What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-08 · 95 added, 51 removed, 142 unchanged (51% of the section changed)

35 unchanged sentences

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.

Management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 43 retail locations across 18 states as of June 30, 2024.

Storage Solutions Segment

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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

Growth Strategy and Strategic Restructuring Plan

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

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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.

Management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 43 retail locations across 18 states as of June 30, 2024.

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.

In July 2024, we announced a strategic restructuring plan focused on long-term profitability and advancing growth initiatives in key areas of our Gardening and Cultivation segment such as our proprietary brands, commercial sales, and e-commerce business.

These restructuring plans primarily include reductions in cost structure by closing and consolidating twelve redundant or underperforming retail locations, in addition to the seven retail locations closed in the first half of 2024, workforce reductions, and other operational improvements in inventory management, sales and marketing, and administrative activities.

We expect that these restructuring activities will be substantially completed by the end of fiscal year 2024 and will improve gross profit margin and profitability and generate annualized cost savings of approximately $12.0 million.

We are currently unable to make a good faith determination of an estimate or range of estimates of the total expected restructuring and restructuring related costs.

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.

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

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R ESULTS OF OPERATIONS

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

Comparison of the Unaudited Results for the Three Months Ended June 30, 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,

Three Months Ended June 30,

2024 2023 Year-to-Year Variance

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Operating expenses 20,935 39.1 % 23,442 36.7 % (2,507) (10.7) %

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

Loss from operations (6,514) (12.2) % (6,305) (9.9) % (209) (3.3) %

Other income 713 1.3 % 699 1.1 % 14 2.0 %

Net loss before taxes (5,801) (10.8) % (5,606) (8.8) % (195) (3.5) %

Provision for income taxes (95) (0.2) % (93) (0.1) % (2) (2.2) %

Net loss $ (5,896) (11.0) % $ (5,699) (8.9) % $ (197) (3.5) %

Net sales for the three months ended June 30, 2024 were $53.5 million, a decrease of $10.4 million or 16.3% as compared to net sales of $63.9 million for the three months ended June 30, 2023.

The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $46.1 million for the three months ended June 30, 2024 compared to $55.6 million for the three months ended June 30, 2023.

This decrease in net sales was primarily due to the fiscal 2023 consolidation of twelve retail locations after June 30, 2023 as well as the seven retail locations closed in the first half of 2024.

Same-store sales decreased approximately 6.2%, primarily attributable to decreased e-commerce and brick-and-mortar retail sales volume declines.

Proprietary brand sales as a percentage of Cultivation and Gardening net sales for the three months ended June 30, 2024 increased to 21.5% as compared to 16.7% for the three months ended June 30, 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 June 30, 2024 was 73.0%, which was an increase from 69.7% for the three months ended June 30, 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 $7.4 million for the three months ended June 30, 2024 compared to $8.4 million for the three months ended June 30, 2023.

Cost of Sales

Cost of sales for the three months ended June 30, 2024 was $39.1 million, a decrease of $7.7 million or 16.4% compared to $46.8 million for the three months ended June 30, 2023.

The decrease in cost of sales was primarily due to the 16.3% decrease in sales, as previously discussed, partially offset by reduced inventory discounts from vendors in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Gross profit was $14.4 million for the three months ended June 30, 2024 compared to $17.1 million for the three months ended June 30, 2023, a decrease of $2.7 million or 15.8%.

The decrease in gross profit is primarily related to the Gardening and Cultivation segment, which decreased $2.4 million, or 18.0%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 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 $0.3 million, or 8.3%, in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Gross profit margin increased slightly at 26.9% for the three months ended June 30, 2024 compared to 26.8% for the three months ended June 30, 2023.

Gross margin improved for the Storage Solutions segment to 46.9% in the three months ended June 30, 2024 from 45.4% in three months ended June 30, 2023, which was offset by a decrease in Cultivation and Gardening gross profit margin to 23.7% for the three months ended June 30, 2024 from 24.0% for the three months ended June 30, 2023, primarily due to continued industry pricing compression on distributed products.

Operating Expenses

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 $20.9 million for the three months ended June 30, 2024 and $23.4 million in the three months ended June 30, 2023, a decrease of $2.5 million or 10.7%.

Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were $10.2 million for the three months ended June 30, 2024, compared to $12.0 million for the three months ended June 30, 2023, a decrease of $1.8 million or 15.0%.

The decrease in store operating costs was primarily due to the fiscal 2023 consolidation of twelve retail locations after June 30, 2023 as well as the seven retail locations closed in the first half of 2024.

Total corporate overhead, which is comprised of selling, general, and administrative expense, estimated credit losses, and depreciation and amortization expense, was $10.7 million for three months ended June 30, 2024 compared to $11.4 million for the three months ended June 30, 2023, a decrease of $0.7 million or 6.2%.

Selling, general, and administrative costs decreased by $0.4 million or 5.3% for the three months ended June 30, 2024 primarily as a result of decreased professional fees and corporate expenses and decreased share-based compensation.

The remaining decrease was primarily driven by a $0.2 million decrease in depreciation and amortization expense in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Other Income (Expense)

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.

Other income (expense) remained flat at approximately $0.7 million for each of the three months ended June 30, 2024 and June 30, 2023.

Comparison of the Unaudited Results for the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30,

2024 2023 Year-to-Year Variance

Net sales $ 101,424 100.0 % $ 120,752 100.0 % $ (19,328) (16.0) %

Cost of sales 74,639 73.6 % 87,326 72.3 % (12,687) (14.5) %

Gross profit 26,785 26.4 % 33,426 27.7 % (6,641) (19.9) %

Operating expenses 42,731 42.1 % 47,151 39.0 % (4,420) (9.4) %

Loss from operations (15,946) (15.7) % (13,725) (11.4) % (2,221) (16.2) %

Other income 1,306 1.3 % 1,985 1.6 % (679) (34.2) %

Net loss before taxes (14,640) (14.4) % (11,740) (9.7) % (2,900) (24.7) %

Provision for income taxes (93) (0.1) % (93) (0.1) % — — %

Net loss $ (14,733) (14.5) % $ (11,833) (9.8) % $ (2,900) (24.5) %

Net sales for the six months ended June 30, 2024 were $101.4 million, a decrease of $19.3 million or 16.0% as compared to net sales of $120.8 million for the six months ended June 30, 2023.

The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $89.2 million for the six months ended June 30, 2024 compared to $104.7 million for the six months ended June 30, 2023.

This decrease in net sales was primarily due to the fiscal 2023 consolidation of twelve retail locations after June 30, 2023 as well as the seven retail locations closed in the first half of 2024.

Same-store sales decreased approximately 3.8%, attributable to decreased e-commerce and brick-and-mortar retail sales volume declines.

Proprietary brand sales as a percentage of Cultivation and Gardening net sales for the six months ended June 30, 2024 was 22.0% as compared to 17.5% for the six months ended

June 30, 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 six months ended June 30, 2024 was 71.6%, which was an increase from 67.9% for the six months ended June 30, 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.

Additionally, net sales of commercial fixtures within our Storage Solutions segment decreased to $12.2 million for the six months ended June 30, 2024 compared to $16.1 million for the six months ended June 30, 2023.

Cost of Sales

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.

Cost of sales for the six months ended June 30, 2024 was $74.6 million, a decrease of $12.7 million or 14.5% compared to $87.3 million for the six months ended June 30, 2023.

The decrease in cost of sales was primarily due to the 16.0% decrease in sales, as previously discussed, partially offset by reduced inventory discounts from vendors and non-recurring costs associated with store consolidations in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Gross profit was $26.8 million for the six months ended June 30, 2024 compared to $33.4 million for the six months ended June 30, 2023, a decrease of $6.6 million or 19.9%.

The decrease in gross profit is primarily related to the Gardening and Cultivation segment, which decreased $5.3 million, or 20.0%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 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 $1.3 million, or 19.5%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Gross profit margin was 26.4% for the six months ended June 30, 2024, a decrease of 130 basis points from a gross profit margin of 27.7% for the six months ended June 30, 2023.

The decrease was primarily attributable to an 160 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.

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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.

Operating expenses were $42.7 million for the six months ended June 30, 2024 and $47.2 million for the six months ended June 30, 2023, a decrease of $4.4 million or 9.4%.

Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were $20.8 million for the six months ended June 30, 2024, compared to $24.6 million for the six months ended June 30, 2023, a decrease of $3.8 million or 15.4%.

Additionally, as part of our 2023 charitable initiatives, we had approximately $0.4 million more charitable donations in the six months ended June 30, 2023 as compared to the six months ended June 30, 2024.

Total corporate overhead, which is comprised of selling, general, and administrative expense, estimated credit losses, and depreciation and amortization expense, decreased to $21.9 million for the six months ended June 30, 2024 compared to $22.5 million for the six months ended June 30, 2023, a decrease of $0.6 million or 2.8%.

Selling, general, and administrative costs increased by $0.7 million or 4.7% for the six months ended June 30, 2024 primarily as a result of one-time severances and related professional fees and increased marketing expenses related to various proprietary product launches.

This increase was offset by the estimated credit recoveries of $0.5 million in the six months ended June 30, 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 $0.4 million in the six months ended June 30, 2023.

Other Income (Expense)

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.

Other income (expense) was $1.3 million for the six months ended June 30, 2024 compared to $2.0 million for the six months ended June 30, 2023.

This decrease is primarily attributable to the $0.9 million gain recognized in the six months ended June 30, 2023 related to a prior acquisition indemnity holdback.

Use of Non-GAAP Financial Information

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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)

Benefit (provision) for income taxes (2) —

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Net loss $ (5,896) $ (5,699) $ (14,733) $ (11,833)

Provision for income taxes 95 93 93 93

Interest income (737) (753) (1,339) (1,181)

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Restructuring and other charges (1)

394 1,260 1,808 1,519

Adjusted EBITDA $ (1,143) $ 856 $ (4,014) $ (946)

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LIQUIDITY AND CAPITAL RESOURCES

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.

As of June 30, 2024, we had working capital of $105.4 million compared to working capital of $116.5 million as of December 31, 2023, a decrease of $11.2 million.

The decrease in working capital from December 31, 2023 to June 30, 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 well as reductions in inventory and common stock repurchases.

As of June 30, 2024, we had cash, cash equivalents, and marketable securities of $56.0 million.

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

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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.

During the three and six months ended June 30, 2024, we repurchased 1.7 million shares of common stock for $4.2 million, an average price of $2.39 per share.

As of June 30, 2024, approximately $1.8 million remained available under the stock repurchase program.

We retired 0.8 million shares of common stock repurchased under the program in the three and six months ended June 30, 2024.

The following discussion sets forth the major sources and uses of cash for the six months ended June 30, 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.

Net cash and cash equivalents used in operating activities for the six months ended June 30, 2024 was $4.0 million compared to net cash provided by operating activities of $7.4 million for the six months ended June 30, 2023.

The changes in operating cash were primarily driven by the increased net loss 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.

Net cash and cash equivalents provided by investing activities for the six months ended June 30, 2024 was $6.2 million compared to net cash used by investing activities of $17.6 million for the six months ended June 30, 2023.

Investing activities for the six months ended June 30, 2024 were primarily attributable to investment of excess cash into marketable securities of $28.0 million, offset by maturity of marketable securities of $35.6 million.

We also had purchases of property and equipment of $1.4 million during the six months ended June 30, 2024.

Investing activities for the six months ended June 30, 2023 were primarily attributable to investment of excess cash into marketable securities of $51.7 million, offset by maturity of marketable securities of $42.6 million, and purchases of property and equipment of $5.5 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.

Net cash and cash equivalents used in financing activities for the six months ended June 30, 2024 was $4.3 million and was primarily attributable to common stock repurchased under our share repurchase program.

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

Critical Accounting Policies, Judgements, and Estimates

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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