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: SeptemberJune 30, 20172019

Commission File Number: 333-207889

GROWGENERATION CORPORATION

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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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, 2017,August 7, 2019, there were16,438,52135,525,943 shares of the registrant’s common stock issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

See Notes to the Unaudited Consolidated Financial Statements.

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

* Less than $.01 per share

See Notes to the Unaudited Consolidated Financial Statements.

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

See Notes to the Unaudited Consolidated Financial Statements.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

SeptemberJune 30, 20172019

GrowGeneration Corp.Corp (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of EasyLife Corp.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. 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, three (3) 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, one (1) in New Hampshire, three (3) in Maine, and an online e-commerce store, HeavyGardens. Our plan is to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States and Canada.

The Company is engagedengages in theits business of owning and operating retail hydroponic stores through its wholly owned subsidiaries, GrowGeneration Pueblo Corp, GrowGeneration California Corp, GrowGenerationGrow 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 and GGen Distribution Corp. The Company commenced operation with the purchase of four retail hydroponic stores in Pueblo and Canon City, Colorado on May 30, 2014. The Company currently owns and operates a total of 14 stores and is actively engaged in seeking to acquire and open additional hydroponic retail stores.

Principles of Consolidation

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

The various products sold support each other and are interrelated. Management makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis. Accordingly, the various products sold are aggregated into one reportable operating segment as under guidance in the Financial Accounting Standards Board (the “FASB”(“FASB”) Accounting Standards Codification (“ASC or “codification”ASC”) Topic 28 for segment reporting.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 March 31, 2017April 1, 2019 for the years ended December 31, 20162018 and 2015.2017.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net income (loss).

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

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 generally accepted accounting principles.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 2016, 20152018, 2017 and 20142016 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 SeptemberJune 30, 2017.2019. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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

In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. This update was adopted by the Company inDuring the first quarter of fiscal2019, 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 2017. There was no materialof 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 on the Company's consolidated financial statements as a result of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of this accounting standard.$3.2 million.

In November 2015,On January 1, 2019, the FASB issuedCompany also adopted ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”.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 new guidance eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities and assets be classified as noncurrentamendment is effective commencing in a classified statement of financial position. The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods.2019 with early adoption permitted. The adoption of this standardnew guidance did not have a material impact on the consolidated financial statements.our Financial Statements.

In January 2016, the FASB issued ASU 2016-01,Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for the Company starting in the first quarter of fiscal 2019. EarlyThe adoption is permitted for certain provisions. The Company is inof this standard on January 1, 2019 did not have any effect on the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt certain provisions early.

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

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

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

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

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.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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.

Depreciation expense for the three months ended SeptemberJune 30, 20172019 and 20162018 was $22,707$150,842 and $17,158$70,619, respectively and depreciation expense for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 was $62,194$291,132 and $38,181,$126,433, respectively.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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

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

Interest expense for the three months ended SeptemberJune 30, 20172019 and 20162018 was $3,419$3,161 and $1,384,$11,312, respectively and Interest expense for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 was $7,181$8,690 and $3,050,$19,330, respectively.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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 3-5 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.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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.

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 six months ended June 30, 2019 and 2018, convertible debt and accrued interest of $250,356 and $1,425,003, net of unamortized debt discount of $60,783 and $586,804, respectively, were converted into 83,451 and 475,001 shares of common stock, respectively, at the conversion rate of $3.00 per share.

During the six months ended June 30, 2019 and 2018, 172,500 and 532,500 warrants issued in connection with the convertible debt were exercised, resulting in the issuance of 172,500 and 532,500, shares of common stock, respectively.

Amortization of debt discount for the three months ended June 30, 2019 and 2018 was $117,150 and $304,842, respectively and amortization of debt discount for the six months ended June 30, 2019 and 2018 was $242,096 and $622,096, respectively.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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 ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.

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 stockCommon Stock which may be issued over the term of the plan2014 Plan shall not exceed 2,500,000 shares. Awards under the plan2014 Plan are made by the Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s common stocka 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. However, noNo 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 havenot 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.

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 termten-percent stockholder). No option may be exercisable for more than ten years (five years in excessthe case of 5 yearsan incentive stock option granted to a ten-percent stockholder) from the date of grant.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

Options outstanding at SeptemberJune 30, 20172019 are as follows:

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

A summary of the status of the Company’s outstanding stock purchase warrants as of SeptemberJune 30, 20172019 is as follows:

Common Stock

The Company’s current Certificate of Incorporation authorizes the Company to issued 100,000,000 shares of common stock, par value $0.001 per share.Common Stock. As of SeptemberJune 30, 2017,2019, there were 16,088,62134,834,911 shares of common stockCommon Stock outstanding.

20172019 Equity Transactions

During the six months ended June 30, 2019, the Company issued 4,123,257 shares of Common Stock in connection with the sale of 4,123,257 units in a private placement at $3.10 per unit. 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.

During the ninesix months ended SeptemberJune 30, 20172019, the Company sold a totalissued 1,250,000 shares of 1,825,000 units, each consistingCommon Stock upon exercise of one share ofoutstanding common stock and one warrant to purchase one share of common stock, for net proceeds after offering costs of $3,291,565.warrants at $.35 per share.

During the ninesix months ended SeptemberJune 30, 2017, warrants to purchase 2,149,2872019, the Company issued 172,500 shares of common stock were exercised resulting in proceedsCommon Stock upon exercise of outstanding convertible debt warrants.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

During the six months ended June 30, 2019, the Company issued 83,451 shares of $1,504,501.Common Stock upon conversion of $250,356 in outstanding convertible debt and accrued interest at $3.00 per share.

During the ninesix months ended SeptemberJune 30, 2017,2019, the Company issued 195,500594,553 shares of common stock to employees and consultantsCommon Stock valued at $365,000.approximately $1.8 million as partial consideration for assets acquired in business combinations.

During the ninesix months ended SeptemberJune 30, 2017,2019, the Company issued 470,044 shares of Common Stock upon the cashless exercise of 600,000 common stock options.

During the six months ended June 30, 2019, the Company issued 100,000 shares of common stock and 100,000 warrants for consulting servicesCommon Stock, valued at $77,000.approximately $231,000, for employee bonuses accrued at December 31, 2018.

During the ninesix months ended SeptemberJune 30, 2017,2019, the Company issued 80,00050,000 shares of common stock and 150,000 warrants for prepaid consulting servicesCommon Stock, valued at $251,890.approximately $96,000, for consulting services.

During the six months ended June 30, 2019, the Company issued 17,500 shares of Common Stock to employees in connection with share-based compensation.

2018 Equity Transactions

During the six months ended June 30, 2018, the Company issued 2,209,433 shares of Common Stock from the exercise of warrants.

During the six months ended June 30, 2018, the Company issued 560,000 shares of Common Stock valued at approximately $1,390,550 in connection with assets acquired in business combinations.

During the six months ended June 30, 2018, the Company issued 475,000 shares of Common Stock upon conversion of $1,425,000 of convertible debt at $3.00 per share.

During the six months ended June 30, 2018, the Company issued 118,334 shares of Common Stock upon the exercise of 118,334 options and issued 340,580 shares of Common Stock upon the cashless exercise of 400,000 options.

During the six months ended June 30, 2018, the Company issued 26,000 shares of Common Stock, valued at approximately $108,000, for employee bonuses accrued at December 31, 2017 and issued 45,000 shares to employees in accordance with employment agreements.

During the six months ended June 30, 2018, the Company issued 10,000 shares of Common Stock, valued at approximately $45,000, for consulting services.

10. EARNINGS PER SHAREGrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding plus the number of shares of common stock that would be issued assuming exercise or conversion of all potentially dilutive shares of common stock. Potentially dilutive securities are excluded from the calculation when their effect would be anti-dilutive. For all periods presented in the consolidated financial statements, all potentially dilutive securities have been excluded from the diluted share calculations as they were anti-dilutive as a result of the net losses incurred for the respective periods. Accordingly, basic shares equal diluted shares for all periods presented.

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

The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for the three and six months ended June 30, 2019 and 2018.

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

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 six months ended June 30, 2019.

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

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

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

Pro forma consolidated income statement

The Company has evaluated events and transaction occurring subsequent to SeptemberJune 30, 20172019 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. 

On October 8, 2017, our Santa Rosa, CA store was forced to closed by local authorities due to evacuations caused by significant wildfires in the vicinity. The Company was able to gain access to the store on October 22, 2017 and we are in the process of evaluating the extent of damage to the store and its contents as a result of the fire. The Company is fully insured for both damage to the contents of the store as well as business interruption (loss of sales) as a result of the store being closed during this period. The store re-opened on October 26, 2017 and the long-term impact on sales, if any, is unknown at this time as we are still assessing the impact of the fire on our customers.

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, 20162018 filed with the SEC on March 31, 2017.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’s mission

GrowGeneration is to become one of the largest retailchain of hydroponic and organic specialty gardening retail outletsgarden centers in the industry.North America. Today, GrowGeneration owns and operates a chain of fourteen (14)twenty three (23) retail hydroponic/gardening stores, with nine (9)five (5) located in the state of Colorado, five (5) in the state of California, three (3) in the state of Michigan, two (2) in the state of California,Nevada, one (1) in the state of Washington, and two (2) in the State of Oklahoma, one (1) in the state of Nevada (one that opened subsequent to September 30, 2017).Rhode Island, one (1) in the state of New Hampshire, three (3) in the state of Maine, and an online e-commerce store, HeavyGardens. Our plan is to open and operate hydroponic/gardening stores and related businesses throughout the United States.States and Canada.

Today, our 23 facilities operate in 9 states, each state considered an operating region. During the six months ended June 30, 2019 we completed the acquisition of six additional stores that are projected to provide an additional $20 million in revenues annually and opened two stores, one in Tulsa, OK and one in Brewer, ME. 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. These wholly owned divisions are, GrowGeneration Canada, GrowGeneration Hemp, GGen Distribution Corp and our newly purchased e-commerce super-store HeavyGardens.com. GrowGeneration Management Corp is a wholly owned subsidiary to sell directly into the commercial markets. Sales calls into the commercial markets include new capital projects and multi-state operators. Commercial customers set up accounts through our online portal and can order directly online and receive their commercial pricing. HeavyGardens.com is the Company’s recent acquisition of an e-commerce online superstore that today generates approximately $400,000 a month in sales and has over 60,000 unique 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. GrowGeneration Canada was formed to mirror our US operations and strategies to acquire hydro operations in Canada. GrowGeneration Hemp is developing a supply chain to outfit hemp farms, currently over 75,000 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. Lastly, GGen Distribution Corp 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.

Our stores sell thousands of products, such as organic nutrients and soils, advanced lighting technology, state of the art hydroponic and aquaponic equipment and other products needed to grow indoors and outdoors. Our strategy is to target two distinct verticals;groups of customers, namely (i) commercial growers, and (ii) smaller growers whothat 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 cannabisplant-based medicine market, (dispensaries, cultivators and caregivers), the home cannabis grower and to 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 business were well over $4 billion in 2018.

Sales at our stores have grown since we commenced our business in May 2014, as noted below.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.

Our business commenced

The Company continues its rollout of its new enterprise resources planning (“ERP”) solution, which it started in May 2014 when we acquired the assetsfourth quarter of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which owned2018, adding our Northern California, Michigan, Maine, Oklahoma and operated 4 retail stores.Rhode Island stores to our ERP system in 2019. The acquisition was completed on May 29, 2014, through our wholly-owned subsidiary, GrowGeneration Pueblo Corp., a Colorado corporation.ERP system is designed to improve departmental productivity and effectiveness. The purchase price was $499,976, consisting of $243,000 in goodwillERP system also provides reporting tools to better evaluate inventory levels and $273,000 in inventory $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts payable and $355 in customer deposits.  From February 2015 to May 2017, the Company has acquired or opened 9 additional retail locations.purchasing needs.

RESULTSRESULTS OF OPERATIONS

Comparison of the three months ended SeptemberJune 30, 2017 to September 30, 20162019 and 2018

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

Revenue

Net revenue for the three months ended SeptemberJune 30, 20172019 increased approximately $1.9$12.3 million, or 86%172%, to approximately $4.0$19.5 million, compared to approximately $2.1$7.2 million for the three months ended SeptemberJune 30, 2016.2018. The increase in revenues in 2019 was not only due to an increase in same store sales, as noted below, but alsoprimarily due to the addition of 4 retail14 new stores opened or acquired after April 1, 2018, and the new e-commerce site acquired in 2017mid-September 2018. The 14 new stores and the new e-commerce web site contributed $12.7 million in revenue for the quarter ended June 30, 2019. Three new stores which there were nowe opened at various times during the quarter ended June 30, 2018 contributed sales of $1.6 million during that quarter. The chart below shows sales by market for the three months ended SeptemberJune 30, 2016. Sales2019 and 2018. The Company also consolidated some stores in these 4 stores2019 and 2018, primarily in Colorado that had revenues of $66,000 for the three months ended SeptemberJune 30, 2017 were approximately $1.3 million compared to approximately $02019 and $462,000 for the three months ended SeptemberJune 30, 2016. The Company also had store closures in early 2017 that had sales of $20,533 for the three months ended September 30, 2017 and $109,630 for the three months ended September 30, 2016.2018.

AsThe Company currently continues to focus on nine (9) markets and the new e-commerce site noted above,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 of the Company’s products in the Colorado market increased approximately $2 million or 107% comparing the quarter ended June 30, 2019 to June 30, 2018, which was primarily due the Company’s continued focus on increasing commercial sales and the acquisition of a new store in mid-January 2019. Sales of the Company’s products in the California market have seen growth of approximately $3.9 million, or 346%, 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 hadpositioned itself to take advantage of new licenses issued to growers in 2019 and the increase in sales is reflective in that positioning.

Both the Rhode Island and Michigan markets have seen significant sales growth since their acquisitions in late January 2018 and April 2018, respectively. Sales in the Rhode Island market increased 50% primarily from its increased focus on commercial and multi-state commercial customers. Sales in the Michigan market increased 95% also primarily due to the increase in commerce customer accounts.

Revenue in the Nevada market increased 143% primarily due to the acquisition of our Reno store in February 2019.

Sales in the Washington market increased slightly, 5% comparing the quarter ended June 30, 2019 to the quarter ended June 30, 2018.

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

Revenues in Maine/New Hampshire are derived from a new store we opened March 1, 2019 and two stores we acquired in May 2019 in Maine and one store acquired in New Hampshire.

The Company operated the same 89 stores opened for the entire three months ended SeptemberJune 30, 20172019 and 2016.2018: four (4) in Colorado, two (2) in California, one (1) in Nevada, one (1) in Rhode Island and one (1) in Washington. These same stores generated $2.7approximately $6.2 million in sales for the three months ended SeptemberJune 30, 2017,2019, compared to $2.1approximately $5 million in sales for the same periodthree months ended SeptemberJune 30, 2016,2018, an increase of 31%.23%, primarily due to the increase in the number of commercial customers. Same store sales increased in all of the markets as noted below comparing June 30, 2019 to June 30, 2018.

Cost of Goods Sold

Cost of goods sold for the three months ended SeptemberJune 30, 20172019 increased approximately $1.4$8.2 million, or 87%152%, to $2.9approximately $13.7 million, as compared to $1.6approximately $5.4 million for the three months ended SeptemberJune 30, 2016.2018. The increase in cost of goods sold was primarily due to the 86%172% increase in sales comparing the quarterthree months ended SeptemberJune 30, 20162019 to 2017.the three months ended June 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 $1.1$5.8 million for the three months ended SeptemberJune 30, 2017,2019, compared to approximately $.61$1.7 million for the three months ended SeptemberJune 30, 2016,2018, an increase of approximately $507,000$4.1 million or 83%237%. Gross profit as a percentage of sales was 27.7%29.9% for the three months ended SeptemberJune 30, 2017,2019, compared to 28.1%24.2% for the three months ended SeptemberJune 30, 2016.2018. The slight decreaseincrease in the gross profit margin percentage is due to (1) reduced pricing from vendors as a result of our increasing purchasing from those vendors, (2) the increasesales of product acquired in a large bulk purchase in the numberfirst quarter of commercial accounts which have lower margins than the retail customer.2019 at a substantial discount.

Operating Expenses

Operating expenses are comprised of 1) store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were $800,861approximately $2.7 million for the three months ended SeptemberJune 30, 20172019 and $372,317approximately $1.1 million for the three months ended SeptemberJune 30, 2016,2018, an increase of $428,544approximately $1.6 million or 115%138%. The increase in store operating cost is duecosts was directly attributable to 1) the addition of fiveseven (7) 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 June 30, 2018. In addition to the new stores opened or acquired in 20162019, as discussed above, we acquired 8 stores at various times in 2018, opened a new store in October 2018, and 2) slightacquired our new e-commerce site in mid-September 2018. Effective April 1, 2019 we opened two warehouse facilities. The addition of these new store, discussed above, and the two new warehouse facilities were the primary reasons for the increase in staffing due to the 31% increase in same store sales.operating costs. Store operating costs as a percentage of sales were 19.9%14% for the three months ended SeptemberJune 30, 20172019, compared to 17.2%16.1% for the three months ended SeptemberJune 30, 2016. As previously2018. 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. The net impact, as noted we opened five locations in 2017 that were not open at all in 2016 and as suchabove, was lower store operating costs will be higher as the stores ramp up in sales which can take several months. a percentage of revenues.

Corporate overhead, is comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries, and related expenses and was $773,070approximately $1.9 million for the three months ended SeptemberJune 30, 20172019, compared to $224,225approximately $1.2 million for the three months ended SeptemberJune 30, 2016.2018. Corporate overhead was 9.8% of revenue for the three months ended June 30, 2019 and 16.8% for the three months ended June 30, 2018. The increase in salaries and related expense from 20162018 to 20172019 was due primarily to the increase in corporate staff to support expanding operations, including additionalpurchased store integrations, accounting and finance, information systems, purchasing and commercial sales staff to increasestaff. 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 outside sales efforts.existing centralized purchasing and accounting and finance departments, thus delivering cost savings. Corporate salaries and related payroll costs as a percentage of sales were 6.7%4.2% for the three months ended SeptemberJune 30, 2017 and 5%2019 compared to 5.5% for the three months ended SeptemberJune 30, 2016.2018. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were $237,884approximately $549,000 for the three months ended SeptemberJune 30, 20172019 and $98,731approximately $399,000 for the three months ended SeptemberJune 30, 20162018, with a majority of the increase related to advertising and promotion, and travel and entertainment.entertainment and legal fees. General and administrative costs as a percentage of revenue was 5.9%were 2.8% for the three months ended SeptemberJune 30, 2017, compared to 4.6%2019, and 5.6% for the three months ended September 30. 2016. CorporateJune 30, 2018. As noted earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation, which was approximately $265,971$542,000 for the three months ended SeptemberJune 30, 2017,2019, compared to approximately $17,158$408,000 for the three months ended SeptemberJune 30, 2016. The increase in share based compensation is due to an increase in 1) non-cash compensation to consultants, 2) stock issued to employees and 3) the fair market value of options issued to employees. Corporate overhead was 19% of revenue for the three months ended September 30, 2017 and 10% for the three months ended September 30, 2016, primarily due to the increase in non-cash share based compensation.2018.

Net Income (Loss)

The net lossNet income for the three months ended SeptemberJune 30, 20172019 was $460,887,$1,062,000, compared to a net incomeloss of $10,844$(929,959) for the three months ended SeptemberJune 30, 2016.2018, a positive change of nearly $2 million. The increase in net income for the net lossquarter ended June 30, 2019 was primarily due to 1) ana 172% increase in non-cash shares-based compensation of $242,984, 2) the opening of our operations in Denver South, Boulder, Las Vegas, and San Bernardino, CA, 3) costs related to the Seattle Hydro purchase and pre-opening store costs, and 4) higher salaries and related expenses due to ansales with only a 152% increase in corporate support staffcost of sales, 2) a reduction of store operating costs as a percentage of revenue from 16.1 % in 2018 to 14% in 2019, and sales staff dedicated3) a reduction of overhead as a percentage of revenue from 16.8% in 2018 to outside sales.9.8% in 2019.

Comparison of the nine months ended SeptemberSix Months Ended June 30, 2017 to September 30, 20162019 and 2018

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

Revenue

Net revenue for the ninesix months ended SeptemberJune 30, 2017 were2019 increased approximately $10.7$21 million, or 182%, to approximately $32.6 million, compared to approximately $5.6$11.5 million for the ninesix months ended SeptemberJune 30, 2016, an increase of $5.1 million, or 91%.2018. The increase in revenues in 2019 was not only due to an increase in same store sales, as noted below, but alsoprimarily due to the addition of 4 retail9 new stores opened or acquired after January 1, 2018, 8 new stores opened or acquired after January 1, 2019, and the new e-commerce site acquired in mid-September 2018. The 17 new stores and the new e-commerce web site contributed $25.7 million in revenue for the six months ended June 30, 2019 compared to $4.6 million for the six months ended June 30, 2018 from 7 stores which we opened at various times during the six months ended June 30, 2018. The chart below shows sales by market for the six months ended June 30, 2019 and 2018. The Company also consolidated some stores in 2017 for which there were no sales2019 and 2018, primarily in Colorado and California, that had revenues of $801,000 for the ninesix months ended SeptemberJune 30, 2016,2019 and $2.4 million for the six months ended June 30, 2018.

The Company currently continues to focus on nine (9) 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 of the Company’s products in the Colorado market increased $3.9 million or 121% comparing the six months ended June 30, 2019 to the six months ended June 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. Sales of the Company’s products in the California market have seen growth of approximately $6.5 million, or 453%, from the addition of one retailfive (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 duringacquisitions occurred in April 2018, so the quarter ended SeptemberJune 30, 20162019 reflects sales in these four stores for which sales only occurred for a portion ofan entire quarter. Sales in the nineRhode Island and Michigan markets increased 52% and 282% in the six months ended SeptemberJune 30, 2016. Sales2019, respectively, over the same period in these stores for the nine months ended September 30, 2017 were approximately $3.7 million compared to approximately $479,591 for the nine months ended September 30, 2016.2018. The Company also hadis pursuing new store closuresacquisitions in early 2017both of these markets and believes that had sales of approximately $117,777 forthese markets will be growth markets in 2019.

Revenue in the nine months ended September 30, 2017 and approximately $339,695 for the nine months ended September 30, 2016.Nevada market increased 129% as we continue to focus on commercial sales.

As noted above,Sales in the Washington market increased 36% comparing the six months ended June 30, 2019 to the six months ended June 30, 2018.

New stores in the Oklahoma market opened on October 1, 2018 and February 1, 2019, respectively, which was 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.

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

The Company had the same 76 stores opened for the entire ninesix months ended SeptemberJune 30, 20172019 and 2016.2018: four (4) in Colorado, one (1) in Nevada, and one (1) in Washington. These same stores generated $6.8$6.1 million in sales for the ninesix months ended SeptemberJune 30, 2017,2019, compared to $4.8$4.6 million in sales for the same periodsix months ended SeptemberJune 30, 2016,2018, an increase of 43%approximately 1.5 million or 33%. Same store sales increased in all of the markets as noted below comparing June 30, 2019 to June 30, 2018.

Cost of Goods Sold

Cost of goods sold for the ninesix months ended SeptemberJune 30, 20172019 increased $3.8approximately $14.4 million, or 168%, to $7.8approximately $23.1 million, an increase of 97%, as compared to $3.9approximately $8.6 million for the ninesix months ended SeptemberJune 30, 2016.2018. The increase in cost of goods sold was primarily due to the 91%182% increase in sales comparing the ninesix months ended SeptemberJune 30, 20162019 to 2017.the six months ended June 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 $9.5 million for the six months ended June 30, 2019, compared to approximately $2.9 million for the ninesix months ended SeptemberJune 30, 2017, as compared to $1.7 million for the nine months ended September 30, 2016,2018, an increase of approximately $1.3$6.6 million or 76%226%. Gross profit as a percentage of sales was 27.4%29.2% for the ninesix months ended SeptemberJune 30, 2017,2019, compared to 29.7%25.3% for the ninesix months ended SeptemberJune 30, 2016.2018. The decreaseincrease in the gross profit margin percentage is due to (1) reduced pricing from vendors as a result of our increasing purchasing from those vendors, (2) the openingsales of product acquired in a new store in Seattle in mid-May 2017 and the initial product discounting to attract new customers to that location, as well the increaselarge bulk purchase in the numberfirst quarter of commercial accounts which have lower margins than the retail customer.2019 at a substantial discount.

Operating Expenses

Operating expenses are comprised of 1) store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $2.1$4.6 million for the ninesix months ended SeptemberJune 30, 20172019 and approximately $1.1$2 million for the ninesix months ended SeptemberJune 30, 2016,2018, an increase of approximately $1$2.6 million or 98%127%. The increase in store operating costcosts was duedirectly attributable to the 182% increase in sales from the addition of fivesix (6) new locations that were acquired and two new stores opened in new markets in 2019 that were not open for any portion of the six months ended June 30, 2018. We acquired 8 stores at various times in 2016.2018, opened one new store in the third quarter of 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 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 19.6%14.2% for the ninesix months ended SeptemberJune 30, 20172019, compared to 18.9%17.6% for the ninesix months ended SeptemberJune 30, 2016. A previously2018. 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, we opened five locations in 2017 that were not open at all in 2016 and as suchwas lower store operating costs will be higher as the stores ramp up in sales which can take several months. a percentage of revenues.

Corporate overhead is comprised of general and administrative costs, share based compensation, depreciation and amortization general and administrative costs and corporate salaries and related expenses and werewas approximately $1.9$3.4 million for the ninesix months ended SeptemberJune 30, 20172019, compared to approximately $.8$2.2 million for the ninesix months ended SeptemberJune 30, 2016.2018. Corporate overhead was 10.3% of revenue for the six months ended June 30, 2019 and 18.8% for the six months ended June 30, 2018. The increase in salaries and related expense from 20162018 to 20172019 was due primarily to the increase in corporate staff primarily,to support expanding operations, including purchased store integrations, accounting and finance, inventory managementinformation systems, purchasing and commercial sales to support operationsstaff. It should be noted that when we consummate a new acquisition, purchasing and to increase outside sales.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 5.3%4.4% for the ninesix months ended SeptemberJune 30, 2017 and 5.6%2019 compared to 6.3% for the ninesix months ended SeptemberJune 30, 2016. The slight reduction of this percentage is because corporate staff costs do not rise directly commensurate with the increase in revenues.2018. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were approximately $644,700$1.1 million for the ninesix months ended SeptemberJune 30, 20172019 and approximately $282,600$763,000 for the ninesix months ended SeptemberJune 30, 20162018, with a majority of the increase inrelated to advertising and promotion, and travel and entertainment.entertainment and legal fees. General and administrative costs as a percentage of revenue was 6%were 3.5% for the ninesix months ended SeptemberJune 30, 2017 compared to 5%2019, and 6.6% for the ninesix months ended September 30. 2016. The slight increase in the percentage comparing 2016 to 2017 was primarily due to an increase in advertising and promotion expenses from approximately $34,400 in 2016 to approximately $180,500 for 2017, which was mainly due to new store promotional costs in 2017 and increase in professional fees from $35,000 for the nine months ended SeptemberJune 30, 2016 to $243,400 for the nine months ended September 30, 2017. Corporate2018. As noted earlier, corporate overhead includes non-cash expenses, consisting primarily of depreciation and share based compensation, which was approximately $645,400$813,000 for the ninesix months ended SeptemberJune 30, 2017,2019, compared to approximately $184,300$680,000 for the ninesix months ended SeptemberJune 30, 2016. Corporate overhead cost were18% of revenue for the nine months ended September 30, 2017 compare to 15% for the nine months ended September 30 2016, primarily because of the increase in non-cash share based compensation.2018.

Net Income (Loss)

The net lossincome for the ninesix months ended SeptemberJune 30, 20172019 was $1,084,593approximately $1.3 million, compared to $211,682 for the nine months ended September 30, 2016, an increase in thea net loss of $872,911.$(1,883,389) for the six months ended June 30, 2018, a positive change of approximately $3.2 million. The increase innet income for the net losssix months ended June 30, 2019 was primarily due to 1) ana 182% increase in non-cash shares-based compensationsales with only a 168% increase in cost of approximately $461,000,sales, 2) the openinga reduction of our operationsstore operating costs as a percentage of revenue from 17.6 % in Denver South, Las Vegas, Boulder2018 to 14.2% in 2019, and San Bernardino, CA, 3) costs relateda reduction of overhead as a percentage of revenue from 18.8% in 2018 to the Seattle Hydro purchase and pre-opening store costs, and 4), a slight decrease10.3% in the gross profit percentage as noted above.2019.

Operating Activities

Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 20172019 was $2,590,679approximately $861,000 compared to $992,444approximately $3.5 million for the ninesix months ended SeptemberJune 30, 2016.2018. Cash provided byused in operating activities is driven by our net lossincome (loss) and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets, and share based compensation expense.expense, non-cash operating lease expense and amortization of debt discount. Non-cash adjustmentadjustments totaled $708,426approximately $1.1 million and $261,202$1.3 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, so non-cash adjustments had a greaterlesser positive impact on net cash provided byused in operating activities for the ninesix months ended SeptemberJune 30, 20172019 than the same period in 2016.2018. The decrease in the net cash fromused in operating activities comparing June 30, 2019 to June 30, 2018, of approximately $2.7 million, was primarily related to net income of $1.3 million for the increase in thesix months ended June 30, 2019 compared to a net loss of $872,911, an increaseapproximately $1.9 million for the six months ended June 30, 2018. In addition, the six months ended June 30, 2019 was impacted by a decrease in inventory of $2,449,289, an increase in accounts receivable of $292,560,approximately $425,000 (excluding acquired inventory from business combination), an increase in prepaids primarily vendor prepaids, of $259,209,$1.1 million, offset by an increase in accounts payable and other current liabilities of $786,546.approximately $1 million. The increaseincreases in inventory, prepaids, accounts payable and a corresponding increase in trade payables wasother accrued expenses are directly attributable to both and increase in revenues and anthe increase in the number of operating stores between December 31, 2016 and September 30, 2017.in 2019 compared to 2018.

Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 20162018 was $992,444.approximately $3.5 million. This amount was primarily related to a net loss of approximately $1.9 million, increases of inventory of $1,076,310,approximately $3.5 million, accounts receivable of $331,157,$301,000, offset by an increase in accounts payable and other current liabilities of $367,433.approximately $622,000. 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 December 31, 2015January 1, 2018 and SeptemberJune 30, 2016.2018.

Net cash used in investing activities was $869,901approximately $8.8 million for the ninesix months ended SeptemberJune 30, 20172019 and $183,059approximately $1.1 million for the ninesix months ended SeptemberJune 30, 2016. The increase2018. Investing activities in 2017 was due2019 were primarily attributable to acquired intangiblessix stores acquisitions in 2019, for which we paid approximately $7.6 million in cash. Other investing activities in 2019 included the purchase of vehicles and store equipment totaling approximately $1.1 million. Investing activities in 2018 related to the Seattle Hydro purchase in May 2017 and the purchase of vehicles and store equipment to support new store operations. Between January 31, 2017 and September 30, 2017, the Company opened 4 new locations.

Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 20172019 was approximately $4.8$12.9 million and representedwas primarily attributable to 1) proceeds from the sale of common stock netand exercise of offering costs,warrants of $3.3approximately $13.1 million and 2) debt repayment of approximately $289,000. Net cash provided by financing activities for six months ended June 30, 2018 was $20.8 million and was primarily from 1) proceeds from the sale of convertible debt, $8.9 million and 2) sales of Common Stock and proceeds from the exercise of warrants of approximately $1.5$12 million. Net cash provided by financing activities for the nine months ended September 30, 2016 was $987,560 and was primarily from proceeds from the sales of common stock, net of offering costs of $998,500.

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):