GrowGeneration Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands, except shares) September 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 27,436 $ 29,757 Marketable securities 27,787 35,212 Accounts receivable, net of allowance for credit losses of $ 1,800 and $ 1,363 at September 30, 2024 and December 31, 2023, respectively 10,324 8,895 Notes receivable, current, net of allowance for credit losses of $ — and $ 1,732 at September 30, 2024 and December 31, 2023, respectively 1,106 193 Inventory 48,025 64,905 Prepaid income taxes 201 516 Prepaid and other current assets 7,688 7,973 Total current assets 122,567 147,451 Property and equipment, net 21,119 27,052 Operating leases right-of-use assets, net 36,453 39,933 Notes receivable, long-term — 106 Intangible assets, net 11,152 16,180 Goodwill 7,525 7,525 Other assets 823 843 TOTAL ASSETS $ 199,639 $ 239,090 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,183 $ 11,666 Accrued liabilities 2,536 2,530 Payroll and payroll tax liabilities 2,354 2,169 Customer deposits 2,631 5,359 Sales tax payable 1,310 1,185 Current maturities of operating lease liabilities 7,523 8,021 Total current liabilities 24,537 30,930 Operating lease liabilities, net of current maturities 31,620 34,448 Other long-term liabilities 317 317 Total liabilities 56,474 65,695 Commitments and contingencies (Note 13) Stockholders' equity: Common stock; $ 0.001 par value; 100,000,000 shares authorized, 59,242,200 and 61,483,762 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively 59 61 Additional paid-in capital 375,407 373,433 Accumulated deficit ( 232,301 ) ( 200,099 ) Total stockholders' equity 143,165 173,395 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 199,639 $ 239,090 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 1 GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net sales $ 50,006 $ 55,678 $ 151,430 $ 176,430 Cost of sales (exclusive of depreciation and amortization shown below) 39,196 39,490 113,835 126,816 Gross profit 10,810 16,188 37,595 49,614 Operating expenses: Store operations and other operational expenses 10,032 11,658 30,876 36,288 Selling, general, and administrative 7,405 7,582 22,417 21,923 Estimated credit losses (recoveries) 272 257 ( 210 ) 681 Depreciation and amortization 4,972 4,721 12,329 12,477 Impairment loss 220 — 220 — Total operating expenses 22,901 24,218 65,632 71,369 Loss from operations ( 12,091 ) ( 8,030 ) ( 28,037 ) ( 21,755 ) Other income (expense): Other (expense) income ( 50 ) ( 23 ) ( 13 ) 786 Interest income 663 705 2,002 1,886 Interest expense — ( 1 ) ( 70 ) ( 6 ) Total other income 613 681 1,919 2,666 Net loss before taxes ( 11,478 ) ( 7,349 ) ( 26,118 ) ( 19,089 ) Benefit (provision) for income taxes 43 — ( 50 ) ( 93 ) Net loss $ ( 11,435 ) $ ( 7,349 ) $ ( 26,168 ) $ ( 19,182 ) Net loss per share, basic $ ( 0.19 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.31 ) Net loss per share, diluted $ ( 0.19 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.31 ) Weighted average shares outstanding, basic 59,268 61,272 60,479 61,127 Weighted average shares outstanding, diluted 59,268 61,272 60,479 61,127 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited, in thousands) Common Stock Treasury Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity Shares Amount 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 loss — — — — — ( 8,837 ) ( 8,837 ) Balances, March 31, 2024 61,507 $ 62 — $ — $ 374,182 $ ( 208,936 ) $ 165,308 Common stock issued for share-based compensation 181 — — — — — — Common stock withheld for employee payroll taxes — — — — ( 99 ) — ( 99 ) Share-based compensation — — — — 654 — 654 Repurchase of common stock — — ( 1,739 ) ( 4,190 ) — — ( 4,190 ) Cancellation of common stock ( 800 ) ( 1 ) 800 1,874 — ( 1,873 ) — Net loss — — — — — ( 5,896 ) ( 5,896 ) Balances, June 30, 2024 60,888 $ 61 ( 939 ) $ ( 2,316 ) $ 374,737 $ ( 216,705 ) $ 155,777 Common stock issued for share based compensation 71 — — — — — — Common stock withheld for employee payroll taxes — — — — ( 2 ) — ( 2 ) Share-based compensation — — — — 672 — 672 Repurchase of common stock — — ( 778 ) ( 1,847 ) — — ( 1,847 ) Cancellation of common stock ( 1,717 ) ( 2 ) 1,717 4,163 — ( 4,161 ) — Net loss — — — — — ( 11,435 ) ( 11,435 ) Balances, September 30, 2024 59,242 $ 59 — $ — $ 375,407 $ ( 232,301 ) $ 143,165 3 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity Shares Amount 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 loss — — — — — ( 6,134 ) ( 6,134 ) Balances, March 31, 2023 61,035 $ 61 — $ — $ 370,379 $ ( 159,737 ) $ 210,703 Common stock issued for share-based compensation 159 — — — — — — Common stock withheld for employee payroll taxes — — — — ( 105 ) — ( 105 ) Share-based compensation — — — — 816 — 816 Non-cash repurchase of liability awards — — — — 653 — 653 Liability redemption associated with business acquisition 35 — — — 120 — 120 Net loss — — — — — ( 5,699 ) ( 5,699 ) Balances, June 30, 2023 61,229 $ 61 — $ — $ 371,863 $ ( 165,436 ) $ 206,488 Common stock issued for share-based compensation 80 — — — — — — Common stock withheld for employee payroll taxes — — — — ( 12 ) — ( 12 ) Share-based compensation — — — — 938 — 938 Net loss — — — — — ( 7,349 ) ( 7,349 ) Balances, September 30, 2023 61,309 $ 61 — $ — $ 372,789 $ ( 172,785 ) $ 200,065 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 GROWGENERATION CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 26,168 ) $ ( 19,182 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 12,329 12,477 Share-based compensation 2,104 2,452 Estimated credit (recoveries) losses ( 210 ) 681 Loss on asset disposition 440 85 Change in value of marketable securities ( 1,041 ) ( 981 ) Impairment loss on operating lease right-of-use assets 220 — Changes in operating assets and liabilities: Accounts and notes receivable ( 2,026 ) 518 Inventory 16,827 2,691 Prepaid expenses and other assets 619 ( 510 ) Accounts payable and accrued liabilities ( 3,488 ) 6,352 Operating leases ( 61 ) 88 Payroll and payroll tax liabilities 185 ( 2,644 ) Customer deposits ( 2,728 ) 588 Sales tax payable 125 162 Net cash and cash equivalents (used in) provided by operating activities ( 2,873 ) 2,777 Cash flows from investing activities: Acquisitions, net of cash acquired — ( 3,050 ) Purchase of marketable securities ( 41,878 ) ( 85,768 ) Maturities of marketable securities 50,344 83,398 Purchase of property and equipment ( 1,880 ) ( 5,995 ) Proceeds from disposals of assets 131 235 Net cash and cash equivalents provided by (used in) investing activities 6,717 ( 11,180 ) Cash flows from financing activities: Principal payments on long term debt — ( 50 ) Common stock withheld for employee payroll taxes ( 129 ) ( 187 ) Common stock repurchased ( 6,036 ) — Net cash and cash equivalents used in financing activities ( 6,165 ) ( 237 ) Net decrease in cash and cash equivalents ( 2,321 ) ( 8,640 ) Cash and cash equivalents at the beginning of period 29,757 40,054 Cash and cash equivalents at the end of period $ 27,436 $ 31,414 Supplemental cash flow disclosures and non-cash investing and financing transactions: Cash paid for interest $ 70 $ 6 Cash paid for income taxes $ 44 $ 93 Right-of use assets obtained in exchange for new or modified operating lease liabilities $ 3,506 $ 4,173 Cancellation of common stock $ 6,036 $ — Purchase of property and equipment accrued in accounts payable $ 11 $ 355 Non-cash repurchase of liability awards $ — $ 653 Liability redemption associated with business acquisition $ — $ 120 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 5 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 September 30, 2024, GrowGeneration has 31 retail locations across 12 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 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 (Topic 280) - Improvements to Reportable Segment Disclosures ("ASU 2023-07"), which requires an enhanced disclosure of segments on an annual and interim basis, including the title of the chief operating decision maker, significant segment expenses, and the composition of other segment items for each segment's reported profit. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods 6 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) 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 and will adopt this guidance in the fourth quarter of 2024 to provide additional disclosures as required. 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, were $ 0.3 million and $ 1.0 million for the three and nine months ended September 30, 2024, respectively, and were $ 0.5 million and $ 1.0 million for the three and nine months ended September 30, 2023. Changes in fair value of marketable securities are included in Interest income on the Condensed Consolidated Statements of Operations. Level September 30, 2024 December 31, 2023 Cash equivalents 1 $ 17,583 $ 17,300 Marketable securities 2 $ 27,787 $ 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 15, Segments, for disaggregated revenue disclosures. 7 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 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, September 30, 2024 10,324 2,631 Increase (decrease) $ 1,429 $ ( 2,728 ) Opening balance, January 1, 2023 $ 8,336 $ 4,338 Closing balance, September 30, 2023 8,351 4,926 Increase $ 15 $ 588 Of the total amount of customer deposit liability as of January 1, 2024, $ 4.4 million was reported as revenue during the nine months ended September 30, 2024. Of the total amount of customer deposit liability as of January 1, 2023, $ 2.9 million was reported as revenue during the nine months ended September 30, 2023. Notes receivable at September 30, 2024 and December 31, 2023 were as follows: September 30, 2024 December 31, 2023 Notes receivable $ 1,106 $ 2,031 Allowance for credit losses — ( 1,732 ) Notes receivable, net $ 1,106 $ 299 The following table summarizes changes in notes receivable balances that have been deemed impaired. September 30, 2024 December 31, 2023 Notes receivable $ — $ 1,732 Allowance for credit losses — ( 1,732 ) Notes receivable, net $ — $ — During the nine months ended September 30, 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 13, Commitment and Contingencies, for additional information regarding the settlement. 8 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) 5. PROPERTY AND EQUIPMENT Property and equipment at September 30, 2024 and December 31, 2023 consisted of the following: September 30, 2024 December 31, 2023 Vehicles $ 2,524 $ 2,558 Building and land 2,121 2,121 Leasehold improvements 12,049 11,920 Furniture, fixtures and equipment 13,059 14,364 Capitalized software 16,250 16,085 Construction-in-progress 468 — Total property and equipment, gross 46,471 47,048 Accumulated depreciation and amortization ( 25,352 ) ( 19,996 ) Property and equipment, net $ 21,119 $ 27,052 Depreciation and amortization expense related to property and equipment was $ 3.3 million and $ 7.3 million for the three and nine months ended September 30, 2024, respectively. Depreciation and amortization expense related to property and equipment was $ 2.5 million and $ 5.8 million for the three and nine months ended September 30, 2023, respectively. In conjunction with the Company's restructuring activities as discussed in Note 16, Restructuring , the Company reassessed and shortened the estimated useful life of certain capitalized software assets, which resulted in a $ 1.5 million increase to depreciation and amortization expense related to property and equipment in the three and nine months ended September 30, 2024. Refer to Note 16, Restructuring , for additional information on the restructuring activities. 6. GOODWILL AND INTANGIBLE ASSETS The carrying value of goodwill by segment was as follows: Cultivation and Gardening Storage Solutions Total Balance as of December 31, 2023 $ 5,920 $ 1,605 $ 7,525 Balance as of September 30, 2024 $ 5,920 $ 1,605 $ 7,525 Accumulated impairment for goodwill was $ 125.9 million as of September 30, 2024 and December 31, 2023. The changes in intangible assets by segment for the nine months ended September 30, 2024 were as follows: Cultivation and Gardening Storage Solutions Total Balance as of December 31, 2023 $ 13,501 $ 2,679 $ 16,180 Amortization ( 4,442 ) ( 586 ) ( 5,028 ) Balance as of September 30, 2024 $ 9,059 $ 2,093 $ 11,152 9 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) Intangible assets on the Condensed Consolidated Balance Sheets consisted of the following: September 30, 2024 December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 28,198 $ ( 20,572 ) $ 7,626 $ 28,198 $ ( 16,488 ) $ 11,710 Patents, trademarks 69 ( 69 ) — 69 ( 69 ) — Customer relationships 13,192 ( 9,693 ) 3,499 13,192 ( 8,813 ) 4,379 Non-competes 864 ( 837 ) 27 864 ( 773 ) 91 Intellectual property 1,136 ( 1,136 ) — 1,136 ( 1,136 ) — Total $ 43,459 $ ( 32,307 ) $ 11,152 $ 43,459 $ ( 27,279 ) $ 16,180 Amortization expense was $ 1.7 million and $ 5.0 million for the three and nine months ended September 30, 2024, respectively. Amortization expense was $ 2.2 million and $ 6.9 million for the three and nine months ended September 30, 2023, respectively. Future amortization expense as of September 30, 2024 was as follows: 2024 (remainder of the year) $ 1,677 2025 6,339 2026 2,231 2027 799 2028 82 Thereafter 24 Total $ 11,152 7. INCOME TAXES For the nine months ended September 30, 2024, the effective tax rate was 0.2 %, compared to 0.4 % for the nine months ended September 30, 2023. The effective tax rate for each of the nine months ended September 30, 2024 and 2023 was 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, 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: September 30, 2024 December 31, 2023 Operating leases right-of-use assets $ 36,453 $ 39,933 Current maturities of operating lease liability $ 7,523 $ 8,021 Operating lease liability, net of current maturities 31,620 34,448 Total lease liability $ 39,143 $ 42,469 10 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) The weighted-average remaining lease terms and weighted-average discount rates for operating leases were as follows: September 30, 2024 2023 Weighted average remaining lease term 5.7 years 6.1 years Weighted average discount rate 6.2 % 6.0 % 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's subleases generally do not relieve it of its primary obligations under the corresponding head lease. As a result, the Company accounts for the head lease based on the original assessment at inception. Additionally, the Company determines if the sublease arrangement is either a sales-type, direct financing, or operating lease at inception. The Company's subleases are all operating leases related to the sublease of a closed retail location. The Company recognizes sublease income within Store operations and other operational expenses. If the total remaining lease cost on the head lease for the term of the sublease is greater than the anticipated sublease income, the right-of-use asset is assessed for impairment. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. In conjunction with the Company's restructuring activities as discussed in Note 16, Restructuring , the Company assessed and impaired the right-of-use assets of certain closed retail locations, which resulted in an impairment loss of $ 0.2 million in the three and nine months ended September 30, 2024. Refer to Note 16, Restructuring , for additional information on the restructuring activities. The components of lease costs were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Operating lease costs $ 2,441 $ 2,738 $ 7,535 $ 8,434 Variable lease costs 641 176 1,656 1,466 Short-term lease costs 102 98 295 241 Sublease income ( 276 ) ( 272 ) ( 827 ) ( 877 ) Total operating lease costs $ 2,908 $ 2,740 $ 8,659 $ 9,264 Future maturities of the Company's operating lease liabilities and receipts from subleases as of September 30, 2024 were as follows: Lease Payments Sublease Receipts 2024 (remainder of the year) $ 2,458 $ ( 204 ) 2025 9,525 ( 1,187 ) 2026 8,315 ( 1,222 ) 2027 6,491 ( 1,257 ) 2028 6,022 ( 1,294 ) Thereafter 13,595 ( 2,801 ) Total lease payments (receipts) 46,406 ( 7,965 ) Less: imputed interest ( 7,263 ) Operating lease liability as of September 30, 2024 $ 39,143 11 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) Supplemental and other information related to leases was as follows: Nine Months Ended September 30, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 7,574 $ 8,321 9. EARNINGS PER SHARE The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive loss per share computation for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss $ ( 11,435 ) $ ( 7,349 ) $ ( 26,168 ) $ ( 19,182 ) Weighted average shares outstanding, basic 59,268 61,272 60,479 61,127 Effect of dilutive outstanding restricted stock units, stock options, and warrants — — — — Adjusted weighted average shares outstanding, dilutive 59,268 61,272 60,479 61,127 Basic loss per share $ ( 0.19 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.31 ) Dilutive loss per share $ ( 0.19 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.31 ) Diluted loss per share calculations for the three and nine months ended September 30, 2024 excluded 0.7 million and 0.8 million of non-vested restricted stock units, respectively. In addition, for each of the three and nine months ended September 30, 2024, 0.5 million shares of common stock issuable upon exercise of stock options were excluded that would have been anti-dilutive. Diluted loss per share calculations for the three and nine months ended September 30, 2023 excluded 1.1 million and 1.0 million shares of non-vested restricted stock units, respectively. In addition, for each of the three and nine months ended September 30, 2023, 0.6 million shares of common stock issuable upon exercise of stock options, and 33 thousand shares of common stock issuable upon exercise of the stock purchase warrants were excluded that would have been anti-dilutive. 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 $ 0.7 million and $ 2.1 million in the three and nine months ended September 30, 2024, respectively, and $ 0.9 million and $ 2.5 million for the three and nine months ended September 30, 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. 12 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) Restricted stock unit activity for the nine months ended September 30, 2024 is presented in the following table: Units Weighted Average Grant Date Fair Value Nonvested as of December 31, 2023 904,834 $ 5.23 Granted 672,375 $ 2.29 Vested ( 329,417 ) $ 5.52 Forfeited ( 108,250 ) $ 4.05 Nonvested as of September 30, 2024 1,139,542 $ 3.53 As of September 30, 2024, the Company had approximately $ 2.7 million of unrecognized share-based compensation related to restricted stock units, which are expected to be recognized over a weighted average period of approximately 1.9 years. Stock Options Stock option activity for the nine months ended September 30, 2024 is presented in the following table: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Weighted Average Grant Date Fair Value Outstanding as of December 31, 2023 577,998 $ 4.01 0.95 $ 2.25 Granted — — — — Exercised — — — — Forfeited or expired ( 129,832 ) 3.65 — 2.20 Outstanding as of September 30, 2024 448,166 $ 4.11 0.25 $ 2.26 Vested and exercisable as of September 30, 2024 448,166 $ 4.11 0.25 $ 2.26 Liability Awards In August 2022, the Company issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480, Distinguishing Liabilities from Equity , and ASC 718, Compensation-Stock Compensation . These awards entitled the employees to receive an equity award with a specified dollar value of common stock on future dates ranging from June 15, 2023, through June 15, 2025. The awards generally vested over three years subject to the employee's continued employment. On June 15, 2023, the three employees subject to these awards entered into new employment agreements which superseded the prior agreements and removed the liability awards from their compensation package. In accordance with ASC 718-20-35-2A through 718-20-35-9, these awards were evaluated and accounted for as modified awards. In the nine months ended September 30, 2023, the liability of $ 0.7 million was relieved to additional paid-in capital and no awards were outstanding as of September 30, 2024 and December 31, 2023. 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. This share repurchase program was intended to enhance long-term shareholder value. The program did 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 was dependent upon factors such as the stock price, trading volumes, market conditions, and regulatory requirements. The stock repurchase program could be amended, suspended, or discontinued at any time by the Company. 13 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) During the three and nine months ended September 30, 2024, respectively, the Company repurchased 0.8 million and 2.5 million shares of common stock at an average price of $ 2.36 and $ 2.38 per share exclusive of incremental direct costs. As of September 30, 2024, the Company completed all purchases available under the stock repurchase program. The Company recognized the common stock repurchased as treasury stock at the amount paid to repurchase its shares, including the incremental direct costs to repurchase the common stock, as a reduction to stockholders' equity on the Condensed Consolidated Balance Sheets. The Company retired 1.7 million and 2.5 million shares of treasury stock under the share repurchase program in the three and nine months ended September 30, 2024, respectively. The shares were returned to the status of authorized but unissued shares. The retirement of treasury stock is recognized as a deduction from common stock for the shares' par value and any excess cost over par value is recognized as a deduction from retained earnings. Treasury stock is retired on a first in, first out basis. 12. ACQUISITIONS The Company's acquisition strategy has been primarily to acquire (i) well-established, profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence; and (ii) proprietary brands. Acquisitions during the nine months ended September 30, 2024 The Company had no acquisitions during the nine months ended September 30, 2024. Acquisitions during the nine months ended September 30, 2023 On May 23, 2023, the Company purchased substantially all of the assets of Southside Garden Supply ("SGS"), a two -store chain of indoor/outdoor garden centers in Alaska. The total consideration for the purchase of the SGS assets was approximately $ 2.0 million, including $ 1.9 million in cash and an indemnity holdback of $ 0.1 million. The SGS asset acquisition also included acquired goodwill of approximately $ 0.6 million, which represented the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. SGS was included in the Company's Cultivation and Gardening segment. Additionally, the Company made other, individually immaterial acquisitions during the nine months ended September 30, 2023. Total consideration for these purchases was approximately $ 1.2 million, including $ 1.1 million paid in cash and indemnity holdbacks of less than $ 0.1 million. These individually immaterial acquisitions also included aggregate acquired goodwill of approximately $ 0.3 million, which represented the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. These acquisitions were included in the Company's Cultivation and Gardening segment. The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2023. SGS Other Total Inventory $ 720 $ 867 $ 1,587 Prepaids and other current assets 292 1 293 Furniture and equipment — 47 47 Operating lease right-of-use asset 612 620 1,232 Operating lease liability ( 612 ) ( 620 ) ( 1,232 ) Customer relationships 440 — 440 Goodwill 577 253 830 Total $ 2,029 $ 1,168 $ 3,197 The table below represents the consideration paid for the net assets acquired in business combinations during 2023. SGS Other Total Cash $ 1,922 $ 1,128 $ 3,050 Indemnity holdback 107 40 147 Total $ 2,029 $ 1,168 $ 3,197 14 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) 13. 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 nine months ended September 30, 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 September 30, 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. 14. RELATED PARTIES The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner. The firm provides certain legal services. Amounts paid to that firm in total were $ 0.1 million and $ 0.2 million for the three and nine months ended September 30, 2024, respectively, and were immaterial for the three and nine months ended September 30, 2023. As of September 30, 2024 and December 31, 2023, there was an immaterial amount outstanding due to the firm. 15 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) 15. 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. 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 September 30, Nine Months Ended September 30, Net sales 2024 2023 2024 2023 Cultivation and Gardening Proprietary brand sales $ 9,856 $ 9,304 $ 29,513 $ 27,631 Non-proprietary brand sales 31,521 38,731 101,082 125,082 Total Cultivation and Gardening 41,377 48,035 130,595 152,713 Storage Solutions Commercial fixture sales 8,629 7,643 20,835 23,717 Total Storage Solutions 8,629 7,643 20,835 23,717 Total $ 50,006 $ 55,678 $ 151,430 $ 176,430 Three Months Ended September 30, Nine Months Ended September 30, Net sales 2024 2023 2024 2023 Cultivation and Gardening Consumables $ 30,338 $ 35,319 $ 94,196 $ 106,401 Durables 11,039 12,716 36,399 $ 46,312 Total Cultivation and Gardening 41,377 48,035 130,595 $ 152,713 Storage Solutions Durables 8,629 7,643 20,835 $ 23,717 Total Storage Solutions 8,629 7,643 20,835 $ 23,717 Total $ 50,006 $ 55,678 $ 151,430 $ 176,430 16 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) Selected information by segment is presented in the following tables: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net sales Cultivation and Gardening $ 41,377 $ 48,035 $ 130,595 $ 152,713 Storage Solutions 8,629 7,643 20,835 23,717 Total net sales 50,006 55,678 151,430 176,430 Gross profit Cultivation and Gardening 7,170 12,644 28,431 39,210 Storage Solutions 3,640 3,544 9,164 10,404 Total gross profit 10,810 16,188 37,595 49,614 Segment operating (loss) profit Cultivation and Gardening ( 1,548 ) 2,306 1,525 6,574 Storage Solutions 2,326 2,224 5,194 6,752 Total segment operating profit 778 4,530 6,719 13,326 Corporate expenses Selling, general, and administrative 7,405 7,582 22,417 21,923 Estimated credit losses (recoveries) 272 257 ( 210 ) 681 Depreciation and amortization 4,972 4,721 12,329 12,477 Impairment loss 220 — 220 — Loss from operations $ ( 12,091 ) $ ( 8,030 ) $ ( 28,037 ) $ ( 21,755 ) 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. 16. RESTRUCTURING On July 22, 2024, the Company announced a strategic restructuring plan focused on long-term profitability and advancing growth initiatives in key areas of its Gardening and Cultivation segment such as its proprietary brands, commercial sales, and e-commerce business. The restructuring plan primarily includes reductions in cost structure by closing and consolidating twelve redundant or underperforming retail locations, workforce reductions, and other operational improvements in inventory management, sales and marketing, and administrative activities. The Company's restructuring and restructuring related charges consists of inventory disposal costs, retail location closure costs including related contract termination costs and fixed asset disposals, employee termination benefits, asset impairments including the impairment of operating lease right-of-use assets, and other associated costs. 17 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (Unaudited) Since the restructuring activities were announced in July 2024, the Company incurred aggregate restructuring and restructuring-related costs of $ 2.1 million, presented on the Condensed Consolidated Statements of Operations in the three and nine months ended September 30, 2024 as follows: Restructuring Cultivation and Gardening segment: Cost of sales (1) $ 1,039 Gross profit ( 1,039 ) Store operations and other operational expenses (2) 658 Segment operating loss ( 1,697 ) Corporate expenses: Selling, general, and administrative (3) 88 Impairment loss (4) 220 Other expense (5) 50 Total restructuring and restructuring related charges $ ( 2,055 ) (1) Includes inventory disposal costs (2) Costs consist of retail location closure costs and employee termination benefits (3) Includes employee termination benefits and other associated costs (4) Consists of asset impairments for operating lease right-of-use assets (5) Includes non-operating losses related to retail location closures In conjunction with the Company's restructuring activities related to operational and administrative improvements, the Company reassessed and shortened the estimated useful life of certain capitalized software assets, which resulted in an $ 1.5 million increase to depreciation and amortization expense related to property and equipment in the three and nine months ended September 30, 2024. Additionally, certain facilities costs related to closed retail locations for which the Company is pursuing sublease arrangements will be paid over the remaining terms which extend through 2032. The liabilities associated with restructuring costs are included in Accrued liabilities and Payroll and payroll tax liabilities on the Condensed Consolidated Balance Sheets. Activities related to liabilities incurred under the restructuring plan are as follows: Retail Location Closures Termination Benefits Other Associated Costs Total Balance as of January 1, 2024 $ — $ — $ — $ — Additions 556 211 29 796 Payments and other adjustments ( 404 ) ( 73 ) ( 29 ) ( 506 ) Balance as of September 30, 2024 $ 152 $ 138 $ — $ 290 Overall, the Company expects to incur a total of approximately $ 2.4 million in restructuring and restructuring-related costs, including the $ 2.1 million previously incurred. The remainder of the expected charges primarily relate to corporate operational and administrative contract terminations and other associated costs. The Company expects that these restructuring activities will be substantially completed by the end of the first quarter of 2025. 18