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, 2016 filed with the Securities and Exchange
Commission (the “SEC”) on March 31, 2017. In connection with, and because we desire to take advantage of, the “safe
harbor” provisions of 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. 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 are necessarily
based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject
to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially
from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward
looking statements, except as required by law.
OVERVIEW
GrowGeneration’s
mission is to become one of the largest retail hydroponic and organic specialty gardening retail outlets in the industry. Today,
GrowGeneration owns and operates a chain of thirteen (13) 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 Washington and one (1) in the state of Nevada. Our plan
is to open and operate hydroponic/gardening stores throughout the United States.
Our
stores sell thousands of products, such as organic nutrients and soils, advanced lighting technology, state of the art hydroponic
and aquaponic equipment, and other products needed to grow indoors 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. 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 compromise quality, regardless of the season or weather and drought conditions.
Our
target market segments include the commercial growers in the cannabis market (Dispensaries, Cultivators, Caregivers), the home
cannabis grower and to businesses and individuals who grow organically grown herbs and leafy green vegetables.
Sales
at our GrowGeneration stores have grown since 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 continue to experience significant growth over the next few years, primarily from existing and new stores
that we open or acquire. Our growth 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.
The
GrowGeneration 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.
RESULTS
OF OPERATIONS
Comparison
of the three months ended June 30, 2017 to June 30, 2016
The
following table presents certain consolidated statement of operations information and presentation of that data as a percentage
of change from year-to-year.
|
|
Three Months Ended
June 30,
2017
|
|
|
Three Months Ended
June 30,
2016
|
|
|
$
Variance
|
|
Net revenue
|
|
$
|
4,111,036
|
|
|
$
|
1,906,998
|
|
|
$
|
2,204,038
|
|
Cost of goods sold
|
|
|
2,960,275
|
|
|
|
1,337,093
|
|
|
|
1,623,182
|
|
Gross profit
|
|
|
1,150,761
|
|
|
|
569,905
|
|
|
|
580,856
|
|
Operating expenses
|
|
|
1,488,526
|
|
|
|
712,473
|
|
|
|
776,053
|
|
Operating income (loss)
|
|
|
(337,765
|
)
|
|
|
(142,568
|
)
|
|
|
(195,197
|
)
|
Other income (expense)
|
|
|
(2,610
|
)
|
|
|
(1,113
|
)
|
|
|
(1,497
|
)
|
Net income (loss)
|
|
$
|
(340,375
|
)
|
|
$
|
(143,681
|
)
|
|
$
|
(196,694
|
)
|
Revenue
Net
revenue for the three months ended June 30, 2017 increased $2.2 million, or 116%, to $4.1, as compared to $1.9 million for the
three months ended June 30, 2016. The increase in revenues was not only due to an increase in same store sales, as noted below,
but also due to the addition of 4 retail stores in 2017 for which there were no sales for the three months ended June 30, 2016,
and the addition of one retail store during the quarter ended June 30, 2016 for which sales only occurred in a portion of the
three months ended June 30, 2016. Sales in these stores for the three months ended June, 2017 were approximately $1.5 million
compared to approximately $94,500 for the three months ended June 30, 2016. The Company also had one store that closed in early
2017 that had no sales for the three months ended June 30, 2017 and $125,000 for the three months ended June 30, 2016.
As
noted above, the Company had the same 7 stores opened for the entire three months ended June 30, 2017 and 2016. These same stores
generated $2.6 million in sales for the three months ended June 30, 2017, compared to $1.7 million in sales for the same period
ended June 30, 2016, an increase of 54%.
|
|
7 Same Stores
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
Variance
|
|
Net revenue
|
|
$
|
2,591,436
|
|
|
$
|
1,687,164
|
|
|
$
|
904,272
|
|
Cost
of Goods Sold
Cost
of goods sold for the three months ended June 30, 2017 increased $1.6 million, or 121%, to $2.9 million, as compared to $1.3
million for the three months ended March 31, 2016. The increase in cost of goods sold was due to the 116% increase in sales comparing
the quarter ended June 30, 2016 to 2017.
Gross
profit was $1.15 million for the three months ended June 30, 2017, as compared to $.57 million for the three months ended
June 30, 2016, an increase of approximately $581,000 or 102%. Gross profit as a percentage of sales was 28% for the three
months ended June 30, 2017, compared to 30% for the three months ended June 30, 2016. The slight decrease 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, as well the increase in commercial accounts which have lower margins than the retail customer.
Operating
Expenses
Operating
expenses are comprised of 1) store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating
costs were $750,000 for the three months ended June 30, 2017 and $381,232 for the three months ended June 30, 2016, an increase
of $368,768 or 97%. The increase in store operating cost is due to the addition of five locations that were not open in 2016.
Store operating costs as a percentage of sales were 18% for the three months ended June 30, 2017 compared to 20% for the three
months ended June 30, 2016. Store operating costs are generally fixed and so as sales increase the operating costs as a percentage
of revenue decreases. We expect this trend to continue as store sales increase. Corporate overhead is comprised of general and
administrative costs
, share based compensation, depreciation and amortization and corporate salaries
and related expenses and was $738,500 for the three months ended June 30, 2017 compared to $331,200 for the three months ended
June 30, 2016. The increase in salaries and related expense from 2016 to 2017 was the increase in corporate staff to support operations.
Corporate salaries as a percentage of sales were 4% for the three months ended June 30, 2017 and 5% for the three months ended
June 30, 2016
. The reduction of this % 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 $225,100 for the three months ended June 30, 2017 and $117,800 for the three
months ended June 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% for the three months
ended June 30, 2017 compared to 6% for the three months ended June 30. 2016. General and administrative cost, similar to corporate
salaries, do not rise directly proportional with the increase in revenues. Corporate overhead includes non-cash expenses, consisting
primarily of depreciation and share based compensation, which was approximately $345,000 for the three months ended June 30, 2017,
compared to approximately $109,000 for the three months ended June 30, 2016. Corporate overhead was 18% of revenue for the three
months ended June 30, 2017 and 17% for the three months ended June 30, 2016, primarily due to the increase in non-cash share based
compensation.
Net
Income (Loss)
The
net loss for the three months ended June 30, 2017 was $340,375 compared to $143,681 for the three months ended June 30, 2016,
an increase in the net loss of $196,694. The increase in the net loss was primarily due to 1) an increase in non-cash shares-based
compensation of $227,408, 2) the opening of our Denver South, Las Vegas and San Bernardino, CA operations, 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.
Comparison
of the six months ended June 30, 2017 to June 30, 2016
The
following table presents certain consolidated statement of operations information and presentation of that data as a percentage
of change from year-to-year.
|
|
Six months ended
June 30,
2017
|
|
|
Six months ended
June 30,
2016
|
|
|
$
Variance
|
|
Net revenue
|
|
$
|
6,694,959
|
|
|
$
|
3,448,597
|
|
|
$
|
3,246,362
|
|
Cost of goods sold
|
|
|
4,863,340
|
|
|
|
2,386,993
|
|
|
|
2,476,347
|
|
Gross profit
|
|
|
1,831,619
|
|
|
|
1,061,604
|
|
|
|
770,015
|
|
Operating expenses
|
|
|
2,451,543
|
|
|
|
1,282,466
|
|
|
|
1,169,077
|
|
Operating income (loss)
|
|
|
(619,924
|
)
|
|
|
(220,862
|
)
|
|
|
(399,062
|
)
|
Other income (expense)
|
|
|
(3,761
|
)
|
|
|
(1,665
|
)
|
|
|
(2,096
|
)
|
Net income (loss)
|
|
$
|
623,685
|
)
|
|
$
|
(222,527
|
)
|
|
$
|
(401,158
|
)
|
Revenue
Net
revenue for the six months ended June 30, 2017 was $6.7 million compared to $3.45 million for the six months ended June 30, 2016,
an increase of $3.25 million, or 94%. The increase in revenues was not only due to an increase in same store sales, as noted below,
but also due to the addition of 4 retail stores in 2017 for which there were no sales for the six months ended June 30, 2016,
and the additional of one retail store during the quarter ended June 30, 2016 for which sales only occurred for a portion of the
six months ended June 30, 2016. Sales in these stores for the six months ended June, 2017 were approximately $2.2 million compared
to approximately $103,500 for the six months ended June 30, 2016. The Company also had one store that closed in early 2017 that
had sales of approximately $50,000 for the six months ended June 30, 2017 and approximately $230,000 for the six months ended
June 30, 2016.
As
noted above, the Company had the same 7 stores opened for the entire six months ended June 30, 2017 and 2016. These same stores
generated $4.4 million in sales for the six months ended June 30, 2017, compared to $3.1 million in sales for the same period
ended June 30, 2016, an increase of 42%.
|
|
7 Same Stores
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
Variance
|
|
Net revenue
|
|
$
|
4,409,023
|
|
|
$
|
3,115,017
|
|
|
$
|
1,294,006
|
|
Cost
of Goods Sold
Cost
of goods sold for the six months ended June 30, 2017 increased $2.5 million, or 104%, to $4.9 million, as compared to $2.4 million
for the six months ended June 30 31, 2016. The increase in cost of goods sold was due to the 94% increase in sales comparing the
six months ended June 30, 2016 to 2017.
Gross
profit was $1.8 million for the six months ended June 30, 2017, as compared to $1.1 million for the six months ended June
30, 2016, an increase of approximately $770,000 or 73%. Gross profit as a percentage of sales was 27% for the six months
ended June 30, 2017, compared to 31% for the six months ended June 30, 2016. The decrease 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, as
well the increase in commercial accounts which have lower margins than the retail customer.
Operating
Expenses
Operating
expenses are comprised of 1) store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating
costs were $1.3 million for the six months ended June 30, 2017 and $687,000 for the six months ended June 30, 2016, an increase
of $610,574 or 89%. The increase in store operating cost is due to addition of five locations that were not open in 2016. Store
operating costs as a percentage of sales were 19% for the six months ended June 30, 2017 compared to 20% for the six months ended
June 30, 2016. Store operating costs are generally fixed and so as sales increase the operating costs as a percentage of revenue
decreases. Corporate overhead is comprised of, share based compensation, depreciation and amortization, general and administrative
costs and corporate salaries and related expenses and was $1.15 for the six months ended June 30, 2017 compared to $.6 million
for the six months ended June 30, 2016. The increase in salaries and related expense from 2016 to 2017 was the increase in corporate
staff, primarily inventory management and sales, to support operations. Corporate salaries as a percentage of sales were 5% for
the six months ended June 30, 2017 and 6% for the six months ended June 30, 2016. The reduction of this % 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 $406,800 for the six months ended
June 30, 2017 and $183,800 for the six months ended June 30, 2016 with a majority of the increase in advertising and promotion
and travel and entertainment. General and administrative costs as a percentage of revenue was 6% for the six months ended June
30, 2017 compared to 5% for the six months ended June 30. 2016. The slight increase in the percentage comparing 2016 to 2017 was
primarily due to an increase in advertising and promotion expenses from approximately $26,800 in 2016 to approximately $86,100
for 2017 mainly due to new store promotional costs in Q1 2017. Corporate overhead includes non-cash expenses, consisting primarily
of depreciation and share based compensation, which was approximately $442,500 for the six months ended June 30, 2017, compared
to approximately $205,300 for the six months ended June 30, 2016. Corporate overhead cost were 17% of revenue for the six months
ended June 30, 2017 and 2016, primarily because of the increase in non-cash share based compensation.
Net
Income (Loss)
The
net loss for the six months ended June 30, 2017 was $623,685 compared to $222,527 for the six months ended June 30, 2016, an increase
in the net loss of $401,158. The increase in the net loss was primarily due to 1) an increase in non-cash shares-based compensation
of $218,000, 2) the opening of our Denver South, Las Vegas and San Bernardino, CA operations, 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.
Operating
Activities
Net
cash used in operating activities for the six months ended June 30, 2017 was $1,570,584 compared to $727,392 for the six months
ended June 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 $442,455 and $234,171 for the six months ended June 30, 2017
and 2016, respectively, so non-cash adjustments had a greater impact on net cash provided by operating activities for the six
months ended June 30, 2017 than 2016. The net cash from operating activities was primarily related to the increase in the net
loss of $623,685, an increase in inventory of $1,861,698, an increase in accounts receivable of $150,993. An increase in prepaids,
primarily vendor prepaids, of $267,022, offset by an increase in accounts payable and other current liabilities of $890,358.
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 June 30, 2017.
Net
cash used in operating activities for the six months ended June 30, 2016 was $727,392. This amount was primarily related to increases
of inventory of $828,768, accounts receivable of $113,654, offset by an increase in accounts payable and other current liabilities
of $191,308. 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, 2015 and June 30, 2016.
Net
cash used in investing activities was $658,914 for the six months ended June 30, 2017 and $196,640 for the six months ended June
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 June 30, 2017, the Company opened 3
new locations, one that commenced operations shorty after June 30, 2017.
Net cash provided
by financing activities for the six months ended June 30, 2017 was approximately $3.8 million and represented proceeds from the
sale of common stock, net of offering costs, of $3.3 million and proceeds from the exercise of common stock warrants of $503,000.
Net cash provided by financing activities for the six months ended June 30, 2016 was $675,443 and was primarily from proceeds
from the sales of common stock, net of offering costs.
Use
of Non-GAAP Financial Information
The
Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity
compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation
of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes.
These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be
different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered
in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting
principles.
Set
forth below is a reconciliation of Adjusted EBITDA to net income (loss):
|
|
Three Months Ended
|
|
|
|
6/30/2017
|
|
|
6/30/2016
|
|
Net loss
|
|
$
|
(340,375
|
)
|
|
$
|
(143,681
|
)
|
Interest
|
|
|
2,610
|
|
|
|
1,113
|
|
Depreciation and Amortization
|
|
|
19,524
|
|
|
|
11,121
|
|
EBITDA
|
|
|
(318,241
|
)
|
|
|
(131,447
|
)
|
Share based compensation (option comp, warrant comp, stock issued for services)
|
|
|
325,408
|
|
|
|
98,000
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
7,167
|
|
|
$
|
(33,447
|
)
|
|
|
Six Months Ended
|
|
|
|
6/30/2017
|
|
|
6/30/2016
|
|
Net loss
|
|
$
|
(623,685
|
)
|
|
$
|
(222,527
|
)
|
Interest
|
|
|
3,761
|
|
|
|
1,665
|
|
Depreciation and Amortization
|
|
|
40,047
|
|
|
|
21,023
|
|
EBITDA
|
|
|
(579,877
|
)
|
|
|
(199,839
|
)
|
Share based compensation (option comp, warrant comp, stock issued for services)
|
|
|
402,408
|
|
|
|
184,333
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(177,469
|
)
|
|
$
|
(15,506
|
)
|
LIQUIDITY
AND CAPITAL RESOURCES
As of June 30, 2017, we had working capital
of approximately $5.9 million, compared to working capital of approximately $2.8 million at December 31, 2016, an increase of
approximately $2.9 million. The increase in working capital from December 31, 2016 to June 30, 2017 is due primarily from the
proceeds from the sale of common stock and exercise of warrants. At June 30, 2017, we had cash and cash equivalents of approximately
$2.2 million. We believe that existing cash and cash equivalents are sufficient to fund existing operations for the next twelve
months.
We
anticipate that we will need additional financing in the future to continue to acquire and open new stores. To date we have financed
our operations through the issuance of the sale of common stock.
Financing
Activities
2017
Private Placements
On
March 10, 2017, the Company closed a private placement of a total of 825,000 units of its securities to 4 accredited investors.
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 $1,650,000 gross proceeds in 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 June 30, 2017 and December 31, 2016.
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 June 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 June 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
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 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.
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 No. 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 Accounting Standards Update No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities
(“ASU 2016-01”), 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 new guidance related to leases that outlines a comprehensive lease accounting model and supersedes
the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets
for all leases with lease terms of great than 12 months. It also changes the definition of a lease and expands the disclosure
requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective
for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. 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 the new guidance early.
In
March 2016, the FASB issued Accounting Standards Update 2016-09,
Improvements to Employee Share-Based Payment Accounting
(‘ASU
2016-09”), 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.