GrowGeneration Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except shares) March 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 31,050 $ 29,757 Marketable securities 30,280 35,212 Accounts receivable, net of allowance for credit losses of $ 1.4 million and $ 1.4 million at March 31, 2024 and December 31, 2023 7,832 8,895 Notes receivable, current, net of allowance for credit losses of $ 0.2 million and $ 1.7 million at March 31, 2024 and December 31, 2023 215 193 Inventory 66,028 64,905 Prepaid income taxes 213 516 Prepaid and other current assets 6,102 7,973 Total current assets 141,720 147,451 Property and equipment, net 25,336 27,052 Operating leases right-of-use assets, net 40,408 39,933 Notes receivable, long-term 54 106 Intangible assets, net 14,503 16,180 Goodwill 7,525 7,525 Other assets 847 843 TOTAL ASSETS $ 230,393 $ 239,090 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,392 $ 11,666 Accrued liabilities 2,126 2,530 Payroll and payroll tax liabilities 2,097 2,169 Customer deposits 3,880 5,359 Sales tax payable 1,249 1,185 Current maturities of operating lease liabilities 7,593 8,021 Total current liabilities 29,337 30,930 Operating lease liabilities, net of current maturities 35,431 34,448 Other long-term liabilities 317 317 Total liabilities 65,085 65,695 Commitments and contingencies (Note 12) Stockholders' equity: Common stock; $ 0.001 par value; 100,000,000 shares authorized, 61,507,259 and 61,483,762 shares issued and outstanding as of March 31, 2024 and December 31, 2023 62 61 Additional paid-in capital 374,182 373,433 Retained earnings (deficit) ( 208,936 ) ( 200,099 ) Total stockholders' equity 165,308 173,395 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 230,393 $ 239,090 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 1 GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended March 31, 2024 2023 Net sales $ 47,888 $ 56,827 Cost of sales (exclusive of depreciation and amortization shown below) 35,524 40,538 Gross profit 12,364 16,289 Operating expenses: Store operations and other operational expenses 10,634 12,622 Selling, general, and administrative 7,908 6,838 Estimated credit losses (recoveries) ( 488 ) 317 Depreciation and amortization 3,742 3,932 Total operating expenses 21,796 23,709 Income (loss) from operations ( 9,432 ) ( 7,420 ) Other income (expense): Other income (expense) 47 860 Interest income 602 428 Interest expense ( 56 ) ( 2 ) Total other income (expense) 593 1,286 Net income (loss) before taxes ( 8,839 ) ( 6,134 ) Benefit (provision) for income taxes 2 — Net income (loss) $ ( 8,837 ) $ ( 6,134 ) Net income (loss) per share, basic $ ( 0.14 ) $ ( 0.10 ) Net income (loss) per share, diluted $ ( 0.14 ) $ ( 0.10 ) Weighted average shares outstanding, basic 61,499 61,028 Weighted average shares outstanding, diluted 61,499 61,028 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 2 GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (in thousands) Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders' Equity Shares Amount Balances, December 31, 2023 61,484 $ 61 $ 373,433 $ ( 200,099 ) $ 173,395 Common stock issued for share-based compensation 23 1 — — 1 Common stock withheld for employee payroll taxes — — ( 29 ) — ( 29 ) Share-based compensation — — 778 — 778 Net income (loss) — — — ( 8,837 ) ( 8,837 ) Balances, March 31, 2024 61,507 $ 62 $ 374,182 $ ( 208,936 ) $ 165,308 Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Total Stockholders' Equity Shares Amount Balances, December 31, 2022 61,010 $ 61 $ 369,938 $ ( 153,603 ) $ 216,396 Common stock issued for share-based compensation 25 — — — — Common stock withheld for employee payroll taxes — — ( 70 ) — ( 70 ) Share-based compensation — — 511 — 511 Net income (loss) — — — ( 6,134 ) ( 6,134 ) Balances, March 31, 2023 61,035 $ 61 $ 370,379 $ ( 159,737 ) $ 210,703 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 3 GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2024 2023 Cash flows from operating activities: Net income (loss) $ ( 8,837 ) $ ( 6,134 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,742 3,932 Share-based compensation 778 567 Estimated credit losses (recoveries) ( 488 ) 317 Loss (gain) on disposal of fixed assets 33 ( 19 ) Change in value of marketable securities ( 390 ) — Changes in operating assets and liabilities: Accounts and notes receivable 1,551 1,664 Inventory ( 1,123 ) 1,627 Prepaid expenses and other assets 2,170 3,621 Accounts payable and accrued liabilities 295 114 Operating leases 80 372 Payroll and payroll tax liabilities ( 72 ) ( 2,308 ) Customer deposits ( 1,479 ) ( 422 ) Sales tax payable 64 126 Net cash and cash equivalents provided by (used in) operating activities ( 3,676 ) 3,457 Cash flows from investing activities: Purchase of marketable securities ( 21,143 ) ( 10,726 ) Maturities of marketable securities 26,465 33,452 Proceeds from notes receivable 30 — Purchase of property and equipment ( 355 ) ( 3,476 ) Proceeds from disposals of assets — 63 Net cash and cash equivalents provided by (used in) investing activities 4,997 19,313 Cash flows from financing activities: Principal payments on long term debt — ( 16 ) Common stock withheld for employee payroll taxes ( 28 ) ( 70 ) Net cash and cash equivalents provided by (used in) financing activities ( 28 ) ( 86 ) Net increase (decrease) in cash and cash equivalents 1,293 22,684 Cash and cash equivalents at the beginning of period 29,757 40,054 Cash and cash equivalents at the end of period $ 31,050 $ 62,738 Supplemental disclosures of non-cash activities: Cash paid for interest $ 56 $ 2 Cash paid for income taxes $ — $ — Right-of use assets obtained in exchange for new or modified operating lease liabilities $ 2,869 $ 1,310 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 1. GENERAL 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 March 31, 2024, GrowGeneration has 46 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. Basis of Presentation The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 ("2023 Form 10-K"). There were no significant changes to the Company's significant accounting policies as disclosed in the 2023 Form 10-K. The results reported in these unaudited Condensed Consolidated Financial Statements are not necessarily indicative of results for the full fiscal year. All amounts included in the accompanying footnotes to the Condensed Consolidated Financial Statements, except per share data, are in thousands (000). Reclassifications Certain amounts in the prior period Condensed Consolidated Financial Statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported net income (loss) within the Condensed Consolidated Statements of Operations. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. 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. 2. RECENT ACCOUNTING PRONOUNCEMENTS From time to time, the Financial Accounting Standard Board ("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 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 5 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 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. 3. FAIR VALUE MEASUREMENTS Fair Value Measurements Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The carrying amounts of cash and cash equivalents, accounts receivable, 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 reserves for expected credit loss. 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 $ 0.4 million and immaterial for the three months ended March 31, 2024 and 2023, respectively, and included in Interest income on the Condensed Consolidated Statements of Operations. Level March 31, 2024 December 31, 2023 Cash equivalents 1 $ 22,772 $ 17,300 Marketable securities 2 $ 30,280 $ 35,212 4. REVENUE RECOGNITION Disaggregation of Revenues Net sales are disaggregated by the Company's segments, which represent its principal lines of business, as well as by major product line, including proprietary brands, non-proprietary brands, and commercial fixtures, and by product type, including consumable and durable products. Refer to Note 13, Segments, for disaggregated revenue disclosures. 6 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 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 were as follows: Accounts Receivable, Net Customer Deposits Opening balance, January 1, 2024 $ 8,895 $ 5,359 Closing balance, March 31, 2024 7,832 3,880 Increase (decrease) $ ( 1,063 ) $ ( 1,479 ) Opening balance, January 1, 2023 $ 8,336 $ 4,338 Closing balance, March 31, 2023 7,569 3,916 Increase (decrease) $ ( 767 ) $ ( 422 ) Of the total amount of customer deposit liability as of January 1, 2024, $ 2.9 million was reported as revenue during the three months ended March 31, 2024. Of the total amount of customer deposit liability as of January 1, 2023, $ 2.3 million was reported as revenue during the three months ended March 31, 2023. Notes receivable at March 31, 2024 and December 31, 2023 were as follows: March 31, 2024 December 31, 2023 Notes receivable $ 501 $ 2,031 Allowance for credit losses ( 232 ) ( 1,732 ) Notes receivable, net $ 269 $ 299 The following table summarizes changes in notes receivable balances that have been deemed impaired. March 31, 2024 December 31, 2023 Notes receivable $ 232 $ 1,732 Allowance for credit losses ( 232 ) ( 1,732 ) Notes receivable, net $ — $ — During the three months ended March 31, 2024, the Company received a $ 0.3 million settlement related to a $ 1.5 million note receivable, which had been fully reserved as of December 31, 2023. Refer to Note 12, Commitment and Contingencies, for additional information regarding the settlement. 7 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 5. PROPERTY AND EQUIPMENT Property and equipment at March 31, 2024 and December 31, 2023 consisted of the following: March 31, 2024 December 31, 2023 Vehicles $ 2,548 $ 2,558 Building and land 2,121 2,121 Leasehold improvements 11,881 11,920 Furniture, fixtures and equipment 14,459 14,364 Capitalized software 16,085 16,085 Construction-in-progress 133 — Total property and equipment, gross 47,227 47,048 Accumulated depreciation and amortization ( 21,891 ) ( 19,996 ) Property and equipment, net $ 25,336 $ 27,052 Depreciation and amortization expense related to property and equipment was $ 2.1 million and $ 1.7 million for the three months ended March 31, 2024 and 2023, respectively. 6. GOODWILL AND INTANGIBLE ASSETS The carrying value of goodwill at March 31, 2024 and December 31, 2023 by segment was as follows: Cultivation and Gardening Storage Solutions Total Balances, December 31, 2023 $ 5,920 $ 1,605 $ 7,525 Balances, March 31, 2024 $ 5,920 $ 1,605 $ 7,525 Accumulated impairment for goodwill was $ 125.9 million as of March 31, 2024 and December 31, 2023. The changes in intangible assets by segment for the quarter ended March 31, 2024 and year ended December 31, 2023 were as follows: Cultivation and Gardening Storage Solutions Total Balance as of December 31, 2023 $ 13,501 $ 2,679 $ 16,180 Amortization ( 1,482 ) ( 195 ) ( 1,677 ) Balance as of March 31, 2024 $ 12,019 $ 2,484 $ 14,503 Intangible assets on the Company's Consolidated Balance Sheets consisted of the following: March 31, 2024 December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 28,198 $ ( 17,850 ) $ 10,348 $ 28,198 $ ( 16,488 ) $ 11,710 Patents, trademarks 69 ( 69 ) — 69 ( 69 ) — Customer relationships 13,192 ( 9,106 ) 4,086 13,192 ( 8,813 ) 4,379 Non-competes 864 ( 795 ) 69 864 ( 773 ) 91 Intellectual property 1,136 ( 1,136 ) — 1,136 ( 1,136 ) — Total $ 43,459 $ ( 28,956 ) $ 14,503 $ 43,459 $ ( 27,279 ) $ 16,180 8 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) Amortization expense for the three months ended March 31, 2024 and 2023 was $ 1.7 million and $ 2.2 million, respectively. Fu ture amortization expense as of March 31, 2024 was as follows: 2024 (remainder of the year) $ 5,028 2025 6,339 2026 2,231 2027 799 2028 82 Thereafter 24 Total $ 14,503 7. INCOME TAXES For the three months ended March 31, 2024, the effective tax rate was ( 0.02 )%, compared to 0.00 % for the three months ended March 31, 2023. The effective tax rate for each of the three months ended March 31, 2024 and 2023 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 March 31, 2024 , 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. 8. LEASES The right-of-use assets and corresponding liabilities related to the Company's operating leases were as follows: March 31, 2024 December 31, 2023 Operating leases right-of-use assets $ 40,408 $ 39,933 Current maturities of operating lease liability $ 7,593 $ 8,021 Operating lease liability, net of current maturities 35,431 34,448 Total lease liability $ 43,024 $ 42,469 The weighted-average remaining lease terms and weighted-average discount rates for operating leases were as follows: Three Months Ended March 31, 2024 2023 Weighted average remaining lease term 5.99 years 6.46 years Weighted average discount rate 6.2 % 5.8 % Lease expense is recorded within the Company's Condensed Consolidated Statements of Operations based upon the nature of the operating lease right-of-use assets. Where assets are used to directly serve our customers, such as retail locations and distribution centers, lease costs are recorded in Store operations and other operational expenses. Facilities and assets which serve management and support functions are expensed through Selling, general, and administrative. The Company recorded sublease income of $ 0.3 million and $ 0.3 million for the three mo nths ended March 31, 2024 and 2023 , respectively, within Store operations and other operational expenses related to the sublease of a closed retail location . 9 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) The components of lease expense were as follows: Three Months Ended March 31, 2024 2023 Operating lease costs $ 2,563 $ 2,893 Variable lease costs 664 599 Short-term lease costs 85 167 Total operating lease costs $ 3,312 $ 3,659 Future maturities of the Company's operating lease liabilities as of March 31, 2024 were as follows : 2024 (remainder of the year) $ 7,516 2025 9,658 2026 8,410 2027 6,420 2028 5,948 Thereafter 13,567 Total lease payments 51,519 Less: imputed interest ( 8,495 ) Operating lease liability at March 31, 2024 $ 43,024 Supplemental and other information related to leases was as follows: Three Months Ended March 31, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 2,580 $ 2,826 9. 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 three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Net income (loss) $ ( 8,837 ) $ ( 6,134 ) Weighted average shares outstanding, basic 61,499 61,028 Effect of dilutive outstanding restricted stock units, stock options, and warrants — — Adjusted weighted average shares outstanding, dilutive 61,499 61,028 Basic earnings (loss) per share $ ( 0.14 ) $ ( 0.10 ) Dilutive earnings (loss) per share $ ( 0.14 ) $ ( 0.10 ) Diluted earnings per share calculations for the three months ended March 31, 2024 excluded 0.5 million shares of common stock issuable upon exercise of stock options and 0.8 million of non-vested restricted stock units that would have been anti-dilutive. Diluted earnings per share calculations for the three months ended March 31, 2023 excluded 0.6 million shares of common stock issuable upon exercise of stock options, 0.7 million shares of non-vested restricted stock units, and 33 thousand shares of common stock issuable upon exercise of the stock purchase warrants that would have been anti-dilutive. 10 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 10. SHARE-BASED PAYMENTS The Company maintains long-term incentive plans for employees, non-employee members of its Board of Directors (the "Board"), and consultants. 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"). 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 and restricted stock units. The Company recorded share-based compensation expense of $ 0.8 million and $ 0.6 million in the three months ended March 31, 2024 and 2023, respectively. Restricted Stock Units The Company issues restricted stock units to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest annually or biannually over three to four years following the date of grant, subject to the employee's continuing employment as of that date. Restricted stock units are valued using the market value on the grant date. Restricted stock unit activity for the three months ended March 31, 2024 is presented in the following table: Units Weighted Average Grant Date Fair Value Nonvested, December 31, 2023 904,834 $ 5.23 Granted — $ — Vested ( 35,417 ) $ 10.75 Forfeited ( 37,250 ) $ 2.65 Nonvested, March 31, 2024 832,167 $ 5.12 As of March 31, 2024, the Company had approximately $ 2.9 million of unrecognized share-based compensation related to restricted stock units, which are expected to be recognized over a weighted average period of approximately 1.6 years. Stock Options Stock option activity for the three months ended March 31, 2024 is presented in the following table: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Weighted Average Grant Date Fair Value Outstanding at December 31, 2023 577,998 $ 4.01 0.95 $ 2.25 Granted — — — — Exercised — — — — Forfeited or expired ( 68,332 ) 2.76 — 1.82 Outstanding at March 31, 2024 509,666 $ 4.17 0.78 $ 2.31 Vested and exercisable at March 31, 2024 509,666 $ 4.17 0.78 $ 2.31 11. STOCKHOLDERS' EQUITY On March 20, 2024, the Board 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 11 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 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. 12. 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. In February 2024, the Company received $ 0.3 million from the bankruptcy proceedings, which it recorded as a recovery on the $ 1.5 million Note & Option. The remainder of the Note & Option, which were fully reserved, were written off during the three months ended March 31, 2024. 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 March 31, 2024, the Company did not have any liabilities associated with indemnities. In addition, the Company, as permitted under Colorado law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, in each case, as amended to date, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company's request in such capacity. The duration of these indemnifications varies. The Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date. 13. SEGMENTS 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. 12 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 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. During the first quarter of 2024, the Company reviewed and reclassified certain item level designations as consumable or durable products. Comparative prior period disclosures have been recast to conform to the current presentation. Disaggregated revenue by segment is presented in the following tables: Three Months Ended March 31, Net sales 2024 2023 Cultivation and Gardening Proprietary brand sales $ 9,726 $ 9,027 Non-proprietary brand sales 33,382 40,100 Total Cultivation and Gardening 43,108 49,127 Storage Solutions Commercial fixture sales 4,780 7,700 Total Storage Solutions 4,780 7,700 Total $ 47,888 $ 56,827 Three Months Ended March 31, Net sales 2024 2023 Cultivation and Gardening Consumables $ 30,181 $ 32,352 Durables 12,927 $ 16,775 Total Cultivation and Gardening 43,108 $ 49,127 Storage Solutions Durables 4,780 $ 7,700 Total Storage Solutions 4,780 $ 7,700 Total $ 47,888 $ 56,827 13 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) Selected information by segment is presented in the following tables: Three Months Ended March 31, 2024 2023 Net sales Cultivation and Gardening $ 43,108 $ 49,127 Storage Solutions 4,780 7,700 Total net sales 47,888 56,827 Gross profit Cultivation and Gardening 10,325 13,229 Storage Solutions 2,039 3,060 Total gross profit 12,364 16,289 Segment operating profit Cultivation and Gardening 1,064 1,803 Storage Solutions 666 1,864 Total segment operating profit 1,730 3,667 Corporate expenses Selling, general, and administrative 7,908 6,838 Estimated credit losses ( 488 ) 317 Depreciation and amortization 3,742 3,932 Income (loss) from operations $ ( 9,432 ) $ ( 7,420 ) 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. 14