# GrowGeneration Corp.: Form 10-Q for the period ended Jun 30, 2023

- Company: [GrowGeneration Corp.](/companies/grwg.md) (CIK 1604868)
- Form: 10-Q
- Filed: 2023-08-08
- Accepted by EDGAR: Aug 8, 2023, 16:35 ET
- Period: 2023-06-30
- Accession: 0001628280-23-028228
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1604868/000162828023028228/grwg-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1604868/000162828023028228/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $63.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $120.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $17.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $33.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $7.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $14.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$6.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$14.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $93.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $93.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$5.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$11.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 61,077,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 61,053,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $7.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-06-30 | $29.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $162.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $280.7m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $36.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $74.2m | us-gaap:Liabilities |
| Current portion of debt | at 2023-06-30 | $17.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | $206.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 23,827 characters.

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, 2022 filed with the SEC on March 16, 2023. We caution readers regarding certain forward-looking statements, within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, in the following discussion and elsewhere in this 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 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 the largest chain of hydroponic garden centers in the United States and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, and accessories for hydroponic gardening. GrowGeneration also owns and operates an e-commerce platform, www.growgeneration.com, Mobile Media, a vertical racking and storage solutions business, Horticultural Rep Group, 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 products, facility design services, solutions driven staff, and pick, pack and ship 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, Durabreeze fans, and more. GrowGeneration also provides facility design services to commercial growers. As of June 30, 2023, we employed approximately 481 employees, a majority of whom have been branded by us as “Grow Pros”, and our operations span over 953,000 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 herbs, fruits, and vegetables. Additionally, we sell products from our distribution and other segment to wholesalers, resellers, and 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 and quality, regardless of the season or weather conditions.

The Company has three primary reportable segments, including retail operations, e-commerce, and all 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 not allocated to the specific segments and are reflected in the enterprise results.

### Competitive Advantages

The markets in which we sell our products are highly competitive. Our key competitors include many local and 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 around 1,000 hydroponic retailers throughout the U.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 compete in our industry. In addition, as we continue to increase the scope of our operations, including both retail and distribution, 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 that 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

Core to our 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 physical presence is limited. During the first six months of 2023, the Company acquired 5 new locations and expanded into two new states. Our plan is to continue to acquire, open, and operate garden centers.

GrowGeneration will also pursue growth through 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.

R**ESULTS OF OPERATIONS**

### Comparison of the three months ended June 30, 2023 and 2022

### Net Sales

Net sales for the three months ended June 30, 2023 was approximately $63.9 million, compared to $71.1 million for the three months ended June 30, 2022, a decrease of approximately $7.2 million or 10.1%. The decrease was primarily attributed to a decrease of approximately $7.9 million related to same store sales, which represented an approximate 15.1% decrease year over year. Overall sales in our retail segment declined from $55.4 million for the three months ended June 30, 2022 to $46.9 million for the same period in 2023. Distributed sales increased to $13.3 million for the three months ended June 30, 2023, compared to $12.0 million for the three months ended June 30, 2022. E-commerce sales were relatively flat from $3.7 million for the three months ended June 30, 2022, to $3.7 million for the same period in 2023.

### Cost of Sales

Cost of sales for the three months ended June 30, 2023 was approximately $46.8 million, compared to approximately $50.9 million for the three months ended June 30, 2022, a decrease of approximately $4.1 million or 8.0%. The decrease in cost of sales was primarily due to the 10.1% decrease in sales comparing the three months ended June 30, 2023 to the three months ended June 30, 2022.

### Gross Profit

Gross profit was approximately $17.1 million for the three months ended June 30, 2023, compared to approximately $20.2 million for the three months ended June 30, 2022, a decrease of approximately $3.1 million or 15.3%. The decrease in gross profit is primarily related to the 10.1% decrease in net sales comparing the three months ended June 30, 2023 to the three months ended June 30, 2022. Gross profit as a percentage of net sales was 26.8% for the three months ended June 30, 2023, compared to 28.5% for the three months ended June 30, 2022. Gross profit in our retail segment declined from $15.6 million for the three months ended June 30, 2022, to $11.5 million for the same period in 2023. Gross profit from distributed sales increased to $4.8 million for the three months ended June 30, 2023, compared to $3.9 million for the three months ended June 30, 2022. Gross profit from our e-commerce segment was $0.8 million for the three months ended June 30, 2023, compared to $0.7 million for the three months ended June 30, 2022.

### Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $23.7 million for the three months ended June 30, 2023 and approximately $157.0 million for the three months ended June 30, 2022, a decrease of approximately $133.3 million or 85%. The decrease in operating expenses is primarily attributable the impairment loss of $127.8 million recorded during the three months ended June 30, 2022.

Store operating costs were approximately $12.3 million for the three months ended June 30, 2023, compared to $13.8 million for the three months ended June 30, 2022, a decrease of $1.5 million or 11%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.

Total corporate overhead, which is comprised of selling, general, and administrative expense and depreciation and amortization expense, was approximately $11.4 million for the three months ended June 30, 2023, compared to $15.4 million for the three months ended June 30, 2022, a decrease of $4.0 million or 26%. Selling, general, and administrative costs were approximately $7.5 million for the three months ended June 30, 2023, compared to approximately $9.8 million for the three months ended June 30, 2022. Salaries expense decreased to $3.4 million for the three months ended June 30, 2023, from $5.4 million for the same period in 2022. General and administrative expenses decreased to $3.2 million for the three months ended June 30, 2023, from $4.1 million for the same period in 2022.

### Other Income/Expense

Total other income was approximately $1.0 million for the three months ended June 30, 2023, compared to expense of $0.1 million for the three months ended June 30, 2022. This increase is primarily attributable to interest income driven from capital investments.

### Segment Operating Income

Operating loss in our retail segment dropped from $107.1 million to an operating loss of $6.5 million. The operating loss for our e-commerce segment decreased from $8.6 million for the three months ended June 30, 2022 to a loss of $0.4 million for the same period in 2023. Operating income in the distribution and other segment other increases to a loss of $0.4 million in the three months ended June 30, 2023, compared to a loss of of $21.1 million in the three months ended June 30, 2022.

### Income Taxes

Income tax benefit was $0.1 million for the three months ended June 30, 2023, compared to income tax expense of $0.3 million for the three months ended June 30, 2022. The effective tax rate for the six months ended June 30, 2023 is lower than the U.S. federal statutory rate of 21.0%, which is also primarily due to the Company recording a valuation allowance against deferred tax assets. The Company has evaluated positive and negative evidence and has concluded that its deferred tax assets are not expected to be realizable and has recorded a valuation allowance in the current period.

### Net Income

Net loss for the three months ended June 30, 2023 was approximately $5.7 million, compared to net loss of approximately $136.4 million for the three months ended June 30, 2022, an increase of approximately $130.7 million.

### Comparison of the six months ended June 30, 2023 and 2022

### Net Sales

Net sales for the six months ended June 30, 2023 was approximately $120.8 million, compared to $152.9 million for the six months ended June 30, 2022, a decrease of approximately $32.1 million or 21%. The decrease was primarily attributed to a decrease of approximately $29.7 million related to same store sales, which represented an approximate 26.5% decrease year over year. Overall sales in our retail segment declined from $119.7 million for the six months ended June 30, 2022, to $86.3 million for the same period in 2023. Distributed sales increased to $27.4 million for the six months ended June 30, 2023 compared to $24.2 million for the six months ended June 30, 2022. E-commerce sales decreased from $9.0 million for the six months ended June 30, 2022, to $7.0 million for the same period in 2023.

### Cost of Sales

Cost of sales for the six months ended June 30, 2023 was approximately $87.3 million, compared to approximately $110.5 million for the six months ended June 30, 2022, a decrease of approximately $23.2 million or 21%. The decrease in cost of sales was primarily due to the 21% decrease in sales comparing the six months ended June 30, 2023 to the six months ended June 30, 2022.

### Gross Profit

Gross profit was approximately $33.4 million for the six months ended June 30, 2023, compared to approximately $42.4 million for the six months ended June 30, 2022, a decrease of approximately $8.9 million or 21%. The decrease in gross profit is primarily related to the 21% decrease in net sales comparing the six months ended June 30, 2023 to the six months ended June 30, 2022. Gross profit as a percentage of net sales was 27.7% for the six months ended June 30, 2023, compared to 27.7% for the six months ended June 30, 2022. Gross profit in our retail segment declined from $31.1 million for the six months ended June 30, 2022, to $22.3 million for the same period in 2023. Gross profit from distributed sales increased to $9.5 million for the six months ended June 30, 2023, compared to $8.8 million for the six months ended June 30, 2022. Gross profit from our e-commerce segment was $1.7 million for the six months ended June 30, 2023, compared to $2.5 million for the six months ended June 30, 2022.

### Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $47.8 million for the six months ended June 30, 2023 and approximately $186.4 million for the six months ended June 30, 2022, a decrease of approximately $138.6 million or 74%. The decrease in operating expenses is primarily attributable to a $127.8 million impairment loss recognized in the prior year.

Store operating costs were approximately $25.2 million for the six months ended June 30, 2023, compared to $28.3 million for the six months ended June 30, 2022, a decrease of $3.1 million or 11%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations.

Total corporate overhead, which is comprised of selling, general, and administrative expense and depreciation and amortization expense, was approximately $22.5 million for the six months ended June 30, 2023, compared to $30.3 million for the six months ended June 30, 2022, a decrease of $7.7 million or 26%. Selling, general, and administrative costs were approximately $14.3 million for the six months ended June 30, 2023, compared to approximately $19.4 million for the six months ended June 30, 2022. Salaries expense decreased to $6.9 million for the six months ended June 30, 2023, from $10.6 million for the same period in 2022. General and administrative expenses decreased to $6.4 million for the six months ended June 30, 2023, from $7.7 million for the same period in 2022.

### Other Income/Expense

Total other income was approximately $2.6 million for the six months ended June 30, 2023, compared to expense of $0.5 million for the six months ended June 30, 2022. This increase is primarily attributable to income generated from capital investments.

### Segment Operating Income

Operating loss in our retail segment decreased from $114.3 million to an operating loss of $13.6 million. The operating loss for our e-commerce segment decreased from $9.0 million for the six months ended June 30, 2022 to a loss of $0.9 million for the same period in 2023. Operating income in the distribution and other segment decreased to income of $0.2 million in the six months ended June 30, 2023, compared to income of $20.7 million in the six months ended June 30, 2022.

### Income Taxes

Income tax expense was $0.1 million for the six months ended June 30, 2023, compared to income tax benefit of $1.9 million for the six months ended June 30, 2022. The effective tax rate for the six months ended June 30, 2023 is lower than the U.S. federal statutory rate of 21.0%, which is also primarily due to the Company recording a valuation allowance against deferred tax assets. The Company has evaluated positive and negative evidence and has concluded that its deferred tax assets are not expected to be realizable and has recorded a valuation allowance in the current period.

### Net Income

Net loss for the six months ended June 30, 2023 was approximately $11.8 million, compared to net loss of approximately $141.6 million for the six months ended June 30, 2022, an increase of approximately $129.7 million.

### Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2023 was approximately $7.4 million, compared to $1.6 million used for the six months ended June 30, 2022. The Company continued to decrease inventory and improve on receivable collection, partially offset by reductions to customer deposits and payroll and payroll tax liabilities.

Net cash used by investing activities was approximately $17.6 million for the six months ended June 30, 2023, compared to cash provided by investing activities of approximately $14.2 million for the six months ended June 30, 2022. Investing activities in 2023 were primarily attributable to investment of excess cash into marketable securities of $51.7 million, partially offset by maturity of marketable securities of $42.6 million. The Company also had vehicle and store equipment purchases of $5.5 million and business acquisitions of $3.2 million. Investing activities for the six months ended June 30, 2022 were primarily related to maturities of marketable securities of $29.8 million, partially offset by store acquisitions of $6.8 million and the purchase of vehicles and store equipment to support new store operations of $8.8 million.

Net cash used in financing activities for the six months ended June 30, 2023 was approximately $0.2 million and was primarily attributable to common stock withheld for employee payroll taxes. Net cash used by financing activities for the six months ended June 30, 2022 was $1.5 million and was primarily attributable to stock 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, U.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.

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

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
|  | (000) | (000) |
| Net income (loss) | $(5,699) | $(136,379) |
| Income taxes | 93 | (283) |
| Interest income | — | (45) |
| Interest expense | 431 | 10 |
| Depreciation, and amortization | 3,824 | 4,783 |
| EBITDA | $(1,351) | $(131,914) |
| Impairment loss | — | 127,831 |
| Share based compensation (option compensation, warrant compensation, stock issued for services) | 947 | 1,106 |
| Restructuring charges | 1,220 | — |
| Fixed asset disposal | 40 | (12) |
| Adjusted EBITDA | $856 | $(2,989) |
| Adjusted EBITDA per share, basic | $0.01 | $(0.05) |
| Adjusted EBITDA per share, diluted | $0.01 | $(0.05) |

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
|  | (000) | (000) |
| Net income (loss) | $(11,833) | $(141,556) |
| Income taxes | 93 | (1,919) |
| Interest income | — | (47) |
| Interest expense | 5 | 13 |
| Depreciation, and amortization | 7,756 | 9,289 |
| EBITDA | $(3,979) | $(134,220) |
| Impairment loss | — | 127,831 |
| Share based compensation (option compensation, warrant compensation, stock issued for services) | 1,514 | 2,689 |
| Restructuring charges | 1,498 | — |
| Fixed asset disposal | 21 | (84) |
| Adjusted EBITDA | $(946) | $(3,784) |
| Adjusted EBITDA per share, basic | $(0.02) | $(0.06) |
| Adjusted EBITDA per share, diluted | $(0.02) | $(0.06) |

### Liquidity and Capital Resources

As of June 30, 2023, we had working capital of approximately $126.2 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $8.7 million. The decrease in working capital from December 31, 2022 to June 30, 2023 was due primarily to a decrease in accounts receivable and income taxes receivable, partially offset by an increase in current liabilities. At June 30, 2023, we had cash and cash equivalents of approximately $29.6 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States and building our store and brand portfolio through organic growth and acquisitions. We believe that some of our store acquisitions and new store openings can come from cash flow from operations.

We anticipate that we may need additional financing through equity offerings and/or debt financings in the future to continue to acquire and open new stores and related businesses. To date, we have financed our operations through the issuance and sale of common stock, convertible notes, and warrants.

### Critical Accounting Policies, Judgements, and Estimates

For a summary of the Company’s critical accounting policies, judgements, and estimates, please refer to Item 7 of our Form 10-K for the year ended December 31, 2022.

### 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.

## Market risk

As filed, 169 characters.

For a summary of the Company’s quantitative and qualitative disclosures about market risk, please refer to Item 7A of our Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 14,682 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to be effective in providing reasonable assurance 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 rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

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 objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, including the possibility of human error, the circumvention or overriding of controls, or fraud, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected.

As of the period covered by this Quarterly Report on Form 10-Q, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Our management concluded that as of June 30, 2023, 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 December 31, 2021 (described below). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

### Material Weaknesses in Control Activities

#### Evaluation of Disclosure Controls and Procedures

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 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 December 31, 2022, 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 of

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

#### 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 provide 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 detection 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 Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway 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 June 30, 2023 because of the material 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.

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, 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 remaining activities are scheduled to occur in the first half of 2023 in anticipation of conducting management’s testing that will begin in the first half of 2023 in support of issuing 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 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.

## Risk factors

As filed, 123 characters.

For a summary of the Company’s risk factors, please refer to Item 9A of our Form 10-K for the year ended December 31, 2022.

Filed Aug 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-028228. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.