U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Under the Securities Exchange Act of 1934

 

For Quarter Ended: September 30, 2019

 

Commission File Number: 333-207889

 

GROWGENERATION CORPORATION

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

 

Colorado   46-5008129
(State of other jurisdiction
of incorporation) 		  (IRS Employer
ID No.)

 

1000 West Mississippi Avenue

Denver, CO 80223

(Address of principal executive offices)

 

(800)935-8420

(Issuer’s Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
    Emerging growth company ☒

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

As of November 8, 2019, there were 36,707,607 shares of the registrant’s common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
  PART I  
  FINANCIAL INFORMATION  
     
Item 1. Unaudited Interim Consolidated Financial Statements 1
  Condensed Consolidated Balance Sheet as of September 30, 2019 (unaudited) and December 31, 2018 1
  Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2019 and 2018 (Unaudited) 2
  Consolidated Statement of Shareholders Equity for the three months and nine months ended September 30, 2019 and 2018 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (Unaudited) 4
  Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
     
PART II
OTHER INFORMATION
     
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Mine Safety Disclosures 29
Item 5. Other Information 29
Item 6. Exhibits 30
  Signatures 31

 

i

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

    September 30,
2019 		    December 31, 2018  
    (Unaudited)        
ASSETS            
Current assets:            
Cash   $ 15,982,681     $ 14,639,981  
Accounts receivable, net of allowance for doubtful accounts of $119,237 at September 30, 2019 and $133,288 at December 31, 2018     2,170,362       862,397  
Inventory     19,383,839       8,869,469  
Prepaid expenses and other current assets     2,370,439       606,037  
Total current assets     39,907,321       24,977,884  
                 
Property and equipment, net     3,118,482       1,820,821  
Operating leases right-of-use assets, net     7,667,538       -  
Intangible assets, net     226,974       114,155  
Goodwill     17,102,038       8,752,909  
Other assets     394,151       227,205  
TOTAL ASSETS   $ 68,416,504     $ 35,892,974  
                 
LIABILITIES & STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 4,957,782     $ 1,819,411  
Other accrued liabilities     9,829       40,151  
Payroll and payroll tax liabilities     991,075       410,345  
Customer deposits     927,134       516,038  
Sales tax payable     463,315       191,958  
Current maturities of operating leases right-of-use assets     1,935,129       -  
Current maturities of long-term debt     207,582       436,813  
Total current liabilities     9,491,846       3,414,716  
                 
Long-term convertible debt, net of debt discount and debt issuance costs     -       2,044,113  
Operating leases right-of-use assets, net of current maturities     5,869,512       -  
Long-term debt, net of current maturities     264,779       375,626  
Total liabilities     15,626,137       5,834,455  
                 
Commitments and contingencies                
                 
Stockholders’ Equity:                
Common stock; $.001 par value; 100,000,000 shares authorized; 36,652,105 and 27,948,609 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively     36,652       27,949  
Additional paid-in capital     59,178,587       38,796,562  
Accumulated deficit     (6,424,872 )     (8,765,992 )
Total stockholders’ equity     52,790,367       30,058,519  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 68,416,504     $ 35,892,974  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

1

 

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

    Three Months Ended
September 30, 		    Nine months ended
September 30, 		 
    2019     2018     2019     2018  
                         
Sales   $ 21,778,487     $ 8,406,255     $ 54,349,092     $ 19,939,572  
Cost of sales     15,276,906       6,249,129       38,340,670       14,863,600  
Gross profit     6,501,581       2,157,126       16,008,422       5,075,972  
Operating expenses:                                
Store operations     2,744,199       1,415,150       7,360,525       3,456,960  
General and administrative     803,707       375,002       1,928,020       1,137,910  
Share based compensation     553,492       367,098       1,075,735       920,446  
Depreciation and amortization     247,715       114,159       538,847       230,070  
Salaries and related expenses     1,020,627       460,928       2,449,733       1,187,738  
Total operating expenses     5,369,740       2,732,337       13,352,860       6,933,124  
                                 
Income (loss) from operations     1,131,841       (575,211 )     2,655,562       (1,857,152 )
                                 
Other income (expense):                                
Interest expense     (27,067 )     4,795       (35,757 )     (14,535 )
Interest income     60,973       23,584       95,256       53,211  
Other income (loss)     (1,838 )     (1,214 )     (17,635 )     8,102  
Amortization of debt discount     (114,210 )     (236,527 )     (356,306 )     (858,624 )
Total non-operating expense, net     (82,142 )     (209,362 )     (314,442 )     (811,846 )
                                 
Net income (loss)   $ 1,049,699     $ (784,573 )     2,341,120     $ (2,668,998 )
                                 
Net income (loss) per shares, basic   $ .03     $ (.03 )   $ .07     $ (.12 )
Net income (loss) per shares, diluted   $ .03     $ (.03 )   $ .06     $ (.12 )
                                 
Weighted average shares outstanding, basic     35,707,788       25,646,011       31,523,679       22,056,665  
Weighted average shares outstanding, diluted     41,713,369       25,646,011       37,529,260       22,056,665  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

2

 

 

GrowGeneration Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

          Additional           Total  
    Common Stock     Paid-In     Accumulated     Stockholders’  
    Shares     Amount     Capital     (Deficit)     Equity  
Balances, December 31, 2018     27,948,609     $ 27,949       38,796,562     $ (8,765,992 )   $ 30,058,519  
                                         
Sale of Common stock and warrants, net of fees     4,123,254       4,123       12,872,416               12,876,539  
                                         
Share based compensation                     256,551               256,551  
                                         
Common stock issued upon warrant exercise     1,722,463       1,722       1,262,406               1,264,128  
                                         
Common stock issued upon cashless exercise of options     505,868       506       (506 )             -  
                                         
Common stock issued in connection with business combinations     894,553       894       3,338,737               3,339,631  
                                         
Common stock issued upon conversion of convertible debt     1,258,608       1,259       2,309,573               2,310,832  
                                         
Common stock issued for services     98,750       99       132,748               132,847  
                                         
Common stock issued for accrued share-based compensation     100,000       100       210,100               210,200  
                                         
Net income                             2,341,120       2,341,120  
                                         
Balances, September 30, 2019     36,652,105     $ 36,652       59,178,587     $ (6,424,872 )   $ 52,790,367  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

3

 

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

    For the Nine months ended
September 30, 		 
    2019     2018  
Cash flows from operating activities:            
Net income (loss)   $ 2,341,120     $ (2,668,998 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     538,847       230,069  
Amortization of debt discount     356,306       858,624  
Stock-based compensation expense     1,075,735       920,446  
Noncash operating lease expense     137,103       -  
Changes in operating assets and liabilities:                
(Increase) decrease in:                
Accounts receivable     (1,307,965 )     (355,674 )
Inventory     (7,331,270 )     (1,246,125 )
Prepaid expenses and other assets     (2,208,060 )     (69,631 )
Increase (decrease) in:                
Accounts payable and accrued liabilities     3,108,049       242,806  
Payroll and payroll tax liabilities     327,818       39,231  
Customer deposits     411,096       58,498  
Sales tax payable     271,357       116,812  
Net cash used in operating activities     (2,279,864 )     (1,873,942 )
Cash flows from investing activities:                
Assets acquired in business combinations     (8,528,698 )     (5,762,763 )
Purchase of furniture and equipment     (1,536,508 )     (454,999 )
Purchase of intangibles     (112,819 )     (33,500 )
Net cash used in investing activities     (10,178,025 )     (6,251,262 )
Cash flows from financing activities:                
Principal payments on long term debt     (340,078 )     (218,740 )
Proceeds from issuance of convertible debt, net of expenses     -       8,912,765  
Proceeds from the sale of common stock and exercise of warrants, net of expenses     14,140,667       12,546,672  
Net cash provided by financing activities     13,800,589       21,240,697  
Net increase in cash     1,342,700       13,115,493  
Cash at the beginning of period     14,639,981       1,215,265  
Cash at the end of period   $ 15,982,681     $ 14,330,758  
                 
Supplemental disclosures of non-cash financing activities:                
Cash paid for interest   $ 35,757       14,535  
Common stock issued for accrued payroll   $ -       108,420  
Common stock issued for prepaid services   $ 96,000       -  
Debt converted to equity   $ 2,310,832       3,195,484  
Warrants issued for debt discount   $ -       4,239,000  
Acquisition of vehicles with debt financing   $ -       56,174  
Assets acquired by issuance of common stock   $ 3,339,631       5,222,799  
Acquisition of assets with seller financing   $ -       1,087,000  
Right to use assets acquired under operating leases   $ 5,801,725       -  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

4

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

1. NATURE OF OPERATIONS

 

GrowGeneration Corp (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of Easylife Corp and changed its name to GrowGeneration Corp. It maintains its principal office in Denver, Colorado.

 

GrowGeneration is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening. Today, the Company owns and operates a chain of twenty three (23) retail hydroponic/gardening stores, with five (5) located in the state of Colorado, five (5) in the state of California, four (4) in the state of Michigan, two (2) in the state of Nevada, one (1) in the state of Washington, two (2) in the State of Oklahoma, one (1) in the state of Rhode Island, three (3) in Maine, and an online e-commerce store, HeavyGardens. In addition, two new locations one in Tulsa, OK and one in Oklahoma City, OK are expected to open in the fourth quarter of 2019. Our plan is to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States and Canada.

 

The Company engages in its business through its wholly owned subsidiaries, GrowGeneration Pueblo Corp, GrowGeneration California Corp, Grow Generation Nevada Corp, GrowGeneration Washington Corp, GrowGeneration Rhode Island Corp, GrowGeneration Oklahoma Corp, GrowGeneration Canada, GrowGeneration HG Corp, GrowGeneration Hemp Corp, GGen Distribution Corp, GrowGeneration Michigan Corp, GrowGeneration New England Corp and GrowGeneration Management Corp.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The financial statements are prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 105-10, Generally Accepted Accounting Principles, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

 

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 statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures are adequate to make the interim information presented not misleading. 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’s Annual Report on Form 10-K filed on April 1, 2019 for the years ended December 31, 2018 and 2017.

 

5

 

 

 GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Leases

 

We assess whether an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We have elected the practical expedient to not separate lease and non-lease components for all assets. Operating lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over the lease term at the lease start date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease start date in determining the present value of future payments. The operating lease asset is increased by any lease payments made at or before the lease start date and reduced by lease incentives and initial direct costs incurred. The lease term includes options to renew or terminate the lease when it is reasonably certain that we will exercise that option. The exercise of lease renewal options is at our sole discretion. The depreciable life of lease assets and leasehold improvements are limited by the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

 

Segment Reporting

 

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 FASB ASC Topic 280 for segment reporting.

 

Use of Estimates

 

Management uses estimates and assumptions in preparing these financial statements in accordance with 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 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 for income taxes in accordance with FASB ACS 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences related principally to depreciation 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 and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized.

 

The Company adopted the provisions of FASB ACS 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition 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 2018, 2017 and 2016 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 of September 30, 2019. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.

 

6

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements

 

During the first quarter of 2019, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. The Company will recognize those lease payments on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $3.2 million.

 

On January 1, 2019, the Company also adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 more closely aligns the accounting for employee and nonemployee share-based payments. The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.

 

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. The Company adopted these amendments in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.

 

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 was effective for the Company starting in the first quarter of fiscal 2019. The adoption of this standard on January 1, 2019 did not have any effect on the consolidated financial statements and footnote disclosure.

 

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 was effective for the Company as of January 1, 2019. The adoption of this new standard on January 1, 2019 did not have any impact on our consolidated financial statements and footnote disclosures.

 

7

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

3. RECENT ACCOUNTING PRONOUNCEMENTS, continued

 

Recently Issued Accounting Pronouncements – Pending Adoption

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted only as of annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements. 

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not anticipate that the adoption of ASU 2018-13 will have a material impact on the Company’s consolidated financial statements or related financial statement disclosures.

 

4. PROPERTY AND EQUIPMENT

 

    September 30,
2019 		    December 31,
2018 		 
Vehicles   $ 770,962     $ 535,857  
Leasehold improvements     760,794       441,725  
Furniture, fixtures and equipment     2,699,395       1,417,061  
      4,231,151       2,394,643  
(Accumulated depreciation)     (1,112,669 )     (573,822 )
Property and Equipment, net   $ 3,118,482     $ 1,820,821  

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $247,715 and $102,983, respectively and depreciation expense for the nine months ended September 30, 2019 and 2018 was $538,847 and $229,415, respectively.

 

8

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

5. LONG-TERM DEBT

 

    September 30,     December 31,  
    2019     2018  
Long term debt is as follows:            
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   $ -     $ 3,211  
                 
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     8,595       12,976  
                 
Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 24 installments of $24,996, due February 2020     125,000       350,000  
                 
Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 12 installments of $6,003, due September 2019     -       54,000  
                 
Notes payable issued in connection with seller financing of assets acquired, interest at 8.125%, payable in 60 installments of $8,440, due August 2023     338,766       392,252  
    $ 472,361     $ 812,439  
Less Current Maturities     (207,582 )     (436,813 )
Total Long-Term Debt   $ 264,779     $ 375,626  

 

Interest expense for the three months ended September 30, 2019 and 2018 was $27,067 and $(4,795), respectively and interest expense for the nine months ended September 30, 2019 and 2018 was $35,757 and $14,535, respectively.

 

9

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

6. LEASES

 

We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1- 5 years, most of which include options to extend the leases for additional 3 to 5 year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.

 

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term.

 

We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.

 

We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

 

    September 30,  
    2019  
Right to use assets, operating lease assets   $ 7,667,538  
         
Current lease liability   $ 1,935,129  
Non-current lease liability     5,869,512  
    $ 7,804,641  

 

    September 30,  
    2019  
Weighted average remaining lease term     3.9 years  
Weighted average discount rate     7.6 %
         
Operating lease assets obtained for operating lease liabilities   $ 3,050,164  

 

10

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

6. LEASES, continued

 

Maturities of lease liabilities      
2019   $ 537,140  
2020     2,393,058  
2021     2,422,455  
2022     1,891,783  
2023     1,297,329  
2024     512,269  
2025     349,573  
2026     45,438  
Total lease payments     9,449,045  
Less: Imputed interest     (1,644,404 )
Lease Liability at September 30, 2019   $ 7,804,641  

 

7. CONVERTIBLE DEBT

 

On January 12, 2018, the Company completed a private placement of a total of 36 units of the Company’s securities at the price of $250,000 per unit pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated under the Securities Act. Each Unit consisted of (i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”), at a price of $.01 per share or through cashless exercise.

 

The convertible debt has a maturity date of January 12, 2021 and the principal balance and any accrued interest is convertible by the holder at any time into Common Stock of the Company at conversion price of $3.00 a share. Principal due and interest accrued on the notes will automatically convert into shares of Common Stock, at the conversion price, if at any time during the term of the notes, commencing twelve (12) months from the date of issuance, the Common Stock trades minimum daily volume of at least 50,000 shares for twenty (20) consecutive days with a volume weighted average price of at least $4.00 per share. As of September 30, 2019, all convertible debt and accrued interest has been converted to equity and no convertible debt remains outstanding.

 

In relation to this transaction, the Company recorded a debt discount of $4,239,000 related to the fair market value of warrants issued as noted above. The debt discount, which was based on an imputed interest rate, is being amortized on a straight-line basis over the life of the convertible debt.

 

During the nine months ended September 30, 2019 and 2018, convertible debt and accrued interest of approximately $3.1 million and $1.4 million, net of unamortized debt discount of $596,916 and $586,804, respectively, were converted into 1,258,608 and 475,001 shares of common stock, respectively, at the conversion rate of $3.00 per share.

 

During the nine months ended September 30, 2019 and 2018, 405,000 and 813,750 warrants issued in connection with the convertible debt were exercised, resulting in the issuance of 404,490 and 813,540 shares of common stock, respectively.

 

11

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

7. CONVERTIBLE DEBT, continued

 

    September 30,     December 31,  
    2019     2018  
Convertible debt   $        -     $ 3,075,000  
Remaining unamortized debt discount and debt issue costs     -       (1,030,887 )
Convertible debt, net of debt discount and debt issue costs   $ -     $ 2,044,113  

 

Amortization of debt discount for the three months ended September 30, 2019 and 2018 was $114,210 and $236,527, respectively and amortization of debt discount for the nine months ended September 30, 2019 and 2018 was $356,306 and $858,624, respectively.

 

8. SHARE BASED PAYMENTS AND STOCK OPTIONS

 

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 following table presents share-based payment expense and new shares issued for the three and nine months ended September 30, 2019 and 2018.

 

    Three Months Ended
September 30, 		    Nine Months Ended
September 30, 		 
    2019     2018     2019     2018  
Total non-cash share-based compensation   $ 553,492     $ 367,098     $ 1,075,735     $ 920,446  

 

On March 6, 2014, the Company’s Board of Directors (the “Board”) and majority stockholders approved the 2014 Equity Incentive Plan (the “2014 Plan”) pursuant to which the Company may grant incentive and non-statutory options to employees, nonemployee members of the Board, consultants and other independent advisors who provide services to the Company. The maximum shares of Common Stock which may be issued over the term of the 2014 Plan shall not exceed 2,500,000 shares. Awards under the 2014 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 a ten-percent stockholder which is required to be issued at a price not less than 110% of the fair 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. No option may be exercisable for more than ten years (five years in the case of an incentive stock option granted to a ten-percent stockholder) from the date of grant. As of the date of this filing, there are a total of 2,113,834 options issued under the 2014 Plan (of which 1,718,334 options have been exercised and 395,500 remain outstanding), 375,000 shares of Common Stock issued, and 11,166 shares of Common Stock available to be issued.

 

On January 7, 2018, the Board adopted the 2018 Equity Compensation Plan (the “2018 Plan”) and on April 20, 2018, the shareholders approved the 2018 Plan. The 2018 Plan is administered by the Board. The maximum number of shares of Common Stock which may be issued over the term of the plan shall not exceed 2,500,000 shares. The Board may grant options to purchase shares of Common Stock, stock appreciation rights, restricted stock units, restricted or unrestricted shares of Common Stock, performance shares, performance units, other cash-based awards and other stock-based awards.

 

12

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

8. SHARE BASED PAYMENTS AND STOCK OPTIONS, continued

 

The Board may delegate authority to the chief executive officer and/or other executive officers to grant options and other awards to employees (other than themselves), subject to applicable law and the 2018 Plan. No options, stock purchase rights or awards may be made under the 2018 Plan on or after the ten-year anniversary of the adoption of the 2018 Plan by the Board, but the 2018 Plan will continue thereafter while previously granted options, stock appreciation rights or awards remain subject to the 2018 Plan. Options granted under the 2018 Plan may be either “incentive stock options” that are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) or “nonstatutory stock options” that do not meet the requirements of Section 422 of the Code. The Board will determine the exercise price of options granted under the 2018 Plan. The exercise price of stock options may not be less than the fair market value, on the date of grant, per share of our Common Stock issuable upon exercise of the option (or 110% of fair market value in the case of incentive options granted to a ten-percent stockholder). No option may be exercisable for more than ten years (five years in the case of an incentive stock option granted to a ten-percent stockholder) from the date of grant.

 

Options outstanding at September 30, 2019 are as follows:

 

Options   Shares     Weight - Average Exercise Price     Weighted - Average Remaining Contractual Term     Weighted - Average Grant Date Fair Value  
Outstanding at December 31, 2018     1,815,500     $ 1.66     2.65 years     $ .78  
Granted     925,000       3.01           $ 1.98  
Exercised     (657,500 )     .72             .16  
Forfeited or expired     -                        
Outstanding at September 30, 2019     2,083,000     $ 2.56     3.57 years     $ 1.51  
Options vested at September 30, 2019     1,139,666     $ 2.10     2.95 years     $ 1.08  

 

9. STOCK PURCHASE WARRANTS

 

A summary of the status of the Company’s outstanding stock purchase warrants as of September 30, 2019 is as follows:

 

    Warrants     Weighted - Average Exercise Price  
             
Outstanding at December 31, 2018   $ 3,279,667     $ 1.94  
                 
Issued     2,061,629       3.50  
Exercised     (1,549,965 )     .35  
Forfeited     -          
Outstanding at September 30, 2019     3,791,331     $ 3.25  

 

13

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

10. EARNINGS PER SHARE

 

Potentially dilutive securities, issued by the Company, were comprised of the following:

 

    September 30,
2019 		    September 30,
2018 		 
Stock purchase warrants     3,791,331       3,179,500  
Convertible debt warrants     131,250       536,250  
Options     2,083,000       1,534,000  
Total     6,005,581       5,249,750  

 

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, 2019 and 2018.

 

    Three Months Ended     Nine months ended  
    September 30,
2019 		    September 30,
2018 		    September 30,
2019 		    September 30,
2018 		 
Net income (loss)   $ 1,049,699     $ (784,573 )   $ 2,341,120     $ (2,668,998 )
Weighted average shares outstanding, basic     35,707,788       25,646,011       31,523,679       22,056,665  
Effect of dilutive common stock equivalents     6,005,581       -       6,005,581       -  
Adjusted weighted average shares outstanding, dilutive     41,713,369       25,646,011       37,529,260       22,056,665  
Basic income (loss) per shares   $ .03     $ (.03 )   $ .07     $ (.12 )
Dilutive income (loss) per share   $ .03     $ (.03 )   $ .06     $ (.12 )

 

14

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

 

12. ACQUISITIONS

 

The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. The Company has not made any adjustments to the preliminary valuations. The table below represents the allocation of the preliminary purchase price to the acquired net assets during the nine months ended September 30, 2019.

 

    Grand Rapids Hydro     Green
Life
Garden 		    Chlorophyll     Reno Hydroponics     Palm
Springs
Hydroponics 		    Total  
Inventory   $ 1,453,100     $ 1,038,600     $ 1,441,000     $ 238,000     $ 465,500     $ 4,636,200  
Prepaids and other current assets             14,100       22,000       -               36,100  
Furniture and equipment     50,000       100,000       100,000       25,000       25,000       300,000  
Goodwill     2,376,900       2,305,900       2,596,100       516,300       554,000       8,349,200  
Total   $ 3,880,000     $ 3,458,600     $ 4,159,100     $ 779,300     $ 1,044,500     $ 13,321,500  

 

The table below represents the consideration paid for the net assets acquired in business combinations.

 

    Grand Rapids Hydro     Green
Life
Garden 		    Chlorophyll     Reno Hydroponics     Palm
Springs
Hydroponics 		    Total  
Cash   $ 2,350,000     $ 2,647,700     $ 3,659,100     $ 525,000     $ 800,000     $ 9,981,800  
Common stock     1,530,000       810,900       500,000       254,300       244,500       3,339,700  
Total   $ 3,880,000     $ 3,458,600     $ 4,159,100     $ 779,300     $ 1,044,500     $ 13,321,500  

 

The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date of acquisition to the period ended September 30, 2019.

 

    Grand Rapids Hydro   Green
Life
Garden 		  Chlorophyll   Reno Hydroponics   Palm
Springs
Hydroponics 		  Total  
Acquisition date     9/3/2019   5/14/2019   1/21/2019   2/11/2019   2/7/2019      
Revenue   $ 612,900   $ 3,006,100   $ 4,489,000   $ 1,427,600   $ 2,318,500   $ 11,854,100  
Earnings   $ 121,400   $ 703,100   $ 668,900   $ 233,600   $ 497,500   $ 2,224,500  

 

The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the nine months ended September 30, 2018.

 

Pro forma consolidated income statement

 

    September 30,
2018 		 
Revenue   $ 5,552,000  
Earnings   $ 504,400  

 

13. SUBSEQUENT EVENTS

 

The Company has evaluated events and transaction occurring subsequent to September 30, 2019 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. 

 

15

 

 

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, 2018 filed with the SEC on April 1, 2019. 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, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements, except as required by law.

 

OVERVIEW

 

GrowGeneration is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening.

 

Today, GrowGeneration owns and operates a chain of twenty three (23) retail hydroponic/gardening stores, with five (5) located in the state of Colorado, five (5) in the state of California, four (4) in the state of Michigan, two (2) in the state of Nevada, one (1) in the state of Washington, two (2) in the State of Oklahoma, one (1) in the state of Rhode Island, three (3) in the state of Maine, and an online e-commerce store, HeavyGardens. In addition, two new locations one in Tulsa, OK and one in Oklahoma City, OK are expected to open in the fourth quarter of 2019. The Company also operates a distribution warehouse in Sacramento, CA. Our plan is to open and operate hydroponic/gardening stores and related businesses throughout the United States and Canada.

 

Today, our 23 facilities operate in 8 states, each state considered an operating region. During the nine months ended September 30, 2019 we completed the acquisition of six additional stores that are projected to provide an additional $27 million in revenues annually and opened two stores, one in Tulsa, OK and one in Brewer, ME. Two new stores, one in Tulsa, OK and one in Oklahoma City, OK are expected to commence operations in the fourth quarter of 2019. In 2018, we acquired approximately $25 million in revenue from six acquisitions. We continue to achieve our yearly revenue growth goals of 100% year over year growth. Our operations span over 300,000 sq. ft of retail and warehouse space. We employ today approximately 120 agronomist and horticulturist that we have branded “Grow Pros”.

 

In addition to our store operations, GrowGeneration also operates 5 divisions through:

 

· GrowGeneration Management Corp, a wholly owned subsidiary, sells directly into the commercial markets. Revenue is generated, by our dedicated commercial sales team, from new capital projects from multi-state operators. Our commercial division has grown significantly, with revenue attributed to commercial sales well over $4 million in the third quarter of 2019. As we run commercial sales, through the closest store location, our commercial sales are having a positive impact on our same store sales. Commercial customers set up accounts through our online portal and can order directly online and receive their commercial pricing.
· GrowGeneration Canada, a wholly owned subsidiary, was formed to mirror our US operations and strategies to acquire hydro operations in Canada.
· GrowGeneration Hemp, a wholly owned subsidiary, is developing a supply chain to outfit hemp farms, currently over 200,000 acres in the US, with equipment and supplies. As more of these hemp farms become operational and the demand for CBD Isolate and Biomass increases, the increase in hemp farming is expected to be a high growth channel for the Company.

· GGen Distribution Corp, a wholly owned subsidiary, is sourcing and developing new and innovative agricultural products, private label and exclusive products to drive margins and introduce the commercial growers to the latest new technologies to increase yields and the quality of their plants.
· HeavyGardens.com, our newly purchased e-commerce super-store, generates approximately $600,000 a month in sales and has over 60,000 visitors. The Company is implementing an omni-channel approach of ordering online and picking up at one of our store locations. We have allocated capital marketing dollars to a digital marketing campaign to further grow our online brand presence.

 

 

16

 

 

Our stores sell thousands of products, that include nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening and other products needed to grow indoors and outdoors. Our strategy is to target two distinct groups of customers, namely commercial growers and smaller growers that require a local store to fulfill their daily and weekly growing needs. Our supply chain includes over 10,000 sku’s across 12 product departments. We can deliver directly to the grower’s facility, and they can pick up the products at one of our stores or order online.

 

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 plant-based medicine market, the home grower and businesses and individuals who grow organically grown herbs and leafy green vegetables. The landscape for hydroponic retail stores is very fragmented, with smaller single stores which we consider very ripe for our roll up strategy. Further, the products we sell are in demand due to the ever-increasing legalization and the number of licensed cultivation facilities in both the US and Canada. Total sales for the hydroponic equipment industry were well over $4 billion in 2018.

 

Sales at our stores have grown since we commenced our business in May 2014, when we acquired the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which owned and operated four retail stores. Our growth has been fueled by the purchase of additional retail stores, 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 Company continues its rollout of its new enterprise resources planning (“ERP”) solution, which it started in the fourth quarter of 2018, adding our Northern California, Michigan, Maine, Oklahoma and Rhode Island stores to our ERP system in 2019. The ERP system is designed to improve departmental productivity and effectiveness. The ERP system also provides reporting tools to better evaluate inventory levels and inventory purchasing needs.

 

17

 

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended September 30, 2019 and 2018

 

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

 

    Three Months
Ended
September 30,
2019 		    Three Months
Ended
September 30,
2018 		    $
Variance 		   

 

 

 

%
Variance

 
Net revenue   $ 21,778,487     $ 8,406,255     $ 13,372,232       159 %
Cost of goods sold     15,276,906       6,249,129       9,027,777       144 %
Gross profit     6,501,581       2,157,126       4,344,455       201 %
Operating expenses     5,369,740       2,732,337       2,637,403       96 %
Operating income (loss)     1,131,841       (575,211 )     1,707,052          
Other income (expense)     (82,142 )     (209,362 )     127,220       (61 )%
Net income (loss)   $ 1,049,699     $ (784,573 )   $ 1,834,272          

 

Net revenue for the three months ended September 30, 2019 increased approximately $13.4 million, or 159%, to approximately $21.8 million, compared to approximately $8.4 million for the three months ended September 30, 2018. The increase in revenues in 2019 was primarily due to 1) the addition of 10 new stores opened or acquired after October 1, 2018 which had sales of $3.9 million in the third quarter of 2019, 2) the acquisition of a new store in mid-July 2018 that had sales of $2.3 million in the third quarter of 2019 compared to sales of $1.6 million in the third quarter of 2018 and 3) the new e-commerce site acquired in mid-September 2018 which had revenues of $1.4 million in the third quarter of 2019 compared to $122,000 in the third quarter of 2018. The Company also had an increase in same store sales comparing the third quarter of 2018 to the third quarter of 2019 of $2.7 million as detailed in a chart below. The chart directly below shows sales by market for the three months ended September 30, 2019 and 2018. The Company also consolidated some stores in 2019 and 2018, primarily in Colorado and California that had revenues of $480 for the three months ended September 30, 2019 and approximately $1.1 for the three months ended September 30, 2018.

 

The Company currently continues to focus on eight (8) markets and the new e-commerce site noted below and the growth opportunities that exist in each market. We continue to focus on new store acquisitions, proprietary products and the continued development of our online and Amazon sales.

 

    Sales by Market        
    Three Months Ended     Three Months Ended              
    September 30,
2019 		    September 30,
2018 		    Variance     %
Variance 		 
Colorado   $ 4,155,797     $ 1,617,685     $ 2,538,412       157 %
California     4,467,368       2,682,616       1,784,752       67 %
Rhode Island     2,177,808       1,114,306       1,063,502       95 %
Michigan     2,259,115       1,101,356       1,157,759       105 %
Nevada     1,159,576       491,294       668,282       136 %
Washington     310,699       219,434       91,265       42 %
Oklahoma     3,361,443       -       3,361,443       -  
Maine     2,446,501       -       2,446,501       -  
E-commerce     1,381,677       121,537       1,260,140       1003 %
Closed/consolidated locations     58,503       1,058,327       (999,824 )     (95 )%
Total revenues   $ 21,778,487     $ 8,406,255     $ 13,372,232       159 %

 

18

 

 

Sales of the Company’s products in the Colorado market increased approximately $2.5 million or 157% comparing the quarter ended September 30, 2019 to September 30, 2018. The increase in sales in the Colorado market is due to 1) the Company’s continued focus on increasing commercial sales and 2) the acquisition of a new store in mid-January 2019. Same store sales in Colorado increased approximately $818,000 and the new store acquired in mid-January 2019 had sales of $1.7 million. Sales in the California market have seen growth of approximately $1.8 million, or 67%, from the addition of five (5) new stores through acquisitions. The California market experienced slower growth in 2018 as a result of a change in the regulatory environment and the implementation of new rules and regulations which had previously slowed the issuance of new licenses to growers. The Company positioned itself to take advantage of new licenses issued to growers in 2019 and the increase in sales is reflective in that positioning.

 

Sales in the Rhode Island market increased approximately $1.1 million or 95% primarily from its increased focus on commercial and multi-state commercial customers.

 

Sales in the Michigan market increased approximately $1.2 million or 105% due to 1) an acquisition in September 2019 that contributed $646,000 in revenue and 2) the increase in commerce customer accounts.

 

Sales in the Nevada market increased 136% primarily due to the acquisition of our Reno store in February 2019, but a 25% increase in same store sales in the Las Vegas store.

 

Sales in the Washington market increased 42% comparing the quarter ended September 30, 2019 to the quarter ended September 30, 2018.

 

Stores in the Oklahoma market opened on October 1, 2018 and February 1, 2019, respectively and represents a new geographic market for the Company. Sales in this new market have been very strong.

 

Sales in Maine are derived from a new store we opened March 1, 2019 and two stores we acquired in May 2019.

 

The Company operated the same 13 stores opened for the entire three months ended September 30, 2019 and 2018: four (4) in Colorado, three (3) in California, three (3) in Michigan, one (1) in Nevada, one (1) in Rhode Island and one (1) in Washington. These same stores generated approximately $8.4 million in sales for the three months ended September 30, 2019, compared to approximately $5.6 million in sales for the three months ended September 30, 2018, an increase of 48%, primarily due to an increase in the number of commercial customers in those markets. Same store sales increased in all of the markets as noted below comparing September 30, 2019 to September 30, 2018.

 

    13 Same Stores All Markets        
    Three Months Ended     Three Months Ended              
    September 30,
2019 		    September 30,
2018 		    Variance     %
Variance 		 
Colorado market   $ 2,435,688     $ 1,617,385       818,303       51 %
Rhode Island     2,177,808       1,114,306       1,063,502       95 %
Michigan     1,612,876       1,101,356       511,520       46 %
California market     1,203,343       1,087,692       115,651       11 %
Washington market     310,699       219,434       91,265       42 %
Nevada market     612,598       491,294       121,304       25 %
Net revenue, all markets   $ 8,353,012     $ 5,631,467     $ 2,721,545       48 %

 

19

 

 

Cost of Goods Sold

 

Cost of goods sold for the three months ended September 30, 2019 increased approximately $9 million, or 144%, to approximately $15.3 million, as compared to approximately $6.2 million for the three months ended September 30, 2018. The increase in cost of goods sold was primarily due to the 159% increase in sales comparing the three months ended September 30, 2019 to the three months ended September 30, 2018. The increase in cost of goods sold is directly attributable to the increase in the number of stores as discussed above.

 

Gross profit was approximately $6.5 million for the three months ended September 30, 2019, compared to approximately $2.2 million for the three months ended September 30, 2018, an increase of approximately $4.3 million or 201%. Gross profit as a percentage of sales was 29.9% for the three months ended September 30, 2019, compared to 25.7% for the three months ended September 30, 2018. The increase in the gross profit margin percentage is due to (1) reduced pricing from vendors as a result of our increased purchasing from those vendors, (2) the sale of product acquired in a large bulk purchase in the first quarter of 2019 at a substantial discount. 

 

Operating Expenses

 

Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $2.7 million for the three months ended September 30, 2019 and approximately $1.4 million for the three months ended September 30, 2018, an increase of approximately $1.3 million or 94%. The increase in store operating costs was directly attributable to the addition of eight (8) new locations that were acquired in 2019, two locations acquired in June and July 2018 for which there were only partial sales in 2018, and two new stores opened in new markets in 2019 that were not open for any portion of the three months ended September 30, 2018. In addition to the new stores opened or acquired in 2019, as discussed above, we acquired 8 stores at various times in 2018, opened a new store in October 2018, and acquired our new e-commerce site in mid-September 2018. Effective April 1, 2019 we opened two warehouse facilities. The addition of these new stores, discussed above, and the two new warehouse facilities were the primary reasons for the increase in store operating costs. Store operating costs as a percentage of sales were 12.6% for the three months ended September 30, 2019, compared to 16.8% for the three months ended September 30, 2018. Store operating costs were positively impacted by the acquisitions of new stores in 2018 and 2019 which have lower percentage of operating costs to revenues due to their larger size and higher volume. In addition, same store sales increased 48% comparing the quarter ended September 30, 2019 to the quarter ended September 30, 2018. The net impact, as noted above, was lower store operating costs as a percentage of revenues.

 

Corporate overhead, comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $2.6 million for the three months ended September 30, 2019, compared to approximately $1.3 million for the three months ended September 30, 2018. Corporate overhead was 12% of revenue for the three months ended September 30, 2019 and 16% for the three months ended September 30, 2018. The increase in salaries expense from 2018 to 2019 was due primarily to the increase in corporate staff to support expanding operations, including purchased store integrations, accounting and finance, information systems, purchasing and commercial sales staff. It should be noted that when we consummate a new acquisition, purchasing and back office accounting functions are stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and accounting and finance departments, thus delivering cost savings. Corporate salaries and related payroll costs as a percentage of sales were 4.7% for the three months ended September 30, 2019 compared to 5.5% for the three months ended September 30, 2018. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were approximately $804,000 for the three months ended September 30, 2019 and approximately $375,000 for the three months ended September 30, 2018, with a majority of the increase related to advertising and promotion, travel and entertainment and legal fees. General and administrative costs as a percentage of revenue were 3.7% for the three months ended September 30, 2019, and 4.5% for the three months ended September 30, 2018. As noted earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation, was approximately $801,000 for the three months ended September 30, 2019, compared to approximately $481,000 for the three months ended September 30, 2018.

 

20

 

 

Net Income (Loss)

 

Net income for the three months ended September 30, 2019 was $1,049,699, compared to a net loss of $(784,573) for the three months ended September 30, 2018, a positive change of nearly $1.8 million. The increase in net income for the quarter ended September 30, 2019 was primarily due to 1) a 159% increase in sales with only a 144% increase in cost of sales, 2) a reduction of store operating costs as a percentage of revenue from 16.8 % in 2018 to 12.6% in 2019, and 3) a reduction of overhead as a percentage of revenue from 16% in 2018 to 12% in 2019.

 

Comparison of the Nine months ended September 30, 2019 and 2018

 

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

 

    Nine months ended
September 30,
2019 		    Nine months ended
September 30,
2018 		    $
Variance 		   

%
Variance

 
Net revenue   $ 54,349,092     $ 19,939,572     $ 34,409,520       173 %
Cost of goods sold     38,340,670       14,863,600       23,477,070       158 %
Gross profit     16,008,422       5,075,972       10,932,450       215 %
Operating expenses     13,352,860       6,933,124       6,419,736       93 %
Operating income (loss)     2,655,562       (1,857,152 )     4,512,714          
Other income (expense)     (314,442 )     (811,846 )     497,404       61 %
Net income (loss)   $ 2,341,120     $ (2,668,998 )   $ 5,010,118          

 

Revenue

 

Net revenue for the nine months ended September 30, 2019 increased approximately $34.4 million, or 173%, to approximately $54.4 million, compared to approximately $20 million for the nine months ended September 30, 2018. The increase in revenues in 2019 was primarily due to the addition of 10 new stores opened or acquired after September 30, 2018 for which there were no revenues for the nine months ended September 30, 2018 compared to revenues of $20.4 million for the nine months ended September 30, 2019. In addition, there were 8 stores acquired at various times during the nine months ended September 30, 2018 and the new e-commerce site acquired in mid-September 2018 that contributed $23.7 million is revenue for the nine months ended September 30, 2019 compare to revenue of $9.6 million for the nine months ended September 30, 2018. The 18 new stores and the new e-commerce web site contributed $44.1 million in revenue for the nine months ended September 30, 2019 compared to $9.6 million for the nine months ended September 30, 2018. Additionally, same store sales for the 6 locations open the entire nine months ended September 30, 2019 and 2018 increased $2.5 million or 37%. The chart below shows sales by market for the nine months ended September 30, 2019 and 2018. The Company also consolidated some stores in 2019 and 2018, primarily in Colorado, California and New Hampshire, that had revenues of approximately $923,000 for the nine months ended September 30, 2019 and approximately $3.4 million for the nine months ended September 30, 2018.

 

21

 

 

The Company currently continues to focus on eight (8) markets and the new e-commerce site noted below and the growth opportunities that exist in each market. We continue to focus on new store acquisitions, new commercial customers, proprietary products and the continued development of our online and Amazon sales. 

 

    Sales by Market        
    Nine months ended     Nine months ended              
    September 30,
2019 		    September 30,
2018 		    Variance     %
Variance 		 
Colorado   $ 11,392,368     $ 4,888,915     $ 6,503,453       133 %
California     12,389,218       4,114,175       8,275,043       201 %
Rhode Island     5,735,736       3,450,640       2,285,096       66 %
Michigan     5,414,648       1,926,371       3,488,277       181 %
Nevada     2,979,641       1,287,101       1,692,540       132 %
Washington     988,239       718,149       270,090       38 %
Oklahoma     7,420,962       -       7,420,962       -  
Maine     4,010,104       -       4,010,104       -  
E-commerce     3,099,310       121,537       2,977,773       2450 %
Closed/consolidated locations     918,866       3,432,684       (2,513,818 )     (73 )%
Total revenues   $ 54,349,092     $ 19,939,572     $ 34,409,520       173 %

 

Sales in the Colorado market increased $6.5 million or 133% comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018, which was primarily due to the Company’s continued focus on increasing commercial sales and the acquisition of a new store in mid-January 2019. Same store sales in Colorado increased $2 million or $41% and the acquisition had sales of $4.5 million. Sales in the California market have seen growth of approximately $8.3 million, or 201%, from the addition of five (5) new stores through acquisitions. The California market experienced slower growth in 2018 as a result of a change in the regulatory environment and the implementation of new rules and regulations which had previously slowed the issuance of new licenses to growers. The Company positioned itself to take advantage of new licenses issued to growers in 2019 and the increase in sales is reflective in that positioning.

 

Sales in the Rhode Island and Michigan markets are the result of these new acquisitions in 2018. The Rhode Island acquisition occurred in late January 2018 and the Michigan store acquisitions occurred in April 2018 and May 2019, so the quarter ended September 30, 2019 reflects sales in these new stores for an entire quarter. Sales in the Rhode Island market increased 66% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Sales in the Michigan market increased 181% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The Company is pursuing new store acquisitions in both of these markets and believes that these markets will be growth markets in 2020. 

 

Sales in the Nevada market increased 132% as we continue to focus on commercial sales as well as the acquisition of Reno in February 2019.

 

Sales in the Washington market increased 38%.

 

New stores in the Oklahoma market opened on October 1, 2018 and February 1, 2019, respectively, which is a new market for the Company and coincides with the legalization of plant-based medicine in the state. Sales in this new market have been very strong producing revenues of $7.4 million.

 

Maine is also a new market for the Company we opened a new store in Maine on March 1, 2019.

 

22

 

 

The Company had the same 6 stores opened for the entire nine months ended September 30, 2019 and 2018: four (4) in Colorado, one (1) in Nevada, and one (1) in Washington. These same stores generated $9.4 million in sales for the nine months ended September 30, 2019, compared to $6.9 million in sales for the nine months ended September 30, 2018, an increase of approximately $2.5 million or 37%. Same store sales increased in all of the markets as noted below comparing September 30, 2019 to September 30, 2018.

 

    6 Same Stores All Markets        
    Nine months ended     Nine months ended              
    September 30,
2019 		    September 30,
2018 		    Variance     %
Variance 		 
Colorado market   $ 6,897,311     $ 4,888,915     $ 2,008,396       41 %
Washington market     988,239       718,149       270,090       38 %
Nevada market     1,552,035       1,287,101       264,934       21 %
Net revenue, all markets   $ 9,437,585     $ 6,894,165     $ 2,543,420       37 %

 

Cost of Goods Sold

 

Cost of goods sold for the nine months ended September 30, 2019 increased approximately $23.5 million, or 158%, to approximately $38.3 million, as compared to approximately $14.9 million for the nine months ended September 30, 2018. The increase in cost of goods sold was primarily due to the 173% increase in sales comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018. The increase in cost of goods sold is directly attributable to the increase in the number of new and acquired stores as discussed above.

 

Gross profit was approximately $16 million for the nine months ended September 30, 2019, compared to approximately $5.1 million for the nine months ended September 30, 2018, an increase of approximately $10.9 million or 215%. Gross profit as a percentage of sales was 29.5% for the nine months ended September 30, 2019, compared to 25.5% for the nine months ended September 30, 2018. The increase in the gross profit margin percentage was due to (1) reduced pricing from vendors as a result of our increasing purchases from those vendors, (2) the sale of product acquired in a large bulk purchase in the first quarter of 2019 at a substantial discount.

 

Operating Expenses

 

Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $7.4 million for the nine months ended September 30, 2019 and approximately $3.5 million for the nine months ended September 30, 2018, an increase of approximately $3.9 million or 113%. The increase in store operating costs was directly attributable to the 173% increase in sales from 1) the addition of seven (7) new locations that were acquired, 2) three new stores opened in new markets in the fourth quarter of 2018 and the first quarter of 2019 that were not open for any portion of the nine months ended September 30, 2018 and 3) the new ecommerce site acquired mid-September 2018. We also acquired 8 stores at various times in 2018. Effective April 1, 2019 we opened two warehouse facilities. The addition of these new stores and the new warehouse facilities was the primary reason for the increase in store operating costs. Store operating costs as a percentage of sales were 13.5% for the nine months ended September 30, 2019, compared to 17.3% for the nine months ended September 30, 2018. Store operating costs were positively impacted by the acquisitions of new stores in 2018 and 2019 which have a lower percentage of operating costs to revenues due to their larger size and higher volume. The net impact, as noted above, resulted in lower store operating costs as a percentage of revenues. 

 

23

 

 

Corporate overhead is comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries and was approximately $6 million for the nine months ended September 30, 2019, compared to approximately $3.5 million for the nine months ended September 30, 2018. Corporate overhead was 11% of revenue for the nine months ended September 30, 2019 and 17.4% for the nine months ended September 30, 2018. The increase in salaries expense from 2018 to 2019 was due primarily to the increase in corporate staff to support expanding operations, including purchased store integrations, accounting and finance, information systems, purchasing and commercial sales staff. It should be noted that when we consummate a new acquisition, purchasing and back office accounting functions are stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and accounting and finance departments, thus delivering cost savings. Corporate salaries and related payroll costs as a percentage of sales were 4.5% for the nine months ended September 30, 2019 compared to 6% for the nine months ended September 30, 2018. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were approximately $1.9 million for the nine months ended September 30, 2019 and approximately $1.1 million for the nine months ended September 30, 2018, with a majority of the increase related to advertising and promotion, travel and entertainment and legal fees. General and administrative costs as a percentage of revenue were 3.5% for the nine months ended September 30, 2019, and 5.7% for the nine months ended September 30, 2018. As noted earlier, corporate overhead includes non-cash expenses, consisting primarily of depreciation and share based compensation, which was approximately $1.6 million for the nine months ended September 30, 2019, compared to approximately $1.2 million for the nine months ended September 30, 2018.

 

Net Income (Loss)

 

The net income for the nine months ended September 30, 2019 was approximately $2.3 million, compared to a net loss of approximately $(2.7) million for the nine months ended September 30, 2018, a positive change of approximately $5 million. The net income for the nine months ended September 30, 2019 was primarily due to 1) a 173% increase in sales with only a 158% increase in cost of sales, 2) a reduction of store operating costs as a percentage of revenue from 17.3 % in 2018 to 13.5% in 2019, and 3) a reduction of overhead as a percentage of revenue from 17.4% in 2018 to 11% in 2019.

 

Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2019 was approximately $2.3 million compared to approximately $1.9 million for nine months ended September 30, 2018. Cash used in operating activities is driven by our net income (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, share based compensation expense, non-cash operating lease expense and amortization of debt discount. Non-cash adjustments totaled approximately $2.1 million and $2 million for the nine months ended September 30, 2019 and 2018, respectively, so non-cash adjustments had a greater positive impact on net cash used in operating activities for the nine months ended September 30, 2019 than the same period in 2018. The increase in the net cash used in operating activities comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018, of approximately $406,000, was primarily related to net income of approximately $2.3 million for the nine months ended September 30, 2019 offset by significant increases in inventory ($7.3 million), increased in accounts receivable ($1.3 million) and increases in prepaids ($2.2 million). The changes in operating assets described above were offset by non-cash adjustments of $2.1 million, increases in accounts payable of $3.1 million and increases in other liabilities of $1 million.

 

Net cash used in operating activities for the nine months ended September 30, 2018 was approximately $1.9 million. This amount was primarily related to a net loss of approximately $2.7 million, increases of inventory of approximately $1.2 million, accounts receivable of approximately $356,000, offset by an increase in accounts payable and other current liabilities of approximately $457,000 and non-cash adjustment of approximately $2 million. The increase in inventory and a corresponding increase in trade payables was attributable to both an increase in revenues and an increase in the number of operating stores between January 1, 2018 and September 30, 2018.

 

24

 

 

Net cash used in investing activities was approximately $10.2 million for the nine months ended September 30, 2019 and approximately $6.3 million for the nine months ended September 30, 2018. Investing activities in 2019 were primarily attributable to store acquisitions in 2019, for which we paid approximately $8.5 million in cash. Other investing activities in 2019 included the purchase of vehicles and store equipment totaling approximately $1.5 million. Investing activities in for the nine months ended September 30, 2018 we primarily related to store acquisitions for which we paid approximately $5.8 million and the purchase of vehicles and store equipment to support new store operations of approximately $455,000. 

 

Net cash provided by financing activities for the nine months ended September 30, 2019 was approximately $13.8 million and was primarily attributable to proceeds from the sale of common stock and exercise of warrants of approximately $14.1 million, offset by debt repayment of approximately $340,000. Net cash provided by financing activities for nine months ended September 30, 2018 was $21.2 million and was primarily from proceeds from the sale of convertible debt of $8.9 million, proceeds from the sale of Common Stock and the exercise of warrants of $12.5 million, offset by debt repayments of approximately $219,000.

 

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  
    September 30,
2019 		    September 30,
2018 		 
Net income (loss)   $ 1,049,699     $ (784,573 )
Interest     27,067       (4,795 )
Depreciation and Amortization     247,715       114,159  
EBITDA     1,324,481       (675,209 )
Non-cash operating lease expense     54,547       -  
Share based compensation (option compensation, warrant compensation, stock issued for services)     553,492       367,098  
Amortization of debt discount     114,210       236,527  
                 
Adjusted EBITDA   $ 2,046,730     $ (71,584 )
                 
Adjusted EBITDA per share, basic   $ .06       -  
Adjusted EBITDA per share, diluted   $ .05       -  

 

25

 

 

    Nine months ended  
    September 30,
2019 		    September 30,
2018 		 
Net income (loss)   $ 2,341,120     $ (2,668,998 )
Interest     35,757       14,535  
Depreciation and Amortization     538,847       230,070  
EBITDA     2,915,724       (2,424,393 )
Non-cash operating lease expense     137,103       -  
Share based compensation (option compensation, warrant compensation, stock issued for services)     1,075,735       920,446  
Amortization of debt discount     356,306       858,624  
                 
Adjusted EBITDA   $ 4,484,868       (645,323 )
                 
Adjusted EBITDA per share, basic   $ .14     $ (.03 )
Adjusted EBITDA per share, diluted   $ .12     $ (.03 )

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2019, we had working capital of approximately $30.4 million, compared to working capital of approximately $21.6 million as of December 31, 2018, an increase of approximately $8.8 million. The increase in working capital from December 31, 2018 to September 30, 2019 was due primarily to 1) proceeds from the sales of common stock and exercise of warrants totaling approximately $14.1 million during the nine months ended September 30, 2019 offset by 2) the application of a new accounting standard related to accounting for operating leases which resulted in a $1.6 million increase in current liabilities. At September 30, 2019, we had cash and cash equivalents of approximately $16 million. As of the date of this filing, 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 and related businesses. To date we have financed our operations through the issuance and sale of Common Stock, convertible notes and warrants.

 

Financing Activities

 

2019 Private Placement

 

On June 26, 2019, the Company completed a private placement of a total of 4,123,257 units of the Company’s securities at the price of $3.10 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Each unit consisted of (i) one share of Common Stock and (ii) one 3-year warrant, each entitling the holder to purchase one half share of Common Stock, at a price of $3.5 per share. The Company raised a total of $12,782,099 from 19 accredited investors.

 

2018 Private Placement

 

On January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000 per unit. Each unit consisted of (i) a .1% unsecured convertible promissory note in the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of Common Stock, at a price of $.01 per share or through cashless exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering.

 

26

 

 

On May 9, 2018, the Company completed a private placement of a total of 33.33 units of the Company’s securities at the price of $300,000 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Each unit consisted of (i) 100,000 shares of Common Stock and (ii) 50,000 3-year warrants, each entitling the holder to purchase one share of Common Stock, at a price of $.35 per share or through cashless exercise. The Company raised a total of $10,000,000 from three accredited investors.

 

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 consisted 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 consisted 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 total compensation for its services as follows: (i) it issued GVC 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 (for which GVC paid $100), (ii) it paid GVC a cash fee of $150,000, (iii) it paid GVC a non-accountable expense allowance of $60,000, and (iv) it agreed to pay GVC a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants (excluding 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; 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 $119,237 has been reserved as of September 30, 2019 and $133,288 at December 31, 2018.

 

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, and December 31, 2018, we do not believe that we have significant credit risk.

 

27

 

 

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.

 

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, 2019 and December 31, 2018.

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Management maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

28

 

 

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019.

 

Based on that evaluation, management concluded, that our disclosure controls and procedures were effective as of September 30, 2019 in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

As of the end of the period covered by this report, there have been no changes in the internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to the date of management’s last evaluation.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 1A. Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

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

 

On June 26, 2019, the Company completed a private placement of a total of 4,123,254 units of the Company’s securities at the price of $3.10 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Each unit consisted of (i) one share of Common Stock and (ii) one 3-year warrant, each entitling the holder to purchase one half share of Common Stock, at a price of $3.5 per share. The Company raised a total of $12,782,099 from 19 accredited investors.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

29

 

 

Item 6. Exhibits

 

The following exhibits are included and filed with this report.

 

Exhibit   Exhibit Description
3.1   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)
3.2   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)
10.1   Employment Agreement Dated November 4, 2019 between GrowGeneration Corp and Tony Sullivan
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 Officer*
32.2   Section 1350 certification of principal financial and accounting officer*
101   Interactive Data Files
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Definition

 

* Furnished and not filed.

 

 

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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 11, 2019.

 

  GrowGeneration Corporation
     
  By: /s/ Darren Lampert
    Darren Lampert, Chief Executive Officer
(Principal Executive Officer)
     
  By: /s/ Monty Lamirato
    Monty Lamirato, Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer) 

 

 

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Exhibit 10.1

 

FORM OF EXECUTIVE EMPLOYMENT AGREEMENT

 

THIS EXECUTIVE EMPLOYMENT AGREEMENT (the “Agreement”) dated as of November 4, 2019 (the “Effective Date”), is by and between GrowGeneration Corp., a Colorado Corporation with offices at 1000 W Mississippi Ave., Denver, CO 80223 (the “Company’’) and Tony Sullivan, an individual residing at 1 Waterlily Court, Medford, NJ 08055 (the “Executive”.)

 

RECITALS

 

WHEREAS, the Company desires to continue to employ the Executive and the Executive desires to continue employment with the Company, all upon the terms and provisions, and subject to the conditions, as set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the mutual premises, covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt, and legal adequacy of which is hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows:

 

1. POSITION AND DUTIES.

 

(a) Reporting. During the term of this Agreement (the “Employment Term”), the Company shall employ the Executive, and the Executive shall serve, as the Chief Operating Officer of the Company. The Executive shall report directly to the CEO and President of the Company.

 

(b) Responsibilities. The Executive shall have responsibility to oversee all aspects of the Company’s business activities as are customarily performed and enjoyed by persons employed in comparable positions, subject, however, in all instances to the direction and control of the Board. A copy of the Executives duties are attached hereto as Exhibit 1.

 

(c) Devotion of Executive’s Time. Subject to Section 2(d) hereof, the Executive shall devote all of his business time, labor, skill and energy to conducting the business and affairs of the Company and to performing his duties and responsibilities to the Company as set forth in Section 2(b) hereof The Executive shall not become employed with, consult with or otherwise perform services for any other entity or individual during the Term of this Agreement. The Executive shall perform the Executive’s duties and responsibilities to the Company diligently, competently, faithfully and to the best of his ability. Executive shall perform his duties from his home office and shall travel as needed.

 

(d) Representations. The Executive represents and warrants to the Company that the Executive has the right to negotiate and enter into this Agreement, and the Executive’s execution, delivery and performance of this Agreement does not breach, interfere with or conflict with any other contractual agreement, covenant not to compete, option, right of first refusal or other existing business relationship or any judgment or order, in each case, to which the Executive is a party or otherwise subject.

 

2. EMPLOYMENT TERM.

 

(a) Initial Term. The initial term of employment shall be for a period of three years (the “Employment Term”), commencing with the date hereof, unless sooner terminated as provided in this Agreement. This Agreement shall be renewed annually for a term of one year unless the Company or the Executive gives notice to the other of termination at least sixty (60) days prior to the expiration of the initial term, or any successive term, as the case may be.

 

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(b) Termination for Cause. Notwithstanding the provisions of Section 2(a) above. the Company shall have the right to terminate the Executive’s employment for Cause (as defined in Section 2(c) below); provided, however, that the Executive shall not be deemed to have been terminated for Cause unless and until the Board of Directors at a meeting duly called and held for that purpose shall have determined that the Executive committed an act falling within the definition of Cause and specifying the basis for such determination. If the Executive’s employment shall be terminated by the Company for Cause, then the Company shall pay to the Executive any unpaid salary, bonuses and benefits through the effective date of termination. If the Executive’s employment shall be terminated by the Company without Cause, then the Company shall pay to the Executive any unpaid salary, bonuses and benefits through the effective date of termination.

 

(c) Cause. For purposes of this Agreement the term, “Cause” shall mean the Executive’s : (a) engagement in gross misconduct materially injurious to the Company: (b) knowing and willful neglect or refusal to attend to the material duties assigned to him by the Board of Directors of the Company, which is not cured within 30 days after written notice; (c) conviction of an act of fraud or embezzlement; or (e) conviction of a felony.

 

(d) Notice of Termination. Any purported termination of the Executive’s employment by the Company hereunder shall be communicated by a Notice of Termination to the Executive in accordance with Section 13. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which shall indicate those specific termination provisions in. this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provisions so indicated.

 

(e) Date of Termination. For purposes of this Agreement, the date of termination shall be: (a) if this Agreement is terminated by the Company for Incapacity (as defined in Section 4(a) below), the date on which a Notice of Termination is given. (b) if the Executive’s employment is terminated by the Company for any other reason (other than death), the date on which a Notice of Termination is given or (c) if the Company or Executive terminates his employment for any reason, the date on, which he gives the Company notice of such termination.

 

3. COMPENSATION

 

The Company shall pay to the Executive for the services to be rendered by the Executive hereunder, a salary for the initial Employment Term under this Agreement at the rate of $270,000 per annum. The salary shall be payable in accordance with the Company’s regular policies, subject to applicable withholding and other taxes. Such Salary will be increased during the term of this Agreement by 10 percent annually.

 

(a) Bonus. The Executive shall receive a bonus with respect to each fiscal year of the Company during which he is employed hereunder, commencing with the year ending December 31, 2020 in an amount equal to a minimum of $75,000 paid bonus wages at the discretion of the Board of Directors of the Company. It being expressly agreed that the first Bonus payment will be on February 1, 2020, second Bonus payment on December 31, 2021 and the third Bonus payment on December 31, 2022.

 

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(b) Grant of Common Shares and Stock Options. The Executive will be granted 120,000 of GRWG Common Stock payable in 3 incremental payments on 11/01/2019 (40,000 shares), 11/01/2020 (40,000 shares) and 01/01/2021 (40,000 shares). The disposition, transfer or sale of the common shares granted in the Option Agreement is subject to the terms and conditions of the Option Agreement and the Company’s 2018 Equity Incentive Plan. In addition, Executive will be granted 160,000 stock options on 11/4/2019 and 60,000 stock options on 11/4/2020 and 60,000 stock options 11/4/2021.

 

(c) Expenses. The Company agrees promptly to reimburse the Executive for all reasonable and necessary● business expenses, including without limitation: travel and telephone incurred by him on behalf of the Company in the course of his duties hereunder, upon the presentation by the Executive of appropriate evidence thereof.

 

(d) Relocation. The Company will provide an executive level relocation covering all out-of-pocket reimbursement for relocation expenses to the Denver, CO area including gross up (no tax liability), moving, closing costs, temporary housing, etc. The relocation fees will be the lessor of $80,000 or the actual costs of the relocation.

 

4. DEATH; INCAPACITY.

 

(a) Incapacity. If, during the Employment Tem1hereunder, because of illness or other incapacity, the Executive shall fail for a period of six (6) consecutive months (“Incapacity”), to render the services contemplated hereunder, then the Company, at its option, may terminate the employment hereunder by notice to the Executive, effective on the giving of such notice: provided however, that the Company shall (i) pay to the Executive any unpaid salary through the effective date of termination specified in such notice; (l) pay to the Executive his accrued but unpaid incentive compensation, if any, for any bonus period ending on or before. the date of termination of the Executive’s employment with the Company; (iii) continue to pay the Executive for a period of six (6) months following the effective date of termination, an amount equal to the excess, if any, of (A) the salary he was receiving at the time of his In capacity, over (B) any benefit the Executive is entitled to receive during such period under any disability insurance policies provided to the Executive by the Company or maintained by the Executive, such amount to be paid in the manner and at such time as the salary otherwise would have been payable to the Executive; and (iv) pay to the Executive (within 45 days after the end of the fiscal quarter in which such termination occurs) a pro-rata portion (based upon the period ending on the date of termination of the Executive’s employment hereunder) of the incentive compensation, if any, for the bonus period in which such termination occurs. The Company shall have no farther liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of the Executive’ Incapacity and other reimbursable expenses due under Section 3(t) through the date of Executive’s Incapacity, and repayment of compensation for unused vacation days that have accumulated during the calendar years in which such termination occurs).

 

5. TERMINATION BY THE COMPANY OR THE EXECUTIVE WITH NO REASON. Either the Company or the Executive shall have the right to terminate the Executive’s employment hereunder for “No Reason” by providing the Company’s Board of Directors with six months (180) days-notice. Notwithstanding the foregoing, if the Executive terminates this Agreement, the Company shall have the right to terminate this Agreement at any time during the 6-month (180) day notice period. If the Company shall terminate the Executive without cause the Company shall pay the Executive six (6) months’ severance.

 

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6. EMPLOYEE BENEFITS.

 

(a) Eligibility. During the period of the Executive’s employment with the Company hereunder, the Executive shall be entitled to receive such other perquisites and fringe benefits generally if and when made available by the Company to it5 senior executives and key management employees as a group in accordance with the plans and policies of the Company..

 

(b) Vacation Time. The Executive shall be entitled to paid vacation time and holidays per annum as is consistent with his position with the Company and the performance of his duties hereunder: provided that the Executive shall not be able to take vacation time at any time that would materially interfere with the business or operations of the Company. The Executive shall be entitled to four (4) weeks of paid vacation for each twelve (12) months of employment. The timing is subject to the approval of the CEO.

 

(c) The Executive is entitled to paid time for all observed holidays.

 

7. DEDUCTIONS AND WITHHOLDINGS. The amounts payable or which become payable to the Executive under any provision of this Agreement shall be subject to such deductions and withholdings as is required by applicable

 

8. INDEMNIFICATlON. The Company shall indemnify the Executive in his capacity as an officer of the Company to the fullest extent permitted by applicable law against all debts, judgments, costs. charges, or expenses whatsoever incurred or sustained by the Executive in connection with any action, suit or proceeding to which the Executive may be made a party by reason of his being or having been an officer of the Company, or because of actions taken by the Executive which were believed by the Executive to be in the best interests of the Company. and the Executive shall be entitled to be covered by any directors’ and officers’ liability insurance policies which the Company may maintain for the benefit of its directors and officers. subject to the limitations of any such policies. The Company shall have the right to assume, with legal counsel of its choice. the defense. of the Executive in any such action, suit or proceeding for which the Company is providing indemnification to the Executive. Should the Executive determine to employ separate legal counsel in any such action, suit or proceeding. any costs and expenses of such separate legal counsel shall be the sole responsibility of the Executive. If the Company does not assume the defense of any such action, suit or other proceeding. the Company shall, upon request of the Executive, promptly advance or pay an amount for costs or expenses (including, without limitation, the reasonable legal fees and expenses of counsel retained by the Executive) incurred by the Executive in connection with any such action, suit or proceeding. TI1e Company shall not indemnify the Executive against any actions that would be deemed illegal or contrary to the general indemnification provisions of the Delaware General Corporation Law.

 

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9. RESTRICTIONS, RESPECTING CONFIDENTIAL INFORMATION, COMPETING BUSINESSES, ETC.

 

(a) Acknowledgments of Executive. The Executive acknowledges and ages that by virtue of the Executive’ s position and involvement with the business and affairs of the Company, the Executive will develop substantial expertise and knowledge with respect to all aspects of the business. affairs and operations of the Company and will have access to all significant aspects of the business and operations of the Company and to Confidential and Proprietary Information (as such term is hereinafter defined). The Executive acknowledges and agrees that the Company will be damaged if the Executive were to breach any of the provisions of this Section 10 or if the Executive were to disclose or make unauthorized use of any Confidential and Proprietary Information. Accordingly, the Executive expressly acknowledges and agrees that the Executive is voluntarily entering into this Agreement and that the terms, provisions and conditions of this Section 10 are fair and reasonable and necessary to adequately protect the Company.

 

(a) Definition of Confidential Information. For purposes of this: Agreement the term “Confidential and Proprietary Information” shall mean any and all (confidential or proprietary information or material not in the public domain about or relating to the business operations, assets or financial condition of the Company or any of its subsidiaries or affiliates, or any of its trade secrets, including, without limitation, research and development plans or projects: data and reports: computer materials such as programs. instructions and printouts; formulas: product testing information: business improvements, processes, marketing and selling strategies; strategic business plans (whether pursued or not): budgets: unpublished financial statements; licenses: pricing. pricing strategy and cost data: information regarding the skills and compensation of executives; the identities of clients and potential clients: and (ii) any other information documentation or material not in the public domain by virtue of any action by or on the part of the Executive, the knowledge of which gives or may give the Company or any of its subsidiaries or affiliates a material competitive advantage over any entity not possessing such information. For purposes hereof, the term Confidential and Proprietary Information shall not include any information or material (i) that is known to the general public other than due to a breach of this Agreement by the Executive; or (ii) was disclosed to the Executive by a person or entity who the Executive did not reasonably believe was bound to a confidentiality or similar agreement with the Company.

 

(b) Disclosure of Confidential Information. The Executive hereby covenants and agrees that, while the Executive is employed by the Company and for a period of one (1) year thereafter. unless otherwise authorized by the Company in writing, the Executive shall not, directly or indirectly, under any circumstance: (i) disclose to any other person or entity (other than in the regular course of business of the Company) any Confidential and Proprietary Information, other than pursuant to applicable law, regulation or subpoena or with the prior written consent of the Company: tit) act or fail to act so as to impair the confidential or proprietary nature of any Confidential and Proprietary Information; (iii) use any Confidential and Proprietary information other than for the sole and exclusive benefit of the Company: or (iv) offer or agree to or cause or assist in the inception or continuation of any such disclosure. impairment or use of any Confidential and Proprietary Information. Following the Employment Term, the Executive shall return all documents, records and other items containing any Confidential and Proprietary Information to the Company (regardless of the medium in which maintained or stored). without retaining any copies, notes or excerpts thereof, or at the request of the Company, shall destroy such documents, records and items (any such destruction to be certified by the Executive to the Company in writing). Following the Employment Term, the Executive shall return to the Company any property or assets of the Company in the Executive’s possession.

 

5

 

 

(c) Non-Compete. The Executive covenants and agrees that, while the Executive is employed by the Company, in the state of CO and a period of two (2) years thereafter, the Executive shall not, directly or indirectly, manage, operate or control or participate in the ownership, management, operation or control of or otherwise become interested in (whether as an owner, stockholder, member, partner, lender, consultant, executive, officer, director, agent, supplier, distributor or otherwise) any business which is competitive with the business of the Company or any of its subsidiaries or affiliates, or, directly or indirectly, induce or influence any person that has a business relationship with the Company or any of its subsidiaries or affiliates to discontinue or reduce the extent of such relationship. For purposes of this Agreement, the Executive shall be deemed to be directly or indirectly interested in a business if he is engaged or interested in that business as a stockholder, director, officer, executive. agent, member, partner individual proprietor, consultant. advisor or otherwise. but not if the Executive’s interest is limited solely to the ownership of not more than five percent (5%) of the securities of any class of equity securities of a corporation or other person whose shares are listed or admitted to trade on a national securities exchange or are quoted on an electronic quotation medium.

 

(d) No Solicitation. While the Executive is employed by the Company and for one (1) year after the Executive ceases to be an employed by the Company, the Executive shall not, directly or indirectly, solicit to employ, or employ for himself or others, any employee of the Company. or any subsidiary or affiliate of the Company, who was not Mown to the Executive prior to the date of this Agreement.

 

(e) Specific Performance. Because the breach of any of the provisions of this Section 10 may result in immediate and irreparable injury to the Company for which the Company may not have an adequate remedy at law, the Company shall be entitled, in addition to all other rights and remedies available to it at law, in equity or otherwise, to a decree of specific performance of the restrictive covenants contained in this Section 10 and to a temporary and permanent injunction enjoining such breach (without being required to post a bond or famish other security to show any damages).

 

(f) Challenge of Agreement by Executive. In the event the Executive challenges this Agreement and an injunction is issued staying the implementation of any of the restrictions imposed by Section 10 hereof: the time remaining on the restrictions shall be tolled until the challenge is resolved by final adjudication, settlement or otherwise, except that the time remaining on the restrictions shall not be tolled during any period in which the Executive is unemployed.

 

(g) Interpretation of Restrictions. Executive acknowledges that the type and periods of restriction imposed by this Section 10 are fair and reasonable and are reasonably required for the protection of the legitimate interests of the Company and the goodwill associated with the business of the Company; and that the time, scope, geographic area and other provisions of this Agreement have been specifically negotiated by sophisticated commercial parties and are given as an integral part of the transactions contemplated hereby. If any of the covenants in this Section 10, or any part hereof, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants herein, which shall be given full effect, without regard to the invalid portions. In the event that any covenant contained in this Agreement shall. he determined by any court of competent jurisdiction to be W1enforceable by reason of its extending for too great a period of time or over too great a geographical area or by reason of its being too extensive in any other respect, it shall he interpreted to extend only over the maximum period of time for which it may be enforceable and/or over the maximum geographical area as to which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action.

 

6

 

 

9. NOTICES. All notices, demands, consents, requests, instructions and other communications to be given or delivered or permitted under or by reason of the provisions of this Agreement or in connection with the transactions contemplated hereby shall be in writing and shall he deemed to be delivered and received by the intended recipient as follows: (i) if personally delivered, on the “Business Day” (defined as a day on which the New York Stock Exchange is open) of such delivery (as evidenced by the receipt of the personal delivery service); (ii) if mailed certified or registered mail return receipt requested. four (4) Business Days after being mailed: (iii) it’ delivered by overnight courier (with all charges having been prepaid), on the Business Day of such delivery (as evidenced by the receipt of the overnight courier service of recognized standing); or (iv) if delivered by facsimile or e-mail transmission, on the Business Day of such delivery if sent by 6:00 p.m. in the time zone of the recipient, or if sent after that time, on the next succeeding Business Day (as evidenced by the printed confirmation of delivery generated by the sending party’s telecopies machine or e-mail log). If any notice, demand. consent, request. instruction or other communication cannot be delivered because of a changed address of which no notice was given (in accordance with this Section 11), or the refusal to accept same, the notice, demand, consent, request, instruction or other communication shall be deemed received on the second (2nd) Business Day the notice is sent (as evidenced by a sworn affidavit of the sender). All such notices, demands, consents, requests, instructions and other communications will be sent to the addresses first above written. Any notice, consent, direction, approval, instruction, request or other communication given in accordance with this Section 11 shall he effective after it is received by the intended recipient.

 

10. GENERAL PROVISIONS.

 

(a) Benefit of an agreement and Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective executors, administrators, successors and permitted assigns; provided, however. that the Executive may not assign any of his rights or duties hereunder except upon the prior written consent of the Company. This Agreement shall be binding on any successor to the Company whether by merger. consolidation, acquisition of all or substantially all of the Company’s stock, assets or business or otherwise, as fully as if such successor were a signatory hereto, and the Company shall cause such successor to, and such successor shall, expressly assume the Company’s obligations hereunder. The term “Company” as used it this Agreement shall include all such successors. Except as expressly permitted by Section l l(a), nothing herein is intended to or shall be construed to confer upon or give any person, other than the parties hereto, any rights, privileges or remedies under or by reason of this Agreement.

 

Governing Law: Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THAT STATE, WITHOUT REGARD OR REFERENCE TO ITS PRINCIPLES OF LAW CONFLICTS OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED WITHOUT REGARD TO ANY PRESUMPTION AGAINST THE PARTY CAUSING THIS AGREEMENT TO BE DRAFTED. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY CONSENTS TO TILE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY RIGHT TO CONTEST THE VENUE OF SAID COURTS OR TO CLAIM THAT SAID COURTS CONSTITUTEAN INCONVENIENT FORUM. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUITOR PROCEEDING ARISING OUT OF R RELATING TO THIS AGREEMENT.

 

7

 

 

(b) Entire Agreement. This Agreement contains the entire understanding and agreement of the parties and supersedes any and all other prior and/or contemporaneous understandings and agreements, either oral or in writing. between the parties hereto with respect to the subject matter hereof: all of which are merged herein. Each party to this Agreement acknowledges that no representations inducements, promises, or agreements, oral or otherwise, have been made by either party, or anyone acting on behalf of either party, which are not embodied herein and that no other agreement statement or promise not contained in this Agreement shall be valid or binding.

 

(c) Amendments; Waiver. This Agreement may be modified, amended or waived only by an instrument in writing signed by the Company and the Executive. No waiver of any provision hereof shall be valid unless made in writing and signed by the party making the waiver. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver.

 

(d) Attorneys’ Fees. Should any party hereto institute any action or proceeding at law or inequity, or in connection with any arbitration, to enforce any provision of this Agreement, including an action for declaratory relief or for damages by reason of an alleged breach of any provision of this Agreement or otherwise in connection with this Agreement or any provision hereof the prevailing party shall be entitled to recover from the losing party or parties reasonable attorneys’ fees and expenses for services rendered to the prevailing party in such action or proceeding.

 

(e) Right to Legal Representation. The Executive represents and warrants that the Executive has. read this Agreement and the Executive understands connection with the negotiation and execution of this Agreement and that the Executive has either retained and has been represented by such legal counsel or has knowingly and voluntarily waived his right to such legal counsel and desires to enter into this Agreement without the benefit of independent legal representation. The Executive acknowledges that Robinson & Cole LLP is representing the Company in connection with this Agreement and that it is not representing the Executive in connection with this Agreement

 

(f) Affirmations of the Executive. By the Executive’s signature below, the Executive represents to and agrees with the Company that the Executive hereby accepts this Agreement subject to all of the terms and provisions hereof. The Executive has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and folly understands all of the provisions of this Agreement.

 

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IN WITNESS WHEREOF, each of the Company and the Executive has executed this Agreement as of the date first above written.

 

GROWGENERATION CORP. EXECUTIVE

 

By /s/ Darren Lampert   By: /s/ Tony Sullivan
Print:   Darren Lampert     Tony Sullivan

 

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EXHIBIT 1

 

Executive Responsibilities:

 

The Executive is responsible for facilitating smooth functioning of organization’s operations and ensuring that these meet their objectives. The Executive is the head of all operating departments and divisions. He mentors and leads our team with multiple responsibilities, ensuring that the organization gets the right structure to deliver and grow to be the best in the industry.

 

Functions reporting to the Executive include:

 

● Finance, Budgets
● E-commerce
● Commercial
● Store Ops
● Purchasing, Merchandise Planning
● IT
● Supply Chain, Logistics
● HR
● Admin

 

EXECUTIVE Initials:

 

 

GROWGENERATION CORP. Initials:

 

 

 

 

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Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

  I, Darren Lampert, certify that:

 

  1. I have reviewed this Form 10-Q for the fiscal quarter ended September 30, 2019 of GrowGeneration Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 11, 2019 By: /s/ Darren Lampert
    Darren Lampert, Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

  I, Monty Lamirato, certify that:

 

  1. I have reviewed this Form 10-Q for the fiscal quarter ended September 30, 2019 of GrowGeneration Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 11, 2019 By: /s/ Monty Lamirato
    Monty Lamirato, Chief Financial Officer
(Principal Financial Officer)

Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the accompanying Quarterly Report on Form 10-Q of GrowGeneration Corporation (the “Company”) for the fiscal quarter ended September 30, 2019, I, Darren Lampert, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

  1. Such Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in such Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019, fairly presents, in all material respects, the financial condition and results of operations of GrowGeneration Corporation.

 

November 11, 2019 By: /s/ Darren Lampert
    Darren Lampert, Chief Executive Officer
(Principal Executive Officer)

Exhibit 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the accompanying Quarterly Report on Form 10-Q of GrowGeneration Corporation (the “Company”) for the fiscal quarter ended September 30, 2019, I, Monty Lamirato, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

  1. Such Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in such Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019, fairly presents, in all material respects, the financial condition and results of operations of GrowGeneration Corporation.

 

November 11, 2019 By: /s/ Monty Lamirato
    Monty Lamirato, Chief Financial Officer
(Principal Financial Officer)