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Item 7. Management’s Discussion and Analysis

2025-03-13 compared with 2024-03-13 · 137 added, 93 removed, 133 unchanged (63% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the related notes and the other information included elsewhere in this report.

This discussion contains forward-looking statements that involve risks and uncertainties and are not guarantees of future performance.

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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.

our Cultivation and Gardening segment, composed of our hydroponic and organic gardening business;

and our Storage Solutions segment, composed of our benching, racking, and storage solutions business.

MARKETS AND BUSINESS SEGMENTS

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

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

We have two operating segments, each its own reportable segment, based on our major lines of business:

the Cultivation and Gardening segment and the Storage Solutions segment.

Comparative prior period disclosures in this Annual Report on Form 10-K have been recast to conform to the current segment presentation.

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

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

Additionally, through our brand HRG Distribution, we distribute many of our products, including our proprietary products, to customers that are wholesalers, resellers, and retailers in the specialty retail hydroponic and organic gardening industry.

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

Additionally, through our wholesale division, we distribute many of our proprietary products to customers that are wholesalers, resellers, and retailers in the specialty retail hydroponic and organic gardening industry.

We make our products available to growers through a variety of channels, including our hydroponic retail locations, a commercial sales division that provides white glove service to commercial cultivators, a wholesale division that markets to resellers in both the hydroponic and traditional gardening markets, and an online platform at growgeneration.com, which includes a B2B customer portal for commercial and wholesale customers.

Management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 31 retail locations across 12 states as of December 31, 2024.

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

Our products include high-density mobile

storage systems, static shelving, and other accessories such as desks, lockers, safes, and secured storage, offering a solution for every storage need.

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

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

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

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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.

Strategic Restructuring Plan

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

These restructuring plans have primarily included product development costs, digital transformation initiatives, reductions in cost structure by closing and consolidating 12 redundant or underperforming retail locations, in addition to the 7 retail locations closed in the first half of 2024, workforce reductions, and other operational improvements in inventory management, sales and marketing, and administrative activities.

Our 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.

Since the restructuring activities were announced in July 2024, we have incurred aggregate restructuring and restructuring-related costs of $2.4 million, presented on the Consolidated Statements of Operations in the year ended December 31, 2024 as follows (in thousands):

Restructuring

Cultivation and Gardening segment:

Cost of sales (1)

Gross profit (1,048)

Store operations and other operational expenses (2)

Segment operating loss (1,890)

Corporate expenses:

Selling, general, and administrative (3)

Impairment loss (4)

Other expense (5)

Total restructuring and restructuring related charges $ (2,365)

(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 addition to the effect on cost of sales shown above related to inventory disposal costs, we estimate we incurred a $0.9 million loss in gross profit due to inventory discounts offered in conjunction with exiting the 12 retail locations.

Also in conjunction with our restructuring activities to support operational and administrative improvements, we reassessed and shortened the estimated useful life of certain capitalized software assets, which resulted in an $5.3 million increase to depreciation and amortization expense related to property and equipment in the year ended December 31, 2024.

As of December 31, 2024, the outstanding restructuring liability was $0.1 million primarily pertaining to contract terminations costs related to retail location closures, which we expect to pay before the end of the first quarter of 2025.

However, certain facilities costs related to closed retail locations for which we are pursuing sublease arrangements will be paid over the remaining terms which extend through 2032 at the latest.

Overall, we expect to incur a total of $2.7 million in restructuring and restructuring-related costs, including the $2.4 million previously incurred.

The remainder of the expected charges primarily relate to corporate operational and administrative contract terminations and other associated costs.

We expect that these restructuring activities will be substantially completed by the end of the first quarter of 2025 and will improve gross profit margin and profitability while generating annualized cost savings of approximately $12.0 million.

Refer to Note 17, Restructuring, of the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K ("Consolidated Financial Statements") for additional information regarding restructuring activities.

GROWTH STRATEGIES

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

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

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

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

Today, management believes that the Company has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 50 retail locations across 18 states as of December 31, 2023.

During 2023, the Company acquired or opened 5 new locations and expanded its physical retail presence into 2 new states.

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 the year, the Company also reduced redundancies in cost structure by closing and consolidating 14 retail locations in 2023, where we were generally able to serve the same customer base through a single location.

To date in 2024, the Company further closed and consolidated 3 additional stores and may consider additional store consolidations in the future.

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

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

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

In addition, the Company regularly seeks and evaluates accretive acquisition opportunities with similar or complimentary businesses to those businesses it already operates.

For further detail on all acquisitions please see Note 12, Acquisitions, of the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K ("Consolidated Financial Statements").

Since our founding in 2014, we have acquired or opened numerous specialty hydroponic and organic gardening center locations.

Management believes that GrowGeneration has the largest chain of specialty retail hydroponic and organic garden centers in the U.S., with 31 retail locations across 12 states as of December 31, 2024.

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

We regularly seek and evaluates accretive acquisition opportunities with similar or complimentary businesses to those businesses it already operates.

Our main growth strategies for the Storage Solutions segment include expanding the types of customers and industries to which we sell our Storage Solutions products, including greater penetration in controlled environment agriculture, industrial and country club verticals.

For further detail on all acquisitions please see Note 13, Acquisitions, of the Consolidated Financial Statements.

COMPONENTS OF RESULTS OF OPERATIONS

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

Net sales reflect the amount of

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

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

These sales vary by the type of product:

consumables, such as nutrients, additives, growing media, and supplies that are subject to regular replenishment, and durables, such as lighting, environmental control systems, and storage solutions.

Generally, in new markets where legalization of plant-based medicines is recent and licensors are starting new grow operations, there is a higher volume of durable product purchases for facility build-outs compared to purchases of recurring consumable products.

In more mature markets, there are generally more purchases of consumables than durables.

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

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

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

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

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

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

Occupancy expenses of our retail locations and distribution centers, which consist of payroll, rent, and other lease required costs, including common

area maintenance and utilities, are included as a component of operating expenses within Store operations and other operational expenses in the Consolidated Statements of Operations.

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

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Operating expenses 95,694 50.7 % 111,102 49.2 % (15,408) (13.9) %

Income (loss) from operations (49,844) (22.1) % (167,875) (60.4) % 118,031 (70.3) %

Other income (expense) 3,380 1.5 % 1,243 0.4 % 2,137 171.9 %

Net income (loss) before taxes (46,464) (20.6) % (166,632) (59.9) % 120,168 (72.1) %

Benefit (provision) for income taxes (32) — % 2,885 1.0 % (2,917) (101.1) %

Net income (loss) $ (46,496) (20.6) % $ (163,747) (58.9) % $ 117,251 (71.6) %

Net sales for the year ended December 31, 2023 were approximately $225.9 million, a decrease of 18.8% as compared to net sales of approximately $278.2 million for the year ended December 31, 2022.

Loss from operations (51,972) (27.5) % (49,844) (22.1) % (2,128) 4.3 %

Other income 2,620 1.4 % 3,380 1.5 % (760) (22.5) %

Net loss before taxes (49,352) (26.1) % (46,464) (20.6) % (2,888) 6.2 %

Provision for income taxes (158) (0.1) % (32) — % (126) 393.8 %

Net loss $ (49,510) (26.2) % $ (46,496) (20.6) % $ (3,014) 6.5 %

Net sales for the year ended December 31, 2024 were $188.9 million, a decrease of $37.0 million, or 16.4% as compared to net sales of $225.9 million for the year ended December 31, 2023.

The decrease in net sales was primarily related to our Cultivation and Gardening segment, which had net sales of $163.5 million for the year ended December 31, 2024 and $194.5 million for the year ended December 31, 2023.

This decrease in net sales was primarily due to the closure of 14 retail locations during 2023 as well as a decrease of approximately $37.9 million, or 19.3%, in same store sales, which is primarily attributable to continued pressure on the cannabis industry generally.

The percentage of net sales related to consumable products for the year ended December 31, 2023 was approximately 61.7%, which was an increase from 57.9% for the year ended December 31, 2022.

The increase in consumable sales as a percentage of net sales was driven by increased brand adoption of proprietary growing media and nutrient products, and was also offset by a lower total revenue base.

Proprietary brand sales as a percentage of net sales increased to 16.1% for the year ended December 31, 2023 as compared to 13.3% for the year ended December 31, 2022, driven by our strategic initiatives to increase sales volume with our expanded portfolio of proprietary brands and products.

Overall sales of commercial fixtures within our Storage Solutions segment remained relatively flat year-over-year, declining slightly from $32.5 million for the year ended December 31, 2022 to $31.4 million for the year ended December 31, 2023.

This decrease in net sales was primarily due to the closure of 19 retail locations during 2024, which include the 12 redundant or underperforming retail locations consolidated in conjunction with the restructuring plan.

In addition to continued industry

pricing compression on distributed products, we estimate that inventory sales discounts related to exiting the 12 restructuring retail locations contributed to reduced net sales of $0.9 million in the year ended December 31, 2024.

Same-store sales increased approximately 0.9%, primarily attributable to commercial sales growth and customer retention in markets where there were retail location closures.

Proprietary brand sales as a percentage of Cultivation and Gardening net sales increased to 24.2% for the year ended December 31, 2024 as compared to 18.8% for the year ended December 31, 2023, largely driven by our strategic initiatives to increase sales volume with our expanded portfolio of proprietary brands and various product launches.

The percentage of Cultivation and Gardening net sales related to consumable products for the year ended December 31, 2024 was 72.2%, an increase from 71.7% for the year ended December 31, 2023, which was mainly driven by increased brand adoption of proprietary growing media and nutrient products.

Additionally, net sales of commercial fixtures within our Storage Solutions segment decreased to $25.4 million for the year ended December 31, 2024 compared to $31.4 million for the year ended December 31, 2023, primarily due to a similar volume of projects with a decrease in average project size.

Cost of Sales

Cost of sales for the year ended December 31, 2023 decreased approximately $43.3 million or 20.8% compared to the year ended December 31, 2022.

The decrease in cost of sales was primarily due to the 18.8% decrease in sales as previously discussed.

The decrease was also partially driven by the inventory discounts and reductions taken during the second half of the year ended December 31, 2022, which did not occur in the current year.

Gross profit was approximately $61.3 million for the year ended December 31, 2023 compared to approximately $70.3 million for the December 31, 2022, a decrease of approximately $9.0 million, or 12.8%.

The decrease in gross profit was primarily related to the Gardening and Cultivation segment, which decreased 19.4% for the year ended December 31, 2023 as compared to the year ended December 31, 2022, largely as a result of the decrease in sales volume due to store closures and continued pressure on the cannabis industry as discussed above.

The decrease was partially offset by a $2.4 million gross profit increase for the Storage Solutions segment for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Gross profit margin was 27.1% for the year ended December 31, 2023, an increase of 180 basis points from a gross profit margin of 25.3% for the year ended December 31, 2022.

The increase was primarily attributable to an 890 basis point gross profit margin improvement for the Storage Solutions segment as well as a 50 basis point gross profit margin improvement

for the Cultivation and Gardening segment, which was largely driven by the proportional increase of proprietary brand sales to non-proprietary brand sales and less inventory discounts and reductions in the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Cost of sales for the year ended December 31, 2024 was $145.1 million, a decrease of $19.5 million or 11.8%, compared to $164.6 million for the year ended December 31, 2023.

The corresponding reduction in cost of sales as compared to the 16.4% decrease in sales as previously discussed, was largely offset by the additional $1.0 million of inventory disposal costs incurred as part of the restructuring plan as well as costs related to the strategic rationalization of our product offerings, reduced inventory discounts from vendors, and other non-recurring costs associated with store consolidations in the year ended December 31, 2024 compared to the year ended December 31, 2023.

Gross profit was $43.7 million for the year ended December 31, 2024 compared to $61.3 million for the year ended December 31, 2023, a decrease of $17.5 million or 28.6%.

The decrease in gross profit was primarily related to the Cultivation and Gardening segment, which decreased $15.2 million or 32.1% for the year ended December 31, 2024 as compared to the year ended December 31, 2023, largely as a result of the decrease in sales volume due to store consolidations and the effects of the strategic restructuring plan, including the estimated $0.9 million in inventory sales discounts, the additional $1.0 million of inventory disposal costs, and the strategic rationalization of our product offerings in the year ended December 31, 2024.

Additionally, gross profit from our Storage Solutions segment decreased $2.3 million, or 16.6%, in the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily driven by the decrease in revenue.

Gross profit margin was 23.1% for the year ended December 31, 2024, a decrease of 400 basis points from a gross profit margin of 27.1% for the year ended December 31, 2023.

The decrease in gross profit margin was largely driven by the Cultivation and Gardening segment, which had a gross profit margin of 19.7% for the year ended December 31, 2024 as compared to 24.4%, due to the effects of the strategic restructuring plan, including the inventory disposal costs, sales discounts, and product offering rationalization, reduced inventory discounts from vendors, and continued industry pricing compression on distributed products.

The decrease was partially offset by an increase in the Storage Solutions segment gross profit margin to 45.6% in the year ended December 31, 2024 from 44.1% in the year ended December 31, 2023.

Operating Expenses

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

Operating expenses were approximately $111.1 million for the year ended December 31, 2023 and approximately $238.1 million for the year ended December 31, 2022, a decrease of approximately $127.0 million or 53.3%.

Approximately $112.2 million of the decrease in operating expenses related to impairment losses, which were $15.7 million for the year ended December 31, 2023 as compared to $127.8 million for the year ended December 31, 2022, and were predominately related to our goodwill and intangible assets.

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

Operating expenses were $95.7 million for the year ended December 31, 2024 and $111.1 million for the year ended December 31, 2023, a decrease of $15.4 million or 13.9%.

Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were $40.2 million for the year ended December 31, 2024 compared to $48.1 million for the year ended December 31, 2023, a decrease of $7.9 million or 16.4%.

The decrease in store operating costs was primarily due to the 19 retail locations closed during 2024, including the 12 redundant or underperforming retail locations consolidated in conjunction with the restructuring plan.

This decrease was partially offset by the additional $0.8 million of restructuring costs incurred in the year ended December 31, 2024 related to exiting those retail locations and the related employee termination benefits.

Total corporate overhead, which is comprised of selling, general, and administrative, estimated credit losses, and depreciation and amortization, was $48.6 million for the year ended December 31, 2024 as compared to $47.4 million for

the year ended December 31, 2023, an increase of $1.3 million or 2.7%.

The increase in corporate overhead was primarily due to the $2.8 million increase in depreciation and amortization expense, which was largely attributed to the $5.3 million increase related to the accelerated depreciation and amortization for certain capitalized software assets reassessed as part of our restructuring activities and was partially offset by a $2.1 million decrease in amortization expense related to intangible assets as a result of intangible asset impairments in the year ended December 31, 2023.

This increase was further offset by a $1.0 million decrease in estimated credit losses in the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to a $0.3 million settlement received in bankruptcy proceedings related to a note receivable in the year ended December 31, 2024 which had been reserved for in the prior year.

Additionally, selling, general, and administrative expenses decreased $0.6 million as a result of decreased professional fees and corporate expenses and decreased share-based compensation.

Impairment loss was $6.9 million in the year ended December 31, 2024, as compared to $15.7 million in the year ended December 31, 2023.

For each of the years ended December 31, 2024 and December 31, 2023, the impairment losses predominately related to our goodwill and intangible assets.

Refer to the discussion within Critical Accounting Policies and Estimates section as well as Note 6, Goodwill and Intangible Assets, of the Consolidated Financial Statements for additional information regarding our impairment losses.

Store operating costs and other operational expenses, which consisted primarily of payroll, rent and utilities, and allocated corporate overhead costs, were approximately $48.1 million for the year ended December 31, 2023 as compared to $54.7 million for the year ended December 31, 2022, a decrease of $6.6 million or 12.1%.

The decrease in store operating costs was primarily attributable to the closure of 14 retail locations during 2023.

Total corporate overhead, which is comprised of selling, general, and administrative, estimated credit losses, and depreciation and amortization, was approximately $47.4 million for the year ended December 31, 2023 as compared to $55.6 million for the year ended December 31, 2022, a decrease of $8.3 million or 14.9%.

The decrease in corporate overhead was primarily due to the $7.0 million year-over-year reduction in selling, general, and administrative costs, largely driven by a decrease in corporate payroll related expenses to $13.5 million for the year ended December 31, 2023 from $18.4 million for the year ended December 31, 2022.

Other reductions in selling, general, and administrative costs were attributable to our cost rationalization initiatives during 2023.

Other Income (Expense)

Other income (expense) for the year ended December 31, 2023 was approximately $3.4 million, an increase of $2.1 million, as compared to other income (expense) of approximately $1.2 million for the year ended December 31, 2022, primarily driven by the increased investment income from our marketable securities.

Net Income (Loss)

Net loss for the year ended December 31, 2023 was approximately $46.5 million, compared to approximately $163.7 million for the year ended December 31, 2022, an increase of approximately $117.3 million, primarily driven by the decrease of impairment losses by $112.2 million as discussed above.

Additionally, in conjunction with our strategic restructuring activities in 2024, we assessed the right-of-use assets of certain closed retail locations for impairment when we anticipated the total remaining lease cost for the term to be greater than the anticipated sublease income, which resulted in an impairment loss of $0.2 million in the year ended December 31, 2024

Other income for the year ended December 31, 2024 was $2.6 million, a decrease of $0.8 million as compared to other income of $3.4 million for the year ended December 31, 2023.

This decrease was primarily attributable to the $0.9 million gain recognized in the year ended December 31, 2023 related to a prior acquisition indemnity holdback.

Use of Non-GAAP Financial Information

The following non-GAAP financial measures of EBITDA and Adjusted EBITDA are not in accordance with, or an alternative for, generally accepted accounting principles ("GAAP") and should be considered in addition to, and not as a substitute for, the most directly comparable GAAP financial measures.

We believe these non-GAAP financial measures, when used in conjunction with their most directly comparable GAAP financial measures, net income (loss), provide meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods, identify trends affecting our business, and project future performance.

Management uses these non-GAAP financial measures for internal planning and reporting purposes, and we believe that these non-GAAP financial measures may be useful to investors in their assessment of our operating performance, our ability to generate cash, and valuation.

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

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

EBITDA and Adjusted EBITDA

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

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

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

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

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

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

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

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

Year ended December 31,

2024 2023 2022

Net income (loss) $ (46,496) $ (163,747) $ 12,786

Benefit (provision) for income taxes 32 (2,885) 2,443

Net loss $ (49,510) $ (46,496) $ (163,747)

Provision (benefit) for income taxes 158 32 (2,885)

Interest income (2,703) (2,696) (580)

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Impairment loss (1)

Restructuring and other charges (1)

6,875 15,659 127,831

Restructuring plan (2)

Consolidation and other charges (3)

3,160 5,376 568

Adjusted EBITDA $ (14,501) $ (5,554) $ (16,693)

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

(1) Impairment loss related to impairments of goodwill and intangible assets and the restructuring plan for operating lease right-of-use assets impairments

(2) Includes the $2.1 million incurred in the Consolidated Statements of Operations related to the restructuring plan as well as an estimated additional $0.9 million loss in gross profit due to inventory discounts offered in conjunction with the restructuring plan

(3) Consists primarily of expenditures related to the activity of store and distribution consolidation, one-time severances outside of the restructuring plan announced July 2024, and other non-core or non-recurring expenses

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2023, we had working capital of approximately $116.5 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $18.4 million.

The decrease in working capital from December 31, 2022 to December 31, 2023 was due primarily to a decrease in inventory and cash and cash equivalents, partially offset by a decrease in current liabilities.

As of December 31, 2024, we had working capital of $88.9 million, compared to working capital of $116.5 million as of December 31, 2023, a decrease of $27.6 million.

The decrease in working capital from December 31, 2023 to December 31, 2024 was due primarily to reductions in inventory and cash and cash equivalents used to repurchase common stock.

As of December 31, 2024, we had cash, cash equivalents, and marketable securities of $56.5 million.

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

Share Repurchase Program

On March 20, 2024, the Board of Directors of GrowGeneration authorized a share repurchase program, whereby we could repurchase up to $6.0 million worth of our 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 us 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 GrowGeneration.

Except for the our generally applicable insider trading policies, we do not maintain any policies or procedures relating to purchases and sales of our securities by our officers and directors during a repurchase program.

During the year ended December 31, 2024, we repurchased 2.5 million shares of common stock for $6.0 million, an average price of $2.38 per share.

As of December 31, 2024, we had completed all purchases available under the stock repurchase program.

We retired all 2.5 million shares of common stock repurchased under the program in the year ended December 31, 2024.

The following discussion sets forth the major sources and uses of cash for the year ended December 31, 2024 and December 31, 2023.

A discussion regarding the major sources and uses of cash for the year ended December 31, 2021 can

be found under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023.

A discussion regarding the major sources and uses of cash for the year ended December 31, 2022 can be found under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 13, 2024.

Operating Activities

Net cash and cash equivalents provided by operating activities for the year ended December 31, 2023 was approximately $1.4 million, compared to $11.9 million for the year ended December 31, 2022.

The changes in operating cash were primarily driven by our continued efforts to decrease inventory and an increase in customer deposits, partially offset by reductions to accounts payable, payroll, and payroll tax liabilities.

Net cash and cash equivalents used in operating activities for the year ended December 31, 2024 was $1.8 million, compared to net cash provided by operating activities of $1.4 million for the year ended December 31, 2023.

The changes in operating cash were primarily driven by the changes in gross profit and operating expenses, excluding non-cash changes such as depreciation and amortization and impairment loss, as previously discussed in the Results of Operations section as well as changes in working capital, primarily inventory.

Investing Activities

Net cash and cash equivalents used in investing activities was approximately $11.4 million for the year ended December 31, 2023 compared to approximately $11.6 million for the year ended December 31, 2022.

Investing activities for the year ended December 31, 2023 were primarily attributable to investment of excess cash into marketable securities of $98.7 million, partially offset by maturity of marketable securities of $96.8 million.

We also had purchases of property and equipment of $6.7 million, which was primarily related to the implementation and design of a new enterprise resource planning software system, and business acquisitions of $3.1 million.

Investing activities for the year ended December 31, 2022 were primarily related to maturities of marketable securities of $46.6 million, partially offset by investment of excess cash into marketable securities of $38.7 million, acquisitions of $7.2 million, and the purchase of property and equipment primarily related to the design of a new enterprise resource planning software system of $12.9 million.

Net cash and cash equivalents provided by investing activities was $5.7 million for the year ended December 31, 2024 compared to net cash used in investing activities of $11.4 million for the year ended December 31, 2023.

Investing activities for the year ended December 31, 2024 were primarily related to investment of excess cash into marketable securities of $52.6 million, offset by maturity of marketable securities of $60.2 million.

We also had purchases of property and equipment of $2.0 million.

Investing activities for the year ended December 31, 2023 were primarily related to investment of excess cash into marketable securities of $98.7 million, acquisitions of $3.1 million, and the purchase of property and equipment primarily related to the design of a new enterprise resource planning software system of $6.7 million, partially offset by maturities of marketable securities of $96.8 million.

Financing Activities

Net cash and cash equivalents used in financing activities for the year ended December 31, 2023 and December 31, 2022 was approximately $0.3 million and $1.7 million, respectively, and was primarily attributable to common stock withheld to cover employee payroll taxes.

Net cash and cash equivalents used in financing activities for the year ended December 31, 2024 was $6.2 million, primarily attributable to common stock repurchased under our share repurchase program.

Net cash and cash equivalents used in financing activities for the year ended December 31, 2023 was $0.3 million, related primarily to common stock withheld for employee payroll taxes.

Critical Accounting Policies and Estimates

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Goodwill is not amortized but instead is tested for impairment at the reporting unit level at least annually, or more frequently if indicators of impairment exist.

We perform our goodwill impairment assessment for each of our four reporting units that have goodwill.

Effective the fourth quarter of 2023 and prospectively, we performed our required annual goodwill impairment test as of December 1 rather than on December 31, which was the previous practice.

Effective the fourth quarter of 2023 and prospectively, we perform our goodwill impairment assessment for each of our four reporting units that have goodwill on December 1 of each fiscal year, rather than on December 31 which was our previous practice.

We assess goodwill using either a qualitative or quantitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

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Otherwise, no further assessment is required.

Additionally, an

election can be made to bypass the qualitative assessment and proceed directly to performing a quantitative goodwill impairment assessment for a reporting unit.

Additionally, an election can be made to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing a quantitative goodwill impairment assessment for a reporting unit.

The quantitative approach compares the estimated fair value of the reporting unit, including goodwill, to its carrying amount.

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The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value.

For the goodwill impairment test performed on December 1, 2023, we completed a quantitative goodwill impairment assessment for each reporting unit.

As a result of changes to the business and future projections, we identified a $9.3 million impairment related to goodwill.

Additionally, for the year ended December 31, 2022, we recorded a goodwill impairment loss of $116.7 million.

For the goodwill impairment test performed on December 1, 2024, we elected different approaches based on the circumstances surrounding each reporting unit.

Of our four reporting units, only three had remaining goodwill balances.

We elected to qualitatively review one reporting unit for events and circumstances which would indicate whether it was more than likely than not reporting unit fair values were below carrying values.

The qualitative assessment did not identify any indicators of impairment, and accordingly, no further impairment assessments were necessary.

For the remaining two reporting units, we elected to bypass the qualitative assessment and proceed directly to a quantitative assessment.

The estimated fair value of each reporting unit was compared to each respective carrying amount, and, as a result of changes to the business and future projections, we recorded a goodwill impairment loss of $5.9 million.

For the year ended December 31, 2023, we completed a quantitative goodwill impairment assessment for each reporting unit.

As a result of changes to the business and future projections, we recorded a goodwill impairment loss of $9.3 million.

Refer to Note 6, Goodwill and Intangible Assets, of the Consolidated Financial Statements.

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To the extent that profitability declines as compared to forecasted profitability or if adverse changes occur to key assumptions or other fair value measurement inputs, further impairment of long-lived assets could occur in the future.

During the fourth quarter of 2023, we quantitatively evaluated the recoverability of our long-lived assets, including our finite-lived intangible assets, for impairment in conjunction with our annual goodwill impairment assessment.

As a result, we identified a $6.2 million impairment related to our finite-lived intangible assets.

Additionally, we identified a $0.1 million impairment related to our operating lease right-of-use assets for the year ended December 31, 2023.

For the year ended December 31, 2022, we recorded an impairment loss of $11.2 million related to our finite-lived intangible assets.

Refer to Note 6, Goodwill and Intangible Assets, of the Consolidated Financial Statements.

For the years ended December 31, 2024 and 2023, we quantitatively evaluated the recoverability of our long-lived assets for impairment in conjunction with our annual goodwill impairment assessment.

As a result, we identified a $0.7 million and $6.2 million impairment loss related to our finite-lived intangible assets in 2024 and 2023, respectively.

For the year ended December 31, 2024, we also identified a $0.2 million impairment loss related to operating lease right-of-use assets of certain closed retail locations in conjunction with our strategic restructuring plan.

Additionally, for the year ended December 31, 2023 we identified a $0.1 million impairment loss related to our operating lease right-of-use assets.

RECENTLY ACCOUNTING PRONOUNCEMENTS

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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-K

Item 7. Management’s Discussion and Analysis