What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-08 · 168 added, 142 removed, 25 unchanged (93% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023.

We caution readers regarding certain forward-looking statements, within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, in the following discussion and elsewhere in this report.

Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments.

Forward looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change.

These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

We disclaim any obligation to update forward looking statements, except as required by law.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 13, 2024.

We caution readers that this Quarterly Report of GrowGeneration Corp.

on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties.

Forward-looking statements generally can be identified through the use of words such as “guidance,” “outlook,” “projected,” “may,” “likely,” “anticipates,” “believes,” “expects,” “estimates,” “plans,” “intends,” “objectives,” and similar expressions.

These statements reflect management’s best judgment based on factors known at the time of such statements.

Actual events or results may differ materially from those discussed herein.

The forward-looking statements contained in this report have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable.

Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

The assumptions used for purposes of the forward-looking statements contained in this report represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances.

As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment.

To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements.

No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements, except as required by federal securities laws.

There may be additional risks, uncertainties, and other factors that we do not currently view as material or that are not necessarily known.

GrowGeneration Corp.

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

GrowGeneration is the largest chain of hydroponic garden centers in the United States and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, and other products for hydroponic gardening.

GrowGeneration also owns and operates an e-commerce platform, www.growgeneration.com, MMI, a benching, vertical racking and storage solutions business, HRG, a horticultural products sales representative and distributor organization, and proprietary brands across multiple product categories, from lighting to nutrients and additives to environmental control systems.

Our business is driven by a wide selection of products, facility design services, solutions driven staff, and pick, pack and ship distribution and fulfillment capabilities.

GrowGeneration carries and sells thousands of products, including nutrients, growing media, lighting, environmental control systems, vertical benching, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are capable of growing and maximizing yield and quality of a wide range of plants.

Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Harvest Company scissors, and more.

GrowGeneration also provides facility design services to commercial growers.

As of September 30, 2023, we employed approximately 425 employees, a majority of whom have been branded by us as “Grow Pros”, and our operations span over 855,000 square feet of retail and warehouse space.

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

Today, GrowGeneration operates two major lines of business:

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

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

MARKETS AND BUSINESS SEGMENTS

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

Additionally, we sell products from our distribution and other segment to wholesalers, resellers, and retailers.

Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments.

This enables them to produce crops at higher yields and quality, regardless of the season or weather conditions.

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

The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations.

The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources.

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

Certain general and administrative expenses, such as administrative and management expenses, salaries and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses, and technology costs, are allocated to our segments based on revenue and are reflected in the enterprise results.

Competitive Advantages

The markets in which we sell our products are highly competitive.

Our key competitors include many local and national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, and online product resellers and large online marketplaces such as Amazon and eBay.

Our industry is highly fragmented, with hundreds of other hydroponic retailers throughout the U.S.

by management's estimates.

Notwithstanding the foregoing, we are the largest chain of hydroponic garden centers in the U.S.

by management's estimates, and our pricing, inventory and product availability and overall customer service provide us the ability to compete in our industry.

In addition, as we continue to increase the scope of our operations, including both retail and distribution, we expect to be able to continue to purchase inventory at lower volume prices, which we expect will enable us to price competitively and deliver the products that our customers are seeking.

The Company competes by delivering a one-stop shopping experience that includes the widest selection of hydroponics products, end-to-end solutions for all types of cultivation environments, in-store sales and product support, direct manufacturer pricing, and industry-leading expertise and customer service.

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

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

the Cultivation and Gardening segment and the Storage Solutions segment.

Comparative prior period disclosures have been recast to conform to the current segment presentation.

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

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

Cultivation and Gardening Segment

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

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

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

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

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

Additionally, through our brand HRG Distribution, we distribute many of our products, including our proprietary

products, to customers that are wholesalers, resellers, and retailers in the specialty retail hydroponic and organic gardening industry.

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

Management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 46 retail locations across 18 states as of March 31, 2024.

Storage Solutions Segment

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

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

Our products include high-density mobile storage systems, static shelving, and other accessories such as desks, lockers, safes, and secured storage, offering a solution for every storage need.

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

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

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

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

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

Growth Strategy

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

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

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

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

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

Today, management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 46 retail locations across 18 states as of March 31, 2024.

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

However, in light of difficult market conditions that persisted throughout 2023 and into 2024, the Company also reduced redundancies in cost structure by closing and consolidating retail locations where we were generally able to serve the same customer base through a single location.

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

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

The Company regularly seeks and evaluates accretive acquisition opportunities with similar or complimentary businesses to those businesses it already operates.

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

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

In March 2024,

the Company announced it had engaged Lake Street Capital to advise and assist in exploring strategic opportunities for its benching, racking, and storage solutions business.

COMPONENTS OF RESULTS OF OPERATIONS

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

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

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

These sales vary by the type of product:

consumables, such as nutrients, additives, growing media, and supplies that are subject to regular replenishment;

and durables, such as lighting, environmental control systems, and storage solutions.

Generally, in new markets where legalization of plant-based medicines is recent and licensors are starting new grow operations, there is an initial increase of durable product purchases for facility build-outs, which decrease over time as growers establish their operations.

Thereafter, we tend to observe cultivators focus their purchasing patterns to consumables as the primary source of product need.

In more mature markets, the sales patterns tend to favor higher percentages of consumable purchasing in comparison to emerging markets.

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

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

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

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

Cost of Sales

Cost of sales includes cost of goods and shipping costs.

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

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

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

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

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

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

Operating Expenses

Operating expenses are comprised of the following components:

store operations and other operational expenses;

selling, general, and administrative;

estimated credit losses;

depreciation and amortization;

and impairment losses.

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

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

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

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

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

R ESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2023 and 2022

Net sales for the three months ended September 30, 2023 was approximately $55.7 million, compared to $70.9 million for the three months ended September 30, 2022, a decrease of approximately $15.2 million or 21.4%.

The decrease was primarily attributed to a decrease of approximately $6.8 million related to same store sales, which represented an approximate 14.4% decrease year over year.

Overall sales in our retail segment declined from $47.9 million for the three months ended September 30, 2022 to $41.4 million for the same period in 2023.

Net sales from the distribution and other segment decreased to $11.5 million for the three months ended September 30, 2023, compared to $19.8 million for the three months ended September 30, 2022.

E-commerce sales were relatively flat from $3.1 million for the three months ended September 30, 2022, to $2.8 million for the same period in 2023.

Comparison of the Unaudited Results for the Three Months Ended March 31, 2024 and 2023

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

Three Months Ended March 31,

2024 2023 Year-to-Year Variance

Net sales $ 47,888 100.0 % $ 56,827 100.0 % $ (8,939) (15.7) %

Cost of sales 35,524 74.2 % 40,538 71.3 % (5,014) (12.4) %

Cost of sales for the three months ended September 30, 2023 was approximately $39.5 million, compared to approximately $52.5 million for the three months ended September 30, 2022, a decrease of approximately $13.0 million or 24.8%.

The decrease in cost of sales was primarily due to the 21.4% decrease in sales comparing the three months ended September 30, 2023 to the three months ended September 30, 2022.

Gross profit was approximately $16.2 million for the three months ended September 30, 2023, compared to approximately $18.3 million for the three months ended September 30, 2022, a decrease of approximately $2.1 million or 11.7%.

The decrease in gross profit is primarily related to the 21.4% decrease in net sales comparing the three months ended September 30, 2023 to the three months ended September 30, 2022.

Gross profit as a percentage of net sales was 29.1% for the three months ended September 30, 2023, compared to 25.9% for the three months ended September 30, 2022.

Gross profit in our retail segment increased from $10.4 million for the three months ended September 30, 2022, to $10.7 million for the same period in 2023.

Gross profit from the distribution and other segment net sales decreased to $4.6 million for the three months ended September 30, 2023, compared to $7.2 million for the three months ended September 30, 2022.

Gross profit from our e-commerce segment was $0.9 million for the three months ended September 30, 2023, compared to $0.8 million for the three months ended September 30, 2022.

Gross profit 12,364 25.8 % 16,289 28.7 % (3,925) (24.1) %

Operating expenses 21,796 45.5 % 23,709 41.7 % (1,913) (8.1) %

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

Operating costs were approximately $24.5 million for the three months ended September 30, 2023 and approximately $26.4 million for the three months ended September 30, 2022, a decrease of approximately $1.9 million or 7.3%.

The decrease in operating expenses is primarily attributable to decreases in both store operations and selling, general, and administrative expenses partially offset by an increase in deprecation and amortization.

Store operating costs were approximately $11.9 million for the three months ended September 30, 2023, compared to $13.6 million for the three months ended September 30, 2022, a decrease of $1.7 million or 12.2%.

The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.

Total corporate overhead, which is comprised of selling, general, and administrative expense, bad debt expense, and depreciation and amortization expense, was approximately $12.6 million for the three months ended September 30, 2023, compared to $12.8 million for the three months ended September 30, 2022, a decrease of $0.3 million or 2.2%.

Selling, general, and administrative costs were approximately $7.6 million for the three months ended September 30, 2023, compared to approximately $8.8 million for the three months ended September 30, 2022.

Salaries expense decreased to $3.2 million for the three months ended September 30, 2023, from $4.0 million for the same period in 2022.

General and administrative expenses decreased to $2.9 million for the three months ended September 30, 2023, from $3.6 million for the same period in 2022.

Income (loss) from operations (9,432) (19.7) % (7,420) (13.1) % (2,012) 27.1 %

Other income (expense) 593 1.2 % 1,286 2.3 % (693) (53.9) %

Total other income was approximately $1.0 million for the three months ended September 30, 2023, compared to income of $0.2 million for the three months ended September 30, 2022.

This increase is primarily attributable to income from marketable securities and an increase in sublease income.

Segment Operating Income

Operating loss in our retail segment decreased from $23.7 million to an operating loss of $7.6 million.

The operating loss for our e-commerce segment decreased from $2.8 million for the three months ended September 30, 2022 to a loss of $0.8 million for the same period in 2023.

Operating income in the distribution and other segment other decreased to income of less than $0.1 million in the three months ended September 30, 2023, compared to an income of $18.4 million in the three months ended September 30, 2022.

There was no income tax benefit for the three months ended September 30, 2023, compared to income tax benefit of $0.7 million for the three months ended September 30, 2022.

Net loss for the three months ended September 30, 2023 was approximately $7.3 million, compared to net loss of approximately $7.2 million for the three months ended September 30, 2022, an decrease of approximately $0.1 million.

Comparison of the nine months ended September 30, 2023 and 2022

Net sales for the nine months ended September 30, 2023 was approximately $176.4 million, compared to $223.7 million for the nine months ended September 30, 2022, a decrease of approximately $47.3 million or 21.1%.

The decrease was primarily attributed to a decrease of approximately $36.6 million related to same store sales, which represented an approximate 22.9% decrease year over year.

Overall sales in our retail segment declined from $167.6 million for the nine months ended September 30, 2022, to $127.7 million for the same period in 2023.

Net sales from the distribution and other segment sales decreased to $39.0 million for the nine months ended September 30, 2023 compared to $44.1 million for the nine months ended September 30, 2022.

E-commerce sales decreased from $12.0 million for the nine months ended September 30, 2022, to $9.8 million for the same period in 2023.

Net income (loss) before taxes (8,839) (18.5) % (6,134) (10.8) % (2,705) 44.1 %

Benefit (provision) for income taxes 2 — % — — % 2 — %

Net income (loss) $ (8,837) (18.5) % $ (6,134) (10.8) % $ (2,703) 44.1 %

Net sales for the three months ended March 31, 2024 were $47.9 million, a decrease of $8.9 million or 15.7% as compared to net sales of $56.8 million for the three months ended March 31, 2023.

The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $43.1 million for the three months ended March 31, 2024 compared to $49.1 million for the three months ended March 31, 2023.

This decrease in net sales was primarily due to the fiscal 2023 consolidation of 13 retail locations after March 31, 2023 as well as the four additional retail store consolidations during the three months ended March 31, 2024.

Same-store sales decreased approximately $0.4 million, or 1%, primarily due to decreased e-commerce retail sales volume which was partially offset by same-store sales growth in our brick-and-mortar retail locations.

Proprietary brand sales as a percentage of Cultivation and Gardening net sales for the three months ended March 31, 2024 was approximately 23% as compared to approximately 18% for the three months ended March 31, 2023, largely driven by our strategic initiatives to increase sales volume with our expanded portfolio of proprietary brands and various proprietary product launches.

The percentage of Cultivation and Gardening net sales related to consumable products for the three months ended March 31, 2024 was approximately 70%, which was an increase from approximately 66% for the three months ended March 31, 2023.

The increase in consumable sales as a percentage of net sales was driven mainly by increased brand adoption of proprietary growing media and nutrient products.

Additionally, net sales of commercial fixtures within our Storage Solutions segment decreased to $4.8 million for the three months ended March 31, 2024 compared to $7.7 million for the three months ended March 31, 2023.

Cost of Sales

Cost of sales for the nine months ended September 30, 2023 was approximately $126.8 million, compared to approximately $163.0 million for the nine months ended September 30, 2022, a decrease of approximately $36.2 million or 22.2%.

The decrease in cost of sales was primarily due to the 21.1% decrease in sales comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022.

Gross profit was approximately $49.6 million for the nine months ended September 30, 2023, compared to approximately $60.7 million for the nine months ended September 30, 2022, a decrease of approximately $11.1 million or 18.3%.

The decrease in gross profit is primarily related to the 21.1% decrease in net sales comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022.

Gross profit as a percentage of net sales was 28.1% for the nine months ended September 30, 2023, compared to 27.1% for the nine months ended September 30, 2022.

Gross profit in our retail segment declined from $41.4 million for the nine months ended September 30, 2022, to $33.0 million for the same period in 2023.

Gross profit from the distribution and other net sales decreased to $14.0 million for the nine months ended September 30, 2023, compared to $16.0 million for the nine months ended September 30, 2022.

Gross profit from our e-commerce segment was $2.6 million for the nine months ended September 30, 2023, compared to $3.3 million for the nine months ended September 30, 2022.

Cost of sales for the three months ended March 31, 2024 was $35.5 million, a decrease of $5.0 million or 12.4% compared to $40.5 million for the three months ended March 31, 2023.

The decrease in cost of sales was primarily due to the 15.7% decrease in sales, as previously discussed, partially offset by reduced inventory discounts from vendors and non-recurring costs associated with store consolidations in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Gross profit was $12.4 million for the three months ended March 31, 2024 compared to $16.3 million for the three months ended March 31, 2023, a decrease of $3.9 million or 24.1%.

The decrease in gross profit is primarily related to the Gardening and Cultivation segment, which decreased $2.9 million, or 22.0%, for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, largely as a result of the decrease in sales volume due to store consolidations as previously discussed.

Additionally, gross profit from our Storage Solutions segment decreased $1.0 million, or 33.4%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Gross profit margin was 25.8% for the three months ended March 31, 2024, a decrease of 290 basis points from a gross profit margin of 28.7% for the three months ended March 31, 2023.

The decrease was primarily attributable to an 290 basis point gross profit margin decline for the Cultivation and Gardening segment, which was primarily driven by industry pricing compression on distributed products and non-recurring costs associated with store consolidations discussed previously.

The decrease in the total gross profit margin was partially offset by a 300 basis point gross profit margin improvement for the Storage Solutions segment.

Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative, bad debt expense, impairment loss, and depreciation and amortization.

Operating costs were approximately $72.2 million for the nine months ended September 30, 2023 and approximately $212.8 million for the nine months ended September 30, 2022, a decrease of approximately $140.6 million or 66.1%.

The decrease in operating expenses is primarily attributable to a $127.8 million impairment loss recognized in the prior year.

Store operating costs were approximately $37.2 million for the nine months ended September 30, 2023, compared to $41.9 million for the nine months ended September 30, 2022, a decrease of $4.7 million or 11.3%.

The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.

Total corporate overhead, which is comprised of selling, general, and administrative expense, bad debt expense, and depreciation and amortization expense, was approximately $35.1 million for the nine months ended September 30, 2023, compared to $43.1 million for the nine months ended September 30, 2022, a decrease of $8.0 million or 18.6%.

Selling, general, and administrative costs were approximately $21.9 million for the nine months ended September 30, 2023, compared to approximately $28.2 million for the nine months ended September 30, 2022.

Salaries expense decreased to $10.1 million for the nine months ended September 30, 2023, from $14.7 million for the same period in 2022.

General and administrative expenses decreased to $9.2 million for the nine months ended September 30, 2023, from $11.3 million for the same period in 2022.

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

Operating expenses were $21.8 million for the three months ended March 31, 2024 and $23.7 million for the three months ended March 31, 2023, a decrease of $1.9 million or 8.1%.

Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were $10.6 million for the three months ended March 31, 2024, compared to $12.6 million for the three months ended March 31, 2023, a decrease of $2.0 million or 15.8%.

The decrease in store operating costs was primarily attributable to the fiscal 2023 consolidation of 13 retail locations after March 31, 2023 as well as the four additional retail store consolidations during the three months ended March 31, 2023.

Additionally, as part of our 2023 charitable initiatives, we had approximately $0.4 million more charitable donations in the three months ended March 31, 2023 as compared to the three months ended March 31, 2024.

Total corporate overhead, which is comprised of selling, general, and administrative expense, estimated credit losses, and depreciation and amortization expense, was relatively flat with $11.2 million for the three months ended March 31, 2024 compared to $11.1 million for the three months ended March 31, 2023.

Selling, general, and administrative costs increased by $1.1 million or 15.6% for the three months ended March 31, 2024 primarily as a result of one-time severances and related professional fees and increased share-based compensation.

This increase was largely offset by the estimated credit recoveries of $0.5 million in the three months ended March 31, 2024, primarily due to a $0.3 million settlement received in bankruptcy proceedings related to a note receivable, as compared to the estimated credit loss of $0.3 million in the three months ended March 31, 2023.

Other Income (Expense)

Total other income was approximately $3.5 million for the nine months ended September 30, 2023, compared to $0.7 million for the nine months ended September 30, 2022.

This increase is primarily attributable to income from marketable securities and an increase in sublease income.

Segment Operating Income

Operating loss in our retail segment decreased from $137.9 million for the nine months ended September 30, 2022 to an operating loss of $21.2 million for the nine months ended September 30, 2023he operating loss for our e-commerce segment decreased from $11.9 million for the nine months ended September 30, 2022 to a loss of $1.7 million for the same period in 2023.

Operating income in the distribution and other segment increased to income of $0.3 million in the nine months ended September 30, 2023, compared to a loss of $2.3 million in the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, the effective tax rate was (0.42)%, compared to 1.74% for the nine months ended September 30, 2022.

The effective tax rate for each of the nine months ended September 30, 2023 and 2022 is lower than the U.S.

federal statutory rate of 21.0% primarily due to the Company’s valuation allowance against deferred tax assets.

As of September 30, 2023, the Company concluded that its deferred tax assets are not expected to be realizable, based on positive and negative evidence, therefore it has assigned a full valuation allowance against them.

Net loss for the nine months ended September 30, 2023 was approximately $19.2 million, compared to net loss of approximately $148.8 million for the nine months ended September 30, 2022, an increase of approximately $129.6 million.

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2023 was approximately $2.8 million, compared to $9.9 million for the nine months ended September 30, 2022.

The Company continued to decrease inventory and other assets, partially offset by reductions to customer deposits and payroll and payroll tax liabilities.

Investing Activities

Net cash used by investing activities was approximately $11.2 million for the nine months ended September 30, 2023, compared to cash provided by investing activities of approximately $21.4 million for the nine months ended September 30, 2022.

Investing activities in 2023 were primarily attributable to investment of excess cash into marketable securities of $85.8 million, partially offset by maturity of marketable securities of $83.4 million.

The Company also had purchases property, plant, and equipment of $6.0 million, which was primarily related to the implementation and design of a new enterprise resource planning software system, and business acquisitions of $3.1 million.

Investing activities for the nine months ended September 30, 2022 were primarily related to maturities of marketable securities of $39.8 million, partially offset by store acquisitions of $6.8 million and the purchase of property, plant, and equipment related to the design of a new enterprise resource planning software system of $11.6 million.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 was approximately $0.2 million and was primarily attributable to common stock withheld for employee payroll taxes.

Net cash used by financing activities for the nine months ended September 30, 2022 was $1.5 million and was primarily attributable to stock withheld to cover payroll taxes.

Other income (expense) was $0.6 million for the three months ended March 31, 2024 compared to $1.3 million for the three months ended March 31, 2023.

This decrease is primarily attributable to the $0.9 million gain recognized in the three months ended March 31, 2023 related to a prior acquisition indemnity holdback.

Use of Non-GAAP Financial Information

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

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

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

GAAP and may be different from non-GAAP measures used by other companies.

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

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

Three Months Ended September 30,

Net income (loss) $ (7,349) $ (7,202)

Income taxes — (718)

Interest income — (143)

Interest expense 1 3

Depreciation, and amortization 4,721 3,875

EBITDA $ (2,627) $ (4,185)

Share based compensation (option compensation, warrant compensation, stock issued for services) 938 1,291

Impairment, restructuring, and other charges 717 —

Fixed asset disposal 64 165

Adjusted EBITDA $ (908) $ (2,729)

Adjusted EBITDA per share, basic $ (0.01) $ (0.04)

Adjusted EBITDA per share, diluted $ (0.01) $ (0.04)

Nine Months Ended

September 30,

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

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

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

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

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

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

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

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

Three Months Ended March 31,

Net income (loss) $ (8,837) $ (6,134)

Income taxes 93 (2,637)

Benefit (provision) for income taxes (2) —

Interest income (602) (428)

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EBITDA $ (5,643) $ (2,628)

Impairment, restructuring, and other charges 2,215 127,831

Share based compensation (option compensation, warrant compensation, stock issued for services) 2,452 3,980

Fixed asset disposal 85 81

Share-based compensation 778 567

Investment income 580 —

Restructuring and other charges (1)

Adjusted EBITDA $ (2,871) $ (1,802)

Adjusted EBITDA per share, basic $ (0.03) $ (0.11)

Adjusted EBITDA per share, diluted $ (0.03) $ (0.11)

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

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2023, we had working capital of approximately $123.4 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $11.5 million.

The decrease in working capital from December 31, 2022 to September 30, 2023 was due primarily to a decrease in cash and marketable securities and income taxes receivable and an increase in current liabilities.

At September 30, 2023, we had cash and cash equivalents of approximately $31.4 million.

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

As of March 31, 2024, we had working capital of $112.4 million compared to working capital of $116.5 million as of December 31, 2023, a decrease of $4.1 million.

The decrease in working capital from December 31, 2023 to March 31, 2024 was due primarily to a net decrease in cash, cash equivalents, and marketable securities as a result of net cash used in operating activities.

As of March 31, 2024, we had cash, cash equivalents, and marketable securities of $61.3 million.

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

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

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

We may need additional financing through equity offerings and/or debt financings in the future to continue to expand our business consistent with our growth strategies.

To date, we have financed our operations through the issuance and sale of common stock, convertible notes, and warrants.

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

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

Share Repurchase Program

On March 20, 2024, the Board of Directors of the Company authorized a share repurchase program, whereby the Company could repurchase up to $6.0 million worth of its common stock in open market transactions pursuant to Rule 10b-18 of the Exchange Act and a 10b5-1 trading plan.

The program began on April 1, 2024 and continues for up to one year.

This share repurchase program is intended to enhance long-term shareholder value.

The program does not obligate the Company to acquire any specific number of shares or to acquire any shares over any specific period of time.

The timing and amount of any repurchases will depend on factors such as the stock price, trading volumes, market conditions, and regulatory requirements.

The stock repurchase program may be amended, suspended, or discontinued at any time by the Company.

Except for the Company's generally applicable insider trading policies, the Company does not maintain any policies or procedures relating to purchases and sales of its securities by its officers and directors during a repurchase program.

The following discussion sets forth the major sources and uses of cash for the three months ended March 31, 2024 and 2023.

Operating Activities

Net cash and cash equivalents used in operating activities for the three months ended March 31, 2024 was $3.7 million compared to net cash provided by operating activities of $3.5 million for the three months ended March 31, 2023.

The changes in operating cash were primarily driven by the decreased in income (loss) from operations as previously discussed.

Investing Activities

Net cash and cash equivalents provided by investing activities was $5.0 million and $19.3 million for the three months ended March 31, 2024 and March 31, 2023, respectively.

Investing activities for the three months ended March 31, 2024 were primarily attributable to investment of excess cash into marketable securities of $21.1 million, offset by maturity of marketable securities of $26.5 million.

We also had purchases of property and equipment of $0.4 million during the three months ended March 31, 2024.

Investing activities for the three months ended March 31, 2023 were primarily attributable to investment of excess cash into marketable securities of $10.7 million, offset by maturity of marketable securities of $33.5 million, and purchases of property and equipment of $3.5 million, which was primarily related to the implementation and design of a new enterprise resource planning software system.

Financing Activities

Net cash and cash equivalents used in financing activities for the three months ended March 31, 2024 and March 31, 2023 was less than $0.1 million and $0.1 million, respectively, and was primarily attributable to common stock withheld for employee payroll taxes.

Critical Accounting Policies, Judgements, and Estimates

For a summary of the Company’s critical accounting policies, judgements, and estimates, please refer to Item 7 of our Form 10-K for the year ended December 31, 2022.

For a summary of the Company's critical accounting policies, judgements, and estimates, please refer to Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.

Off Balance-Sheet Arrangements

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a summary of the Company’s quantitative and qualitative disclosures about market risk, please refer to Item 7A of our Form 10-K for the year ended December 31, 2022.

For a summary of the Company's quantitative and qualitative disclosures about market risk, please refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis