grwg-20220930

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


☐			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


		Page No.

	PART I FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Stockholders' Equity	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
	Signatures	38

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	—