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: June 30, 2021March 31, 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 CORPORATIONCORP.
(Exact name of small business issuer 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 August 12, 2021May 16, 2022 there were 59,607,23460,744,195 shares of the registrant’s common stock issued and outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROWGENERATION CORPORATION AND SUBSIDIARIESCORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)thousands, except shares and per share amounts)
| | | June 30, 2021 | | December 31, 2020 | | | | | | | | | | |
| | (Unaudited) | | | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 67,155 | | | $ | 177,912 | | Cash and cash equivalents | $ | 47,273 | | | $ | 41,372 | |
Marketable securities | Marketable securities | 57,357 | | | 0 | | Marketable securities | 19,035 | | | 39,793 | |
Accounts receivable, net | 4,377 | | | 3,901 | | |
Notes receivable, current | 4,535 | | | 2,612 | | |
Inventory, net | 95,937 | | | 54,024 | | |
Income taxes receivable | 0 | | | 655 | | |
Accounts receivable, net of allowance for doubtful accounts of $0.6 million and $0.6 million at March 31, 2022 and December 31, 2021 | | Accounts receivable, net of allowance for doubtful accounts of $0.6 million and $0.6 million at March 31, 2022 and December 31, 2021 | 7,386 | | | 5,741 | |
Notes receivable, current, net of allowance for doubtful accounts of $0.9 million and $0.5 million at March 31, 2022 and December 31, 2021 | | Notes receivable, current, net of allowance for doubtful accounts of $0.9 million and $0.5 million at March 31, 2022 and December 31, 2021 | 1,967 | | | 2,440 | |
Inventory | | Inventory | 105,941 | | | 105,571 | |
Prepaid income taxes | | Prepaid income taxes | 5,856 | | | 5,856 | |
Prepaids and other current assets | Prepaids and other current assets | 26,286 | | | 11,125 | | Prepaids and other current assets | 7,035 | | | 16,116 | |
Total current assets | Total current assets | 255,647 | | | 250,229 | | Total current assets | 194,493 | | | 216,889 | |
| Property and equipment, net | Property and equipment, net | 10,455 | | | 6,475 | | Property and equipment, net | 26,928 | | | 24,116 | |
Operating leases right-of-use assets, net | 31,661 | | | 12,088 | | |
Notes receivables, net of current portion | 1,371 | | | 1,200 | | |
Operating leases right-of-use assets | | Operating leases right-of-use assets | 45,839 | | | 43,730 | |
Intangible assets, net | Intangible assets, net | 44,279 | | | 21,490 | | Intangible assets, net | 48,786 | | | 48,402 | |
Goodwill | Goodwill | 108,740 | | | 62,951 | | Goodwill | 132,500 | | | 125,401 | |
Other assets | Other assets | 694 | | | 301 | | Other assets | 807 | | | 800 | |
TOTAL ASSETS | TOTAL ASSETS | $ | 452,847 | | | $ | 354,734 | | TOTAL ASSETS | $ | 449,353 | | | $ | 459,338 | |
| LIABILITIES & STOCKHOLDERS’ EQUITY | LIABILITIES & STOCKHOLDERS’ EQUITY | | LIABILITIES & STOCKHOLDERS’ EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 36,481 | | | $ | 14,623 | | Accounts payable | $ | 14,221 | | | $ | 17,033 | |
Accrued liabilities | Accrued liabilities | 2,639 | | | 672 | | Accrued liabilities | 1,143 | | | 2,044 | |
Payroll and payroll tax liabilities | Payroll and payroll tax liabilities | 4,412 | | | 2,655 | | Payroll and payroll tax liabilities | 4,302 | | | 7,440 | |
Customer deposits | Customer deposits | 6,793 | | | 5,155 | | Customer deposits | 7,190 | | | 11,686 | |
Sales tax payable | Sales tax payable | 2,046 | | | 1,161 | | Sales tax payable | 1,928 | | | 1,923 | |
Income taxes payable | 1,846 | | | 0 | | |
Current maturities of lease liability | Current maturities of lease liability | 5,464 | | | 3,001 | | Current maturities of lease liability | 7,740 | | | 6,858 | |
Current portion of long-term debt | Current portion of long-term debt | 83 | | | 83 | | Current portion of long-term debt | 94 | | | 92 | |
Total current liabilities | Total current liabilities | 59,764 | | | 27,350 | | Total current liabilities | 36,618 | | | 47,076 | |
| Commitments and ontingencies (Note 15) | | Commitments and ontingencies (Note 15) | 0 | | 0 |
Deferred tax liability | Deferred tax liability | 1,697 | | | 750 | | Deferred tax liability | 723 | | | 2,359 | |
Operating lease liability, net of current maturities | Operating lease liability, net of current maturities | 27,427 | | | 9,479 | | Operating lease liability, net of current maturities | 39,879 | | | 38,546 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | 106 | | | 158 | | Long-term debt, net of current portion | 41 | | | 66 | |
Total liabilities | Total liabilities | 88,994 | | | 37,737 | | Total liabilities | 77,261 | | | 88,047 | |
| Stockholders’ Equity: | | |
Common stock | 60 | | | 57 | | |
Stockholders’ equity: | | Stockholders’ equity: | |
Common stock; $0.001 par value; 100,000,000 shares authorized, 60,727,888 and 59,928,564 shares issued and outstanding as of March 31, 2022 and December 31, 2021 | | Common stock; $0.001 par value; 100,000,000 shares authorized, 60,727,888 and 59,928,564 shares issued and outstanding as of March 31, 2022 and December 31, 2021 | 61 | | | 60 | |
Additional paid-in capital | Additional paid-in capital | 353,575 | | | 319,582 | | Additional paid-in capital | 367,064 | | | 361,087 | |
Retained earnings (deficit) | 10,218 | | | (2,642) | | |
Retained earnings | | Retained earnings | 4,967 | | | 10,144 | |
Total stockholders’ equity | Total stockholders’ equity | 363,853 | | | 316,997 | | Total stockholders’ equity | 372,092 | | | 371,291 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 452,847 | | | $ | 354,734 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 449,353 | | | $ | 459,338 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GROWGENERATION CORPORATION AND SUBSIDIARIESCORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
| | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 |
| Sales | $ | 125,885 | | | $ | 43,451 | | | $ | 215,907 | | | $ | 76,433 | | |
Net sales | | Net sales | $ | 81,767 | | | $ | 90,022 | |
Cost of sales | Cost of sales | 90,172 | | | 31,866 | | | 154,817 | | | 55,902 | | Cost of sales | 59,627 | | | 64,645 | |
Gross profit | Gross profit | 35,713 | | | 11,585 | | | 61,090 | | | 20,531 | | Gross profit | 22,140 | | | 25,377 | |
| Operating expenses: | Operating expenses: | | Operating expenses: | |
Store operations | 12,624 | | | 3,877 | | | 20,806 | | | 7,516 | | |
Store operations and other operational expenses | | Store operations and other operational expenses | 14,532 | | | 8,182 | |
Selling, general, and administrative | Selling, general, and administrative | 10,563 | | | 4,431 | | | 17,968 | | | 11,496 | | Selling, general, and administrative | 10,323 | | | 7,405 | |
Depreciation and amortization | Depreciation and amortization | 2,917 | | | 468 | | | 4,971 | | | 827 | | Depreciation and amortization | 4,506 | | | 2,054 | |
Total operating expenses | Total operating expenses | 26,104 | | | 8,776 | | | 43,745 | | | 19,839 | | Total operating expenses | 29,361 | | | 17,641 | |
| Income from operations | 9,609 | | | 2,809 | | | 17,345 | | | 692 | | |
Income (Loss) from operations | | Income (Loss) from operations | (7,221) | | | 7,736 | |
| Other income (expense): | Other income (expense): | | Other income (expense): | |
Other expense | (8) | | | (66) | | | (46) | | | (61) | | |
Other income (expense) | | Other income (expense) | 409 | | | (38) | |
Interest income | Interest income | 36 | | | 0 | | | 40 | | | 25 | | Interest income | 2 | | | 4 | |
Interest expense | Interest expense | (4) | | | (13) | | | (6) | | | (20) | | Interest expense | (3) | | | (2) | |
Total non-operating income (expense), net | Total non-operating income (expense), net | 24 | | | (79) | | | (12) | | | (56) | | Total non-operating income (expense), net | 408 | | | (36) | |
| Net income before taxes | 9,633 | | | 2,730 | | | 17,333 | | | 636 | | |
Net income (loss) before taxes | | Net income (loss) before taxes | (6,813) | | | 7,700 | |
| Provision for income taxes | (2,920) | | | (156) | | | (4,473) | | | (156) | | |
Benefit (provision) for income taxes | | Benefit (provision) for income taxes | 1,636 | | | (1,553) | |
| Net income | $ | 6,713 | | | $ | 2,574 | | | $ | 12,860 | | | $ | 480 | | |
Net income (loss) | | Net income (loss) | $ | (5,177) | | | $ | 6,147 | |
| Net income per share, basic | $ | 0.11 | | | $ | 0.07 | | | $ | 0.22 | | | $ | 0.01 | | |
Net income per share, diluted | $ | 0.11 | | | $ | 0.06 | | | $ | 0.22 | | | $ | 0.01 | | |
Net income (loss) per share, basic | | Net income (loss) per share, basic | $ | (0.09) | | | $ | 0.11 | |
Net income (loss) per share, diluted | | Net income (loss) per share, diluted | $ | (0.09) | | | $ | 0.10 | |
| Weighted average shares outstanding, basic | Weighted average shares outstanding, basic | 59,061 | | | 38,617 | | | 58,588 | | | 38,224 | | Weighted average shares outstanding, basic | 60,126 | | | 58,394 | |
Weighted average shares outstanding, diluted | Weighted average shares outstanding, diluted | 60,223 | | | 41,016 | | | 59,794 | | | 40,241 | | Weighted average shares outstanding, diluted | 60,126 | | | 60,317 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GROWGENERATION CORPORATIONCORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2022 AND 2021 AND 2020
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balances, December 31, 2020 | 57,151 | | | $ | 57 | | | $ | 319,582 | | | $ | (2,642) | | | $ | 316,997 | |
Common stock issued upon warrant exercise | 40 | | | — | | | 111 | | | — | | | 111 | |
Common stock issued upon cashless warrant exercise | 535 | | | 1 | | | (1) | | | — | | | 0 | |
Common stock issued upon exercise of options | 1 | | | — | | | 2 | | | — | | | 2 | |
Common stock issued upon cashless exercise of options | 5 | | | — | | | — | | | — | | | 0 | |
Common stock issued in connection with business combinations | 548 | | | — | | | 29,249 | | | — | | | 29,249 | |
Common stock issued for share based compensation | 300 | | | — | | | — | | | — | | | 0 | |
Common stock redeemed in litigation settlement | (90) | | | — | | | — | | | — | | | 0 | |
Common stock redemption | (96) | | | — | | | (3,954) | | | — | | | (3,954) | |
Share based compensation | — | | | — | | | 1,187 | | | 0 | | | 1,187 | |
Net income | — | | | — | | | — | | | 6,147 | | | 6,147 | |
Balances, March 31, 2021 | 58,394 | | | $ | 58 | | | $ | 346,176 | | | $ | 3,505 | | | $ | 349,739 | |
Common stock issued upon warrant exercise | 216 | | | — | | | 224 | | | — | | | 224 | |
Common stock issued upon cashless warrant exercise | 119 | | | — | | | — | | | — | | | 0 | |
Common stock issued upon exercise of options | 460 | | | 1 | | | 1,729 | | | — | | | 1,730 | |
Common stock issued upon cashless exercise of options | 272 | | | — | | | — | | | — | | | 0 | |
Common stock issued in connection with business combinations | 101 | | | 1 | | | 3,938 | | | — | | | 3,939 | |
Share based compensation | — | | | — | | | 1,508 | | | — | | | 1,508 | |
Net income | — | | | — | | | — | | | 6,713 | | | 6,713 | |
Balances, June 30, 2021 | 59,562 | | | $ | 60 | | | $ | 353,575 | | | $ | 10,218 | | | $ | 363,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 149 | | | — | | | — | | | | | — | |
Common stock withheld for employee payroll taxes | | | | | (1,355) | | | | | (1,355) | |
Share based compensation | | | | | 1,583 | | | | | 1,583 | |
Net income (loss) | | | | | | | (5,177) | | | (5,177) | |
Balances, March 31, 2022 | 60,728 | | | $ | 61 | | | $ | 367,064 | | | $ | 4,967 | | | $ | 372,092 | |
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Total Stockholders’ Equity |
| | Shares | | Amount | | | Shares | | Amount | |
Balances, December 31, 2019 | 36,876 | | | $ | 37 | | | $ | 60,742 | | | $ | (7,970) | | | $ | 52,809 | | |
Balances, December 31, 2020 | | Balances, December 31, 2020 | 57,151 | | | $ | 57 | | | $ | 319,582 | | | $ | (2,642) | | | $ | 316,997 | |
Common stock issued upon warrant exercise | Common stock issued upon warrant exercise | 191 | | | — | | | 510 | | | — | | | 510 | | Common stock issued upon warrant exercise | 40 | | | — | | | 111 | | | — | | | 111 | |
Common stock issued upon cashless warrant exercise | Common stock issued upon cashless warrant exercise | 19 | | | — | | | — | | | — | | | 0 | | Common stock issued upon cashless warrant exercise | 535 | | | 1 | | | (1) | | | — | | | — | |
Common stock issued upon exercise of options | | Common stock issued upon exercise of options | 1 | | | — | | | 2 | | | — | | | 2 | |
Common stock issued upon cashless exercise of options | Common stock issued upon cashless exercise of options | 280 | | | — | | | — | | | — | | | 0 | | Common stock issued upon cashless exercise of options | 5 | | | — | | | — | | | — | | | — | |
Common stock issued in connection with business combinations | Common stock issued in connection with business combinations | 250 | | | — | | | 1,102 | | | — | | | 1,102 | | Common stock issued in connection with business combinations | 548 | | | — | | | 29,249 | | | — | | | 29,249 | |
Common stock issued for assets | Common stock issued for assets | 24 | | | — | | | 101 | | | — | | | 101 | | Common stock issued for assets | 300 | | | — | | | — | | | — | | | — | |
Common stock issued for services | Common stock issued for services | 50 | | | — | | | — | | | — | | | 0 | | Common stock issued for services | (90) | | | — | | | — | | | — | | | — | |
Common stock issued for share based compensation | Common stock issued for share based compensation | 519 | | | 1 | | | 1,760 | | | — | | | 1,761 | | Common stock issued for share based compensation | (96) | | | — | | | (3,954) | | | — | | | (3,954) | |
Share based compensation | Share based compensation | — | | | — | | | 2,209 | | | — | | | 2,209 | | Share based compensation | — | | | — | | | 1,187 | | | — | | | 1,187 | |
Net loss | — | | | — | | | — | | | (2,094) | | | (2,094) | | |
Balances, March 31, 2020 | 38,209 | | | $ | 38 | | | $ | 66,424 | | | $ | (10,064) | | | $ | 56,398 | | |
Common stock issued upon warrant exercise | 81 | | | — | | | 282 | | | — | | | 282 | | |
Common stock issued upon cashless warrant exercise | 78 | | | — | | | — | | | — | | | 0 | | |
Common stock issued upon cashless exercise of options | 30 | | | — | | | — | | | — | | | 0 | | |
Common stock issued in connection with business combinations | 108 | | | — | | | 705 | | | — | | | 705 | | |
Common stock issued for assets | 10 | | | — | | | 67 | | | — | | | 67 | | |
Common stock issued for services | 325 | | | — | | | 717 | | | — | | | 717 | | |
Common stock issued for share based compensation | 5 | | | — | | | 25 | | | — | | | 25 | | |
Share based compensation | — | | | — | | | 1,162 | | | — | | | 1,162 | | |
Net income | — | | | — | | | — | | | 2,574 | | | 2,574 | | |
Balances, June 30, 2020 | 38,846 | | | $ | 38 | | | $ | 69,382 | | | $ | (7,490) | | | $ | 61,930 | | |
Net income (loss) | | Net income (loss) | — | | | — | | | — | | | 6,147 | | | 6,147 | |
Balances, March 31, 2021 | | Balances, March 31, 2021 | 58,394 | | | $ | 58 | | | $ | 346,176 | | | $ | 3,505 | | | $ | 349,739 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GROWGENERATION CORPORATION AND SUBSIDIARIESCORP.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $ | 12,860 | | | $ | 480 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 4,971 | | | 827 | |
Stock-based compensation expense | 3,241 | | | 5,302 | |
Bad debt expense, net of recoveries | 313 | | | 195 | |
Deferred taxes | 947 | | | 0 | |
Changes in operating assets and liabilities: | | | |
Accounts and notes receivable | (2,883) | | | 652 | |
Inventory | (32,763) | | | (6,154) | |
Prepaid expenses and other assets | (14,487) | | | (2,550) | |
Accounts payable and accrued liabilities | 23,280 | | | 6,608 | |
Operating leases | 838 | | | 157 | |
Payroll and payroll tax liabilities | 1,757 | | | 272 | |
Income taxes payable | 1,846 | | | 156 | |
Customer deposits | 1,469 | | | (169) | |
Sales tax payable | 885 | | | 345 | |
Net cash provided by operating activities | 2,274 | | | 6,121 | |
Cash flows from investing activities: | | | |
Assets acquired in business combinations | (48,045) | | | (3,032) | |
Purchase of marketable securities | (57,357) | | | 0 | |
Purchase of property and equipment | (4,428) | | | (1,280) | |
Purchase of intangibles | (1,262) | | | (709) | |
Net cash used in investing activities | (111,092) | | | (5,021) | |
Cash flows from financing activities: | | | |
Principal payments on long term debt | (52) | | | (47) | |
Common stock redeemed | (3,954) | | | 0 | |
Proceeds from the sale of common stock and exercise of warrants, net of expenses | 2,067 | | | 792 | |
Net cash provided by (used in) financing activities | (1,939) | | | 745 | |
Net change | (110,757) | | | 1,845 | |
Cash at the beginning of period | 177,912 | | | 12,979 | |
Cash at the end of period | $ | 67,155 | | | $ | 14,824 | |
| | | |
Supplemental disclosures of non-cash activities: | | | |
Cash paid for interest | $ | 6 | | | $ | 20 | |
Common stock issued for accrued payroll | $ | 0 | | | $ | 718 | |
Common stock issued for business combination | $ | 33,187 | | | $ | 1,808 | |
Assets acquired by issuance of common stock | $ | 0 | | | $ | 168 | |
Right to use assets acquired under new operating leases | $ | 19,573 | | | $ | 1,095 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (5,177) | | | $ | 6,147 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 4,506 | | | 2,054 | |
Stock-based compensation expense | 1,583 | | | 1,327 | |
Bad debt expense, net of recoveries | (471) | | | (184) | |
Gain on asset disposition | 20 | | | — | |
Deferred taxes | (1,636) | | | 384 | |
Changes in operating assets and liabilities (net of the effect of acquisitions): | | | |
Accounts and notes receivable | (701) | | | (1,165) | |
Inventory | 3,761 | | | (16,716) | |
Prepaid expenses and other assets | 9,740 | | | (8,175) | |
Accounts payable and accrued liabilities | (5,082) | | | 10,613 | |
Operating leases | 106 | | | (87) | |
Payroll and payroll tax liabilities | (3,138) | | | 261 | |
Income taxes payable | — | | | 455 | |
Customer deposits | (5,738) | | | 4,615 | |
Sales tax payable | 5 | | | 1,213 | |
Net cash provided by (used in) operating activities | (2,222) | | | 742 | |
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (6,806) | | | (39,307) | |
Purchase of marketable securities | — | | | (41,077) | |
Maturities from marketable securities | 20,758 | | | — | |
Purchase of property and equipment | (4,451) | | | (1,679) | |
Purchase of intangibles | — | | | (681) | |
Net cash provided by (used in) investing activities | 9,501 | | | (82,744) | |
Cash flows from financing activities: | | | |
Principal payments on long term debt | (23) | | | (27) | |
Common stock withheld for employee payroll taxes | (1,355) | | | (3,954) | |
Proceeds from the sale of common stock and exercise of warrants, net of expenses | — | | | 113 | |
Net cash provided by (used in) financing activities | (1,378) | | | (3,868) | |
Net change | 5,901 | | | (85,870) | |
Cash and cash equivalents at the beginning of period | 41,372 | | | 177,912 | |
Cash and cash equivalents at the end of period | $ | 47,273 | | | $ | 92,042 | |
| | | |
Supplemental disclosures of non-cash activities: | | | |
Cash paid for interest | $ | 3 | | | $ | 2 | |
Common stock issued for business combination | $ | 5,750 | | | $ | 29,249 | |
Right of use assets acquired under new operating leases | $ | 2,703 | | | $ | 3,220 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 2022
(Unaudited)
1.GENERAL
GrowGeneration CorpCorp. (the “Company”, "we"“we”, or "our"“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. Currently, the Company owns and operates a chain of fifty-eight (58)sixty-three (63) retail hydroponic/gardening stores across 1213 states, an online e-commerce platform, and proprietary businesses that market grow solutions 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, 2020.2021. There were no significant changes to our significant accounting policies as disclosed in our 2021 Form 10-K, except for the immaterial out-of-period adjustments discussed below. 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 per share data, isare in thousands (000).
Risk and Uncertainties
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility whichthat may negatively affect our business operations.operations and financial results. As a result, if the pandemic persists or worsens,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). The Company has experienced minimal business interruption as a result of the COVID-19 pandemic. We have been deemed an “essential” business by state and local authorities in the areas in which we operate and as such have not been subject to business closures. The COVID-19 pandemic to date has resulted in temporary supply chain delays of our inventory.inventory, higher operating costs and increased shipping costs, among other impacts. 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.
New Accounting PoliciesPronouncements 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. The Company is in the process of evaluating the impact of this standard.
Immaterial out-of-period adjustments
During the Six Months Ended June 30,three months ended March 31, 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
Securities
during the period ended March 31, 2022. The Company classifies its commercial paper and debt securities as marketable securities. Marketable securitiesassessed the materiality of this adjustment on the previously issued annual financial statements in accordance with available fair market values are stated at fair market values. Unrealized gains and unrealized losses on these marketable securities are reported, netSEC Staff Accounting Bulletin No. 99. The Company concluded that the changes were not material to any of applicable income taxes, in other comprehensive income. Realized gains or losses on sale of marketable securities are computed using primarily the moving average cost and reported in net income. Forpreviously issued consolidated financial statements.
During the sixthree months ended June 30,March 31, 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 there were no significant unrealized gains or losses recorded.
the Company inappropriately
reported a single segment, aggregating multiple operating segments. The impact at March 31, 2021 was that $8.8 million of revenue, $3.5 million of gross margin, and $1.5 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 financial statements in accordance with SEC Staff Accounting Bulletin No. 99. The Company concluded that the ommission was not material to any of the previously issued consolidated financial statements and will begin reporting segments results in accordance with ASC 280 on a prospective basis starting with the quarter ending March 31, 2022.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 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 judgment. Accordingly, the degree of judgment 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 salessale 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 notesnotes' effective interest rate.
| | | | | | | | | | | | | | | | | |
| Level | | June 30, 2021 | | December 31, 2020 |
Cash equivalents | 2 | | $ | 67,155 | | | $ | 177,912 | |
Marketable securities | 2 | | $ | 57,357 | | | $ | 0 | |
Notes receivable | 2 | | $ | 5,906 | | | $ | 2,937 | |
Notes receivable impaired | 3 | | $ | 0 | | | $ | 875 | |
Accounts receivable | 2 | | $ | 4,377 | | | $ | 3,901 | |
| | | | | | | | | | | | | | | | | |
| Level | | March 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | 1 | | $ | 47,273 | | | $ | 41,372 | |
Marketable securities | 2 | | $ | 19,035 | | | $ | 39,793 | |
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 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"(“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.
As an emerging growth company, the Company is permitted to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. The Company has chosen to take advantage of the extended transition period for complying with new or revised accounting standards.
Refer to Note 3 to the Consolidated Financial Statements reported in Form 10-K for the year ended December 31, 20202021 for recently issued accounting pronouncements that are pending adoption.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this new guidance, effective January 1, 2020, did not have a material impact on our Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The standard was effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those periods. There was no material impact on our consolidated financial statements and related disclosures as a result of adopting this standard.
4.REVENUE RECOGNITION
The following table disaggregates revenue by source:
| | | Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
Sales at company owned stores | Sales at company owned stores | $ | 108,911 | | | $ | 40,128 | | | $ | 190,138 | | | $ | 71,912 | | Sales at company owned stores | $ | 64,296 | | | $ | 81,227 | |
Distribution | 4,988 | | | 0 | | | 7,823 | | | 0 | | |
Distribution and other | | Distribution and other | 12,203 | | | 2,835 | |
E-commerce sales | E-commerce sales | 11,986 | | | 3,323 | | | 17,946 | | | 4,521 | | E-commerce sales | 5,268 | | | 5,960 | |
Total Revenues | $ | 125,885 | | | $ | 43,451 | | | $ | 215,907 | | | $ | 76,433 | | |
Total Net Sales | | Total Net Sales | $ | 81,767 | | | $ | 90,022 | |
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
4.REVENUE RECOGNITION, continued
The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:
| | | Receivables | | Customer Deposit Liability | | Receivables | | Customer Deposit Liability |
Opening balance, January 1, 2021 | $ | 7,713 | | | $ | 5,155 | | |
Closing balance, June 30, 2021 | 10,283 | | | 6,793 | | |
Opening balance, January 1, 2022 | | Opening balance, January 1, 2022 | $ | 5,741 | | | $ | 11,686 | |
Closing balance, March 31, 2022 | | Closing balance, March 31, 2022 | 7,386 | | | 7,190 | |
Increase (decrease) | Increase (decrease) | $ | 2,570 | | | $ | 1,638 | | Increase (decrease) | $ | 1,645 | | | $ | (4,496) | |
| Opening balance, January 1, 2020 | $ | 4,455 | | | $ | 2,504 | | |
Closing balance, June 30, 2020 | 3,609 | | | 2,335 | | |
Opening balance, January 1, 2021 | | Opening balance, January 1, 2021 | $ | 3,901 | | | $ | 5,155 | |
Closing balance, March 31, 2021 | | Closing balance, March 31, 2021 | 4,276 | | | 9,939 | |
Increase (decrease) | Increase (decrease) | $ | (846) | | | $ | (169) | | Increase (decrease) | $ | 375 | | | $ | 4,784 | |
Of the total amount of customer deposit liability as of January 1, 2021, $2,8732022, $7.6 million was reported as revenue during the sixthree months ended June 30, 2021.March 31, 2022. Of the total amount of customer deposit liability as of January 1, 2020, $1,5992021, $2.1 million was reported as revenue during the sixthree months ended June 30, 2020.
The Company also has customer trade receivables under longer term financing arrangements at interest rates ranging from 9% to 12% with repayment terms ranging for 12 to 18 months. Long term trade receivables as of June 30, 2021 and DecemberMarch 31, 2020 are as follows:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Note receivable | $ | 6,172 | | | $ | 4,104 | |
Allowance for losses | (266) | | | (292) | |
Notes receivable, net | $ | 5,906 | | | 3,812 | |
The following table summarizes changes in notes receivable balances that have been deemed impaired.
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Note receivable | $ | 266 | | | $ | 1,166 | |
Allowance for losses | (266) | | | (292) | |
Notes receivable, net | $ | 0 | | | 874 | |
2021.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 2022
5.INVESTMENTS
Marketable securities have maturities of less than one year as of June 30, 2021.March 31, 2022. There were no significant realized or unrealized gains or losses for the sixthree months ended June 30, 2021.March 31, 2022.
The components of investments, available for salessale securities, as of June 30, 2021March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Level | | Adjusted Cost Basis | | Unrealized Gain (Loss) | | Recorded Basis |
Commercial paper | Level 2 | | $ | 9,994 | | | $ | 0 | | | $ | 9,994 | |
Corporate notes and bonds | Level 2 | | 47,363 | | | 0 | | | 47,363 | |
Marketable securities | | | $ | 57,357 | | | $ | 0 | | | $ | 57,357 | |
| | | | | | | | | | | | | | | | | |
| Adjusted Cost Basis | | Unrealized Gain (Loss) | | Recorded Basis |
Corporate notes and bonds | $ | 19,035 | | | $ | — | | | $ | 19,035 | |
6.NOTES RECEIVABLE
Notes receivable include customer tradeThe Company also has notes receivables under longlonger term financing arrangements at interest rates ranging from 8% to 12% with repayment terms ranging for 12 to 18 months. Notes receivables as of March 31, 2022 and other note receivables not associated with customer transactions.December 31, 2021 are as follows:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Trade receivables under longer term financing arrangements | $ | 5,906 | | | $ | 3,812 | |
Note receivable, non-customer related | 0 | | | 0 | |
Subtotal | 5,906 | | | 3,812 | |
Less, current portion | (4,535) | | | (2,612) | |
Notes receivable, noncurrent | $ | 1,371 | | | 1,200 | |
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Notes receivable | $ | 2,843 | | | $ | 2,962 | |
Allowance for losses | (876) | | | (522) | |
Notes receivable, net | $ | 1,967 | | | 2,440 | |
The following table summarizes changes in notes receivable balances that have been deemed impaired:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Note receivable | $ | 1,500 | | | $ | 1,500 | |
Allowance for losses | (876) | | | (522) | |
Notes receivable, net | $ | 624 | | | 978 | |
7.PROPERTY AND EQUIPMENT
| | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Vehicles | Vehicles | $ | 2,256 | | | $ | 1,342 | | Vehicles | $ | 2,442 | | | $ | 2,258 | |
Building | Building | 1,107 | | | 477 | | Building | 2,121 | | | 1,187 | |
Leasehold improvements | Leasehold improvements | 3,381 | | | 1,988 | | Leasehold improvements | 11,282 | | | 9,186 | |
Furniture, fixtures and equipment | Furniture, fixtures and equipment | 8,223 | | | 5,739 | | Furniture, fixtures and equipment | 12,153 | | | 10,992 | |
Capitalized software | | Capitalized software | 2,575 | | | 4,753 | |
Construction-in-progress | | Construction-in-progress | 5,311 | | | 2,948 | |
Total property and equipment, gross | Total property and equipment, gross | 14,967 | | | 9,546 | | Total property and equipment, gross | 35,884 | | | 31,324 | |
Accumulated depreciation and amortization | Accumulated depreciation and amortization | (4,512) | | | (3,071) | | Accumulated depreciation and amortization | (8,956) | | | (7,208) | |
Property and equipment, net | Property and equipment, net | $ | 10,455 | | | $ | 6,475 | | Property and equipment, net | $ | 26,928 | | | $ | 24,116 | |
Depreciation expense for the three and six months ended June 30,March 31, 2022 and 2021 was $782 thousand$1.8 million, and $1.4$0.7 million, respectively. Depreciation expense for the three and six months ended June 30, 2020 was $374 thousand and $705 thousand, respectively.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 2022
8.GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill are as follows:
| | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Balance, beginning of period | Balance, beginning of period | $ | 62,951 | | | $ | 17,799 | | Balance, beginning of period | $ | 125,401 | | | $ | 62,951 | |
Goodwill additions and measurement period adjustments | Goodwill additions and measurement period adjustments | 45,789 | | | 45,152 | | Goodwill additions and measurement period adjustments | 7,099 | | | 62,450 | |
Balance, end of period | Balance, end of period | $ | 108,740 | | | $ | 62,951 | | Balance, end of period | $ | 132,500 | | | $ | 125,401 | |
A summary of intangible assets is as follows:
| | | | | | | | |
| | Weighted-Average |
| | Amortization Period |
| | of Intangible Assets |
| | as of March 31, 2022 |
| | (in years) |
Trade names | | 3.92 |
Patents | | 3.83 |
Customer relationships | | 5.12 |
Non-competes | | 3.20 |
Intellectual property | | 3.92 |
Total | | 4.34 |
Intangible assets consist of the following:
| | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Tradenames | $ | 24,184 | | | $ | (2,298) | | | $ | 13,923 | | | $ | (398) | | |
Patents, trademarks | 100 | | | (35) | | | 100 | | | (9) | | |
Trade names | | Trade names | $ | 28,774 | | | $ | (6,377) | | | $ | 28,300 | | | $ | (4,948) | |
Patents | | Patents | 100 | | | (45) | | | 100 | | | (42) | |
Customer relationships | Customer relationships | 18,372 | | | (1,260) | | | 6,297 | | | (138) | | Customer relationships | 27,569 | | | (4,157) | | | 25,175 | | | (3,055) | |
Non-competes | Non-competes | 1,115 | | | (118) | | | 796 | | | (22) | | Non-competes | 1,639 | | | (335) | | | 1,384 | | | (233) | |
Intellectual property | Intellectual property | 2,065 | | | (138) | | | 0 | | | 0 | | Intellectual property | 2,065 | | | (447) | | | 2,065 | | | (344) | |
Capitalized software | 2,762 | | | (470) | | | 1,163 | | | (222) | | |
| $ | 48,598 | | | $ | (4,319) | | | $ | 22,279 | | | $ | (789) | | |
Total | | Total | $ | 60,147 | | | $ | (11,361) | | | $ | 57,024 | | | $ | (8,622) | |
Amortization expense for the sixthree months ended June 30,March 31, 2022 and 2021 was $2.7 million and 2020 was $2,135 and $3,530,$1.4 million, respectively.
| Future amortization expense is as follows: | Future amortization expense is as follows: | | Future amortization expense is as follows: | |
2021, remainder | $ | 4,714 | | |
2022 | 9,525 | | |
2022, remainder | | 2022, remainder | $ | 8,414 | |
2023 | 2023 | 9,164 | | 2023 | 11,217 | |
2024 | 2024 | 8,817 | | 2024 | 11,094 | |
2025 | 2025 | 8,283 | | 2025 | 10,700 | |
2026 | | 2026 | 5,654 | |
Thereafter | Thereafter | 3,776 | | Thereafter | 1,707 | |
Total | Total | $ | 44,279 | | Total | $ | 48,786 | |
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 2022
9. INCOME TAXES
9.LONG-TERM DEBT
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Long term debt is as follows: | | | |
Wells Fargo Equipment Finance, interest at 3.5% per annum, payable in monthly installments of $518.96 beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $25 | $ | 0 | | | $ | 1 | |
| | | |
Notes payable issued in connection with seller financing of assets acquired, interest at 8.125%, payable in 60 installments of $8,440.00, Due August 2023 | 189 | | | 240 | |
| $ | 189 | | | $ | 241 | |
Less Current Maturities | (83) | | | (83) | |
Total Long-Term Debt | $ | 106 | | | $ | 158 | |
Interest expense forFor the three months ended June 30, 2021 and 2020 was $4 thousand and $13 thousand, respectively.
Interest expense forMarch 31, 2022, the sixeffective tax rate is 24.02%, which increased from 20.17% at March 31, 2021. The increase in rate is primarily due to the effect of stock based compensation. The three months ended June 30, 2021 and 2020 was $6 thousand and $20 thousand, respectively. March 31, 2022 effective tax rate is higher than the US federal statutory rate of 21.00%, which is also primarily due to stock compensation.
10.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 1-51-10 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 noncancelablenon-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Right to use assets, operating lease assets | $ | 31,661 | | | $ | 12,088 | |
| | | |
Current lease liability | $ | 5,464 | | | $ | 3,001 | |
Non-current lease liability | 27,427 | | | 9,479 | |
| $ | 32,891 | | | $ | 12,480 | |
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.
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Right of use assets, operating lease assets | $ | 45,839 | | | $ | 43,730 | |
| | | |
Current lease liability | $ | 7,740 | | | $ | 6,858 | |
Non-current lease liability | 39,879 | | | 38,546 | |
| $ | 47,619 | | | $ | 45,404 | |
| | | June 30, 2021 | | June 30, 2020 | | March 31, 2022 | | March 31, 2021 |
Weighted average remaining lease term | Weighted average remaining lease term | 7.17 years | | 3.44 years | Weighted average remaining lease term | 6.85 years | | 3.34 years |
Weighted average discount rate | Weighted average discount rate | 6.0 | % | | 7.6 | % | Weighted average discount rate | 5.5 | % | | 6.0 | % |
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Operating lease costs | Operating lease costs | $ | 3,548 | | | $ | 1,714 | | Operating lease costs | $ | 2,662 | | | $ | 1,541 | |
Variable lease costs | | Variable lease costs | 863 | | | — | |
Short-term lease costs | Short-term lease costs | 1,109 | | | 31 | | Short-term lease costs | 126 | | | 141 | |
Total operating lease costs | Total operating lease costs | $ | 4,657 | | | $ | 1,745 | | Total operating lease costs | $ | 3,651 | | | $ | 1,682 | |
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
March 31, 202210.LEASES, continued
The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2021: March 31, 2022:
| 2021 (remainder of the year) | $ | 3,769 | | |
2022 | 6,720 | | |
2022 (remainder of the year) | | 2022 (remainder of the year) | $ | 7,641 | |
2023 | 2023 | 6,021 | | 2023 | 9,711 | |
2024 | 2024 | 4,884 | | 2024 | 8,519 | |
2025 | 2025 | 4,246 | | 2025 | 7,478 | |
2026 | | 2026 | 5,841 | |
Thereafter | Thereafter | 15,170 | | Thereafter | 18,525 | |
Total lease payments | Total lease payments | 40,810 | | Total lease payments | 57,715 | |
Less: Imputed interest | Less: Imputed interest | (7,919) | | Less: Imputed interest | (10,096) | |
Lease Liability at June 30, 2021 | $ | 32,891 | | |
Lease Liability at March 31, 2022 | | Lease Liability at March 31, 2022 | $ | 47,619 | |
11.SHARE BASED PAYMENTS
The Company maintains long-term incentive plans for employee,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 sixthree months ended June 30, 2021March 31, 2022 and 2020.2021:
| | | Six months ended June 30, | | Three months ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Restricted stock | Restricted stock | $ | 1,935 | | | $ | 3,316 | | Restricted stock | $ | 1,201 | | | $ | 645 | |
Stock options | Stock options | 559 | | | 1,986 | | Stock options | 43 | | | 308 | |
Warrants | Warrants | 747 | | | 0 | | Warrants | 339 | | | 374 | |
Total | Total | $ | 3,241 | | | $ | 5,302 | | Total | $ | 1,583 | | | $ | 1,327 | |
As of June 30, 2021,March 31, 2022, the Company had approximately $10.4$12.9 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 3.33.7 years. As of June 30, 2021,March 31, 2022, the Company also had approximately $3.3$2.2 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 2.51.7 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 thirdfourth anniversary of the date of grant, subject to the employee’s continuing employment as of that date.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
March 31, 202211.SHARE BASED PAYMENTS AND STOCK OPTIONS, continued
Restricted stock activity for the sixthree months ended June 30, 2021March 31, 2022 is presented in the following table:
| | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Nonvested, December 31, 2020 | 630 | | | $ | 4.15 | | |
Nonvested, December 31, 2021 | | Nonvested, December 31, 2021 | 483,750 | | | $ | 20.19 | |
Granted | Granted | 201 | | | $ | 45.56 | | Granted | 595,500 | | | $ | 10.84 | |
Vested | Vested | (291) | | | $ | 4.39 | | Vested | (247,000) | | | $ | 4.40 | |
Forfeited | Forfeited | (9) | | | $ | 18.54 | | Forfeited | (13,750) | | | $ | 5.72 | |
Nonvested, June 30, 2021 | 531 | | | $ | 20.40 | | |
Nonvested, March 31, 2022 | | Nonvested, March 31, 2022 | 818,500 | | | $ | 18.18 | |
The table below summarizes all option activity under all plans during the sixthree months ended June 30, 2021:March 31, 2022:
| Options | Options | | Shares | | Weight - Average Exercise Price | | Weighted - Average Remaining Contractual Term | | Weighted - Average Grant Date Fair Value | Options | | Shares | | Weight - Average Exercise Price | | Weighted - Average Remaining Contractual Term | | Weighted - Average Grant Date Fair Value |
Outstanding at December 31, 2020 | | 1,803 | | | $ | 3.92 | | | 3.47 | | $ | 2.38 | | |
Outstanding at December 31, 2021 | | Outstanding at December 31, 2021 | | 906,425 | | | $ | 4.38 | | | 2.85 | | $ | 2.45 | |
Granted | Granted | | 0 | | 0 | | | — | | | 0 | | Granted | | — | | | — | | | — | | | — | |
Exercised | Exercised | | (753) | | | 3.05 | | | 1.65 | | Exercised | | — | | | — | | | — | | | — | |
Forfeited or expired | Forfeited or expired | | (50) | | | 4.16 | | | — | | | 2.28 | | Forfeited or expired | | (187,427) | | | 5.12 | | | — | | | 2.89 | |
Outstanding at June 30, 2021 | | 1,000 | | | $ | 4.56 | | | 3.31 | | $ | 2.46 | | |
Options vested at June 30, 2021 | | 774 | | | $ | 4.29 | | | 2.80 | | $ | 3.31 | | |
Outstanding at March 31, 2022 | | Outstanding at March 31, 2022 | | 718,998 | | | $ | 4.02 | | | 2.59 | | $ | 4.02 | |
Options vested at March 31, 2022 | | Options vested at March 31, 2022 | | 679,000 | | | $ | 4.35 | | | 2.52 | | $ | 2.44 | |
A summary of the status of the Company’s outstanding stock purchase warrants for the sixthree months ended June 30, 2021March 31, 2022 is as follows:
| | | Warrants | | Weighted Average Exercise Price | | Warrants | | Weighted Average Exercise Price |
Outstanding at December 31, 2020 | 1,393 | | | $ | 7.49 | | |
Outstanding at December 31, 2021 | | Outstanding at December 31, 2021 | 330,884 | | | $ | 22.14 | |
Issued | Issued | 0 | | | Issued | — | | | — | |
Exercised | Exercised | (968) | | | $ | 2.84 | | Exercised | — | | | — | |
Forfeited | Forfeited | 0 | | | Forfeited | — | | | — | |
Outstanding at June 30, 2021 | 425 | | | $ | 17.25 | | |
Outstanding at March 31, 2022 | | Outstanding at March 31, 2022 | 330,884 | | | $ | 22.14 | |
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 2022
12.EARNINGS PER SHARE
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for the three and six months ended June 30, 2021March 31, 2022 and 2020.2021:
| | | | | | | | | | | |
| Three Months Ended |
| June 30, 2021 | | June 30, 2020 |
Net income | $ | 6,713 | | | $ | 2,574 | |
Weighted average shares outstanding, basic | 59,061 | | | 38,617 | |
Effect of dilution | 1,162 | | | 2,399 | |
Adjusted weighted average shares outstanding, dilutive | 60,223 | | | 41,016 | |
Basic earnings per shares | $ | 0.11 | | | $ | 0.07 | |
Dilutive earnings per share | $ | 0.11 | | | $ | 0.06 | |
| | | Six Months Ended | | Three Months Ended |
| | June 30, 2021 | | June 30, 2020 | | March 31, 2022 | | March 31, 2021 |
Net income | $ | 12,860 | | | $ | 480 | | |
Net income (loss) | | Net income (loss) | $ | (5,177) | | | $ | 6,147 | |
Weighted average shares outstanding, basic | Weighted average shares outstanding, basic | 58,588 | | | 38,224 | | Weighted average shares outstanding, basic | 60,126 | | | 58,394 | |
Effect of dilution | Effect of dilution | 1,206 | | | 2,017 | | Effect of dilution | — | | | 1,923 | |
Adjusted weighted average shares outstanding, dilutive | Adjusted weighted average shares outstanding, dilutive | 59,794 | | | 40,241 | | Adjusted weighted average shares outstanding, dilutive | 60,126 | | | 60,317 | |
Basic earnings per shares | $ | 0.22 | | | $ | 0.01 | | |
Basic earnings per share | | Basic earnings per share | $ | (0.09) | | | $ | 0.11 | |
Dilutive earnings per share | Dilutive earnings per share | $ | 0.22 | | | $ | 0.01 | | Dilutive earnings per share | $ | (0.09) | | | $ | 0.10 | |
The following potentially outstanding restricted stock, stock options, and warrants were excluded from the computation of diluted EPS because the effect would have been antidilutive:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
Restricted stock | 1,336 | | — |
Stock options | 393 | | — |
Warrants | 819 | | — |
Total | 2,548 | | — |
| | | |
13.ACQUISITIONS
Our acquisition strategy is primarily to acquire (i) well established profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence; and (ii) proprietary brands and private label brands. The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheetsCondensed Consolidated Balance Sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon athe preliminary valuation, and the Company’sCompany's estimates and assumptions are subject to change within the measurement period as valuations are finalized.finalized, not to exceed one year from the acquisition date. The Company has made adjustments to the preliminary valuations of the acquisitionacquisitions based on valuation analysisanalyses prepared by independent third-party valuation consultants. During the three months ended March 31, 2022 our measurement period adjustments included increasing goodwill by $1.3 million offset with intangible assets. As a result of these measurement period adjustments, we made an insignificant reduction in amortization expense. All acquisition costs are expensed as incurred and recorded in general and administrative expenses in the consolidated statementsCondensed Consolidated Statements of operations.Operations.
Acquisitions during the sixthree months ended June 30,March 31, 2022
On February 1, 2022, the Company purchased all of the assets of Horticultural Rep Group, Inc. (“HRG”), a specialty marketing and sales organization of horticultural products based in Ogden, Utah. The total consideration for the purchase of HRG was approximately $13.4 million, including $6.8 million in cash and common stock valued at $5.7 million. The Asset Purchase Agreement also provides for an indemnity holdback to be settled in common stock of the Company valued at $0.9 million. Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. HRG is included in our Distribution and other segment. The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
March 31, 2022
The table below represents the allocation of the purchase price to the acquired net assets during the three months ended March 31, 2022.
| | | | | | | | | | | | |
| HRG | | | | | | | |
Inventory | $ | 4,170 | | | | | | | | |
Prepaids and other current assets | 76 | | | | | | | | |
Furniture and equipment | 148 | | | | | | | | |
Operating lease right of use asset | 666 | | | | | | | | |
Operating lease liability | (666) | | | | | | | | |
Customer relationships | 2,430 | | | | | | | | |
Trademark | 496 | | | | | | | | |
Non-compete | 255 | | | | | | | | |
Goodwill | 5,816 | | | | | | | | |
Total | $ | 13,391 | | | | | | | | |
The table below represents the consideration paid for the net assets acquired in business combinations.
| | | | | |
| HRG |
Cash | $ | 6,806 | |
Indemnity stock holdback | 875 | |
Common stock | 5,710 | |
Total | $ | 13,391 | |
The following table discloses the date of the acquisition noted above and the revenue and earnings included in the Condensed Consolidated Statement of Operations for the period ended March 31, 2022.
| | | | | |
| HRG |
Acquisition date | February 1, 2022 |
Revenue | 3,436 | |
Net Income | — | |
The following represents the pro forma Condensed Consolidated Statement of Operations as if the acquisition had been included in the consolidated results of the Company for the entire period for the three months ended March 31, 2022 and 2021.
| | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| March 31, 2022 (Unaudited) | | March 31, 2021 (Unaudited) | |
Revenue | $ | 83,603 | | | $ | 93,458 | | |
Net income | $ | (5,176) | | | $ | 6,147 | | |
Acquisitions during the three months ended March 31, 2021
On January 25, 2021, the Company purchased all of the assets of Indoor Garden & Lighting, Inc, a two-store chain of hydroponic and equipment and indoor gardening supply stores serving the Seattle and Tacoma, Washington area. The total consideration for the purchase of Garden & Lighting was approximately $1.7 million, including $1.2 million in cash and common stock valued at approximately $0.5 million. Acquired goodwill of approximately $0.8$0.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Indoor Garden & Lighting, Inc. is included in our Retail segment.
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
March 31, 2022
On February 1, 2021, the Company purchased all of the assets of J.A.R.B., Inc d/b/a Grow Depot Maine, a two-store chain in Auburn and Augusta, Maine. The total consideration for the purchase of Grow Depot Maine was approximately $2.1 million, including $1.7 million in cash and common stock valued at approximately $0.4 million. Acquired goodwill of approximately $1.3$0.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
13.ACQUISITIONS, continued Grow Depot Maine is included in our Retail segment.
On February 15, 2021, the Company purchased all of the assets of Grow Warehouse LLC, a four-store chain of hydroponic and organic garden stores in Colorado (3) and Oklahoma (1). The total consideration for the purchase of Grow Warehouse LLC was approximately $17.8 million, including $8.1 million in cash and common stock valued at approximately $9.7 million. Acquired goodwill of approximately $11.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Grow Warehouse LLC is included in our Retail segment.
On February 22, 2021, the Company purchased all of the assets of San Diego Hydroponics & Organics, a four-store chain of hydroponic and organic garden stores in San Diego, CA.California. The total consideration for the purchase of San Diego Hydroponics was approximately $9.3 million, including $4.8 million in cash and common stock valued at approximately $4.5 million. Acquired goodwill of approximately $5.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. San Diego Hydroponics & Organics is included in our Retail segment.
On March 12, 2021, the Company purchased all of the assets of Charcoir Corporation, whowhich sells an RHP-certified growing medium made from the highest-grade coconut fiber. The total consideration for the purchase of Charcoir was approximately $16.4 million, including $9.9 million in cash and common stock valued at approximately $6.5 million. Acquired goodwill of approximately $6.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established distribution market for the Company of a proprietary brand. Charcoir is included in our Distribution and other segment.
On March 15, 2021, the Company purchased all of the assets of 55 Hydroponics, a hydroponic and organic superstore located in Santa Ana, CA.California. The total consideration for the purchase of 55 Hydroponics was approximately $6.5 million, including $5.4 million in cash and common stock valued at approximately $1.1 million. Acquired goodwill of approximately $3.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. 55 Hydroponics is included in our Retail segment.
On March 15, 2021, the Company purchased all of the assets of Aquarius, a hydroponic and organic garden store in Springfield, MA.Massachusetts. The total consideration for the purchase of Aquarius was approximately $3.6 million, including $2.4 million in cash and common stock valued at approximately $1.2 million. Acquired goodwill of approximately $1.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Aquarius is included in our Retail segment.
On March 19, 2021, the Company purchased all of the assets of Agron, LLC, an online seller of growing equipment. The total consideration for the purchase of Agron was approximately $11.3 million, including $6 million in cash and common stock valued at approximately $5.3 million. Acquired goodwill of approximately $8.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established e-commerce market for the Company targeting the commercial customer. Agron is included in our E-commerce segment.
On April 19, 2021, the Company purchased the assets of Grow Depot LLC ("Down River Hydro"), a hydroponic and indoor gardening supply store in Brownstown, MI. The total consideration for the purchase of Down River Hydro was approximately $4.4 million, including approximately $3.2 million in cash and common stock valued at approximately $1.2 million. Acquired goodwill of approximately $2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.
On May 24, 2021, the Company purchased the assets of The Harvest company ("Harvest"), a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity County. The total consideration for the purchase if Harvest was approximately $8.3 million, including approximately $5.6 million in cash and common stock valued at approximately $2.8 million. Acquired goodwill of approximately $4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
March 31, 202213.ACQUISITIONS, continued
The table below represents the allocation of the purchase price to the acquired net assets during the sixthree months ended June 30,March 31, 2021.
| | | Agron | | Aquarius | | 55 Hydro | | Charcoir | | San Diego Hydro | | | Agron | | Aquarius | | 55 Hydro | | Charcoir | | San Diego Hydro | | Grow Warehouse | | Grow Depot Maine | | Indoor Garden | | Total |
Inventory | Inventory | $ | 0 | | | $ | 957 | | | $ | 780 | | | $ | 839 | | | $ | 1,400 | | | Inventory | $ | — | | | $ | 957 | | | $ | 780 | | | $ | 839 | | | $ | 1,400 | | | $ | 2,450 | | | $ | 326 | | | $ | 372 | | | $ | 7,124 | |
Prepaids and other current assets | Prepaids and other current assets | 29 | | | 12 | | | 29 | | | 534 | | | 36 | | | Prepaids and other current assets | 46 | | | 12 | | | 29 | | | 534 | | | 36 | | | 30 | | | 3 | | | — | | | 690 | |
Furniture and equipment | Furniture and equipment | 46 | | | 63 | | | 50 | | | 0 | | | 315 | | | Furniture and equipment | 29 | | | 63 | | | 50 | | | — | | | 315 | | | 250 | | | 25 | | | 94 | | | 826 | |
Liabilities | Liabilities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | Liabilities | — | | | — | | | — | | | — | | | — | | | (169) | | | — | | | — | | | (169) | |
Operating lease right to use asset | 87 | | | 0 | | | 853 | | | 0 | | | 970 | | | |
Operating lease right of use asset | | Operating lease right of use asset | 98 | | | 108 | | | 861 | | | — | | | 1,079 | | | 641 | | | 92 | | | 137 | | | 3,016 | |
Operating lease liability | Operating lease liability | (87) | | | 0 | | | (853) | | | 0 | | | (970) | | | Operating lease liability | (98) | | | (108) | | | (861) | | | — | | | (1,079) | | | (641) | | | (92) | | | (137) | | | (3,016) | |
Customer relationships | Customer relationships | 832 | | | 339 | | | 809 | | | 5,712 | | | 605 | | | Customer relationships | 832 | | | 339 | | | 809 | | | 5,712 | | | 605 | | | 1,256 | | | 549 | | | 210 | | | 10,312 | |
Trade name | Trade name | 1,530 | | | 485 | | | 870 | | | 1,099 | | | 1,192 | | | Trade name | 1,530 | | | 485 | | | 870 | | | 1,099 | | | 1,192 | | | 2,748 | | | 344 | | | 353 | | | 8,621 | |
Non-compete | Non-compete | 139 | | | 0 | | | 26 | | | 0 | | | 6 | | | Non-compete | 139 | | | — | | | 26 | | | — | | | 6 | | | 94 | | | 36 | | | 2 | | | 303 | |
Intellectual property | Intellectual property | 0 | | | 0 | | | 0 | | | 2,065 | | | 0 | | | Intellectual property | — | | | — | | | — | | | 2,065 | | | — | | | — | | | — | | | — | | | 2,065 | |
Goodwill | Goodwill | 8,673 | | | 1,702 | | | 3,915 | | | 6,119 | | | 5,728 | | | Goodwill | 8,673 | | | 1,702 | | | 3,915 | | | 6,119 | | | 5,728 | | | 11,120 | | | 866 | | | 661 | | | 38,784 | |
Total | Total | $ | 11,249 | | | $ | 3,558 | | | $ | 6,479 | | | $ | 16,368 | | | $ | 9,282 | | | Total | $ | 11,249 | | | $ | 3,558 | | | $ | 6,479 | | | $ | 16,368 | | | $ | 9,282 | | | $ | 17,779 | | | $ | 2,149 | | | $ | 1,692 | | | $ | 68,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Grow Warehouse | | Grow Depot Maine | | Indoor Garden | | Down River Hydro | | Harvest | | Total |
Inventory | | $ | 2,448 | | | $ | 326 | | | $ | 372 | | | $ | 824 | | | $ | 1,204 | | | $ | 9,150 | |
Prepaids and other current assets | | 30 | | | 3 | | | 0 | | | 3 | | | 7 | | | 683 | |
Furniture and equipment | | 250 | | | 25 | | | 94 | | | 50 | | 100 | | | 993 | |
Liabilities | | (169) | | | 0 | | | 0 | | | 0 | | | 0 | | | (169) | |
Operating lease right to use asset | | 94 | | | 91 | | | 129 | | | 0 | | | 0 | | | 2,224 | |
Operating lease liability | | (94) | | | (91) | | | (129) | | | 0 | | | 0 | | | (2,224) | |
Customer relationships | | 1,256 | | | 549 | | | 210 | | | 634 | | | 1,016 | | | 11,962 | |
Trade name | | 2,748 | | | 344 | | | 353 | | | 698 | | | 1,392 | | | 10,711 | |
Non-compete | | 94 | | | 36 | | | 2 | | | 16 | | | 0 | | | 319 | |
Intellectual property | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,065 | |
Goodwill | | 11,122 | | | 866 | | | 661 | | | 2,126 | | | 4,606 | | | 45,518 | |
Total | | 17,779 | | | 2,149 | | | 1,692 | | | $ | 4,351 | | | $ | 8,325 | | | $ | 81,232 | |
The table below represents the consideration paid for the net assets acquired in business combinations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agron | | Aquarius | | 55 Hydro | | Charcoir | | San Diego Hydro |
Cash | $ | 5,973 | | | $ | 2,331 | | | $ | 5,347 | | | $ | 9,902 | | | $ | 4,751 | |
Common stock | 5,276 | | | 1,227 | | | 1,132 | | | 6,466 | | | 4,531 | |
Total | $ | 11,249 | | | $ | 3,558 | | | $ | 6,479 | | | $ | 16,368 | | | $ | 9,282 | |
| | | Grow Warehouse | | Grow Depot Maine | | Indoor Garden | | Down River Hydro | | Harvest | | Total | | Agron | | Aquarius | | 55 Hydro | | Charcoir | | San Diego Hydro | | Grow Warehouse | | Grow Depot Maine | | Indoor Garden | | Total |
Cash | Cash | $ | 8,100 | | | $ | 1,738 | | | $ | 1,165 | | | $ | 3,177 | | | $ | 5,561 | | | $ | 48,045 | | Cash | $ | 5,973 | | | $ | 2,331 | | | $ | 5,347 | | | $ | 9,902 | | | $ | 4,751 | | | $ | 8,100 | | | $ | 1,738 | | | $ | 1,165 | | | $ | 39,307 | |
Common stock | Common stock | 9,679 | | | 411 | | | 527 | | | 1,174 | | | 2,764 | | | 33,187 | | Common stock | 5,276 | | | 1,227 | | | 1,132 | | | 6,466 | | | 4,531 | | | 9,679 | | | 411 | | | 527 | | | $ | 29,249 | |
Total | Total | $ | 17,779 | | | $ | 2,149 | | | $ | 1,692 | | | $ | 4,351 | | | $ | 8,325 | | | $ | 81,232 | | Total | $ | 11,249 | | | $ | 3,558 | | | $ | 6,479 | | | $ | 16,368 | | | $ | 9,282 | | | $ | 17,779 | | | $ | 2,149 | | | $ | 1,692 | | | $ | 68,556 | |
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement for the period ended June 30,March 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agron | | Aquarius | | 55 Hydro | | Charcoir | | San Diego Hydro | |
Acquisition date | 3/19/2021 | | 3/15/2021 | | 3/15/2021 | | 3/12/2021 | | 2/22/2021 | |
Revenue | $ | 6,105 | | | $ | 2,684 | | | $ | 2,222 | | | $ | 1,880 | | | $ | 3,446 | | |
Net Income | $ | 324 | | | $ | 365 | | | $ | 314 | | | $ | 518 | | | $ | 547 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agron | | Aquarius | | 55 Hydro | | Charcoir | | San Diego Hydro | | Grow Warehouse | | Grow Depot Maine | | Indoor Garden | | Total |
Acquisition date | 3/19/2021 | | 3/15/2021 | | 3/15/2021 | | 3/12/2021 | | 2/22/2021 | | 2/15/2021 | | 2/1/2021 | | 1/25/2021 | | |
Revenue | $ | 230 | | | $ | 185 | | | $ | 328 | | | $ | 276 | | | $ | 1,001 | | | $ | 2,168 | | | $ | 993 | | | $ | 805 | | | $ | 5,986 | |
Net Income | $ | 22 | | | $ | 16 | | | $ | 32 | | | $ | 101 | | | $ | 117 | | | $ | 294 | | | $ | 205 | | | $ | 118 | | | $ | 905 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grow Warehouse | | Grow Depot Maine | | Indoor Garden | | Down River Hydro | | Harvest | | Total |
Acquisition date | 2/15/2021 | | 2/1/2021 | | 1/25/2021 | | 4/19/2021 | | 5/24/21 | | |
Revenue | $ | 6,753 | | | $ | 2,779 | | | $ | 2,308 | | | $ | 1,200 | | | $ | 1,489 | | | $ | 5,986 | |
Net Income | $ | 1,297 | | | $ | 555 | | | $ | 433 | | | $ | 176 | | | $ | 268 | | | $ | 905 | |
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
13.ACQUISITIONS, continued
The following representstable discloses the pro forma consolidated income statement of operations as if the acquisitionsacquisition had been included in the consolidated results of the Company for the entire period for the quarterthree months ended June 30, 2021 and 2020.
| | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 (Unaudited) | | June 30, 2021 (Unaudited) | |
Revenue | $ | 130,504 | | | $ | 229,599 | | |
Net income | $ | 12,446 | | | $ | 19,849 | | |
March 31, 2021.
| | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2020 (Unaudited) | | June 30, 2020 (Unaudited) | |
Revenue | $ | 40,501 | | | $ | 90,126 | | |
Net income | $ | 1,849 | | | $ | 2,352 | | |
| | | | | | | | |
| Three Months Ended March 31, 2021 | |
| (Unaudited) | |
Revenue | $ | 99,095 | | |
Net income | $ | 7,403 | | |
Acquisitions during the six months ended June 30, 2020.
On February 26, 2020 we acquired certain assets of Health & Harvest LLC in a transaction valued at approximately $2.85 million. Acquired goodwill of approximately $1.1 million represented the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital.
On June 16, 2020 we acquired certain assets of H2O Hydroponics, LLC in a transaction valued at approximately $2.0 million. Acquired goodwill of approximately $1.0 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company's existing working capital.
The table below represents the allocation of the purchase price to the acquired net assets during the six months ended June 30, 2020.
| | | | | | | | | | | |
| H2O Hydroponics LLC | Health & Harvest LLC | Total |
Inventory | $ | 498 | | $ | 1,054 | | $ | 1,552 | |
Prepaids and other current assets | 4 | | 0 | | 4 | |
Furniture and equipment | 50 | | 51 | | 101 | |
Right to use asset | 902 | | 192 | | 1,094 | |
Lease liability | (902) | | (192) | | (1,094) | |
Customer relationships | 150 | | 255 | | 405 | |
Trade name | 234 | | 357 | | 591 | |
Non-compete | 43 | | 6 | | 49 | |
Goodwill | 1,008 | | 1,130 | | 2,138 | |
Total | $ | 1,987 | | $ | 2,853 | | $ | 4,840 | |
The table below represents the consideration paid for the net assets acquired in business combinations.
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
March 31, 2022 | | | | | | | | | | | |
| H2O Hydroponics LLC | Health & Harvest LLC | Total |
Cash | $ | 1,282 | | $ | 1,750 | | $ | 3,032 | |
Common stock | 705 | | 1,103 | | 1,808 | |
Total | $ | 1,987 | | $ | 2,853 | | $ | 4,840 | |
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date of acquisition to the period ended June 30, 2020.
| | | | | | | | | | | |
| H2O Hydroponics LLC | Health & Harvest LLC | Total |
Acquisition date | 6/26/20 | 2/26/2020 | |
Revenue | $ | 227 | | $ | 2,300 | | $ | 2,527 | |
Earnings | $ | 28 | | $ | 462 | | $ | 490 | |
The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the six months ended June 30, 2020 and 2019.
Pro forma consolidated income statement:
| | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2019 | | June 30, 2019 | |
Revenue | $ | 21,759 | | | $ | 37,122 | | |
Earnings | $ | 1,149 | | | $ | 1,465 | | |
14.RELATED PARTIES
The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner. The firm provides certain legal services. Amounts paid for to that firm in total was approximately $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2021, there was no outstanding balance due.
14. COMMITMENTS AND CONTINGENCIES
15.SUBSEQUENT EVENTS
Legal Matters
From time to time, the Company has been, and may again become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any litigation, and is not aware of any pending or threatened litigation, against the Company that it believes could have a material adverse effect on its business, operating results, financial condition, or cash flows.
Indemnifications
In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of March 31, 2022, the Company did not have any liabilities associated with indemnities.
In addition, the Company, as permitted under Colorado law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, in each case, as amended to date, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications varies. The Company has evaluated eventsa director and transaction occurring subsequentofficer insurance policy that may enable it to June 30,recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.
15. SEGMENTS
As discussed in Note ,1 at December 31, 2021 upthe Company had 2 reportable segments which increased to 3 at March 31, 2022 based on quantitative and qualitative analyses the dateCompany now also reports E-commerce as a reportable segment. The Company has 3 primary reportable segments including retail operations, e-commerce and all other which includes the distribution of this filingproprietary brands to wholesale accounts. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of these consolidated financial statements. These statements contain all necessary adjustmentsits operations. The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. Shared services and disclosures resulting fromother corporate costs are allocated to individual segments based on that evaluation. segments profitability.
For all acquisitions subsequentRetail – Currently, the Company owns and operates a chain of 63 hydroponic/gardening centers focused on serving growers and cultivators. Inclusive of commercial sales organizations selling directly to the endcustomers outside of the quarter,physical retail network. Some of our garden centers have multi-functions, with added capabilities that include warehousing, distribution and fulfillment for direct shipments of products to garden center locations, pick, pack and ship for our online platforms and direct fulfillment to our commercial customers.
E-commerce – Our digital strategy is focused on capturing the Company’s initial accounting forhome, craft and commercial grower online. GrowGeneration.com offers over 10,000 hydroponic products, all curated by our product team. GrowGeneration.com offers customers the option to have their orders shipped directly to their locations, anywhere in North America. The Company also sells and distributes product through third-party marketplaces.
Distribution and other – In December 2020, GrowGeneration purchased the business combination has not been completed becauseof Canopy Crop Management Corp., the valuations have not yet been received fromdeveloper of the Company’s independent valuation firm.
popular Power Si line of monosilicic acid products, a widely used nutrient additive for plants. On July 1,March 12, 2021, the Company purchased Char Coir, a line of premium coco pots, cubes and medium. On December 31, 2021, the Company purchased the assets of Aqua Serene, an indoor/outdoor garden center with stores in EugeneMobile Media, Inc. (“MMI”), a mobile shelving design and Ashland, Oregon. The total consideration for the purchase was $10.0 million, including approximately $7.7 million in cash and 46,554 shares of common stock valued at approximately $2.3 million.
build facility. On July 3, 2021,February 1, 2022, the Company purchased the assets of Mendocino Greenhouse & Garden Supply, Inc,Horticultural Rep Group, Inc. (“HRG”), a Northern California-based hydroponic garden center locatedspecialty marketing and sales organization of horticultural products based in Mendocino, California.Ogden, Utah. The total consideration forCompany is in the purchase was approximately $4.0 million.
process of combining the operations and management of these non-retail enterprises. The products these companies provide are integrated into our
GrowGeneration Corporation and SubsidiariesCorp.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021March 31, 2022
On July 27, 2021,retail, e-commerce, and direct sales activities and we receive incremental gross profit from the Company entered into a seriessale of asset purchase agreements (the “Purchase Agreements”) through its wholly-owned subsidiary, GrowGeneration Michigan Corp., to purchase the assetsthese products. The profit generated from subsidiaries of HGS Hydro (“HGS Hydro”) with 6 stores across the State of Michiganthose sales are recorded in our retail and a seventh store to opene-commerce segments.
Selected information by segment is presented in the fall of 2021. This acquisition is expected to close before the end of 2021 fiscal year-end. As consideration for the assets, the Company agreed to pay HGS Hydro an aggregate purchase price of approximately $72.2 million which includes $55.2 million in cash and approximately $17.0 million in shares of the Company's restricted common stock.following tables:
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
Net sales | | |
Retail | $ | 64,296 | | $ | 81,227 | |
E-Commerce | 5,268 | | 5,960 | |
Distribution and other | 12,203 | | 2,835 | |
Total | $ | 81,767 | | $ | 90,022 | |
| | |
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
Gross profit | | |
Retail | $ | 15,493 | | $ | 21,901 | |
E-Commerce | 1,745 | | 1,997 | |
Distribution and other | 4,902 | | 1,479 | |
Total | $ | 22,140 | | $ | 25,377 | |
| | |
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
Income (Loss) from operations | | |
Retail | $ | (7,183) | | $ | 6,258 | |
E-Commerce | (432) | | 441 | |
Distribution and other | 394 | | 1,037 | |
Total | $ | (7,221) | | $ | 7,736 | |
| | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the SEC on March 29, 2021. In connection with, and because we desire to take advantage10, 2022. We caution readers regarding certain forward looking statements, within the meaning of the “safe harbor” provisionsSecurities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the SEC.report. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements, except as required by law.
OVERVIEW
GrowGeneration Corp. (together with all of its wholly-owneddirect and indirect wholly owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014 and 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, environmental control systems and accessories for hydroponic gardening. GrowGeneration also owns and operates an e-commerce platforms,platform, www.growgeneration.com, Mobile Media, a vertical racking and www.agron.io, Canopy Crop Management Corp,storage solutions business, Horticultural Rep Group, a horticultural products sales representative and distributor organization, and Power Si, CharCoir, Inc, and several other proprietary private-label brands across multiple product categories from LED lighting to nutrients and additives and environmental control systems for indoor cultivation.
Markets
GrowGeneration sellsells thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, vertical benching and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are designed and intended for growing a wide range of plants. In addition, vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other severe weather conditions and insect pests.
Our retail operations are driven by a wide selection of all hydroponic products, service and solutions driven staff and pick, pack and ship distribution and fulfillment capabilities. We employemployed approximately 671660 employees as of March 31, 2022, a majority of them we have branded as “Grow Pros.” Currently, our operations span over 875,0001,022,000 square feet of retail and warehouse space.
We operate our business throughThe Company has three primary reportable segments including retail operations, e-commerce and all other. The Company has segmented its operations to reflect the following business units:
•Retail: 58manner in which management reviews and evaluates the results of its operations. The structure reflects the manner in which the chief operating hydroponic/gardening centers focused on serving growers and cultivators.decision maker regularly assesses information for decision-making purposes, including the allocation of resources.
•Commercial: SalesWe recognize specifically identifiable operating costs such as cost of sales, distribution expenses, selling and general administrative expenses within each segment. Certain general and administrative expenses, such as administrative and management expenses, salaries and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses and technology costs, are not allocated to commercial customers, including large multi-state operatorsthe specific segments and cultivators.
•E-Commerce/Omni-channel: Our e-commerce operation, includes GrowGeneration.com and Agron.io, a business-to-business (B2B) online portal for commercial growers. GrowGeneration.com is currently adding “Buy online/Pick upare reflected in store” same day pick up service.
•Proprietary Brands and Private Label: GrowGeneration sells a variety of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, vertical benching, environmental control systems and accessories for hydroponic gardening.the enterprise results.
Competitive Advantages
As the largest chain of hydroponic garden centers by revenue and number of stores in the United States based on management’s estimates, we believe that we have the following core competitive advantages over our competitors:
•We offer a one-stop shopping experience to all types of growers by providing “selection, service, and solutions”;
•We provide end-to-end solutions for our commercial customers from capex built-out to consumables to nourish their plants;
•We have a knowledge-based sales team, all with horticultural experience;
•We offer the options to transact online, in store, or buy online and pick up;
•We consider ourselves to be a leader of the products we offer, from launching new technologies to the development of our private label products;
and
•We have a professional team for mergers and acquisitions, and to acquire and open new locations and successfully add them to our company portfolio; and
•We offer a program of issuing credit to licensed commercial customers based on a credit evaluation process.portfolio.
Growth Strategy - Store Acquisitions and New Store Openings
Core to our growth strategy is to expand the number of our retail garden centers throughout North America. The hydroponic retail landscape is fragmented, which allows us to acquire the “best of breed” hydroponic operations. In addition to the 1213 states in which we are currently operating, in, we have identified new market opportunities in states that include Connecticut, Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi, Missouri and Missouri. In 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and completed eight (8) acquisitions, adding 14 new locations.Virginia. The Company acquired 1723 new locations in the first half of 2021, three additional locations in July 2021 and has an active target pipelineexpects to open many new stores in 2022.
Secondary to this growth strategy is the expansion of acquisitions which are planneddistribution and sales capabilities for products that the company owns, distributes, or represents to close in 2021.independent retail garden centers for resale.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30,March 31, 2022 and 2021 and 2020.
Net revenue for the three months ended June 30, 2021March 31, 2022 was approximately $125.9$81.8 million, compared to $43.5$90.0 million for the three months ended June 30, 2020 an increaseMarch 31, 2021, a decrease of approximately $82.4$8.3 million or 190%9%. This increase includedThe decrease was attributed to a decrease of approximately $45.4$26.2 million of additional revenue related to 2020 and 2021 acquisitions and $23.3 million of revenue from same store sales.
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 2021 was approximately $90.2 million, compared to approximately $31.9 million for the three months ended June 30, 2020, an increase of approximately $58.3 million or 183%. The increase in cost of goods sold was primarily due to the 190% increase in sales comparing the three months ended June 30, 2021 to the three months ended June 30, 2020.
Gross profit was approximately $35.7 million for the three months ended June 30, 2021, compared to approximately $11.6 million for the three months ended June 30, 2020, an increase of approximately $24.1 million or 208%. The increase in gross profit is primarily related to the 190% increase in revenues comparing the quarter ended June 30, 2021 to the quarter ended June 30, 2020. Gross profit as a percentage of revenues was 28.4% for the three months ended June 30, 2021, compared to 26.7% for the three months ended June 30, 2020. The increase in the gross profit margin percentage is primarily due to higher increases in revenues from both private label products and distributed products which were 7.1% of revenues for the quarter ended June 30, 2021 and less than 1% of revenues for the quarter ended June 30, 2020.
Operating Expenses
Operating expenses are comprised of store operations, selling, general, and administrative and depreciation and amortization. Operating costs were approximately $26.1 million for the three months ended June 30, 2021 and approximately $8.8 million for the three months ended June 30, 2020, an increase of approximately $17.3 million or 197%.
Store operating costs were approximately $12.6 million for the three months ended June 30, 2021, compared to $3.9 million for the quarter ended June 30, 2020, an increase of $8.7 million or 226%. The increase in store operating costs was directly attributable to the 190% increase in revenues, the addition of twenty-nine (29) locations that were added after June 30, 2020, and one (1) locations added during the quarter ended June 30, 2020 that were open for the entire quarter ended June 30, 2021.
Total corporate overhead was approximately $13.5 million for the three months ended June 30, 2021, compared to $4.9 million for the quarter ended June 30, 2020, an increase of $8.6 million or 175%. Selling, general, and administrative costs were approximately $10.6 million for the three months ended June 30, 2021, compared to approximately $4.4 million for the three months ended June 30, 2020. Salaries expense increase to $5.6 million from $2.0 million primarily due to an increase in corporate staff and general and administrative expenses increased to $3.0 million from $1.3 million to support expanding operations. Share-based compensation increased to $1.9 million from $1.2 million primarily due to expanding corporate staff to support the increased operations.
Net Income
Net income for the three months ended June 30, 2021 was approximately $6.7 million, compared to net income of approximately $2.6 million for the three months ended June 30, 2020, a increase of approximately $4.1 million.
Comparison of the six months ended June 30, 2021 and 2020.
Net revenue for the six months ended June 30, 2021 was approximately $215.9 million, compared to $76.4 million for the six months ended June 30, 2020 an increase of approximately $139.5 million or 182%. This increase included $73.4 million of additional revenue from 2020 and 2021 acquisitions and $37.8 million of additional revenue from same store sales, performance. which represented 35.5% of the decrease year over year. Overall sales in our retail segment declined from $81.2 million to $64.3 million. Distributed sales were $12.2 million. E-commerce sales decreased from $6.0 million to $5.3 million.
Cost of Goods Sold
Cost of goods sold for the sixthree months ended June 30, 2021March 31, 2022 was approximately $154.8$59.6 million, compared to approximately $55.9$64.6 million for the sixthree months ended June 30, 2020, an increaseMarch 31, 2021, a decrease of approximately $98.9$5.0 million or 177%8%. The increasedecrease in cost of goods sold was primarily due to the 182% increase9% decrease in sales comparing the sixthree months ended June 30, 2021March 31, 2022 to the sixthree months ended June 30, 2020.March 31, 2021.
Gross profit was approximately $61.1$22.1 million for the sixthree months ended June 30, 2021,March 31, 2022, compared to approximately $20.5$25.4 million for the sixthree months ended June 30, 2020, an increaseMarch 31, 2021, a decrease of approximately $40.6$3.2 million or 198%13%. The increasedecrease in gross profit is primarily related to the 182% increase9% decrease in revenues comparing the sixthree months ended June 30, 2021March 31, 2022 to the sixthree months ended June 30, 2020.March 31, 2021. Gross profit as a percentage of revenues was 28.3%27.1% for the sixthree months ended June 30, 2021,March 31, 2022, compared to 26.9%28.2% for the sixthree months ended June 30, 2020. The increaseMarch 31, 2021. Gross profit in the grossour retail segment declined from $21.9 million to $15.5 million. Gross profit margin percentage is primarily due to higher increases in revenues from both private label productsdistributed sales was $4.9 million and distributed products which were 6.8% of revenueswas $1.7 million from e-commerce sales for the quarterthree months ended June 30, 2021 and less than 1% of revenues for the quarter ended June 30, 2020.March 31, 2022.
Operating Expenses
Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $43.7$29.4 million for the sixthree months ended June 30, 2021March 31, 2022 and approximately $19.8$17.6 million for the sixthree months ended June 30, 2020,March 31, 2021, an increase of approximately $23.9$11.7 million or 121%66%.
Store operating costs were approximately $20.8$14.5 million for the sixthree months ended June 30, 2021,March 31, 2022, compared to $7.5$8.2 million for the sixthree months ended June 30, 2020,March 31, 2021, an increase of $13.3$6.4 million or 177%78%. The increase in store operating costs was directly attributable to the 182% increase in revenues, the addition of twenty-nine (29)23 locations that were added after June 30, 2020, and two (2) locations added during the six months ended June 30, 20202021, including 16 stores that were open for the entire quarter ended June 30,added subsequent to March 31, 2021.
Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately $22.9$14.8 million for the sixthree months ended June 30, 2021,March 31, 2022, compared to $12.3$9.5 million for the quarterthree months ended June 30, 2020,March 31, 2021, an increase of $10.6$5.4 million or 86%57%. Selling, general, and administrative costs were approximately $18.0$10.3 million for the sixthree months ended June 30, 2021,March 31, 2022, compared to approximately $11.5$7.4 million for the sixthree months ended June 30, 2020.March 31, 2021. Salaries expense increased to $9.6$5.2 million from $3.8$4.0 million primarily due to an increase in corporate staff and general andstaff. General administrative expenses increased to $5.1$3.6 million from $2.4$2.1 million to support expanding operations. These increases were partially offset by a decrease in share-based compensation to $3.2 million from $5.3 million primarily due to new executive compensation agreements effective January 1, 2020 that had front loaded vesting provisions for shares and options that vested January 1, 2020 for which the remaining vesting was over a two-year period.
Other Income/Expense
Total other income was approximately $0.4 million for the three months ended March 31, 2022, compared to expense of $36.0 thousand for the three months ended March 31, 2021. This increase is primarily attributable to a gain recorded related to an earnout revaluation adjustment related to The Harvest Company acquisition.
Segment Operating Income
Operating income in our retail segment dropped from $6.3 million to an operating loss of $7.2 million as a result of lower sales volume, lower gross margins and higher expenses at existing stores combined with operating losses at nine stores not in operation in the same period in 2021, including acquired and new retail locations. Operating income in our e-commerce segment declined from $0.4 million to a loss of $0.4 million as a result of lower revenue and higher operating expenses as well as integration costs of Agron.IO that was consolidated with our core e-commerce webstore in the period. Operating income in all other decreased to $0.4 million in the three months ended March 31, 2022 compared to $1.0 million in the three months ended March 31, 2021. Increase in the operating income of the other segment was primarily attributable to the addition of HRG and MMI.
Income Taxes
Income tax benefit was $1.6 million for the three months ended March 31, 2022, compared to income tax expense of $1.6 million for the three months ended March 31, 2021. Effective tax rate is impacted by differences in timing of expenses for share based compensation, depreciation, amortization and the impact of 162(m) on deductible wages. As such, the Company’s taxable income varies from reported income in a material way.
Net Income
Net incomeloss for the sixthree months ended June 30, 2021March 31, 2022 was approximately $12.9$5.2 million, compared to a net income of approximately $0.5$6.1 million for the sixthree months ended June 30, 2020,March 31, 2021, a increasedecrease of approximately $12.4$11.3 million.
Operating Activities
Net cash providedused by operating activities for sixthree months ended June 30, 2021March 31, 2022 was approximately $2.3$2.2 million compared to $6.1$0.7 million provided for the sixthree months ended June 30, 2020.March 31, 2021. The Company reduced prepaid inventory by $9.1 million in the quarter as well as retail store inventory by $3.8 million, which was more that offset by payments for accounts payable and deferred compensation, including annual cash bonuses.
Net cash used inprovided by investing activities was approximately $111.1$9.5 million for the sixthree months ended June 30, 2021 andMarch 31, 2022 compared to cash used of approximately $5.0$82.7 million for the sixthree months ended June 30, 2020.March 31, 2021. Investing activities in 20212022 were primarily attributable to acquisitions of $48.0$6.8 million , purchase of marketable securities of $57.4 million,and vehicles and store equipment purchases $4.4of $4.5 million and intangible asset purchasespartially offset by the maturity of $1.3marketable securities of $20.8 million. Investing activities for the sixthree months ended June 30, 2020March 31, 2021 were primarily related to store acquisitions of $3.0$39.3 million, purchase of marketable securities of $41.1 million, the purchase of vehicles and store equipment to support new store operations of $1.3$1.7 million, and intangible assets of $0.7 million.
Net cash used in financing activities for the sixthree months ended June 30, 2021March 31, 2022 was approximately $1.9$1.4 million and was primarily attributable to stock redemptions partially offset by the proceeds from the sales of common stock and exercise of warrants.redemptions. Net cash providedused by financing activities for sixthree months ended June 30, 2020March 31, 2021 was $0.7$3.9 million and was primarily from proceeds from the sale of commonattributable to stock and exercise of warrants.redemptions.
Use of Non-GAAP Financial Information
The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company 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. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.
Set forth below is a reconciliation of Adjusted EBITDA to net income (loss):
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2021 | | 2020 |
| (000) | | (000) |
Net income | $ | 6,713 | | | $ | 2,574 | |
Income taxes | 2,920 | | | 156 | |
Interest expense | 4 | | | 13 | |
Depreciation and Amortization | 2,917 | | | 468 | |
EBITDA | $ | 12,554 | | | $ | 3,211 | |
Share based compensation (option compensation, warrant compensation, stock issued for services) | 1,914 | | | 1,187 | |
Adjusted EBITDA | $ | 14,468 | | | $ | 4,398 | |
| | | |
Adjusted EBITDA per share, basic | $ | 0.24 | | | $ | 0.11 | |
Adjusted EBITDA per share, diluted | $ | 0.24 | | | $ | 0.11 | |
The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company 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. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.
Set forth below is a reconciliation of Adjusted EBITDA to net income (loss):
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | (000) | | (000) | | (000) | | (000) |
Net income | Net income | $ | 12,860 | | | $ | 480 | | Net income | $ | (5,177) | | | $ | 6,147 | |
Income taxes | Income taxes | 4,473 | | | 156 | | Income taxes | (1,636) | | | 1,553 | |
Interest | Interest | 6 | | | 20 | | Interest | 3 | | | 2 | |
Depreciation and Amortization | Depreciation and Amortization | 4,971 | | | 827 | | Depreciation and Amortization | 4,506 | | | 2,054 | |
EBITDA | EBITDA | $ | 22,310 | | | $ | 1,483 | | EBITDA | $ | (2,304) | | | $ | 9,756 | |
Share based compensation (option compensation, warrant compensation, stock issued for services) | Share based compensation (option compensation, warrant compensation, stock issued for services) | 3,241 | | | 5,302 | | Share based compensation (option compensation, warrant compensation, stock issued for services) | 1,583 | | | 1,327 | |
Adjusted EBITDA | Adjusted EBITDA | 25,551 | | | $ | 6,785 | | Adjusted EBITDA | (721) | | | $ | 11,083 | |
| Adjusted EBITDA per share, basic | Adjusted EBITDA per share, basic | $ | 0.44 | | | $ | 0.18 | | Adjusted EBITDA per share, basic | $ | (0.01) | | | $ | 0.19 | |
Adjusted EBITDA per share, diluted | Adjusted EBITDA per share, diluted | $ | 0.43 | | | $ | 0.17 | | Adjusted EBITDA per share, diluted | $ | (0.01) | | | $ | 0.18 | |
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2021,March 31, 2022, we had working capital of approximately $195.9$157.9 million, compared to working capital of approximately $222.9$169.8 million as of December 31, 2020,2021, a decrease of approximately $27.0 million..$11.9 million. The decrease in working capital from December 31, 20202021 to June 30, 2021March 31, 2022 was due primarily to ten (10) business acquisition completed during the six months ended June 30, 2021 for which the cash consideration was approximately $48.0 million. Thisa decrease in working capital related to business acquisitions wasmarketable securities, inventory and prepaid inventory partially offset by an increasedecreases in inventory associated with more locations and our ability to leverage greater bulk purchasing due to our growth.current liabilities. At June 30, 2021,March 31, 2022, we had cash and cash equivalents of approximately $67.2$47.3 million and available for sale debt securities of $57.4$19.0 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States and building our brand portfolio through organic growth and acquisitions. Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings. We believe that some of our store acquisitions and new store openings can come from cash flow from operations.
We anticipate that we may need additional financing in the future to continue to acquire and open new stores and related businesses. To date we have financed our operations through the issuance and sale of common stock, convertible notes and warrants.
Critical Accounting Policies, Judgements and Estimates
For a summaryBusiness Combinations
Note 1 - Operations and Summary of Significant Accounting Policies to the Company’s significant accounting policies, please refer to Note 2 to our Consolidated Financial Statements filed onconsolidated financial statements included in Part II. Item 8 of our Form 10-K for the year ended December 31, 2020.2021 describes the significant accounting policies used in preparation of these consolidated financial statements. We believe the following critical accounting policy and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change. In each of these areas, management makes estimates based on historical results, current trends and future projections. Therefore, these are considered to be our critical accounting policies and estimates.
We account for transactions that represent business combinations under the acquisition method of accounting, which requires us to allocate the total consideration paid for each acquisition to the assets we acquire and liabilities we assume based on their fair values as of the date of acquisition, including identifiable intangible assets. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. We may refine our estimates and make adjustments to the assets acquired and liabilities assumed over a measurement period, not to exceed one year.
The Company has financial liabilities resulting from our business combinations, including contingent consideration arrangements. We estimate the fair value of these financial liabilities using Level 3 inputs that require the use of numerous assumptions, which may change based on the occurrence of future events and lead to increased or decreased operating income in future periods. Estimating the fair value at an acquisition date and in subsequent periods involves significant judgments, including projecting the future financial performance of the acquired businesses. The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions.
Changes in the fair value of these financial liabilities are recorded in the Consolidated Statements of Operations within other income (expense).
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We areFor a smaller reporting companysummary of the Company’s quantitative and are not requiredqualitative disclosures about market risk, please refer to provideItem 7A of our Form 10-K for the information under this item pursuant to Regulation S-K.year ended December 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Management maintains “disclosureWe maintain disclosure controls and procedures” as such term is (as defined in RuleRules 13a-15(e) underand 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),) that are designed to ensurebe effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer,management to allow timely decisions regarding required disclosure.
In making this assessment, management used the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on evaluation under these criteria, management determined, based upon the existence of the material weaknesses described below, that we did not maintain effective internal control over financial reporting as of June 30, 2021.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
The Company did not design and implement effective control activities based on the criteria established in the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
The following were contributing factors to the material weaknesses in control activities:
• Insufficient resources within the accounting and financial reporting department to review the accounting implications of complex transactions..
•Inadequate segregation of duties within the bank accounts.
•Ineffective information technology general controls (ITGCs) in the areas of user access over certain information technology (IT) systems that support the Company’s financial reporting processes.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the implementation of remediation plans for the deficiency to address the material weakness identified.
Remediation Plan and Status
Our remediation efforts are ongoing and we will continue our initiatives to implement and document policies, procedures, and internal controls. Remediation efforts will include but are not limited to new hires in critical positions to improve segregation of duties, supervision and oversight, as well as implementation of technologies to improve effective controls.
Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.
Inherent Limitations on Effectiveness of Controls
Management including our CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, including the possibility of human error, the circumvention or overriding of controls, or fraud, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected.
These inherent limitations includeAs of the realitiesperiod covered by this Quarterly Report on Form 10-Q, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Our management concluded that judgments in decision-making can be faultyas of March 31, 2022, our disclosure controls and that breakdowns can occurprocedures were not effective, because of simple errorthe material weaknesses in our internal control over financial reporting identified by management as of December 31, 2021 (described below). A material weakness is a deficiency, or mistake. Controlsa combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
Material Weaknesses in Control Activities
The following were contributing factors to the material weaknesses in control activities as of December 31, 2021, several of which also canwere determined to be circumventedthe material weaknesses at December 31, 2020:
•Insufficient resources within the accounting and financial reporting department to review the accounting for complex financial reporting transactions including areas such as business combinations, share based compensation, and the related income tax reporting.
•There are inadequate segregation of duties within the various bank accounts of the Company to prevent and detect unauthorized transactions in a timely manner. Additionally, there are deficiencies in the segregation of duties issues within IT, human resources, and manual journal entry posting processes.
•There are inadequate information and technology general controls, including segregation of duties, change management, and user access, which were inadequate to support financial reporting applications and support automated controls and functionality.
•There are inadequate controls over physical inventory counts.
Deficiencies in control activities contributed to material accounting errors identified and corrected through 2021 and prior years. These corrected design deficiencies in control activities were previously considered to contribute to the potential for there to have been material accounting errors in multiple financial statement account balances and disclosures.
We have concluded that significant progress has been made toward mitigating the above-mentioned control weakness as of March 31, 2022 and December 31, 2021, but we have not been able to adequately confirm the design and confirm the control weakness has been remediated as of the date of this report. In making this assessment, management used the criteria set forth by the individual actsInternal Control — Integrated Framework (2013) issued by the Committee of some persons, by collusion of two or more people, or by management overrideSponsoring Organizations of the Treadway Commission.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the implementation of remediation plans to address the material weaknesses discussed above.
Material Weakness Remediation Plan and Status
Our remediation efforts are ongoing and we will continue our initiatives to implement and document policies, procedures, and internal controls. The designIn 2021, the Company completed the following remedial actions:
•Hired and trained additional resources within the accounting and financial reporting departments to review the accounting for warrant compensation accounting, share-based compensation accounting, and rebates.
•Hired and trained additional resources to specifically manage cash and ensure adequate segregation of any systemduties.
•Implemented numerous general and access controls over all information technology (IT) systems that supports the Company's financial reporting processes.
•Implementation and redesign of controls is based in part onover inventory count procedures.
Our management believes that these actions, and additional actions to be taken, are reasonably designed to remediate the control deficiencies identified and strengthen our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or modify certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degreeremediation measures described above.
Remediation of compliance with policies or procedures.the identified material weaknesses and strengthening our internal control environment has continued during the period ended March 31, 2022 and will continue throughout 2022 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The COVID-19 coronavirus pandemic could haveFor a material negative effect on our results of operations, cash flows, financial position, and business operations.
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations.
We are unable to predict the impact that COVID-19 will have on our results of operations, cash flows, financial position, and business operations due to numerous uncertainties. These uncertainties include, but are not limited to: the severitysummary of the virus; the duration of the pandemic; governmental actions which include restrictions on our operations upCompany’s risk factors, please refer to and including potential closureItem 9A of our stores and distribution centers; the duration and degree of quarantine or shelter-in-place measures, including additional measures that may still occur; impacts on our supply chain which include suppliers of our products and our transportation vendors; the health of our workforce and our ability to maintain staffing needs to operate our business; how macroeconomic factors evolve including unemployment rates and recessionary pressures; the impact of the crisis on consumer shopping patterns, both during and after the crisis; volatility in the economy as well as the credit and financial markets during and after the pandemic; the incremental costs of doing business during the crisis as well as on a long-term basis; potential increases in insurance premiums, medical claims costs, and workers’ compensation claim costs; unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; potential delays in growth initiatives including the timing of new store openings; potential adverse effects on our internal control environment and information security as a result of changes to a remote work environment; and the long-term impact of the crisis on our business.
In addition, we cannot predict the impact that the pandemic will have on our manufacturers and suppliers of our products and other business partners such as service vendors; however, any material effect on these parties could adversely impact our results of operations and our ability to operate our business effectively.
The COVID-19 coronavirus pandemic could have a material negative effect on our supply chain.
Circumstances surrounding and related to the COVID-19 pandemic have created unprecedented impacts on the global supply chain. Our business relies on an efficient and effective supply chain, including the manufacture and transportation of our products as well as the effective functioning of our distribution centers. Impacts related to the COVID-19 pandemic are placing strain on the domestic and international supply chain that could negatively affect the flow or availability of our products and result in higher out-of-stock inventory positions due to difficulties in timely obtaining product from the manufacturers and suppliers of our products as well as transportation of those products to our distribution centers and stores. Further, we may have to source products from different manufacturers or geographic locations which could result in, among other things, higher product costs, increased transportation costs, delays in receiving products or lower quality of the products.
Any of these circumstances could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation.
Actions taken to protect the health and safety of our team members and customers during the COVID-19 coronavirus pandemic have increased our operating costs and may not be sufficient to protect against operational or reputational harm to our business.
In response to the COVID-19 pandemic, we have taken a number of actions across our business to help protect our team members, customers, and others in the communities we serve. These measures include personal protective equipment for our team members, a requirement to wear masks in our facilities, increased staffing in order to provide contact-free curbside pickup from stores, expansion of our capabilities to support delivery to customer homes, increased cleaning and sanitizing measures, and monitoring for “social distancing” directives, as well as additional cleaning materials in our facilities. Additionally, we have provided appreciation bonuses as well as permanent increases in compensation and benefits for our team members in our stores and distribution centers to further support them during and after the COVID-19 pandemic. Actions such as these have
resulted in significant incremental costs and we expect that we will continue to incur these costsForm 10-K for the foreseeable future, which in turn will have an adverse impact on our results of operations.
The health and safety of our team members and customers are of primary concern to our management team. However, due to the unpredictable nature of this virus and the consequences of our actions, we may see unexpected outcomes notwithstanding our added safety measures. For instance, if we do not respond appropriately to the pandemic, or if our customers do not participate in “social distancing” and other safety measures, the well-being of our team members and customers could be jeopardized. Furthermore, any failure to appropriately respond, or the perception of an inadequate response, could cause reputational harm to our brand and subject us to claims and litigation from team members, customers and service providers.
Additionally, an outbreak of confirmed cases of COVID-19 in our stores or distribution centers could result in temporary or sustained workforce shortages or facility closures which would negatively impact our underlying business and results of operations.year ended December 31, 2021.
There may be limitations on the effectiveness of our internal controls. Failure of our internal control over financial reporting could harm our business and financial results.
Proper systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.
Moreover, we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially adversely impact us.
In connection with the evaluation of our internal control over financial reporting as of December 31, 2020 that was undertaken by management, management identified the following material weaknesses in our control activities: i) insufficient resources within the accounting and financial reporting department to review the accounting for warrant compensation accounting, share-based compensation accounting, and accounting for rebates; ii) inadequate segregation of duties within the bank accounts; and ineffective information technology general controls (ITGCs) in the areas of user access over certain information technology (IT) systems that support the Company’s financial reporting processes. Based upon the existence of such material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020.
We have adopted a remediation plan and are in the process of implementing such plan. Remediation efforts will include but are not limited to new hires in critical positions to improve segregation of duties, supervision and oversight, as well as implementation of technologies to improve effective controls. Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.
If we are unable to assert that our internal control over financial reporting is effective, or, if applicable, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Common Stock to decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 19, 2021,February 1, 2022, the Company purchased all of the assets of Grow Depot LLC ("Down River Hydro"Horticultural Rep Group, Inc. (“HRG”), a hydroponicspecialty marketing and indoor gardening supply storesales organization of horticultural products based in Brownstown, MI. As part of theOgden, Utah. The total consideration for the asset purchase the Company issued 25,895 shares of HRG was approximately $13.4 million, including $6.8 million in cash and common stock valued at approximately $1.2$5.7 million. The Asset Purchase Agreement also provides for an indemnity holdback to be settled in common stock of the Company valued at $0.9 million. Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. HRG is included in our Distribution and other segment. The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations.
On May 24, 2021, the Company purchased the assets of The Harvest company, a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity County. As part of the consideration for the asset purchase, the Company issued 74,989 shares of common stock valued at approximately $2.8 million.
The above issuances were made by the Company pursuant to registration exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are included and filed with this report.
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Exhibit | | Exhibit Description |
3.1 | | |
3.2 | | |
10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5 | | |
10.6 | | |
10.7 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101 | | Interactive Data Files |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Definition |
| | | | | | | | |
| * | Furnished and not filed. |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on August 12, 2021.May 16, 2022.
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| GrowGeneration Corporation |
| | |
| By: | /s/ Darren Lampert |
| | Darren Lampert, Chief Executive Officer (Principal Executive Officer) |
| | |
| By: | /s/ Jeff Lasher |
| | Jeff Lasher, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) |