U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Under the Securities Exchange Act of 1934

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 2017

2023

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 CORPORATION

CORP.

(Exact name of small business issuerregistrant as specified in its charter)

Colorado46-5008129
Colorado46-5008129
(State of other jurisdiction

of incorporation)		(IRS Employer

ID No.)

1000 West Mississippi Avenue

Denver, CO 80223

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 classTrading symbolName of each exchange on which registered
Common Stock, par value $0.001 per shareGRWGThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post 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☒☐
(Do not check if a smaller reporting company)Emerging growth company☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 8, 2017,October 31, 2023 there were16,438,521  61,311,293 shares of the registrant’s common stock issued and outstanding.





TABLE OF CONTENTS

Page No.
PART IPage No.
FINANCIAL INFORMATION
PART I FINANCIAL INFORMATION
1
1
2
3
3
5
4
6
11
22
20
28
20
28
PART II OTHER INFORMATION
OTHER INFORMATION
32
Legal Proceedings21
32
Item 1A.Risk Factors21
21
32
21
32
21
32
21
32
22
33
23
34


i

PART I – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


GROWGENERATION CORPORATION AND SUBSIDIARIES

CORP.

CONDENSED CONSOLIDATED BALANCE SHEET

  September 30,
2017		  December 31, 2016 
  Unaudited    
ASSETS      
Current assets:      
Cash $1,905,477  $606,644 
Accounts receivable, net of allowance for doubtful accounts of $47,829 at September 30, 2017 and December 31, 2016  683,795   391,235 
Inventory  5,023,727   2,574,438 
Prepaid expenses and other current assets  607,450   35,256 
Total current assets  8,220,449   3,607,573 
         
Property and equipment, net  1,136,351   549,854 
Intangible assets, net  25,337   - 
Goodwill  523,000   243,000 
Other assets  93,565   42,526 
TOTAL ASSETS $9,998,702  $4,442,953 
         
LIABILITIES & STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $1,318,787  $643,793 
Payroll and payroll tax liabilities  132,249   77,068 
Customer deposits  59,600   51,672 
Sales tax payable  95,385   46,942 
Current portion of long term debt  54,112   23,443 
Total current liabilities  1,660,133   842,918 
         
Long term debt, net of current portion  89,639   41,726 
Total liabilities  1,749,772   884,644 
         
Commitments and contingencies        
         
Stockholders’ Equity:        
Common stock; $.001 par value; 100,000,000 shares authorized; 16,088,621 and 11,742,834 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively  16,088   11,743 
Additional paid-in capital  10,467,090   4,696,221 
Accumulated deficit  (2,234,248)  (1,149,655)
Total stockholders’ equity  8,248,930   3,558,309 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $9,998,702  $4,442,953 

See Notes to the UnauditedSHEETS

(Unaudited)
(in thousands, except shares and per share amounts)
 September 30,
2023		December 31,
2022
ASSETS  
Current assets:  
Cash and cash equivalents$31,414 $40,054 
Marketable securities35,203 31,852 
Accounts receivable, net of allowance for credit losses of $1.1 million and $0.7 million at September 30, 2023 and December 31, 20228,351 8,336 
Notes receivable, current, net of allowance for credit losses of $1.7 million and $1.3 million at September 30, 2023 and December 31, 2022— 1,214 
Inventory75,987 77,091 
Prepaid income taxes477 5,679 
Prepaids and other current assets12,383 6,455 
Total current assets163,815 170,681 
Property and equipment, net28,946 28,669 
Operating leases right-of-use assets42,316 46,433 
Intangible assets, net24,466 30,878 
Goodwill16,808 15,978 
Other assets880 803 
TOTAL ASSETS$277,231 $293,442 
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$20,219 $15,728 
Accrued liabilities3,413 1,535 
Payroll and payroll tax liabilities2,027 4,671 
Customer deposits4,926 4,338 
Sales tax payable1,503 1,341 
Current maturities of lease liability8,374 8,131 
Current portion of long-term debt— 50 
Total current liabilities40,462 35,794 
Commitments and contingencies (Note 12)
Operating lease liability, net of current maturities36,387 40,659 
Other long-term liabilities317 593 
Total liabilities77,166 77,046 
Stockholders’ equity:
Common stock; $0.001 par value; 100,000,000 shares authorized, 61,309,456 and 61,010,155 shares issued and outstanding as of September 30, 2023 and December 31, 202261 61 
Additional paid-in capital372,789 369,938 
Retained earnings (deficit)(172,785)(153,603)
Total stockholders’ equity200,065 216,396 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$277,231 $293,442 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1

1


GROWGENERATION CORPORATION AND SUBSIDIARIES

CORP.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF OPERATIONS

(Unaudited)

  Three Month Ended
September 30,		  Nine months ended
September 30,		 
  2017  2016  2017  2016 
             
Sales $4,028,170  $2,169,129  $10,722,738  $5,617,726 
Cost of sales  2,912,328   1,560,359   7,775,718   3,947,352 
Gross profit  1,115,842   608,770   2,947,020   1,670,374 
                 
Operating expenses:                
Store operations  800,861   372,317   2,098,201   1,057,447 
General and administrative  237,884   98,731   644,708   282,604 
Share based compensation  242,984   -   645,392   184,333 
Depreciation and amortization  22,987   17,158   63,035   38,181 
Salaries and related expenses  269,215   108,336   574,158   314,843 
Total operating expenses  1,573,931   596,542   4,025,494   1,877,408 
                 
Income (loss) from operations  (458,089)  12,228   (1,078,474)  (207,034)
                 
Other income (expense):                
Other income  621   -   1,062   2 
Other expense  -   -   -   (1,600)
Interest expense  (3,419)  (1,384)  (7,181)  (3,050)
Total non-operating expense, net  (2,798)  (1,384)  (6,119)  (4,648)
                 
Net income (loss) $(460,887) $10,844  $(1,084,593) $(211,682)
                 
Net income (loss) per shares, basic and diluted $(.03) $*  $(.08) $(.02)
                 
Weighted average shares outstanding, basic and diluted  14,819,742   10,584,262   13,857,393   10,584,262 

* Less than $.01

(in thousands, except per share

See Notes to the Unaudited amounts)

 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Net sales$55,678 $70,850 $176,430 $223,710 
Cost of sales (exclusive of depreciation and amortization shown below)39,490 52,516 126,816 163,009 
Gross profit16,188 18,334 49,614 60,701 
Operating expenses:
Store operations and other operational expenses11,930 13,585 37,165 41,884 
Selling, general, and administrative7,582 8,796 21,923 28,164 
Bad debt expense257 172 681 1,774 
Depreciation and amortization4,721 3,875 12,477 13,164 
Impairment loss— — — 127,831 
Total operating expenses24,490 26,428 72,246 212,817 
Income (Loss) from operations(8,302)(8,094)(22,632)(152,116)
Other income (expense):
Other income (expense)954 34 3,549 547 
Interest income— 143 — 190 
Interest expense(1)(3)(6)(16)
Total non-operating income (expense), net953 174 3,543 721 
Net income (loss) before taxes(7,349)(7,920)(19,089)(151,395)
Benefit (provision) for income taxes— 718 (93)2,637 
Net income (loss)$(7,349)$(7,202)$(19,182)$(148,758)
Net income (loss) per share, basic$(0.12)$(0.12)$(0.31)$(2.45)
Net income (loss) per share, diluted$(0.12)$(0.12)$(0.31)$(2.45)
Weighted average shares outstanding, basic61,272 60,855 61,127 60,771 
Weighted average shares outstanding, diluted61,272 60,855 61,127 60,771 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2





2

GROWGENERATION CORPORATION AND SUBSIDIARIES

CORP.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) 
(in thousands)
Common StockAdditional
Paid-In Capital		Retained
Earnings (Deficit)		Total
Stockholders’ Equity
 SharesAmount
Balances, June 30, 202361,229 $61 $371,863 $(165,436)$206,488 
Common stock issued for share based compensation80 — — — — 
Common stock withheld for employee payroll taxes— — (12)— (12)
Share based compensation— — 938 — 938 
Net income (loss)— — — (7,349)(7,349)
Balances, September 30, 202361,309 $61 $372,789 $(172,785)$200,065 
Common StockAdditional
Paid-In Capital		Retained
Earnings (Deficit)		Total
Stockholders’ Equity
 SharesAmount
Balances, June 30, 202260,782 $61 $368,077 $(131,412)$236,726 
Common stock issued for share-based compensation78 — — — — 
Common stock withheld for employee payroll taxes— — (17)— (17)
Share based compensation— — 1,104 — 1,104 
Net income (loss)— — — (7,202)(7,202)
Balances, September 30, 202260,860 $61 $369,164 $(138,614)$230,611 

3


Common StockAdditional
Paid-In Capital		Retained
Earnings (Deficit)		Total
Stockholders’ Equity
 SharesAmount
Balances, December 31, 202261,010 $61 $369,938 $(153,603)$216,396 
Common stock issued for share based compensation264 — — — — 
Common stock withheld for employee payroll taxes— — (187)— (187)
Share based compensation— — 2,265 — 2,265 
Noncash repurchase of liability awards— — 653 — 653 
Liability redemption associated with business acquisition35 — 120 — 120 
Net income (loss)— — — (19,182)(19,182)
Balances, September 30, 202361,309 $61 $372,789 $(172,785)$200,065 

Common StockAdditional
Paid-In Capital		Retained
Earnings (Deficit)		Total
Stockholders’ Equity
 SharesAmount
Balances, December 31, 202159,929 $60 $361,087 $10,144 $371,291 
Common stock issued in connection with business combination650 1 5,749 — 5,750 
Common stock issued for share-based compensation255 — — — — 
Common stock withheld for employee payroll taxes— — (1,465)— (1,465)
Share based compensation— — 3,793 — 3,793 
Common stock issued upon cashless exercise of options12 — — — — 
Common stock issued upon cashless exercise of warrants14 — — — — 
Net income (loss)— — — (148,758)(148,758)
Balances, September 30, 202260,860 $61 $369,164 $(138,614)$230,611 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4

GROWGENERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  For the Nine months ended
September 30,		 
  2017  2016 
Cash flows from operating activities:      
Net loss $(1,084,593) $(211,682)
Adjustments to reconcile net loss to net cash used in operating activities:        
Provision for doubtful accounts receivable  -   3,688 
Depreciation and amortization  63,035   38,181 
Commission, non-cash  -   35,000 
Stock-based compensation expense  645,391   184,333 
Inventory valuation reserve  -   - 
Changes in operating assets and liabilities:        
(Increase) decrease in:        
Accounts receivable  (292,560)  (331,157)
Inventory  (2,449,289)  (1,076,310)
Prepaid expenses and other assets  (259,209)  (1,930)
Increase (decrease) in:        
Accounts payable  674,994   320,335 
Payroll and payroll tax liabilities  55,181   13,607 
Customer deposits  7,928   8,432 
Sales tax payable  48,443   25,059 
Net cash used in operating activities  (2,590,679)  (992,444)
Cash flows from investing activities:        
Purchase of furniture and equipment  (563,724)  (183,059)
Purchase of intangibles  (306,177)  - 
Net cash used in investing activities  (869,901)  (183,059)
Cash flows from financing activities:        
Principal payments on long term debt  (36,752)  (10,940)
Proceeds from the sale of common stock and exercise of warrants, net of expenses  4,796,165   998,500 
Net cash provided by financing activities  4,759,413   987,560 
Net increase (decrease) in cash  1,298,833   (187,943)
Cash at the beginning of period  606,644   699,417 
Cash at the end of period $1,905,477  $511,474 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $7,181  $3,050 
Common stock and warrants issued for prepaid services $416,886   - 
Acquisition of vehicles with debt financing $84,968  $57,324 
Insurance premium financing $30,366   - 
Taxes paid  -  $- 

See Notes to the Unaudited

(in thousands)
 Nine Months Ended September 30,
 20232022
Cash flows from operating activities:  
Net income (loss)$(19,182)$(148,758)
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Depreciation and amortization12,477 13,164 
Stock-based compensation expense2,452 3,980 
Bad debt expense681 1,774 
(Gain) loss on asset disposition85 629 
Impairment loss— 127,831 
Deferred taxes— (2,166)
Change in value of marketable securities(981)— 
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts and notes receivable518 (4,987)
Inventory2,691 20,622 
Prepaid expenses and other assets(510)10,718 
Accounts payable and accrued liabilities6,352 (2,405)
Operating leases88 374 
Payroll and payroll tax liabilities(2,644)(3,046)
Customer deposits588 (7,538)
Sales tax payable162 (322)
Net cash provided by (used in) operating activities2,777 9,870 
Cash flows from investing activities:  
Acquisitions, net of cash acquired(3,050)(6,806)
Purchase of marketable securities(85,768)— 
Maturities from marketable securities83,398 39,793 
Purchase of property and equipment(5,995)(11,635)
Disposal of assets235 — 
Net cash provided by (used in) investing activities(11,180)21,352 
Cash flows from financing activities:  
Principal payments on long term debt(50)(69)
Common stock withheld for employee payroll taxes(187)(1,465)
Net cash provided by (used in) financing activities(237)(1,534)
Net change(8,640)29,688 
Cash and cash equivalents at the beginning of period40,054 41,372 
Cash and cash equivalents at the end of period$31,414 $71,060 
Supplemental disclosures of non-cash activities:  
Cash paid for interest$6 $16 
Cash paid for income taxes$93 $— 
Common stock issued for business combination$— $5,750 
Right-of-use assets acquired under new operating leases$4,173 $6,221 
Indemnity holdback from business acquisitions$— $875 
Noncash repurchase of liability awards$653 $— 
Liability redemption associated with business acquisition$120 $— 
Purchase of property and equipment accrued in accounts payable$355 $— 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

5




GrowGeneration Corporation and Subsidiaries

Corp.

Notes to the UnauditedTo Condensed Consolidated Financial Statements

September 30, 2017

1.NATURE OF OPERATIONS

2023

(Unaudited)
1.GENERAL
GrowGeneration Corp. (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of EasyLife Corp.(together with its direct and changed its name to GrowGeneration Corp. It maintains its principal office in Denver, Colorado.

The Company is engaged in the business of owning and operating retail hydroponic stores through itsindirect wholly owned subsidiaries, collectively “GrowGeneration” or the “Company”) is a leading marketer and distributor of nutrients, growing media, lighting, benching and racking, environmental control systems, and other products for both indoor and outdoor hydroponic and organic gardening, including proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Harvest Company scissors, and more. Incorporated in Colorado in 2014, GrowGeneration Pueblo Corp,is the largest chain of specialty retail hydroponic and organic garden centers in the U.S. As of September 30, 2023, GrowGeneration California Corp, GrowGeneration Nevada Corp, GrowGeneration Washington Corp, and GrowGeneration Management Corp and GGen Distribution Corp.has 56 retail locations across 18 states in the U.S. The Company commenced operation with the purchase of four retail hydroponic stores in Puebloalso operates an online superstore for cultivators at growgeneration.com, as well as a wholesale business for resellers, Horticultural Rep Group ("HRG"), and Canon City, Colorado on May 30, 2014. The Company currently ownsa benching, racking, and operates a total of 14 stores and is actively engaged in seekingstorage solutions business, Mobile Media ("MMI"). GrowGeneration also provides facility design services to acquire and open additional hydroponic retail stores.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company’s financial statements are prepared on the accrual method of accounting. The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP). The consolidated financial statements of the Company included the accounts of GrowGeneration Pueblo Corp, GrowGeneration California Corp, GrowGeneration Nevada Corp, GrowGeneration Washington Corp, GrowGeneration Management Corp and GGen Distribution Corp. All material intercompany accounts, balances and transactions have been eliminated in consolidation.

The various products sold support each other and are interrelated. Management makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis. Accordingly, the various products sold are aggregated into one reportable operating segment as under guidance in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC or “codification”) Topic 28 for segment reporting.

commercial growers.


Basis of Presentation - Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the normal recurring adjustments necessary to present fairly the financial position and results of operations as of and for the periods presented. The interim results are not necessarily indicative of the results to be expected for the full year or any future period.

Certain information and footnote disclosures normally included in the consolidated financial statementsCondensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant toof America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes thatAccordingly, they do not include all of the disclosures are adequate to makeinformation and notes required by U.S. GAAP for complete financial statements. In the interim information presented not misleading.opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’sCompany's Annual Report on Form 10-K filed on March 31, 2017 for the yearsfiscal year ended December 31, 2016 and 2015.

Reclassifications

Certain2022 (“2022 Form 10-K”). There were no significant changes to the Company's significant accounting policies as disclosed in our 2022 Form 10-K. The results reported in these unaudited Condensed Consolidated Financial Statements are not necessarily indicative of results for the full fiscal year.

All amounts included in the prior periodaccompanying footnotes to the consolidated financial statements, have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net income (loss)except per share data, are in thousands (000).

4

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Use of Estimates


Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles.U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.

Income Taxes

The Company accounts





6
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

2.FAIR VALUE MEASUREMENTS
Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for income taxesthe asset or liability in accordance with FASB ACS 740, Income Taxes, which requiresan orderly transaction between market participants on the recognitionmeasurement date. Valuation techniques used to measure fair value must maximize the use of deferred income taxes for differences betweenobservable inputs and minimize the basisuse 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 financial statementidentical 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 income tax purposes. The differences related principallythat are significant to depreciationdetermining the fair value of property and equipment, reserve for obsolete inventory and bad debt. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be deductible or taxable when the assets or liabilities, including pricing models, discounted cash flow methodologies and liabilities are recoveredsimilar techniques.
To the extent that the valuation is based on models or settled. Deferred taxes are also recognized for operating lossesinputs that are available to offset future taxable income. Valuation allowances are established to reduce deferred tax assetsless observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the amount expectedfair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable, available for sale securities, accounts payable, and all other current liabilities approximate fair values due to be realized.

The Company adopted the provisionstheir short-term nature. Changes in fair value of FASB ACS 740-10-25, which prescribes a recognition thresholdmarketable securities, principally derived from accretion of discounts, was $0.5 million and measurement attribute$1.0 million for the recognitionthree and measurement of tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. The Company’s tax returns are subject to tax examinations by U.S. federal and state authorities until respective statute of limitation. Currently, the 2016, 2015 and 2014 tax years are open and subject to examination by taxing authorities. However, the Company is not currently under audit nor has the Company been contacted by any of the taxing authorities. The Company does not have any accrual for uncertain tax positions as ofnine months ended September 30, 2017. It is not anticipated that unrecognized tax benefits would significantly increase2023, and included in Other income (expense) on the Condensed Consolidated Statements of Operations. The fair value of notes receivable approximates the outstanding balance net of reserves for expected credit loss.

 LevelSeptember 30,
2023		December 31,
2022
Cash equivalents1$16,560 $25,087 
Marketable securities2$35,203 $31,852 


7
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

3.RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or decrease within 12 months of the reporting date.

3.RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS

In May 2014,other standard setting bodies issue new accounting pronouncements. Updates to the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”.  The new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries.  The section is intended to conform revenue accounting principles with a concurrently issued International Financial ReportingAccounting Standards with previously differing treatment between United States practice and thoseCodification (“ASC”) are communicated through issuance of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information.  The updated guidance was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. On July 9, 2015, the FASB approved a one-year delay of the effective date. The Company will now adopt the new provisions of this accounting standard at the beginning of fiscal year 2018.

In July 2015, the FASB issuedan Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost. The Company has implemented all new accounting pronouncements that are in effect and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were mademay impact our financial statements. In addition to the current guidance on inventory measurement. ASU 2015-11 isaccounting pronouncement discussed below, no other new accounting pronouncement issued or effective for interim and annual periods beginning after December 15, 2016. This update was adopted byduring the Company in the first quarter of fiscal year 2017. There was nohad or is expected to have a material impacteffect on the Company'sCompany’s consolidated financial statements as a result of the adoption of this accounting standard.

5
or disclosures.


3.RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS, continued

Recently Adopted Accounting Pronouncements

In November 2015, theJune 2016, FASB issued ASU No. 2015-17, “Balance Sheet Classification2016-13, “Financial Instruments — Credit Losses (Topic 326),” changing the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses based upon a company’s historical credit loss experience, adjusted for asset-specific risk characteristics, current economic conditions, and reasonable forecasts, rather than incurred losses as required previously by the other-than-temporary impairment model. The ASU applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities, net investments in leases, and off-balance sheet credit exposures. ASU No. 2016-13 was effective January 1, 2020, and the Company adopted this standard effective January 1, 2023. The adoption of Deferred Taxes”. The new guidance eliminatesthis standard primarily applied to the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities and assets be classified as noncurrent in a classified statementvaluation of financial position. The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods.the Company’s accounts receivable. The adoption of this standard did not have a material impact on the consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01,Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities , which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted for certain provisions. The Company is in the process of determining the effects the adoption will have on itsCompany’s consolidated financial statements as well as whether to adopt certain provisions early.

In February 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. ASU 2016-02 is not effective for us until January 1, 2019, with early adoption permitted. We are continuing to evaluate this guidanceor disclosures, and the impact to us, as both lessor and lessee, on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected asCompany’s estimate of the beginning of the fiscal year of adoption. We adopted this guidance effective January 2, 2017, and the adoption did not have a material effect on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are currently evaluating the impact of the new guidance on our goodwill impairment testing process and consolidated financial statements.

On August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,” which better aligns risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The new standard will be effective for the Companyexpected credit losses as of January 1, 2019. Early adoption is permitted. We do not believe2023, using the expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of this new standard will have any impact on our consolidated financial statementsthe standard.

4.REVENUE RECOGNITION
Disaggregation of Revenues

Net sales are disaggregated by the Company's segments, which represent its principal lines of business, as well as by the type of good or service, including sales of private label products, non-private label products or distributed brands, and footnote disclosures.

6
sales of commercial fixtures. See Note 13, Segments, for disaggregated revenue by segment.


4.PROPERTY AND EQUIPMENT

   September 30, 2017  December 31,
2016		 
 Vehicles $239,825  $102,014 
 Leasehold improvements  178,190   131,411 
 Furniture, fixtures and equipment  853,498   389,396 
    1,271,513   622,821 
 (Accumulated depreciation)  (135,161)  (72,967)
 Property and Equipment, net $1,136,351  $549,854 

Contract Assets and Liabilities

The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:
 Accounts Receivable, NetCustomer Deposits
Opening balance, January 1, 2023$8,336 $4,338 
Closing balance, September 30, 20238,351 4,926 
Increase (decrease)$15 $588 
Opening balance, January 1, 2022$5,741 $11,686 
Closing balance, September 30, 202210,147 5,390 
Increase (decrease)$4,406 $(6,296)
Of the total amount of customer deposit liability as of January 1, 2023, $2.9 million was reported as revenue during the nine months ended September 30, 2023. Of the total amount of customer deposit liability as of January 1, 2022, $11.1 million was reported as revenue during the nine months ended September 30, 2022.

8
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

5.PROPERTY AND EQUIPMENT
 September 30,
2023		December 31,
2022
Vehicles$2,596 $2,176 
Building and land2,121 2,121 
Leasehold improvements12,268 12,562 
Furniture, fixtures and equipment14,951 13,195 
Capitalized software16,085 2,644 
Construction-in-progress— 9,569 
Total property and equipment, gross48,021 42,267 
Accumulated depreciation(19,075)(13,598)
Property and equipment, net$28,946 $28,669 
Depreciation expense for the three and nine months ended September 30, 20172023 was $2.5 million and 2016$5.8 million. Depreciation expense for the three and nine months ended September 30, 2022 was $22,707$1.7 million and $17,158 respectively$5.4 million.

9
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

6. GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill are as follows:
 September 30, 2023December 31,
2022
Balance, beginning of period$15,978 $125,401 
Goodwill additions and measurement period adjustments830 7,234 
Impairment— (116,657)
Balance, end of period$16,808 $15,978 

During the second quarter of 2022, the Company’s market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which was contrary to prior experience. Management reassessed business performance expectations following persistent adverse developments in equity markets, deterioration in the environment in which the Company operates, inflation, lower than expected sales, and an increase in operating expenses. These indicators, in the aggregate, required impairment testing for finite-lived intangible assets at the asset group level and goodwill at the reporting unit level as of June 30, 2022.

As a result, the Company performed a cash recoverability test on the following finite-lived intangible assets: customer relationships, trade names, and non-competes. For goodwill impairment testing purposes, the Company identified four reporting units, of which three were subject to a quantitative assessment. The Company determined the fair value of its reporting units using the income approach, where estimated future returns are discounted to present value at an appropriate rate of return. The Company recognized impairment losses for related to its finite-lived intangibles and goodwill on June 30, 2022 as disclosed in the table below. There were no goodwill or finite-lived intangible impairments recognized during the nine months ended September 30, 2023.

The goodwill balance and impairment by segment are as follows:

RetailE-commerceDistributionTotal
Gross carrying value at December 31, 2021$101,811 $11,659 $11,931 $125,401 
Acquisitions & measurement period adjustments1,418 (341)6,157 7,234 
Gross carrying value at December 31, 2022103,229 11,318 18,088 132,635 
Acquisitions & measurement period adjustments830 — — 830 
Gross carrying value, at September 30, 2023$104,059 $11,318 $18,088 $133,465 
Accumulated impairment losses at December 31, 2021$— $— $— $— 
Impairment(103,094)(9,848)(3,715)(116,657)
Accumulated impairment losses at December 31, 2022(103,094)(9,848)(3,715)(116,657)
Impairment— — — — 
Accumulated impairment losses at September 30, 2023$(103,094)$(9,848)$(3,715)$(116,657)
Net carrying value at December 31, 2022$135 $1,470 $14,373 $15,978 
Net carrying value at September 30, 2023$965 $1,470 $14,373 $16,808 








10
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

A summary of intangible assets is as follows:
Weighted-Average
Amortization Period
of Intangible Assets
as of September 30, 2023
(in years)
Trade names2.47
Patents2.34
Customer relationships3.86
Non-competes0.59
Intellectual property2.42
Total2.98

Intangible assets consist of the following:
 September 30, 2023
 Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Trade names$29,062 $(15,066)$13,996 
Patents100 (67)33 
Customer relationships17,542 (8,308)9,234 
Non-competes932 (727)205 
Intellectual property2,065 (1,067)998 
Total$49,701 $(25,235)$24,466 

 December 31, 2022
 Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Trade names$29,062 $(10,517)$18,545 
Patents100 (56)44 
Customer relationships17,102 (6,501)10,601 
Non-competes932 (551)381 
Intellectual property2,065 (758)1,307 
Total$49,261 $(18,383)$30,878 

















11
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

Intangibles and impairment by segment are as follows:

RetailE-commerceDistributionTotal
Gross carrying value at December 31, 2021$37,825 $2,501 $16,698 $57,024 
Acquisitions & measurement period adjustments229 — 3,182 3,411 
Gross carrying value at December 31, 202238,054 2,501 19,880 60,435 
Acquisitions & measurement period adjustments440 — — 440 
Gross carrying value at September 30, 2023$38,494 $2,501 $19,880 $60,875 
Accumulated amortization at December 31, 2021$(6,285)$(354)$(1,983)$(8,622)
Amortization(5,721)(460)(3,580)(9,761)
Accumulated amortization at December 31, 2022(12,006)(814)(5,563)(18,383)
Amortization(3,793)(335)(2,724)(6,852)
Accumulated amortization at September 30, 2023$(15,799)$(1,149)$(8,287)$(25,235)
Accumulated impairment losses at December 31, 2021$— $— $— $— 
Impairments(11,079)(95)— (11,174)
Accumulated impairment losses at December 31, 2022(11,079)(95)— (11,174)
Impairments— — — — 
Accumulated impairment losses September 30, 2023$(11,079)$(95)$— $(11,174)
Net carrying value at December 31, 2022$14,969 $1,592 $14,317 $30,878 
Net carrying value September 30, 2023$11,616 $1,257 $11,593 $24,466 

Amortization expense for the three and nine months ended September 30, 2023 was $2.2 million and $6.9 million. Amortization expense for the three and nine months ended September 30, 2022 was $2.2 million and $7.7 million.

Future amortization expense as of September 30, 2023 is as follows:
 
2023, remainder$2,229 
20248,799 
20258,426 
20263,663 
20271,217 
Thereafter132 
Total$24,466 
7. INCOME TAXES

For the nine months ended September 30, 2023, the effective tax rate was (0.42)%, compared to 1.74% for the nine months ended September 30, 2017 and 2016 was $62,194 and $38,181, respectively. 

5.OTHER COMMITMENTS

On September 22, 2017 the Board2022. The effective tax rate for each of Directors approved new three-year employment agreements with its CEO and President. Compensation under each new employment agreement is $175,000 annually with 10% increases on each January 1 during the term of the agreement. In addition, the CEO and President are eligible for bonus payment based on achieving certain revenue objective. The CEO and President will each be granted up to 300,000 options to purchase shares of common stock of the Company, of which 30,750 have been granted as of September 22, 2017.

In April and May 2017, the Company also entered into three-year employment agreements with its COO and CFO, respectively. These agreements require payment of monthly wages and benefits.

6.LONG-TERM DEBT

   September 30,  December 31, 
   2017  2016 
 Long term debt is as follows:      
 Chrysler Capital, interest ranging from 9.8% and 10.9% per annum, payable in monthly installments of $1,889.59 beginning May 2017 through June 2022, secured by vehicles with a book value of $128,800 $83,565  $- 
          
 Hitachi Capital, interest at 8.0% per annum, payable in monthly installments of $631.13 beginning September 2015 through August 2019, secured by delivery equipment with a book value of $24,910  13,424   18,133 
          
 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 $25,437  19,574   24,559 
          
 RMT Equipment, interest at 10.9% per annum, payable in monthly installments of $1,154.79 beginning June 2016 through October 2018, secured by delivery equipment with a book value of $31,130  13,545   22,477 
          
 Note payable insurance premium financing, interest at 4.74% per annum, payable in 10 installments of $3,441, due January 2018  13,642   - 
   $143,750  $65,169 
 Less Current Maturities  (54,112)  (23,443)
 Total Long-Term Debt $89,638  $41,726 

7

6.LONG-TERM DEBT, continued

Interest expense for the three months ended September 30, 2017 and 2016 was $3,419 and $1,384, respectively and for the nine months ended September 30, 20172023 and 20162022 is lower than the U.S. federal statutory rate of 21.0% primarily due to the Company’s valuation allowance against deferred tax assets. As of September 30, 2023, the Company concluded that its deferred tax assets are not expected to be realizable, based on positive and negative evidence, therefore it has assigned a full valuation allowance against them.


12
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

8. LEASES

The right-of-use assets and corresponding liabilities related to the Company's operating leases are as follow:

 September 30,
2023		December 31,
2022
Operating leases right-of-use assets$42,316 $46,433 
Current maturities of lease liability$8,374 $8,131 
Operating lease liability, net of current maturities36,387 40,659 
Total lease liability$44,761 $48,790 
The weighted-average remaining lease terms and weighted-average discount rates for operating leases were as follows:

 September 30,
2023		September 30,
2022
Weighted average remaining lease term6.07 years6.68 years
Weighted average discount rate6.0 %5.5 %

Lease expense is recorded within the Company’s Condensed Consolidated Statements of Operations based upon the nature of the operating lease right-of-use assets. Where assets are used to directly serve our customers, such as retail locations and distribution centers, lease costs are recorded in Store operations and other operational expenses. Facilities and assets which serve management and support functions are expensed through Selling, general, and administrative. Additionally, the Company recorded sublease income of $0.3 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, within Other income (expense) related to the sublease of a closed retail location.

The components of lease expense are as follows:

 Three Months Ended September 30,
 20232022
Operating lease costs$2,738 $2,615 
Variable lease costs176 664 
Short-term lease costs98 69 
Total operating lease costs$3,012 $3,348 

 Nine Months Ended
September 30,
 20232022
Operating lease costs$8,434 $8,060 
Variable lease costs1,466 2,004 
Short-term lease costs241 306 
Total operating lease costs$10,141 $10,370 
13
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

Future maturities of the Company’s operating lease liabilities as of September 30, 2023: 

2023 (remainder of the year)$2,797 
202410,519 
20259,694 
20267,844 
20275,446 
Thereafter17,065 
Total lease payments53,365 
Less: Imputed interest(8,604)
Lease Liability at September 30, 2023$44,761 

Supplemental and other information related to leases was $7,181as follows:

 Nine Months Ended
September 30,
 20232022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases$8,321 $7,692 
9. SHARE BASED PAYMENTS
The Company maintains long-term incentive plans for employees, non-employee members of its Board of Directors, and $3,050, respectively.

7.SHARE BASED PAYMENTS AND STOCK OPTIONS

consultants. The plans allow 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 awards in the form of common stock warrants to non-employees.

The following table presents share-based paymentaward expense and new shares issued for the three and nine months ended September 30, 20172023 and 2016.

   Three Months Ended
September 30,		  Nine months ended
September 30,		 
   2017  2016  2017  2016 
 Restricted shares issued  66,500          -   371,500   140,000 
 Shares based expense from issuance of common stock $117,040  $-  $365,040  $98,000 
 Shares based expense from issuance of common stock options $84,695   -  $162,103  $86,333 
 Subtotal shares issued for services and options issued $201,735  $-  $527,143  $184,333 
 Warrants issued for services  41,249   -   118,249   - 
 Total non cash compensation $242,984   -  $645,392  $184,333 

On March 6, 2014, the Company’s Board2022:

 Three months ended September 30,Nine months ended September 30,
 2023202220232022
Restricted stock$938 $951 $2,452 $2,902 
Stock options— — — 59 
Warrants— 340 — 1,019 
Total$938 $1,291 $2,452 $3,980 
As of Directors (the “Board”) and majority stockholders approved the 2014 Equity Incentive Plan pursuant to whichSeptember 30, 2023, the Company may grant incentive and non-statutory optionshad approximately $4.5 million of unamortized share-based compensation for share based awards, which are expected to be recognized over a weighted average period of approximately 1.9 years.
Restricted Stock
The Company issues shares of restricted stock to eligible employees, nonemployee memberswhich are subject to forfeiture until the end of an applicable vesting period. The awards generally vest on the first, second, third, or fourth anniversary of the Board, consultants and other independent advisors who provide servicesdate of grant, subject to the Company. The maximum sharesemployee’s continuing employment as of commonthat date. Restricted stock which may be issued over the term of the plan shall not exceed 2,500,000 shares. Awards under the plan are made by the Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s common stock which is required to be issued at a price not less than 110% of the fairvalued using market value on the day of the grant. Each option is exercisable at such time or times, during such period and for such numbers of shares shall be determined by the plan administrator. However, no option shall have a term in excess of 5 years from the date of grant.

Options outstanding at grant date.

14
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2017 are as follows:

 Options Shares  Weight - Average Exercise Price  Weighted - Average Remaining Contractual Term
 Outstanding at December 31, 2016  1,880,000  $0.62  2.27 years
 Granted  296,500  $1.82   
 Exercised  -   -   
 Forfeited or expired  (27,000)  -   
 Outstanding at September 30, 2017  2,149,500  $.77  1.92 years
 Options vested at September 30, 2017  2,049,500  $.72   

8
2023


8.STOCK PURCHASE WARRANTS

During

Restricted stock activity for the nine months ended September 30, 2017,2023 is presented in the Company granted 825,000 warrants to investors in a private placement and 100,000 warrants to an advisor pursuant to certain advisor agreement. These warrants are exercisable for a period of five years with an exercise price of $2.75 and $.70, respectively.

following table:

 SharesWeighted Average Grant Date Fair Value
Nonvested, December 31, 2022614,875 $9.41 
Granted1,110,000 $3.77 
Vested(305,167)$5.77 
Forfeited(345,750)$7.01 
Nonvested, September 30, 20231,073,958 $5.42 
The table below summarizes all option activity under all plans during the nine months ended September 30, 2023:
OptionsSharesWeighted -
Average
Exercise
Price		Weighted -
Average
Remaining
Contractual
Term		Weighted -
Average
Grant Date
Fair Value
Outstanding at December 31, 2022604,498 $3.97 1.87$2.24 
Granted— — — — 
Exercised(20,000)3.50 — — 
Forfeited or expired— — — — 
Outstanding at September 30, 2023584,498 $3.99 1.17$2.24 
Vested at September 30, 2023584,498 $3.99 1.17$2.24 
A summary of the status of the Company’s outstanding stock purchase warrants as offor the nine months ended September 30, 20172023 is as follows:

   Warrants  Weighted - Average Exercise Price 
        
 Outstanding December 31, 2016  3,885,729  $0.70 
          
 Granted  2,475,000   2.65 
 Exercised  (2,149,287)  0.70 
 Forfeited  -   - 
 Outstanding September 30, 2017  4,211,442  $1.79 

9.STOCKHOLDERS’ EQUITY

Common Stock

The Company’s current Certificate of Incorporation authorizes

 WarrantsWeighted Average
Exercise Price
Outstanding at December 31, 202232,500 $10.61 
Issued— — 
Exercised— — 
Forfeited(32,500)$10.61 
Outstanding at September 30, 2023— $— 
Liability Awards

In August 2022, the Company issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480-10-25 and ASC 718-10-25. These awards entitled the employees to issued 100,000,000receive an equity award with a specified dollar value of common stock on future dates ranging from June 15, 2023, through June 15, 2025. The awards generally vested over three years subject to the employee’s continued employment. On June 15, 2023, the three employees subject to these awards entered into new employment agreements which superseded the prior agreements and removed the liability awards from their compensation package. In accordance with ASC 718-20-35-2A through 718-20-35-9, these awards were evaluated and accounted for as modified awards. The liability of $0.7 million was relieved to additional paid-in capital and the incremental expense of $0.1 million will be recognized over the remaining term of the modified awards.



15
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

10. EARNINGS (LOSS) 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 nine months ended September 30, 2023 and 2022:

 Three Months Ended
 September 30,
2023		September 30,
2022
Net income (loss)$(7,349)$(7,202)
Weighted average shares outstanding, basic61,272 60,855 
Effect of dilution— — 
Adjusted weighted average shares outstanding, dilutive61,272 60,855 
Basic earnings (loss) per share$(0.12)$(0.12)
Dilutive earnings (loss) per share$(0.12)$(0.12)
 Nine Months Ended
 September 30,
2023		September 30,
2022
Net income (loss)$(19,182)$(148,758)
Weighted average shares outstanding, basic61,127 60,771 
Effect of dilution— — 
Adjusted weighted average shares outstanding, dilutive61,127 60,771 
Basic earnings (loss) per share$(0.31)$(2.45)
Dilutive earnings (loss) per share$(0.31)$(2.45)

Diluted earnings per share calculations for each of three and nine month ended September 30, 2023 excluded 1.1 million shares of common stock par value $0.001issuable upon exercise of stock options and 0.6 million of non-vested restricted stock that would have been anti-dilutive. Diluted earnings per share. Asshare calculations for each of three and nine month ended September 30, 2017, there were 16,088,6212022 excluded 0.6 million shares of common stock outstanding.

2017 Equity Transactions

issuable upon exercise of stock options, 0.7 million of non-vested restricted stock, and 0.3 million of shares of common stock issuable upon exercise of the stock purchase warrants that would have been anti-dilutive.


11. ACQUISITIONS
The Company's 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 Condensed Consolidated Balance Sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of purchase price was based upon the preliminary valuation, and the Company's estimates and assumptions are subject to change within the measurement period as valuations are finalized, not to exceed one year from the acquisition date. The Company has made adjustments to the preliminary valuations of the acquisitions based on valuation analyses prepared by independent third-party valuation consultants. There have been no measurement period adjustments during the current year. During the nine months ended September 30, 20172022, measurement period adjustments included increasing goodwill by $1.3 million offset with intangible assets, which resulted in an insignificant reduction in amortization expense. All acquisition costs are expensed as incurred and recorded in Selling, general, and administrative expenses in the Company sold a totalCondensed Consolidated Statements of 1,825,000 units, each consisting of one share of common stock and one warrant to purchase one share of common stock, for net proceeds after offering costs of $3,291,565.

DuringOperations.

Acquisitions during the nine months ended September 30, 2017, warrants to purchase 2,149,287 shares of common stock were exercised resulting in proceeds to2023
On May 23, 2023, the Company purchased substantially all of $1,504,501.

Duringthe assets of Southside Garden Supply ("Alaska"), a two-store chain of indoor/outdoor garden centers. The total consideration for the purchase of the Alaska assets was approximately $2.0 million, including $1.9 million in cash and an indemnity holdback of $0.1 million. The Alaska asset acquisition also included acquired goodwill of approximately $0.6 million, which represents the value expected to rise from organic growth and an opportunity for the Company to expand into a new market. Alaska is included in our Retail segment.


16
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

Additionally, the Company made other, individually immaterial acquisitions during the nine months ended September 30, 2017,2023. Total consideration for these purchases was approximately $1.2 million, including $1.1 million paid in cash and indemnity holdbacks of less than $0.1 million. These individually immaterial acquisitions also included aggregate acquired goodwill of approximately $0.3 million, which represents the value expected to rise from organic growth and an opportunity for the Company issued 195,500 sharesto expand into a new market. These acquisitions are included in our Retail segment.

The table below represents the allocation of common stockthe purchase price to employees and consultants valued at $365,000.

Duringthe acquired net assets during the nine months ended September 30, 2017,2023.


 AlaskaOtherTotal
Inventory$720 $867 $1,587 
Prepaids and other current assets292 1 293 
Furniture and equipment— 47 47 
Operating lease right-of-use asset630 648 1,278 
Operating lease liability(630)(648)(1,278)
Customer relationships440 — 440 
Goodwill577 253 830 
Total$2,029 $1,168 $3,197 

The table below represents the Company issued 100,000 shares of common stock and 100,000 warrantsconsideration paid for consulting services valued at $77,000.

Duringthe net assets acquired in business combinations during the nine months ended September 30, 2017,2023.


 AlaskaOtherTotal
Cash$1,922 $1,128 $3,050 
Indemnity holdback107 40 147 
Total$2,029 $1,168 $3,197 

The following table discloses the Company issued 80,000 sharesdate of common stockthe acquisitions noted above and 150,000 warrantsthe revenue and earnings included in the Condensed Consolidated Statement of Operations for prepaid consulting services valued at $251,890.

9
the nine months ended September 30, 2023.


10. EARNINGS PER SHARE

Basic net loss per share is computed by dividing net loss by

 AlaskaOtherTotal
Acquisition dateMay 23, 2023
Net sales$1,127 $2,044 $3,171 
Net income (loss)$(52)$(17)$(69)

The following represents the weighted average numberpro forma Condensed Consolidated Statement of shares of common stock outstanding. Diluted net loss per share is computed by dividing net loss byOperations as if the weighted average number of shares of common stock outstanding plus the number of shares of common stock that would be issued assuming exercise or conversion of all potentially dilutive shares of common stock. Potentially dilutive securities are excluded from the calculation when their effect would be anti-dilutive. For all periods presentedacquisitions had been included in the consolidated results of the Company for the entire period for the three and nine months ended September 30, 2023, and 2022.

 Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net sales$55,499 $74,747 $178,465 228,915 
Net income (loss)$(7,726)$(7,193)$(19,217)(148,863)

Acquisitions during 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 the assets 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 provided 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.
17
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023


The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2022.

HRG
Inventory$4,170 
Prepaids and other current assets76 
Furniture and equipment148 
Operating lease right-of-use asset666 
Operating lease liability(666)
Customer relationships2,430 
Trademark496 
Non-compete255 
Goodwill5,816 
Total$13,391 

The table below represents the consideration paid for the net assets acquired in business combinations during the nine months ended September 30, 2022.
HRG
Cash$6,806 
Indemnity stock holdback875 
Common stock5,710 
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 nine months ended September 30, 2022. Revenue and earnings amounts include other proprietary brands now being included under HRG for operations.

HRG
Acquisition dateFebruary 1, 2022
Net sales$13,474 
Net Income (loss)$(209)

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 and nine months ended September 30, 2022.

Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
Net sales$80,901 $235,443 
Net income (loss)$(135,514)$(149,316)




18
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

12. COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is involved in lawsuits and claims that arise in the normal course of business, including the initiation and defense of proceedings related to contract and employment disputes. In the Company's opinion, these claims individually and in the aggregate are not expected to have a material adverse effect on its financial statements,condition, results of operations, or cash flows.

In December 2021, the Company was sued in the U.S. District Court for the Southern District of Texas related to a Promissory Note & Asset Acquisition Rights Option (“Note & Option”) with TGC Systems, LLC (“Total Grow”). The case was dismissed and the parties submitted the matter to arbitration pursuant to the arbitration clause of the Note & Option. Among other claims, Total Grow alleged that the Company was liable to Total Grow based on promissory estoppel and breach of contract for failing to consummate the acquisition of Total Grow by the Company. The Company counterclaimed for repayment of $1.5 million principal plus interest loaned by the Company to Total Grow pursuant to the Note & Option. The Company accrued a reserve of $1.5 million against the Note & Option. On July 26, 2023, the arbitrator denied all potentially dilutive securities have been excludedof Total Grow's claims and defenses, determined that the Company prevailed in its counterclaim, and awarded the Company an award in full settlement of the matter. The Company is in the process of attempting to collect the arbitration award from Total Grow.

There can be no assurance that future developments related to pending claims or claims filed in the diluted share calculations as they were anti-dilutivefuture, whether as a result of the net losses incurred for the respective periods. Accordingly, basic shares equal diluted shares for all periods presented.

Potentially dilutive securities were comprised of the following:

   Nine months ended
September 30,		 
   2017  2016 
 Warrants  4,211,442   4,084,229 
 Options  2,149,500   1,872,000 
    6,370,942   5,956,229 

11.SUBSEQUENT EVENTS

The Company has evaluated events and transaction occurring subsequent to September 30, 2017 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. 

On October 8, 2017, our Santa Rosa, CA store was forced to closed by local authorities due to evacuations caused by significant wildfires in the vicinity. The Company was able to gain access to the store on October 22, 2017 and we are in the process of evaluating the extent of damage to the store and its contentsadverse outcomes or as a result of significant defense costs, will not have a material effect on the fire.Company’s financial condition, results of operations, or cash flows. The Company believes that its assessment of contingencies is fully insuredreasonable and that the related accruals, in the aggregate, are adequate; however, there can be no assurance that the final resolution of these matters will not have a material effect on the Company's financial condition, results of operations, or cash flows.


Indemnifications

In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of September 30, 2023, 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 both damagecertain events or occurrences, subject to certain limits, while the contentsofficer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications varies. The Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.

13. SEGMENTS

The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its 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 other corporate costs are allocated to an individual segment based on that segment's profitability.

Retail – The core of the storeCompany's business strategy is to operate the largest chain of retail garden centers in the U.S. The hydroponic retail landscape is fragmented, which has allowed us to acquire “best of breed” hydroponic retail operations and leverage efficiencies of a centralized organization. Some of our garden centers have multi-functions, with added capabilities that include warehousing, distribution, and fulfillment for the Company's online platforms and commercial customers.

The retail segment also includes the Company's commercial sales organization, which is focused on selling products and services, including end-to-end solutions, for large commercial cultivators outside of the physical retail network. When commercial customers gain new cultivation licenses, they need lighting, benching, environmental control systems, irrigation, fertigation, and other products to outfit their facilities. Existing facilities also need consumable products for operations, as well as equipment updates from time to time. Commercial customers typically purchase large dollar amounts, quantities, and sizes of products. The Company offers commercial customers volume pricing, terms, and financing.

E-commerce – The Company's digital strategy is primarily focused on capturing the home, craft, and commercial grower online. GrowGeneration.com offers thousands of hydroponic products, all curated by the Company's product team.
19
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

GrowGeneration.com offers customers the option to have their orders shipped directly to their locations, anywhere in North America. GrowGeneration also sells its products through its distribution website, HRGdist.com, and online marketplaces such as Amazon and Walmart.

Distribution and other – In December 2020, GrowGeneration purchased the business interruption (loss of sales) as a resultCanopy Crop Management Corp., the developer of the store being closed during this period. The store re-opened on October 26, 2017popular PowerSi line of monosilicic acid products, a widely used nutrient additive for plants. In March 2021, the Company purchased Charcoir, a line of premium coco pots, cubes and medium. In December 2021, the long-term impact onCompany purchased the assets of Mobile Media, Inc., a mobile shelving and storage solutions developer and manufacturer. In February 2022, the Company purchased the assets of Horticultural Rep Group, Inc., a specialty marketing and sales if any,organization specializing in horticultural products. These products are integrated into the Company's retail, e-commerce, and direct sales activities, and it receive incremental revenue from their sale.

Disaggregated revenue by segment is unknown at this time as we are still assessingpresented in the impact offollowing table:

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net sales
Retail
Private label sales$6,797 $6,381 $20,598 $19,477 
Non-private label sales34,600 41,567 107,117 148,121 
Total retail41,397 47,948 127,715 167,598 
E-Commerce
Private label sales553 253 1,214 953 
Non-private label sales2,207 2,820 8,541 11,083 
Total e-commerce2,760 3,073 9,755 12,036 
Distribution and other
Private label sales1,954 2,244 5,819 8,244 
Non-private label sales1,924 3,150 9,424 11,097 
Commercial fixture sales7,643 14,435 23,717 24,735 
Total distribution and other11,521 19,829 38,960 44,076 
Total net sales$55,678 $70,850 $176,430 $223,710 





















20
GrowGeneration Corp.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2023

Selected information by segment is presented in the fire on our customers.

10
following tables:


Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net sales
Retail$41,397 $47,948 $127,715 $167,598 
E-Commerce2,760 3,073 9,755 12,036 
Distribution and other11,521 19,829 38,960 44,076 
Total net sales$55,678 $70,850 $176,430 $223,710 

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Gross profit
Retail$10,747 $10,354 $33,005 $41,448 
E-Commerce885 826 2,566 3,280 
Distribution and other4,556 7,154 14,043 15,973 
Total gross profit$16,188 $18,334 $49,614 $60,701 

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Income (Loss) from operations
Retail$(7,584)$(23,653)$(21,206)$(137,939)
E-Commerce(754)(2,830)(1,682)(11,869)
Distribution and other36 18,389 256 (2,308)
Total income (loss) from operations$(8,302)$(8,094)$(22,632)$(152,116)






21

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, 20162022 filed with the SEC on March 31, 2017. In connection with, and because we desire to take advantage16, 2023. 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 us or on our behalf. We disclaim any obligation to update forward looking statements, except as required by law.

OVERVIEW

GrowGeneration’s mission

GrowGeneration Corp. (together with all of its direct and indirect wholly-owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014. GrowGeneration is to become one of the largest retailchain of hydroponic and organic specialty gardening retail outletsgarden centers in the industry. Today,United States and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, and other products for hydroponic gardening. GrowGeneration also owns and operates an e-commerce platform, www.growgeneration.com, MMI, a chainbenching, vertical racking and storage solutions business, HRG, a horticultural products sales representative and distributor organization, and proprietary brands across multiple product categories, from lighting to nutrients and additives to environmental control systems.

Our business is driven by a wide selection of fourteen (14) retail hydroponic/gardening stores, with nine (9) located in the state of Colorado, two (2) in the state of California, one (1) in the state of Washingtonproducts, facility design services, solutions driven staff, and two (2) in the state of Nevada (one that opened subsequent to September 30, 2017). Our plan is to openpick, pack and operate hydroponic/gardening stores throughout the United States.

Our stores sellship distribution and fulfillment capabilities. GrowGeneration carries and sells thousands of products, including nutrients, growing media, lighting, environmental control systems, vertical benching, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are capable of growing and maximizing yield and quality of a wide range of plants. Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Harvest Company scissors, and more. GrowGeneration also provides facility design services to commercial growers. As of September 30, 2023, we employed approximately 425 employees, a majority of whom have been branded by us as “Grow Pros”, and our operations span over 855,000 square feet of retail and warehouse space.


Markets and Business Segments
Our target customer segments include the commercial growers in the plant-based medicine market, the craft grower, and vertical and urban farmers who grow organic nutrientsherbs, fruits, and soils, advanced lighting technology, state of the art hydroponic and aquaponic equipment,vegetables. Additionally, we sell products from our distribution and other products neededsegment to grow indoorswholesalers, resellers, and outdoors. Our strategy is to target two distinct verticals; namely (i) commercial growers, and (ii) smaller growers who require a local store to fulfill their daily and weekly growing needs.

GrowGeneration serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines.retailers. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields without having to compromiseand quality, regardless of the season or weather conditions.


The Company has three primary reportable segments, including retail operations, e-commerce, and drought conditions.

Our target marketdistribution and other. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its 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.


We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, and 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 allocated to our segments include the commercial growersbased on revenue and are reflected in the cannabis market (dispensaries, cultivatorsenterprise results.
22

Competitive Advantages

The markets in which we sell our products are highly competitive. Our key competitors include many local and caregivers),national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, and online product resellers and large online marketplaces such as Amazon and eBay. Our industry is highly fragmented, with hundreds of other hydroponic retailers throughout the home cannabis growerU.S. by management's estimates.
Notwithstanding the foregoing, we are the largest chain of hydroponic garden centers in the U.S. by management's estimates, and our pricing, inventory and product availability and overall customer service provide us the ability to businessescompete in our industry. In addition, as we continue to increase the scope of our operations, including both retail and individuals who grow organically grown herbs and leafy green vegetables.

Sales at our stores have grown sincedistribution, we commenced our business in May 2014, as noted below. Our growth has been fueled by frequent and higher dollar transactions from commercial growers, individual home growers and gardeners who grow their own organic foods. We expect to be able to continue to purchase inventory at lower volume prices, which we expect will enable us to price competitively and deliver the products that our customers are seeking. The Company competes by delivering a one-stop shopping experience significantthat includes the widest selection of hydroponics products, end-to-end solutions for all types of cultivation environments, in-store sales and product support, direct manufacturer pricing, and industry-leading expertise and customer service.


Growth Strategy

GrowGeneration expects to pursue growth overthrough expansion of its commercial sales and distribution capabilities to sell more product to commercial cultivators for large grow operations and independent retail garden centers for resale, as well as by promoting and expanding its portfolio of proprietary brands to increase its market share, product offerings, and profitability.
A secondary component of the next few years, primarily fromCompany's growth strategy is to expand the number of our retail garden centers in the U.S., especially in markets where we do not already have a physical presence or where our existing and new stores that we open or acquire. Our growthphysical presence is likely to come from four distinct channels: establishing new stores in high-value markets, internal growth at existing stores, acquiring existing stores with strong customer bases and strong operating histories and the creation of a business to business e-commerce portal at www.GrowGeneration.com.

Our business commenced in May 2014 when we acquired the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which owned and operated 4 retail stores. The acquisition was completed on May 29, 2014, through our wholly-owned subsidiary, GrowGeneration Pueblo Corp., a Colorado corporation. The purchase price was $499,976, consisting of $243,000 in goodwill and $273,000 in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts payable and $355 in customer deposits.  From February 2015 to May 2017, the Company has acquired or opened 9 additional retail locations.

11
limited.


RESULTS

RESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2017 to September 30, 2016

The following table presents certain consolidated statement of operations information2023 and presentation of that data as a percentage of change from year-to-year.

  Three Months Ended
September 30,
2017		  Three Months Ended
September 30,
2016		  $
Variance		 
Net revenue $4,028,170  $2,169,129  $1,859,041 
Cost of goods sold  2,912,328   1,560,359   1,351,969 
Gross profit  1,115,842   608,770   507,072 
Operating expenses  1,573,931   596,542   977,389 
Operating income (loss)�� (458,089)  12,228   (470,317)
Other income (expense)  (2,798)  (1,384)  (1,414)
Net income (loss) $(460,887) $10,844  $(471,731)

Revenue

2022


Net revenueSales
Net sales for the three months ended September 30, 2017 increased2023 was approximately $1.9 million, or 86%, to approximately $4.0$55.7 million, compared to approximately $2.1$70.9 million for the three months ended September 30, 2016.2022, a decrease of approximately $15.2 million or 21.4%. The increase in revenuesdecrease was not only dueprimarily attributed to an increase ina decrease of approximately $6.8 million related to same store sales, as noted below, but also duewhich represented an approximate 14.4% decrease year over year. Overall sales in our retail segment declined from $47.9 million for the three months ended September 30, 2022 to $41.4 million for the additionsame period in 2023. Net sales from the distribution and other segment decreased to $11.5 million for the three months ended September 30, 2023, compared to $19.8 million for the three months ended September 30, 2022. E-commerce sales were relatively flat from $3.1 million for the three months ended September 30, 2022, to $2.8 million for the same period in 2023.

Cost of 4 retail stores in 2017 for which there were noSales

Cost of sales for the three months ended September 30, 2016. Sales in these 4 stores for the three months ended September 30, 2017 were2023 was approximately $1.3$39.5 million, compared to approximately $0 for the three months ended September 30, 2016. The Company also had store closures in early 2017 that had sales of $20,533 for the three months ended September 30, 2017 and $109,630 for the three months ended September 30, 2016.

As noted above, the Company had the same 8 stores opened for the entire three months ended September 30, 2017 and 2016. These same stores generated $2.7 million in sales for the three months ended September 30, 2017, compared to $2.1 million in sales for the same period ended September 30, 2016, an increase of 31%.

  8 Same Stores 
  Three Months Ended  Three Months Ended    
  September 30,
2017		  September 30,
2016		  Variance 
Net revenue $2,705,837  $2,059,499  $646,338 

12

Cost of Goods Sold

Cost of goods sold for the three months ended September 30, 2017 increased approximately $1.4 million, or 87%, to $2.9 million, as compared to $1.6$52.5 million for the three months ended September 30, 2016.2022, a decrease of approximately $13.0 million or 24.8%. The increasedecrease in cost of goods soldsales was primarily due to the 86% increase21.4% decrease in sales comparing the quarterthree months ended September 30, 20162023 to 2017.

the three months ended September 30, 2022.


Gross Profit

Gross profit was approximately $1.1$16.2 million for the three months ended September 30, 2017,2023, compared to approximately $.61$18.3 million for the three months ended September 30, 2016, an increase2022, a decrease of approximately $507,000$2.1 million or 83%11.7%. The decrease in gross profit is primarily related to the 21.4% decrease in net sales comparing the three months ended September 30, 2023 to the three months ended September 30, 2022. Gross profit as a percentage of net sales was 27.7%29.1% for the three months ended September 30, 2017,2023, compared to 28.1%25.9% for the three months ended September 30, 2016. The slight decrease2022. Gross profit in the gross profit percentage is due to the increase in the number of commercial accounts which have lower margins than theour retail customer.

Operating Expenses

Operating expenses are comprised of 1) store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were $800,861segment increased from $10.4 million for the three months ended September 30, 20172022, to $10.7 million for the same period in 2023. Gross profit from the distribution and $372,317other segment net sales decreased to $4.6 million for the three months ended September 30, 2016, an increase of $428,544 or 115%. The increase in store operating cost is due2023, compared to 1) the addition of five locations that were not open in 2016 and 2) slight increase in staffing due to the 31% increase in same store sales. Store operating costs as a percentage of sales were 19.9%$7.2 million for the three months ended September 30, 2017 compared to 17.2%2022. Gross profit from our e-commerce segment was $0.9 million for the three months ended September 30, 2016. As previously noted, we opened five locations in 2017 that were not open at all in 2016 and as such store operating costs will be higher as the stores ramp up in sales which can take several months. Corporate overhead is comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries and related expenses and was $773,0702023, compared to $0.8 million for the three months ended September 30, 2017 compared to $224,2252022.


23

Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative, bad debt expense, and depreciation and amortization. Operating costs were approximately $24.5 million for the three months ended September 30, 2016. The increase in salaries2023 and related expense from 2016 to 2017 was the increase in corporate staff to support operations including additional sales staff to increase our outside sales efforts. Corporate salaries and related costs as a percentage of sales were 6.7%approximately $26.4 million for the three months ended September 30, 20172022, a decrease of approximately $1.9 million or 7.3%. The decrease in operating expenses is primarily attributable to decreases in both store operations and 5%selling, general, and administrative expenses partially offset by an increase in deprecation and amortization.
Store operating costs were approximately $11.9 million for the three months ended September 30, 2016. General and administrative expenses, comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were $237,8842023, compared to $13.6 million for the three months ended September 30, 20172022, a decrease of $1.7 million or 12.2%. The decrease in store operating costs was directly attributable to payroll reductions and $98,731expense savings recognized from store consolidations.
Total corporate overhead, which is comprised of selling, general, and administrative expense, bad debt expense, and depreciation and amortization expense, was approximately $12.6 million for the three months ended September 30, 2016 with a majority of the increase advertising and promotion and travel and entertainment. General and administrative costs as a percentage of revenue was 5.9%2023, compared to $12.8 million for the three months ended September 30, 2017, compared to 4.6% for the three months ended September 30. 2016. Corporate overhead includes non-cash expenses, consisting primarily2022, a decrease of depreciation$0.3 million or 2.2%. Selling, general, and share based compensation, which wasadministrative costs were approximately $265,971$7.6 million for the three months ended September 30, 2017,2023, compared to approximately $17,158$8.8 million for the three months ended September 30, 2016. The increase in share based compensation is due2022. Salaries expense decreased to an increase in 1) non-cash compensation to consultants, 2) stock issued to employees and 3) the fair market value of options issued to employees. Corporate overhead was 19% of revenue$3.2 million for the three months ended September 30, 20172023, from $4.0 million for the same period in 2022. General and 10%administrative expenses decreased to $2.9 million for the three months ended September 30, 2016,2023, from $3.6 million for the same period in 2022.

Other Income/Expense

Total other income was approximately $1.0 million for the three months ended September 30, 2023, compared to income of $0.2 million for the three months ended September 30, 2022. This increase is primarily dueattributable to theincome from marketable securities and an increase in non-cash share based compensation.

sublease income.


Segment Operating Income

Operating loss in our retail segment decreased from $23.7 million to an operating loss of $7.6 million. The operating loss for our e-commerce segment decreased from $2.8 million for the three months ended September 30, 2022 to a loss of $0.8 million for the same period in 2023. Operating income in the distribution and other segment other decreased to income of less than $0.1 million in the three months ended September 30, 2023, compared to an income of $18.4 million in the three months ended September 30, 2022.

Income Taxes

There was no income tax benefit for the three months ended September 30, 2023, compared to income tax benefit of $0.7 million for the three months ended September 30, 2022.

Net Income (Loss)

The net


Net loss for the three months ended September 30, 20172023 was $460,887,approximately $7.3 million, compared to net incomeloss of $10,844approximately $7.2 million for the three months ended September 30, 2016. The increase in the net loss was primarily due to 1)2022, an increase in non-cash shares-based compensationdecrease of $242,984, 2) the opening of our operations in Denver South, Boulder, Las Vegas, and San Bernardino, CA, 3) costs related to the Seattle Hydro purchase and pre-opening store costs, and 4) higher salaries and related expenses due to an increase in corporate support staff and sales staff dedicated to outside sales.

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approximately $0.1 million.


Comparison of the nine months ended September 30, 2017 to September 30, 2016

The following table presents certain consolidated statement of operations information2023 and presentation of that data as a percentage of change from year-to-year.

  Nine months ended
September 30,
2017		  Nine months ended
September 30,
2016		  $
Variance		 
Net revenue $10,722,738  $5,617,726  $5,105,012 
Cost of goods sold  7,775,718   3,947,352   3,828,366 
Gross profit  2,947,020   1,670,374   1,276,646 
Operating expenses  4,025,494   1,877,408   2,148,086 
Operating income (loss)  (1,078,474)  (207,034)  (871,440)
Other income (expense)  (6,119)  (4,648)  (1,471)
Net income (loss) $(1,084,593) $(211,682) $(872,911)

Revenue

2022


Net revenueSales
Net sales for the nine months ended September 30, 2017 were2023 was approximately $10.7$176.4 million, compared to approximately $5.6$223.7 million for the nine months ended September 30, 2016, an increase2022, a decrease of $5.1approximately $47.3 million or 91%21.1%. The increase in revenuesdecrease was not only dueprimarily attributed to an increase ina decrease of approximately $36.6 million related to same store sales, as noted below, but also duewhich represented an approximate 22.9% decrease year over year. Overall sales in our retail segment declined from $167.6 million for the nine months ended September 30, 2022, to $127.7 million for the additionsame period in 2023. Net sales from the distribution and other segment sales decreased to $39.0 million for the nine months ended September 30, 2023 compared to $44.1 million for the nine months ended September 30, 2022. E-commerce sales decreased from $12.0 million for the nine months ended September 30, 2022, to $9.8 million for the same period in 2023.

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Cost of 4 retail stores in 2017 for which there were noSales

Cost of sales for the nine months ended September 30, 2016, and the addition of one retail store during the quarter ended September 30, 2016 for which sales only occurred for a portion of the nine months ended September 30, 2016. Sales in these stores for the nine months ended September 30, 2017 were2023 was approximately $3.7$126.8 million, compared to approximately $479,591 for the nine months ended September 30, 2016. The Company also had store closures in early 2017 that had sales of approximately $117,777 for the nine months ended September 30, 2017 and approximately $339,695 for the nine months ended September 30, 2016.

As noted above, the Company had the same 7 stores opened for the entire nine months ended September 30, 2017 and 2016. These same stores generated $6.8 million in sales for the nine months ended September 30, 2017, compared to $4.8 million in sales for the same period ended September 30, 2016, an increase of 43%.

  7 Same Stores 
  Nine months ended  Nine months ended    
  September 30,
2017		  September 30,
2016		  Variance 
Net revenue $6,845,762  $4,798,440  $2,047,322 

Cost of Goods Sold

Cost of goods sold for the nine months ended September 30, 2017 increased $3.8 million, to $7.8 million an increase of 97%, as compared to $3.9$163.0 million for the nine months ended September 30, 2016.2022, a decrease of approximately $36.2 million or 22.2%. The increasedecrease in cost of goods soldsales was primarily due to the 91% increase21.1% decrease in sales comparing the nine months ended September 30, 20162023 to 2017.

the nine months ended September 30, 2022.


Gross Profit

Gross profit was $2.9approximately $49.6 million for the nine months ended September 30, 2017, as2023, compared to $1.7approximately $60.7 million for the nine months ended September 30, 2016, an increase2022, a decrease of approximately $1.3$11.1 million or 76%18.3%. The decrease in gross profit is primarily related to the 21.1% decrease in net sales comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022. Gross profit as a percentage of net sales was 27.4%28.1% for the nine months ended September 30, 2017,2023, compared to 29.7%27.1% for the nine months ended September 30, 2016. The decrease2022. Gross profit in the gross profit percentage is due to the opening of a new store in Seattle in mid-May 2017 and the initial product discounting to attract new customers to that location, as well the increase in the number of commercial accounts which have lower margins than theour retail customer.

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Operating Expenses

Operating expenses are comprised of 1) store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $2.1segment declined from $41.4 million for the nine months ended September 30, 2017 and approximately $1.12022, to $33.0 million for the nine months ended September 30, 2016, an increase of approximately $1 million or 98%. The increasesame period in store operating cost was due2023. Gross profit from the distribution and other net sales decreased to addition of five locations that were not open in 2016. Store operating costs as a percentage of sales were 19.6% for the nine months ended September 30, 2017 compared to 18.9% for the nine months ended September 30, 2016. A previously noted above, we opened five locations in 2017 that were not open at all in 2016 and as such store operating costs will be higher as the stores ramp up in sales which can take several months. Corporate overhead is comprised of, share based compensation, depreciation and amortization, general and administrative costs and corporate salaries and related expenses and were approximately $1.9 for the nine months ended September 30, 2017 compared to approximately $.8$14.0 million for the nine months ended September 30, 2016. The increase in salaries and related expense from 20162023, compared to 2017 was due to the increase in corporate staff, primarily, accounting and finance, inventory management and sales, to support operations and to increase outside sales. Corporate salaries as a percentage of sales were 5.3%$16.0 million for the nine months ended September 30, 2017 and 5.6%2022. Gross profit from our e-commerce segment was $2.6 million for the nine months ended September 30, 2016. The slight reduction of this percentage is because corporate staff costs do not rise directly commensurate with the increase in revenues. General and administrative expenses, comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were approximately $644,7002023, compared to $3.3 million for the nine months ended September 30, 20172022.


Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative, bad debt expense, impairment loss, and depreciation and amortization. Operating costs were approximately $282,600$72.2 million for the nine months ended September 30, 2016 with a majority of the increase in advertising2023 and promotion and travel and entertainment. General and administrative costs as a percentage of revenue was 6%approximately $212.8 million for the nine months ended September 30, 2017 compared2022, a decrease of approximately $140.6 million or 66.1%. The decrease in operating expenses is primarily attributable to 5% for the nine months ended September 30. 2016. The slight increasea $127.8 million impairment loss recognized in the percentage comparing 2016 to 2017 was primarily due to an increase in advertising and promotion expenses fromprior year.
Store operating costs were approximately $34,400 in 2016 to approximately $180,500 for 2017, which was mainly due to new store promotional costs in 2017 and increase in professional fees from $35,000$37.2 million for the nine months ended September 30, 20162023, compared to $243,400$41.9 million for the nine months ended September 30, 2017. Corporate2022, a decrease of $4.7 million or 11.3%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.
Total corporate overhead, includes non-cash expenses, consisting primarilywhich is comprised of selling, general, and administrative expense, bad debt expense, and depreciation and share based compensation, whichamortization expense, was approximately $645,400$35.1 million for the nine months ended September 30, 2017,2023, compared to approximately $184,300$43.1 million for the nine months ended September 30, 2016. Corporate overhead cost were18%2022, a decrease of revenue$8.0 million or 18.6%. Selling, general, and administrative costs were approximately $21.9 million for the nine months ended September 30, 2017 compare2023, compared to 15%approximately $28.2 million for the nine months ended September 30, 2016,2022. Salaries expense decreased to $10.1 million for the nine months ended September 30, 2023, from $14.7 million for the same period in 2022. General and administrative expenses decreased to $9.2 million for the nine months ended September 30, 2023, from $11.3 million for the same period in 2022.

Other Income/Expense

Total other income was approximately $3.5 million for the nine months ended September 30, 2023, compared to $0.7 million for the nine months ended September 30, 2022. This increase is primarily becauseattributable to income from marketable securities and an increase in sublease income.

Segment Operating Income

Operating loss in our retail segment decreased from $137.9 million for the nine months ended September 30, 2022 to an operating loss of $21.2 million for the nine months ended September 30, 2023he operating loss for our e-commerce segment decreased from $11.9 million for the nine months ended September 30, 2022 to a loss of $1.7 million for the same period in 2023. Operating income in the distribution and other segment increased to income of $0.3 million in the nine months ended September 30, 2023, compared to a loss of $2.3 million in the nine months ended September 30, 2022.

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Income Taxes

For the nine months ended September 30, 2023, the effective tax rate was (0.42)%, compared to 1.74% for the nine months ended September 30, 2022. The effective tax rate for each of the increase in non-cash sharenine months ended September 30, 2023 and 2022 is lower than the U.S. federal statutory rate of 21.0% primarily due to the Company’s valuation allowance against deferred tax assets. As of September 30, 2023, the Company concluded that its deferred tax assets are not expected to be realizable, based compensation.

on positive and negative evidence, therefore it has assigned a full valuation allowance against them.


Net Income (Loss)

The net


Net loss for the nine months ended September 30, 20172023 was $1,084,593approximately $19.2 million, compared to $211,682net loss of approximately $148.8 million for the nine months ended September 30, 2016,2022, an increase in the net loss of $872,911. The increase in the net loss was primarily due to 1) an increase in non-cash shares-based compensation of approximately $461,000, 2) the opening of our operations in Denver South, Las Vegas, Boulder and San Bernardino, CA, 3) costs related to the Seattle Hydro purchase and pre-opening store costs, and 4), a slight decrease in the gross profit percentage as noted above.

$129.6 million.


Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2017 was $2,590,679 compared to $992,444 for the nine months ended September 30, 2016. Cash provided by operating activities is driven by our net loss and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets and share based compensation expense. Non-cash adjustment totaled $708,426 and $261,202 for the nine months ended September 30, 2017 and 2016, respectively, so non-cash adjustments had a greater impact on net cash provided by operating activities for the nine months ended September 30, 2017 than2023 was approximately $2.8 million, compared to $9.9 million for the same periodnine months ended September 30, 2022. The Company continued to decrease inventory and other assets, partially offset by reductions to customer deposits and payroll and payroll tax liabilities.
Investing Activities

Net cash used by investing activities was approximately $11.2 million for the nine months ended September 30, 2023, compared to cash provided by investing activities of approximately $21.4 million for the nine months ended September 30, 2022. Investing activities in 2016.2023 were primarily attributable to investment of excess cash into marketable securities of $85.8 million, partially offset by maturity of marketable securities of $83.4 million. The net cash from operating activitiesCompany also had purchases property, plant, and equipment of $6.0 million, which was primarily related to the increase in the net lossimplementation and design of $872,911, an increase in inventorya new enterprise resource planning software system, and business acquisitions of $2,449,289, an increase in accounts receivable of $292,560, an increase in prepaids, primarily vendor prepaids, of $259,209, offset by an increase in accounts payable and other current liabilities of $786,546. The increase in inventory and a corresponding increase in trade payables was attributable to both and increase in revenues and an increase in the number of operating stores between December 31, 2016 and September 30, 2017.

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Net cash used in operating$3.1 million. Investing activities for the nine months ended September 30, 2016 was $992,444. This amount was2022 were primarily related to increasesmaturities of inventorymarketable securities of $1,076,310, accounts receivable of $331,157,$39.8 million, partially offset by an increase in accounts payablestore acquisitions of $6.8 million and other current liabilitiesthe purchase of $367,433. The increase in inventoryproperty, plant, and equipment related to the design of a corresponding increase in trade payables was attributable to both an increase in revenues and an increase in the numbernew enterprise resource planning software system of operating stores between December 31, 2015 and September 30, 2016.

$11.6 million. 

Financing Activities

Net cash used in investingfinancing activities was $869,901 for the nine months ended September 30, 20172023 was approximately $0.2 million and $183,059was primarily attributable to common stock withheld for the nine months ended September 30, 2016. The increase in 2017 was due to acquired intangibles related to the Seattle Hydro purchase in May 2017 and the purchase of vehicles and store equipment to support store operations. Between January 31, 2017 and September 30, 2017, the Company opened 4 new locations.

employee payroll taxes. Net cash providedused by financing activities for the nine months ended September 30, 20172022 was approximately $4.8$1.5 million and represented proceeds from the sale of common stock, net of offering costs, of $3.3 million and proceeds from the exercise of warrants of approximately $1.5 million. Net cash provided by financing activities for the nine months ended September 30, 2016 was $987,560 and was primarily from proceeds from the sales of commonattributable to stock net of offering costs of $998,500.

withheld to cover payroll taxes.


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 principlesU.S. GAAP 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.

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

  Three Months Ended 
  9/30/2017  9/30/2016 
Net income (loss) $(460,887) $10,844 
Interest  3,419   1,384 
Depreciation and Amortization  22,987   17,158 
EBITDA  (434,481)  29,386 
Share based compensation (option comp, warrant comp, stock issued for services)  242,984   - 
         
Adjusted EBITDA $(191,497) $29,386 

  Nine months ended 
  9/30/2017  9/30/2016 
Net loss $(1,084,593) $(211,682)
Interest  7,181   3,050 
Depreciation and Amortization  63,035   38,181 
EBITDA  (1,014,377)  (170,451)
Share based compensation (option comp, warrant comp, stock issued for services)  645,392   184,333 
         
Adjusted EBITDA $(368,985) $13,882 

16

 Three Months Ended September 30,
 20232022
 (000)(000)
Net income (loss)$(7,349)$(7,202)
Income taxes— (718)
Interest income— (143)
Interest expense1 3 
Depreciation, and amortization4,721 3,875 
EBITDA$(2,627)$(4,185)
Share based compensation (option compensation, warrant compensation, stock issued for services)938 1,291 
Impairment, restructuring, and other charges717 — 
Fixed asset disposal64 165 
Adjusted EBITDA$(908)$(2,729)
Adjusted EBITDA per share, basic$(0.01)$(0.04)
Adjusted EBITDA per share, diluted$(0.01)$(0.04)

LIQUIDITY AND CAPITAL RESOURCES

 Nine Months Ended
September 30,
 20232022
 (000)(000)
Net income (loss)$(19,182)$(148,758)
Income taxes93 (2,637)
Interest income— (190)
Interest expense6 16 
Depreciation, and amortization12,477 13,164 
EBITDA$(6,606)$(138,405)
Impairment, restructuring, and other charges2,215 127,831 
Share based compensation (option compensation, warrant compensation, stock issued for services)2,452 3,980 
Fixed asset disposal85 81 
Adjusted EBITDA$(1,854)$(6,513)
Adjusted EBITDA per share, basic$(0.03)$(0.11)
Adjusted EBITDA per share, diluted$(0.03)$(0.11)

Liquidity and Capital Resources
As of September 30, 2017,2023, we had working capital of approximately $6.6$123.4 million, compared to working capital of approximately $2.8$134.9 million as of December 31, 2016, an increase2022, a decrease of approximately $3.8$11.5 million. The increasedecrease in working capital from December 31, 20162022 to September 30, 20172023 was due primarily to the proceeds from the sale of common stocka decrease in cash and exercise of warrants.marketable securities and income taxes receivable and an increase in current liabilities. At September 30, 2017,2023, we had cash and cash equivalents of approximately $1.9$31.4 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital.
We believe that existing cash and cash equivalents are sufficient to fund existing operations for the next twelve months.

We anticipate that we willmay need additional financing through equity offerings and/or debt financings in the future to continue to acquire and open new stores.expand our business consistent with our growth strategies. To date, we have financed our operations through the issuance of theand sale of common stock.

Financing Activities

2017 Private Placements

On March 10, 2017, the Company closedstock, convertible notes, and warrants.

27

Critical Accounting Policies, Judgements, and Estimates
For a private placement of a total of 825,000 units of its securities to 4 accredited investors. Each unit consists of (i) one sharesummary of the Company’s common stockcritical accounting policies, judgements, and (ii) one 5-year warrantestimates, please refer to purchase one shareItem 7 of common stock at an exercise price of $2.75 per share. The Company raised an aggregate of $1,650,000 gross proceeds inour Form 10-K for the offering.

On May 15, 2017, the Company closed a private placement of a total of 1,000,000 units of its securities through GVC Capital LLC (“GVC Capital”) as its placement agent. Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common stock at an exercise price of $2.75 per share. The Company raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital a total compensation for its services of (i) for a price of $100 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75 per share, (ii) a cash fee of $150,000, (iii) a non-accountable expense allowance of $60,000, and (iv) a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants (not including the 250,000 warrants issued to Merida Capital Partners, LP) when they are exercised.

Critical Accounting Policies, Judgments and Estimates

Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of intangible assets; valuation allowances and reserves for receivables, inventory and deferred income taxes; revenue recognition related to contracts accounted for under the percentage of completion method; share-based compensation; and loss contingencies, including those related to litigation. Actual results could differ from those estimates.

Accounts Receivable and Concentration of Credit Risk

Accounts receivable are recorded at the invoiced amounts less an allowance for doubtful accounts and do not bear interest. The allowance for doubtful accounts is based on our estimate of the amount of probable credit losses in our accounts receivable. We determine the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment. Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance when we determine that the potential for recovery is remote. An allowance for doubtful accounts of approximately $47,800 has been reserved as of September 30, 2017 andyear ended December 31, 2016.

17
2022.


We are exposed to credit risk in the normal course of business, primarily related to accounts receivable. We are affected by general economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition of its customers and maintains an allowance for doubtful accounts. As of September 30, 2017, and December 31, 2016, we do not believe that we have significant credit risk.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based on our current financial condition and liquidity. We believe the amounts due to related parties also approximate their fair value, as their carried interest rates are consistent with those of our notes payable with third parties.

Long-lived Assets

We evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted future cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows. No impairment was determined as of September 30, 2017 and December 31, 2016.

Revenue Recognition

Revenue on product sales is recognized upon delivery or shipment. Customer deposits and lay away sales are not reported as revenue until final payment is received and the merchandise has been delivery.

Stock-based Compensation

We account for stock-based awards at fair value on the date of grant, and recognize compensation over the service period that they are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.

OFF-BALANCE SHEET ARRANGEMENTS

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.

RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS

In May 2014, the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”.  The new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries.  The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information.  The updated guidance was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. On July 9, 2015, the FASB approved a one-year delay of the effective date. The Company will now adopt the new provisions of this accounting standard at the beginning of fiscal year 2018.

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In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. This update was adopted by the Company in the first quarter of fiscal year 2017. There was no material impact on the Company's consolidated financial statements as a result of the adoption of this accounting standard.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods. The adoption of this standard did not have a material impact on the consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01,Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities , which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted for certain provisions. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt certain provisions early.

In February 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. ASU 2016-02 is not effective for us until January 1, 2019, with early adoption permitted. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We adopted this guidance effective January 2, 2017, and the adoption did not have a material effect on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are currently evaluating the impact of the new guidance on our goodwill impairment testing process and consolidated financial statements.

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RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS, continued

On August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,” which better aligns risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The new standard will be effective for the Company as of January 1, 2019. Early adoption is permitted. We do not believe the adoption of this new standard will have any impact on our consolidated financial statements and footnote disclosures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We areRISK

For 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, 2022.

ITEM 4. CONTROLS AND PROCEDURES.

PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management maintains “disclosure

We 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”"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 connection with

Management 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 preparationobjectives 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.
As of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by management,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 RulesRule 13a-15(e) and Rule 15d-15(e) underof the Exchange Act). Our management concluded that as of September 30, 2017.

Based on that evaluation, management concluded, that2023, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting identified by management as of September 30, 2017December 31, 2022 (described below). A material weakness is a deficiency, or a combination of deficiencies, in recording, processing, summarizing,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

Evaluation of Disclosure Controls and reportingProcedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are controls and other procedures designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

As of September 30, 2023, 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 as appropriate,of September 30, 2023, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described below.

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Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed by or under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, and overseen by the Board of Directors, to allowprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes policies and procedures that:

•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of its management and directors; and
•Provide reasonable assurance regarding prevention or timely decisions regarding required disclosure.

Changesdetection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s consolidated financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting using the criteria in Internal Controls over Financial Reporting

AsControl - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the endTreadway Commission (the “COSO Framework”). As a result of this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2023 because of the period covered by this report, there have been no changesmaterial weaknesses in internal control over financial reporting discussed below.


•Control Environment: The Company did not maintain an effective control environment based on the criteria established in the COSO framework, which resulted in deficiencies in principles associated with the control environment.

In addition, the following material weaknesses were previously identified and contributed to the material weakness in the control environment:

•Insufficient resources within the accounting and financial reporting department to review the accounting of complex financial reporting transactions including areas such as business combinations, share based compensation and the related income tax reporting
•Ineffective controls over updating and distributing accounting policies and procedures across the organization.

The control environment material weaknesses contributed to other material weaknesses within our system of internal controls over financial reporting related to the following COSO components:

•Risk Assessment: The Company did not design and implement an effective risk assessment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the risk assessment component of the COSO framework.
•Information and Communication: The Company did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting.
•Monitoring Activities: The Company did not have effective monitoring activities to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness.
•Control Activities: As a consequence of the material weaknesses described above, internal control deficiencies related to the design and operation of process-level controls and general information technology controls were determined to be pervasive throughout the Company’s financial reporting processes.

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In addition, the following material weaknesses were previously identified and contributed to the material weakness in control activities:

•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.
•Inadequate controls over physical inventory counts.
•Inadequate controls over valuations, inclusive of appropriate valuation model inputs and appropriate forecasting for prospective financial information.
•Inadequate segregation of duties within human resources, manual journal entry posting processes, and various bank accounts of the Company to prevent and detect unauthorized transactions in a timely manner.

While these material weaknesses did not result in material misstatements of the Company’s consolidated financial statements as of and for the year ended December 31, 2022,and management does not believe that these material weaknesses resulted in material misstatements as of September 30, 2023, these material weaknesses create a reasonable possibility that a material misstatement of account balances or disclosures in annual or interim consolidated financial statements may not be prevented or detected in a timely manner.

The Company’s independent registered public accounting firm, Grant Thornton LLP, which audited the 2022 consolidated financial statements included in the Form 10-K, has expressed an adverse opinion on the Company's internal control over financial reporting.

Remediation Plan and Status

Our management is committed to remediating identified control deficiencies (including both those that rise to the level of a material weakness and those that do not), fostering continuous improvement in our internal controls and enhancing our overall internal controls environment.

Through the full year of 2023, the Company initiated and will continue efforts toward implementation of certain steps in its remediation plan, including:

•Engaged a third-party CPA firm to assist with the redesign of the Sarbanes-Oxley program inclusive of entity-level controls.
•Created and staffed a controls compliance analyst charged with monitoring and facilitating compliance with the Company’s responsibilities under the Sarbanes Oxley Act of 2002 (“SOX”).
•Implemented a global risk and compliance software to assist in monitoring and documenting compliance with SOX.
•For certain processes, developed new and revised existing process narratives and identified risks inherent to those processes.
•Developed new controls and revised the design of existing controls for a significant number of relevant key controls to mitigate the aforementioned risks, inclusive of general information technology controls and entity-level controls.
•Certain business functions have been restructured or consolidated to align more closely with effective business operation as well as to enable appropriate segregation of duties.

The following activities are scheduled to be completed or have been ongoing throughout 2023 in anticipation of conducting management’s testing that is ongoing or will occur in 2023 to support the issuance of management’s assessment of internal control over financial reporting as of December 31, 2023:

•Conduct initial organization-wide training sessions with all control owners.
•Implementation of new business systems to support information technology general controls.
•Completion of the identification of risks arising from inappropriate segregation of duties and fraud risks.
•Completion of risk assessment and control design for the remaining populations of processes and controls.
•Implementation of controls across all financial reporting processes and information technology environments.
•Development of effective communication plans relating to, among other things, identification of deficiencies and recommendations for corrective actions. These plans will apply to all parties responsible for remediation.
•Implement periodic compliance reports are made to the Nominating and Governance Committee of the Board of Directors.
•Ongoing training with control owners, as necessary.
•Ongoing migration of certain components of a legacy information technology system onto a common information technology environment, including risk assessment, control design and implementation of new and revised controls.

Our management believes that these remediation actions, when fully implemented, will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. Our remediation efforts are ongoing and additional
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remediation initiatives may be necessary. We will continue our initiatives to implement and document the strengthening of existing, and development of new policies, procedures, and internal controls.

Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2023. 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 remediate the ineffectiveness 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.
Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, except for the implementation of remediation plans to address the material weaknesses discussed above, during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to the date of management’s last evaluation.

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reporting.



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PART II – OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
For a summary of the Company’s risk factors, please refer to Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

As a smaller reporting company, we are not required to provide9A of our Form 10-K for the information required by this item.

Itemyear ended December 31, 2022.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item


ITEM 3. Defaults upon Senior Securities

DEFAULTS UPON SENIOR SECURITIES

None.

Item

ITEM 4. Mine Safety Disclosures

MINE SAFETY DISCLOSURES

Not applicable.

Item

ITEM 5. Other Information

None.

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OTHER INFORMATION

Item

None.
32

ITEM 6. Exhibits

EXHIBITS

The following exhibits are included and filed with this report.

ExhibitExhibit Description
10.1ExhibitEmployment Agreement with Darren Lampert dated September 22, 2017 (filed herewith)Exhibit Description
10.23.1
Employment Agreement with Michael Salaman dated September 22, 2017 (filed herewith)Certificate of Incorporation of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed on November 9, 2015)
31.13.2
Bylaws of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 as filed on November 9, 2015)
31.1
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
31.2
Rule 13a-14(a)/15d-14(a) certification of principal financial and accounting officer
32.1
Section 1350 certification of Chief Executive OfficerOfficer*
32.2
Section 1350 certification of principal financial and accounting officerofficer*
101Interactive Data Files (filed herewith)
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Definition

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*Furnished and not filed.

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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 November 8, 2017.

2023.
GrowGeneration Corporation
GrowGeneration Corp.
By:
By:/s/ Darren Lampert
Darren Lampert, Chief Executive Officer

(Principal Executive Officer)
By:/s/ Monty Lamirato
By:Monty Lamirato,/s/ Gregory Sanders
Gregory Sanders, Chief Financial Officer

(Principal Accounting Officer and

Principal Financial Officer) 

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