 31, 2022 excluded 0.6 million shares of common stock issuable upon exercise of stock options, 0.6 million shares of non-vested restricted stock, and 33 thousand shares of common stock issuable upon exercise of the stock purchase warrants that would have been anti-dilutive. For the year ended December 31, 2021, there were no anti-dilutive shares outstanding that were excluded from the dilutive earnings per share calculation. 11. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Savings Retirement Plan that covers substantially all full-time employees who meet the plan's eligibility requirements and provides for an employee elective contribution. The Company made matching contributions to the plan of $ 0.6 million, $ 0.6 million, and $ 0.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. 12. ACQUISITIONS The Company's acquisition strategy has been 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. The Company accounts for acquisitions in accordance with ASC 805, Business Combinations . Assets acquired and liabilities assumed are recognized at their estimated fair values in accordance with ASC 820, Fair Value Measurements , as F-28 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company's estimates and assumptions are subject to change as valuations are finalized within the measurement period, which cannot extend beyond one year from the acquisition date. Measurement period adjustments are recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date. The process for estimating fair values requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. Any changes to these estimates may have a material impact on the Company's operating results or financial position. There were no measurement period adjustments during the year ended December 31, 2023. During the year ended December 31, 2022, the Company's measurement period adjustments included a $ 1.3 million reduction to estimated fair value of acquired intangible assets with the offset to goodwill. As a result of these measurement period adjustments, the Company made an insignificant reduction in amortization expense. All acquisition costs are expensed as incurred and recorded in Selling, general and administrative expense in the Consolidated Statements of Operations. Acquisition costs were less than $ 0.1 million for the years ended December 31, 2023 and were $ 0.2 million and $ 0.7 million for the years ended December 31, 2022 and 2021, respectively. 2023 Acquisitions On May 23, 2023, the Company purchased substantially all of the assets of Southside Garden Supply ("SGS"), a two-store chain of indoor/outdoor garden centers in Alaska. The total consideration for the purchase of the SGS assets was approximately $ 2.0 million, including $ 1.9 million in cash and an indemnity holdback of $ 0.1 million. The SGS 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. SGS is included in the Company's Cultivation and Gardening segment. Additionally, the Company made other, individually immaterial acquisitions during the year ended December 31, 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 the Company's Cultivation and Gardening segment. The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2023. SGS 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 612 620 1,232 Operating lease liability ( 612 ) ( 620 ) ( 1,232 ) 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 year ended December 31, 2023. SGS Other Total Cash $ 1,922 $ 1,128 $ 3,050 Indemnity holdback 107 40 147 Total $ 2,029 $ 1,168 $ 3,197 F-29 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the Consolidated Statement of Operations for the year ended December 31, 2023. SGS Other Total Acquisition date May 23, 2023 Net sales $ 2,040 $ 3,167 $ 5,207 Net income (loss) $ 41 $ ( 40 ) $ 1 The following represents the pro forma Consolidated Statement of Operations as if the acquisitions had been included in the consolidated results of the Company for the entire period for the years ended December 31, 2023, 2022, and 2021. December 31, 2023 (Unaudited) December 31, 2022 (Unaudited) December 31, 2021 (Unaudited) Net sales $ 228,032 $ 285,524 $ 429,846 Net income (loss) $ ( 46,524 ) $ ( 163,712 ) $ 12,820 2022 Acquisitions 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 approximately $ 5.7 million. The asset purchase agreement also provided for an indemnity holdback to be settled in common stock of the Company valued at approximately $ 0.9 million. Acquired goodwill of approximately $ 5.8 million 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 the Company's Cultivation and Gardening segment. On November 3, 2022, the Company purchased certain assets of St. Louis Hydroponic Company ("STL"), a hydroponic retail store in St. Louis, Missouri. The total consideration for the purchase of the assets of STL was approximately $ 0.4 million in cash. Acquired goodwill of approximately $ 0.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. STL is included in the Company's Cultivation and Gardening segment. The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2022. HRG STL Total Inventory $ 4,170 $ 279 $ 4,449 Prepaids and other current assets 76 10 86 Furniture and equipment 148 — 148 Operating lease right of use asset 666 — 666 Operating lease liability ( 666 ) — ( 666 ) Customer relationships 2,430 — 2,430 Trademark 496 — 496 Non-compete 255 — 255 Goodwill 5,816 135 5,951 Total $ 13,391 $ 424 $ 13,815 F-30 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below represents the consideration paid for the net assets acquired in business combinations. HRG STL Total Cash $ 6,806 $ 424 $ 7,230 Indemnity stock holdback 875 — 875 Common stock 5,710 — 5,710 Total $ 13,391 $ 424 $ 13,815 The following table discloses the date of the acquisition noted above and the revenue and earnings included in the Consolidated Statement of Operations for the year ended December 31, 2022. Revenue and earnings amounts include other proprietary brands now being included under HRG for operations. HRG STL Total Acquisition date February 1, 2022 November 3, 2022 Revenue $ 19,239 $ 178 $ 19,417 Net Income (loss) $ ( 629 ) $ 41 $ ( 588 ) The following represents the pro forma Consolidated Income Statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the years ended December 31, 2022 and 2021. December 31, 2022 (Unaudited) December 31, 2021 (Unaudited) Revenue $ 280,897 $ 441,906 Net income (loss) $ ( 162,156 ) $ 12,198 2021 Acquisitions On January 25, 2021, the Company purchased the assets of Indoor Garden & Lighting, Inc ("Indoor Garden"), a two -store chain of hydroponic and equipment and indoor gardening supply stores serving the Seattle and Tacoma, Washington area. The total consideration for the purchase of Garden & Lighting was approximately $ 1.7 million, including approximately $ 1.2 million in cash and common stock valued at approximately $ 0.5 million. Acquired goodwill of approximately $ 0.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Indoor Garden is included in the Company's Cultivation and Gardening segment. On February 1, 2021, the Company purchased the assets of J.A.R.B., Inc d/b/a Grow Depot Maine ("Grow Depot Maine"), a two -store chain in Auburn and Augusta, Maine. The total consideration for the purchase of Grow Depot Maine was approximately $ 2.1 million, including approximately $ 1.7 million in cash and common stock valued at approximately $ 0.4 million. Acquired goodwill of approximately $ 0.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Grow Depot Maine is included in the Company's Cultivation and Gardening segment. On February 15, 2021, the Company purchased the assets of Grow Warehouse LLC ("Grow Warehouse"), a four -store chain of hydroponic and organic garden stores in Colorado ( 3 ) and Oklahoma ( 1 ). The total consideration for the purchase of Grow Warehouse was approximately $ 17.8 million, including approximately $ 8.1 million in cash and common stock valued at approximately $ 9.7 million. Acquired goodwill of approximately $ 11.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Grow Warehouse is included in the Company's Cultivation and Gardening segment. On February 22, 2021, the Company purchased the assets of San Diego Hydroponics & Organics ("San Diego Hydro"), a four -store chain of hydroponic and organic garden stores in San Diego, California. The total consideration for the purchase of San Diego Hydro was approximately $ 9.3 million, including approximately $ 4.8 million in cash and common stock valued at approximately $ 4.5 million. Acquired goodwill of approximately $ 5.7 million represents the value expected to F-31 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rise from organic growth and an opportunity to expand into a well-established market for the Company. San Diego Hydro is included in the Company's Cultivation and Gardening segment. On March 12, 2021, the Company purchased the assets of Charcoir Corporation ("Charcoir"), which sells an RHP-certified growing medium made from the highest-grade coconut fiber. The total consideration for the purchase of Charcoir was approximately $ 16.4 million, including approximately $ 9.9 million in cash and common stock valued at approximately $ 6.5 million. Acquired goodwill of approximately $ 6.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established distribution market for the Company of a proprietary brand. Charcoir is included in the Company's Cultivation and Gardening segment. On March 15, 2021, the Company purchased the assets of 55 Hydroponics ("55 Hydro"), a hydroponic and organic superstore located in Santa Ana, California. The total consideration for the purchase of 55 Hydro was approximately $ 6.5 million, including approximately $ 5.3 million in cash and common stock valued at approximately $ 1.1 million. Acquired goodwill of approximately $ 3.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. 55 Hydro is included in the Company's Cultivation and Gardening segment. On March 15, 2021, the Company purchased the assets of Aquarius Hydroponics ("Aquarius"), a hydroponic and organic garden store in Springfield, Massachusetts. The total consideration for the purchase of Aquarius was approximately $ 3.6 million, including approximately $ 2.3 million in cash and common stock valued at approximately $ 1.2 million. Acquired goodwill of approximately $ 1.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Aquarius is included in the Company's Cultivation and Gardening segment. On March 19, 2021, the Company purchased the assets of Agron, LLC, an online seller of growing equipment. The total consideration for the purchase of Agron was approximately $ 11.2 million, including approximately $ 6.0 million in cash and common stock valued at approximately $ 5.3 million. Acquired goodwill of approximately $ 8.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established e-commerce market for the Company targeting the commercial customer. Agron is included in the Company's Cultivation and Gardening segment. On April 19, 2021, the Company purchased the assets of Grow Depot LLC ("Down River Hydro"), a hydroponic and indoor gardening supply store in Brownstown, Michigan. The total consideration for the purchase of Down River Hydro was approximately $ 4.4 million, including approximately $ 3.2 million in cash and common stock valued at approximately $ 1.2 million. Acquired goodwill of approximately $ 2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Down River Hydro is included in the Company's Cultivation and Gardening segment. On May 24, 2021, the Company purchased the assets of The Harvest Company ("Harvest"), a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity Counties. The total consideration for the purchase of Harvest was approximately $ 8.3 million, including approximately $ 5.6 million in cash and common stock valued at approximately $ 2.8 million. Acquired goodwill of approximately $ 4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Harvest is included in the Company's Cultivation and Gardening segment. On July 19, 2021, the Company purchased the assets of Aqua Serene, Inc., ("Aqua Serene"), an Oregon corporation which consists of an indoor/outdoor garden center with stores in Eugene and Ashland, Oregon. The total consideration for the purchase was approximately $ 11.7 million, including approximately $ 9.9 million in cash and common stock valued at approximately $ 1.8 million. Acquired goodwill of approximately $ 7.0 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Aqua Serene is included in the Company's Cultivation and Gardening segment. On July 3, 2021, the Company purchased the assets of Mendocino Greenhouse & Garden Supply, Inc ("Mendocino"), a Northern California-based hydroponic garden center located in Mendocino, California. The purchase agreement was modified on July 19, 2021 to amend the purchase price. The total consideration for the purchase was $ 4.0 million in cash. Acquired goodwill of approximately $ 2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Mendocino is included in the Company's Cultivation and Gardening segment. F-32 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On August 24, 2021, the Company purchased the assets of Commercial Grow Supply, Inc. ("CGS"), a hydroponic superstore located in Santa Clarita, California. The total consideration for the purchase was approximately $ 7.2 million, including approximately $ 6.0 million in cash and common stock valued at approximately $ 1.3 million. Acquired goodwill of approximately $ 4.0 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. CGS is included in the Company's Cultivation and Gardening segment. On August 23, 2021 the Company purchased the assets of Hoagtech Hydroponics, Inc. ("Hoagtech"), a Washington -based corporation consisting of a hydroponic and garden supply center serving the Bellingham, Washington area. The total consideration for the purchase was approximately $ 3.9 million in cash. The Asset Purchase Agreement contains a contingent payment equal to $ 0.6 million to be settled in common stock of the Company if this garden supply center reaches $ 8.0 million in revenue within a 12-month calendar period from the date of close. The Company used a third-party specialist to value this contingent consideration. The probability that the target will be reached was determined to be 5 % which resulted in a value of approximately $ 28.5 thousand of contingent consideration which was added to goodwill. Acquired goodwill of approximately $ 4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Hoagtech is included in the Company's Cultivation and Gardening segment. On October 15, 2021, the Company purchased the assets of Indoor Store, LLC ("All Seasons Gardening"), an indoor-outdoor garden supply center specializing in hydroponics systems, lighting, and nutrients. All Seasons Gardening is the largest hydroponics retailer in New Mexico. The total consideration for the purchase was approximately $ 0.9 million, including approximately $ 0.7 million in cash and common stock valued at approximately $ 0.2 million. Acquired goodwill of approximately $ 0.5 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. All Seasons is included in the Company's Cultivation and Gardening segment. On December 31, 2021, the Company purchased the assets of Mobile Media, Inc ("MMI"), a mobile shelving manufacturing and warehouse facility. The total consideration for the purchase was approximately $ 9.1 million, including approximately $ 8.3 million in cash and common stock valued at approximately $ 0.8 million. Acquired goodwill of approximately $ 1.2 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. MMI is included in the Company's Storage Solutions segment. The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2021: Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse Grow Depot Maine Indoor Garden Downriver Inventory $ — $ 957 $ 780 $ 839 $ 1,400 $ 2,450 $ 326 $ 372 $ 824 Prepaids and other current assets 46 12 29 534 36 30 3 — 3 Furniture and equipment 29 63 50 — 315 250 25 94 50 Liabilities — — — — — ( 169 ) — — — Operating lease right of use asset 98 108 861 — 1,079 641 92 137 273 Operating lease liability ( 98 ) ( 108 ) ( 861 ) — ( 1,079 ) ( 641 ) ( 92 ) ( 137 ) ( 273 ) Customer relationships 832 339 809 5,712 605 1,256 549 210 634 Trade name 1,530 485 870 1,099 1,192 2,748 344 353 698 Non-compete 139 — 26 — 6 94 36 2 16 Intellectual property — — — 2,065 — — — — — Goodwill 8,673 1,702 3,915 6,119 5,728 11,120 866 661 2,126 Total $ 11,249 $ 3,558 $ 6,479 $ 16,368 $ 9,282 $ 17,779 $ 2,149 $ 1,692 $ 4,351 F-33 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total Inventory $ 1,204 1,696 753 875 751 100 3,530 $ 16,857 Prepaids and other current assets 7 2 1 1 37 1 — 742 Furniture and equipment 100 500 160 100 144 25 328 2,233 Liabilities — — — — ( 29 ) — ( 250 ) ( 448 ) Operating lease right of use asset 3,782 1,177 408 746 1,569 37 2,332 13,340 Operating lease liability ( 3,782 ) ( 1,177 ) ( 408 ) ( 746 ) ( 1,569 ) ( 37 ) ( 2,332 ) ( 13,340 ) Customer relationships 1,016 1,235 575 1,382 493 154 2,964 18,765 Trade name 1,392 1,231 414 852 428 117 1,039 14,792 Non-compete — 11 6 11 3 — 238 588 Intellectual property — — — — — — — 2,065 Goodwill 4,606 6,976 2,091 4,027 2,105 545 1,202 62,462 Total $ 8,325 11,651 4,000 $ 7,248 3,932 942 $ 9,051 $ 118,056 The table below represents the consideration paid for the net assets acquired in business combinations during 2021: Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse Grow Depot Maine Indoor Garden Downriver Cash $ 5,973 $ 2,331 $ 5,347 $ 9,902 $ 4,751 $ 8,100 $ 1,738 $ 1,165 $ 3,177 Common stock 5,276 1,227 1,132 6,466 4,531 9,679 411 527 1,174 Total $ 11,249 $ 3,558 $ 6,479 $ 16,368 $ 9,282 $ 17,779 $ 2,149 $ 1,692 $ 4,351 Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total Cash $ 5,561 $ 9,860 $ 4,000 $ 5,976 $ 3,932 $ 701 $ 8,270 $ 80,784 Common stock 2,764 1,791 — 1,272 — 241 781 37,272 Total $ 8,325 $ 11,651 $ 4,000 $ 7,248 $ 3,932 $ 942 $ 9,051 $ 118,056 The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the Consolidated Income Statement from the date of acquisition to the period ended December 31, 2021. Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse LLC Grow Depot Maine Indoor Garden Downriver Acquisition date 3/19/2021 3/15/2021 3/15/2021 3/12/2021 2/22/2021 2/15/2021 2/1/2021 1/25/2021 3/31/2021 Revenue $ 14,403 $ 9,640 $ 6,017 $ 6,840 $ 7,173 $ 13,147 $ 6,655 $ 6,265 $ 3,663 Net Income (loss) $ ( 305 ) $ 1,679 $ 399 $ 1,039 $ 906 $ 2,175 $ 1,132 $ 1,088 $ 297 Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total Acquisition date 5/3/21 7/19/21 7/19/21 8/24/21 8/23/21 10/15/21 12/31/21 Revenue $ 6,706 $ 2,742 $ 1,455 $ 1,534 $ 1,564 $ 187 $ — $ 87,991 Net Income (loss) $ 924 $ 445 $ 106 $ 15 $ 141 $ 52 $ — $ 10,093 F-34 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following represents the pro forma Consolidated Income Statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the years ended December 31, 2021. December 31, 2021 (Unaudited) Revenue $ 452,126 Net income $ 13,511 13. RELATED PARTIES The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner. The firm provides certain legal services. Amounts paid to that firm in total were approximately $ 0.2 million, $ 0.3 million, and $ 0.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023 and 2022, there was an immaterial amount outstanding due to the firm. 14. SEGMENTS During the fourth quarter of 2023, the Company realigned it operating and reportable segments to correspond with changes to its operating model, management structure, and internal reporting and to better align with how the CODM makes operating decisions, allocates resources, and assesses performance. Accordingly, the Company identified two operating segments, each its own reportable segment, based on its major lines of business: the Cultivation and Gardening segment, composed of the Company's hydroponic and organic gardening business; and the Storage Solutions segment, composed of the Company's benching, racking, and storage solutions business. Comparative prior period disclosures have been recast to conform to the current segment presentation. In addition to sales by operating segment, which represent the Company's principal lines of business, the CODM evaluates the Company's operations by regularly reviewing sales by major product line, including proprietary brands, non-proprietary brands, and commercial fixtures, and by product type, including consumable and durable products. Disaggregated revenue by segment is presented in the following tables: December 31, Net sales 2023 2022 2021 Cultivation and Gardening Proprietary brand sales $ 36,473 $ 36,906 $ 39,970 Non-proprietary brand sales 157,991 208,775 382,519 Total Cultivation and Gardening 194,464 245,681 422,489 Storage Solutions Commercial fixture sales 31,418 32,485 — Total Storage Solutions 31,418 32,485 — Total $ 225,882 $ 278,166 $ 422,489 December 31, Net sales 2023 2022 2021 Cultivation and Gardening Consumables $ 139,431 $ 161,012 $ 243,626 Durables 55,033 84,669 178,863 Total Cultivation and Gardening 194,464 245,681 422,489 Storage Solutions Durables 31,418 32,485 — Total Storage Solutions 31,418 32,485 — Total $ 225,882 $ 278,166 $ 422,489 F-35 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Selected information by segment is presented in the following tables: December 31, 2023 2022 2021 Net sales Cultivation and Gardening $ 194,464 $ 245,681 $ 422,489 Storage Solutions 31,418 32,485 — Total net sales 225,882 278,166 422,489 Gross profit Cultivation and Gardening 47,404 58,837 118,241 Storage Solutions 13,854 11,426 — Total gross profit 61,258 70,263 118,241 Segment operating profit Cultivation and Gardening 4,265 8,475 68,499 Storage Solutions 8,911 7,108 — Total segment operating profit 13,176 15,583 68,499 Corporate expenses Selling, general, and administrative 29,799 36,758 39,469 Estimated credit losses 955 1,737 1,428 Depreciation and amortization 16,607 17,132 12,600 Impairment loss 15,659 127,831 — Income (loss) from operations $ ( 49,844 ) $ ( 167,875 ) $ 15,002 The Company does not evaluate segments by assets as it is not practical and does not inform any of its decision making processes. The CODM neither reviews nor requests this information. Customer and supplier concentrations No customer accounted for more than 10% of the Company's sales for the years ended December 31, 2023, 2022, and 2021. As of December 31, 2023, the loss of any supplier or vendor would not have a severe impact on the Company's business. 15. COMMITMENTS AND CONTINGENCIES Legal Matters From time to time, the Company has been, and may again become involved in legal proceedings arising in the ordinary course of its business, including the initiation and defense of proceedings related to contract and employment disputes. It is the Company's opinion that 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 for failing to consummate the acquisition of Total Grow by the Company. The Company asserted counterclaims for repayment of $ 1.5 million in principal loaned by the Company to Total Grow pursuant to the Note & Option, plus interest and certain costs. In July 2023, the arbitrator rendered an arbitration award denying all of Total Grow's claims and defenses and awarding the Company more than $ 2.0 million in total, consisting of principal, interest, and certain costs. Total Grow voluntarily filed for bankruptcy in October 2023. As of December 31, 2023, the Company had accrued a reserve of $ 1.5 million against the Note & Option. F-36 Table of Contents GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 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. F-37 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.