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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For Quarter Ended: September 30, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
Commission File Number: 333-207889
GROWGENERATION CORP.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Colorado | | 46-5008129 |
(State of other jurisdiction of incorporation) | | (IRS Employer ID No.) |
5619 DTC Parkway, Suite 900
Greenwood Village, Colorado 80111
(Address of principal executive offices)
(800) 935-8420
(Issuer’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading symbol | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | GRWG | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2022 there were 60,929,095 shares of the registrant’s common stock issued and outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROWGENERATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares and per share amounts)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 71,060 | | | $ | 41,372 | |
Marketable securities | — | | | 39,793 | |
Accounts receivable, net of allowance for doubtful accounts of $1.1 million and $0.6 million at September 30, 2022 and December 31, 2021 | 10,147 | | | 5,741 | |
Notes receivable, current, net of allowance for doubtful accounts of $1.3 million and $0.5 million at September 30, 2022 and December 31, 2021 | 1,247 | | | 2,440 | |
Inventory | 89,080 | | | 105,571 | |
Prepaid income taxes | 6,339 | | | 5,856 | |
Prepaids and other current assets | 5,495 | | | 16,116 | |
Total current assets | 183,368 | | | 216,889 | |
| | | |
Property and equipment, net | 29,846 | | | 24,116 | |
Operating leases right-of-use assets | 44,510 | | | 43,730 | |
Intangible assets, net | 32,611 | | | 48,402 | |
Goodwill | 15,843 | | | 125,401 | |
Other assets | 886 | | | 800 | |
TOTAL ASSETS | $ | 307,064 | | | $ | 459,338 | |
| | | |
LIABILITIES & STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 16,133 | | | $ | 17,033 | |
Accrued liabilities | 1,984 | | | 2,044 | |
Payroll and payroll tax liabilities | 4,394 | | | 7,440 | |
Customer deposits | 5,390 | | | 11,686 | |
Sales tax payable | 1,601 | | | 1,923 | |
Current maturities of lease liability | 7,970 | | | 6,858 | |
Current portion of long-term debt | 89 | | | 92 | |
Total current liabilities | 37,561 | | | 47,076 | |
Commitments and contingencies (Note 14) | | | |
Deferred tax liability | 193 | | | 2,359 | |
Operating lease liability, net of current maturities | 38,588 | | | 38,546 | |
Long-term debt, net of current portion | — | | | 66 | |
Other long-term liabilities | 111 | | | — | |
Total liabilities | 76,453 | | | 88,047 | |
| | | |
Stockholders’ equity: | | | |
Common stock; $0.001 par value; 100,000,000 shares authorized, 60,859,674 and 59,928,564 shares issued and outstanding as of September 30, 2022 and December 31, 2021 | 61 | | | 60 | |
Additional paid-in capital | 369,164 | | | 361,087 | |
Retained earnings (deficit) | (138,614) | | | 10,144 | |
Total stockholders’ equity | 230,611 | | | 371,291 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 307,064 | | | $ | 459,338 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except shares and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Net sales | $ | 70,850 | | | $ | 116,003 | | | $ | 223,710 | | | $ | 331,910 | |
Cost of sales (exclusive of depreciation and amortization shown below) | 52,516 | | | 81,940 | | | 163,009 | | | 236,757 | |
Gross profit | 18,334 | | | 34,063 | | | 60,701 | | | 95,153 | |
| | | | | | | |
Operating expenses: | | | | | | | |
Store operations and other operational expenses | 13,585 | | | 14,842 | | | 41,884 | | | 35,648 | |
Selling, general, and administrative | 8,796 | | | 10,530 | | | 28,164 | | | 28,102 | |
Bad debt expense | 172 | | | 477 | | | 1,774 | | | 873 | |
Depreciation and amortization | 3,875 | | | 3,539 | | | 13,164 | | | 8,510 | |
Impairment loss | — | | | — | | | 127,831 | | | — | |
Total operating expenses | 26,428 | | | 29,388 | | | 212,817 | | | 73,133 | |
| | | | | | | |
Income (Loss) from operations | (8,094) | | | 4,675 | | | (152,116) | | | 22,020 | |
| | | | | | | |
Other income (expense): | | | | | | | |
Other income (expense) | 34 | | | 78 | | | 547 | | | 32 | |
Interest income | 143 | | | 395 | | | 190 | | | 435 | |
Interest expense | (3) | | | (25) | | | (16) | | | (31) | |
Total non-operating income (expense), net | 174 | | | 448 | | | 721 | | | 436 | |
| | | | | | | |
Net income (loss) before taxes | (7,920) | | | 5,123 | | | (151,395) | | | 22,456 | |
| | | | | | | |
Benefit (provision) for income taxes | 718 | | | (1,096) | | | 2,637 | | | (5,569) | |
| | | | | | | |
Net income (loss) | $ | (7,202) | | | $ | 4,027 | | | $ | (148,758) | | | $ | 16,887 | |
| | | | | | | |
Net income (loss) per share, basic | $ | (0.12) | | | $ | 0.07 | | | $ | (2.45) | | | $ | 0.29 | |
Net income (loss) per share, diluted | $ | (0.12) | | | $ | 0.07 | | | $ | (2.45) | | | $ | 0.28 | |
| | | | | | | |
Weighted average shares outstanding, basic | 60,855 | | | 58,531 | | | 60,771 | | | 58,994 | |
Weighted average shares outstanding, diluted | 60,855 | | | 59,490 | | | 60,771 | | | 60,108 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
(in thousands, except shares and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balances, June 30, 2022 | 60,782 | | | $ | 61 | | | $ | 368,077 | | | $ | (131,412) | | | $ | 236,726 | |
Common stock issued for share based compensation | 78 | | | — | | | — | | | — | | | — | |
Common stock withheld for employee payroll taxes | — | | | — | | | (17) | | | — | | | (17) | |
Share based compensation | — | | | — | | | 1,104 | | | — | | | 1,104 | |
Net income (loss) | — | | | — | | | — | | | (7,202) | | | (7,202) | |
Balances, September 30, 2022 | 60,860 | | | $ | 61 | | | $ | 369,164 | | | $ | (138,614) | | | $ | 230,611 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balances, June 30, 2021 | 59,562 | | | $ | 60 | | | $ | 353,575 | | | $ | 10,218 | | | $ | 363,853 | |
Common stock issued upon cashless warrant exercise | 5 | | | — | | | — | | | — | | | — | |
Common stock issued upon exercise of options | 8 | | | — | | | 22 | | | — | | | 22 | |
Common stock issued upon cashless exercise of options | 47 | | | — | | | — | | | — | | | — | |
Common stock issued in connection with business combinations | 87 | | | — | | | 3,063 | | | — | | | 3,063 | |
Common stock issued for share-based compensation | 61 | | | — | | | 220 | | | — | | | 220 | |
Share based compensation | — | | | — | | | 1,722 | | | — | | | 1,722 | |
Net income (loss) | — | | | — | | | — | | | 4,027 | | | 4,027 | |
Balances, September 30, 2021 | 59,770 | | | $ | 60 | | | $ | 358,602 | | | $ | 14,245 | | | $ | 372,907 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balances, December 31, 2021 | 59,929 | | | $ | 60 | | | $ | 361,087 | | | $ | 10,144 | | | $ | 371,291 | |
Common stock issued in connection with business combination | 650 | | | 1 | | | 5,749 | | | — | | | 5,750 | |
Common stock issued for share based compensation | 255 | | | — | | | — | | | — | | | — | |
Common stock withheld for employee payroll taxes | — | | | — | | | (1,465) | | | — | | | (1,465) | |
Share based compensation | — | | | — | | | 3,793 | | | — | | | 3,793 | |
Common stock issued upon cashless exercise of options | 12 | | | — | | | — | | | — | | | — | |
Common stock issued upon cashless exercise of warrants | 14 | | | — | | | — | | | — | | | — | |
Net income (loss) | — | | | — | | | — | | | (148,758) | | | (148,758) | |
Balances, September 30, 2022 | 60,860 | | | $ | 61 | | | $ | 369,164 | | | $ | (138,614) | | | $ | 230,611 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balances, December 31, 2020 | 57,152 | | | $ | 57 | | | $ | 319,582 | | | $ | (2,642) | | | $ | 316,997 | |
Common stock issued upon warrant exercise | 256 | | | — | | | 335 | | | — | | | 335 | |
Common stock issued upon cashless warrant exercise | 657 | | | 1 | | | (1) | | | — | | | — | |
Common stock issued upon exercise of options | 469 | | | 1 | | | 1,753 | | | — | | | 1,754 | |
Common stock issued upon cashless exercise of options | 325 | | | — | | | — | | | — | | | — | |
Common stock issued in connection with business combinations | 736 | | | 1 | | | 36,250 | | | — | | | 36,251 | |
Common stock issued for assets | 300 | | | — | | | — | | | — | | | — | |
Common stock issued for services | (90) | | | — | | | — | | | — | | | — | |
Common stock issued for share based compensation | (35) | | | — | | | (3,734) | | | — | | | (3,734) | |
Share based compensation | — | | | — | | | 4,417 | | | — | | | 4,417 | |
Net income (loss) | — | | | — | | | — | | | 16,887 | | | 16,887 | |
Balances, September 30, 2021 | 59,770 | | | $ | 60 | | | $ | 358,602 | | | $ | 14,245 | | | $ | 372,907 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except shares and per share amounts) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (148,758) | | | $ | 16,887 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 13,164 | | | 8,510 | |
Stock-based compensation expense | 3,980 | | | 5,347 | |
Bad debt expense, net of recoveries | 1,774 | | | 873 | |
Gain on asset disposition | 629 | | | — | |
Impairment loss | 127,831 | | | — | |
Deferred taxes | (2,166) | | | 1,601 | |
Changes in operating assets and liabilities (net of the effect of acquisitions): | | | |
Accounts and notes receivable | (4,987) | | | (8,397) | |
Inventory | 20,622 | | | (46,030) | |
Prepaid expenses and other assets | 10,718 | | | (18,960) | |
Accounts payable and accrued liabilities | (2,405) | | | 26,338 | |
Operating leases | 374 | | | 1,013 | |
Payroll and payroll tax liabilities | (3,046) | | | 4,050 | |
Customer deposits | (7,538) | | | 8,419 | |
Sales tax payable | (322) | | | 2,215 | |
Net cash provided by (used in) operating activities | 9,870 | | | 1,866 | |
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (6,806) | | | (71,813) | |
Purchase of marketable securities | — | | | (75,000) | |
Maturities from marketable securities | 39,793 | | | 45,039 | |
Purchase of property and equipment | (11,635) | | | (10,756) | |
Purchase of intangibles | — | | | (2,311) | |
Net cash provided by (used in) investing activities | 21,352 | | | (114,841) | |
Cash flows from financing activities: | | | |
Principal payments on long term debt | (69) | | | (38) | |
Common stock withheld for employee payroll taxes | (1,465) | | | (3,954) | |
Proceeds from the sale of common stock and exercise of warrants, net of expenses | — | | | 2,090 | |
Net cash provided by (used in) financing activities | (1,534) | | | (1,902) | |
Net change | 29,688 | | | (114,877) | |
Cash and cash equivalents at the beginning of period | 41,372 | | | 177,912 | |
Cash and cash equivalents at the end of period | $ | 71,060 | | | $ | 63,035 | |
| | | |
Supplemental disclosures of non-cash activities: | | | |
Cash paid for interest | $ | 16 | | | $ | 31 | |
Common stock issued for business combination | $ | 5,750 | | | $ | 36,250 | |
Right of use assets acquired under new operating leases | $ | 6,221 | | | $ | 26,115 | |
| | | |
Indemnity holdback from business acquisition | $ | 875 | | | 0 |
Cash paid for income taxes | $ | — | | | $ | 4,275 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GrowGeneration Corp.
Notes To Condensed Consolidated Financial Statements
September 30, 2022
(Unaudited)
1.GENERAL
GrowGeneration Corp. (the “Company”, “we”, or “our”) is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening. As of September 30, 2022, the Company owns and operates a chain of 61 retail hydroponic/gardening stores across 15 states, an online e-commerce platform, and proprietary brands and private label brands that we market grow through our platforms and other wholesale customers. The Company’s plan is to continue to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States.
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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There were no significant changes to our significant accounting policies as disclosed in our 2021 Form 10-K. The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.
All amounts included in the accompanying footnotes to the consolidated financial statements, except share and per share data, are in thousands (000).
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions 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.
Risk and Uncertainties
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility that may negatively affect our business operations and financial results. As a result, if the pandemic or its effects persist or worsen, our accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time). Although the COVID-19 pandemic to date has resulted in supply chain delays of our inventory, higher operating costs and increased shipping costs, among other impacts, we have experienced minimal business interruption as a result of the COVID-19 pandemic. As events surrounding the COVID-19 pandemic can change rapidly we cannot predict how it may disrupt our operations or the full extent of the disruption.
Immaterial out-of-period adjustments
During the nine months ended September 30, 2022, the Company recorded an immaterial out-of-period adjustment that impacted the prior year Consolidated Balance Sheets. The adjustment related to a change in the calculation of operating lease right-of-use assets and operating lease liabilities. This adjustment corrected an understatement of operating lease right-of-use assets of $1.3 million and an understatement of operating lease liabilities of $1.3 million as of December 31, 2021 during the period ended September 30, 2022. The Company assessed the materiality of this adjustment on the previously issued annual financial statements in accordance with SEC Staff Accounting Bulletin No. 99. The Company concluded that the changes were not material to any of the previously issued consolidated financial statements.
During the nine months ended September 30, 2022, the Company identified an omission regarding the disclosure of reportable segments under ASC 280 related to the year ended December 31, 2021. During the year ended December 31, 2021 the Company inappropriately reported a single segment, aggregating multiple operating segments. The impact at September 30, 2021 was that $41.0 million of revenue, $13.7 million of gross margin, and $3.1 million of operating income should have been reported as a separate “Distribution and other segment.” The Company assessed the materiality of this omission on the previously issued interim and annual consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 99. The Company concluded that the omission was not material to any of the previously issued consolidated financial statements and began reporting segments results in accordance with ASC 280 on a prospective basis starting with the quarter ended March 31, 2022.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
2.FAIR VALUE MEASUREMENTS
Fair Value Measurements
Fair value is defined as the exchange price that would be received for 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, available for sale securities, 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 and are reviewed for impairment at least annually. The fair value of impaired notes receivable is determined based on estimated future payments discounted back to present value using the notes' effective interest rate.
| | | | | | | | | | | | | | | | | |
| Level | | September 30, 2022 | | December 31, 2021 |
Marketable securities | 2 | | $ | — | | | $ | 39,793 | |
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
3.RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326),” changing the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The ASU will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities, net investments in leases, and off-balance sheet credit exposures. ASU No. 2016-13 was effective January 1, 2020. The Company is in the process of evaluating the impact of this standard.
Refer to Note 3 to the Consolidated Financial Statements reported in Form 10-K for the year ended December 31, 2021 for recently issued accounting pronouncements that are pending adoption.
4.REVENUE RECOGNITION
The following table disaggregates revenue by source:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
Sales at company owned stores | $ | 47,948 | | | $ | 100,799 | | $ | 167,598 | | | $ | 290,937 | |
Distribution and other | 19,829 | | | 4,696 | | 44,076 | | | 12,519 | |
E-commerce sales | 3,073 | | | 10,508 | | 12,036 | | | 28,454 | |
Total Net Sales | $ | 70,850 | | | $ | 116,003 | | $ | 223,710 | | | $ | 331,910 | |
The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:
| | | | | | | | | | | |
| Receivables | | Customer Deposit Liability |
Opening balance, January 1, 2022 | $ | 5,741 | | | $ | 11,686 | |
Closing balance, September 30, 2022 | 10,147 | | | 5,390 | |
Increase (decrease) | $ | 4,406 | | | $ | (6,296) | |
| | | |
Opening balance, January 1, 2021 | $ | 3,901 | | | $ | 5,155 | |
Closing balance, September 30, 2021 | 6,953 | | | 13,743 | |
Increase (decrease) | $ | 3,052 | | | $ | 8,588 | |
Of the total amount of customer deposit liability as of January 1, 2022, $11.1 million was reported as revenue during the nine months ended September 30, 2022. Of the total amount of customer deposit liability as of January 1, 2021, $3.7 million was reported as revenue during the nine months ended September 30, 2021.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
5.PROPERTY AND EQUIPMENT
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Vehicles | $ | 2,432 | | | $ | 2,258 | |
Building | 2,121 | | | 1,187 | |
Leasehold improvements | 11,502 | | | 9,186 | |
Furniture, fixtures and equipment | 12,909 | | | 10,992 | |
Capitalized software | 2,580 | | | 4,753 | |
Construction-in-progress | 10,665 | | | 2,948 | |
Total property and equipment, gross | 42,209 | | | 31,324 | |
Accumulated depreciation | (12,363) | | | (7,208) | |
Property and equipment, net | $ | 29,846 | | | $ | 24,116 | |
Depreciation expense for the three and nine months ended September 30, 2022 was $1.7 million and $5.4 million. Depreciation expense for the three and nine months ended September 30, 2021 was $0.9 million and $2.4 million.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
6. GOODWILL AND INTANGIBLE ASSETS
The Company performs its goodwill impairment testing annually during the fourth quarter, or more frequently if events or if circumstances were to occur that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill. The adjusted carrying amount of goodwill shall be its new accounting basis.
During the second quarter of 2022, the Company’s market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which is contrary to prior experience. Management reassessed business performance expectations, following persistent adverse developments in equity markets, deterioration in the environment in which we operate, inflation, lower than expected sales, and an increase in operating expenses. These indicators, in the aggregate, required impairment testing for finite-lived intangible assets at the asset group level and goodwill at the reporting unit level.
Under ASC 360, we performed a cash recoverability test on the following intangible assets: customer relationships, trade name, and non-compete. The carrying amounts of any assets that are not within the scope of ASC 360-10, other than goodwill, were adjusted for impairment, as necessary, prior to testing long-lived assets and goodwill. The Company recognized impairment losses as disclosed in the table below.
For goodwill impairment testing purposes, the Company determined four reporting units, three of which were subject to a quantitative assessment. We determined fair value using the income approach, where estimated future returns are discounted to present value at an appropriate rate of return. The Company completed its interim goodwill impairment test as of June 30, 2022 and recognized impairment losses as disclosed in the table below.
The changes in goodwill are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Balance, beginning of period | $ | 125,401 | | | $ | 62,951 | |
Goodwill additions and measurement period adjustments | 7,099 | | | 62,450 | |
Impairment | (116,657) | | | — | |
Balance, end of period | $ | 15,843 | | | $ | 125,401 | |
The goodwill balance and impairment by segment are as follows:
| | | | | | | | | | | | | | |
| Retail | E-commerce | Distribution | Total |
Gross carrying value December 31, 2020 | $ | 55,180 | | $ | 2,911 | | $ | 4,860 | | $ | 62,951 | |
Acquisitions & measurement period adjustments | 47,583 | | 8,748 | | 6,119 | | 62,450 | |
Gross carrying value December 31, 2021 | 102,763 | | 11,659 | | 10,979 | | 125,401 | |
Acquisitions & measurement period adjustments | 331 | | (341) | | 7,109 | | 7,099 | |
Gross carrying value, September 30, 2022 | $ | 103,094 | | $ | 11,318 | | $ | 18,088 | | $ | 132,500 | |
| | | | |
Accumulated impairment losses December 31, 2020 | $ | — | | $ | — | | $ | — | | $ | — | |
Impairment | — | | — | | — | | — | |
Accumulated impairment losses December 31, 2021 | — | | — | | — | | — | |
Impairment | (103,094) | | (9,848) | | (3,715) | | (116,657) | |
Accumulated impairment losses September 30, 2022 | $ | (103,094) | | $ | (9,848) | | $ | (3,715) | | $ | (116,657) | |
| | | | |
Net carrying value at December 31, 2021 | $ | 102,763 | | $ | 11,659 | | $ | 10,979 | | $ | 125,401 | |
Net carrying value at September 30, 2022 | $ | — | | $ | 1,470 | | $ | 14,373 | | $ | 15,843 | |
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
A summary of intangible assets is as follows:
| | | | | | | | |
| | Weighted-Average |
| | Amortization Period |
| | of Intangible Assets |
| | as of September 30, 2022 |
| | (in years) |
Trade names | | 3.43 |
Patents | | 3.34 |
Customer relationships | | 4.75 |
Non-competes | | 2.11 |
Intellectual property | | 3.42 |
Total | | 3.64 |
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Trade names | $ | 28,774 | | | $ | (9,254) | | | $ | 19,520 | |
Patents | 100 | | | (52) | | | 48 | |
Customer relationships | 17,102 | | | (5,909) | | | 11,193 | |
Non-competes | 932 | | | (493) | | | 439 | |
Intellectual property | 2,065 | | | (654) | | | 1,411 | |
Total | $ | 48,973 | | | $ | (16,362) | | | $ | 32,611 | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
Trade names | $ | 28,300 | | | $ | (4,948) | | | $ | 23,352 | | |
Patents | 100 | | | (42) | | | 58 | | |
Customer relationships | 25,175 | | | (3,055) | | | 22,120 | | |
Non-competes | 1,384 | | | (233) | | | 1,151 | | |
Intellectual property | 2,065 | | | (344) | | | 1,721 | | |
Total | $ | 57,024 | | | $ | (8,622) | | | $ | 48,402 | | |
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
Intangibles and impairment by segment are as follows:
| | | | | | | | | | | | | | |
| Retail | E-commerce | Distribution | Total |
Gross carrying value December 31, 2020 | 17,635 | | — | | 3,481 | | 21,116 | |
Acquisitions & measurement period adjustments | 20,190 | | 2,501 | | 13,217 | | 35,908 | |
Gross carrying value December 31, 2021 | 37,825 | | 2,501 | | 16,698 | | 57,024 | |
Acquisitions & measurement period adjustments | (58) | | — | | 3,181 | | 3,123 | |
Gross carrying value, September 30, 2022 | 37,767 | | 2,501 | | 19,879 | | 60,147 | |
| | | | |
Accumulated amortization December 31, 2020 | (540) | | — | | (27) | | (567) | |
Amortization | (5,745) | | (354) | | (1,956) | | (8,055) | |
Accumulated amortization December 31, 2021 | (6,285) | | (354) | | (1,983) | | (8,622) | |
Amortization | (4,720) | | (348) | | (2,672) | | (7,740) | |
Accumulated amortization September 30, 2022 | (11,005) | | (702) | | (4,655) | | (16,362) | |
| | | | |
Accumulated impairment losses December 31, 2020 | — | | — | | — | | — | |
Impairments | — | | — | | — | | — | |
Accumulated impairment losses December 31, 2021 | — | | — | | — | | — | |
Impairments | (11,079) | | (95) | | — | | (11,174) | |
Accumulated impairment losses September 30, 2022 | (11,079) | | (95) | | — | | (11,174) | |
| | | | |
Net carrying value at December 31, 2021 | 31,540 | | 2,147 | | 14,715 | | 48,402 | |
Net carrying value at September 30, 2022 | 15,683 | | 1,704 | | 15,224 | | 32,611 | |
Amortization expense for the three and nine months ended September 30, 2022 was $2.2 million and $7.7 million. Amortization expense for the three and nine months ended September 30, 2021 was $2.6 million and $6.1 million.
| | | | | |
Future amortization expense is as follows: | |
2022, remainder | $ | 2,196 | |
2023 | 8,785 | |
2024 | 8,668 | |
2025 | 8,295 | |
2026 | 3,532 | |
Thereafter | 1,135 | |
Total | $ | 32,611 | |
7. INCOME TAXES
For the three months ended September 30, 2022, the effective tax rate is 9.07% which decreased from 21.39% for the three months ended September 30, 2021. For the nine months ended September 30, 2022, the effective tax rate is 1.74%, which decreased from 24.80% at September 30, 2021. The decrease in the effective tax rate is primarily due to the Company recording a valuation allowance against deferred tax assets. The effective tax rate for the nine months ended September 30, 2022 is lower than the US federal statutory rate of 21.0%, which is also primarily due to the Company recording a valuation allowance against deferred tax assets. The Company has evaluated positive and negative evidence and has concluded that its deferred tax assets are not expected to be realizable and has recorded a valuation allowance in the current period.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
8. LEASES
We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1 to 10 years, most of which include options to extend the leases for additional 3 to 5-year periods. Generally, the lease term is the minimum of the non-cancellable period of the lease or the lease term inclusive of reasonably certain renewal periods.
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of remaining lease payments over the lease term. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term.
We have elected the practical expedient to account for lease and non-lease components as a single component for our entire population of leases.
Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less that do not include an option to purchase the underlying asset that we are reasonably certain to exercise are not recorded on the balance sheet.
Lease expense is recorded within our consolidated statements of operations based upon the nature of the assets. Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in “store operating costs.” Facilities and assets which serve management and support functions are expensed through general and administrative expenses.
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Right of use assets, operating lease assets | $ | 44,510 | | | $ | 43,730 | |
| | | |
Current lease liability | $ | 7,970 | | | $ | 6,858 | |
Non-current lease liability | 38,588 | | | 38,546 | |
Total lease liability | $ | 46,558 | | | $ | 45,404 | |
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Weighted average remaining lease term | 6.68 years | | 6.89 years |
Weighted average discount rate | 5.5 | % | | 6.5 | % |
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
Operating lease costs | $ | 2,615 | | | 2,139 | |
Variable lease costs | 664 | | | — | |
Short-term lease costs | 69 | | | 103 | |
Total operating lease costs | $ | 3,348 | | | $ | 2,242 | |
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Operating lease costs | $ | 8,060 | | | $ | 5,687 | |
Variable lease costs | 2,004 | | | — | |
Short-term lease costs | 306 | | | 1,212 | |
Total operating lease costs | $ | 10,370 | | | $ | 6,899 | |
The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2022:
| | | | | |
2022 (remainder of the year) | $ | 2,614 | |
2023 | 10,121 | |
2024 | 8,971 | |
2025 | 7,914 | |
2026 | 6,291 | |
Thereafter | 20,041 | |
Total lease payments | 55,952 | |
Less: Imputed interest | (9,394) | |
Lease Liability at September 30, 2022 | $ | 46,558 | |
9. SHARE BASED PAYMENTS
The Company maintains long-term incentive plans for employees, non-employee members of our Board of Directors and consultants. The plans allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, 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 payment awards made to employees and directors of the Company, including stock options and restricted shares. The Company also issues share-based payments in the form of common stock warrants to non-employees.
The following table presents share-based payment expense for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| 2022 | | 2021 | 2022 | | 2021 |
Restricted stock | $ | 951 | | | $ | 1,576 | | $ | 2,902 | | | $ | 3,511 | |
Stock options | — | | | 162 | | 59 | | | 721 | |
Warrants | 340 | | | 368 | | 1,019 | | | 1,115 | |
Total | $ | 1,291 | | | $ | 2,106 | | $ | 3,980 | | | $ | 5,347 | |
As of September 30, 2022, the Company had approximately $5.7 million of unamortized share-based compensation for option awards and restricted stock awards, which is expected to be recognized over a weighted average period of approximately 3.3 years. As of September 30, 2022, the Company also had approximately $1.5 million of unamortized share-based compensation for common stock warrants issued to consultants, which is expected to be recognized over a weighted average period of 1.3 years.
Restricted Stock
The Company issues shares of restricted stock to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest on the first, second, third, or fourth anniversary of the date of grant, subject to the employee’s continuing employment as of that date. Restricted stock is valued using market value on the grant date.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2022
Restricted stock activity for the nine months ended September 30, 2022 is presented in the following table:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Nonvested, December 31, 2021 | 483,750 | | | $ | 20.19 | |
Granted | 983,749 | | | $ | 9.21 | |
Vested | (294,566) | | | $ | 9.94 | |
Forfeited | (500,350) | | | $ | 20.05 | |
Nonvested, September 30, 2022 | 672,583 | | | $ | 6.07 | |
The table below summarizes all option activity under all plans during the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Options | | Shares | | Weighted - Average Exercise Price | | Weighted - Average Remaining Contractual Term | | Weighted - Average Grant Date Fair Value |
Outstanding at December 31, 2021 | | 906,425 | | | $ | 4.38 | | | 2.85 | | $ | 2.45 | |
Granted | | — | | | |