As filed with the Securities and Exchange Commission on June 30, 20169, 2020
Registration No. 333-207889
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3 to
FormFORM S-1
REGISTRATION STATEMENT UNDER
UNDER
THE SECURITIES ACT OF 1933
GrowGeneration Corp.
(Exact Namename of Registrant as Specifiedspecified in its Charter)charter)
Colorado | 5200 | 46-5008129 | ||
(State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
incorporation or organization) | Classification Code Number) | Identification |
503 North Main Street,930 W 7th Ave, Suite 740A
Pueblo,Denver, Colorado 8100380204
Telephone: 800-935-8420
(Address, including zip code, and telephone number,
including area code, of Registrant’s principal executive offices)
Darren Lampert
Chief Executive Officer
GrowGeneration Corp.
503 North Main Street,930 W 7th Ave, Suite 740A
Pueblo,Denver, Colorado 8100380204
Telephone: 800-935-8420
(Address,Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Mitchell Lampert, Esq. Robinson & Cole LLP 1055 Washington Boulevard Stamford, CT 06901 Telephone: (203) 462-7559 Fax: (203) 462-7599 | Stuart Bressman Rupa Briggs White & Case LLP 1221 Avenue of the Americas New York, NY 10020 Telephone: (212) 819-8200 Fax: (212) 354-8113 |
Mitchell Lampert, Esq.
Robinson & Cole LLP
1055 Washington Boulevard
Stamford, Ct. 06901
Telephone: (203) 462-7559
Approximate date of commencement of proposed sale to the public:As soon as practicable on or after the effective date of this registration statement.Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒box:☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to Be Registered | Amount to Be Registered | Proposed Maximum Offering Price per Share(1) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee(2) | ||||||||||||
Shares of common stock sold to selling stockholders in 2016 Private Placement(7) | 890,714 | $ | .70 | $ | 623,500 | $ | 62.79 | |||||||||
Shares of common stock underlying warrants sold to selling stockholders in 2016 Private Placement (8) | 890,714 | $ | .70 | $ | 623,500 | $ | 62.79 | |||||||||
Shares of common stock sold to selling stockholders in 2015 Private Placement in October 2015(5) | 2,465,001 | $ | .70 | 1,725,501 | $ | 173.76 | (9) | |||||||||
Shares of common stock underlying warrants sold to selling stockholders in 2015 Private Placement in October 2015 (6) | 2,465,001 | $ | .70 | $ | 1,725,501 | $ | 173.76 | (9) | ||||||||
Shares of common stock sold to selling stockholders in 2015 Private Placement in March 2015(4) | 300,000 | $ | .60 | $ | 180,000 | $ | 18.13 | (9) | ||||||||
Shares of common stock sold to selling stockholders in 2014 Private Placement(3) | 1,000,000 | $ | .60 | $ | 600,000 | $ | 60.42 | (9) | ||||||||
Total | 8,011,430 | $ | $ | 5,478,002 | $ | 551.64 | (10) |
Title of Each Class of Securities to be Registered | Amount to be Registered (1) | Proposed Offering Price Per Share (2) | Proposed Maximum Aggregate Offering Price (2)(3) | Amount of Registration Fee | ||||||||||||
Common Stock, par value $0.001 per share | - | $ | - | $ | 40,250,000 | $ | 5,224.45 |
(1) | ||
(2) | Estimated solely for the |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until thisthe Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to suchsaid Section 8(a), may determine.
EXPLANATORY NOTE
We are submitting this Amendment No. 3 (“Amendment No. 3”) to our Registration Statement on Form S-1 that we filed with the Securities and Exchange Commission (“SEC”) on November 9, 2015 (the “Registration Statement”), amended on May 11, 2016 (the “Amendment No. 1) and June 15, 2016 (the “Amendment No. 2”), pursuant to an SEC comment letter dated June 21, 2016 in order to revise and amend certain disclosures and information in the Registration Statement.
Furthermore, we have additionally made minor revisions to disclosures throughout this Amendment No. 3 to make the information contained herein consistent and clear.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission declares our registration statementis effective. This prospectus is not an offer to sell these securities, and iswe are not soliciting an offeroffers to buy these securities, in any state where the offer or sale of these securities is not permitted.
GrowGeneration Corp.SUBJECT TO COMPLETION, DATED JUNE 9, 2020
8,011,430 Shares
Common StockPRELIMINARY PROSPECTUS
This prospectus relates to the offer
$35,000,000
Common Stock
We are offering $35,000,000 of shares of our common stock. The public offering price for sale of up to an aggregate of 8,011,430 shareseach share of common stock of GrowGeneration Corp. by the selling stockholders named herein. We are not offering any securities pursuant to this prospectus. The shares of common stock offered by the selling stockholders include 3,355,715 shares of common stock underlying warrants.is $ .
Our common stock is not presently tradedlisted on any market or securities exchange, and we have not applied for listing or quotation on any exchange. We are seeking sponsorship for the tradingNasdaq Capital Market under the symbol “GRWG.” On June 8, 2020, the last reported sale price of our common stock on the OTC Bulletin Board and/or OTCQBNasdaq Capital Market upon the effectiveness of the registration statement of which this prospectus forms a part. The 8,011,430 shares of our common stock can be sold by selling security holders at a fixed price of $.60was $7.11 per share until our shares are quoted on the OTC Bulletin Board and/or OTCQB Market and thereafter at prevailing market prices or privately negotiated prices. There can be no assurance that a market maker will agree to file the necessary documents with the Financial Industry Regulatory Authority (referred to herein as FINRA), nor can we provide assurance that our shares will actually be quoted on the OTC Bulletin Board and/or OTCQB Market or, if quoted, that a viable public market will materialize or be sustained.share.
Following the effectiveness of the registration statement of which this prospectus forms a part, the sale and distribution of securities offered hereby may be effected in one or more transactions that may take place on the OTC Bulletin Board and/or OTCQB Market, including ordinary brokers’ transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders. See “Plan of Distribution.”
The selling stockholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation.
We are an “emerging growth company” underas defined by the federal securities lawsJumpstart Our Business Startups Act of 2012, and will be subjectas such, we have elected to comply with certain reduced public company reporting requirements. requirements for this prospectus and future filings.
Investing in our common stock is highly speculative andsecurities involves a significanthigh degree of risk. See “Risk Factors”Before deciding whether to invest in our securities, please read “Risk Factors” beginning on page 37 of this prospectus, in our Annual Report on Form 10-K for a discussion of information that should be considered before making a decision to purchasethe fiscal year ended December 31, 2019, as amended, and in our common stock.Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined ifpassed upon the adequacy or accuracy of this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.
Per Share | Total | |||||||
Public offering price | $ | $ | ||||||
Underwriting discounts and commissions (1) | $ | $ | ||||||
Proceeds to us, before expenses | $ | $ |
(1) | See “Underwriting” for additional information regarding underwriting compensation. |
We have granted the underwriters an option to purchase up to an additional $5,250,000 of shares of common stock from us at the public offering price less the underwriting discounts and commissions, and on the same terms and conditions as set forth above, for 30 days after the date of this prospectus. If the underwriters exercise the option in full, the total public offering price will be $40,250,000, the total underwriting discounts and commissions will be $2,415,000, and the total proceeds, before expenses, to us will be $37,835,000.
The underwriters expect to deliver the shares against payment through the facilities of the Depository Trust Company on or about , 2020, subject to the satisfaction of customary closing conditions.
Sole Book-Running Manager
Oppenheimer & Co.
Co-Managers
Ladenburg Thalmann | Lake Street |
The date of this prospectus is ________________, 2016., 2020.
You should rely only on the information contained in this prospectus.
We have not, and the underwriters have not, authorized any other personanyone to provide you with any information different from or in addition to make any representation other than that contained in this prospectus. If anyone provides you with differentprospectus, any amendment or inconsistentsupplement to this prospectus or in any free writing prospectus prepared we may authorize to be delivered or made available to you. We do not, and the underwriters do not, take any responsibility for, and can provide no assurance as to the reliability of, any information you should not rely on it.that others may provide to you. We are not making an offeroffering to sell, these securitiesand seeking offers to buy, shares of our common stock only in any jurisdictionjurisdictions where an offer or sale is notoffers and sales are permitted. You should assume that theThe information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus.prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. You should also read and consider the information in the documents to which we have referred you under the caption “Where You Can Find More Information” in this prospectus.
Additional risks and uncertainties not presently known or that are currently deemed immaterial may also impair our business operations. The risks and uncertainties described in this document and other risks and uncertainties which we may face in the future will have a greater impact on those who purchase our common stock. These purchasers will purchase our common stock at the market price or at a privately negotiated price and will run the risk of losing their entire investments.
For investors outside the United States:We Neither we nor the underwriters have not done anything that would permit thisa public offering of the securities or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required toPersons outside the United States who come into possession of this prospectus must inform yourselvesthemselves about, and to observe any restrictions relating to, thisthe offering of the securities and the distribution of this prospectus.prospectus outside of the United States.
InTRADEMARKS, TRADE NAMES AND SERVICE MARKS
We use various trademarks, trade names and service marks in our business, includingBlueprint Controllers, Carbide, DuraBreeze, Elemental Solutions, GrowGeneration, GrowXcess, GuardenWare, Harvester’s Edge, HeavyGardens, Ion, MixSure+, OptiLUME, Power Matrix, Smart Support, Sunleaves, Sunspot, The Fountain for Automation, VitaPlant, andWhere The Pros Go To Grow. For convenience, we may not include the SM,®or™ symbols, but such omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law. Any other trademarks, trade names or service marks referred to in this prospectus we rely on and refer to information and statistics regarding our industry. We obtained this statistical, market and otherare the property of their respective owners.
INDUSTRY AND MARKET DATA
This prospectus includes industry data and forecasts that we obtained from publicly availableindustry publications and surveys, public filings and internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our ranking, market position and market estimates are based on third-party forecasts, management’s estimates and assumptions about our markets and our internal research. We have not independently verified such third-party information, nor have we ascertained the underlying economic assumptions relied upon in those sources, and we cannot assure you of the accuracy or completeness of such information contained in this prospectus. Such data involve risks and uncertainties and is subject to change based on various factors, including those discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”
ii
ThisThe following summary highlights information contained elsewhere in other parts of this prospectus. Because it is a summary, itprospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock,securities, you should carefully read thethis entire prospectus, carefully, including our consolidated financial statements and the related notes includedsections in this prospectus and the information set forth under the headingsentitled “Risk Factors” andFactors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.
When usedExcept as otherwise indicated herein unlessor as the context otherwise requires, otherwise, references in this prospectus to “GrowGeneration,” the “Company,” “we,” “our”“us” and “us”“our” refer to GrowGeneration Corp., a Colorado corporation, collectivelytogether with itsour wholly-owned subsidiaries (GrowGeneration Pueblo Corp, GrowGeneration Pueblo Corp., a Colorado corporation, which we sometimes refer to herein asCalifornia Corp, Grow Generation Nevada Corp, GrowGeneration PuebloWashington 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, GrowGeneration Florida Corp and GrowGeneration California,Management Corp.) on a Delaware corporation.consolidated basis.
Our Company
General
GrowGeneration Corp.’s mission is to become one ofWe believe we are the largest retailchain of stand-alone hydroponic garden centers by revenue and organic specialty gardening retail outletsnumber of stores in the industry. Today, GrowGeneration ownsUnited States. We also believe we are a leading marketer and operatesdistributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening, based on management’s estimates. We have a diverse customer base, with commercial customers constituting the majority of our total sales. As of June 9, 2020, we own and operate a chain of 927 retail and commercial hydroponic/gardening stores, with 8 locatedcenters in 10 U.S. states. We also operate an online e-commerce store, growgeneration.com. Our core strategy continues to focus on expanding our geographic reach across the stateUnited States through organic growth, in terms of Coloradoincreasing same store sales and 1expanding customer base, and acquisitions.
Our retail operations are driven by our high-quality products, value-add knowledgeable staff and fast distribution capabilities. As of June 9, 2020, we employ horticulturists that we have branded “Grow Pros”. Our operations span over 300,000 square feet of retail and warehouse space. During COVID-19, we have been deemed an “essential” supplier to the agricultural industry and, as such, we remained open and continued our operations. In the first quarter of 2020, our revenue was $33 million, which increased 152% from the same period of the prior year, and in 2019, our revenue was $80 million, which increased 175% compared to 2018.
We operate our business through the state of California. following sales channels:
● | Retail: 27 retail and commercial hydroponic/gardening centers focused on serving growers and cultivators. |
● | Commercial: Sales to commercial customers, including expert growers and cultivators, and provide them with advice from sales representatives with the requisite expertise (whom we brand as “GrowPros”) to serve their specific needs. |
● | E-Commerce: Our existing e-commerce operation, growgeneration.com (previously HeavyGarden.com and GrowGen.Pro), is currently being developed and rebranded into an omni-channel sales approach to enable e-commerce at all of our locations, which we intend to launch in late June 2020. |
● | Distribution: The majority of our stores are also functioning as warehouse, distribution and fulfillment centers for directing products to our store locations and to the retail, wholesale and mass hydroponic markets. |
Growth Strategy - Store Acquisitions and New Store Openings
Our plangrowth strategy is to openexpand the number of our retail and operate hydroponic/gardening storescommercial operations throughout the United States. The hydroponic retail landscape is fragmented, which we believe has allowed us to acquire the “best of breed” locations in the United States. In addition, we have a two-year roadmap to open a number of new locations in markets that we believe are underserved throughout the country. In addition to the 10 states where we are currently operating, we have identified Arizona, Illinois, Pennsylvania, New York, New Jersey and Missouri as new markets where we plan to open a new operation. In 2019, we opened and acquired ten locations and in the first quarter of 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and acquired Healthy Harvest located outside of Miami, FL.
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OurCommercial Sales Division
In 2019, we created a commercial division with a dedicated sales and support team to sell and service large commercial customers, who are primarily licensed growers of medicinal and non-medicinal cannabis. As of the first quarter of 2020, our commercial division services over 500 commercial accounts, who collectively contributed $17 million in revenue or approximately 20% of our sales in 2019. We have identified over 14,000 licensed hemp and cannabis growers in the United States, and believe there is significant room for us to expand our base of commercial customers.
E-Commerce Strategy
We are currently developing and rebranding our existing GrowGeneration stores have grown. Our growth has been fueled by frequente-commerce operation, HeavyGarden.com and higher dollar transactions from commercial growers, individual home growers, and gardeners. We expect to continue to experience significant, albeit lower percentage growth over the next few years,GrowGen.Pro, as growgeneration.com, which will depend onbe an omni-channel sales approach to enable e-commerce at all of our abilitylocations, providing our customers convenient ways to increaseshop when and how they feel comfortable. We intend to launch this strategy in late June 2020. This omni-channel approach will provide 24/7 availability of products and allow our capital.customers to “Buy Online and Pick Up In Store.” Customers will be able to shop online in all product departments and access descriptions, reviews and pictures of our products. Our customers can order online and they can choose to either have their products delivered directly to their growing facility (usually within 48 hours) or they can pick up the products at one of our stores (usually within 24 hours). We expect future growth to come from existingbelieve that this omni-channel initiative will result in a more seamless, convenient shopping experience for our customers 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, acquiring existing stores with strong customer bases and strong operating histories, the development of a business to business sales team, and the creation of a branded e-commerce portal at www.GrowGeneration.com.will drive financial results.
OurDistribution Channel
We have built a supply chain that currently spans through 27 locations across 10 states. We are in the process of building several 20,000 square foot store operations that will serve as fulfillment service centers, in addition to serving the local retail and commercial customers. These stores and fulfillment centers will ship directly to a farm or home as well as to any commercial hydroponic store (including ours and others) in the United States. We have a fleet of trucks that allow us to deliver within the proximity of any of these locations.
Products and Private Label Strategy
We sell thousandsa variety of products, suchincluding nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as organicwell as other indoor and outdoor growing products. Our supply chain includes several thousand stock keeping units (“SKUs”) across 12 product departments. Many of our products are consumables leading to repeat orders by our customers. Consumable products are mainly nutrients and soils, advanced lighting technology, state ofadditives that feed the art hydroponic and aquaponic equipment, and other products needed to grow indoors and outdoors.plants on a recurring basis. Our strategy is to targetsupply products to two distinct verticals; namely i) professionalgroups of customers: commercial growers and ii) smaller growers whothat require a local storecenter to fulfill their daily and weekly growing needs.
2
The Offering
We are also actively developing a line of private label products that we intend to sell through our garden centers under brands we own or control. Our strategy is to deliver high-quality products at a lower cost, and higher margin to us. To further our private label strategy, we acquired various trademarks in March 2019 to aid in branding our ‘in house’ products to our customers. We introduced our first private labeled products under the Sunleaves brand in first quarter of 2020. This initial offering encompassed a broad variety of products ranging from trellis netting to plastic pots and organic nutrients. We intend to introduce additional private label products during 2020 and 2021. We believe that expanding our private label offerings will have a positive impact on our margins and profitability in the near term.
Markets
Our stores sell thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that serve multi-purposes and are designed and intended for growing a wide range of plants. Hydroponics is a specialized method of growing plants using mineral nutrient solutions in a water solvent, as opposed to soil. This method is typically used inside greenhouses to give growers the ability to better regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. Hydroponic growers benefit from these techniques by producing crops faster and with higher crop yields per acre as compared to traditional soil-based growers. Indoor growing techniques and hydroponic products are being utilized in new and emerging industries or segments, including the growing of cannabis and hemp. In addition, vertical farms producing organic fruits and vegetables are also beginning to utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other severe weather conditions and insect pests.
According to a report by Markets and Markets on the hydroponics market, the global hydroponics system market is estimated to grow from an estimated $8 billion in 2019 to approximately $16 billion by 2025, at a compound annual growth rate of approximately 12%. In the U.S. hydroponics market, the legalization of cannabis for medicinal and non-medicinal use and increased number of licensed cultivation facilities are driving demand for hydroponic products. Currently there are comprehensive, publicly available medical marijuana/cannabis programs in 33 states and the District of Columbia, including 11 states that also permit recreational sales to adults. We believe that the growth in licensed cultivation facilities and the increase in organically grown produce will increase the demand for hydroponics products generally. Further, the current landscape for retail stores focusing on selling hydroponic garden products is very fragmented and presents opportunities for consolidation.
We have a diverse customer base, with commercial customers constituting the majority of our total sales. We cater to commercial and home cultivators growing specialty crops, including growing cannabis and hemp, along with organic herbs and leafy green vegetables. We believe that commercial growers choose to source their hydroponic gardening supplies from us because we understand their specific needs and employ sales representatives with the requisite expertise (whom we brand as “GrowPros”) to serve expert growers and cultivators by helping them reduce any potential challenges in utilizing hydroponic products to grow their crops. Based on our customer profile, we believe that we are well positioned to benefit from growth of the overall hydroponic market. In addition, we believe that the highly fragmented hydroponics retail market and numerous single store operators presents us with a significant opportunity to execute our roll-up strategy to expand and deepen our geographic footprint.
Competitive Advantages
As the largest chain of stand-alone hydroponic garden centers by revenue and number of stores in the United States based on management’s estimates, we believe that we have the following core competitive advantages over our competitors:
● | We offer a one-stop shopping experience to all types of growers by providing “selection, service, and solutions”; |
● | We provide end-to-end solutions for our commercial customers from capex built-out to consumables to nourish their plants; |
● | We have a knowledge-based sales team, all with horticultural experience; |
● | We offer the options to transact online, in store, or buy online and pick up; |
● | We consider ourselves to be a leader of the products we offer, from launching new technologies to the development of our private label products; and |
● | We have a professional team for mergers and acquisitions to acquire and open new locations and successfully add them to our company portfolio. |
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Risks Associated with Our Business
Investing in our securities involves substantial risk. The risks described under the heading “Risk Factors” beginning on page 7 of this prospectus may cause us to not realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges include the following:
● | The COVID-19 pandemic and the efforts to mitigate its impact may have an adverse effect on our business, liquidity, results of operations, financial condition and price of our securities. |
● | We face intense competition that could prohibit us from developing or increasing our customer base. |
● | If we need additional capital to fund our operations, we may not be able to obtain sufficient capital and may be forced to limit the expansion of our operations. |
● | Our business depends substantially on the continuing efforts of our executive officers and our business may be severely disrupted if we lose their services. |
● | Certain of our products may be purchased for use in new and emerging industries or segments and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. |
● | Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations. |
● | Our ongoing investment in our new private label product line is inherently risky and could disrupt our ongoing businesses. |
● | If we are unable to effectively execute our e-commerce business, our reputation and operating results may be harmed. |
● | There are risks, including stock market volatility, inherent in owning our common stock. |
Corporate Information
We were incorporated under the laws of the State of Colorado in 2014.
Our principal executive office is located at 930 W 7th Ave, Suite A, Denver, CO 80204, and our telephone number is (800) 935-8420. Our website address is www.GrowGeneration.com. Information on our website is not incorporated by reference and is not a part of this prospectus.
On December 2, 2019, the Company was approved to commence trading its common stock on the Nasdaq Capital Market under the ticker symbol of “GRWG.” Prior to that date, the Company’s stock traded on the OTCQX Best Market since October 10, 2017, prior to which it traded on the OTCQB Market since November 11, 2016.
Implications of Being an Emerging Growth Company and Smaller Reporting Company
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company up to December 31, 2021, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have total annual gross revenue of $1.07 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.07 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Additionally, even if we no longer qualify as an emerging growth company, as long as we are neither a “large accelerated filer” nor an “accelerated filer,” we would not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
We cannot predict if investors will find our securities less attractive because we may rely on these exemptions, which could result in a less active trading market for our securities and increased volatility in the price of our securities.
Finally, we are a “smaller reporting company” (and may continue to qualify as such even after we no longer qualify as an emerging growth company) and accordingly may provide less public disclosure than larger public companies, including the inclusion of only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operations disclosure. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
4
THE OFFERING
Common | ||
Public offering price | $ | |
Common | ||
Underwriters’ over-allotment option | We have granted the underwriters the option to purchase up to an additional $5,250,000 of shares of our common stock, solely to cover over-allotments, if any. The underwriters can exercise this option at any time within 30 days after the date of this prospectus. | |
Use of | We We intend to use the net proceeds from | |
Risk | An investment in our |
The Nasdaq Capital Market symbol | “GRWG” |
Except as otherwise indicated herein, the number of shares of common stock outstanding before this offering and that will be outstanding after this offering is based on 38,713,338 shares of common stock outstanding as of June 9, 2020 and excludes: (i) a total of 3,151,079 shares of our common stock issuable upon exercise of warrants; and (ii) a total of 2,334,170 shares of our common stock issuable upon exercise of options.
Unless otherwise stated or the context requires otherwise, all information in this prospectus assumes that the option to purchase up to additional shares of common stock that we have granted to the underwriters is not exercised.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth our summary historical consolidated financial data as of, and for the periods ended on, the dates indicated.The summary consolidated statements of operations data for the years ended December 31, 2019 and 2018 and the summary consolidated balance sheet data as of December 31, 2019 and 2018 are derived from our audited consolidated financial statements and notes that are included elsewhere in this prospectus. The summary consolidated statements of operations data for the three months ended March 31, 2020 and 2019 and the summary consolidated balance sheets data as of March 31, 2020 and 2019 are derived from our unaudited interim consolidated financial statements and notes that are included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and on the same basis as the audited consolidated financial statements, except for the impact of the adoption of ASU 2016-02,Leases, and have included all adjustments, consisting of only normal recurring adjustments that, in our opinion, we consider necessary for a fair statement of the consolidated financial information set forth in those statements. Our historical results are not necessarily indicative of our results in any future period and results from our interim period may not necessarily be indicative of the results of the entire year.
The following summary consolidated financial data should be read together with the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. The summary consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.
For the Three Months Ended March 31, 2020 | For the Three Months Ended March 31, 2019 | For the Fiscal Year Ended December 31, 2019 | For the Fiscal Year Ended December 31, 2018 | |||||||||||||
$ (Unaudited) | $ (Unaudited) | $ (Audited) | $ (Audited) | |||||||||||||
Statement of operations data: | ||||||||||||||||
Revenues | $ | 32,981,506 | $ | 13,087,222 | $ | 79,733,568 | $ | 29,000,730 | ||||||||
Cost of sales | 24,035,257 | 9,400,591 | 57,171,721 | 22,556,172 | ||||||||||||
Gross Profit | 8,946,249 | 3,686,631 | 22,561,847 | 6,444,558 | ||||||||||||
Operating expenses | 11,063,232 | 3,337,120 | 20,421,726 | 10,700,206 | ||||||||||||
Income (loss) from operations | (2,116,983 | ) | 349,511 | 2,140,121 | (4,255,648 | ) | ||||||||||
Other expense | 23,645 | (120,090 | ) | (261,317 | ) | (818,107 | ) | |||||||||
Net income (loss) | $ | (2,093,518 | ) | $ | 229,421 | $ | 1,878,804 | $ | (5,073,755 | ) | ||||||
Income (loss) per share, basic | $ | (.055 | ) | $ | .01 | $ | .06 | $ | (.22 | ) | ||||||
Income (loss) per share, diluted | $ | (.055 | ) | $ | .01 | $ | .05 | $ | (.22 | ) | ||||||
Weighted average ordinary shares outstanding, basic | 37,823,304 | 28,437,132 | 32,833,594 | 23,492,650 | ||||||||||||
Weighted average ordinary shares outstanding, diluted | 37,823,304 | 34,263,302 | 39,228,696 | 23,492,650 | ||||||||||||
Balance sheet data | ||||||||||||||||
Current assets | $ | 48,928,766 | $ | 23,619,636 | $ | 42,643,569 | $ | 24,977,884 | ||||||||
Total assets | $ | 80,459,513 | $ | 43,705,790 | $ | 72,022,352 | $ | 35,892,974 | ||||||||
Current liabilities | $ | 17,263,857 | $ | 6,229,786 | $ | 12,081,264 | $ | 3,414,716 | ||||||||
Total liabilities | $ | 22,978,767 | $ | 12,120,126 | $ | 18,130,609 | $ | 5,834,455 | ||||||||
Total equity | $ | 57,480,746 | $ | 31,585,664 | $ | 53,891,743 | $ | 30,058,519 | ||||||||
Total liabilities and stockholder’s equity | $ | 80,459,513 | $ | 43,705,790 | $ | 72,022,352 | $ | 35,892,974 |
An investment in our common stock is speculative and illiquid andsecurities involves a high degree of risk, including the risk of a loss of your entire investment.risk. You should carefully consider the risks and uncertainties described below and all of the other information contained in this prospectus and in any free writing prospectuses prepared by or on behalf of us or to which we have referred you, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before purchasing shares ofdeciding whether to invest in our common stock.securities. If any of the following riskspossible events described below actually materialize,occur, our business, business prospects, cash flow, results of operations or financial condition prospects and/or operations could suffer.be harmed. In such event,this case, the valuetrading price of our common stock could decline, and you couldmight lose all or a substantial portionpart of the money that you pay for our common stock.your investment.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking statements,” which include information relatingThe following is a discussion of the risk factors that we believe are material to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject tous at this time. These risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, results of operations, financial condition and cash flows.
Risks Related to Our Business
The COVID-19 pandemic and the efforts to mitigate its impact may have an adverse effect on our business, liquidity, results of operations, financial condition and price of our securities.
The pandemic involving the novel strain of coronavirus, or COVID-19, and the measures taken to combat it, may have certain an adverse effect on our business. Public health authorities and governments at local, national and international levels have announced various measures to respond to this pandemic. Some measures that directly or indirectly impact our business include:
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All forward-looking statements includedAlthough we have been deemed an “essential” business by state and local authorities in this prospectusthe areas in which we operate, we have undertaken the following measures in an effort to mitigate the spread of COVID-19 including limiting store business hours, and encouraging employees to work remotely if possible. We also have enacted our business continuity plans, including implementing procedures requiring employees working remotely where possible which may make maintaining our normal level of corporate operations, quality controls and internal controls difficult. Moreover, the COVID-19 pandemic has caused temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory. Further, the COVID-19 pandemic and mitigation efforts have also adversely affected our customers’ financial condition, resulting in reduced spending for the products we sell.
As events are basedrapidly changing, we do not know how long the COVID-19 pandemic and the measures that have been introduced to respond to it will disrupt our operations or the full extent of that disruption. Further, once we are able to restart normal business hours and operations doing so may take time and will involve costs and uncertainty. We also cannot predict how long the effects of COVID-19 and the efforts to contain it will continue to impact our business after the pandemic is under control. Governments could take additional restrictive measures to combat the pandemic that could further impact our business or the economy in the geographies in which we operate. It is also possible that the impact of the pandemic and response on information availableour suppliers, customers and markets will persist for some time after governments ease their restrictions. These measures have negatively impacted, and may continue to us onimpact, our business and financial condition as the dateresponses to control COVID-19 continue.
Many of this prospectus. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whetherour suppliers are experiencing operational difficulties as a result of new information, future eventsCOVID-19, which in turn may have an adverse effect on our ability to provide products to our customers.
The measures being taken to combat the pandemic are impacting our suppliers and may destabilize our supply chain. For example, manufacturing plants have closed and work at others curtailed in many places where we source our products. Some of our suppliers have had to temporarily close a facility for disinfecting after employees tested positive for COVID-19, and others have faced staffing shortages from employees who are sick or otherwise. All subsequent written and oral forward-looking statements attributableapprehensive about coming to work. Further, the ability of our suppliers to ship their goods to us or persons acting on our behalf are expressly qualifiedhas become difficult as transportation networks and distribution facilities have had reduced capacity and have been dealing with changes in their entirety by the cautionary statements contained above and throughout this prospectus.
We have a limited operating history on which to evaluate our business or base an investment decision.types of goods being shipped.
Our business prospects are difficultCurrently the difficulties experienced by our suppliers have not yet impacted our ability to predict becauseproducts to our customers and we do not significantly depend on any one supplier; however, if this continues, it may negatively affect our inventory and delayed the delivery of merchandise to our limited operating historystores and unproven business strategy. We acquired 4 stores called “Pueblo Organicscustomers, which in turn will adversely affect our revenues and Hydroponics” in 2014 and openedresults of operations. If the difficulties experienced by our Conifer, Trinidad and Colorado Springs, andsuppliers continue, we cannot guarantee that we will be able to locate alternative sources of supply for our Santa Rosa, California stores in 2015. On March 1, 2016, we opened our 9th store, located in Denver, CO. Accordingly, our operation of these stores has been limited.merchandise on acceptable terms, or at all. If we are unable to manage these stores as well as others that we open or acquire,adequately purchase appropriate amounts of inventory, our business is unlikely to succeed. Our business shouldand results of operations may be viewedmaterially and adversely affected.
Economic conditions could adversely affect our business.
Uncertain global economic conditions, in particular in light of these risks,the COVID-19 pandemic, could adversely affect our business. Negative global economic trends, such as decreased consumer and business spending, high unemployment levels and declining consumer and business confidence, pose challenges to our business and uncertainties.could result in declining revenues, profitability and cash flow. Although we continue to devote significant resources to support our brands, unfavorable economic conditions may negatively affect demand for our products.
We face intense competition that could prohibit us from developing or increasing our customer base and generating revenue.base.
The specialty gardening and hydroponic product industry within which we compete is highly competitive. We may compete with companies that have greater capital resources facilities and diversity of product lines. We compete in the specialty gardening industry, selling hydroponic and organic nutrients, soils and other gardening related products. Additionally, if demand for our hydroponic growing equipment and products continues to grow , we expect many new competitors to enter the market, as there are no significant barriers to retail sales of hydroponic growing equipment and related gardening products.facilities. More established gardening companies with much greater financial resources which do not currently compete with us may be able to easily adapt their existing operations to sales of hydroponic growing equipment. Our competitors may also introduce new hydroponic growing equipment, and manufacturers may sell equipment direct to consumers. Due to this competition, there is no assurance that we will not encounter difficulties in generating or increasing revenues and capturingmaintaining and/or increasing market share. In addition, increased competition may lead to reduced prices and/or margins for products we sell. Our competitors may also introduce new hydroponic growing equipment, manufacturers may sell equipment direct to consumers, and our distributers could cease sales of product to us.
If we need additional capital to fund the expansion of our operations, we may not be able to obtain sufficient capital on terms favorable to us and may be forced to limit the scopeexpansion of our operations.
If adequate additional financing is not available on reasonable terms, we may not be able to expand our retail or online operations and we may be forced to modify our business plans accordingly. There is no assurance that additional financing will be available to us. In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund the future expansion of our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in sales and marketing; and (iv) new store openings and or acquisitions. We cannot assure youThere can be no assurance that we will be able to obtain capital in the future to meet our needs. If we cannot obtain additional funding, we may be required to: (i) limit our expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete. Moreover, even if we do find a source of additional capital we may not be able to negotiate terms and conditions for receiving the additional capital that are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. We cannot give you any assurance that any additional financing will be available to us or if available, will be on terms favorable to us. If we cannot obtain sufficient capital to fund our expansion, we may be forced to limit the scope of our acquisitions and new store openings.
Our business depends substantially on the continuing efforts of our executive officers and our business may be severely disrupted if we lose their services.
Our future success depends substantially on the continued services of our executive officers, especially our Chief Executive Officer, Darren Lampert, our President, Michael Salaman, our Chief OperatingFinancial Officer, Jason DawsonMonty Lamirato, and our Chief FinancialOperating Officer, Irwin Lampert.Tony Sullivan. We do not maintain key man life insurance on any of our executive officers and directors. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore,The loss of any of our officers could cause our business mayto be severely disrupted, and we may incur additional expenses to recruit and retain new officers.
If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive hydroponics and gardening industry depends in large part upon our ability to attract highly qualified managerial and sales personnel. In order to induce valuable employees to come and work for us or to remain with us, we intend to provide employees with stock options that vest over time. The value to employees of stock options that vest over time will be significantly affected by movements in our stock price that we will not be able to control and may at any time be insufficient to counteract more lucrative offers from other companies. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior personnel.
In order to increase our sales and marketing infrastructure, we will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As we continue to work to open and/or acquire additional retail store locations, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to continue to grow our operation and compete in the hydroponics industry effectively will depend, in part, on our ability to effectively manage any future growth.
Litigation may adversely affect our business, financial condition and results of operations.
From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. Since inception, the Company has not been a party to any material litigation.
WeCertain of our products may not obtain insurance coveragebe purchased for use in new and emerging industries or segments and/or be subject to adequately cover all significant risk exposures.varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.
We will be exposed to liabilitiessell hydroponic gardening products that end users may purchase for use in new and emerging industries or segments, including the growing of cannabis, that may not grow or achieve market acceptance in a manner that we can predict. The demand for these products depends on the uncertain growth of these industries or segments.
In addition, we sell products that end users may purchase for use in industries or segments, including the growing of cannabis, that are uniquesubject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. For example, certain countries and 33 U.S. states have adopted frameworks that authorize, regulate, and tax the cultivation, processing, sale, and use of cannabis for medicinal and/or non-medicinal use, while the U.S. Controlled Substances Act and the laws of other U.S. states prohibit growing cannabis.
Our hydroponic gardening products are multi-purpose products designed and intended for growing a wide range of plants and are generally purchased from retailers by end users who may grow any variety of plants, including cannabis. Although the demand for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop, we cannot reasonably predict the nature of such developments or the effect, if any, that such developments could have on our business.
Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.
Acquisitions are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential acquisitions and strategic transactions. The areas where we may face risks in connection with acquisitions include, but are not limited to, the productsfailure to successfully further develop the acquired business, the implementation or remediation of controls, procedures and policies at the acquired business, the transition of operations, users and customers onto our existing platforms, and cultural challenges associated with integrating employees from the acquired business into our organization, and retention of employees from the businesses we provide. We currently maintain only premises insuranceacquire. Our failure to address these risks or other problems encountered in connection with our acquisitions could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances, incur unanticipated liabilities, and there can be no assurance that we will acquire or maintain insurance for certain risks, that the amountharm our business generally.
Our acquisitions could also result in dilutive issuances of our insurance coverage will be adequate to cover all claims orequity securities, the incurrence of debt, contingent liabilities or that we willamortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results of operations and cash flows. Also, the anticipated benefits and synergies of many of our acquisitions may not be forcedmaterialize.
Our ongoing investment in our new private label product line is inherently risky and could disrupt our ongoing businesses.
We have invested and expect to bear substantial costs resulting fromcontinue to invest in our new private label product line. Such endeavors may involve significant risks and uncertainties, including insufficient revenues to offset liabilities assumed and expenses associated with this new investment, inadequate return of business. Itcapital on our investment, and unidentified issues not discovered in our assessment of such strategy and offerings. Because this new venture is inherently risky, no assurance can be given that such strategy and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results.
If we are unable to effectively execute our e-commerce business, our reputation and operating results may be harmed.
We sell certain of our products over the Internet through our online store, which represents a small but growing percentage of our overall net sales. The success of our e-commerce business depends on our investment in this platform, consumer preferences and buying trends relating to e-commerce, and our ability to both maintain the continuous operation of our online store and our fulfillment operations and provide a shopping experience that will generate orders and return visits to our online store.
We are also not possiblevulnerable to obtain insurance to protect against all operationalcertain additional risks and liabilities. Theuncertainties associated with our e-commerce business, including: changes in required technology interfaces; website downtime and other technical failures; costs and technical issues associated with website software, systems and technology investments and upgrades; data and system security; system failures, disruptions and breaches and the costs to address and remedy such failures, disruptions or breaches; computer viruses; and changes in and compliance with applicable federal and state regulations. In addition, our efforts to remain competitive with technology trends, including the use of new or improved technology, creative user interfaces and other e-commerce marketing tools such as paid search and mobile applications, among others, may increase our costs and may not increase sales or attract consumers. Our failure to obtainsuccessfully respond to these risks and uncertainties might adversely affect the sales of our e-commerce business, as well as damage our reputation and brands.
In addition, the success of our e-commerce business and the satisfaction of our consumers depend on their timely receipt of our products or to be able to pick up their desired products from one of our garden centers. The efficient delivery and/or pick up of our products requires that our garden and distribution centers have adequate insurance coverage on terms favorablecapacity to us,support the current level of e-commerce operations and any anticipated increased levels that may occur as a result of the growth of our e-commerce business. If we encounter difficulties with our garden and distribution centers, or at all,if any garden and distribution centers shut down for any reason, including as a result of fire or other natural disaster or pursuant to expanded stay-at-home orders or other restrictions due to the current COVID-19 pandemic, we could face shortages of inventory, resulting in out of stock conditions in our online store, and we could incur significantly higher costs and longer lead times associated with distributing our products to our consumers and experience dissatisfaction from our consumers. Any of these issues could have a material adverse effect on our business financial condition and results of operations.harm our reputation.
Federal practices could change with respect to providersOur reliance on a limited base of equipment potentially usable by participants in the medical cannabis industry, which could adversely impact us.
Cannabis growers utilize various products that we offer for sale. While we are not aware of any threatened or current federal or state law enforcement actions against any retailer of hydroponic equipment that might be used for cannabis growing or use we have heard that a number of years ago, law enforcement authorities did initiate raids at some retail stores where operators evidently knew they were selling hydroponic equipment directly to customers who indicated they intended to use it for the cultivation of recreational cannabis. Those raids took place in a different legal landscape, well before the legalization of medical or recreational cannabis by any state. We are unaware of any threatened or actual law enforcement activity, ever, against manufacturers or retailers of supplies marketed for usage by participants in the emerging cannabis industry.
A theoretical risk exists that our activities could be deemed to be facilitating the selling or distribution of cannabis in violation of the Federal Controlled Substances Act, or to constitute aiding or abetting, or being an accessory to, a violation of that Act. We believe, however, that such a risk is relatively low. Federal authorities have not focused their resourcessuppliers on such tangential or secondary violations of the Act, nor have they threatened to do so, with respect to the sale of equipment that might be used by cannabis gardeners, or with respect to any supplies marketed to participants in the emerging medical cannabis industry. We are unaware of such a broad application of the Controlled Substances Act by federal authorities, and we believe that such an attempted application would be unprecedented.
If the federal government were to change its practices, or were to expend its resources attacking providers of equipment that could be usable by participants in the medical or recreational cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the salescertain of our products.
Continued federal interventionproducts may result in certain segments of the cannabis industry is disruptive to the industry, and may have a negative impact on us.
Our products are sold to growers of various crops, including cannabis, and we expect the number of gardeners or cannabis users buying our products to remain relatively unaffected despite federal interference in some segments of the cannabis industry. Although we expect minimal impact on the Company from any federal government crackdown on cannabis providers, the disruption to the cannabis industry could cause some potential customers to be more reluctant to invest in growing equipment, including equipment we sell. Moreover, the federal government’s tactics may change or have unforeseen effects, which could be detrimentaldisruptions to our business.
supply chain and business and adversely affect our financial results.
There can be no assurance that our intended operations will not violate state or federal law.
We have not requested or obtained any opinionrely on a limited number of counsel or ruling from any authority to determine ifsuppliers for certain of our intended operations are in compliance with or violate any state or federal laws or whetherhydroponic products and other supplies. If we are assisting othersunable to violate a state or federal law. In the event that our intended operations are deemed to violate any laws or if we are deemed to be others to violate a state or federal law, we could have liability that could cause us to modify or cease our operations.
Our 2014, 2015maintain supplier arrangements and 2016 Private Placements were made pursuant to an exemption from registration.
Our 2014, 2015 and 2016 Private Placements were made in reliance upon the so-called "private placement" exemption from registration with the Securities and Exchange Commission (the “SEC”) provided by Sections 4(a)(2) of the 1933 Securities Act, by Regulation D, Rule 506 adopted there under, and the exemptions from registration provided by the Blue Sky laws of states in which our securities are offered. However, reliance upon these exemptions is highly technical and should not be viewed as a guarantee that such exemptions are indeed available. If for any reason the private placement exemption is not available for the 2014, 2015 and 2016 Private Placements and no other exemption from registration is found to be available, the sale of the securities in such Private Placements would be deemed to have been made in violation of the applicable laws, thus requiring registration of those securities. As a remedy for such a violation, each investor would have the right to rescind its purchase and to have its full investment returned. If an investor requests return of its investment, it is possible that funds would not be available to us for that purpose, and that liquidation of us may be required. Any refunds made would reduce funds available to us for our operations. A significant number of requests for rescission would probably leave us without funds sufficient to respond to such requests or to proceed successfully with its activities.
There are a significant number of shares of common stock eligible for sale, which could depress the market price of such shares.
Effective on the date of this Prospectus, there are 8,011,430 shares of our common stock, which includes 4,655,715 shares of common stock being sold by Investors and 3,355,715 shares of common stock underlying the Investor Warrants with an exercise price of $0.70 per share, available for sale in the public market. The availability of such a large number of shares of common stock for sale in the public market could harm the market price of the stock. Further, shares may be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect as well.
The offering price of our shares and the exercise price of our warrants have been determined on an arbitrary basis.
The Offering price of the units which consisted of shares of common stock and warrants that we sold prior to the date of this Prospectus and the exercise price of the warrants were determined by us on an arbitrary basis and bear no relationship to earnings, asset values, book value or any other recognized criteria of value. Neither the price at which we have sold our shares nor the exercise price of our warrants should be viewed as an indication of the value of those securities.
If product liability lawsuits are brought against us, we may incur substantial liabilities.
We face a potential risk of product liability as a result of any of the products that we offer for sale. For example, we may be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We do not maintain any product liability insurance. Even if we obtain product liability insurance in the future, we may have to pay amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.
We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or products, we may not be able to realize the benefit of acquiring such businessesrelationships, if we are unable to successfully integrate themcontract with suppliers at the quantity and quality levels needed for our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and/or marketingbusiness, if any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.
Risks Related to Our Common Stock
Our officers and directors will control our company for the foreseeable future, including the outcome of matters requiring stockholder approval.
Our founders, officers and directors collectively beneficially own approximately 64.20% of our outstanding shares of common stock. As a result, such individuals will have the ability, acting together, to control the electionkey suppliers becomes insolvent or experience other financial distress or if any of our directorskey suppliers is negatively impacted by COVID-19, including with respect to staffing and the outcomeshipping of corporate actions requiring stockholder approval, such as: (i) a merger or a sale of our company, (ii) a sale of all or substantially all of our assets, and (iii) amendments to our articles of incorporation and bylaws. This concentration of voting power and controlproducts, we could have a significant effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other stockholders and be disadvantageous to our stockholders with interests different from those entities and individuals. Certain of these individuals also have significant control over our business, policies and affairs as officers or directors of our company. Therefore, you should not invest in reliance on your ability to have any control over our company. See “Principal Stockholders.”
An investmentexperience disruptions in our company should be considered illiquid.
An investment in our company requires a long-term commitment, with no certainty of return. Because we do not plan to become an SEC reporting company by the traditional means of conducting an initial public offering of our common stock, we may be unable to establish a liquid market for our common stock. Moreover, we do not expect security analysts of brokerage firms to provide coverage of our company in the near future. In addition, investment banks may be less likely to agree to underwrite primary or secondary offerings on behalf of our company or its stockholders in the future than they would if we were to become a public reporting company by means of an initial public offering of common stock. If all or any of the foregoing risks occur, it wouldsupply chain, which could have a material adverse effect on our company.financial condition, results of operations and cash flows.
Our operations may be impaired if our information technology systems fail to perform adequately or if we are the subject of a data breach or cyber-attack.
We rely on information technology systems in order to conduct business, including communicating with employees and our key commercial customers, ordering and managing materials from suppliers, shipping products to customers and analyzing and reporting results of operations. While we have taken steps to ensure the security of our information technology systems, our systems may nevertheless be vulnerable to computer viruses, security breaches and other disruptions from unauthorized users. If our information technology systems are damaged or cease to function properly for an extended period of time, whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well as with our retail customers could be significantly impaired, which may adversely impact our business.
Additionally, in the normal course of our business, we collect, store and transmit proprietary and confidential information regarding our customers, employees, suppliers and others, including personally identifiable information. An operational failure or breach of security from increasingly sophisticated cyber threats could lead to loss, misuse or unauthorized disclosure of this information about our employees or customers, which may result in regulatory or other legal proceedings, and have a material adverse effect on our business and reputation. We also may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber-attacks. Any such attacks or precautionary measures taken to prevent anticipated attacks may result in increasing costs, including costs for additional technologies, training and third party consultants. The losses incurred from a breach of data security and operational failures as well as the precautionary measures required to address this evolving risk may adversely impact our financial condition, results of operations and cash flows.
No public market forWe have identified a material weakness in our internal control over financial reporting and may experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, as a result of which, we may not be able to accurately report our financial condition or results of operations which may adversely affect investor confidence in us and, as a result, the value of our common stock currently exists, and an active trading market may not develop or be sustained.stock.
AsEffective internal controls over financial reporting are necessary for us to provide reliable financial reports. If we arecannot maintain effective controls and reliable financial reports, our business and operating results could be harmed. Our management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2020, and concluded that our internal control over financial reporting were not effective as of March 31, 2020 due to a material weakness relating to proper accounting and valuation of equity instruments recorded within share-based compensation expense. Management has evaluated remediation plans for the deficiency and has implemented changes to address the material weakness identified, including engaging an independent third party consultant to review all documents and schedules related to equity and share-based compensation prepared by the Chief Financial Officer, as well as other high-level accounting treatment, tax accrual and purchase price allocation.
We cannot assure you that there will not be material weaknesses or significant deficiencies in our early stages, an investment in our company will likely require a long-term commitment, with no certainty of return. There is no public market for our common stock, and even if we become a publicly-listed company, of which no assurances can be given, we cannot predict whether an active market for our common stock will ever developinternal control over financial reporting in the future. In the absenceAny failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of an active trading market:operations. The effectiveness of our controls and procedures may be limited by a variety of factors, including:
● |
● |
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● | The possibility that any enhancements to controls and procedures may |
AssumingOur management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting during any period in accordance with the provisions of Sarbanes-Oxley Act. Had we can find market makersperformed an evaluation and had our independent registered public accounting firm performed an audit of our internal control over financial reporting in accordance with the provisions of Sarbanes-Oxley Act, additional control deficiencies amounting to establish quotations formaterial weaknesses may have been identified. If we fail to remedy any material weakness, our common stock, we expect that our common stock will be quoted on the OTC Bulletin Board (known as the OTCBB) or OTCQB market operated by OTC Markets Group, Inc. These markets are relatively unorganized, inter-dealer, over-the-counter markets that provide significantly less liquidity than NASDAQ or the NYSE MKT (formerly known as the NYSE AMEX). No assurances can be given that our common stock, even if quoted on such markets, will ever trade on such markets, much less a senior market like NASDAQ or NYSE MKT. In this event, there would be a highly illiquid market for our common stock and youfinancial statements may be unableinaccurate, our access to dispose of your common stock at desirable prices or at all. Moreover, there is a risk that our common stock could be delisted from the OTCBB/OTCQB, in which case it might be listed on the so called “Pink Sheets”, which is even more illiquid than the OTC Bulletin Board.
The lack of an active market impairs your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire additional intellectual property assets by using our shares as consideration.
We may not qualify for OTC Bulletin Board inclusion, and therefore youmarkets may be unable to sell your shares.
We believe that, at some time followingrestricted and the effectiveness of this registration statement of which this prospectus forms a part, our common stock will become eligible for quotation on the OTC Bulletin Board and/or OTCQB Market, which we refer to herein as the OTCBB/OTCQB. No assurances can be given, however, that this eligibility will be granted. OTCBB/OTCQB eligible securities include securities not listed on a registered national securities exchange in the U.S. and that are also required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1933, as amended (which we refer to herein as the Securities Act), and require that we be current in its periodic securities reporting obligations.
Among other matters, in order for our common stock to become OTCBB/OTCQB eligible, a broker/dealer member of FINRA, must file a Form 211 with FINRA and commit to make a market in our securities once the Form 211 is approved by FINRA. As of the date of this prospectus, we have not made arrangements with any person to file a Form 211 and a Form 211 has not been filed with FINRA by any broker/dealer. If for any reason our common stock does not become eligible for quotation on the OTCBB/OTCQB or a public trading market does not develop, purchasers of shares of our common stock may have difficulty selling their shares should they desire to do so. If we are unable to satisfy the requirements for quotation on the OTCBB/OTCQB, any quotation of in our common stock would be conducted in the “pink” sheets market. As a result, a purchaser of our common stock may find it more difficult to dispose of, or to obtain accurate quotations as to the price of their shares. The above-described rules may materially adversely affect the liquidity of our securities. See “Plan of Distribution.”
Even if our common stock becomes publicly-traded and an active trading market develops, the market price of our common stock may be significantly volatile.suffer.
Even if our securities become publicly-traded and even if an active market for our common stock develops, of which no assurances can be given, the market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:
The securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of shares of our common stock.
The registration for resale of a significant portion of our outstanding shares of common stock in this registration statement may have a depressive effect on our stock price.
We are registering for resale 4,655,715 shares of our common stock plus 3,355,715 shares of common stock underlying outstanding warrants. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.
Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The OTCBB does not meet such requirements and if the price of our common stock is less than $5.00, our common stock will be deemed penny stocks. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that prior to effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirementsCOVID-19 pandemic may have the effect of reducingheightening many of the trading activityother risks described in this ’‘Risk Factors’’ section.
To the secondaryextent the COVID-19 pandemic may adversely affect our business and financial results, it may also have the effect of heightening many of the other risks described in this ’‘Risk Factors’’ section, or other risks which we may not be currently aware of.
Risks Related to Our Common Stock
There are risks, including stock market forvolatility, inherent in owning our common stock.
The market price and volume of our common stock have been, and thereforemay continue to be, subject to significant fluctuations. These fluctuations may arise from general stock holdersmarket conditions, the impact of risk factors described herein on our results of operations and financial position, or a change in opinion in the market regarding our business prospects or other factors, many of which may have difficulty selling their shares.be outside our immediate control.
FINRA sales practice requirements may also limit your ability to buy and sellThe shares of our common stock which could depress the price of our shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our share price.
You may face significant restrictions on the resale of your shares due to state “blue sky” laws.
Each state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that state.
We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock. We have not yet applied to have our securities registered in any state and will not do so until we receive expressions of interest from investors resident in specific states after they have viewed this prospectus. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration or qualification.
The shares you purchase in this offering may experience substantial dilution by exercises of outstanding warrants and options.
As of June 30, 2016,9, 2020, we had outstanding warrants to purchase an aggregatea total of 3,355,7153,151,079 shares of our common stock atissuable upon exercise of warrants, and a weighted average exercise pricetotal of $.70 and options to purchase an aggregate of 1,885,0002,334,170 shares of our common stock at anissuable upon exercise price of $.60 per share (the first $100,000 of options granted to each of our officers and directors may be deemed to be incentive stock options and are exercisable at a price of $.66 per share; the balance of the options owned by such persons may be deemed to be non-qualified options and are exercisable at a price of $.60 per share).options. The exercise of such outstanding options and warrants will result in substantial dilution of your investment. In addition, youour shareholders may experience additional dilution if we issue common stock in the future. As a resultAny of thissuch dilution you may receive significantly less thanhave adverse effect on the full purchase price you paid for the shares in the event of liquidation.our common stock.
We are an “emergingemerging growth company” and will be ablea smaller reporting company within the meaning of the Securities Act, and if we take advantage of reducedcertain exemptions from disclosure requirements applicableavailable to “emerging growth companies” or “smaller reporting companies,” whichthis could make our common stocksecurities less attractive to investors.investors and may make it more difficult to compare our performance with other public companies.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for as long as we continue to be an “emerging growth company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will incur significantly increased costs and devote substantial management time as a result of operating as a public company particularly after we are no longer an “emerging growth company.”
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the Securities and Exchange Commission, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. We are just beginning the process of compiling the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. In that regard, we currently do not have an internal audit function, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.
However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirementscompanies.”
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Section 404Regulation S-K. Smaller reporting companies may take advantage of the Sarbanes-Oxley Act,certain reduced disclosure obligations, regarding executive compensationincluding, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our periodic reportsordinary shares held by non-affiliates exceeds $250 million as of the prior June 30, or (2) our annual revenues exceeded $100 million during such completed fiscal year and proxy statements, and exemptions from the requirementsmarket value of holding a nonbinding advisory vote on executive compensation and stockholder approvalour ordinary shares held by non-affiliates exceeds $700 million as of any golden parachute payments not previously approved. We intend tothe prior June 30. To the extent we take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselvesreduced disclosure obligations, it may also make comparison of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards asour financial statements with other public companies that are not “emerging growth companies.”difficult or impossible.
After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs
There may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may materially harm our company.costs.
Proper systems of internal controls over financial accounting and disclosure are criticalRisks Related to the operation of a public company. As we are a start-up company, we are at the very early stages of establishing, and we may be unable to effectively establish such systems, especially in light of the fact that we expect to operate as a publicly reporting company. This would leave us without the ability to reliably assimilate and compile financial information about our company and significantly impair our ability to prevent error and detect fraud, all of which would have a negative impact on our company from many perspectives.Offering
Moreover,If you purchase our securities in this offering, you may incur immediate and substantial dilution in the book value of your shares. You will experience further dilution if we do not expect that disclosure controlsissue additional equity or internal control over financial reporting, even if established, will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance thatequity-linked securities in the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially adversely impact us.future.
We may be unable to complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value
The public offering price per share of our common stock.
Westock may be required, pursuant to Section 404 ofsubstantially higher than the Sarbanes-Oxley Act, to furnish a report by our management on, among other things, the effectivenessnet tangible book value per share of our internal control over financial reporting forcommon stock immediately prior to the first fiscal year beginning afteroffering. After giving effect to the effective datesale of the registration statement$35,000,000 of which this prospectus is a part. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.
If we are unable to assert that our internal control over financial reporting is effective, or, if applicable, our independent registered public accounting firm is unable to express an opinion on the effectivenessshares of our internal controls, we could lose investor confidencecommon stock in this offering, at the accuracy and completenessassumed public offering price of our financial reports,$7.11 per share, which would causeis the last reported sale price of our common stock to decline,on the Nasdaq Capital Market on June 8, 2020, and we may be subject to investigation or sanctionsafter deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the SEC. We will also be required to disclose changes made in our internal control and procedures on a quarterly basis.
However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the recently enacted JOBS Act, if we take advantage (as we expect to do) of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to five years, although if the market valueus, purchasers of our common stock that is held by non-affiliates exceeds $700 million asin this offering will incur immediate dilution of any June 30 before that time, we would cease to be an “emerging growth company” as$5.52 per share in the net tangible book value of the following December 30.common stock they acquire. For a further description of the dilution that investors in this offering may experience, see “Dilution.”
At such time,If we issue additional shares of common stock (including pursuant to the exercise of outstanding stock options or warrants), or securities convertible into or exchangeable or exercisable for shares of common stock, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future. Anystockholders, including investors who purchase shares of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our company, which could have a negative impact on our stock price.
We do not currently intend to pay dividends on our common stock in the foreseeable future,this offering, will experience additional dilution, and consequently, your ability to achieve a returnany such issuances may result in downward pressure on your investment will depend on appreciation in the price of our common stock. We also cannot assure you that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders.
We have broad discretion in the use of the net proceeds we receive from this offering.
Our management will have broad discretion in the application of the net proceeds we receive in this offering, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether our management is using the net proceeds appropriately. Because of the number and variability of factors that will determine our use of our net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Pending their use, we may invest our net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
● | our current and future capital requirements to support our efforts to open or acquire new retail locations; | |
● | our dependence on consumer interest in growing crops with the equipment, soil and nutrients that we offer; | |
● | our dependence on third-parties to manufacture and sell us inventory; | |
● | our ability to maintain or protect the validity of our intellectual property; | |
● | our ability to retain key executive members; | |
● | our ability to internally develop products under existing intellectual property; | |
● | interpretations of current laws and the passage of future laws; | |
● | the accuracy of our estimates regarding expenses and capital requirements; and | |
● | our ability to adequately support growth. |
Moreover, new risks regularly emerge and it is not possible for our management to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. All forward-looking statements included in this prospectus are based on information available to us on the date of this prospectus. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this prospectus.
We estimate that the net proceeds to us from this offering will be approximately $32,150,000 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds will be approximately $37,085,000, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering primarily to expand our network of hydroponic/garden centers through organic growth and acquisitions, and for general corporate purposes. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. We have not yet determined the amount of net proceeds to be used specifically for any particular purpose or the timing of these expenditures. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds from the sale of these securities. Pending their use, we intend to invest the net proceeds to us from this offering in short-term, investment-grade, interest-bearing instruments.
We believe that the net proceeds from this offering, together with our existing cash, cash equivalents and investments, will enable us to fund our operations, acquisitions and new store openings through at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect.
We have never declared or paid cash dividends on our common stockcapital stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Upon dissolution of our company, you may not recoup all or any portion of your investment.
In the event of a liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, the proceeds and/or assets of our company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities will be distributed to the stockholders of common stock on a pro rata basis. There can be no assurance that we will have available assets to pay to the holders of common stock, or any amounts, upon such a liquidation, dissolution or winding-up of our Company. In this event, you could lose some or all of your investment.
We will not receive any of the proceeds from the sale of the common stock by the selling stockholders named in this prospectus. All proceeds from the sale of the common stock will be paid directly to the selling stockholders.
We would, however, receive proceeds upon the exercise of the warrants held by the selling stockholders which, if such warrants are exercised in full would be approximately $2,349,000. Proceeds, if any, received from the exercise of such warrants will be used for working capital and general corporate purposes. No assurances can be given that any of such warrants will be exercised.
We have never paid any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination related to pay dividendsdividend policy will be made at the discretion of our boardBoard of directors Directorsand will depend onupon, among other factors, our financial condition, results of operations, financial condition, capital requirements, tax considerations, legal or contractual restrictions, business prospects, the requirements of current or then-existing debt instruments, general economic conditions and other factors that our boardBoard of directors deems relevant. In addition,Directors may deem relevant.
The following table sets forth our cash, cash equivalents and investments and our capitalization as of March 31, 2020:
● | on an actual basis; and |
● | on an as adjusted basis to give effect to the sale of $35,000,000 of shares of common stock in this offering at the assumed public offering price of $7.11 per share, which is the last reported sale price of our common stock on the Nasdaq Capital Market on June 8, 2020, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
The as adjusted information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the actual public offering price of our common stock and other terms of any future debt or credit financings may preclude us from paying dividends.this offering determined at pricing.
You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of March 31, 2020 | ||||||||
Actual | As Adjusted | |||||||
(in thousands, except share data) | ||||||||
Cash, cash equivalents and investments | $ | 11,441,225 | $ | 42,941,225 | ||||
Long term liabilities, less current portion | $ | 230,820 | $ | 230,820 | ||||
Stockholders’ equity | 57,480,746 | 88,980,746 | ||||||
Common stock, par value $0.001 per share; 100,000,000 authorized shares, 38,209,300 shares issued and outstanding, actual; 100,000,000 authorized shares; 43,131,944 shares issued and outstanding, as adjusted | 38,209 | 43,132 | ||||||
Additional paid-in capital | 66,423,243 | 97,918,320 | ||||||
Accumulated deficit | (8,980,706 | ) | (8,980,706 | ) | ||||
Total stockholders’ equity | $ | 57,480,746 | $ | 88,980,746 | ||||
Total capitalization | $ | 57,711,566 | $ | 89,211,566 |
If the underwriters exercise their over-allotment option in full, as adjusted cash, cash equivalents and investments, additional paid-in capital, total stockholders’ equity, total capitalization and shares of common stock outstanding as of March 31, 2020 would be $47.7 million, $102.6 million, $93.7 million, $93.9 million and 47,666,225 shares, respectively.
Except as otherwise indicated herein, the number of shares of our common stock to be outstanding after this offering is based on 38,209,300 shares of common stock outstanding as of March 31, 2020 and excludes: (i) a total of 3,368,951 shares of our common stock issuable upon exercise of warrants; and (ii) a total of 2,109,170 shares of our common stock issuable upon exercise of options.
If you invest in this offering, your ownership interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.
Our net tangible book value as of March 31, 2020 was approximately $37.3 million, or $0.98 per share. Net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the number of shares of our common stock outstanding as of March 31, 2020. Dilution with respect to net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of our common stock immediately after this offering.
After giving effect to the sale of $35,000,000 of shares of our common stock in this offering at the assumed offering price of $7.11 per share, the last reported sale price of our common stock on the Nasdaq Capital Market on June 8, 2020, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and assuming no exercise of the underwriters’ over-allotment option in full, our as adjusted net tangible book value as of March 31, 2020 would have been approximatelyMANAGEMENT'S$68.8 million, or $1.59 per share. This represents an immediate increase in net tangible book value of $0.61 per share to existing stockholders. Investors purchasing our common stock in this offering will have paid $5.52 more than the as adjusted net tangible book value per share after this offering. The following table illustrates this on a per share basis:
Assumed public offering price per share | $ | 7.11 | ||||||
Net tangible book value per share as of March 31, 2020 | $ | 0.98 | ||||||
Increase per share attributable to new investors | $ | 0.61 | ||||||
As adjusted net tangible book value per share after this offering | $ | 1.59 | ||||||
As adjusted net tangible book value per share to investors purchasing shares in this offering | $ | 1.59 | ||||||
Dilution in net tangible book value per share to new investors | $ | 5.52 | ||||||
Dilution as a percentage of purchase price in the offering | 78 | % |
Each $1.00 increase (decrease) in the assumed public offering price of $7.11 per share, which is the last reported sale price of our common stock on the Nasdaq Capital Market on June 8, 2020, would increase (decrease) the as adjusted net tangible book value per share after this offering by approximately $0.02, and dilution in as adjusted net tangible book value per share to new investors by approximately $0.02 after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us, and assuming no exercise of the underwriters’ over-allotment option in full.
If the underwriters exercise their over-allotment option in full in this offering, the as adjusted net tangible book value after the offering would be $1.68 per share, the increase in as adjusted net tangible book value per share to existing stockholders would be $0.70 per share and the dilution per share to new investors would be $5.43 per share, in each case assuming a public offering price of $7.11 per share.
Except as otherwise indicated herein, the number of shares of our common stock to be outstanding after this offering is based on 38,209,300 shares of common stock outstanding as of March 31, 2020 and excludes: (i) a total of 3,368,951 shares of our common stock issuable upon exercise of warrants; and (ii) a total of 2,109,170 shares of our common stock issuable upon exercise of options.
To the extent that any outstanding options or warrants are exercised, new options, warrants or restricted stock units are issued under our stock-based compensation plans, or new shares of preferred stock are issued, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements based upon our current plans, estimates, beliefs and expectations that involve risks, uncertainties and uncertainties.assumptions. Our actual results couldmay differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed belowset forth under the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus, particularly those under "Risk Factors." Dollars in tabular format are presented in thousands, except per share data, or otherwise indicated.prospectus.
OVERVIEW
GrowGeneration Corp.’s mission is to become one ofOVERVIEW
We believe we are the largest retailchain of stand-alone hydroponic garden centers by revenue and organic specialty gardening retail outletsnumber of stores in the United States. Today, GrowGeneration ownsWe also believe we are a leading marketer and operatesdistributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening, based on management’s estimates. We have a diverse customer base, with commercial customers constituting the majority of our total sales. As of June 9, 2020, we own and operate a chain of 827 retail and commercial hydroponic/gardening centers in 10 U.S. states. We also operate an online e-commerce store, growgeneration.com. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth, in terms of increasing same store sales and expanding customer base, and acquisitions.
Today, our commercial division services over 500 commercial accounts. Based on our results in Oklahoma, we opened our fourth location in Tulsa, OK, a 40,000 square feet super garden center. We are also actively acquiring and developing a line of private label products, which would be sold through our garden centers under brands owned or controlled by us. In this regard, we acquired a variety of trademarks in March 2019 to bolster our ability to supply branded “house” products to our customers. We started to introduce our first private-label products under the Sunleaves Garden Product brand both in our garden centers and through our e-commerce website in the fourth quarter of 2019. Our initial private label lineup includes a one-part micro and macro nutrient+ Cal mag powder line, for both cannabis and hemp farmers, a silica+ micronutrient booster and a root stimulant. All of these products are additives that can be used with any nutrient regimen. We are also planning to introduce a wider line of private label products, including rope ratchets for hoisting lighting, breathable fabric pots and T5 florescent lights for indoor gardens that will be launched in the second quarter of 2020.
Trends and Other Factors Impacting Our Performance
Acquisitions
We are an acquisitive company. Since 2014, we have acquired 24 stores and opened 15 new stores. We plan to continue to pursue acquisitions going forward. We actively evaluate and pursue acquisitions on an ongoing basis, and are focusing on Arizona, Illinois, Pennsylvania, New York, New Jersey and Missouri as new markets where we plan to open new operations.
The following table summarizes the stores we acquired, opened and consolidated since 2014:
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 3/31/2020 | ||||||||||||||||||||||
Distribution center | 1 | |||||||||||||||||||||||||||
Stores acquired | 4 | 2 | 2 | 8 | 7 | 1 | ||||||||||||||||||||||
Stores opened | 2 | 4 | 4 | 1 | 3 | 1 | ||||||||||||||||||||||
Stores closed/consolidated | (5 | ) | (6 | ) | (2 | ) | ||||||||||||||||||||||
Net store added | 4 | 4 | 4 | 1 | 3 | 9 | 2 | |||||||||||||||||||||
Cumulative Stores | 4 | 8 | 12 | 13 | 16 | 25 | 27 |
We have a strong acquisition track record within the hydroponic garden center space and believe we have developed a reputation for treating sellers and their staff in Coloradoa fair manner. We believe our reputation and one (1) in California.scale have positioned us as a buyer of choice for hydroponic garden centers operators who want to sell their businesses. Our planstrategy is to acquire openstores at attractive EBITDA multiples and operate hydroponic/then grow same-store sales while benefitting from cost-reducing synergies.
Regulatory Environment
We sell hydroponic gardening products to end users that may use such products in new and emerging industries or segments, including the growing of cannabis. The demand for hydroponic gardening products depends on the uncertain growth of these industries or segments due to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. For example, certain countries and 33 U.S. states have adopted frameworks that authorize, regulate, and tax the cultivation, processing, sale, and use of cannabis for medicinal and/or non-medicinal use, while the U.S. Controlled Substances Act and the laws of other U.S. states prohibit growing cannabis. Demand for our products could be impacted by changes in the regulatory environment with respect to such industries and segments.
How We Evaluate Our Operations
Sales
We earn our sales primarily from the sale of hydroponic garden products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products. 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.
Our sales depend on the type of products we sell and the mix between consumables and non-consumables. Due to their nature, purchases of consumables results in repeat orders as customers seek to replenish their supplies. In 2019, approximately 60% of our sales were consumables. Generally, in markets where legalization is recent and licensors are ramping up their grow operations, there are more purchases of non-consumables for build-outs compared to purchases of consumables. In more mature markets, there are generally more purchases of consumables than non-consumables. Our sales are also impacted by our customer mix of commercial and non-commercial customers, as larger commercial customers may receive volume discounts. More than a majority of our sales is derived from our commercial customers.
Gross Profit
We calculate gross profit as sales less cost of goods sold. Cost of goods sold consists of cost of product sold and freight. Gross profit excludes depreciation and amortization, which is presented separately in our consolidated statements of operations.
Gross Profit Margin
Our overall gross profit margin varies with our product mix, in particular the percentage of sales of consumable products versus non-consumables, such as in connection with build-outs, during a particular quarter. In addition, our customer mix impacts gross profit margin due to larger commercial customers receiving discounts.
Operating Expenses
Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Corporate overhead is comprised of share-based compensation, depreciation and amortization, general and administrative costs and corporate salaries and related expenses. General and administrative expenses (“G&A”) consist mainly of advertising and promotions, travel & entertainment, professional fees and insurance. G&A as a percentage of sales does not increase commensurate with an increase in sales. Our largest expenses are payroll and rent and these are largely fixed and not variable. Our advertising and marketing expenses are controllable and variable depending on the particular market.
Same-Store Sales
We assess the organic growth of our sales on a same-store basis. We believe that our assessment on a same-store basis represents an important indicator of comparative financial results and provides relevant information to assess our performance. New and acquired stores throughoutbecome eligible for inclusion in the United States.comparable store base if the store has been under our ownership for the entire period in the same-store base periods for which we are including the store. For example, our same store sales for the three months ended March 31, 2020 and 2019 includes stores that operated for the entire quarter in both 2020 and 2019. We do not include any stores that were closed or consolidated during a particular period.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, further adjusted for other items such as non-cash equity compensation charges. See “—Use of Non-GAAP Financial Measure” for more information and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
The following table summarizes the comparison of our financial performance in the three months ended March 31, 2020 and 2019:
For the Three Months Ended | Quarter to Quarter Comparison | |||||||||||||||
March 31, | Increase/ | Percentage | ||||||||||||||
2020 | 2019 | (decrease) | Change | |||||||||||||
Sales | $ | 32,981,506 | $ | 13,087,222 | $ | 19,894,284 | 152.0 | % | ||||||||
Gross profit | $ | 8,946,249 | $ | 3,686,631 | $ | 5,259,618 | 142.7 | % | ||||||||
Gross Profit % | 27.13 | % | 28.17 | % | ||||||||||||
Operating expenses – store operations | $ | 3,638,685 | $ | 1,957,790 | $ | 1,680,895 | 85.9 | % | ||||||||
Operating expenses – store operations as a % of sales | 11.03 | % | 14.96 | % | ||||||||||||
�� | ||||||||||||||||
Operating income from store operations(1) | $ | 5,307,564 | $ | 1,728,841 | $ | 3,578,723 | 207.0 | % | ||||||||
Operating income from store operations, % of sales | 16.09 | % | 13.21 | % | ||||||||||||
Same Store Sales(2) | $ | 15,186,018 | $ | 9,607,606 | $ | 5,578,412 | 58.1 | % | ||||||||
Adjusted EBITDA(3) | $ | 2,710,437 | $ | 615,509 | $ | 2,094,928 | 340.4 | % |
(1) | Operating income from store operations is calculated as gross profit less operating expenses – store operations. |
(2) | Same store sales for quarter ended March 31, 2020 and 2019 included fourteen stores; each of these stores operated under our ownership for the full quarter ended March 31 in 2020 and 2019. |
(3) | See reconciliation in “—Use of Non-GAAP Financial Measure.” |
Our financial performance was improved in the first quarter of 2020, compared to the same quarter in the previous year. In the quarter ended March 31, 2020, sales were $33.0 million, an increase of 152%, compared to $13.1 million for the quarter ended March 31, 2019. Adjusted EBITDA was $2.7 million for the quarter ended March 31, 2020 compared to $615,000 for quarter ended March 31, 2019, an increase of 340%. Our same store sales for the fourteen stores that were operating under ownership during the entirety of 2020 and 2019 periods increased 58% for the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. Operating income from store operations was $5.3 million for the quarter ended March 31, 2020, compared to $1.7 million for the quarter ended March 31, 2019, an increase of 207%. Gross profit margin percentage was 27.1% for the first quarter of 2020, compared to 28.2% for the first quarter of 2019. We experienced increases in sales in all markets, most notably the California market (+53.3%) and Michigan market (+275.7%) period-over-period, primarily attributable to date has been fueledthe growth of commercial and walk-in business at our garden centers located in these states. Our online business grew by opening new stores and by frequent and higher dollar transactions185% in the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019.
The following table summarizes the comparison of our stores from commercial growers, individual home growers, and gardeners. financial performance in the past two years:
For the Year Ended | Year to Year Comparison | |||||||||||||||
December 31, | Increase/ | Percentage | ||||||||||||||
2019 | 2018 | (decrease) | Change | |||||||||||||
Sales | $ | 79,733,568 | $ | 29,000,730 | $ | 50,732,838 | 174.9 | % | ||||||||
Gross profit | $ | 22,561,847 | $ | 6,444,558 | $ | 16,117,289 | 250.1 | % | ||||||||
Gross Profit % | 28.3 | % | 22.2 | % | ||||||||||||
Operating expenses – store operations | $ | 10,095,422 | $ | 5,202,330 | $ | 4,893,092 | 94.1 | % | ||||||||
Operating expenses – store operations as a % of sales | 12.7 | % | 17.9 | % | ||||||||||||
Operating income from store operations(1) | $ | 12,466,425 | $ | 1,242,228 | $ | 11,224,197 | 904 | % | ||||||||
Operating income from store operations(1), % of sales | 15.6 | % | 4.3 | % | ||||||||||||
Same Store Sales(2) | $ | 12,995,795 | $ | 9,528,453 | $ | 3,467,342 | 36.4 | % | ||||||||
Adjusted EBITDA(3) | $ | 6,641,050 | $ | (823,843 | ) | $ | 7,464,893 |
(1) | Operating income from store operations is calculated as gross profit less operating expenses – store operations. |
(2) | Same store sales for the year ended December 31, 2019 and 2018 included 6 stores; each of these stores was operated under our ownership for the full year ended December 31, 2019 and 2018. |
(3) | See reconciliation in “—Use of Non-GAAP Financial Measure.” |
We expectimproved our financial performance in 2019. In 2019, sales increased 175% to continue$79.7 million year-over-year. Adjusted EBITDA for 2019 was $6.6 million representing a positive $0.20 per share, basic. For a reconciliation of Adjusted EBITDA to experiencenet income, see “—Use of Non-GAAP Financial Information”. Our same store sales growth overfor the next few years in existing stores and by increasing the number of15 stores that we operate, which will depend onwere operating under our abilityownership during the entire year in 2019 and 2018 increased approximately 36% year-over-year. Gross profit margins increased to 28.3%, an increase our capital.of 610 basis points year-over-year. We saw significant increases of sales in all key markets, including Colorado (+132%), California (+161%), Nevada (+127%), Michigan (+200%), and Rhode Island (+79%), year-over-year. Our growth is likely to come from three distinct channels: establishing new stores in high-value markets, acquiring existingOklahoma contributed $11.8 million in net revenue and our stores in Maine added $6.2 million in net revenue. Our e-commerce store, growgeneration.com, added approximately $4.8 million in sales. Our commercial division generated approximately $17 million in sales. Along with our strong customer basestop-line growth, we reduced our operating expenses – store operations to 12.7% of sales in 2019 compared to 17.9% in 2018 and strong operating histories, buildingcorporate overhead to 8.5% as a businesspercentage of our sales, not including non-cash expenditures, from 11.2% in 2018. We successfully completed the implementation of our Enterprise Resource Planning (“ERP”) platform, designed to businesslower costs, integrate our online and store sales team and the creation of a branded e-commerce portal at www.GrowGeneration.com.
Our stores sell thousands of products, such as organic nutrientssupply channels, improve departmental productivity and soils, advanced lighting technology, state of the art hydroponicprovide forecasting and aquaponic equipment, and other products needed to grow indoors and outdoors. Our strategy is to target two distinct verticals; namely i) professional growers, and ii) smaller growers who require a local store to fulfill their daily and weekly growing needs. We are of the belief that our retail outlets provide a superior level of customer service to our customers through a well trained staff.
On February 15, 2015, we opened our first non-acquired GrowGeneration store in Trinidad, Colorado. This store is 3,000 square feet and was initially stocked with $100,000 in inventory. Our lease obligation is $1,000 per month for the next 3 years.reporting tools.
In April 2015,2019, we continued focusing our efforts on increasing our footprint through acquisitions and openings of new locations. We increased our store footprint from 16 to 25 locations in 2019, inclusive of two store closings/consolidations. Net revenue increased 175% between 2018 and 2019. In September 2018, we acquired approximately $30,000 of inventorye-commerce operation, HeavyGarden.com and are currently rebranding it as growgeneration.com, which is being launched in late June 2020 and will serve as the base for our omni-channel strategy and will enable e-commerce at cost from Green Growers, Inc., a retail store located in Canon City, Colorado. In connection therewith, we engaged the CEO of Green Growers, Inc. as a sales consultant for a period of two years. We pay this individual a base fee of $1,200 per month during the first year and $600 per month during the second year of his consulting agreement, together with incentive compensation for any new business he generates, in an amount equal to 25%all of the gross profitGrowGeneration locations.
We have raised funds in private placements for $12.8 million from 19 accredited investors in 2019 and $19 million, primarily from the three private equity firms, Gotham Green Partners, Navy Capital and Merida Capital Partners, in 2018.
Summary of Acquisitions
The comparability of our results of operations between the periods discussed below is naturally affected by the acquisitions we have completed during such periods. We are also continuously evaluating and pursuing acquisitions on allan ongoing basis, and such business. We also issued this consultant 10,000 three (3)acquisitions, if completed, will continue to impact the comparability of our financial results. While we expect continued growth and strategic acquisitions in the future, our acquisitions may have materially different characteristics than our historical results, and such differences in economics may impact the comparability of our future results of operations to our historical results.
In 2020, we have made the following acquisition:
● | On February 25, 2020, we purchased the assets of Health & Harvest, LLC with one location in Pembroke Pines, FL. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration Florida Corp, and a three-year commercial lease for warehouse space, effective February 26, 2020 and subleased the store space, with the current lease expiring July 31, 2020. |
The above acquisition will be fully reflected in our consolidated financial statements for the fiscal year options, exercisable at a priceending December 31, 2021 but are only partially reflected in our consolidated financial statements for the quarter ended March 31, 2020 and the fiscal year ending December 31, 2020, beginning on the date of $.60 per share, as additional compensation under his consulting agreement.acquisition and do not impact our results of operations for the quarter ended March 31, 2019 and fiscal years 2019, 2018 and 2017.
Fiscal Year 2019 Acquisitions
In June 2015,2019, we acquired approximately $68,000made the following acquisitions and consolidations:
● | On December 18, 2019, we purchased the assets of Grow World LLC with one location in Portland, OR. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration Washington Corp, and an assignment of lease, effective December 18, 2019, to rent the premises in Portland, OR. The lease terminates on December 31, 2026. |
● | On September 3, 2019, we purchased the assets of Grand Rapids Hydroponics with one location in Grand Rapids, MI. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration Michigan Corp, and a ten-year commercial lease agreement, effective from September 9, 2019, to rent the premises in Grand Rapids, MI. |
● | On May 13, 2019, we purchased the assets of GreenLife Garden Supply Corp., with two store locations in Maine and one in New Hampshire. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration Rhode Island Corp., and five-year commercial lease agreements, effective from May 9, 2019 and July 1, 2019, respectively, to rent the premises in York and Biddeford, Maine where store assets are located. |
● | On February 7, 2019, we purchased the assets of Palm Springs Hydroponics, Inc. located in Palm Springs, California. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration California Corp., and a commercial lease agreement with a term of five years and three months, effective from February 7, 2019 to April 30, 2024, to rent the premises where the assets were located to open a new store. |
● | On February 11, 2019, we purchased the assets of Reno Hydroponics, Inc. located in Reno, Nevada. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration Nevada Corp., and a one-year commercial lease agreement, effective from February 1, 2019 to January 31, 2020, to rent the premises where the assets were located to open a new store. We have since entered into a new lease expiring March 31, 2021. |
● | On January 22, 2019, we purchased the assets of Chlorophyll, Inc., located in Denver, Colorado. In connection with the purchase of the assets, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration Pueblo Corp., and a five-year commercial lease agreement, effective from January 21, 2019, to rent the premises where the assets were located to open a new store. |
● | In March 2019, weconsolidated our store located in Canon City, CO with its Pueblo West, CO store. |
● | Effective January 1, 2019, our two Santa Rosa, CA stores were consolidated into a single store at our Santa Rosa Moorland location acquired in July 2018. |
We refer to the fiscal year 2019 acquisitions described above collectively as the “2019 Acquisitions.” The 2019 Acquisitions will be fully reflected in our consolidated financial statements for the fiscal year ending December 31, 2020 but are only partially reflected in our consolidated financial statements for the fiscal year ending December 31, 2019, beginning on the date of inventory at cost from Happy Grow Lucky, Inc., a retail store located in Conifer, Colorado. acquisition and do not impact our results of operations for fiscal years 2018 and 2017.
Fiscal Year 2018 Acquisitions
In connection therewith,2018, we engagedmade the 2 principalsfollowing acquisitions and consolidations:
● | On December 1, 2018, we entered into a lease agreement throughourwholly-owned subsidiary, GrowGeneration Rhode Island, Corp., to rent certain premises located in Brewer, Maine, to be effective from December 1, 2018 to February 28, 2023. This premises were used by us to open a new store. |
● | In November 2018, we signed a commercial lease to open a 9,600 square feet warehouse and product showroom in Tulsa to service the emerging legal cannabis cultivators in the State of Oklahoma. The lease is effective from January 1, 2019 to December 31, 2024. We opened this store for business on February 1, 2019. |
● | In October 2018, weconsolidated our store located in Boulder, CO with our Denver, CO store. |
● | On September 15, 2018, we purchased the assets of Virgus, Inc. d/b/a/ Heavy Gardens, an online store for hydroponic and garden supplies. In connection with the purchase, we entered into an asset purchase agreement throughourwholly-owned subsidiary, GrowGeneration HG Corp. |
● | On August 23, 2018, we signed a commercial lease to open a 10,000 square feet warehouse and product showroom in Oklahoma City to service the emerging legal cannabis cultivators in the State of Oklahoma. The lease is effective from October 1, 2018 to September 30, 2023. We opened this store for business on October 1, 2018. |
● | On July 13, 2018, we purchased the assets of a retail hydroponic store, Santa Rosa Hydroponics & Grower Supply Inc., located in Santa Rosa, California. In connection with the purchase of the assets, we entered into an asset purchase agreement and a commercial lease agreement, effective from July 14, 2018 to July 13, 2023, to rent the premises where the assets were located. |
● | In May 2018, weconsolidated our store located in Colorado Springs, CO with our Denver, CO store and in April 2018, consolidated its store located in Pueblo West with our Pueblo Downtown store. |
● | On April 12, 2018, we purchased substantially all of the assets of Superior Growers Supply, Inc.’s business located in Michigan. In connection with the purchase of the assets, we entered into an asset purchase agreement through our wholly-owned subsidiary, GrowGeneration Michigan Corp., and three leases to rent the premises where the assets were located. Following this acquisition, we opened three stores in the state of Michigan. |
● | On January 30, 2018, we purchased all of the assets of a retail hydroponic store, Humboldt Depot, located in Arcata, CA. In connection with the asset purchase, we entered into an asset purchase agreement through our wholly-owned subsidiary, GrowGeneration California, and two commercial leases, to be effective from February 1, 2018 to January 31, 2021, to rent the premises where the assets were located. |
● | On January 23, 2018, we purchased all of the assets of a retail hydroponic store, East Coast Hydroponic Warehouse, located in Warwick, RI. In connection with the purchase of the assets, we entered into an asset purchase agreement and a commercial lease, to be effective from January 24, 2018 to January 23, 2023, to rent the premises where the assets were located. |
We refer to the fiscal year 2018 acquisitions described above collectively as sales consultants for a period of one year. We will pay each sales consultant $420 per month, together with incentive compensation for any new business they generate, in an amount equal to 25%the “2018 Acquisitions.” The full impact of the gross profit of such business. In addition, we executed a new 3 year lease2018 Acquisitions is reflected in our consolidated financial statements for the premisesfiscal year ending December 31, 2019 but were only partially reflected in Conifer, Colorado. at a rateour consolidated financial statements for the fiscal year ended December 31, 2018, beginning on the date of $2,400 per month.acquisition and do not impact our results of operations in fiscal year 2017.
On September 1, 2015, we signed a 5 year lease, at a rate of $3,780 to open our Colorado Springs, Colorado store.Fiscal Year 2017 Acquisitions
On October 28, 2015,In 2017, we purchase approximately $169,000 of inventory, at cost, from Sweet Leaf Hydroponics Inc., a retail store located in Santa Rosa, California. In connection therewith, we also acquired some equipment frommade the seller for $25,000. following acquisitions and consolidations:
● | Effective as of December 31, 2017, we consolidated our store located in Denver north with our Denver south store and warehouse facility we leased on February 1, 2017. |
● | On September 19, 2017, we entered into a commercial lease, effective from October 1, 2017 to November 30, 2021, to rent certain office and warehouse space located in North Las Vegas, Nevada, to open its fourteenth store. |
● | On August 15, 2017, we entered into a commercial lease to rent certain premises located in Boulder, Colorado, to be effective from September 1, 2017 to August 31, 2019 and opened a new store. |
● | On April 25, 2017, we entered into a commercial lease through GrowGeneration California to rent certain premises located in San Bernardino, California, to be effective from May 1, 2017 to May 1, 2020. The premises was used by us to operate as a new store. |
● | On February 8, 2017, we purchased certain assets of a retail hydroponic and garden supply business located in Santa Rosa, CA. In connection with the asset purchase, we entered into an asset purchase agreement through our wholly-owned subsidiary, GrowGeneration California, as well as a commercial lease, effective from March 1, 2017 to February 28, 2022, to rent the premises where the assets were located. In connection therewith, we closed its then existing store in Santa Rosa and consolidated those operations with the new store. |
● | On February 1, 2017, we entered into a commercial lease to rent certain 12,837 square feet premises located in Denver, Colorado, to be effective from February 1, 2017 to February 1, 2022, to open a new retail store, warehouse space and offices. |
● | On January 30, 2017, we entered into a commercial lease to rent certain 7,383 square feet premises located in Trinidad, Colorado, to be effective from March 1, 2017 to February 28, 2022, which was used by us to open a new store to replace and consolidate its then existing 3,000 square feet store in Trinidad as part of our expansion plan. |
We have entered into a one-year agreement with onerefer to the fiscal year 2017 acquisitions described above collectively as the “2017 Acquisitions.” The full impact of the principals to act as a sales consultant2017 Acquisitions is reflected in our consolidated financial statements for usthe fiscal years ended December 31, 2019 and 2018 but were only partially reflected in our consolidated financial statements for a periodthe fiscal year ending December 31, 2017, beginning on the date of one year, at a cost of $1,000 per month. We executed a two year lease with the landlord of Sweet Leaf Hydroponics Inc. for $5,300 per month through December 2017. We also issued this consultant 25,000 three (3) year options, exercisable at a price of $.60 per share, as additional compensation under his consulting agreement.acquisition.
On November 28, 2015, the Company acquired $35,000 of inventory of Greenhouse Tech Inc., a retail store located in Colorado. The Company engaged the principal of Greenhouse Tech as a sales consultant for 1 year, at $13 per hour and 20% of the gross profits on all sales generated by sales consultant.
On March 1, 2016, we signed a 3 year lease, at a rate of $3,650 for the first year, 4,498 square feet, located in Denver, Colorado.
RESULTS OF OPERATIONS
Comparison of the three month period ofQuarters Ended March 31, 2015 to March 31, 20162020 and 2019
The following table presents certain consolidated statement of operations information and presentation of that data as a dollar and percentage change period-over-period. See above for a discussion on comparability of change from year-to-year.results of operations regarding our acquisitions in “—Summary of Acquisitions” above.
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ Variance | % Variance | |||||||||||||
Sales | $ | 32,981,506 | $ | 13,087,222 | $ | 19,894,284 | 152 | % | ||||||||
Cost of goods sold | 24,035,257 | 9,400,591 | 14,634,666 | 156 | % | |||||||||||
Gross profit | 8,946,249 | 3,686,631 | 5,259,618 | 143 | % | |||||||||||
Operating expenses | 11,063,232 | 3,337,120 | 7,726,112 | 232 | % | |||||||||||
Operating (loss) income | (2,116,983 | ) | 349,511 | (2,466,494 | ) | |||||||||||
Other income (expense) | 23,465 | (120,090 | ) | 143,555 | ||||||||||||
Net (loss) income | $ | (2,093,518 | ) | $ | 229,421 | $ | (2,322,939 | ) |
Sales for the three months ended March 31, 2020 was approximately $33 million, compared to approximately $13.1 million for the three months ended March 31, 2019, which was an increase of approximately $19.9 million, or 152%. The increase was primarily due to the following factors:
● | seven new stores opened or acquired at various times in 2019 and 2020 which had sales of $9 million for the quarter ended March 31, 2020 for which there were no sales for the quarter ended March 31, 2019; |
● | five stores opened or acquired in early 2019, that had sales of $6.8 million for the quarter ended March 31, 2020 compared to sales of $2.4 million for the quarter ended March 31, 2019; |
● | an increase in the 14 same store sales of 58% during the quarter ended March 31, 2020 as compared to the quarter ended March 31, 2019 (see table below); and |
● | an increase in e-commerce sales of $1.3 million, or 185%, for the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. The increase in same store sales at fourteen of our locations contributed sales of $15.2 million for the quarter ended March 31, 2020 compared to sales of $9.6 million for the quarter ended March 31, 2019, a 58% increase. |
We currently focus on ten markets, our new e-commerce website, growgeneration.com, and growth opportunities that exist in each market. We continue to focus on new store acquisitions and openings, private label products and the continued development of our online sales through growgeneration.com and sales through our Amazon.com store and direct sales to Amazon.com.
Sales by Market | ||||||||||||||||
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Variance | % Variance | |||||||||||||
Colorado | $ | 4,125,453 | $ | 3,338,273 | $ | 787,180 | 23.6 | % | ||||||||
California | 4,282,312 | 2,793,171 | 1,489,141 | 53.3 | % | |||||||||||
Rhode Island | 3,781,591 | 1,497,982 | 2,283,609 | 152.4 | % | |||||||||||
Michigan | 5,796,581 | 1,542,851 | 4,253,730 | 275.7 | % | |||||||||||
Nevada | 1,193,255 | 867,647 | 325,608 | 37.5 | % | |||||||||||
Washington | 364,520 | 327,297 | 37,223 | 11.4 | % | |||||||||||
Oregon | 1,655,852 | - | 1,655,852 | - | ||||||||||||
Oklahoma | 6,293,564 | 1,552,749 | 4,740,815 | 305.3 | % | |||||||||||
Maine | 2,980,538 | 54,065 | 2,926,473 | 5,412.9 | % | |||||||||||
Florida | 559,340 | - | 559,340 | - | ||||||||||||
E-commerce (growgeneration.com) | 1,944,687 | 681,299 | 1,263,388 | 185.4 | % | |||||||||||
Closed/consolidated locations | 3,813 | 431,888 | (428,077 | ) | - | |||||||||||
Total sales | $ | 32,981,506 | $ | 13,087,222 | $ | 19,894,284 | 152 | % |
Sales in the Colorado market increased approximately $787,000 or 23.6% in the quarter ended March 31, 2020 compared to March 31, 2019. The increase in sales in the Colorado market was primarily due to our continued focus on increasing commercial sales, and the acquisition of a new store in mid-January 2019. Same store sales for four stores in Colorado increased approximately $703,000 in the three months ended March 31, 2020 compared to the same period in 2019.
Quarter Ending March 31, 2015 | Quarter Ending March 31, 2016 | $ Variance | ||||||||||
Net revenue | $ | 594,641 | $ | 1,541,599 | $ | 946,958 | ||||||
Cost of goods sold | 424,446 | 1,049,900 | 625,454 | |||||||||
Gross profit | 170,195 | 491,699 | 321,504 | |||||||||
General and administrative expenses | 220,326 | 570,544 | 350,218 | |||||||||
Operating income (loss) | (50,131 | ) | (78,844 | ) | (28,713 | ) | ||||||
Other income (expense) | - | 1 | 1 | |||||||||
(Loss) before income taxes | (50,131 | ) | (78,844 | ) | (27,914 | ) | ||||||
Income taxes - current benefit (expense) | - | - | - | |||||||||
Net (loss) | $ | (50,131 | ) | $ | (78,844 | ) | $ | (28,713 | ) |
RevenueSales in the California market increased approximately $1.5 million, or 53.3%, in the quarter ended March 31, 2020 compared to March 31, 2019. Same store sales in the California market increased approximately $879,000 over the same quarter in 2019 and the Palm Springs center (acquired in mid-February 2019) had sales of approximately $1 million, representing a $610,000 increase, or 152%, over the same period in 2019.
Net revenueSales in the Rhode Island market increased approximately $2.3 million, or 152.4%, period-over period primarily due to our increased focus on commercial and multi-state commercial customers.
Sales in the Michigan market increased approximately $4.3 million, or 275.7%, period-over-period due to an acquisition in September 2019 that contributed $2.7 million in sales in the quarter ended March 31, 2020 and an increase in same store sales for three stores of $1.5 million, or 97%, period-over-period primarily due to the increase in commercial accounts.
Sales in the Nevada market increased 37.5% due to the acquisition of our Reno store in February 2019 which had sales of $650,000 in the quarter ended March 31, 2020 compared to revenues of $386,000 for the quarter ended March 31, 20162019 and a 13% increase in same store sales in the Las Vegas store, period-over-period.
Sales in the Washington market increased $946,958 to $1,541,599 as compared to $594,64111.4% for the quarter ended March 31, 2015. The increase was due2020 compared to revenue from the retail stores that we acquired and opened during that period and the growth from our existing stores.
For the quarter ended March 31, 2015,2019. Washington currently is one of our smaller markets.
Sales in Oregon were approximately $1.7 million. Oregon represents a new market for us as we completed our first acquisition in the Company addedmarket in mid-December 2019.
Currently we have four stores in the Oklahoma market. Sales in the Oklahoma market increased $4.7 million or 305.3% in the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. The increase in sales was primarily related to the addition on the three new stores. Same stores sales for one additional store to its existing 4 stores, for a total of 5 stores that generated net revenue of $594,641increased 8% in Oklahoma City year-over-year.
Sales in Maine have increased $2.9 million for the quarter ended March 31, 2015, as2020 compared to net revenue of $1,005,078 for the Company's 5 existing stores in the same period in 2016.
In the quarter ended March 31, 2016, the Company2019. The increase was primarily due to a new store opened 3January 31, 2019 and two new stores that generated net revenueacquired in May 2019. The new store acquired in January 2019 had sales of $536,521.$757,500 in the quarter ended March 31, 2020 compared to $54,000 for the quarter ended March 31, 2019. The two new stores acquired in May 2019 contributed $2.2 million in sales for the quarter ended March 31, 2020.
Florida was a new market resulting from an acquisition in February 2020. Sales in this market were $559,000 for the quarter ended March 31, 2020.
5 Existing Stores | 3 New Stores | |||||||||||||||||||
Quarter Ending | Quarter Ending | Quarter Ending | ||||||||||||||||||
March 31, 2015 | March 31, 2016 | $ Variance | March 31, 2016 | Total $ Variance | ||||||||||||||||
Net revenue | $ | 594,641 | $ | 1,005,078 | $ | 410,437 | $ | 536,521 | $ | 946,958 |
We generated same-store sales for 14 stores which operated under our ownership during the entire period during the quarters ended March 31, 2020 and 2019 in the following markets: four in Colorado, three in California, three in Michigan, one in Nevada, one in Rhode Island, one in Washington and one in Oklahoma. These stores generated approximately $15.2 million in sales for the three months ended March 31, 2020, compared to approximately $9.6 million in sales for the three months ended March 31, 2019, an increase of 58%, primarily due to an increase in the number of commercial customers in these markets. Same store sales increased in all of the markets as noted below comparing March 31, 2020 to March 31, 2019.
Same Store Sales By Market | ||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2020 | March 31, 2019 | Variance | % Variance | |||||||||||||
Colorado market | $ | 2,719,924 | $ | 2,016,826 | 703,098 | 35 | % | |||||||||
Rhode Island | 3,781,591 | 1,497,982 | 2,283,609 | 152 | % | |||||||||||
Michigan | 3,044,737 | 1,542,851 | 1,501,886 | 97 | % | |||||||||||
Oklahoma | 1,460,366 | 1,348,234 | 112,132 | 8 | % | |||||||||||
California market | 3,272,547 | 2,393,163 | 879,384 | 37 | % | |||||||||||
Washington market | 364,520 | 327,297 | 37,223 | 11 | % | |||||||||||
Nevada market | 542,333 | 481,253 | 61,080 | 13 | % | |||||||||||
Net revenue, all markets | $ | 15,186,018 | $ | 9,607,606 | $ | 5,578,413 | 58 | % |
Cost of Goods Sold
Cost of goods sold for the quarter ended March 31, 2020 was approximately $24 million compared to approximately $9.4 million for the quarter ended March 31, 2019, which represented an increase of approximately $14.6 million, or 156%, from the previous period. The increase in cost of goods sold was primarily due to the 152% increase in sales during the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. The increase in cost of goods sold is directly attributable to the increase in the number of stores open during the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019, as discussed above.
Gross profit was approximately $8.9 million for the quarter ended March 31, 2020 compared to approximately $3.7 million for the quarter ended March 31, 2019, an increase of approximately $5.3 million, or 143%. The increase in cost of goods sold is primarily related to the 152% increase in sales for the quarter ended March 31, 2016 increased $625,454 to $1,049,900 as2020 compared to $424,446 for the quarter endingended March 31, 2015. The increase was due to increased sales.
2019. Gross profit as a percentage of sales was $491,699 for the quarter March 31, 2016 as compared to $170,195 for the quarter ending March 31, 2015.
General and Administrative Expenses
General and administrative expenses27.1% for the quarter ended March 31, 2016 increased $350,218 to $570,544 as2020, compared to $220,326 for the quarter ending March 31, 2015. The increase was due mainly to increased payroll expenses, professional fees, travel expense and stock based compensation related to stock option grants and stock compensation for stock issued to employees.
Non-cash general and administrative expenses28.2% for the quarter ended March 31, 2016 totaled $96,514,2019. The decrease in the gross profit margin percentage was due to a greater percentage of our sales in the quarter ended March 31, 2020 resulting from larger commercial and e-commerce sales, which have lower margins. Commercial and e-commerce sales accounted for approximately 32% of overall sales for the quarter ended March 31, 2020, resulting in a margin reduction of approximately 0.8%.
Operating Expenses
Operating expenses are comprised of store operations expenses, primarily payroll, rent and utilities, and corporate overhead. Store operating expenses were approximately $3.6 million for the quarter ended March 31, 2020 and approximately $2 million for the quarter ended March 31, 2019, an increase of approximately $1.6 million or 86%. The increase in store operating costs was directly attributable to the addition of six new locations after March 31, 2019, and six locations added at various times during the quarter ended March 31, 2019 that were open for the entire quarter ended March 31, 2020. Effective April 1, 2019 we opened two warehouse distribution facilities. The addition of these 12 new stores and the two new warehouse facilities were the primary reasons for the increase in store operating costs. Store operating expenses as a percentage of sales were 11% for the quarter ended March 31, 2020 compared to 15% for the quarter ended March 31, 2019, a 26% reduction. Store operating expenses were positively impacted by the opening of new and acquired stores throughout 2019 and the one acquisition in February 2020. These stores have a lower percentage of operating expenses to sales due to their larger size and higher volume. As noted above, same store sales for fourteen stores increased 58% for the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019, which also contributed to a reduction in the store operating expenses as a percentage of sales with (i)respect to these fourteen stores.
Corporate overhead, comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $7.4 million for the quarter ended March 31, 2020, compared to approximately $1.4 million for the quarter ended March 31, 2019. Corporate overhead was 22.5% of $9,902 (ii)sales for the quarter ended March 31, 2020 and 10.5% for the quarter ended March 31, 2019. The increase in corporate overhead as a percentage of sales for the quarter ended March 31, 2020 was primarily due to the increase in non-cash share based compensation from approximately $80,000 for the quarter ended March 31, 2019 to approximately $4.1 million for the quarter ended March 31, 2020.
The increase in non-cash share-based compensation was primarily the result of several new executive employment agreements which became effective January 1, 2020 and resulted in the vesting of common stock optionand common stock options at the start of the quarter, as well as options issued in 2018 and 2019 for options vesting in 2020. The share-based awards associated with the new executive employment agreements resulted in approximately one-third of the award being recognized as an expense in the first quarter of 2020, due to vesting. The remaining two-thirds on the share-based awards are being recognized over a 24-month period commencing January 2020 and ending December 2021, based on shared based award vesting in future periods. The vesting of these shares and options was significantly higher in the first quarter of 2020 than they will be in the periods subsequent to March 31, 2020. The non-cash share-based compensation for the remainder of $ 86,333,2020 is substantially less per quarter than the amount recorded in the first quarter of 2020, based on current awards outstanding, and (iii) bad debtis estimated to be approximately $2.4 million for the remainder of 2020.
The increase in salaries expense from the quarter ended March 31, 2019 to the quarter ended March 31, 2020 was due primarily to the increase in corporate staff to support expanding operations, including store manager integrations, accounting and finance, information systems, purchasing and commercial sales staff. 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. Corporate salaries and related payroll costs as a percentage of $279.sales were 5.5% for the quarter ended March 31, 2020 compared to 5% for the quarter ended March 31, 2019. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance were approximately $1.15 million for the quarter ended March 31, 2020 and approximately $493,000 for the quarter ended March 31, 2019. A majority of the increase was related to advertising and promotion, travel and entertainment and legal fees. General and administrative expenses as a percentage of sales were 3.5% for the quarter ended March 31, 2020, and 3.8% for the quarter ended March 31, 2019. Corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation, was approximately $4.5 million for the quarter ended March 31, 2020, compared to approximately $227,000 for the quarter ended March 31, 2019.
Net Income (Loss)
Net loss for the quarter ended March 31, 20162020 was $78,844 asapproximately $2.1 million compared to a net lossincome of $50,131approximately $229,000 for the quarter endingended March 31, 2015.2019, a reduction of approximately $2.3 million. The increase innet loss for the quarter ended March 31, 2020 was primarily due to the increase in stock basedshare-based compensation payrollfrom approximately $80,000 in 2019 to $4.1 million for the quarter ended March 31, 2020. Net income from store operations was approximately $5.3 million for the quarter ended March 31, 2020, compared to approximately $1.7 million for the quarter ended March 31, 2019. Operating expenses for store operations were offset by increased corporate overhead of approximately $7.4 million for the quarter ended March 31, 2020 compared to approximately $1.4 million for the quarter ended March 31, 2019. This increase of $6 million was primarily related to the increase in non-cash share-based compensation expense of approximately $4.1 million. Increases in G&A and professional feessalaries in the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019 accounted for the remaining increase.
Comparison of the Years Ended December 31, 2019 and 2018
The following table sets forth information from our statements of operations for the years ended December 31, 2019 and 2018:
For the Year Ended | Year to Year Comparison | |||||||||||||||
December 31, | Increase/ | Percentage | ||||||||||||||
2019 | 2018 | (decrease) | Change | |||||||||||||
Sales | $ | 79,733,568 | $ | 29,000,730 | $ | 50,732,838 | 174.9 | % | ||||||||
Cost of Sales | 57,171,721 | 22,556,172 | 34,615,549 | 153.5 | % | |||||||||||
Gross profit | 22,561,847 | 6,444,558 | 16,117,289 | 250.1 | % | |||||||||||
Operating expenses | 20,421,726 | 10,700,206 | 9,721,520 | 90.9 | % | |||||||||||
Income (loss) from operations | 2,140,121 | (4,255,648 | ) | 6,395,769 | 298.8 | % | ||||||||||
Other income (expense) | (261,317 | ) | (818,107 | ) | 556,790 | |||||||||||
Net Income (loss) | $ | 1,878,804 | $ | (5,073,755 | ) | $ | 6,952,559 | 370.1 | % |
Sales
Sales for the year ended December 31, 2019 were approximately $79.7 million compared to approximately $29 million for the year ended December 31, 2018, an increase of $50.7 million, or 175%. The increase in sales is due to the addition of ten new retail stores opened or acquired during 2019 for which there were no sales for these retail stores for the year ended December 31, 2018 as well as eight stores and the openinge-commerce site opened or acquired at various times during 2018 that were open for all of 2019. Sales in the ten new stores opened or acquired in 2019 were $26 million. Sales from our e-commerce site and the eight stores opened in 2018 were approximately $38.3 million for the year ended December 31, 2019 compared to approximately $14.5 million for the year ended December 31, 2018. We also had store closures and consolidations in 2019 and 2018. Sales of the closed and consolidated stores were approximately $909,000 for the year ended December 31, 2019 and approximately $4.5 million for the year ended December 31, 2018.
While we continued to focus on the nine markets noted below and the growth opportunities that exist in each market, we also are focusing on new store acquisitions, proprietary products, and developing our online sales through growgeneration.com and sales through our Amazon.com store and direct sales to Amazon.com.
Sales by Market | ||||||||||||
Year Ended December 31, 2019 | Year Ended December 31, 2018 | Variance | ||||||||||
Colorado market | $ | 15,490,021 | $ | 6,665,197 | $ | 8,824,824 | ||||||
California market | 15,570,418 | 5,964,080 | 9,606,338 | |||||||||
Rhode Island market | 8,395,123 | 4,700,102 | 3,695,021 | |||||||||
Michigan market | 9,268,460 | 3,086,693 | 6,181,767 | |||||||||
Maine market | 6,203,649 | - | 6,203,649 | |||||||||
Nevada market | 4,360,013 | 1,924,025 | 2,435,988 | |||||||||
Washington market | 1,283,169 | 939,231 | 343,938 | |||||||||
Oklahoma market | 11,793,303 | 463,264 | 11,330,039 | |||||||||
Oregon market | 153,856 | - | 153,856 | |||||||||
Closed/consolidated locations | 908,642 | 4,473,222 | (3,564,580 | ) | ||||||||
Hemp market | 1,583,176 | - | 1,583,176 | |||||||||
E-commerce site | 4,763,738 | 784,916 | 3,978,822 | |||||||||
Total revenues | $ | 79,773,568 | $ | 29,000,730 | $ | 50,772,838 |
Overall sales in the Colorado market increased approximately $8.8 million or 132%, as noted above, comparing the year ended December 31, 2019 to the year ended December 31, 2018, with a majority of that increase, $6 million, attributable to the acquisition of our new Denver north store location in January 2019. The remaining Colorado stores saw an increase of approximately $2.8 million from 2018 to 2019. We continued to focus selling efforts in building growth in this market primarily in the commercial market.
Our sales in the California market experienced growth of approximately $9.6 million, or 161%, primarily from the addition of 5 new stores through acquisitions during 2018. These five stores contributed sales of $15.6 million in 2019 compared to $6 million in 2018.
Sales in the Rhode Island and Michigan markets are the result of new stores.acquisitions in 2018 and one acquisition in Michigan in 2019. Rhode Island sales increased $3.7 million from 2018 to 2019, an increase of 79% and sales in Michigan increased $6.2 million or 200% from 2018 to 2019. Increases in commercial sales were the primary driver of the overall increase in both Rhode Island and Michigan.
Maine was a new market in 2019 as a result of us opening a new store in February 2019 and the acquisition of two stores in May 2019.
Our revenue in the Nevada market increased by approximately $2.4 million in the year ended December 31, 2019 compared to year ended December 31, 2018, primarily due to the acquisition of our Reno location in February 2019. This location contributed $2.1 million in sales in 2019. Our Las Vegas store had an increase in sales of $329,000, or 17%, from 2018 to 2019. We continued to focus on adding commercial customers in the Nevada market.
Sales in the Washington market increased $344,000, or 37%, from 2018 to 2019, as we continued to focus on adding commercial customers in this location.
Oregon was a new market in 2019 with an acquisition of a new store in December 2019.
We opened our first store in Oklahoma in October 2018, followed by new store openings in February 2019 and November 2019. Oklahoma has been a significant new market for us by contributing sales of $11.8 million in 2019 compared to $463,000 in 2018. We have a strong presence in this market and opened our fourth location in March 2020. Oklahoma has generated strong sales in both commercial and non-commercial customers.
We had six stores (four in Colorado, one in Washington and one in Nevada) opened for the entire year ended December 31, 2019 and 2018 which are included in our same store sales table below. These stores generated $13 million in sales for the year ended December 31, 2019 compared to $9.5 million in sales for the same period ended December 31, 2018, an increase of 36.4%. The increase in sales in these six stores was primarily related to an increase in commercial sales.
Same Store Sales | ||||||||||||
Year ended | Year ended | |||||||||||
December 31, 2019 | December 31, 2018 | Variance | ||||||||||
Colorado | $ | 9,459,465 | $ | 6,665,197 | $ | 2,794,268 | ||||||
Washington | 1,283,169 | 939,231 | 343,938 | |||||||||
Nevada | 2,253,161 | 1,924,025 | 329,136 | |||||||||
Sales | $ | 12,995,795 | $ | 9,528,453 | $ | 3,467,342 |
Cost of Goods Sold
Cost of goods sold, consisting of cost of product sold and freight, for the year ended December 31, 2019 increased approximately $34.6 million, or 153.5%, to $57.2 million, compared to $22.6 million for the year ended December 31, 2018. The increase in cost of goods sold was due to the 174.9% increase in sales for the year ended December 31, 2018 to 2019 compared primarily due to the increase in the number of stores between 2018 and 2019 as noted above.
Gross profit was $22.6 million for the year ended December 31, 2019, as compared to $6.4 million for the year ended December 31, 2018, which was an increase of approximately $16.1 million, or 250.1%. Gross profit as a percentage of sales was 28.3% for the year ended December 31, 2019 compared to 22.2% for the year ended December 31, 2018. The increase in the gross profit margin percentage in 2019 was due to reduced pricing from vendors as a result of our increasing purchases from those vendors; and the sale to customers of products acquired by us in a large bulk purchase at a substantial discount in the first quarter of 2019. The increase in the gross profit percentage was also due to the slight decrease in non-cash inventory valuation adjustments of approximately $870,000 in 2018, compared to $809,000 in 2019. The inventory valuation adjustments consist of a reserve for obsolete inventory as well as the write down of inventory resulting from physical inventory counts and to its current fair market value where that is lower than cost.
Operating Expenses
Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating expenses were approximately $10.1 million for the year ended December 31, 2019 compared to approximately $5.2 million for the year ended December 31, 2018, an increase of approximately $4.9 million or 94%. The increase in store operating costs was due to the addition of ten new stores in 2019 and 9 new stores 2018. Sales increased 174.9%, but store operating expenses increased only 94%. Store operating expenses as a percentage of sales were 12.7% for the year ended December 31, 2019, compared to 18% for the year ended December 31, 2018, a 29% reduction of store operating costs as a percentage of revenues. Store operating costs were positively impacted by the acquisitions of new stores in 2018 and 2019 which have a lower percentage of operating expenses to sales due to their larger size and higher volume. The net impact, as noted above, resulted in lower store operating expenses as a percentage of sales.
Corporate overhead is comprised of share-based compensation, depreciation and amortization, general and administrative costs and corporate salaries and related expenses and was approximately $10.3 million for the year ended December 31, 2019, compared to approximately $5.5 million for the year ended December 31, 2018. Corporate overhead costs were 13% of sales for the year ended December 31, 2019 compared to 18.9% for the year ended December 31, 2018. The increase in salaries and related expenses from 2018 to 2019 was due to the increase in corporate staff, primarily accounting and finance, inventory management, sales, information technology and store operations to support both current and future operations and to increase stores commercial sales. Corporate salaries as a percentage of sales were 4.5% for the year ended December 31, 2019 and 5.7% for the year ended December 31, 2018. The decrease in this percentage was due to corporate staff costs not rising directly commensurate with the increase in sales. To the extent current corporate staff levels do not rise commensurate with an increase in sales in the future, the percentage of salaries to sales would decline.
General and administrative expenses, comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, were approximately $3.2 million for the year ended December 31, 2019 and approximately $1.6 million for the year ended December 31, 2018 with a majority of the increase in advertising and promotion and travel and entertainment. General and administrative costs as a percentage of revenue were 4% for the year ended December 31, 2019, compared to 5.5% for the year ended December 31, 2018. This percentage decreased because general and administrative costs did not increase commensurate with the increase in revenues.
Corporate overhead includes non-cash expenses, consisting primarily of depreciation and share-based compensation, which was approximately $3.5 million for the year ended December 31, 2019 compared to approximately $2.2 million for the year ended December 31, 2018.
Net Income (Loss)
Net income for the year ended December 31, 2019 was approximately $1.9 million compared to a loss of approximately $5.1 million for the year ended December 31, 2018, an increase of $6.9 million. Net income for 2019 compared to the net loss for 2018 was primarily due to the increase in sales being higher than the increase in cost of goods sold thereby increasing the gross profit margin and gross profit by $16.1 million in 2019. Store operating expenses increased by $4.9 million in 2019 compared to 2018, resulting in store operations contributing $11.2 million more in gross profit in 2019 than in 2018. As noted above, corporate overhead also increased $4.9 million over 2018.
Use of Non-GAAP Financial Information
Adjusted EBITDA is not a recognized term under generally accepted accounting principles in the U.S. (“GAAP”) and does not purport to be an alternative to net income (loss) as a measure of operating performance. We present Adjusted EBITDA because it is a primary measure used by management to evaluate operating performance. We believe the presentation of Adjusted EBITDA enhances our investors’ overall understanding of the financial performance of our business and provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. We also use this non-GAAP measure for internal planning and reporting purposes.
We define “Adjusted EBITDA” as Net income (loss) before interest, depreciation and amortization, as well as certain other items, such as lease termination fees, audit fees related to business combinations, non-cash operating lease expense, inventory valuation adjustments, amortization of debt discount and share-based compensation (option comp, warrant comp, stock issued for services).
We believe that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA measure when reporting their results. We compensate for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
Adjusted EBITDA have limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
● | Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on debt; |
● | Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; |
● | Adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and |
● | although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
Set forth below is a reconciliation of Adjusted EBITDA to net income (loss) for the quarter ended March 31, 2020 and 2019:
Three Months Ended | ||||||||
March 31, 2020 | March 31, 2019 | |||||||
Net income (loss) | $ | (2,093,518 | ) | $ | 229,421 | |||
Interest | 7,181 | 6,961 | ||||||
Depreciation and Amortization | 359,142 | 146,624 | ||||||
EBITDA | (1,727,195 | ) | 383,006 | |||||
Non-cash operating lease expense | 121,636 | 27,279 | ||||||
Share based compensation (option compensation, warrant compensation, stock issued for services) | 4,115,068 | 80,278 | ||||||
Inventory adjustments | 200,928 | - | ||||||
Amortization of debt discount | - | 124,946 | ||||||
Adjusted EBITDA | $ | 2,710,437 | $ | 615,509 | ||||
Adjusted EBITDA per share, basic | $ | .07 | .02 | |||||
Adjusted EBITDA per share, diluted | $ | .06 | .02 |
Set forth below is a reconciliation of Adjusted EBITDA to net income (loss) for the year ended December 31, 2019 and 2018:
Year ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Net Income (loss) | $ | 1,878,804 | $ | (5,073,755 | ) | |||
Interest | 45,191 | 23,565 | ||||||
Depreciation and Amortization | 1,044,553 | 351,070 | ||||||
EBITDA | 2,968,548 | (4,699,120 | ) | |||||
Lease termination fees | - | 35,000 | ||||||
Audit fees related to business combinations | - | 85,200 | ||||||
Non-cash operating lease expense | 16,375 | - | ||||||
Inventory valuation adjustments | 809,286 | 870,257 | ||||||
Amortization of debt discount | 356,306 | 989,601 | ||||||
Share based compensation (option comp, warrant comp, stock issued for services) | 2,490,535 | 1,895,219 | ||||||
Adjusted EBITDA | $ | 6,641,050 | $ | (823,843 | ) | |||
Adjusted EBITDA per share, basic | $ | 0.20 | $ | (0.04 | ) | |||
Adjusted EBITDA per share, diluted | $ | 0.17 | $ | (0.04 | ) |
LIQUIDITY AND CAPITAL RESOURCES
We believe that existing cash and cash equivalents are sufficient to fund existing operations for the next twelve months. Our primary requirements for liquidity have been to fund our working capital needs, capital expenditures, general corporate needs, as well as to invest in or acquire companies that are synergistic with our business. To date we have financed our operations through the sale of Common Stock, exercise of warrants and convertible debentures. Currently, we have no demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth and acquisitions. Based on our strategy we intend to raise additional capital in the future through equity offerings and/or debt financings.
For the Three Months Ended March 31, | For the December 31, | |||||||||||||||
2020 | 2019 | 2019 | 2018 | |||||||||||||
$ (Unaudited) | $ (Unaudited) | $ (Audited) | $ (Audited) | |||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 751,672 | $ | (2,461,569 | ) | $ | (3,339,260 | ) | $ | (1,541,031 | ) | |||||
Investing activities | (2,761,396 | ) | (5,519,723 | ) | (11,810,680 | ) | (6,367,311 | ) | ||||||||
Financing activities | 471,505 | (97,835 | ) | 13,489,403 | 21,333,058 |
Working Capital
As of March 31, 2020, we had working capital of approximately $31.7 million, compared to working capital of approximately $30.6 million as of December 31, 2019, an increase of approximately $1.1 million. The increase in working capital was due primarily to proceeds from the exercise of warrants totaling approximately $510,000 during the three months ended March 31, 2020.
As of December 31, 2019, we had working capital of approximately $30.6 million, compared to working capital of approximately $21.6 million as of December 31, 2018, an increase of approximately $9 million. The increase in working capital from December 31, 2018 to December 31, 2019 was due primarily to the proceeds from the sale of our common stock, par value $0.01, proceeds for a convertible debt offering and exercise of warrants totaling approximately $13.9 million. At December 31, 2019, we had cash and cash equivalents of approximately $13 million.
Operating Activities
Net cash provided by operating activities for the quarter ended March 31, 2020 was approximately $.75 million compared to net cash used by operating activities of approximately $2.5 million for the quarter ended March 31, 2019. 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 and amortization of debt discount. Non-cash adjustments totaled approximately $4.5 million and approximately $351,000 for the quarter ended March 31, 2020 and 2019, respectively. Non-cash adjustments had a positive impact on net cash used in operating activities for the three months ended March 31, 2020 than the same period in 2019. The net cash provided by operating activities of $752,000 for the quarter ended March 31, 2020 compared to the net cash used in operating activities for the quarter ended March 31, 2019, of approximately $2.5 million. This was primarily related to the net loss of approximately $2.1 million for the quarter ended March 31, 2020 due to net increases in inventory and prepaids of approximately $6.8 million offset by positive non-cash adjustments of approximately $4.5 million and increases in accounts payable, customer deposits and other current liabilities of approximately $5.3million.
Net cash used in operating activities for the quarter ended March 31, 2019 was $304,151.approximately $2.5 million. This amount was primarily related to net income of approximately $229,000 due to positive non-cash adjustments of approximately $351,000 and an increase in accounts payable and other current liabilities of approximately $1.8 million offset by increases of inventory of $574,399 offset by increases in account payableapproximately $4.1 million, accounts receivable of $303,760, payrollapproximately $215,000 and sales tax liabilitiesprepaids of $22,372 and non-cash expenses of $96,514 consisting of $86,333 stock option compensation, and depreciation of $9,902 and $279 bad debt expense.
Comparison of inception (March 6, 2014) through December 31, 2014 to twelve months ended December 31, 2015
The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from year-to-year.
Inception March 6, 2014 through December 31, 2014 | Year Ended December 31, 2015 | $ Variance | ||||||||||
Net revenue | $ | 1,202,366 | $ | 3,455,146 | $ | 2,252,780 | ||||||
Cost of goods sold | 809,039 | 2,351,836 | 1,542,797 | |||||||||
Gross profit | 393,327 | 1,103,310 | 709,983 | |||||||||
General and administrative expenses | 582,982 | 1,617,930 | 1,034,948 | |||||||||
Operating income (loss) | (189,655 | ) | (514,620 | ) | (324,965 | ) | ||||||
Other income (expense) | - | (14,136 | ) | (14,136 | ) | |||||||
(Loss) before income taxes | (189,655 | ) | (528,756 | ) | (339,101 | ) | ||||||
Net (loss) | $ | (189,655 | ) | $ | (528,756 | ) | $ | (339,101 | ) |
Revenue
Net revenue for the year ended December 31, 2015 increased $2,252,780 to $3,455,146 as compared to $1,202,366 for the period from inception March 6, 2014 through December 31, 2014. The increase was due to revenue from the retail stores that we acquired and opened during that period.
From Inception March 6, 2014 to December 31, 2014, the Company had 4 stores that generated net revenue of $1,202,365.
In the year ended December 31, 2015, the same 4 existing stores generated net revenue of $2,661,562. In the year ended December 31, 2015, 4 new stores generated net revenue of $793,584.
4 Existing Stores | 4 New Stores | |||||||||||||||||||
Inception | ||||||||||||||||||||
March 6, 2014 | ||||||||||||||||||||
through | Year Ended | Year Ended | ||||||||||||||||||
December 31, | December 31, | December 31, | Total | |||||||||||||||||
2014 | 2015 | $ Variance | 2015 | $ Variance | ||||||||||||||||
Net revenue | $ | 1,202,366 | $ | 2,661,562 | $ | 1,459,196 | $ | 793,584 | $ | 2,252,780 |
Cost of Goods Sold
Cost of sales for the year ended December 31, 2015 increased $1,542,797 to $2,351,836 as compared to $809,039 for the period from inception March 6, 2014 through December 30, 2014. The increase was due to increased sales.
Gross profit was $1,103,310 for the year ended December 31, 2015 as compared to $393,327 for the period from inception March 6, 2014 through December 31, 2014.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2015 increased $1,034,948 to $1,617,930 as compared to $582,982 for the period from inception March 6, 2014 through December 31, 2014. The increase was due mainly to increased payroll expenses, professional fees, travel expense and stock based compensation related to stock option grants and stock compensation for stock issued to employees.
Non-cash general and administrative expenses for the year ended December 31, 2015 totaled $256,177, with (i) depreciation of $16,436; (ii) stock based compensation of $87,967; (iii) stock compensation of $141,983; and (iv) bad debt expense of $9,791.
Non-cash general and administrative expenses for the period from inception March 6, 2014 through December 31, 2014 totaled $89,902, with (i) depreciation of $3,569; (ii) stock based compensation of $86,333; and (iii) bad debt expense of $2,887.
Other Income/ Expense
Other expense for the year ended December 31, 2015 was $14,136 as compared to other expense of $0 for the period from inception March 6, 2014 through December 31, 2014. The expenses consisted of start-up costs of $11,220 and interest expense of $2,916.
Net (Loss)
Net loss for the year ended December 31, 2015 was $528,756 as compared to a net loss of $125,605 for the period from inception March 6, 2014 through December 31, 2014. The increase in loss was primarily due to the increase in stock based compensation and professional fees.
Operating Activitiesapproximately $619,000.
Net cash used in operating activities for the year ended December 31, 20152019 was $1,135,639. This amountapproximately $3.3 million, compared to $1.5 million for the year ended December 31, 2018, an increase of approximately $1.8 million. Cash provided by 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 and changes in valuation allowances. Non-cash adjustment totaled approximately $4.4 million and approximately $3.4 for the years ended December 31, 2019 and 2018, respectively, resulting in the non-cash adjustments having a greater impact on net cash provided by operating activities for the year ended December 31, 2019 than the same period in 2018. Despite net income of $1.9 million and non-cash adjustments of $4.4 million for 2019, these positive adjustments were offset by increases in inventory of $10.5 million, increases in trade receivable of $3.8 million and increases in other current assets of $2.1 million offset by increases in trade accounts payable of $4.2 million, customer deposits of $2 million and other current liabilities of $500,000. For the year ended December 31, 2018 the net loss of $5.1 million was offset by non-cash adjustments totaling $3.4 million and the increases in current assets of $1.2 million were offset the increase in current liabilities of $1.3 million, so the net cash used in operating activities in 2018 was primarily related to the net loss.
Investing Activities
Net cash used in investing activities was approximately $2.8 million for the quarter ended March 31, 2020 and approximately $5.5 million for the quarter ended March 31, 2019. Investing activities in 2020 were primarily attributable to a net lossstore acquisition ($1.8 million) and vehicles and store equipment purchases ($652,000). Investing activities in for the quarter ended March 31, 2019 were primarily related to store acquisitions for which we paid approximately $5.0 million and the purchase of $528,756,vehicles and store equipment to support new store operations of approximately $430,000.
Net cash used in investing activities was approximately $11.8 for the year ended December 31, 2019 and approximately $6.4 million for the year ended December 31, 2018. The increase in 2019 was due to the multiple asset acquisitions throughout 2019 and the purchase of inventoryvehicles and store equipment to support new store operations. During 2019, we opened or acquired ten new stores and as such we incurred expenditures for store racking and displays, vehicles and other store furniture and fixtures. During 2018, we opened or acquired nine new stores and as such we incurred expenditures for store racking and displays, vehicles and other store furniture and fixtures.
Financing Activities
Net cash provided by financing activities for the quarter ended March 31, 2020 was approximately $472,000 and was primarily attributable to proceeds from the exercise of $1,003,855warrants of approximately $510,000, offset by increasesdebt principal payments of approximately $38,000. Net cash used in account payablefinancing activities for the quarter ended March 31, 2019 was $(98,000) and was primarily from proceeds from the exercise of $124,313, payroll and sales tax liabilitieswarrants of $39,725 and non-cash expenses$2,000, offset by debt principal payments of $294,677 consisting of stock based compensation of $229,950, inventory market value reserve of $38,500, depreciation of $16,436 and bad debt expense of $9,791.
LIQUIDITY AND CAPITAL RESOURCES
approximately $100,000.
As at June 30, 2016, we hadNet cash of approximately $400,000. We had cash of $699,417 as ofprovided by financing activities for the year ended December 31, 20152019 was approximately $13 million and a net working capital of approximately $1,630,040.
We will need to obtain additional financing in the future to continue to acquire and open new stores. We have financed our operations through the issuance ofrepresented proceeds from the sale of our common stock.stock and exercise of warrants, net of offering costs, of $13.9 million offset by payments of long-term debt of $460,000. Net cash provided by financing activities for the year ended December 31, 2018 was approximately $21.3 million and was comprised of proceeds from the sales of our common stock and exercise of warrants, net of offering costs of $12.9 million and proceeds from convertible debt of $8.9 million, net of payments of long-term debt of $455,000.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2015 was $1,978,214. This amount reflects proceeds from the 20152019 Private Placements, along with proceeds from short-term borrowings of $48,714 and long-term debt of $23,999.
2014 Private Placement
In March 2014, we raised $600,000 from the sale of 1,000,000 shares of our common stock to seventeen (17) accredited investors, at a price of $.60 per share. All securities sold in the 2014 Private Placement were arranged by officers and directors and no commissions or other remuneration was paid to any person in connection with such sales. Proceeds from this sale were utilized to effect the acquisition of the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which we completed on May 29, 2014, through our wholly-owned subsidiary, GrowGeneration Pueblo Corp., a Colorado corporation. The purchase price was $499,976, consisting of $243,000 in goodwill and $273,000 in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts payable and $355 in customer deposits.
2015 Private Placements
In April 2015, we raised $180,000 from the sale of 300,000 shares of our common stock to four (4) accredited investors, at a price of $.60 per share. All securities sold in this private placement were arranged by officers and directors and no commissions or other remuneration was paid to any person in connection with such sales. We used the proceeds raised in this offering for inventory purchases and working capital.
On March 12, 2015June 26, 2019, we entered into an agreement with Cavu Securities LLC,completed a FINRA Member broker dealer (“Cavu”), pursuant to which we engaged Cavu onprivate placement of a non-exclusive basis to act as our lead placement agent fortotal of 4,123,257 units of the sale of up to $4,200,000 of our units. Each unit was offeredCompany’s securities at athe price of $.70$3.10 per unit. Each unit consisted of (i) one share of our common stockCommon Stock and (ii) one 5 year3-year warrant, each entitling the holder to purchase one half share of Common Stock, at an exercisea price of $0.70$3.50 per share. The units were offered and sold on a “best-effort” basis. On October 30, 2015, we closed the private placement withCompany raised a total of 2,465,001$12,782,099 from 19 accredited investors.
2018 Private Placements
On January 17, 2018, we completed a private placement of a total of 36 units sold and realized gross proceeds of $1,725,501. We paid Cavu total compensation for its servicesour securities at the price of $250,000 per unit. Each unit consisted of (i) $73,295a 0.1% unsecured convertible promissory note in commissions;the principal amount of $250,000, and (ii) five-year warrantsa 3-year warrant entitling the holder to purchase 142,80037,500 shares of our common stock, at an exercisea price equal to $0.70of $.01 per share; and (iii) 77,833 sharesshare or through cashless exercise. We raised gross proceeds of our common stock.
2016 Private Placement$9,000,000 from 23 accredited investors in the offering.
On April 29, 2016, the Company sold 890,714May 9, 2018, we completed a private placement of a total of 33.33 units to 10 accredited investorsof its securities at a price of $0.70$300,000 per unit with eachto 3 accredited investors. Each unit consistingconsisted of one(i) 100,000 share of our common stock and one(ii) 50,000 3-year warrant to purchase one share of common stock at an exercise price of $.70$.35 per share. The warrants have a five year life forWe raised an aggregate of $10,000,000 gross proceeds of $623,500. We paid Cavu, our placement agent, a total compensation for its services of (i) five-year warrants to purchase 50,000 shares of our common stock, at an exercise price equal to $0.70 per share; and (ii) 50,000 shares of our common stock.
Our contractual cash obligations as of December 31, 2015 are summarized in the table below:offering.
Less Than | Greater Than | |||||||||||||||||||
Contractual Cash Obligations | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Operating leases | $ | 558,670 | $ | 153,510 | $ | 258,860 | $ | 146,300 | $ | - | ||||||||||
Note payable | 27,771 | 7,574 | 20,197 | - | - | |||||||||||||||
$ | 586,441 | $ | 161,084 | $ | 279,057 | $ | 146,300 | $ | - |
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATESCritical Accounting Policies, Judgments and Estimates
Use of Estimates
The applicationpreparation of GAAP involvesthese consolidated financial statements in conformity with accounting principles generally accepted in the exerciseUnited States (U.S. GAAP) requires management to make a number of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgmentsassumptions 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 various other factorsmanagement judgment. Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance when we determine that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.potential for recovery is remote. An allowance for doubtful accounts of approximately $291,372 has been reserved as of March 31, 2020 and December 31, 2019.
CashWe 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 Cash Equivalents- We classify highly liquid temporary investments withevaluates the financial condition of its customers and maintains an original maturityallowance for doubtful accounts. As of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. AtMarch 31, 2020, and December 31, 2015 all deposit balances were fully insured by the FDIC. We2019, we do not believe that we have not experienced any losses in such accounts and management believes it is not exposed to any significant risk for cash on deposit.credit risk.
Accounts Receivable and Revenue -Revenue is recognized on the saleFair Value of a product when the product is shipped, which is when the risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. Financial Instruments
The majoritycarrying amounts of our salesfinancial instruments, including accounts receivable and accounts payable, are cash or credit card; however, we occasionally extend termscarried 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 customers. Accounts receivable are reviewed periodically for collectability.current financial condition and liquidity.
Inventories -Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at the lower of cost or market. The reserve for obsolete inventory was $13,500 at December 31, 2014 and $52,000 at December 31, 2015.Long-lived Assets
Property and Equipment - Property and equipment are stated at cost. Assets acquired held under capital leases are initially recorded at the lower of the present value of the minimum lease payments discounted at the implicit interest rate (8% for assets currently held under capital lease) or the fair value of the asset. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over an estimated useful life based on the particular asset. Assets acquired under capital lease are depreciated over the lesser of the useful life or the lease term. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Goodwill and Intangible Assets -We evaluate the carrying value of goodwill, intangible assets, and long-lived assets during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, (4) continued losses from operations, (5) continued negative cash flows from operations, and (6) the suspension of trading of the Company’s securities. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.
The result of our 2015 annual goodwill impairment testing validates that the value of the goodwill has not been impaired as of December 31, 2015. TheCompany based its testing on the following factors:
1. Our stores which we purchased in 2014 began operations in 2008;
2. The stores grew from 1-4 stores from 2008-2014 and at the end of 2015, we had 8 total stores;
3. A loyal customer base expanded in 2015;
4. A list of reliable suppliers are all in good standing; and
5. Our business is growing and expanding.
Long Lived Assets– We reviews our long-lived assets for impairment annuallyon an annual basis or whenwhenever events or changes in circumstances indicate that the carrying amount of an assetamounts may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. AssetsAn asset is considered to be disposed of and assets not expected to provide anyimpaired when the anticipated undiscounted future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
Fair Value Measurements and Financial Instruments -ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuationcash flows of an asset or liabilitygroup 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 the measurement date. The three levels are defined as follows:March 31, 2020 and December 31, 2019.
Level 1 - Inputs toRevenue 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 valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.merchandise has been delivery.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.Stock-based Compensation
Level 3 - InputsWe 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 the valuation methodology are unobservable and significant tovest. We estimate the fair value measurement.
of stock options and stock purchase warrants using the Black-Scholes option pricing model. The carryingestimated value of cash, accounts receivable, investment inthe portion of a related party, accounts payables, accrued expenses, duestock-based award that is ultimately expected to related party, notes payable,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 convertible notes approximates their fair values due to their short-term maturities.
Derivative financial instruments -We evaluate all of its financial instruments to determine ifthe extent that actual forfeitures differ from estimated forfeitures, such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments thatdifferences are accounted for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.
31
RECENTLY ISSUED ACCOUNTING STANDARDS
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 derivative instrumentnew 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 initially recordedeffective 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 March 31, 2020.
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 its fair value through earnings and is then re-valued at each reporting date, with changes in(ii) when the fair value reportedoption 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 operations. For stock-based derivativehedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial instruments,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 usesas 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.
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 weighted average Black-Scholes-Merton option pricingnew forward-looking expected loss model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classifiedthat generally will result in the balance sheetearlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the losses will be recognized as current or non-current based on whether or not net-cash settlementallowances rather than as reductions in the amortized cost of the derivative instrument could be requiredsecurities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within twelve monthsthose 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 balance sheet date.adoption of this guidance on the Company’s consolidated financial statements.
Stock Based Compensation– WeIn 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 share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of our common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by us at the grant date, baseda material impact on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, we recognize stock compensation costs utilizing the fair value methodology over theCompany’s consolidated financial statements or related period of benefit. Grants of stock to non-employees and other parties are accounted for in accordance with the ASC 505.financial statement disclosures.
Background
GrowGeneration Corp. was incorporatedWe believe we are the largest chain of stand-alone hydroponic garden centers by revenue and number of stores in Colorado in 2014 in order to acquire 4 existingthe United States. We also believe we are a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic supply stores. Ingardening, based on the past year,knowledge and estimate of management. We have a diverse customer base, with commercial customers (licensed growers) constituting the majority of our total sales. As of June 9, 2020, we have grown intoown and operate a chain of 927 retail and commercial hydroponic/gardening stores, eight (8)centers in 10 U.S. states. We also operate an online e-commerce store, growgeneration.com. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth, in terms of increasing same store sales and expanding customer base, and acquisitions.
Our retail operations are driven by our high-quality products, value-add knowledgeable staff and fast distribution capabilities. As of June 9, 2020, we employ horticulturists that we have branded “Grow Pros”. Our operations span over 300,000 square feet of retail and warehouse space. During COVID-19, we have been deemed an “essential” supplier to the agricultural industry and, as such, we remain open and continue our operations. In the first quarter of 2020, our revenue was $33 million, which are locatedincreased 152% from the same period of the prior year, and in Colorado2019, our revenue was $80 million, which increased 175% compared to 2018.
We operate our business through the following sales channels:
● | Retail: 27 retail and commercial hydroponic/gardening centers focused on serving growers and cultivators. |
● | Commercial: Sales to commercial customers, including expert growers and cultivators, and provide them with advice from sales representatives with the requisite expertise (whom we brand as “GrowPros”) to serve their specific needs. |
● | E-Commerce: Our existing e-commerce operation, growgeneration.com (previously HeavyGarden.com and GrowGen.Pro), is currently being developed and rebranded into an omni-channel sales approach to enable e-commerce at all of our locations, which we intend to launch in late June 2020. |
● | Distribution: The majority of our stores are also functioning as warehouse, distribution and fulfillment centers for directing products to our store locations and to the retail, wholesale and mass hydroponic markets. |
Growth Strategy - Store Acquisitions and one (1)New Store Openings
Our growth strategy is to expand the number of which is located in California.our retail and commercial operations throughout the United States. The hydroponic/gardening industryhydroponic retail landscape is fragmented, which we believe has allowed us to acquire the “best of breed” locations in which typical retail stores are small family owned businesses, usually consistingthe United States. In addition, the company has a 2-year roadmap to open a number of a single location. This is particularly truenew locations in Colorado and Californiaunderserved markets throughout the country. In addition to the 10 states where we are currently operate. We intendoperating, we have identified Arizona, Illinois, Pennsylvania, New York, New Jersey and Missouri as new markets where we plan to open or acquire additional retail storesa new operation. In 2019, we opened and increaseacquired ten locations and expand our footprint in these states. Ironically, recent water shortages in the West Coast are putting pressure on food growers to use as little water as possible which also bodes well for hydroponic supply companies like GrowGeneration, as hydroponics is widely considered to require less water for grow operations.first quarter of 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and acquired Healthy Harvest located outside of Miami, FL.
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Products and Private Label Strategy
GrowGeneration stores offer essential supplies to theWe sell a variety of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic and gardening, industry, including medium (i.e., farming soil), industry-leading hydroponic equipment, power-efficient lighting, plant nutrients, and thousands of additional products used by professional growers and specialty cultivation operations. We offer our products through our retail stores. GrowGeneration is also actively seeking the establishment of a brand of private labeled products, which will be sold through GrowGeneration outlets.
Markets
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 innovativeas well as other indoor and outdoor growing techniquesproducts. Our supply chain includes several thousand stock keeping units (“SKUs”) across 12 product departments. Many of our products are consumables leading to produce specialty cropsrepeat orders by our customers. Consumable products are mainly nutrients and additives that feed the plants on a recurring basis. Our strategy is to supply products to two groups of customers: commercial growers and smaller growers that require a local center to fulfill their daily and weekly growing needs.
We are also actively developing a line of private label products that we intend to sell through our garden centers under brands we own or control. Our strategy is to deliver high-quality products at a lower cost, and higher margin to us. To further our private label strategy, we acquired various trademarks in highly controlled environments.March 2019 to aid in branding our ‘in house’ products to our customers. We introduced our first private labeled products under the Sunleaves brand in first quarter of 2020. This enables theminitial offering encompassed a broad variety of products ranging from trellis netting to produce crops at higher yields without havingplastic pots and organic nutrients. We expect to compromise quality, regardless ofintroduce additional private label products during 2020 and 2021. We believe that expanding our private label offerings will have a positive impact on our margins and profitability in the season or weather and drought conditions.near term.
Markets
Our target market segments include Home Growersstores sell thousands of organic vegetableproducts, including nutrients, growing media, advanced indoor and fruit Growers (small farms, home gardengreenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that serve multi-purposes and are designed and intended for growing a wide range of plants. Hydroponics is a specialized method of growing plants using mineral nutrient solutions in a water solvent, as opposed to soil. This method is typically used inside greenhouses to give growers restaurantsthe ability to better regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. Hydroponic growers farmer markets), the Do-it Yourselfers (home flowerbenefit from these techniques by producing crops faster and plant growers/ mass market and growers in the cannabis related market (Dispensaries, Cultivators, Caregivers).
with higher crop yields per acre as compared to traditional soil-based growers. Indoor growing techniques have primarily been used to cultivate plant-based medicines. Plant-based medicines often require high-degreeand hydroponic products are being utilized in new and emerging industries or segments, including the growing of regulationcannabis and controls including government compliance, security, and crop consistency, making indoor growing techniques a preferred method. Cultivators of plant-based medicines often make a significant investment to design and build-out their facilities. They look to work with companies such as GrowGeneration that understand their specific needs and can help mitigate risks that could jeopardize their crops. Plant-based medicines are believed to be among the fastest-growing market in the U.S. and several industry pundits believe that plant-based medicines may even displace prescription pain medication by providing patients with a safer, more affordable alternative.
Indoor growing techniques, however, are not limited to plant-based medicines. Verticalhemp. In addition, vertical farms producing organic fruits and vegetables are also beginning to emerge in the marketutilize hydroponics due to a rising shortage of farmland andas well as environmental vulnerabilities including drought, other severe weather conditions and insect pests. Indoor growing techniques enable cultivators
According to a report by Markets and Markets on the hydroponics market, the global hydroponics system market is estimated to grow crops all-year-roundfrom an estimated $8 billion in urban areas,2019 to approximately $16 billion by 2025, at a compound annual growth rate of approximately 12%. In the U.S. hydroponics market, the legalization of cannabis for medicinal and take up less ground while minimizing environmental risks. Indoor growing techniques typically require a more significant upfront investment to designnon-medicinal use and build-out theseincreased number of licensed cultivation facilities than traditional farmlands. If new innovations lower the costsare driving demand for indoor growing,hydroponic products. Currently there are comprehensive, publicly available medical marijuana/cannabis programs in 33 states and the costsDistrict of Columbia, including 11 states that also permit recreational sales to operate traditional farmlands continue to rise, then indoor growing techniques may be a compelling alternativeadults. We believe that the growth in licensed cultivation facilities and the increase in organically grown produce will increase the demand for hydroponics products generally. Further, the broader agricultural industry.current landscape for retail stores focusing on selling hydroponic garden products is very fragmented and presents opportunities for consolidation.
We have a diverse customer base, with commercial customers constituting the majority of our total sales. We cater to commercial and home cultivators growing specialty crops, including growing cannabis and hemp, along with organic herbs and leafy green vegetables. We believe that commercial growers choose to source their hydroponic gardening supplies from us because we understand their specific needs and employ sales representatives with the requisite expertise (whom we brand as “GrowPros”) to serve expert growers and cultivators by helping them reduce any potential challenges in utilizing hydroponic products to grow their crops. Based on our customer profile, we believe that we are well positioned to benefit from growth of the overall hydroponic market. In addition, we believe that the highly fragmented hydroponics retail market and numerous single store operators presents us with a significant opportunity to execute our roll-up strategy to expand and deepen our geographic footprint.
Research and Development
The company hasWe have not incurred any research and development expense as of today.during the fiscal years ended December 31, 2019 and 2018.
Customers and Suppliers
Our key customers vary by state and are expected to be more defined as the company moveswe move from itsour retail walk-in purchasing sales strategy to serving cultivation facilities directly, and underwhich we expect will result in predictable purchasing activity. We have a diverse customer base, with commercial customers constituting the majority of our total sales. We cater to commercial and home cultivators growing specialty crops, including growing cannabis and hemp, along with organic herbs and leafy green vegetables. Currently, none of our customers accounted for more than 5% of our sales.sales in the years ended December 31, 2019 and 2018.
In 2019, we created a commercial division with a dedicated sales and support team to sell and service large commercial customers, who are primarily licensed growers of medicinal and non-medicinal cannabis. As of the first quarter of 2020, our commercial division services over 500 commercial accounts, who collectively contributed approximately $17 million in revenue or approximately 20% of our sales in 2019. We have identified over 14,000 licensed hemp and cannabis growers in the United States, and believe there is significant room for us to expand our base of commercial customers.
Our key suppliers include several manufacturers and distributors such as HydroFarm, BWGSFoxFarm Fertilizer, Canna, USA Mills Nutrients, Hawthorne Garden Supply, Hydrofarm, and Sunlight Supply to product specific suppliers such as Botanicare, General Hydroponics and Can Fan USA.others. All the products purchased and resoldsold are applicable to indoor and outdoor growing for organics, greens, and plant-based medicines.
Demand for Products
Demand for indoor As of December 31, 2019 and outdoor growing equipment is currently high due to legalization2018, two suppliers represented 51% and 56% of plant-based medicines, primarily Cannabis, which is mainly due to equipmentour purchases, for build-out and repeat purchases of consumable nutrients needed during the growing period. This demand is projected to continue to grow as a result of the supporting state laws in 24 states and the District of Columbia. Continued innovation and more efficient build-out technologies along with larger and consolidated cultivation facilities is expected to further expand market demand for GrowGeneration products and services. We expect the market to continue to segment into urban farmers serving groups of individuals, community cultivators, and large-scale cultivation facilities across the states. Each segment will be optimized to different distribution channels that GrowGeneration currently provides.respectively. We are of the opinion that asthe loss of either supplier would not have a material adverse impact on our volume increases,business, because both suppliers provide the same products and we will obtain volume discounts on purchasing that should allow us to maximize both our revenues and gross margins.maintain direct manufacturing agreements with vendors.
E-Commerce Strategy
The Company isWe are currently developing itsand rebranding our existing e-commerce websiteoperation, HeavyGarden.com and portal,www.growgeneration.com. The site plansGrowGen.Pro, as growgeneration.com, which will be an omni-channel sales approach to offer for sale hydroponic, specialty and organic gardening products. Online shoppers are ableenable e-commerce at all of our locations, providing our customers convenient ways to shop from product departments, from nutrientswhen and how they feel comfortable. We intend to lightinglaunch this strategy in late June 2020. This omni-channel approach will provide 24/7 availability of products and allow our customers to hydroponic“Buy Online and greenhouse equipment, delivering an easy and quick method to find the products that they want to purchase. Our e-commerce site has been designed to appeal to both the professional grower, as well as the home gardener/hobbyist. Each product listed on the site contains product descriptions, product reviews and a picture so the consumer can make an informed and educated purchase. Our product filters allow the consumer to search by brand, manufacturer, or by function such as wattage. Designed as an information portal as well as an e-commerce store, the consumer will find videos, articles, blogs and other relevant content, all generated by Grow Generation’s internal staff, which we call our “Grow Pros”. The GrowGeneration shopperPick Up In Store.” Customers will be able to shop online 24/7in all product departments and if they chooseaccess descriptions, reviews and pictures of our products. Our customers can order online and receivethey can choose to either have their products delivered directly to their grow operationgrowing facility (usually within 48 hours) or home, order online andthey can pick up at one of the GrowGeneration retail stores, or simply use our site as a resource and shop with our Grow Prosproducts at one of our retail locations. Google advertising, social media andstores (usually within 24 hours). We believe that this omni-channel initiative will result in store advertising are the primary advertising tools we will use to drive traffic to www.growgeneration.com
Goals and Strategy
Our goal is to become one of the nation's largest providers of equipment and suppliesa more seamless, convenient shopping experience for growing organics, herbs and greens and plant-based medicines. We intend to achieve our goal by implementing the following strategies:
1. Engage with cultivation facilities and secure exclusive supplier contracts;
2. Own, operate and expand regional retail stores to service and support the operations of professional and home growers;
3. Develop and grow our e-commerce platform;
4. Establish a national sales team;
5. Establish a brand of “house” or white-labeled products which we would sell exclusively;
6. Assemble the most knowledgeable staff and leadership team; and
7. Acquire additional products and services that are essential to our customers and will drive financial results.
Distribution Channel
We have built a supply chain that currently spans through 27 locations across 10 states. We are in the process of building several 20,000+ square feet store operations that will serve as fulfillment service centers, in addition to serving the local retail and commercial customers. These stores and fulfillment centers will ship directly to a farm or home as well as to any commercial hydroponic store (including ours and others) in the United States. We have a fleet of trucks that allow us to deliver high-margins.within the proximity of any of these locations.
TABLE OF CONTENTSSeasonality
We do not have any material seasonal impacts.
Competition
The markets in which we sell our products are highly competitive. Our key competitors include many local and national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, as well as online product resellers and large online marketplaces such as Amazon.com and EBay.eBay. Our industry generally referred to “Hydroponic Gardening Stores” is a highly fragmented industry with over 1,000 retail outlets throughout the U.S. We compete with companies that have greater capital resources, facilities and diversity of product lines. Our competitive advantages, against these stores, are primarily based uponcompetitors may also introduce new hydroponic growing equipment, manufacturers may sell equipment direct to consumers, and our distributers could cease sales of product to us.
Notwithstanding the foregoing, we believe that our pricing, inventory and product availability and overall customer service. Asservice provide us with the ability to compete in this marketplace. We believe that we have the following core competitive advantages over our competitors:
● | We offer a one-stop shopping experience to all types of growers by providing “selection, service, and solutions”; |
● | We provide end-to-end solutions for our commercial customers from capex built-out to consumables to nourish their plants; |
● | We have a knowledge-based sales team, all with horticultural experience; |
● | We offer the options to transact online, in store, or buy online and pick up; |
● | We consider ourselves to be a leader of the products we offer, from launching new technologies to the development of our private label products; and |
● | We have a professional team for mergers and acquisitions to acquire and open new locations and successfully add them to our company portfolio. |
In addition, as we increase our number of stores and inventory per store, we areexpect to be able to purchase a large amountlarger amounts of inventory at a lower volume sale price, and accordingly,prices, which we are ableexpect will enable us to price competitively and deliver the products that our customers are seeking. We also believe, thatcompete on supply chain competency, field sales support, in-store sales support, the consistencystrength of a national brandour relationships with major manufacturers, distributors and operating in multiple states, will give our customers confidence to shop with us.advertising.
Based on our knowledge and communication with our suppliers, we do not believe our suppliers sell directly to the retail market or our customers.
Intellectual Property and Proprietary Rights
Our intellectual property is primarily in the formconsists of our brands and their related trademarks, domain names and domain names.websites, customer lists and affiliations, product know-how and technology, and marketing intangibles. We also hold rights to website addresses related to our business including websites that arewww.growgeneration.com which we actively useduse in our day-to-day business suchbusiness. A list of the trademarks we owned are aswww.GrowGeneration.com follows:Blueprint Controllers, Carbide, DuraBreeze, Elemental Solutions, GrowGeneration, GrowXcess, GuardenWare, Harvester’s Edge, HeavyGardens, Ion, MixSure+, OptiLUME, Power Matrix, Smart Support, Sunleaves, Sunspot, The Fountain for Automation, VitaPlant, andWhere The Pros Go To Grow. We ownhave trademark applications pending in the federally registered service markUnited States for “GrowGeneration”. WeGROWGEN, GROWGENERATION, GROWGENERATION Design, HYDROTHRIVE, and CHUBBY BUDDHA; and we also owned the federally registeredhave trademark “Where the Pros Go to Grow”.applications pending in Canada for GROWGEN, GROWGENERATION, and GROWGENERATION Design.
Government Regulation
We have a policy of entering into confidentialitysell products, including hydroponic gardening products, that end users may purchase for use in new and non-disclosure agreements with our employees and some of our vendors and customers as necessary.
Government Regulation
While there is no governmental regulation relating toemerging industries or segments, including the sale of hydroponic equipment or soil and nutrients that we sell, there are laws and regulations governing the cultivation and salegrowing of cannabis and related products. Currently, there are over twenty four states plushemp, that may not grow or achieve market acceptance in a manner that we can predict. The demand for these products depends on the Districtuncertain growth of Columbiathese industries or segments.
In addition, we sell products that have laws and/end users may purchase for use in industries or regulation that recognize in one form or another legitimate medical uses forsegments, including the growing of cannabis and hemp, that are subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations and consumer use of cannabis in connection with medical treatment. About a dozen otherperceptions. For example, certain countries and 33 U.S. states are considering legislation to similar effect. As ofhave adopted frameworks that authorize, regulate, and tax the date of this Prospectus, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation, processing, sale, and use of cannabis for personalmedicinal and/or non-medicinal use, while the U.S. Controlled Substances Act and the laws of other U.S. states prohibit growing cannabis. In addition, with the passage of the Farm Bill in December 2018, hemp cultivation is prohibitednow broadly permitted. The Farm Bill explicitly allows the transfer of hemp-derived products across state lines for commercial or other purposes. It also puts no restrictions on the basissale, transport, or possession of federal law and may or may not be permitted onhemp-derived products, so long as those items are produced in a manner consistent with the basis of state law. Active enforcementWe believe the recent passage of the current federal regulatory position2018 Farm Bill will allow the Company to expand its marketplace opportunities.
Our gardening products, including our hydroponic gardening products, are multi-purpose products designed and intended for growing a wide range of plants and are purchased by cultivators who may grow any variety of plants, including cannabis and hemp. Although the demand for our products may be negatively impacted depending on cannabishow laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop, we cannot reasonably predict the nature of such developments or the effect, if any, that such developments could have on a regional or national basis may directly and adversely affect the willingness of customers of GrowGeneration to invest in or buy products from GrowGeneration. Active enforcement of the current federal regulatory position on cannabis may thus directly or indirectly adversely affect GrowGeneration operations.our business.
Employees
As of the date of this Prospectus,June 9, 2020, we have 19 full time254 total employees, 215 of which are full-time employees and 1739 of which are part-time employees. We planNo employees are subject to add sales representatives in all states that we operate a retail store.collective bargaining agreements.
Principal OfficesProperties
Our principal offices are located at 503 North Main St,930 W 7th Ave, Suite 740, Pueblo,A, Denver, CO 81003, which is80204. As of December 31, 2019, we leased six (6) facilities in the officeState of our accountants. We do not pay any rent for such office. We leaseColorado, eight (8) stores in the stateState of Colorado andCalifornia, one (1) in the State of CaliforniaNevada, one (1) in the State of Washington, one (1) in the State of Oregon, one (1) in the State of Rhode Island, four (4) in the State of Oklahoma, four (4) in the State of Michigan, three (3) in the State of Maine, two (2) in the State of Florida, all for our corporate and retail operations. Information relating to our stores is set forth inIn total the table below:Company leases approximately 357,900 square feet of space, which consists primarily of 6,900 feet of corporate office space, 104,000 square feet of warehouse space and 247,000 square feet of store space.
Store 1 | Store 2 | Store 3 | Store 4 | Store 5 | Store 6 | Store 7 | Store 8 | Store 9 | ||||||||||
Pueblo West | Downtown | Southside | Canon City | Trinidad | Conifer | Colorado Springs | Santa Rosa | Denver 4731 Lipan Ave | ||||||||||
Street | 609 Enterprise, Unit 150 | 109, 111 & 113 W 4th Street | 2704 S. Prairie Ave, Suite C | 520 Main Street | 2395 Nevada Ave. | 26591 Main Street | 310-H/I South 8th Street | 353 College Ave | ||||||||||
City | Pueblo West | Pueblo | Pueblo | Canon City | Trinidad | Conifer | Colorado Springs | Santa Rosa | Denver | |||||||||
State & Zip | CO, 81007 | CO, 81003 | CO, 81005 | CO, 81212 | CO, 81082 | CO, 80433 | CO, 80904 | CA, 94501 | CO 80211 | |||||||||
Beginning | 5/27/2014 | 3/1/2015 | 10/1/2014 | 6/1/2014 | 12/1/2014 | 6/11/2014 | 9/1/2015 | 2/1/2016 | 3/1/2016 | |||||||||
Ending | 4/30/2020 | 2/28/2018 | 9/30/2017 | 5/31/2017 | 12/31/2017 | 4/30/2019 | 12/31/2020 | 12/31/2017 | 3/1/2019 | |||||||||
Renewal Option | none | month-to-month | agreed upon terms | none | 3yrs | month-to-month | 64 months | 24 month renewal option | 2 years with renew option | |||||||||
Square Footage | 3300 | 3300 | 1800 | 2500 | 3000 | 3000 | 3360 | 3300 | 4500 | |||||||||
Monthly rent1 | $2,100 | $1,500 | $950 | $900 | $1,000 | $2,400 | $3,780 | $5,600 | $3,650 |
1Some of our leases have increases during the term of the lease. Our Pueblo West rent increases to $2,300 per month in May 2016; our Pueblo Downtown, SouthsideExecutive Officers and Trinidad rent does not increase; our Canon City rent increases to $950 per month in June 2016; our Conifer rent increases to $2,500 per month in May 2016; and our Colorado Springs rent increases to $2,940 per month in November 2017, to $3,080 in November 2018 and to $3,220 in November 2019.
All directors hold office for one-year terms until the election and qualification of their successors. Officers are appointed by our board of directorsBoard and serve at the discretion of the board, subject to applicable employment agreements. The following table sets forth information regarding our executive officers and the members of our board of directors.Board.
Name | Age | Position | ||
Darren Lampert | Chief Executive Officer and Director | |||
Michael Salaman | President and Director | |||
Chief Operating Officer, Executive VP | ||||
Monty Lamirato | 64 | Chief Financial Officer | ||
Stephen Aiello | Director | |||
Director | ||||
Paul Ciasullo | 61 | Director |
DarrenLampert has been our Chief Executive Officer and a Director since our inception in 2014. Mr. Lampert began his career in 1986 as a founding member of the law firm of Lampert and Lampert (1986-1999), where he concentrated on securities litigation, NASD (now FINRA) compliance and arbitration and corporate finance matters. Mr. Lampert has represented clients in actions and investigations brought before government agencies and self-regulatory bodies. Mr. Lampert has spent the past 15 years working as a portfolio manager and proprietary trader at Schonfeld Securities (1999-2005), Schottenfeld Group (2007) and Incremental Capital (2008-2010). From 2010 to 2014, Mr. Lampert was a private investor. Mr. Lampert graduated in 1982 with a Bachelor of Science degree in business administration from Ithaca College. Mr. Lampert received a JD from Bridgeport University School of Law in 1985. Mr. Lampert was admitted to practice law in New York in 1986 and is also admitted to practice before the United States District Courts for the Southern and Eastern Districts of New York.
Michael Salaman has been our President and a Director since our inception. MichaelMr. Salaman served as the Chairman of Skinny Nutritional Corp. sincefrom January 2002 to March 2014 and as Chief Executive Officer and President of Skinny Nutritional Corp. sincefrom June 2010.2010 to March 2014. He also served as Chief Executive Officer of Skinny Nutritional Corp. Skinny Nutritional Corp. filed for Chapter 11 Bankruptcy protection in 2013 and the assets were sold to a private equity firm in March 2014. Mr. Salaman has over 20 years’ experience in the area of start-ups, new product development, distribution and marketing. Mr. Salaman began his business career as Vice President of Business Development for National Media Corp., an infomercial marketing company in the United States from 1985-1993. From 1995-2001, Mr. Salaman started ana Digital Media company called American Interactive Media, Inc., a developer of Web TV set-top boxes and ISP services. In 2002, Mr. Salaman became the principal officer of that entity and directed its operations as a marketing and distribution company and in 2005 focused its efforts in the enhanced water business. Mr. Salaman received a Bachelor of Business Administration degree in business from Temple University in 1986.
Irwin LampertTony Sullivan joined the Company as Chief Operating Officer and Executive Vice President in November 2019. His initiatives include, but are not limited to, providing support to all GrowGeneration stores; adding new locations; integrating our e-commerce, commercial and store supply channels; designing, building and implementing our company strategy, business strategies, plans and procedures; setting comprehensive goals for business growth and success; developing, standardizing and deliver critical key performance indicators, metrics and business acumen across organization. From 2017 to recently, Mr. Sullivan served as Executive Vice President and Chief Operating Officer of Forman Mills, a $300 million Private Equity sponsored business. From 2015 to 2017, he was Senior Vice President Operations for Dollar Express, a $500 million carve-out of 330 Family Dollar stores in 36 states, Private Equity sponsored business. From 2006 to 2015, he was employed at Anna’s Linens for 9+ years where he served in several operating roles, most recently as SVP, Chief Operating Officer. Previously Mr. Sullivan served for 20+ years at Foot Locker Inc. leading 2,100 + stores, 3 Divisions (Foot Locker, Kids Foot Locker and Foot Action) over $2.5B in sales as VP Store Operations. Mr. Sullivan is known and respected for his expertise in wide-range governance, hypergrowth, and macro-level strategic management methodologies, with an emphasis on identifying and addressing business infrastructure to position organizations for expansion and profitability. He has been ourachieved outstanding success scaling businesses for rapid profits and market dominance in start-ups, private, PE-backed, and public companies with revenues up to $2.5 billion.
Monty Lamiratojoined the Company as Chief Financial Officer and Secretary in May 2017. From March 2009 to just prior to joining GrowGen, Mr. Lamirato worked as an independent consultant providing chief financial officer and financial reporting consulting services to companies of various sizes in a Director since our inception.variety of industries. In this capacity, he prepared and reviewed SEC filings and GAAP-compliant financial statements, provided technical accounting assistance, designed and developed inventory and logistics systems for inventory management, developed scalable accounting and reporting systems, internal accounting controls and annual budgets and evaluated short-term investment alternatives for idle cash. From March 2013 until November 2016, Mr. LampertLamirato served as Chief Financial Officer of Strategic Environmental & Energy Resources, Inc., a publicly traded holding company that provides a wide range of environmental, renewable fuels and industrial waste stream management services, where he was responsible for all SEC filings, prepared all GAAP and SEC compliant financial statements and developed financial and operating metrics and other key performance indicators for evaluation of business results by management. Mr. Lamirato has been retiredalso served as Chief Financial Officer and Treasurer of ARC Group Worldwide, Inc. from June 2001 to March 2009, Vice President of Finance at GS2.net, LLC from November 2000 to May 2001, and also Vice President of Finance for over ten years.PlanetOutdoors.com, Inc. from June 1999 to October 2000. He began his career as an audit staff member with Coopers & Lybrand in 1977, where he remained until he served as an Audit Manager and Audit Partner with Mitchell Finley and Company, P.C. from 1986 to 1993. Mr. LampertLamirato received a Bachelor of Science, cum laude, from Regis College in Denver and is a certified public accountant and attorney. He received a B.S. in Accounting from Brooklyn College and LLB from Brooklyn Law School. Irwin Lampert is the father of Darren Lampert.Certified Public Accountant.
Jason Dawsonhas been our Chief Operating Office since June 2014. Mr. Dawson is the founder of Pueblo Hydroponics, which he was the President of from 2008-2014. From 2003-2008, Mr. Dawson was Head of International Sales for Gualala Robotics, Inc. a lighting manufacturer. Mr. Dawson has over 15 years of experience in the gardening and hydroponic industries.
StevenStephen Aiellohas been a Director of the Company since May 2014. Mr. Aiello was a partner at Jones and Company from 2004-2008. From 2001-2003, he worked at 033 Asset Management. From 1986-2001, he was a partner at Montgomery Securities. Mr. Aiello received a B.A. in Psychology from Ithaca College and an MBA from Fordham University. Since 2010, Mr. Aiello has been a private investor and owner of real estate properties.
Jody KaneSean Stiefel has been a Director of the Company since May 2014.January 2018. Mr. Kane Stiefel founded Navy Capital LLC in 2014, where he is currently a Portfolio Manager and is responsible for all aspects of stock selection, investment due diligence and portfolio construction. Mr. Stiefel launched the Navy Capital Green Fund, LP in 2017 as a global public equity focused cannabis dedicated fund. Navy Capital has been involved in cannabis related investing since early 2016. Prior to founding Navy Capital, Mr. Stiefel was a research analyst and trader for Northwoods Capital Management Partners, a global equity fund with a fundamental value and special situations investment strategy. Mr. Stiefel had previously served as an associate within an equity long/short fund at Millennium Partners, and he began his career as an equities trading analyst for Barclays Capital. He is a graduate of the University of Southern California’s Marshall School of Business.
Paul Ciasullo has been a Director of the Company since May 2020 and a board member of Leafline Labs, LLC since 2018, which is a provider, manufacturer and distributor of medical cannabis in Minnesota. In 2010, Mr. Ciasullo founded Wallstreet Research Solutions, LLC, which provided sales, marketing and customer account services primarily in partnership with and to build a fixed income research firm specializing in bond and loan covenants called Covenant Review, LLC (with which he had been working to build the business since 2007). Covenant Review and Wallstreet Research Solutions merged and later re-branded as Fulcrum Financial Data LLC and Mr. Ciasullo acted as President of Global Marketing and Sales and was a board member from 2014 to 2018 when the company was sold to Fitch Ratings Services. While working with Covenant Review, Mr. Ciasullo built a sales force in the U.S. and London including assimilation of the purchase of a UK company Capital Structure Ltd where he was also on the Board. From 2005 to 2006, Mr. Ciasullo was a Managing PartnerDirector at Diamond Bridge Capital from February 2009 throughSoleil Securities Group Inc., responsible for developing a strategy for bringing alternative research such as industry knowledge into a stock research environment. In 2000, Mr. Ciasullo was a founder of and acted as President of CreditSights, Inc., an institutional investment research firm specializing in fixed income research for institutional investors where, until 2004, he built a global salesforce after overseeing the datedesign and build of this Prospectus and from 2005-2009,the original website which was amongst the first in the industry to deliver research over the internet. Prior to that, Mr. Kane was an analystCiasullo held a number of Managing Director positions as head of trading at Sidoti & Company LLC.large brokerage firms. Mr. KaneCiasullo graduated from TroyBrown University in 1981 with a B.S.Bachelor of Arts in Finance in 2001.Economics and International Relations.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees other than Michael Salaman (see biographical information of Michael Salaman above regarding the Chapter 11 Bankruptcy protection filed by Skinny Nutritional Corp. in 2013) has:
● been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
● had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
● been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
● been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
● been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
● | been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
● been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board Committees
Audit Committee
The Company’s Audit Committee is comprised of, Stephen Aiello (Chairman), Sean Stiefel and Paul Ciasullo. The Board has determined that all of Messrs. Aiello, Stiefel and Ciasullo are independent directors. Mr. Aiello qualifies as an “audit committee financial expert” within the meaning of the rules of the SEC. The Board has adopted an Audit Committee Charter, which was filed as Exhibit 99.1 to the Company’s Annual Report on Form 10-K for year ended December 31, 2019 (“2019 10-K”).
The purpose of the Audit Committee is to perform and to assist the Board of Directors in fulfilling its oversight responsibility relating to (i) the Company’s financial statements and financial reporting process and the Company’s systems of internal accounting and financial controls; (ii) the integrity of the Company’s financial statements; (iii) the appointment, retention and performance of the internal auditors, if applicable; (iv) the annual independent audit of the Company’s financial statements, the engagement of the independent auditors and the evaluation of the independent auditors’ qualifications, independence and performance; (v) the compliance by the Company does not currently maintainwith legal and regulatory requirements, including the Company’s disclosure controls and procedures; and (vi) the evaluation of management’s process to assess and manage the Company’s enterprise risk issues.
Compensation Committee
The Company’s Compensation Committee is comprised of Stephen Aiello and Paul Ciasullo. The Board has adopted a boardCompensation Committee Charter, which was filed as Exhibit 99.2 to the 2019 10-K.
The purpose of the Compensation Committee is to review, determine and approve all forms of compensation to be provided to the Company’s executive officers and any equity compensation to be provided to all employees, and monitor the performance of the Company’s executive officers.
Nominating and Corporate Governance Committee
The Company’s Nominating and Corporate Governance Committee is comprised of Stephen Aiello and Paul Ciasullo. The Board has adopted a Nominating and Corporate Governance Committee Charter, which was filed as Exhibit 99.3 to the 2019 10-K.
The purpose of the Nominating and Corporate Governance Committee is to (i) oversee all aspects of the Company’s corporate governance functions on behalf of the Board; (ii) make recommendations to the Board of Directors regarding corporate governance issues; (iii) identify, review and evaluate candidates to serve as directors that is composed of the Company consistent with criteria approved by the Board of Directors and review and evaluate incumbent directors; (iv) serve as a majorityfocal point for communication between such candidates, non-committee directors and the Company’s management; (v) select or recommend to the Board of “independent” directors. TheDirectors for selection candidates to the Board of Directors to serve as nominees for director for the annual meeting of stockholders; and (vi) make other recommendations to the Board of Directors regarding affairs relating to the directors of the Company, does not expect to initially appoint an audit committee, nominating committee and/or compensation committee, or to adopt charters relative to each such committees.including director compensation.
Code of Business Conduct and Ethics
We have notThe Company has adopted a Code of Business Conduct and Ethics, but anticipate doing so followingwhich was filed as Exhibit 14.1 to the effectiveness2019 10-K.
Insider Trading Policy
The Company has adopted an Insider Trading Policy which sets forth the procedure regarding trading by insiders in securities of the registration statement of which this prospectus is a part.Company.
Limitation of Directors Liability and Indemnification
The Colorado Business Corporations Act authorizes corporations to limit or eliminate, subject to certain conditions, the personal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties.
We do not have directorThe Amended and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us, including matters arising underRestated Bylaws of the Securities Act, although we intend to acquire such insurance. Colorado law and our bylawsCompany provide that wethe Company will indemnify ourits directors and officers who, by reason of the fact that he or she is one of ourthe Company’s officers or directors, is involved in a legal proceeding of any nature.
The Company has purchased director and officer liability insurance to cover certain liabilities its directors and officers may incur in connection with their services to the Company.
There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted. We are
The Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
Indemnification Agreements
We haveThe employment agreements the Company entered into indemnification agreements with each of ourits current directors and executive officers. The indemnification agreements provideofficers provides for indemnification to the fullest extent permitted by applicable law for the executive officers against all debts, judgments, costs, charges or expenses judgments, fines and penalties actually and reasonablywhatsoever incurred or sustained by an indemniteeexecutive officer in connection with threatened, pendingany action, suit or completedproceeding to which the executive officer may be made a party by reason of his being or having been an officer of the Company, or because of actions suits or other proceedings, subject to certain limitations. The indemnification agreements also provide fortaken by the advancement of expenses in connection with a proceeding prior to a final, nonappealable judgment or other adjudication, provided thatexecutive officer which were believed by the indemnitee provides an undertaking to repay to us any amounts advanced if the indemnitee is ultimately found notexecutive officer to be entitled to indemnification by us. The indemnification agreements set forth procedures for making and responding to a request for indemnification or advancementin the best interests of expenses, as well as dispute resolution procedures that will apply to any dispute between us and an indemnitee arising under the indemnification agreements.Company.
EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
The following table presents information regarding the total compensation awarded to, earned by, or paid to our chief executive officer and the three most highly-compensated executive officers (other than the chief executive officer) who were serving as executive officers as of June 30, 2016December 31, 2019 for services rendered in all capacities to us for the years ended December 31, 20152019 and 2014.2018.
Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards(1) ($) | All Other Compensation ($) | Total ($) | Year | Salary ($) | Bonus ($) | Option Awards ($)(1) | Stock Based Awards ($)(2) | Total ($) | ||||||||||||||||||||||||||||||||
Darren Lampert | 2015 | 90,000 | 0 | 0 | 0 | 90,000 | 2019 | 211,750 | 358,765 | 1,147,700 | 1,224,000 | 2,914,215 | ||||||||||||||||||||||||||||||||
Chief Executive Officer | 2014 | 9,000 | 0 | 30,333 | 0 | 39,333 | 2018 | 192,500 | 105,000 | 58,000 | - | 355,500 | ||||||||||||||||||||||||||||||||
Michael Salaman | 2015 | 90,000 | 0 | 0 | 0 | 90,000 | 2019 | 211,750 | 358,765 | 1,147,700 | 1,224,000 | 2,914,215 | ||||||||||||||||||||||||||||||||
President and Secretary | 2014 | 9,000 | 0 | 18,667 | 0 | 27,667 | ||||||||||||||||||||||||||||||||||||||
President | 2018 | 192,500 | 105,000 | 58,000 | - | 355,500 | ||||||||||||||||||||||||||||||||||||||
Jason Dawson | 2015 | 84,000 | 0 | 0 | 0 | 84,000 | ||||||||||||||||||||||||||||||||||||||
Monty Lamirato (3) | 2019 | 175,000 | 30,750 | 389,100 | 373,500 | 968,350 | ||||||||||||||||||||||||||||||||||||||
Chief Financial Officer and Secretary | 2018 | 162,500 | - | 46,600 | - | 209,100 | ||||||||||||||||||||||||||||||||||||||
Tony Sullivan (4) | 2019 | 45,000 | - | 726,300 | 498,000 | 1,269,300 | ||||||||||||||||||||||||||||||||||||||
Chief Operating Officer | 2014 | 84,000 | 0 | 9,333 | 0 | 93,333 | ||||||||||||||||||||||||||||||||||||||
Irwin Lampert | 2015 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Chief Financial Officer and Secretary | 2014 | 0 | 0 | 18,667 | 0 | 18,667 | ||||||||||||||||||||||||||||||||||||||
Joe Prinzivalli (4) | 2019 | 127,400 | - | - | - | 127,400 | ||||||||||||||||||||||||||||||||||||||
Chief Operating Officer | 2018 | 110,000 | - | 23,300 | - | 133,300 |
(1) | |
(2) | |
(3) | As of May 15, 2017, Monty Lamirato started to provide his services to the |
(4) | Effective November 4, 2019 Mr. Tony Sullivan was appointed Chief Operating Officer and Executive Vice President and Mr. Joe Prinzivalli resigned as Chief Operating Officer. |
Employment and Consulting Agreements
We haveOn September 22, 2017, the Company entered into employment agreements with Darren Lampert, Chief Executive Officer, and Michael Salaman, President, who have each agreed to devote their full time and attention to our business. We have no employment agreement with Irwin Lampert, who has agreed to devote such time to the Company’s business as he deems necessary in his sole discretion. Darren Lampert and Michael Salaman each receive compensation of $100,000 per annum for their full time employment and Irwin Lampert will receive compensation of $3,000 per month for his part-time services commencing October 1, 2016. Additionally, each member of Management may receive a year-end cash bonus and options as determined by our Board of Directors. In February 2015, we entered into a three year employment agreement with Jason Dawson, our Chief Operating Officer, pursuant to which we pay Mr. Dawson compensation of $84,000$175,000 per annum, subject to a 10% increase each January 1 during the term of the agreement.agreements. In addition, commencing with the year ending December 31, 2017, each of Mr. Dawson will also beLampert and Mr. Salaman is entitled to receive a cash bonus payment equal to 0.5% multiplied by the difference between revenue in each fiscal year less $7,980,471, and is granted up to 300,000 options to purchase shares of common stock of the Company, of which 30,750 have been granted as of the date of their respective agreements.
On June 21, 2019, the Board of Directors approved the terms of new three-year employment agreements, effective January 1, 2020, with Darren Lampert, Chief Executive Officer, and Michael Salaman, President. On March 23, 2020, the Company entered into three-year executive employment agreements with each of Mr. Lampert and Mr. Salaman, respectively, pursuant to which the Company agreed to pay each of them a salary of $275,000 per annum, subject to a 10% increase each January 1 during the term of the agreements. In addition, commencing with the year ending December 31, 2020, each of Mr. Lampert and Mr. Salaman is eligible for a cash bonus payment equal to 0.5% multiplied by the difference between revenue in each fiscal year less $79,773,568. The Company also agreed to (i) issue each of them a total of 300,000 shares of common stock in three equal installments each year; and (ii) grant each of them 300,000 options to purchase shares of Common Stock of the Company with a three year vesting schedule with 100,000 options vested as of January 1, 2020, 100,000 options as of January 1, 2021 and 100,000 options as of January 1, 2022. In addition, Mr. Lampert and Mr. Salaman each received a one-time signing bonus of 100,000 shares of common stock as of January 1, 2020.
On May 15, 2017, the Company entered into a three-year executive employment agreement with Monty Lamirato as Chief Financial Officer and Secretary, pursuant to which the Company agreed to pay Mr. Lamirato a salary of $150,000 per annum for the first year, $162,500 for the second year and $175,000 for the third year. The Company also agreed to issue to Mr. Lamirato 25,000 shares of common stock and 50,000 stock options as of July 10, 2017, May 15, 2018 and May 15, 2019, respectively.
On November 5, 2019, the Company entered into a new three-year executive employment agreement, effective January 1, 2020, with Monty Lamirato as Chief Financial Officer and Secretary, pursuant to which the Company agreed to pay Mr. Lamirato a salary of $205,000 per annum for the first year, $225,000 for the second year and $250,000 for the third year. The Company also agreed to issue to Mr. Lamirato a total of 90,000 shares of Common Stock in three equal installments each year and grant a total of 150,000 stock options with 50,000 options vesting on January 1, 2020, January 1, 2021 and January 1, 2022.
On November 4, 2019, the Company entered into a three-year executive employment agreement with Tony Sullivan as Chief Operating Officer and Executive Vice President, pursuant to which the Company agreed to pay Mr. Sullivan a salary of $270,000 per annum, subject to a 10% increase each year on each of the anniversary datesdate of his employmentthis agreement. In addition, the Company agreed to pay Mr. Sullivan a bonus with respect to each fiscal year in an amount equal to a minimum of $75,000. The Company also agreed to issue to Mr. Sullivan a total of 120,000 shares of Common Stock in three equal installments each year and grant a total of 280,000 stock options with 160,000 vested on November 4, 2019, 60,000 on November 4, 2020 and 60,000 on November 4, 2021. Mr. Sullivan was also paid a relocation fee of up to $80,000.
Additionally, each member of management may receive a year-end cash bonus and options as determined by the Compensation Committee and the Board.
42
Outstanding Equity Awards at Fiscal Year-End Table
The following table summarizes, for each of the named executive officers, the number of shares of common stock underlying outstanding stock options held as of June 30, 2016.December 31, 2019.
Option Awards | ||||||||||||
Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Option exercise price ($)1 | Option expiration date | ||||||||
Darren Lampert | 650,000 | 0 | $.66/$.60 | March 16, 2019 as to 400,000 options and May 12, 2019 as to 250,000 options | ||||||||
Michael Salaman | 400,000 | 0 | $.66/$.60 | March 6, 2019 | ||||||||
Jason Dawson | 200,000 | 0 | $.66/$.60 | March 30, 2019 | ||||||||
Irwin Lampert | 400,000 | 0 | $.66/$.60 | March 16, 2019 |
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares of units of stock that have not vested ($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |||||||||||||||||||||||||
Darren Lampert | 133,335 | 0 | $ | 1.76 | September 22, 2022 | - | - | - | - | |||||||||||||||||||||||||
Darren Lampert | 16,667 | 8,333 | $ | 3.59 | October 23, 2023 | - | - | - | - | |||||||||||||||||||||||||
Darren Lampert | 33,333 | 16,667 | $ | 2.96 | March 25, 2024 | - | - | - | - | |||||||||||||||||||||||||
Darren Lampert | 0 | 300,000 | $ | 4.10 | June 19, 2024 | 400,000 | $ | 1,640,000 | - | - | ||||||||||||||||||||||||
Michael Salaman | 133,335 | 0 | $ | 1.76 | September 22, 2022 | - | - | - | - | |||||||||||||||||||||||||
Michael Salaman | 16,667 | 8,333 | $ | 3.59 | October 23, 2023 | - | - | - | - | |||||||||||||||||||||||||
Michael Salaman | 33,333 | 16,667 | $ | 2.96 | March 25, 2024 | - | - | - | - | |||||||||||||||||||||||||
Michael Salaman | 0 | 300,000 | $ | 4.10 | June 19, 2024 | 400,000 | $ | 1,640,000 | - | - | ||||||||||||||||||||||||
Monty Lamirato | 50,000 | 100,000 | $ | 4.12 | November 4, 2024 | 90,000 | $ | 369,000 | - | - | ||||||||||||||||||||||||
Tony Sullivan | 160,000 | 120,000 | $ | 3.52 | November 3, 2024 | 80,000 | $ | 328,000 | - | - |
1Director Compensation
The first $100,000 of options grantedfollowing table details the compensation paid to or accrued for each of the above persons may be deemed to be incentive stock options and are exercisable at a price of $.66 per share. The balance ofCompany’s non-management directors in the options owned by such persons may be deemed to be non-qualified options and are exercisable at a price of $.60 per share.year ended December 31, 2019:
Fees Earned or Paid in Cash (1) | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compensation | Total | ||||||||||||||||||||||
Name | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Stephen Aiello | -0- | -0- | 97,000 | -0- | -0- | -0- | 97,000 | |||||||||||||||||||||
Peter Rosenberg (2) | -0- | -0- | 97,000 | -0- | -0- | -0- | 97,000 | |||||||||||||||||||||
Sean Stiefel | -0- | -0- | 97,000 | -0- | -0- | -0- | 97,000 |
(1) | During the year ended December 31, 2019, directors did not receive any cash compensation for serving on the Board of the Company. |
(2) | Mr. Rosenberg served on the Board until May 11, 2020. |
2014 Equity CompensationIncentive Plan
General
On March 6, 2014, our Board of Directors adopted an Equity CompensationIncentive Plan (the “2014 Plan”). The 2014 Plan was approved by the stockholdersshareholders on March 6, 2014. As of June 9, 2020, there are a total of 2,113,834 options issued under the 2014 Plan (of which 1,718,334 options have been exercised and 224,000 remain outstanding), and 375,000 shares of Common Stock issued. There are a total of 11,166 shares of Common Stock available to be issued under the 2014 Plan.
Amended and Restated 2018 Equity Incentive Plan
On January 7, 2018, the Board adopted the 2018 Equity Incentive Plan, which was approved and ratified by the shareholders on April 20, 2018. On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable thereunder from 2,500,000 to 5,000,000, which amendment was approved by shareholders on May 11, 2020 (as amended and restated, the “Amended 2018 Plan”). As of June 9, 2020, there have been a total of (i) 1,899,000 options issued (of which 1,843,500 options are currently outstanding, 43,833 have been exercised, and 11,667 have been forfeited which will be available for future grants), and (ii) 690,833 shares of Common Stock issued. There are a total of 2,421,834 shares of Common Stock available to be issued under the 2018 Plan.
The general purpose of the 2014Amended 2018 Plan is to provide an incentive to ourthe Company’s employees, directors, consultants and advisors by enabling them to share in the future growth of ourthe Company’s business. OurThe Board of Directors believes that the granting of stock options, restricted stock awards, unrestricted stock awards and similar kinds of equity-based compensation promotes continuity of management and increases incentive and personal interest in the welfare of ourthe Company by those who are primarily responsible for shaping and carrying out ourits long range plans and securing ourits growth and financial success.
OurThe Board of Directors believes that the 2014Amended 2018 Plan will advance ourthe Company’s interests by enhancing ourits ability to (a) attract and retain employees, consultants, directors and advisors who are in a position to make significant contributions to ourthe Company’s success; (b) reward ourthe Company’s employees, consultants, directors and advisors for these contributions; and (c) encourage employees, consultants, directors and advisors to take into account ourthe Company’s long-term interests through ownership of ourits shares.
Description of the 2014Amended and Restated 2018 Equity Incentive Plan
The following description of the principal terms of the 2014Amended 2018 Plan is a summary and is qualified in its entirety by the full text of the 2014Amended 2018 Plan, which is attachedwas filed as Exhibit 10.5 hereto.an exhibit to the Proxy Statement on Schedule 14A filed on March 27, 2020.
Administration.The 2014Amended 2018 Plan will be administered by our Board of Directors.Board. Our Board of Directors may grant options to purchase shares of our common stock, stock appreciation rights, restricted stock units, restricted or unrestricted shares of our common stock, performance shares, performance units, other cash-based awards and other stock-based awards. The Board of Directors also has broad authority to determine the terms and conditions of each option or other kind of equity award, adopt, amend and rescind rules and regulations for the administration of the 2014Amended 2018 Plan and amend or modify outstanding options, grants and awards. The Board of Directors 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 2014 Plan. No options, stock purchase rights or awards may be made under the Plan on or after the ten year anniversary of the adoption of the 2014 Plan by our Board of Directors, but the 2014 Plan will continue thereafter while previously granted options, stock appreciation rights or awards remain subject to the 2014 Plan.
Eligibility.Persons eligible to receive options, stock appreciation rights or other awards under the 2014Amended 2018 Plan are those employees, consultants, advisorsdirectors and directorsconsultants of our Company and our subsidiaries who,subsidiaries. As of June 9, 2020, approximately 254 employees, three non-employee directors, and approximately six consultants are eligible to participate in the opinion ofAmended 2018 Plan. The Board may at any time and from time to time grant awards under the Board of Directors, are inAmended 2018 Plan to eligible persons on a position to contribute to our success.discretionary basis.
Shares Subject to the 2014Amended 2018 Plan.The aggregate number of shares of common stock available for issuance in connection with options and awards granted under the 2014Amended 2018 Plan is 2,500,000,5,000,000, subject to customary adjustments for stock splits, stock dividends or similar transactions. Incentive Stock Options may be granted under the 2014Amended 2018 Plan with respect to all of those shares. If any option or stock appreciation right granted under the 2014Amended 2018 Plan terminates without having been exercised in full or if any award is forfeited, or if shares of common stock are withheld to cover withholding taxes on options or other awards, the number of shares of common stock as to which such option or award was forfeited, or which were withheld, will be available for future grants under the 2014Amended 2018 Plan. No employee, consultant, advisor or director may receive options or stock appreciation rights relating to more than 1,000,000The maximum aggregate number of shares of our common stock in the aggregate inwith respect to one or more awards that may be granted to any employee, director or consultant during any calendar year.year shall be 1,000,000 and the maximum aggregate amount of cash that may be paid in cash during any calendar year with respect to one or more awards payable in cash shall be $600,000.
Terms and Conditions of Options.Options granted under the 2014Amended 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. Incentive stock options may be granted only to employees. Each option grant will be evidenced by an award agreement that will specify the terms and conditions as determined by the Board. The Board of Directors will determine the exercise price of options granted under the 204 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).
If on the date of grant the common stock is listed on a stock exchange or is quoted on the automated quotationa national market system, of Nasdaq, the fair market value shall generally be the closing sale price on the last trading day before the date of grant. If no such prices are available, the fair market value shall be determined in good faith by the Board of Directors based onupon the reasonable applicationadvice of a reasonablequalified valuation method.expert.
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 granted under the 2014Amended 2018 Plan will be exercisable at such time or times as the Board of Directors prescribes at the time of grant. No employee may receive incentive stock options that first become exercisable in any calendar year in an amount exceeding $100,000. The Board of Directors may, in its discretion, permit a holder of an option to exercise the option before it has otherwise become exercisable, in which case the shares of our common stock issued to the recipient will continue to be subject to the vesting requirements that applied to the option before exercise.
Generally, the option price may be paid (a) in cash or by certified bank check, (b) through delivery of shares of our common stock having a fair market value equal to the purchase price, (c) through cashless exercise, or (c)(d) a combination of these methods. The Board of Directors is also authorized to establish a cashless exercise program and to permit the exercise price (or tax withholding obligations) to be satisfied by reducing from the shares otherwise issuable upon exercise a number of shares having a fair market value equal to the exercise price.
No option may be transferred other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an option may be exercised only by the recipient. However,Options granted under the 2018 Plan will be exercisable at such time or times as the Board prescribes at the time of Directorsgrant. No employee may permitreceive incentive stock options that first become exercisable in any calendar year in an amount exceeding $100,000.
The following table sets forth stock options that were approved by the holderBoard to the persons and groups named below under the Amended 2018 Plan as of an option, stock appreciation right or other award to transfer the option, right or other award to immediate family members or a family trust for estate planning purposes. The Board of Directors will determine the extent to which a holder of a stock option may exercise the option following termination of service with us.December 31, 2019.
Name and Position | Number of Shares of Common Stock underlying Stock Options | |||
Darren Lampert, Chief Executive Officer | 375,000 | |||
Michael Salaman, President | 375,000 | |||
Monty Lamirato, Chief Financial Officer | 170,000 | |||
Tony Sullivan, Chief Operating Officer | 280,000 | |||
All executive officers as a group | 1,180,000 | |||
All non-executive directors as a group | 225,000 | |||
All non-executive officer employees as a group | 217,333 |
Stock Appreciation Rights. The Board of Directors may grant stock appreciation rights independent of orunder the Amended 2018 Plan in connection with an option. Thesuch amounts as the Board of Directorsin its sole discretion will determine the other terms applicable todetermine. Each stock appreciation rights.right grant will be evidenced by an award agreement that will specify the terms and conditions as determined by the Board. The exercise price per share of a stock appreciation right will be determined by the Board, of Directors, but will not be less than 100% of the fair market value of a share of our common stock on the date of grant, as determined by the Board of Directors.grant. The maximum term of any SAR granted under the 2014Amended 2018 Plan is ten years from the date of grant. Generally, each SAR stock appreciation right will entitle a participant upon exercise to an amount equal to:
● | the excess of the fair market value on the exercise date of one share of our common stock over the exercise price,multiplied by | |
● | the number of shares of common stock covered by the stock appreciation right. |
Payment may be made in shares of our common stock, in cash, or partly in common stock and partly in cash, all as determined by the Board of Directors.Board.
Restricted Stock and Restricted Stock Units.The Board of Directors may award restricted common stock and/or restricted stock units under the 2014 Plan. Restricted stock awards consist of shares of stock that are transferred to a participant subject to restrictions that may resultAmended 2018 Plan in forfeiture if specified conditions are not satisfied. Restricted stock units confer the right to receive shares of our common stock, cash, or a combination of shares and cash, at a future date upon or following the attainment of certain conditions specified bysuch amounts as the Board of Directors.in its sole discretion will determine. The Board of Directors will determine the restrictions and conditions applicable to each award of restricted stock or restricted stock units, as evidenced in an award agreement, which may include performance-based conditions. Dividends and other distributions with respect to restricted stock may be paid to the holder of the shares as and when dividends are paid to stockholders, or atunless otherwise provided in the time that the restricted stock vests, as determined by the Board of Directors. Dividend equivalent amounts may be paid with respect to restricted stock units either when cash dividends are paid to stockholders or when the units vest.award agreement. Unless the Board of Directors determines otherwise, holders of restricted stock will have the right to vote the shares.
Performance Shares and Performance Units.The Board of Directors may award performance shares and/or performance units under the 2014 Plan. Performance shares andAmended 2018 Plan in such amounts as the Board in its sole discretion will determine. Each performance units are awards, denominated in either shares or U.S. dollars, which are earned during a specified performance period subject to the attainment of performance criteria, asunit will have an initial value that is established by the Board on or before the date of Directors.grant. Each performance share will have an initial value equal to the fair market value of a share on the date of grant. The Board of Directorsat its discretion will set performance objectives or other vesting provisions. The Board will determine the restrictions and conditions applicable to each award of performance shares and performance units.units, as evidenced in an award agreement.
Effect of Certain Corporate Transactions.The Board of Directors may, at In the time of the grant of an award, provide for the effectevent of a change in control (as defined in the 2014Amended 2018 Plan) on any award, including (i) accelerating or extending the time periods for exercising, vesting in, or realizing gain from any award, (ii) eliminating or modifying the performance or other conditions of an award, or (iii) providing for the cash settlement of an award for an equivalent cash value, as determined by, the Board of Directors. The Board of Directors may, in itshas the discretion and without the need for the consent of any recipient of an award alsoto take one or more of the following actions contingentas to an outstanding award: (i) awards will be assumed, or substantially equivalent awards will be substituted, by the acquiring or succeeding corporation; (ii) awards will terminate upon or immediately prior to the occurrenceconsummation of asuch change in control: (a) cause anycontrol; (iii) outstanding awards will vest and become exercisable, or all outstanding options and stock appreciation rightsrestrictions applicable to become immediately exercisable,an award will lapse, in whole or in part; (b) cause any other awardspart prior to become non-forfeitable,or upon consummation of such change in wholecontrol, and terminate upon or immediately prior to the effectiveness of such change in part; (c) cancel any option or stock appreciation rightcontrol; (iv) an award is terminated in exchange for a substitute option; (d) cancel any awardan amount of restricted stock, restricted stock units, performance shares or performance units in exchange for a similar award of the capital stock of any successor corporation; (e) redeem any restricted stock, restricted stock unit, performance share or performance unit for cash and/or other substitute consideration with a valueproperty, if any, equal to the fair market valueamount that would have been attained upon the exercise of such award; (v) an unrestricted share of our common stock onaward is replaced with other rights or property selected by the dateBoard in its sole discretion; or (vi) any combination of the change in control; (f) cancel any option or stock appreciation right in exchange for cash and/or other substitute consideration based on the value of our common stock on the date of the change in control, and cancel any option or stock appreciation right without any payment if its exercise price exceeds the value of our common stock on the date of the change in control; or (g) make such other modifications, adjustments or amendments to outstanding awards as the Board of Directors deems necessary or appropriate.foregoing.
Amendment, Termination. The Board of Directors may at any time amend, alter, amend the terms of awards in any manner not inconsistent with the 2014Amended 2018 Plan, provided that no amendment shall adversely affect the rights of a participant with respect to an outstanding award without the participant’s consent. In addition, our board of directorsBoard may at any time amend, suspend, or terminate the 2014Amended 2018 Plan, provided that (i) no such amendment, suspension or termination shall materially and adversely affect the rights of any participant under any outstanding award without the consent of such participant and (ii) to the extent necessary to comply with any applicable law or stock exchange rule, the 2014 Plan requires us toCompany will obtain stockholder consent. Stockholder approval is required for any planconsent of amendment that increasesto the number of shares of common stock available for issuance under the 2014 Plan or changes the persons or classes of persons eligible to receive awards.plan.
Tax Withholding
AsPrior to the delivery of any shares or cash pursuant to an award or exercise thereof, the Company will have the power and when appropriate, we shall have the right to deduct or withhold, or require each optionee purchasing sharesa holder of common stock and each grantee receivingsuch award to remit to the Company, an award of shares of common stock under the 2014 Planamount sufficient to pay anysatisfy federal, state, local, foreign or localother taxes required by law to be withheld.withheld with respect to such award or exercise thereof.
Option Grants and Stockof Awards
The grant of options and other awards under the 2014Amended 2018 Plan is discretionary, and wethe Company cannot determine now the specific number or type of options or awards to be granted in the future to any particular person or group.
Equity Compensation Plan Information
The following table provides certain information with respect to all of our equity compensation plans in effect as of the fiscal year ended December 31, 2019.
Number of common shares to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding option, warrants and rights (b) | Number of common shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) (c) | ||||||||||
Equity compensation plans approved by security holders | ||||||||||||
2014 Equity Compensation Plan | 224,000 | $ | 2.03 | 11,166 | ||||||||
2018 Equity Compensation Plan | 1,698,5003 | $ | 3.26 | 692,917 | ||||||||
Equity compensation plans not approved by security holders | — | $ | — | — | ||||||||
Total | 1,922,500 | $ | 3.33 | 704,083 |
The following table sets forth the number of shares of common stock beneficially owned as of June 30, 20169, 2020 by:
● | each of our stockholders who is known by us to beneficially own 5% or more of our common stock; | |
● | each of our executive officers; | |
● | each of our directors; and | |
● | all of our directors and current executive officers as a group. |
Beneficial ownership is determined based on the rules and regulations of the Commission.SEC. A person has beneficial ownership of shares if such individual has the power to vote and/or dispose of shares. This power may be sole or shared and direct or indirect. Applicable percentage ownership in the following table is based on the total of 10,053,54838,713,338 shares of common stock outstanding as of June 30, 2016.9, 2020. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock that are subject to options or warrants held by that person and exercisable as of, or within 60 days of, June 30, 2016.the date of this Prospectus. These shares, however, are not counted as outstanding for the purposes of computing the percentage ownership of any other person(s). Except as may be indicated in the footnotes to this table and pursuant to applicable community property laws, each person named in the table has sole voting and dispositive power with respect to the shares of common stock set forth opposite that person’s name. Unless indicated below, the address of each individual listed below is c/o GrowGeneration Corp.. 503 North Main Street, Pueblo, Colorado 81003.Corp., 930 W 7th Ave, Suite A, Denver, CO 80204.
Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
Michael Salaman | 2,400,000 | 1 | 23.00 | % | ||||
Darren Lampert | 2,400,000 | 1 | 22.40 | % | ||||
Irwin Lampert | 1,650,000 | 1 | 15.80 | % | ||||
Jason Dawson | 400,000 | 1 | 2.00 | % | ||||
Jody Kane | 100,000 | 1 2 | * | |||||
Stephen Aiello | 200,000 | 1 2 3 | 1.00 | % | ||||
All Officers and Directors (6) | 7,150,000 | 64.20 | % |
Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
Michael Salaman, President and Director | 1,664,836 | 1 | 4.27 | % | ||||
Darren Lampert, Chief Executive Officer and Director | 1,615,249 | 2 | 4.14 | % | ||||
Tony Sullivan, Executive Vice President and Chief Operating Officer | 200,000 | 3 | * | |||||
Monty Lamirato, Chief Financial Officer and Secretary | 153,987 | 4 | * | |||||
Stephen Aiello, Director | 510,809 | 5 | 1.32 | % | ||||
Paul Ciasullo, Director | 416,666 | 6 | 1.08 | % | ||||
Sean Stiefel, Director | 1,464,104 | 7 | 3.73 | % | ||||
All Officers and Directors (7 Persons) | 6,125,651 | 15.03 | % | |||||
Merida Capital Partners, LP | 4,992,438 | 8 | 12.48 | % | ||||
Gotham Green Fund 1, L.P. | 4,551,531 | 9 | 11.56 | % |
* | Less than 1% |
* Less than 1%
1 | Includes i) 1,381,501 shares of common stock; and ii) 283,335 vested stock options. Mr. Salaman also has 8,333 options exercisable commencing October 23, 2020, 16,667 options exercisable on March 26, 2021, 100,000 options exercisable on January 1, 2021 and 100,000 options exercisable on January 1, 2022. |
2 | Includes i) 1,331,914 shares of common stock; and ii) 283,335 vested stock options. Mr. Lampert also has 8,333 options exercisable commencing October 23, 2020, 16,667 options exercisable on March 26, 2021, 100,000 options exercisable on January 1, 2021 and 100,000 options exercisable on January 1, 2022. |
3 | Includes i) 40,000 shares of common stock; and ii) 160,000 vested options. Mr. Sullivan also has 60,000 options exercisable beginning November 3, 2020 and 60,000 options exercisable beginning November 3, 2021. |
4 | Includes i) 103,987 shares of common stock and ii) 50,000 vested stock options. Mr. Lamirato also has 50,000 options exercisable commencing January 1, 2021 and 50,000 options exercisable commencing January 1, 2022. |
5 | Includes i) 269,143 shares of common stock owned directly by Mr. Aiello; ii) 150,000 shares of common stock owned by Aiello Family Trust; iii) 91,666 vested stock options; Mr. Aiello also owns 8,333 options exercisable commencing October 23, 2020, 16,667 options exercisable commencing March 26, 2021, 16,667 options exercisable commencing May 12, 2021 and 16,667 options exercisable commencing May 12, 2022.. |
6 | Includes i) 400,000 shares of common stock; and ii) 16,666 vested stock options. Mr. Ciasullo also has 16,667 options exercisable commencing May 12, 2021 and 16,667 options exercisable commencing May 12, 2022. |
7 | Includes (i) 116,666 vested stock options; (ii) 279,570 shares of common stock underlying warrants held by Navy Capital Green Fund, LP; (iii) 96,774 shares of common stock underlying warrants held by Navy Capital Green Co-Invest Fund LP; (iv) 777,546 shares of common stock held by Navy Capital Green Fund LP; and (v) 193,548 shares of common stock held by Navy Capital Green Co-Invest Fund LP. Mr. Stiefel is a founder and Chief Executive Officer of Navy Capital. Accordingly, Mr. Stiefel may be deemed to indirectly beneficially own the shares held by Navy Capital and its affiliated entities, and vice versa. Mr. Stiefel also has 8,333 options exercisable commencing October 23, 2020, 16,667 options exercisable commencing March 26, 2021, 16,667 options exercisable commencing May 12, 2021 and 16,667 options exercisable commencing May 12, 2022. |
8 | Includes (i) 2,338,029 shares of common stock held by Merida Capital Partners, LP; (ii) 872,957 shares of common stock held by Merida Capital Partners II LP; (iii) 483,871 shares of common stock held by Merida Capital Partners III LP; and (iv) 1,297,581 shares of common stock underlying warrants held by Merida and its affiliates. The address of Merida Capital Partners, LP is 641 Lexington Avenue, 18th Floor, New York, NY 10022. |
9 | Includes (i) 522,262 shares of common stock held by Gotham Green Fund 1, L.P.; (ii) 2,093,385 shares of common stock held by Gotham Green Fund 1 (Q), L.P.; (iii) 1,101,135 shares of common stock held by Gotham Green Fund II (Q), L.P.; (iv) 189,187 shares of common stock held by Gotham Green Fund II, L.P.; (v) 550,568 shares of common stock underlying warrants held by Gotham Green Fund II (Q), L.P.; and vi) 94,594 shares of common stock underlying warrants held by Gotham Green Fund II, L.P. The address of Gotham Green Fund 1, L.P. is 1437 4th Street, Santa Monica, CA 90401. |
1Includes 400,000 options issued to Michael Salaman, 650,000 options issued to Darren Lampert, 400,000 options issued to Irwin Lampert; 200,000 options issued to Jason Dawson, 50,000 options issued to Stephen Aiello and 50,000 options issued to Jody Kane under our 2014 Equity Incentive Plan. The first $100,000 of options issued to each of the above persons are intended to be ISOs and are exercisable at a price of $.66 per share. The balance of the options are NSOs and are exercisable at a price of $.60 per share.
2Represents 50,000 shares of common stock purchased in the Company’s 2014 Private Placement at $.60 per share.
3 Represents 50,000 shares of common stock and 50,000 shares of common stock underlying warrants purchased in the Company’s 2016 Private Placement at $.70 per share.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Other than compensation arrangements for our named executive officers and directors, we describeUnless described below, each transactionduring the last two fiscal years, there are no transactions or series of similar transactions since March 5, 2014 (inception), to which we were a party or will be a party, in which:
● | the amounts involved exceeded or will exceed $120,000; and | |
● | any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest. |
Compensation and indemnification arrangements for our named executive officers and directors are described in the section entitled “Executive and Director Compensation.”
GrowGeneration Corp. was formed as a Colorado corporation on March 5, 2014. On March 6, 2014 the corporation adopted the 2014 Equity Inceptive Plan. To date, we have issued 650,000 options to our CEO, Darren Lampert; 400,000 options to our CFO, Irwin Lampert; 400,000 options to our President Michael Salaman; 200,000 options to our COO, Jason Dawson; 50,000 options to our director Jody Kane; 50,000 options to our director Steve Aiello, and 25,000 options to our employees. All of the options issued to date are exercisable at prices between $.60 and $.66 per share.
On March 15, 2014 we entered into an agreement to acquire the assets of a retail chain comprising of four stores in Southern Colorado operating under the name of Pueblo Hydroponics and Organics. On May 29, 2014, our wholly-owned subsidiary, GrowGeneration Colorado Corp., a Colorado corporation, completed the acquisition of the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics and Organics). The purchase price was $499,976, consisting of $243,000 in goodwill and $273,000 in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts payable and $355 in customer deposits.
On February 15, 2015, we opened our first non-acquired GrowGeneration store in Trinidad, Co. This store is 3,000 square feet and was initially stocked with $100,000 in inventory. Our lease obligation is $1,000 per month for the next 3 years.
In April 2015, we acquired approximately $30,000 of inventory at cost from Green Growers, Inc., a retail store located in the state of Colorado. In connection therewith, we engaged the CEO of Green Growers, Inc. as a sales consultant for a period of two years. We will pay this individual a base fee of $1,200 per month during the first year and $600 per month during the second year of his consulting agreement, together with incentive compensation for any new business he generates, in an amount equal to 25% of the gross profit on all such goods and services that he generates. We also issued this consultant 10,000 three (3) year options, exercisable at a price of $.66 per share, as additional compensation under his consulting agreement.
In June 2015, we acquired approximately $68,000 of inventory at cost from Happy Grow Lucky, Inc., a retail store located in Conifer, Co. In connection therewith, we engaged the 2 principals as sales consultants for a period of one year. We will pay each sales consultant $420 per month, together with incentive compensation for any new business they generate, in an amount equal to 25% of the gross profit on all such goods and services that they generate. In addition, we executed a new 3 year lease for the premises in Conifer, Co. at a rate of $2400 per month.
On September 1, 2015, we signed a 5 year lease, at a rate of $ 3,780 to open our Colorado Springs store.
On October 8, 2015, we completed an inventory purchase of approximately $169,000 of inventory at cost and $25,000 of fixed assets from Sweet Leaf Hydroponics Inc., a retail store located in Santa Rosa, California. In connection therewith, we are engaging one of the principals, as a sales consultant for a period of one year. The agreement with the sales consultant requires a payment of $1,000 per month for one year, together with incentive compensation for any new business generated in the amount equal to 25% of the gross profit on such business. The store is approximately 3,300 square feet.
On November 28, 2015, we acquired $35,000 of inventory of Greenhouse Tech Inc., a retail store located in CO. We engaged the principal of Greenhouse Tech as a sales consultant for 1 year, at $13 per hour and 20% of the gross profits on all sales generated by sales consultant.
2014 Private Placement
In March 2014, we raised $600,000 from the sale of 1,000,000 shares of our common stock to seventeen (17) accredited investors, at a price of $.60 per share. All securities sold in the 2014 Private Placement were arranged by officers and directors and no commissions or other remuneration was paid to any person in connection with such sales. Proceeds from this sale were utilized to effect the acquisition of the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which we completed on May 29, 2014, through our wholly-owned subsidiary, GrowGeneration Pueblo Corp., a Colorado corporation. The purchase price was $499,976, consisting of $243,000 in goodwill and $273,000 in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts payable and $355 in customer deposits.
2015 Private Placements
In April 2015, we raised $180,000 from the sale of 300,000 shares of our common stock to four (4) accredited investors, at a price of $.60 per share. All securities sold in this private placement were arranged by officers and directors and no commissions or other remuneration was paid to any person in connection with such sales. We used the proceeds raised in this offering for inventory purchases and working capital.
On March 12, 2015 we entered into an agreement with Cavu Securities LLC, a FINRA Member broker dealer (“Cavu”), pursuant to which we engaged Cavu on a non-exclusive basis to act as our lead placement agent for the sale of up to $4,200,000 of our units.Each unit was offered at a price of $.70 per unit. Each unit consisted of (i) one share of our common stock and (ii) one 5 year warrant to purchase one share of Common Stock at an exercise price of $0.70 per share.The units were offered and sold on a “best-effort” basis On October 30, 2015, we closed the private placement with a total of 2,465,001 units sold and realized gross proceeds of $1,725,501. We paid Cavu total compensation for its services of (i) $73,295 in commissions; (ii) five-year warrants (the “Placement Agent Warrants”) to purchase 142,800 shares of our common stock, at an exercise price equal to $0.70 per share; and (iii) 77,833 shares of our common stock.
We have agreed to indemnify Cavu to the fullest extent permitted by law, against certain liabilities that may be incurred in connection with the 2015 Private Placement, including certain civil liabilities under the Securities Act, and, where such indemnification is not available, to contribute to the payments such FINRA Members may be required to make in respect of such liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the Placement Agent, pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
2016 Private Placement
On April 29, 2016, the Company closed on the 2016 Private Placement to which they sold 890,714 units to 10 accredited investors at a price of $.70 per unit, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $623,500.
On April 29, 2016, the Company issued to the placement agent in connection with our 2016 Private Placement (i) five-year warrants to purchase 50,000 shares of its common stock, at an exercise price equal to $0.70 per share; and (ii) 50,000 shares of its common stock.
Indemnification Agreements
We have entered into indemnification agreements with each of our current directors and executive officers. The indemnification agreements provide for indemnification against expenses, judgments, fines and penalties actually and reasonably incurred by an indemnitee in connection with threatened, pending or completed actions, suits or other proceedings, subject to certain limitations. The indemnification agreements also provide for the advancement of expenses in connection with a proceeding prior to a final, nonappealable judgment or other adjudication, provided that the indemnitee provides an undertaking to repay to us any amounts advanced if the indemnitee is ultimately found not to be entitled to indemnification by us. The indemnification agreement set forth procedures for making and responding to a request for indemnification or advancement of expenses, as well as dispute resolution procedures that will apply to any dispute between us and an indemnitee arising under the Indemnification Agreements.
Our current Certificate of Incorporation authorizes us to issue:
● | 100,000,000 shares of common stock, par value $0.001 per share. |
As of June 30, 2016,9, 2020, there were 10,053,54838,713,338 shares of common stock outstanding. The number of shares of common stock outstanding as of June 30, 20169, 2020 does not includeinclude: (i) 3,355,715 sharesa total of common stock issuable upon the exercise of warrants; (ii)3,151,079 shares of our common stock issuable upon the exercise of 1,885,000 outstanding stock options;warrants; and (iii) 142,800 warrants issued to the Placement Agent in connection with our 2015 Private Placement in October 2015 pursuant to which it can acquire 142,800(ii) a total of 2,334,170 shares of our common stock at a purchase priceissuable upon exercise of $.70 per share; (iv) 50,000 warrants issued to the Placement Agent in connection with our 2016 Private Placement pursuant to which it can acquire 50,000 shares of our common stock at a purchase price of $.70 per share. options.
The following statements are summaries only of the material provisions of our authorized capital stock and are qualified in their entirety by reference to our Certificate of Incorporation and our Amended and Restated Bylaws, which is filed as an exhibit to the registration statement of which this prospectus forms a part.
Common Stock
Voting.The holders of our common stock are entitled to one vote for each share held of record on all matters on which the holders are entitled to vote (or consent to).
Dividends.The holders of our common stock are entitled to receive, ratably, dividends only if, when and as declared by our Board of Directors out of funds legally available therefor and after provision is made for each class of capital stock having preference over the common stock (including the common stock).
Liquidation Rights.In the event of our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share, ratably, in all assets remaining available for distribution after payment of all liabilities and after provision is made for each class of capital stock having preference over the common stock (including the common stock).
Conversion Rights.The holders of our common stock have no conversion rights.
Preemptive and Similar Rights.The holders of our common stock have no preemptive or similar rights.
Redemption/Put Rights.There are no redemption or sinking fund provisions applicable to the common stock. All of the outstanding shares of our common stock are fully-paid and nonassessable.
Transfer Restrictions.Shares of our common stock are subject to transfer restrictions. See “Restrictions on the Transfer of Securities.”
Warrants
As of June 30, 2016,9, 2020, we had outstanding warrants to purchase an aggregate of 3,355,7153,151,079 shares of common stock at an exercise price of $.70 per share (not including 142,800 warrants issued to the Placement Agent in connection with the 2015 Private Placement in October 2015 and 50,000 warrants issued to the Placement Agent in connection with the 2016 Private Placement).
Each Warrant entitles the holder to purchase one share of Common Stock at a purchase price of $0.70 during the five (5) year period commencing on the issuance of the Warrants. The exercise price and number of shares of Common Stock issuable on exercise of the Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number, the number of shares of Common Stock to be issued to the Warrant holder. Each Warrant may be redeemed by the Company at any time, following a period of any 20 of the 30 consecutive trading days in which the closing sales price of the Common Stock equals or exceeds 150% the then exercise price of the Warrant, on notice to the holder and at a redemption price of $0.001 per warrant share; provided the resale of the Warrant Shares has been registered under the Securities Act or are otherwise freely tradable. Such notice shall specify, among other things, that payment of the redemption price will be made upon surrender of the Warrant, and that if the Warrant is not exercised by the close of business on the date fixed for redemption, which shall be not less than 30 days prior to the date fixed for redemption, the exercise rights of the Warrant shall expire unless extended by the Company.stock.
Options
As of June 30, 2016,9, 2020, we had outstanding options to purchase an aggregate of 1,885,0002,334,170 shares of our common stock with exercise prices ranging from $0.60 to $0.66 per share.
Registration Rights
In connection with the 2014 Private Placement, 2015 Private Placements and 2016 Private Placements we granted registration rights to the private placement investors, wherein we agreed to file(out of which a registration statement covering the resaletotal of the shares of common stock and the shares of common stock underlying the warrants (issued in the 2015-2016 Private Placement). We1,389,174 are have agreed to use commercially reasonable efforts to have the registration statement declared effective within ninety (90) days after the registration statement is filed (the "Effectiveness Deadline")currently vested).
We shall keep the registration statement “evergreen” for one (1) year from the date it is declared effective by the Commission or until Rule 144 of the Securities Act is available to the holders of registrable securities purchased in the 2014 Private Placement and the 2015 Private Placements with respect to all of their shares, whichever is earlier. We will pay all costs and expenses incurred by us in complying with our obligations to file registration statements pursuant to the registration rights agreement.
Transfer Agent and Registrar
VStock Transfer, LLC is the transfer agent and registrar for our common stock.
QuotationListing of Securities
We intendOur common stock is presently traded on the Nasdaq Capital Market under the ticker symbol of “GRWG”.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF OUR COMMON STOCK
The following is a summary of the material U.S. federal income tax consequences to seek to have a broker-dealer file a Form 211 in order to havenon-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock quotedissued pursuant to this offering. This discussion is not a complete analysis of all potential U.S. federal income tax consequences relating thereto, and does not address any estate or gift tax consequences or any tax consequences arising under any state, local or foreign tax laws, or any other U.S. federal tax laws. This discussion is based on the OTC Bulletin Board and/Internal Revenue Code of 1986, as amended, or OTCQB. Itthe Code, and applicable Treasury Regulations promulgated thereunder, judicial decisions and published rulings and administrative pronouncements of the Internal Revenue Service, or IRS, all as in effect as of the date hereof. These authorities are subject to differing interpretations and may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.
This discussion is anticipated thatlimited to non-U.S. holders who purchase our common stock pursuant to this offering and who hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a particular holder in light of such holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including:
● | certain former citizens or long-term residents of the United States; | |
● | partnerships or other pass-through entities (and investors therein); | |
● | “controlled foreign corporations;” | |
● | “passive foreign investment companies;” | |
● | corporations that accumulate earnings to avoid U.S. federal income tax; | |
● | banks, financial institutions, investment funds, insurance companies, brokers, dealers or traders in securities; | |
● | tax-exempt organizations and governmental organizations; | |
● | tax-qualified retirement plans; | |
● | persons subject to the alternative minimum tax; | |
● | persons that own, or have owned, actually or constructively, more than 5% of our common stock; | |
● | accrual-method taxpayers subject to special tax accounting rules under Section 451(b) of the Code; | |
● | persons who have elected to mark securities to market; | |
● | persons who hold or receive our common stock pursuant to the exercise of any option or otherwise as compensation; | |
● | “qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds; and | |
● | persons holding our common stock as part of a hedging or conversion transaction or straddle, or a constructive sale, or other risk reduction strategy or integrated investment. |
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our common stock and the partners in such partnerships are urged to consult their tax advisors about the particular U.S. federal income tax consequences to them of holding and disposing of our common stock.
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS. YOU SHOULD ALSO CONSULT WITH YOUR TAX ADVISOR WITH RESPECT TO SUCH CHANGES IN U.S. TAX LAW AS WELL AS POTENTIAL CONFORMING CHANGES IN STATE TAX LAWS.
Definition of Non-U.S. Holder
For purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a “U.S. person” or a partnership (including any entity or arrangement treated as a partnership) for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
● | an individual who is a citizen or resident of the United States; | |
● | a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia; | |
● | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or | |
● | a trust (1) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
Distributions on Our Common Stock
As described under the section titled “Dividend Policy,” we have not paid and do not anticipate paying dividends. However, if we make cash or other property distributions on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a non-U.S. holder’s tax basis in our common stock, but not below zero. Any excess will be quotedtreated as gain realized on the OTC Bulletin Board and/sale or OTCQBother disposition of our common stock and will be treated as described under the section titled “Gain on Disposition of Our Common Stock” below.
Subject to the discussions below regarding effectively connected income, backup withholding and Sections 1471 through 1474 of the Code (commonly referred to as FATCA), dividends paid to a non-U.S. holder of our common stock generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish us or our paying agent with a valid IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) and satisfy applicable certification and other requirements. This certification must be provided to us or our paying agent before the payment of dividends and must be updated periodically. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then will be required to provide certification to us or our paying agent, either directly or through other intermediaries.
If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on our common stock are effectively connected with such holder’s U.S. trade or business (and are attributable to such holder’s permanent establishment in the United States if required by an applicable tax treaty), the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must generally furnish a valid IRS Form W-8ECI (or applicable successor form) to the applicable withholding agent.
However, any such effectively connected dividends paid on our common stock generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Non-U.S. holders that do not provide the required certification on a timely basis, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
Gain on Disposition of Our Common Stock
Subject to the discussions below regarding backup withholding and FATCA, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the sale or other disposition of our common stock, unless:
● | the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, and if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; | |
● | the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition, and certain other requirements are met; or | |
● | our common stock constitutes a “United States real property interest” by reason of our status as a United States real property holding corporation, or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holder’s holding period for our common stock, and our common stock is not regularly traded on an established securities market during the calendar year in which the sale or other disposition occurs. |
If we are a USRPHC and either our common stock is not regularly traded on an established securities market or a non-U.S. holder holds, or is treated as holding, more than 5% of our outstanding common stock, directly or indirectly, during the applicable testing period, gain described in the third bullet point above will generally be taxed in the same manner as gain that is effectively connected with the conduct of a U.S. trade or business, except that the branch profits tax generally will not apply. Determining whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other trade or business assets and our foreign real property interests. We believe that we are not currently and do not anticipate becoming a USRPHC for U.S. federal income tax purposes, although there can be no assurance we will not in the future become a USRPHC. If we are a USRPHC and our common stock is not regularly traded on an established securities market, a non-U.S. holder’s proceeds received on the disposition of shares will also generally be subject to withholding at a rate of 15%. Prospective investors are encouraged to consult their own tax advisors regarding the possible consequences to them if we are, or were to become, a USRPHC.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty), but may be offset by certain U.S.-source capital losses (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Annual reports are required to be filed with the IRS and provided to each non-U.S. holder indicating the amount of dividends on our common stock paid to such holder and the amount of any tax withheld with respect to those dividends. These information reporting requirements apply even if no withholding was required because the dividends were effectively connected with the holder’s conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, currently at a 24% rate, generally will not apply to payments to a non-U.S. holder of dividends on or promptlythe gross proceeds of a disposition of our common stock provided the non-U.S. holder furnishes the required certification for its non-U.S. status, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI, or certain other requirements are met. Backup withholding may apply if the payor has actual knowledge, or reason to know, that the holder is a U.S. person who is not an exempt recipient.
Backup withholding is not an additional tax. If any amount is withheld under the backup withholding rules, the non-U.S. holder should consult with a U.S. tax advisor regarding the possibility of and procedure for obtaining a refund or a credit against the non-U.S. holder’s U.S. federal income tax liability, if any.
Withholding on Foreign Entities
FATCA imposes a U.S. federal withholding tax of 30% on certain payments made to a “foreign financial institution” (as specially defined under these rules) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding certain U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or an exemption applies. FATCA also generally will impose a U.S. federal withholding tax of 30% on certain payments made to a non-financial foreign entity unless such entity provides the withholding agent a certification identifying certain direct and indirect U.S. owners of the entity or an exemption applies. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. FATCA currently applies to dividends paid on our common stock. Under applicable Treasury Regulations and administrative guidance, withholding under FATCA would have applied to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019, but under proposed regulations (the preamble to which specifies that taxpayers are permitted to rely on such proposed regulations pending finalization), no withholding would apply with respect to payments of gross proceeds.
Prospective investors are encouraged to consult with their own tax advisors regarding the possible implications of this legislation on their investment in our common stock.
We entered into an underwriting agreement with the underwriters named below on , 2020. Oppenheimer & Co. Inc. is acting as the sole book-running manager and representative of the underwriters, and Ladenburg Thalmann & Co. Inc. and Lake Street Capital Markets, LLC are acting as co-managers. The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters’ obligations are several, which means that each underwriter is required to purchase a specified number of shares of common stock, but is not responsible for the commitment of any other underwriter to purchase shares of common stock. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below:
Number of | |||
Underwriter | Shares of Common Stock | ||
Oppenheimer & Co. Inc. | |||
Ladenburg Thalmann & Co. Inc. | |||
Lake Street Capital Markets, LLC | |||
Total |
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the option described below), if any are purchased.
The shares of common stock offered hereby are expected to be ready for delivery on or about , 2020 against payment in immediately available funds.
The underwriters are offering the shares of common stock subject to various conditions and may reject all or part of any order. The representative of the underwriters has advised us that the underwriters propose initially to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at a price less a concession not in excess of $ per share of common stock to brokers and dealers. After the shares of common stock are released for sale to the public, the representative may change the offering price, the concession, and other selling terms at various times.
We have granted the underwriters an option to purchase additional shares for the purpose of covering over-allotments. This option, which is exercisable for up to 30 days after the date of this prospectus, provided, however, that is no assurance that ourpermits the underwriters to purchase a maximum of additional shares of common stock from us. If theunderwritersexercise all or part of this option, they will actually be approved and quotedpurchase shares of common stock covered by the option at the public offering price that appears on the OTC Bulletin Board or OTCQB.
SELLING STOCKHOLDERScover page of this prospectus, less the underwriting discounts and commissions. The underwriters have severally agreed that, to the extent the option is exercised, they will each purchase a number of additional shares proportionate to such underwriter’s initial amount reflected in the foregoing table. If this option is exercised in full, the total price to public will be $ , and the total proceeds to us, before expenses, will be $ million.
The following table sets forthprovides information regarding the amount of the discounts and commissions to be paid to the underwriters by us, before expenses:
Per Share of Common Stock | Total Without Exercise of Underwriters’ Option | Total With Full Exercise of Underwriters’ Option | ||||||||||
Public offering price | $ | $ | $ | |||||||||
Underwriting discounts and commissions(1) | $ | $ | $ | |||||||||
Proceeds, before expenses, to us | $ | $ | $ |
(1) | We have agreed to pay the underwriters a commission of 6% of the gross proceeds of this offering. |
We estimate that our total expenses of the offering, excluding the estimated underwriting discounts and commissions, will be approximately $ . We have agreed to reimburse the underwriters for all reasonable out-of-pocket costs and expenses incident to the performance of the obligations of the representative under the underwriting agreement (including, without limitation, the fees and expenses of the underwriters’ outside attorneys).
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended.
We have agreed to a 90-day “lock-up,” during which, without the prior written consent of Oppenheimer & Co. Inc., we shall not issue, sell or register with the Securities and Exchange Commission (the “SEC”) (other than on Form S-8 or on any successor form) with respect to any of our equity securities (or any securities convertible into, exercisable for or exchangeable for any of our equity securities), except for (i) the issuance of the shares of common stock offered pursuant to this prospectus; (ii) the issuance of shares of common stock or securities convertible into or exercisable or exchangeable for shares of common stock, to an unaffiliated third-party on an arm’s-length basis, representing in the aggregate no more than 10% of our issued and outstanding shares of common stock as of the date of this prospectus, which may be issued only in connection with the acquisition of a business or assets, as long as recipients of such securities agree to our knowledge, about the beneficial ownership of our common stockbe bound by the selling stockholders both beforea lock-up agreement; and immediately after the offering.
All of the selling stockholders received their securities in: (i) our formation, (ii) 2014 Private Placement; (iii) the 2015 Private Placements; and/or (iv) the 2016 Private Placement. We believe that the selling stockholders have sole voting and investment power with respect to allissuance of the shares of common stock beneficially owned by them unless otherwise indicated. We believe that all securities purchased by broker-dealers or affiliates of broker-dealers were purchased by such persons and entities in the ordinary course of business and at the time of purchase, such purchasers did not have any agreements or understandings, directly or indirectly, with any person to distribute such securities.
The percent of beneficial ownership for the selling stockholders is based on 10,053,548 shares of common stock outstanding as of the date of this prospectus. Warrants to purchase shares of our common stock held by certain investors that are currently exercisable or exercisable within 60 days of the date of this prospectus are considered outstanding and beneficially owned by such investors for the purpose of computing the percentage ownership of their respective percentage ownership but are not treated as outstanding for the purpose of computing the percentage ownership of any other stockholder. Unless otherwise stated below,pursuant to our knowledge, none of the selling stockholders has had a material relationship with us other thanexisting stock option or bonus plan as a stockholder at any time within the past three years or has ever been one of our officers or directors.
Pursuant to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes any shares of our common stock as to which a stockholder has sole or shared voting power or investment power, and also any shares of our common stock which the stockholder has the right to acquire within 60 days, including upon exercise of warrants to purchase shares of our common stock.
The shares of common stock being offered pursuant to this prospectus may be offered for sale from time to time during the perioddescribed in the registration statement of which this prospectus isforms a part remains effective, by or for the account of the selling stockholders. After the date of effectiveness, the selling stockholders may have sold or transferred, in transactions covered by this prospectus or in transactions exempt from the registration requirements of the Securities Act, some or all of their common stock.part.
Information aboutOur executive officers, directors and certain of our significant stockholders have also agreed to a 90-day “lock-up,” during which, without the selling stockholders may change over time. Any changed information will be set forth in an amendmentprior written consent of Oppenheimer & Co. Inc., they shall not, directly or indirectly, (i) offer, pledge, assign, encumber, announce the intention to the registration statementsell, sell, contract to sell, sell any option or supplementcontract to this prospectus,purchase, purchase any option or contract to the extent required by law.
Shares Beneficially | Shares Beneficially | |||||||||||||||||||||||
Owned as of the date of | Shares | Owned After the | ||||||||||||||||||||||
this Prospectus(1) | Offered by | Offering(1)(2) | ||||||||||||||||||||||
Name of Selling Stockholder | Number Shares | Warrants | Percent | this Prospectus(1)(3) | Number | Percent | ||||||||||||||||||
Darryl H. Aarons | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Aiello Family Trust (4) | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Jan Arnett | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Clifford Berger | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
David Cohen | 100,000 | 100,000 | 0 | 0 | ||||||||||||||||||||
William B. Deakins | 100,000 | 100,000 | 0 | 0 | ||||||||||||||||||||
Vivek R. Dave | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Shawn German | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Kelly John Frederick | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Kurt Hughes | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Jody Kane (5) | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Jonathan Lichter | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Kevin F. McGrath | 175,000 | 50,000 | 225,000 | 0 | 0 | |||||||||||||||||||
Myron Perlstein | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Jonathan Rahn | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Steven Rosen | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Steven Salaman | 100,000 | 100,000 | 0 | 0 | ||||||||||||||||||||
John Maher | 100,000 | 100,000 | 0 | 0 | ||||||||||||||||||||
Barbara Lampert | 50,000 | 50,000 | 0 | 0 | ||||||||||||||||||||
Mark Berger | 75,000 | 75,000 | 0 | 0 | ||||||||||||||||||||
Robert Ayerle | 265,000 | 265,000 | 530,000 | 0 | 0 | |||||||||||||||||||
Stephen Siegel | 265,000 | 265,000 | 530,000 | 0 | 0 | |||||||||||||||||||
Robert Donnelly | 265,000 | 265,000 | 530,000 | 0 | 0 | |||||||||||||||||||
Steven and Kathleen Salvo | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
David Patterson | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Neil Druks | 100,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||||||
Ben Nickolls | 125,000 | 125,000 | 250,000 | 0 | 0 | |||||||||||||||||||
John Nickoll Martial Trust (6) | 205,000 | 205,000 | 410,000 | 0 | 0 | |||||||||||||||||||
Rocco Basile | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Daniel Waldman | 142,858 | 142,858 | 285,716 | 0 | 0 | |||||||||||||||||||
Christine Armstrong | 70,000 | 70,000 | 140,000 | 0 | 0 | |||||||||||||||||||
Brett Nesland | 100,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||||||
Don Stangel | 100,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||||||
Roger Lobo | 35,714 | 35,714 | 71,428 | 0 | 0 | |||||||||||||||||||
Don Allon | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Robert Yosaitis | 214,286 | 214,286 | 428,572 | 0 | 0 | |||||||||||||||||||
Ron Rech | 100,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||||||
Ray Klein | 71,429 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||||||
JJS Associates, LP (7) | 100,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||||||
Mitchell Baruchowitz | 20,000 | 20,000 | 40,000 | 0 | 0 | |||||||||||||||||||
Andrew Fox | 35,714 | 35,714 | 71,428 | 0 | 0 | |||||||||||||||||||
Don Stangle | 267,857 | 267,857 | 535,714 | 0 | 0 | |||||||||||||||||||
Robert Prag | 75,000 | 75,000 | 150,000 | 0 | 0 | |||||||||||||||||||
Brett Nesland | 60,000 | 60,000 | 120,000 | 0 | 0 | |||||||||||||||||||
Paul Ciasullo | 75,000 | 75,000 | 150,000 | 0 | 0 | |||||||||||||||||||
David Moss | 70,000 | 70,000 | 140,000 | 0 | 0 | |||||||||||||||||||
Good Harvest Investment LLC (8) | 142,857 | 142,857 | 285,714 | 0 | 0 | |||||||||||||||||||
William Deakins | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Jim Czirr | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Stephen Aiello | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Allon Rosin | 50,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||||||
Total | 4,655,715 | 3,355,715 | 8,011,430 | 0 | 0 |
* Less than 1%.
(1)Share numbers include shares underlying warrants held by the selling stockholder.
(2) Assumes the salesell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, all shares offered pursuant to this prospectus.
(3)Share numbers include shares of common stock issuable upon exercise of options that are exercisable within sixty days of June 30, 2016.
(4)The person having voting, dispositive or investment powers overAiello Family Trust is Steven Aiello, who is a Director of the Company.
(5) Jody Kane is a Director of the Company.
(6)The person having voting, dispositive or investment powers overJohn Nickoll Martial Trust is John Nickoll.
(7)The person having voting, dispositive or investment powers over JJS Associates, LP is Trideer, LLC, General Partner, of which Jason Hirsch is the control person.
(8)The person having voting, dispositive or investment powers over Good Harvest investment LLC is William Freas.
The selling stockholders, which term as used herein includes donees, pledgees, transferees or other successors-in-interest sellingany shares of common stock or interestsany securities convertible into or exercisable or exchangeable for common stock, owned either of record or beneficially (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) by any signatory of the lock-up agreement on the date of the prospectus or thereafter acquired; (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or any securities convertible into or exercisable or exchangeable for common stock, whether any such transaction described in clauses (i) or (ii) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or publicly announce an intention to do any of the foregoing; and (iii) make any demand for or exercise any right with respect to, the registration of any shares of common stock receivedor any security convertible into or exercisable or exchangeable for common stock. The foregoing shall not apply to (i) common stock to be transferred as a gift or gifts (provided, that (a) any donee shall execute and deliver to Oppenheimer & Co. Inc., acting on behalf of the underwriters, not later than one business day prior to such transfer, a lock-up agreement to Oppenheimer & Co. Inc. and (b) if the lock-up signatory is required to file a report under Section 16(a) of the Exchange Act, reporting a reduction in beneficial ownership of shares of common stock or beneficially owned shares or any securities convertible into or exercisable or exchangeable for common stock or beneficially owned shares during the 90-day “lock-up,” the lock-up signatory shall include a statement in such report to the effect that such transfer is being made as a gift), (ii) the sale of the shares of common stock to be sold pursuant to this prospectus and (iii) beginning on the date which is 30 days after the date of this prospectus, from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their sharessales of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.
The selling stockholders may sell some or all of their shares at a fixed price of $.60 per share until our shares are quoted on the OTC Bulletin Board and/or OTCQB Market and thereafter at prevailing market prices or privately negotiated prices. Prior to being quoted on the OTC Bulletin Board and/or OTCQB Market, shareholders may sell their shares in private transactions to other individuals.
Our common stock is not listed or traded on any public exchange, and we have not applied for listing or quotation on any exchange. We are seeking sponsorship for the quotation of our common stock on the OTC Bulletin Board and/or OTCQB Market. In order to be quoted on the OTC Bulletin Board and/or OTCQB Market, a market maker must file an application on our behalf in order to make a market for our common stock. There can be no assurance that a market maker will agree to file the necessary documents with FINRA, nor can there be any assurance that such an application for quotation will be approved. There is further no assurance that an active trading market for our shares will develop, or, if developed, that it will be sustained. In the absence of a trading market or an active trading market, investors may be unable to liquidate their investment.
The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:
The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus; provided, however, that prior to any such transfer the following information (or such other information as may be required by the federal securities laws from time to time) with respect to each such selling beneficial owner must be added to the prospectus by way of a prospectus supplement or post-effective amendment, as appropriate: (1) the name of the selling beneficial owner; (2) any material relationship the selling beneficial owner has had within the past three years with us or any of our predecessors or affiliates; (3) the amount of securities of the class owned by such beneficial owner before the offering; (4) the amount to be offered for the beneficial owner’s account; and (5) the amount and (if one percent or more) the percentage of the class to be owned by such beneficial owner after the offering is complete.
In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering, provided, however, we will receive proceeds from the exercise of the warrants held by certain investors.
The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to thewritten requirements of that rule.
The selling stockholders and any underwriters, broker-dealers or agents, or their affiliates, that participate in the sale of the common stock or interests therein are “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.
The maximum amount of compensation to be received by any FINRA member or independent broker-dealer for the sale of any securities registered under this prospectus will not be greater than 8.0% of the gross proceeds from the sale of such securities.
In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.
We have advised the selling stockholders that the anti-manipulation rules of Regulation MRule 10b5-1 under the Exchange Act may apply to sales of sharescurrently in effect on the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copiesdate of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify(provided, that any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arisingfiling made under the Securities Act.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no publicExchange Act in connection with such a sale shall disclose that such sale was made pursuant to a Rule 10b5-1 trading marketplan entered into on which our common stock is traded. Among other matters, in order for our common stock to become OTCBB/OTCQB eligible, a FINRA-member broker/dealer must file a Form 211 with FINRA and commit to make a market in our securities oncedate before the Form 211 is approved by FINRA.date of this prospectus). As of the date of this prospectus, Darren Lampert and Michael Salaman have trading plans in effect intended to comply with Rule 10b5-1 under the Form 211 has not been filed with FINRA. There is no assurance that our common stock will be included on the OTCBB/OTCQB.
The sharesSecurities Exchange Act of common stock registered hereby can be sold by selling stockholders at a fixed price of $.60 per share until our shares are quoted on the OTC Bulletin Board and/or OTCQB Market and thereafter at prevailing market prices or privately negotiated prices. We determined such fixed price based on the highest price at which1934, as amended, covering up to approximately 800,000 shares of our common stock were sold in our previous private placements.the aggregate (400,000 shares each) at varying prices.
We can offer no assuranceRules of the SEC may limit the ability of the underwriters to bid for or purchase shares of common stock before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules:
● | Stabilizing transactions - the representative may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, so long as stabilizing bids do not exceed a specified maximum. | |
● | Over-allotments and syndicate covering transactions - the underwriters may sell more shares of common stock in connection with this offering than the number of shares of common stock that they have committed to purchase. This over-allotment creates a short position for the underwriters. This short sales position may involve either “covered” short sales or “naked” short sales. Covered short sales are short sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares of common stock in this offering described above. The underwriters may close out any covered short position either by exercising its over-allotment option or by purchasing shares of common stock in the open market. To determine how they will close the covered short position, the underwriters will consider, among other things, the price per share of common stock available for purchase in the open market, as compared to the price at which they may purchase shares of common stock through the over-allotment option. Naked short sales are short sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that, in the open market after pricing, there may be downward pressure on the price per share of common stock that could adversely affect investors who purchase shares of common stock in this offering. | |
● | Penalty bids - if the representative purchases shares of common stock in the open market in a stabilizing transaction or syndicate covering transaction, it may reclaim a selling concession from the underwriters and selling group members who sold those shares of common stock as part of this offering. | |
● | Passive market making - market makers in the common stock who are underwriters or prospective underwriters may make bids for or purchases of shares of common stock, subject to limitations, until the time, if ever, at which a stabilizing bid is made. |
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales or to stabilize the market price of our common stock may have the effect of raising or maintaining the market price of our common stock or preventing or mitigating a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The imposition of a penalty bid might also have an active public market in our shares will develop or be sustained. Future saleseffect on the price of substantial amountsthe common stock if it discourages resales of our shares in the public market could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.
Holders
As of the date of this prospectus, there are 63 record holders of our common stock.
Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may occur on the Nasdaq Capital Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time.
Electronic Delivery of Prospectus: A prospectus in electronic format may be delivered to potential investors by one or more of the underwriters participating in this offering. The prospectus in electronic format will be identical to the paper version of such prospectus. Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part.
Notice to Non-U.S. Investors
European Economic Area and the United Kingdom
In relation to each Member State of the European Economic Area and the United Kingdom (each, a “Relevant State”), no shares have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation), except that offers of the shares may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:
A. | to any legal entity which is a qualified investor as defined under the Prospectus Regulation; |
B. | to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the representative for any such offer; or |
C. | in any circumstances falling within Article 1(4) of the Prospectus Regulation, |
provided that no such offer of shares shall require the issuer or any of the representatives to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
In the case of any shares being offered to a financial intermediary as that term is used in Article 5(1) of the Prospectus Regulation, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer to the public other than their offer or resale in a Relevant State to qualified investors, in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.
We, the representative and each of our and the representative’s respective affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and agreements.
For the purposes of this provision, the expression an “offer to the public” in relation to any shares in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
References to the Prospectus Regulation include, in relation to the United Kingdom, the Prospectus Regulation as it forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018.
The above selling restriction is in addition to any other selling restrictions set out below.
In connection with the offering, the representative is not acting for anyone other than the issuer and will not be responsible to anyone other than the issuer for providing the protections afforded to their clients nor for providing advice in relation to the offering.
United Kingdom
This document is for distribution only to persons who (i) have professional experience in matters relating to investments and who qualify as investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc.”) of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended (“FSMA”)) in connection with the issue or sale of any securities may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This document is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons.
Canada
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus supplement (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Israel
In the State of Israel, this prospectus supplement shall not be regarded as an offer to the public to purchase shares of common stock under the Israeli Securities Law, 5728 – 1968, which requires a prospectus to be published and authorized by the Israel Securities Authority, if it complies with certain provisions of Section 15 of the Israeli Securities Law, 5728 – 1968, including, inter alia, if: (i) the offer is made, distributed or directed to not more than 35 investors, subject to certain conditions (the “Addressed Investors”); or (ii) the offer is made, distributed or directed to certain qualified investors defined in the First Addendum of the Israeli Securities Law, 5728 –1968, subject to certain conditions (the “Qualified Investors”). The Qualified Investors shall not be taken into account in the count of the Addressed Investors and may be offered to purchase securities in addition to the 35 Addressed Investors. The company has not and will not take any action that would require it to publish a prospectus in accordance with and subject to the Israeli Securities Law, 5728 – 1968. We have not and will not distribute this prospectus supplement or make, distribute or direct an offer to subscribe for our common stock to any person within the State of Israel, other than to Qualified Investors and up to 35 Addressed Investors.
Qualified Investors may have to submit written evidence that they meet the definitions set out in of the First Addendum to the Israeli Securities Law, 5728 – 1968. In particular, we may request, as a condition to be offered common stock, that Qualified Investors will each represent, warrant and certify to us and/or to anyone acting on our behalf: (i) that it is an investor falling within one of the categories listed in the First Addendum to the Israeli Securities Law, 5728 – 1968; (ii) which of the categories listed in the First Addendum to the Israeli Securities Law, 5728 – 1968 regarding Qualified Investors is applicable to it; (iii) that it will abide by all provisions set forth in the Israeli Securities Law, 5728 – 1968 and the regulations promulgated thereunder in connection with the offer to be issued common stock; (iv) that the shares of common stock that it will be issued are, subject to exemptions available under the Israeli Securities Law, 5728 – 1968: (a) for its own account; (b) for investment purposes only; and (c) not issued with a view to resale within the State of Israel, other than in accordance with the provisions of the Israeli Securities Law, 5728 – 1968; and (v) that it is willing to provide further evidence of its Qualified Investor status. Addressed Investors may have to submit written evidence in respect of their identity and may have to sign and submit a declaration containing, inter alia, the Addressed Investor’s name, address and passport number or Israeli identification number.
We have not authorized and do not authorize the making of any offer of securities through any financial intermediary on our behalf, other than offers made by the underwriters and their respective affiliates, with a view to the final placement of the securities as contemplated in this document. Accordingly, no purchaser of the shares, other than the underwriters, is authorized to make any further offer of shares on our behalf or on behalf of the underwriters.
Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document does not constitute a prospectus within the meaning of, and has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, the Company or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority (“FINMA”), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
Robinson & Cole, LLP, 1055 Washington Boulevard, Stamford, CT 06901 has acted as our counsel in connection with the preparation of this prospectus. The law firm of Andrew I. Telsey, P.C., 12835 E. Arapahoe Road, Suite I-803, Centennial, CO 80112 has acted as our special Colorado local counsel in connection with the issuance of an opinion relating to the validity of the securities offered in this prospectus. White & Case LLP, 1221 Avenue of the Americas, New York, NY 10020, has acted as counsel for the underwriters.
The consolidated financial statements of GrowGeneration Corp. appearing in this prospectus and related registration statement have been audited by Connolly Grady & Cha, LLP (“Connolly”), an independent registered public accounting firm, as set forth in their report thereon and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATIONFOR SECURITIES ACT LIABILITIESOn March 27, 2019, the Audit Committee of the Company approved the dismissal of Connolly as the Company’s independent registered public accounting firm. The reports of Connolly on the Company’s consolidated financial statements for the fiscal years ended December 31, 2019 and 2018 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended December 31, 2019 and 2018, and through March 27, 2020, there have been no “disagreements” (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) with Connolly on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Connolly would have caused Connolly to make reference thereto in its reports on the consolidated financial statements for such years. During the fiscal years ended December 31, 2019 and 2018 and through March 27, 2020, there have been no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K).
Our directorsEffective as of March 27, 2020, the Company engaged Plante & Moran, PLLC (“Plante Moran”) as its new registered independent public accountant. During the fiscal years ended December 31, 2019 and officers are indemnified2018, and through March 27, 2020, neither the Company, nor anyone on its behalf, consulted Plante Moran regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the fullest extent permitted under Colorado law. We may also purchaseconsolidated financial statements of the Company, and maintain insurance which protects our officersno written report or oral advice was provided to the Company by Plante Moran that was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation S-K and directors against any liabilities incurredthe related instructions) or a “reportable event” (as that term is defined in connection with their service in such a capacity, and such a policy may be obtained by us in the future.Item 304(a)(1)(v) of Regulation S-K).
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. This prospectus, which is part of the registration statement,does not contain all of the information set forth in the registration statement andomits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information pertaining to us and our common stock, reference is made to the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents or provisions of any documents referred to in this prospectus are not necessarily complete, and in each instance where a copy of the document has been filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matters involved.
You may read and copy all or any portion of the registration statement without charge at the office of the SEC at the Public Reference Room at Station Place, 100 F Street, N.E., Washington, D.C. 20549. Copies of the registration statement may be obtained from the SEC at prescribed rates from the Public Reference Section of the SEC at such address. In addition, registration statements and certain other filings made with the SEC electronically are publicly available through the SEC’s web sitewebsite athttp://www.sec.gov. We also maintain a website at www.GrowGeneration.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus. We have included our website in this prospectus solely as an inactive textual reference, and you should not consider the contents of our website in making an investment decision with respect to our common stock. The registration statement, including all exhibits and amendments to the registration statement, has been filed electronically with the SEC.
Contemporaneously with the effectiveness of the registration statement of which this prospectus is a part, we will become subjectYou may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to the information and periodic reporting requirementsthose reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act and, accordingly, will file annual reports containing financial statements audited by an independent public accounting firm, quarterly reports containing unaudited financial data, current reports, and other information with the Securities and Exchange Commission. You will be ableSEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, inspect and copy such periodic reports, and other information at the SEC’s public reference room, and the web site of the SEC referred to above.SEC.
GROWGENERATION, CORP.INDEX TO FINANCIAL STATEMENTS
December 31, 2020 and 2019
F-1
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 11,441,225 | $ | 12,979,444 | ||||
Accounts receivable (net of allowance for credit losses of $291,372) | 4,575,300 | 4,455,209 | ||||||
Inventory | 28,671,398 | 22,659,357 | ||||||
Prepaid expenses and other current assets | 4,240,843 | 2,549,559 | ||||||
Total current assets | 48,928,766 | 42,643,569 | ||||||
Property and equipment, net | 3,711,479 | 3,340,616 | ||||||
Operating leases right-of-use assets, net | 7,240,673 | 7,628,591 | ||||||
Intangible assets, net | 564,671 | 233,280 | ||||||
Goodwill | 19,650,370 | 17,798,932 | ||||||
Other assets | 363,554 | 377,364 | ||||||
TOTAL ASSETS | $ | 80,459,513 | $ | 72,022,352 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 9,147,215 | $ | 6,024,750 | ||||
Other accrued liabilities | 51,287 | - | ||||||
Payroll and payroll tax liabilities | 1,779,035 | 1,072,142 | ||||||
Customer deposits | 3,554,469 | 2,503,785 | ||||||
Sales tax payable | 755,381 | 533,656 | ||||||
Current maturities of operating leases liability | 1,893,594 | 1,836,700 | ||||||
Current maturities of long-term debt | 82,876 | 110,231 | ||||||
Total current liabilities | 17,263,857 | 12,081,264 | ||||||
Operating leases liability, net of current maturities | 5,484,090 | 5,807,266 | ||||||
Long-term debt, net of current maturities | 230,820 | 242,079 | ||||||
Total liabilities | 22,978,767 | 18,130,609 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Common stock; $.001 par value; 100,000,000 shares authorized; 38,209,300 and 36,876,305 shares issued and outstanding, respectively | 38,209 | 36,876 | ||||||
Additional paid-in capital | 66,423,243 | 60,742,055 | ||||||
Accumulated deficit | (8,980,706 | ) | (6,887,188 | ) | ||||
Total stockholders’ equity | 57,480,746 | 53,891,743 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 80,459,513 | $ | 72,022,352 |
See Notes to the Unaudited Consolidated Financial Statements.
F-2
GROWGENERATION CORPORATION AND SUBSIDIARIES
GrowGeneration Corp
and Subsidiary
Consolidated Financial Statements
March 31, 2016CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Sales | $ | 32,981,506 | $ | 13,087,222 | ||||
Cost of sales | 24,035,257 | 9,400,591 | ||||||
Gross profit | 8,946,249 | 3,686,631 | ||||||
Operating expenses: | ||||||||
Store operations | 3,638,685 | 1,957,790 | ||||||
General and administrative | 1,152,577 | 493,096 | ||||||
Share based compensation | 4,115,068 | 80,278 | ||||||
Depreciation and amortization | 359,142 | 146,624 | ||||||
Salaries and related expenses | 1,797,760 | 659,332 | ||||||
Total operating expenses | 11,063,232 | 3,337,120 | ||||||
(Loss) income from operations | (2,116,983 | ) | 349,511 | |||||
Other income (expense): | ||||||||
Interest expense | (7,181 | ) | (131,637 | ) | ||||
Interest income | 24,842 | 18,833 | ||||||
Other income (loss) | 5,804 | (7,286 | ) | |||||
Total non-operating income (expense), net | 23,465 | (120,090 | ) | |||||
Net (loss) income | $ | (2,093,518 | ) | $ | 229,421 | |||
Net (loss) income per shares, basic | $ | (.055 | ) | $ | .01 | |||
Net (loss) income per shares, diluted | $ | (.055 | ) | $ | .01 | |||
Weighted average shares outstanding, basic | 37,823,304 | 28,437,132 | ||||||
Weighted average shares outstanding, diluted | 37,823,304 | 34,263,302 |
See accompanying notes and accountants' compilation report.Notes to the Unaudited Consolidated Financial Statements.
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF INCOMESTOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 20162020 and 2019
(Unaudited)
2016 | 2015 | |||||||
REVENUES | ||||||||
Sales | $ | 1,541,599 | $ | 594,641 | ||||
Cost of sales | (1,049,900 | ) | (424,446 | ) | ||||
Gross profit | 491,699 | 170,195 | ||||||
EXPENSES | ||||||||
Advertising and promotion | 5,286 | 11,961 | ||||||
Alarm and security | 1,442 | 552 | ||||||
Automobile expense | 3,419 | 1,931 | ||||||
Bad debt expense | 279 | - | ||||||
Bank service charges | 3,965 | 1,491 | ||||||
Cash (over) short | 1,299 | (148 | ) | |||||
Credit card fees | 10,786 | 4,657 | ||||||
Computer and internet expenses | 4,888 | 1,361 | ||||||
Depreciation expense | 9,902 | 2,250 | ||||||
Donations | 500 | - | ||||||
Insurance expense | 4,038 | 1,908 | ||||||
Interest expense | 553 | - | ||||||
Finance charges | 66 | - | ||||||
Janitorial expense | 476 | 162 | ||||||
Licenses & permits | 2,745 | 57 | ||||||
Meals and entertainment | 7,062 | 3,976 | ||||||
Office supplies | 10,244 | 12,605 | ||||||
Stock compensation | - | - | ||||||
Stock option compensation | 86,333 | - | ||||||
Officer salary | 63,900 | 46,500 | ||||||
Salary and wages other | 191,520 | 72,513 | ||||||
Payroll tax and benefits | 26,001 | 12,918 | ||||||
Postage and delivery | 639 | 303 | ||||||
Accounting & audit fees | 16,000 | 5,340 | ||||||
Legal fees | 7,875 | - | ||||||
Commissions & other professional fees | 1,525 | - | ||||||
Rent expense | 59,959 | 17,900 | ||||||
Repairs and maintenance | 3,883 | 422 | ||||||
Supplies | 3,348 | 5,340 | ||||||
Telephone expense | 6,090 | 2,789 | ||||||
Training | 1,399 | - | ||||||
Travel expense | 22,942 | 5,592 | ||||||
Utilities | 12,180 | 7,946 | ||||||
Total expense | 570,544 | 220,326 | ||||||
Net ordinary income (loss) | (78,845 | ) | (50,131 | ) | ||||
Other income (expense) | ||||||||
Interest income | 1 | - | ||||||
Net (Loss) before income taxes | (78,844 | ) | (50,131 | ) | ||||
Income Tax Benefit | - | - | ||||||
Net Loss | $ | (78,844 | ) | $ | (50,131 | ) | ||
Loss per common share | $ | (0.008 | ) | $ | (0.008 | ) |
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 | ||||||||||
Common stock issued upon warrant exercise | 172,500 | 172 | 1,552 | 1,724 | ||||||||||||||||
Common stock issued upon cashless exercise of options | 228,890 | 229 | (229 | ) | - | |||||||||||||||
Common stock issued in connection with business combinations | 344,553 | 345 | 998,406 | 998,751 | ||||||||||||||||
Common stock issued for prepaid services | 50,000 | 50 | 95,950 | 96,000 | ||||||||||||||||
Common stock issued for accrued share-based compensation | 100,000 | 100 | 210,100 | 210,200 | ||||||||||||||||
Share based compensation | (8,951 | ) | (8,951 | ) | ||||||||||||||||
Net income | 229,421 | 229,421 | ||||||||||||||||||
Balances, March 31, 2019 | 28,844,552 | $ | 28,845 | $ | 40,093,390 | $ | (8,536,571 | ) | $ | 31,585,664 | ||||||||||
Balances, December 31, 2019 | 36,876,305 | $ | 36,876 | $ | 60,742,055 | $ | (6,887,188 | ) | $ | 53,891,743 | ||||||||||
Common stock issued upon warrant exercise | 191,235 | 191 | 509,928 | 510,119 | ||||||||||||||||
Common stock issued upon cashless warrant exercise | 18,712 | 19 | (19 | ) | - | |||||||||||||||
Common stock issued upon cashless exercise of options | 279,823 | 280 | (280 | ) | - | |||||||||||||||
Common stock issued in connection with business combinations | 273,892 | 274 | 1,203,050 | 1,203,324 | ||||||||||||||||
Common stock issued for services | 50,000 | 50 | (50 | ) | - | |||||||||||||||
Common stock issued for share based compensation | 519,333 | 519 | 1,759,913 | 1,760,432 | ||||||||||||||||
Share based compensation | - | 2,208,646 | 2,208,646 | |||||||||||||||||
Net loss | (2,093,518 | ) | (2,093,518 | ) | ||||||||||||||||
Balances, March 31, 2020 | 38,209,300 | $ | 38,209 | $ | 66,423,243 | $ | (8,980,706 | ) | $ | 57,480,746 |
See accompanying notes and accountants' compilation report.Notes to the Unaudited Consolidated Financial Statements.
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2016(Unaudited)
2016 | 2015 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | (78,844 | ) | $ | (50,131 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Stock & Option compensation | 86,333 | - | ||||||
Depreciation and amortization | 9,902 | 2,250 | ||||||
Bad debt expense | 279 | - | ||||||
Inventory market value reserve | (9,873 | ) | - | |||||
(Increase) decrease in: | ||||||||
Accounts receivable | (76,859 | ) | (16,917 | ) | ||||
Employee advances | (943 | ) | - | |||||
Inventory | (574,399 | ) | (153,940 | ) | ||||
Prepaid expenses | 7,957 | 3,922 | ||||||
Security deposits | (760 | ) | - | |||||
Increase (decrease) in: | ||||||||
Accounts payable | 303,760 | 161,992 | ||||||
Customer deposits | 6,924 | (3,288 | ) | |||||
Payroll liabilities | 13,363 | 147 | ||||||
Sales tax payable | 9,009 | 4,178 | ||||||
Net Cash Flow Used by Operating Activities | (304,151 | ) | (51,787 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisition of furniture and equipment | (129,239 | ) | (14,375 | ) | ||||
Net Cash Flow Used by Investing Activities | (129,239 | ) | (14,375 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Short term borrowings | 35,636 | 28,582 | ||||||
Proceeds from long-term debt | 28,527 | - | ||||||
Principal payments on long-term debt | (1,860 | ) | - | |||||
Issuance of common stock | 322,000 | 90,000 | ||||||
Net Cash Flow Provided by Financing Activities | 384,303 | 118,582 | ||||||
Net Increase in Cash and Cash Equivalents | (49,087 | ) | 52,420 | |||||
Cash and Cash Equivalents at Beginning of period | 699,417 | 110,559 | ||||||
Cash and Cash Equivalents at End of period | $ | 650,330 | $ | 162,979 | ||||
Supplemental Information: | ||||||||
Interest paid during quarter ending March 31 | $ | 553 | $ | - | ||||
Taxes paid during quarter ending March 31 | $ | 800 | $ | - |
See accompanying notes and accountants' compilation report.
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2016
Additional | Retained | Total | ||||||||||||||||||
Common Stock | Paid-In | Earnings | Stockholders' | |||||||||||||||||
Shares | Amount | Capital | (Deficit) | Equity | ||||||||||||||||
Balances, December 31, 2015 | 8,967,834 | $ | 8,968 | $ | 2,862,816 | $ | (718,411 | ) | $ | 2,153,373 | ||||||||||
Issuance of common stock at $.70 per share | 460,000 | 460 | 289,340 | - | 289,800 | |||||||||||||||
Warrants issued at $.70 per share | - | - | 32,200 | - | 32,200 | |||||||||||||||
Stock option expense | - | - | 86,333 | - | 86,333 | |||||||||||||||
Net (loss) | - | - | - | (78,844 | ) | (78,844 | ) | |||||||||||||
Balances, March 31, 2016 | 9,427,834 | $ | 9,428 | $ | 3,270,689 | $ | (797,255 | ) | $ | 2,482,862 |
See accompanying notes and accountants' compilation report.
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (2,093,518 | ) | $ | 229,421 | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 359,142 | 146,624 | ||||||
Amortization of debt discount | - | 124,946 | ||||||
Stock-based compensation expense | 4,115,068 | 80,278 | ||||||
Bad debt | 20,632 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable | (140,723 | ) | (215,309 | ) | ||||
Inventory | (4,960,155 | ) | (4,050,616 | ) | ||||
Prepaid expenses and other assets | (1,823,464 | ) | (619,382 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued liabilities | 3,173,752 | 1,205,744 | ||||||
Operating leases | 121,636 | 27,297 | ||||||
Payroll and payroll tax liabilities | 706,893 | 315,133 | ||||||
Customer deposits | 1,050,684 | 181,544 | ||||||
Sales tax payable | 221,725 | 112,751 | ||||||
Net cash provided by (used in) operating activities | 751,672 | (2,461,569 | ) | |||||
Cash flows from investing activities: | ||||||||
Assets acquired in business combinations | (1,750,000 | ) | (4,984,075 | ) | ||||
Purchase of furniture and equipment | (652,187 | ) | (430,148 | ) | ||||
Purchase of intangibles | (359,209 | ) | (105,500 | ) | ||||
Net cash used in investing activities | (2,761,396 | ) | (5,519,723 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments on long term debt | (38,614 | ) | (99,560 | ) | ||||
Proceeds from the sale of common stock and exercise of warrants, net of expenses | 510,119 | 1,725 | ||||||
Net cash provided by (used in) financing activities | 471,505 | (97,835 | ) | |||||
Net decrease in cash | (1,538,219 | ) | (8,079,128 | ) | ||||
Cash at the beginning of period | 12,979,444 | 14,639,981 | ||||||
Cash at the end of period | $ | 11,441,225 | $ | 6,560,853 | ||||
Supplemental disclosures of non-cash financing activities: | ||||||||
Cash paid for interest | $ | 7,181 | 18,833 | |||||
Common stock issued for accrued payroll | $ | - | 210,200 | |||||
Common stock issued for prepaid services | $ | - | 96,000 | |||||
Assets acquired by issuance of common stock | $ | 1,203,324 | 998,751 | |||||
Right to use assets acquired under operating leases | $ | 192,614 | 1,791,307 |
See Notes to the Unaudited Consolidated Financial Statements.
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
1. | NATURE OF OPERATIONS |
GrowGeneration Corp (the “Company”) was incorporated onis 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. As of March 6, 2014 in Colorado under31, 2020, the name of Easylife and changed its name to GrowGeneration Corp. It maintains its principal office in Pueblo, Colorado.
GrowGeneration Corp is engaged in the business of owning and operating retail hydroponic stores through wholly owned subsidiaries. It currently owns Grow Generation Pueblo Corp. which operates retail hydroponic stores in Colorado located in Pueblo, Canon City, Trinidad, Conifer, Colorado Springs and Denver; and Grow Generation California Corp. which operates a retail store in Santa Rosa California. The Company today owns and operates 9a chain of twenty seven (27) retail hydroponic/gardening stores, with five (5) located in the state of Colorado, four (4) 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, one (1) in the state of Oregon, four (4) in the State of Oklahoma, one (1) in the state of Rhode Island, three (3) in Maine, (1) in Florida, one (1) distribution center in California and an online e-commerce store, GrowGen.Pro. In addition, we operate a warehouse out of Sacramento, CA. Our plan is to acquire, open and operate hydroponic/gardening stores and is actively engagedrelated businesses throughout the United States and Canada.
The Company engages in seeking to acquire additional hydroponic retail stores. its business through its wholly-owned subsidiaries, GrowGeneration Pueblo Corp, GrowGeneration California Corp, GrowGeneration 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, GrowGeneration Florida Corp and GrowGeneration Management Corp.
2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
The Company’saccompanying unaudited condensed consolidated interim financial statements include our accounts and those of our wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement hasof the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles.
Subsequent Events
The Company has evaluated eventsthe instructions to Form 10-Q pursuant to the rules and transaction occurring from March 31, 2016 through June 27, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
Basis of Presentation and Consolidation
The Company’s financial statements are prepared on the accrual method of accounting. The accounting and reporting policiesregulations of the Company conform to generally accepted accounting principles (GAAP). The consolidated financial statements of the Company included the accounts of GrowGeneration Pueblo Corp. IntercompanyU.S. Securities and Exchange Commission. All significant intercompany balances and transactions are eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (“Annual Report”) filed on March 27, 2020, and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the three months ended March 31, 2020.
F-6
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
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.
Revenue RecognitionAdditionally, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.
RevenueAs we continue to monitor the COVID-19 situation, the Company is considered an “essential” supplier to the agricultural industry, suppling the nutrients and nourishment required to feed their plants. The Company has been opened during this difficult time. We have plans and procedures in place to ensure our customers and employees stay safe during this time of uncertainty. As a result of COVID-19 we reduced some hours of operations at the store level and some stores were closed on product salesthe weekends, primarily in the later part of the first quarter of 2020. There have been some minor delays in vendor shipments as their warehouses and supply chain were affected by staffing shortages. The Company successfully implemented a will call and curb side pick-up process that is working well. Other than what has been disclosed above, we have not experienced adverse effects from COVID-19.
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 upon delivery or shipment. Customer deposits/layaway sales are not reported as income until final payment is received andon a straight-line basis over the merchandise is delivered.lease term.
Income Taxes
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect from balances outstanding at March 31, 2016. Based on the Company's assessment of the credit history with customers having outstanding balances and current relationships with them. At March 31, 2016, the Company established an allowance for doubtful accounts of $6,500.
GrowGeneration Corporation and Subsidiaries
Notes to Financial Statements
March 31, 2016
Property and Equipment
Expenditures for maintenance and repairs are charged against operations. Renewals and betterment that materially extend the life of the asset are capitalized. Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
For federal income tax purposes, depreciation is computed using the accelerated cost recovery system and the modified accelerated cost recovery system.
Income Taxes
The Company accounts for income taxes in accordance with FASB ACSthe Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis oftax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and incomeliabilities and their respective tax purposes. The differences related principally to depreciation of propertybases and equipment, reserve for obsolete inventory and bad debt.tax credit carry forwards. Deferred tax assets and liabilities representare measured using enacted tax rates expected to apply to taxable income in the futureyears in which those temporary differences are expected to be recovered or settled. The effect on deferred tax consequence for those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes are alsoof a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided for operating losses that are available to offset future taxable income. Valuation allowances are established to reducethe amount of deferred tax assets that would otherwise be recorded for income tax benefits primarily relating to operating loss carryforwards as realization cannot be determined to be more likely than not.
GrowGeneration Corporation and Subsidiaries
Notes to the amount expected to be realized.Unaudited Consolidated Financial Statements
March 31, 2020
2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
The Company adopted the provisions of FASB ACSASC 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 their respective statute of limitation. Currently, the 20152019, 2018 and 20142017 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 March 31, 2016. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 month of the reporting date.2020.
PresentationThere is no income tax provision, and as such no effective tax rate (“ETR”), in the accompanying condensed consolidated statement of Sales Taxesoperations due to the cumulative operating losses that indicate a 100% valuation allowance for the deferred tax assets and state income taxes is appropriate.
Revenue Recognition
The Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives services at which point, the performance obligation is requiredsatisfied. Sales and other taxes collected concurrent with revenue producing activities are excluded from revenue. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The Company monitors provisions for estimated returns. Payment for goods and services sold by the Company is typically due upon satisfaction of the performance obligations. Under certain circumstances, the Company does provide goods and services to customers on a credit basis (seeAccounts Receivable below). The Company accounts for shipping and handling activities as a fulfillment costs rather than as a separate performance obligation. When the Company receives payment from customers before the customer has taken possession of the merchandise or the service has been performed, the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete.
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect sales tax for the State of Colorado, State of California, City of Pueblo, City of Canon City, City of Colorado Springs, Pueblo County and Fremont County, Jefferson County, El Paso County, City & County of Denver, City of Santa Rosa ranging from 3.9% to 8.25%balances outstanding at year-end, based on the Company's sales to nonexempt customers.Company’s assessment of the credit history with customers having outstanding balances and current relationships with them. A reserve for uncollectable receivables is established when collection of amounts due is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, client cash flow difficulties or ongoing service or billing disputes. Credit is generally extended on a short-term basis thus receivables do not bear interest. At March 31, 2020 and December 31, 2019, the Company established an allowance for doubtful accounts of $291,372, respectively.
Inventory
Inventory consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or market. The Company collects that sales tax from customersperiodically reviews the value of items in inventory and remits the entire amountprovides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to the corresponding taxing authorities. The Company's accounting policy is to exclude the tax collected and remitted from revenue and cost of sales.goods sold.
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, |
AdvertisingProperty and Equipment
The Company expenses all advertisingProperty and promotional costs when incurred. Advertisingequipment are carried at cost. Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement, whichever is shorter. Renewals and promotional expensebetterment that materially extend the life of the asset are capitalized. Expenditures for maintenance and repairs are charged against operations. Depreciation of property and equipment is provided on the three months ending March 31, 2016 amounted to $4,096.straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
Freight and Shipping
Estimated Lives | ||
Vehicle | 5 years | |
Furniture and fixtures | 5-7 years | |
Computers and equipment | 3-5 years | |
Leasehold improvements | 10 years not to exceed lease term |
It is the Company's policy to classify freight and shipping costs as part of cost of sales. Total freight and shipping costs for the three months ending March 31, 2016 was $1,145.
Cash and CashEquivalents
For purposes of the statement of cash flows, the Company considers all unrestricted highly liquid investments with a maturity of three months or less when acquired to be cash equivalents.
Goodwill
Goodwill represents the excess of acquisition costspurchase price over the fair value of net tangible and intangible assets acquired in connection with an acquisition.assets. The Company accounts for goodwill in accordance with the provisions of FASB Accounting Standards Update (ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. provisions of FASB Accounting Standards Update (ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. In accordance with FASB ASC Topic 350 for Intangibles – Goodwill and Other, goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. The Company’s review for impairment includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill, the first step of the two-step quantitative goodwill impairment test is performed, which compares the fair value of the reporting unit with itsits´ carrying amounts, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, an additional procedures must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.
Stock Based Compensation
The carryingCompany records stock-based compensation in accordance with FASB ASC Topic 718,Compensation-Stock Compensation (“ASC 718”). The Company estimates the fair value of goodwillstock options using the Black-Scholes option pricing model. The fair value of stock options granted is testedrecognized as an expense over the requisite service period. Stock-based compensation expense for impairment at least annually.all share-based payment awards are recognized using the straight-line single-option method.
Inventory
Inventory consists primarilyThe Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of gardening suppliesoptions granted is derived from historical data on employee exercises and materials andpost-vesting employment termination behavior. The risk-free rate selected to value any particular grant is recorded at the lower of cost (first-in, first-out method) or market.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. ASU 2014-09 will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance. ASU 2014-09 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point of time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016. Non public entities are required to apply the guidance for annual periods beginning after December 15, 2017. Early application is not permitted for public entities. The Company is currently evaluating the impact the adoption of ASU 2014-09 will havebased on the Company's financial statements and disclosures.U.S. Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.
F-9
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
On March 1, 2016New Accounting Pronouncements
As an emerging growth company, the Company entered into a three year lease for 4,498 square feetis permitted to delay the adoption of retail space and opened its 9th store located in Denver Colorado at a monthly rate of $3,650.
new or revised accounting standards until such time as those standards apply to private companies. The Company leases its store facilities under operating leases ranging from $850has chosen to $5,600 per month. The following is a schedule of future minimum rental payments required under the termtake advantage of the operating leases as of March 31, 2016:
12 months Ending March 31, | Amount | ||||
2017 | $ | 266,460 | |||
2018 | 237,980 | ||||
2019 | 155,316 | ||||
2020 | 86,720 | ||||
2021 | 32,100 | ||||
Thereafter | - | ||||
$ | 778,576 |
Rent expense under all operating leasesextended transition period for the three months ending March 31, 2016 was $59,959.complying with new or revised accounting standards.
Effective May 2014,Recently Adopted Accounting Pronouncements
During the first quarter of 2019, the Company entered into employment agreementsadopted the FASB 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 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 its CEOan 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 President.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 agreements require paymentamendment is effective commencing in 2019 with early adoption permitted. The adoption of monthly wages and benefits. These agreements expire May 2017.this new guidance did not have a material impact on our Financial Statements.
In April 2015,August 2018, the Company acquired approximately $30,000SEC 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 inventory at cost from Green Growers, Inc., a retail store locatedchanges in Canon City, Colorado. In connection therewith,stockholders’ equity in the Company engaged the CEO of Green Growers, Inc.,interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a sales consultantfootnote or separate statement, is required for a period of two years.the current and comparative quarter and year-to-date interim periods. The agreement requires a base fee of $1,200 per month duringamendments 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 first year and $600 per month during the second year, together with incentive compensation for any new business he generates, in a n amount equal to 25% of the gross profit on all such goods and services generated. In addition, the Company issued this consultant 10,000 five (5) year options, exercisable at a price of $0.60 per share as additional compensation under his consulting agreement.quarter ended March 31, 2019.
In June 2015,August 2018, the Company acquired approximately $68,000FASB 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 adoption of inventory at cost from Happy Grow Lucky, Inc.,this new guidance, effective January 1, 2020 did not have a retail store located in Conifer, CO. In connection therewith, the Company engaged the two principals as sales consultants for a period of one year. The agreement requires monthly payment of $840 together with incentive compensation for any new business generated, in an amount equal to 25% of the gross profitmaterial impact on all such goods and services that they generate. In addition, we executed a new three year lease for the premises in Conifer, CO at a rate of $2,400 per month.our Financial Statements.
On October 8, 2015, the Company completed an inventory purchase of approximately $169,000 of inventory and $25,000 of fixed assets from Sweet Leaf Hydroponics Inc., a retail store located in Santa Rosa, CA. In connection therewith, the Company engaged one of the principals as a sales consultant for a period of one year. The agreement requires compensation of 25% of the gross profits for any new business generated.
On November 28, 2015, the Company acquired $35,000 of inventory of Greenhouse Tech, Inc., a retail store located in Colorado Springs, CO. The Company hired the principal of Greenhouse Tech, Inc. as a sales consultant for 1 year at $13 per hour and 20% of the gross profits on all sales generated by the sales consultant.
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
Recently Issued Accounting Pronouncements – Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326),” changing the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The ASU will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. In November 2019, the FASB issued ASU No. 2019-10, changing effective dates for the new standards to give implementation relief to certain types of entities. The Company is subjectrequired to federaladopt the new standards no later than January 1, 2023 according to ASU 2019-10, with early adoption allowed. We are currently evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2022 and should be applied on a prospective basis. The Company is currently evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and Colorado and California state income tax.interim recognition of enactment of tax laws or rate changes. The standard will be effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those periods. We are currently evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.
4. | REVENUE RECOGNITION |
Disaggregation of Revenues
The following table disaggregates revenue by source:
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||
Sales at company owned stores | $ | 31,036,819 | $ | 12,405,923 | ||||
E-commerce sales | 1,944,687 | 681,299 | ||||||
Total Revenues | $ | 32,981,506 | $ | 13,087,222 |
Contract Balances
Depending on when the timing of when a customer takes possession of product and when a customer make payments for such product, the Company recognizes a customer trade receivable (asset) or a customer deposit (liability). The difference between the opening and subsidiaries file a consolidated federal income tax return. The Company’s consolidated provision for income taxes for the period from inception March 6, 2014 through March 31, 2016 consistsclosing balances of the following:Company’s customer trade receivables and the customer deposit liability results from timing differences between the Company’s performance and the customer’s payment.
Three Months Ended March 31, | Year Ended December 31, | For the Period from Inception March 6, 2014 through December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||||
Income Tax Expense (benefit) | |||||||||||||
Current tax expense | |||||||||||||
Federal | $ | -0- | $ | -0- | $ | -0- | |||||||
State | -0- | -0- | -0- | ||||||||||
Deferred tax (benefit) | |||||||||||||
Federal | -0- | -0- | -0- | ||||||||||
State | -0- | -0- | -0- | ||||||||||
Total | $ | -0- | $ | -0- | $ | -0- |
The consolidated provision for income taxes for the period from inception March 6, 2014 through March 31, 2016 differs from that computed by applying federal statutory rates to income before federal income tax expense, as indicated in the following analysis:
As of March 31, | Year Ended December 31, | For the Period from Inception March 6, 2014 through December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||||
Expected federal tax provision (benefit) at 35% rate | $ | (27,596 | ) | $ | (185,065 | ) | $ | (66,380 | ) | ||||
Surtax exemption | 3,942 | 26,438 | 9,483 | ||||||||||
Meals and entertainment | 954 | 2,724 | 1,410 | ||||||||||
State income tax | (1,903 | ) | (15,590 | ) | (8,563 | ) | |||||||
Valuation allowance | 24,603 | 171,493 | 64,050 | ||||||||||
Total income tax (benefit) | $ | - | $ | - | $ | - | |||||||
Effective tax rate (benefit) | 0.0 | % | 0.0 | % | 0.0 | % |
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
A summary
Contract Balances
Depending on the timing of deferred tax assetswhen a customer takes possession of product and liabilitieswhen a customer make payments for such product, the Company recognizes a customer trade receivable (asset) or a customer deposit (liability). The difference between the opening and closing balances of the Company’s customer trade receivables and the customer deposit liability results from timing differences between the Company’s performance and the customer’s payment.
The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as offollows:
Receivables | Customer Deposit Liability | |||||||
Opening balance, 1/1/2020 | $ | 4,455,209 | $ | 2,503,785 | ||||
Closing balance, 3/31/2020 | 4,575,300 | 3,554,469 | ||||||
Increase (decrease) | $ | 120,091 | $ | 1,050,684 | ||||
Opening balance, 1/1/2019 | $ | 862,397 | $ | 516,038 | ||||
Closing balance, 3/31/2019 | 1,077,706 | 697,582 | ||||||
Increase (decrease) | $ | 215,309 | $ | 181,544 |
5. | PROPERTY AND EQUIPMENT |
March 31, 2020 | December 31, 2019 | |||||||
Vehicles | $ | 840,354 | $ | 702,447 | ||||
Leasehold improvements | 1,205,530 | 884,685 | ||||||
Furniture, fixtures and equipment | 3,532,019 | 3,305,323 | ||||||
5,577,903 | 4,892,455 | |||||||
(Accumulated depreciation) | (1,866,424 | ) | (1,551,839 | ) | ||||
Property and Equipment, net | $ | 3,711,479 | $ | 3,340,616 |
Depreciation expense for the three months ended March 31, 2016 is2020 and 2019 was $331,324 and $146,624, respectively.
6. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill: The changes in goodwill are as follows:
March 31, 2020 | December 31, 2019 | |||||||
Balance, beginning of year | $ | 17,798,932 | $ | 8,752,909 | ||||
Goodwill additions | 1,851,438 | 9,046,023 | ||||||
Impairments | - | - | ||||||
Balance, end of year | $ | 19,650,370 | $ | 17,798,932 |
As of March 31, | Year Ended December 31, | For the Period from Inception March 6, 2014 through December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||||
Deferred tax assets: | |||||||||||||
Reserve for inventory obsolescence | $ | 14,589 | $ | 18,008 | $ | 4,675 | |||||||
Reserve for bad debt | 2,251 | 2,251 | 1,000 | ||||||||||
Stock option compensation | 138,860 | 108,963 | 29,897 | ||||||||||
Federal tax loss carryforward | 141,788 | 135,562 | 32,791 | ||||||||||
State tax loss carryforward | 21,882 | 20,923 | 5,061 | ||||||||||
Subtotal deferred tax assets | 319,370 | 285,707 | 73,424 | ||||||||||
Less: valuation allowance | (261,746 | ) | (235,543 | ) | (64,050 | ) | |||||||
Total net deferred tax assets | 57,624 | 50,164 | 9,374 | ||||||||||
Deferred tax liabilities: | |||||||||||||
Accumulated depreciation and amortization | (57,624 | ) | (50,164 | ) | (9,374 | ) | |||||||
Total deferred tax liabilities | (57,624 | ) | (50,164 | ) | (9,374 | ) | |||||||
NET DEFERRED TAX ASSETS | $ | - | $ | - | $ | - |
As of March 31, 2016, the Company had $472,624 federal and state net operating loss carryforwards, which results in a deferred tax asset of $163,670, expiring in 2034, 2035 and 2036.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred since inception. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of March 31, 2016, a valuation allowance of $261,746 has been recorded to record the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
Long term debt is as follows: | March 31, 2016 | ||||
8.0%, Hitachi Capital, payable $631.13 monthly beginning September 2015 through August 2019, secured by delivery equipment with a book value of $29,508 | $ | 22,576 | |||
3.5%, Wells Fargo Equipment Finance, payable $518.96 monthly beginning April 2016 through March 2011, secured by warehouse equipment with a book value of $28,527 | 28,090 | ||||
$ | 50,666 | ||||
Less Current Maturities | (11,312 | ) | |||
Total Long-Term Debt | $ | 39,354 |
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
Future Debt Maturities – A scheduleIntangible assets on the Company’s consolidated balance sheets consist of expectedthe following:
March 31, 2020 | December 31, 2019 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Patents and trademarks | $ | 100,000 | $ | - | $ | 100,000 | $ | - | ||||||||
Capitalized software | 494,265 | 29,594 | 135,030 | 1,750 | ||||||||||||
$ | 594,265 | $ | 29,594 | $ | 235,030 | $ | 1,750 |
Amortization expense for the three months ended March 31, 2020 and 2019 was $27,818 and $0, respectively.
7. | LONG-TERM DEBT |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Long term debt is as follows: | ||||||||
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 | $ | 4,752 | $ | 7,109 | ||||
Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 24 installments of $24,996, due February 2020 | - | 24,997 | ||||||
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 | 308,944 | 320,204 | ||||||
$ | 313,696 | $ | 352,310 | |||||
Less Current Maturities | (82,876 | ) | (110,231 | ) | ||||
Total Long-Term Debt | $ | 230,820 | $ | 242,079 |
Interest expense for the three months ended March 31, 2020 and 2019 was $7,181 and $6,691, respectively.
8. | 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.
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
8. | LEASES, continued |
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.
Lease expense is recorded within our consolidated statements of operations based upon the nature of the assets. Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in “cost of sales.” Facilities and assets which serve management and support functions are expensed through general and administrative expenses.
March 31, 2020 | December 31, 2019 | |||||||
Right to use assets, operating lease assets | $ | 7,240,673 | $ | 7,628,591 | ||||
Current lease liability | $ | 1,893,594 | $ | 1,836,700 | ||||
Non-current lease liability | 5,484,090 | 5,807,266 | ||||||
$ | 7,377,684 | $ | 7,643,966 |
March 31, 2020 | March 31, 2019 | |||||||
Weighted average remaining lease term | 3.24 years | 3.5 years | ||||||
Weighted average discount rate | 7.6 | % | 7.6 | % |
March 31, 2020 | March 31, 2019 | |||||||
Operating lease costs | $ | 924,583 | $ | 423,973 | ||||
Short-term lease costs | 16,053 | 5,735 | ||||||
Total operating lease costs | $ | 940,636 | $ | 429,708 |
The following table presents the maturity of the Company’s operating lease liabilities as of March 31, 2020: | ||||
2020 (remainder of the year) | $ | 1,930,342 | ||
2021 | 2,597,468 | |||
2022 | 2,150,123 | |||
2023 | 1,608,229 | |||
2024 | 813,984 | |||
Thereafter | 1,433,499 | |||
Total lease payments | 10,533,645 | |||
Less: Imputed interest | (3,155,961 | ) | ||
Lease Liability at March 31, 2020 | $ | 7,377,684 |
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
9. | 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, at a price of $.01 per share or through cashless exercise.
The convertible debt paymentshas a maturity date of January 12, 2021 and the portion allocatedprincipal 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 August 21, 2019, all remaining convertible debt and accrued interest had been converted to principal follows:equity and no convertible debt remains outstanding.
During the three months ended March 31, 2019, 172,500 warrants issued in connection with the convertible debt were exercised, resulting in the issuance of 172,500 shares of common stock.
Amortization of debt discount for the three months ended March 31, 2019 was $124,946.
10. | 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.
During the three months ended March 31, 2020 the Company issued 518,333 shares of common stock (stock-based awards) to officers and employees that vested immediately resulting in compensation expense of approximately $2,130,000. No stock-based awards were issued for the three months ended March 31, 2019 that vested immediately.
Twelve Months | Total | Allocated to | |||||||
Ending March 31 | Payment | Principal | |||||||
2017 | $ | 13,801 | $ | 11,312 | |||||
2018 | 13,801 | 11,999 | |||||||
2019 | 13,801 | 12,733 | |||||||
2020 | 9,383 | 9,012 | |||||||
2021 | 5,709 | 5,610 | |||||||
$ | 56,495 | $ | 50,666 |
During the three months ended March 31, 2020 and March 31, 2019, the Company recorded $145,990 and $0, respectively, of share-based compensation to executives that is included in payroll and payroll tax liabilities.
The following table presents share-based payment expense and new shares issued for the three months ended March 31, 2020 and 2019.
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Total non-cash share-based compensation | $ | 4,115,068 | $ | 80,278 |
On March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive stock planPlan (“2014 Plan”) pursuant to which the Company may grant incentive, and non-statutory options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock or cash awards to employees, nonemployee members of theour Board, consultants and other independent advisors who provide services to the Corporation.Company. The maximum shares of common stock which may be issued over the term of the plan shall not exceed 2,500,000 shares. Awards under this plan are made by the Board or a committee ofdesignated by the Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s common stock which is required to be issued at a price not less than 110% of the 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, noplan administrator. No option shall havemay be exercisable for more than ten years (five years in the case of an incentive stock option granted to a term in excess of 5 years10% stockholder) from the date of grant.
On March 6, 2014, the Company issued 650,000 options to its CEO, Darren Lampert, issued 400,000 options to its CFO, Irwin Lampert, issued 400,000 options to its President, Michael Salaman and issued 200,000 options to its COO, Jason Dawson exercisable at prices between $.60 and $.66 cents per share. On May 12, 2014, the Company issued 50,000 options to its director, Jody Kane and on May 14, 2014, the company issued 50,000 options to its director, Stephen Aiello, exercisable at prices between $.60 and $.66 cents per share. On July 7, 2014, the Company issued 100,000 options to 8 of its employees, exercisable at prices between $.60 and $.66 cents per share. On April 15, 2015, the Company issued 10,000 options to sales consultant Duane Nunez and on October 8, 2015, the Company issued 25,000 options to sales consultant Troy Sowers. The options vest 1/3 immediately, 1/3 one year after date of issuance and 1/3 two years after date of issuance. Compensation expense recorded for the three months ended March 31, 2016 was $86,333.
Each option is estimated as of the date of grant using a Black-Scholes Merton option valuation model that uses the assumptions noted in the table below. To address the lack of historical volatility data for the Company, expected volatility is based on the volatilities of peer companies.
As of March 31, 2016, there were 1,885,000 options issued and outstanding under the plan.
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
SHARE BASED PAYMENTS AND STOCK OPTIONS, |
A summaryOn 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. On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable thereunder from 2,500,000 to 5,000,000, which amendment was approved by shareholders on May 11, 2020. The 2018 Plan will be administered by the Board. 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 also has broad authority to determine the terms and conditions of each option activityor other kind of equity award, adopt, amend and rescind rules and regulations for the administration of the 2018 Plan and amend or modify outstanding options, grants and awards.
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 10% stockholder) from the date of grant.
Awards issued under the 2014 Plan as of March 31, 2016:2020 are summarized below:
Weight-Average | Weighted-Average Remaining | ||||||||||
Options | Shares | Exercise Price | Contractual Term | ||||||||
Outstanding at December 31, 2015 | 1,885,000 | $ | 0.62 | 3 years | |||||||
Granted | - | - | |||||||||
Exercised | - | - | |||||||||
Forfeited or expired | - | - | |||||||||
Outstanding at March 31, 2016 | 1,885,000 | $ | 0.62 | 3 years |
2020 | ||||
Total shares available for issuance pursuant to the 2014 Plan | 2,500,000 | |||
Options outstanding, March 31, 2020 | (224,000 | ) | ||
Total options exercised under 2014 Plan | (1,889,833 | ) | ||
Total shares issued pursuant to the 2014 Plan | (375,000 | ) | ||
Awards available for issuance under the 2014 Plan, March 31, 2020 | 11,167 |
A summary ofAwards issued under the status of the Company’s nonvested shares2018 Plan as of March 31, 20162020 are summarized below:
2020 | ||||
Total shares available for issuance pursuant to the 2018 Plan, after amendment | 5,000,000 | |||
Options outstanding, March 31, 2020 | (1,618,500 | ) | ||
Total options exercised under 2018 Plan | (31,333 | ) | ||
Total shares issued pursuant to the 2018 Plan | (69,750 | ) | ||
Awards available for issuance under the 2018 Plan, March 31, 2020 | 3,280,417 |
GrowGeneration Corporation and changesSubsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
10. | SHARE BASED PAYMENTS AND STOCK OPTIONS, continued |
The table below summarizes all the options granted by the Company under all plans during the three months then ended is presented below:March 31, 2020:
Weighted-Average | |||||||||
Nonvested shares | Shares | Fair Market Value | |||||||
Nonvested at December 31, 2015 | 639,999 | $ | 0.14 | ||||||
Granted | - | ||||||||
Vested | (616,667 | ) | $ | 0.14 | |||||
Forfeited | - | - | |||||||
Outstanding at March 31, 2016 | 23,332 | $ | 0.14 |
Options | Shares | Weight - Average Exercise Price | Weighted - Average Remaining Contractual Term | Weighted - Average Grant Date Fair Value | ||||||||||
Outstanding at December 31, 2019 | 1,916,333 | $ | 2.78 | 3.81 years | $ | 1.71 | ||||||||
Granted | 607,500 | 3.92 | $ | 2.29 | ||||||||||
Exercised | (414,663 | ) | $ | 1.83 | $ | .85 | ||||||||
Forfeited or expired | - | |||||||||||||
Outstanding at March 31, 2020 | 2,109,170 | $ | 2.97 | 3.01 years | $ | 1.88 | ||||||||
Options vested at March 31, 2020 | 1,210,837 | $ | 2.74 | 2.68 years | $ | 1.66 |
STOCK PURCHASE WARRANTS |
In the months of September and December 2015, the Company granted 2,465,001 warrants to investors in a private placement of common shares. These warrants are exercisable for a period of five years with an exercise price of $.70. In October 2015, 142,800 warrants were issued to “Selling Agents” for private placement of common stock.
Each warrant is estimated as of the date of grant using a Black-Scholes Merton option valuation model that uses the assumptions noted in the table below. To address the lack of historical volatility data for the Company, expected volatility is based on the volatilities of peer companies.
As of March 31, 2016, there were 3,067,801 warrants granted.
A summary of the status of the Company’s outstanding stock purchase warrants as of March 31, 20162020 is as follows:
Warrants | Weighted - Average Exercise Price | |||||||
Outstanding at December 31, 2019 | 3,697,686 | $ | 3.25 | |||||
Issued | - | |||||||
Exercised | (191,235 | ) | $ | 2.75 | ||||
Forfeited | (250,000 | ) | 5.75 | |||||
Outstanding at March 31, 2020 | 3,256,451 | $ | 3.08 |
Weighted-Average | Weighted-Average | ||||||||||||
Shares | Exercise Price | Fair Market Value | |||||||||||
Outstanding December 31, 2015 | 2,607,801 | $ | 0.70 | $ | .07 | ||||||||
Granted | 460,000 | $ | 0.70 | $ | .07 | ||||||||
Exercised | - | - | - | ||||||||||
Forfeited | - | - | - | ||||||||||
Outstanding at March 31, 2016 | 3,067,801 | $ | 0.70 | $ | .07 |
12. | EARNINGS PER SHARE |
Potentially dilutive securities, issued by the Company, were comprised of the following:
March 31, 2020 | March 31, 2019 | |||||||
Stock purchase warrants | 3,256,451 | 3,279,500 | ||||||
Convertible debt warrants | 112,500 | 363,750 | ||||||
Options | 2,109,170 | 1,775,500 | ||||||
Total | 5,478,121 | 5,418,750 |
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 20162020
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. As of March 31, 2016 there were 9,427,834 shares of common stock outstanding. The number of shares of common stock outstanding as of March 31, 2016 does not include (i) 3,067,001 shares of common stock issuable upon the exercise of warrants; (ii) shares of our common stock issuable upon the exercise of 1,885,000 outstanding stock options; and (iii) 142,800 warrants issued to the Placement Agent in connection with the Company’s 2015 Private Placement pursuant to which it can acquire 142,800 shares of common stock at a purchase price of $.70 per share.
On January 4, 2016, the Company offered for sale 3,000,000 units at $.70, with gross proceeds of $2,100,000. Each unit consists of one share of common stock and one five-year warrant to purchase one share of common stock at an exercise price of $.70 per share. If all of the 3,000,000 units offered in the offering have been sold and if all of the warrants are exercised, Company would receive a total of $2,100,000 in proceeds.
On March 31, 2016, the Company sold 460,000 units to four accredited investors at a price of $.70 per unit, with each unit consisting of one share of common stock and one five-year warrant to purchase one share of common stock at an exercise price of $.70 per share. If all of the 460,000 warrants are exercised, the Company would receive a total of $322,000 in proceeds.
On April 29, 2016, the Company closed on the 2016 private placement, to which they sold 890,714 units to 10 accredited investors at a price of $.70 per unit, with each unit consisting of one share of common stock and on five-year warrant to purchase one share of common stock at an exercise price of $.70 per share. If all of the 890,714 warrants are exercised, the Company would receive a total of $623,500 in proceeds.
As May 3, 2016, the Company has a total of 10,053,548 shares of common stock outstanding, 3,548,515 warrants outstanding and exercisable at $.70 per share and 1,885,000 stock options. As of the date of May 3, 2016, none of the warrants has been exercised.
GrowGeneration Corporation and Subsidiaries
Notes to Financial Statements
March 31, 2016
EARNINGS PER SHARE, continued |
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 months ended March 31, 2016,2020 and 2019. Potentially dilutive securities were not included in the year ended December 31, 2015 andcomputation of diluted loss per share for the period from inception March 6, 2014 through December 31, 2014.
Three Months Ended March 31, | Year Ended December 31, | For the Period from Inception March 6, 2014 through December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||||
Net Loss | $ | (78,844 | ) | $ | (528,756 | ) | $ | (189,655 | ) | ||||
Weighted average share outstanding basic | 6,563,271 | 6,563,271 | 6,000,000 | ||||||||||
Effect of dilutive common stock equivalents | |||||||||||||
Adjusted weighted average shares outstanding - dilutive | 6,563,217 | 6,563,271 | 6,000,000 | ||||||||||
Basic loss per share | $ | (.01 | ) | $ | (.08 | ) | $ | (.03 | ) | ||||
Dilutive loss per share | $ | (.01 | ) | $ | (.08 | ) | $ | (.03 | ) |
The effective of the 1,885,000 stock option and the 3,067,001 of warrants outstanding as ofthree months ended March 31, 20162020, because to do so would have been anti-dilutive. Therefore, basic loss per share is antidilutive and therefore not presented in the above table.
On April 29, 2016, the Company closed on the 2016 private placement to which the sold 890,714 units to 10 accredited investors at a price of $.70 per unit, with each unit consisted of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $623,500.
On April 29, 2016, the Company issued 50,000 common shares and 50,000 warrants to the Placement Agent in connection with its 2016 Private Placement pursuant to which it can acquire 50,000 shares of common stock at a purchase price of $.70same as diluted loss per share.
Three months ended | ||||||||
March 31, 2020 | March 31, 2019 | |||||||
Net income (loss) | $ | (2,093,518 | ) | $ | 229,421 | |||
Weighted average shares outstanding, basic | 37,823,304 | 28,437,132 | ||||||
Effect of dilutive common stock equivalents | - | 5,418,750 | ||||||
Adjusted weighted average shares outstanding, dilutive | 37,823,304 | 33,855,882 | ||||||
Basic income (loss) per shares | $ | (.055 | ) | $ | .01 | |||
Dilutive income (loss) per share | $ | (.055 | ) | $ | .01 |
13. | ACQUISITIONS |
The Company 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. Our acquisition strategy is to acquire well established profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence. 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.
On February 26, 2020 we acquired certain assets of Health & Harvest LLC in a transaction valued at approximately $2.85 million. Acquired goodwill of approximately $1,750,600 represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital. Transaction costs incurred in connection with this acquisition were not significant.
The table below represents the allocation of the purchase price to the acquired net assets during the three months ended March 31, 2020.
Health & Harvest LLC | ||||
Inventory | $ | 1,052,500 | ||
Prepaids and other current assets | - | |||
Furniture and equipment | 50,000 | |||
Right to use asset | 192,600 | |||
Lease liability | (192,600 | ) | ||
Goodwill | 1,750,600 | |||
Total | $ | 2,852,500 |
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
14. | ACQUISITIONS, continued |
The table below represents the consideration paid for the net assets acquired in business combinations.
Health & Harvest LLC | ||||
Cash | $ | 1,750,000 | ||
Common stock | 1,102,500 | |||
Total | $ | 2,852,500 |
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 March 31, 2020.
Health & Harvest LLC | ||||
Acquisition date | 2/26/2020 | |||
Revenue | $ | 559,340 | ||
Earnings | $ | 112,882 |
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 three months ended March 31, 2019.
Pro forma consolidated income statement:
March 31, 2019 | ||||
Revenue | $ | 1,365,700 | ||
Earnings | $ | 19,200 |
The table below represents the allocation of the preliminary purchase price to the acquired net assets during the three months ended March 31, 2019.
Chlorophyll | Reno Hydroponics | Palm Springs Hydroponics | Total | |||||||||||||
Inventory | $ | 1,441,000 | $ | 238,000 | $ | 465,500 | $ | 2,144,500 | ||||||||
Prepaids and other current assets | 22,000 | - | 22,000 | |||||||||||||
Furniture and equipment | 100,000 | 25,000 | 25,000 | 150,000 | ||||||||||||
Right to use asset | 702,000 | - | 329,300 | 1,031,300 | ||||||||||||
Lease liability | (702,000 | ) | - | (329,300 | ) | (1,031,300 | ) | |||||||||
Goodwill | 2,596,100 | 516,300 | 554,000 | 3,666,400 | ||||||||||||
Total | $ | 4,159,100 | $ | 779,300 | $ | 1,044,500 | $ | 5,982,900 |
F-19
GrowGeneration Corp
Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
For
14. | ACQUISITIONS, continued |
The table below represents the Year Ended Decemberconsideration paid for the net assets acquired in business combinations for the period ended March 31, 20152019.
Chlorophyll | Reno Hydroponics | Palm Springs Hydroponics | Total | |||||||||||||
Cash | $ | 3,659,100 | $ | 525,000 | $ | 800,000 | $ | 4,984,100 | ||||||||
Common stock | 500,000 | 254,300 | 244,500 | 998,800 | ||||||||||||
Total | $ | 4,159,100 | $ | 779,300 | $ | 1,044,500 | $ | 5,982,900 |
The following table discloses the date of the acquisitions noted above and the Periodrevenue and earnings included in the consolidated income statement from Inceptionthe date of acquisition to the period ended March 31, 2019.
(
Chlorophyll | Reno Hydroponics | Palm Springs Hydroponics | Total | |||||||||||||
Acquisition date | 1/21/2019 | 2/11/2019 | 2/7/2019 | |||||||||||||
Revenue | $ | 3,450,600 | $ | 1,594,900 | $ | 121,500 | $ | 5,167,000 | ||||||||
Earnings | $ | 613,000 | $ | 165,300 | $ | 5,800 | $ | 784,100 |
The following represents the proforma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the three months ended March 6, 2014) to December 31, 20142018.
Pro forma consolidated income statement
March 31, 2018 | ||||
Revenue | $ | 2,088,200 | ||
Earnings | $ | 389,100 |
15. | SUBSEQUENT EVENTS |
The Company has evaluated events and transaction occurring subsequent to March 31, 2020 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.
F-20
GrowGeneration Corp
and Subsidiaries
Consolidated Financial Statements
For the Year Ended December 31, 2015
and the Period from Inception
(March 6, 2014) to December 31, 2014
GrowGeneration Corp and Subsidiaries
December 31, 2015 and For the Period from Inception
(March 6, 2014) to December 31, 2014
Contents
TABLEREPORT OF CONTENTS
INDEPENDENT AUDITOR’S REPORTREGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Stockholders of GrowGeneration Corp
503 N. Main Street – Suite 740
Pueblo, Colorado 81003Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GrowGeneration Corp and Subsidiaries (the Company) as of December 31, 20152019 and 2014,2018, and the related consolidated statements of operations, comprehensive income, stockholders’stockholder s’ equity, and cash flows for each of the yearyears in the two-year period ended December 31, 20152019, and the period from inception (March 6, 2014)related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2014. GrowGeneration Corp’s management is responsible2019 and 2018, and the results of its operations and its cash flows for these consolidatedeach of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements.statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The companyCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
Ouraudits included performing procedures to assesstherisks of material misstatement of the financialstatements, whether dueto error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining,on a testatest basis,evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditfinancialstatements.Our audits also includes assessing the accountingincluded evaluatingtheaccounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation.wellasevaluating theoverall presentation of thefinancialstatements. We believe that our audit providesthatouraudits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GrowGeneration Corp and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the year ended December 31, 2015 and the period from inception (March 6, 2014) to December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ Connolly Grady & Cha, P.C
Certified Public Accountants
We haveservedas the Company’sauditorsince2014
Philadelphia,Springfield, Pennsylvania
June 30, 2016
March 27, 2020
GrowGeneration Corp. and Subsidiaries
GrowGeneration Corp and Subsidiaries
Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS
Year Ended | From Inception (March 6, 2014) to | |||||||
December 31, | December 31, | |||||||
2015 | 2014 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 699,417 | $ | 110,559 | ||||
Accounts receivable, net of allowance for doubtful accounts of $6,500 and $2,887, respectively | 37,554 | 8,698 | ||||||
Employee advances | 2,950 | |||||||
Inventory | 1,311,639 | 346,284 | ||||||
Prepaid expenses | 17,036 | 5,870 | ||||||
Total Current Assets | 2,068,596 | 471,411 | ||||||
Fixed Assets | ||||||||
Furniture and equipment | 291,241 | 37,524 | ||||||
Accumulated depreciation | (20,005 | ) | (3,569 | ) | ||||
Total Fixed Assets, Net | 271,236 | 33,955 | ||||||
Other Assets | ||||||||
Security deposits | 27,230 | 8,090 | ||||||
Goodwill | 243,000 | 243,000 | ||||||
Total Other Assets | 270,230 | 251,090 | ||||||
Total Assets | $ | 2,610,062 | $ | 756,456 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current maturities of long-term debt | $ | 5,866 | ||||||
Accounts payable | 292,078 | 167,765 | ||||||
Short term borrowings | 56,184 | 7,470 | ||||||
Customer deposits | 18,410 | 8,250 | ||||||
Payroll and payroll tax liabilities | 43,925 | 17,007 | ||||||
Sales taxes payable | 22,093 | 9,286 | ||||||
Total Current Liabilities | 438,556 | 209,778 | ||||||
Long-Term Debt – net of current portion | 18,133 | -0- | ||||||
Stockholders’ Equity | ||||||||
Common stock .001 par value, 100,000,000 shares authorized: 8,967,834 shares issued and outstanding at December 31, 2015 and 6,000,000 shares issued and outstanding at December 31, 2014 | 8,968 | 6,000 | ||||||
Additional paid in capital | 2,862,816 | 730,333 | ||||||
Accumulated deficit | (718,411 | ) | (189,655 | ) | ||||
Total Equity | $ | 2,153,373 | $ | 546,678 | ||||
Total Liabilities and Stockholders’ Equity | $ | 2,610,062 | $ | 756,456 |
December 31, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 12,979,444 | $ | 14,639,981 | ||||
Accounts receivable, net of allowance for doubtful accounts of $291,372 and $133,288 at December 31, 2019 and 2018 | 4,455,209 | 862,397 | ||||||
Inventory | 22,659,357 | 8,869,469 | ||||||
Prepaids and other current assets | 2,549,559 | 606,037 | ||||||
Total current assets | 42,643,569 | 24,977,884 | ||||||
Property and equipment, net | 3,340,616 | 1,820,821 | ||||||
Operating leases right-of-use assets, net | 7,628,591 | - | ||||||
Intangible assets, net | 233,280 | 114,155 | ||||||
Goodwill | 17,798,932 | 8,752,909 | ||||||
Other assets | 377,364 | 227,205 | ||||||
TOTAL ASSETS | $ | 72,022,352 | $ | 35,892,974 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 6,024,750 | $ | 1,819,411 | ||||
Accrued liabilities | - | 40,151 | ||||||
Payroll and payroll tax liabilities | 1,072,142 | 410,345 | ||||||
Customer deposits | 2,503,785 | 516,038 | ||||||
Sales tax payable | 533,656 | 191,958 | ||||||
Current maturities of right-of-use assets | 1,836,700 | - | ||||||
Current portion of long-term debt | 110,231 | 436,813 | ||||||
Total current liabilities | 12,081,264 | 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 | 5,807,266 | - | ||||||
Long-term debt, net of current portion | 242,079 | 375,626 | ||||||
Total liabilities | 18,130,609 | 5,834,455 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Common stock; $.001 par value; 100,000,000 shares authorized; 36,876,305 and 27,948,609 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 36,876 | 27,949 | ||||||
Additional paid-in capital | 60,742,055 | 38,796,562 | ||||||
Accumulated deficit | (6,887,188 | ) | (8,765,992 | ) | ||||
Total stockholders’ equity | 53,891,743 | 30,058,519 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 72,022,352 | $ | 35,892,974 |
SeeThe accompanying notes toare an integral part of these audited consolidated financial statements.
TABLEGrowGeneration Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CONTENTS
GrowGeneration Corp and Subsidiaries
Consolidated Statements of OperationsOPERATIONS
Year Ended December 31, 2015 | For the Period from Inception (March 6, 2014) to December 31, 2014 | |||||||
Revenues | ||||||||
Sales | $ | 3,455,146 | $ | 1,202,366 | ||||
Cost of sales | (2,351,836 | ) | (809,039 | ) | ||||
Gross profit | 1,103,310 | 393,327 | ||||||
Expenses | ||||||||
Advertising and promotion | 51,332 | 16,189 | ||||||
Alarm and security | 3,087 | 1,556 | ||||||
Automobile expenses | 14,915 | 5,950 | ||||||
Bad debt | 9,791 | 2,887 | ||||||
Bank service charges | 8,004 | 2,569 | ||||||
Cash (over) short | (2,519 | ) | (277 | ) | ||||
Credit card fees | 27,819 | 14,622 | ||||||
Computer and internet expenses | 7,417 | 1,711 | ||||||
Depreciation expense | 16,436 | 3,569 | ||||||
Insurance expense | 10,715 | 4,459 | ||||||
License and permits | 904 | 2,128 | ||||||
Meals and entertainment | 20,839 | 9,398 | ||||||
Office supplies | 17,673 | 9,422 | ||||||
Officers’ salaries | 252,500 | |||||||
Payroll, payroll tax and benefits | 491,372 | 216,478 | ||||||
Postage and delivery | 1,782 | 244 | ||||||
Professional fees | 233,769 | 107,085 | ||||||
Rent expense | 105,269 | 33,975 | ||||||
Repairs and maintenance | 4,520 | 1,065 | ||||||
Stock compensation | 141,983 | |||||||
Stock option compensation | 87,967 | 86,333 | ||||||
Supplies | 10,747 | 1,094 | ||||||
Telephone expense | 13,498 | 4,738 | ||||||
Travel expense | 54,676 | 44,302 | ||||||
Uniforms | 1,053 | |||||||
Utilities | 33,434 | 12,432 | ||||||
Total Expense | 1,617,930 | 582,982 | ||||||
Net (loss) from operations | (514,620 | ) | (189,655 | ) | ||||
Other (Expenses) | ||||||||
Start up costs | (11,220 | ) | ||||||
Interest | (2,916 | ) | ||||||
Total other (expenses) | (14,136 | ) | -0- | |||||
Net (Loss) before income tax benefit | (528,756 | ) | (189,655 | ) | ||||
Income Tax Benefit | 0 | 0 | ||||||
Net Loss | $ | (528,756 | ) | $ | (189,655 | ) | ||
Loss per common share | (.08 | ) | (.03 | ) |
For the Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Sales | $ | 79,733,568 | $ | 29,000,730 | ||||
Cost of sales | 57,171,721 | 22,556,172 | ||||||
Gross profit | 22,561,847 | 6,444,558 | ||||||
Operating expenses: | ||||||||
Store operations | 10,095,422 | 5,202,330 | ||||||
General and administrative | 3,172,019 | 1,603,421 | ||||||
Share based compensation | 2,490,535 | 1,895,219 | ||||||
Depreciation and amortization | 1,044,553 | 351,070 | ||||||
Salaries and related expenses | 3,619,197 | 1,648,166 | ||||||
Total operating expenses | 20,421,726 | 10,700,206 | ||||||
Net income (loss) from operations | 2,140,121 | (4,255,648 | ) | |||||
Other income (expense): | ||||||||
Miscellaneous income (expense) | (4,545 | ) | 115,875 | |||||
Interest income | 144,725 | 79,184 | ||||||
Interest expense | (45,191 | ) | (23,565 | ) | ||||
Amortization of debt discount | (356,306 | ) | (989,601 | ) | ||||
Total non-operating income (expense), net | (261,317 | ) | (818,107 | ) | ||||
Net income (loss) | $ | 1,878,804 | $ | (5,073,755 | ) | |||
Net income (loss) per share, basic | $ | .06 | $ | (.22 | ) | |||
Net income (loss) per share, diluted | $ | .05 | $ | (.22 | ) | |||
Weighted average shares outstanding, basic | 32,833,594 | 23,492,650 | ||||||
Weighted average shares outstanding, diluted | 39,228,696 | 23,492,650 |
SeeThe accompanying notes toare an integral part of these audited consolidated financial statements.
TABLEGrowGeneration Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CONTENTS
STOCKHOLDERS’ EQUITY
GrowGeneration CorpFOR THE YEARS ENDED DECEMBER 31, 2019 and Subsidiaries
Consolidated Statements of Cash Flows2018
Year Ended December 31, 2015 | For the Period from Inception (March 6, 2014) to December 31, 2014 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net (loss) | $ | (528,756 | ) | $ | (189,655 | ) | ||
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
Depreciation | 16,436 | 3,569 | ||||||
Bad debt expense | 9,791 | 2,887 | ||||||
Inventory market value reserve | 38,500 | 13,500 | ||||||
Stock compensation | 229,950 | 86,333 | ||||||
(Increase) decrease in: | ||||||||
Accounts receivable | (38,647 | ) | (6,299 | ) | ||||
Employee advances | (2,950 | ) | ||||||
Inventory | (1,003,855 | ) | (86,784 | ) | ||||
Prepaid expenses | (11,166 | ) | (4,550 | ) | ||||
Security deposits | (19,140 | ) | (8,090 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable | 124,313 | 110,490 | ||||||
Customer deposits | 10,160 | 7,895 | ||||||
Payroll and payroll tax liabilities | 26,918 | 17,007 | ||||||
Sales taxes payable | 12,807 | 9,286 | ||||||
Net Cash (Used In) Operating Activities | (1,135,639 | ) | (44,411 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisition of Subsidiaries | (499,976 | ) | ||||||
Acquisition of furniture and equipment | (253,717 | ) | (2,524 | ) | ||||
Net Cash (Used In) Investing Activities | (253,717 | ) | (502,500 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds (payment) on short term borrowing | 48,714 | 7,470 | ||||||
Proceeds (payments) from long-term debt, net | 23,999 | |||||||
Issuance of common stock | 1,905,501 | 650,000 | ||||||
Net Cash Provided by Financing Activities | 1,978,214 | 657,470 | ||||||
Net Increase in Cash and Cash Equivalents | 588,858 | 110,559 | ||||||
Cash and Cash Equivalents at Beginning of Period | 110,559 | -0- | ||||||
Cash and Cash Equivalents at End of Period | $ | 699,417 | $ | 110,559 | ||||
Supplemental Information: | ||||||||
Interest paid during the period | $ | 2,925 | $ | -0- | ||||
Taxes paid during the period | $ | -0- | $ | -0- |
Additional | Total | |||||||||||||||||||
Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
Shares | Amount | Capital | (Deficit) | Equity | ||||||||||||||||
Balances, December 31, 2017 | 16,846,835 | $ | 16,846 | $ | 11,254,212 | $ | (3,692,237 | ) | $ | 7,578,821 | ||||||||||
Sale of Common stock and warrants, net of fees | 3,333,333 | 3,333 | 9,956,544 | - | 9,959,877 | |||||||||||||||
Warrants issued for services | - | - | 456,807 | - | 456,807 | |||||||||||||||
Stock option expense | - | - | 546,370 | - | 546,370 | |||||||||||||||
Common stock issued upon warrant exercise | 3,076,461 | 3,077 | 2,590,617 | - | 2,593,694 | |||||||||||||||
Common stock issued upon exercise of options | 995,186 | 995 | 320,706 | - | 321,701 | |||||||||||||||
Common stock issued in connection with business combinations | 1,550,000 | 1,550 | 5,303,600 | - | 5,305,150 | |||||||||||||||
Common stock issued upon conversion of convertible debt | 2,013,294 | 2,014 | 3,619,917 | - | 3,621,931 | |||||||||||||||
Warrants issued with convertible debt | - | - | 4,239,000 | - | 4,239,000 | |||||||||||||||
Common stock issued for services | 107,500 | 108 | 400,395 | - | 400,503 | |||||||||||||||
Common stock issued for accrued share-based compensation | 26,000 | 26 | 108,394 | - | 108,420 | |||||||||||||||
Net loss | (5,073,755 | ) | (5,073,755 | ) | ||||||||||||||||
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 | 12,639,510 | - | 12,643,633 | |||||||||||||||
Share based compensation | 1,215,273 | 1,215,273 | ||||||||||||||||||
Common stock issued upon warrant exercise | 1,757,913 | 1,758 | 1,298,141 | 1,299,899 | ||||||||||||||||
Common stock issued upon exercise of options | 10,000 | 10 | 5,990 | 6,000 | ||||||||||||||||
Common stock issued upon cashless exercise of options | 505,868 | 506 | (506 | ) | - | |||||||||||||||
Common stock issued in connection with business combinations | 969,553 | 969 | 3,624,411 | - | 3,625,380 | |||||||||||||||
Common stock issued upon conversion of convertible debt | 1,258,608 | 1,259 | 2,404,010 | 2,405,269 | ||||||||||||||||
Common stock issued for services | 202,500 | 202 | 548,564 | 548,766 | ||||||||||||||||
Common stock issued for accrued share-based compensation | 100,000 | 100 | 210,100 | 210,200 | ||||||||||||||||
Net income | 1,878,804 | 1,878,804 | ||||||||||||||||||
Balances, December 31, 2019 | 36,876,305 | $ | 36,876 | $ | 60,742,055 | $ | (6,887,188 | ) | $ | 53,891,743 |
SeeThe accompanying notes toare an integral part of theses audited consolidated financial statements.
GrowGeneration CorpCorp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Year Ended December 31, 2015 CONSOLIDATED STATEMENTS OF CASH FLOWS
Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
Shares | Amount | Capital | (Deficit) | Equity | ||||||||||||||||
Balances, December 31, 2014 | 6,000,000 | $ | 6,000 | $ | 730,333 | $ | (189,655 | ) | $ | 546,678 | ||||||||||
Issuance of common stock at $.60 per share | 300,000 | 300 | 179,700 | 180,000 | ||||||||||||||||
Issuance of common stock at $.70 per share | 2,465,001 | 2,465 | 1,550,486 | 1,552,951 | ||||||||||||||||
Warrants issued at $.70 per share | 172,550 | 172,550 | ||||||||||||||||||
Stock option expense | 87,967 | 87,967 | ||||||||||||||||||
Stock compensation at $.70 per share | 202,833 | 203 | 141,780 | 141,983 | ||||||||||||||||
Net (loss) | (528,756 | ) | (528,756 | ) | ||||||||||||||||
Balances, December 31, 2015 | 8,967,834 | $ | 8,968 | $ | 2,862,816 | $ | (718,411 | ) | $ | 2,153,373 |
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | 1,878,804 | $ | (5,073,755 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,044,553 | 351,069 | ||||||
Provision for doubtful accounts receivable | 172,135 | 35,459 | ||||||
Inventory valuation reserve | 429,126 | 153,397 | ||||||
Amortization of debt discount | 356,306 | 989,601 | ||||||
Stock based compensation | 2,490,535 | 1,895,219 | ||||||
Noncash operating lease expense | 15,375 | - | ||||||
Other | (66,536 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable | (3,764,947 | ) | (244,288 | ) | ||||
Inventory | (10,482,014 | ) | (792,575 | ) | ||||
Prepaid expenses and other assets | (2,061,701 | ) | (182,616 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued liabilities | 4,165,188 | 514,154 | ||||||
Customer deposits | 1,987,747 | 423,688 | ||||||
Payroll and payroll tax liabilities | 154,471 | 270,878 | ||||||
Sales taxes payable | 341,698 | 118,738 | ||||||
Net Cash (Used In) Operating Activities | (3,339,260 | ) | (1,541,031 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Assets acquired in business combinations | (9,458,743 | ) | (5,680,409 | ) | ||||
Purchase of property and equipment | (2,232,812 | ) | (625,379 | ) | ||||
Purchase of goodwill and other intangibles | (119,125 | ) | (61,523 | ) | ||||
Net Cash (Used In) Investing Activities | (11,810,680 | ) | (6,367,311 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Principal payments on long term debt | (460,129 | ) | (454,979 | ) | ||||
Proceeds from issuance of convertible debt, net of expenses | - | 8,912,765 | ||||||
Proceeds from the sales of common stock and exercise of warrants and options, net of expenses | 13,949,532 | 12,875,272 | ||||||
Net Cash Provided by Financing Activities | 13,489,403 | 21,333,058 | ||||||
Net Increase(decrease) in Cash and Cash Equivalents | (1,660,537 | ) | 13,424,716 | |||||
Cash and Cash Equivalents at Beginning of year | 14,639,981 | 1,215,265 | ||||||
Cash and Cash Equivalents at End of year | $ | 12,979,444 | $ | 14,639,981 | ||||
Supplemental Information: | ||||||||
Common stock and warrants issued for prepaid services | $ | 96,000 | $ | 45,000 | ||||
Common stock issued for accrued payroll liability | 210,200 | - | ||||||
Debt converted to Equity | 2,310,832 | 3,621,931 | ||||||
Assets acquired by issuance of stock | 3,625,380 | 5,305,150 | ||||||
Warrants issued for debt discount | - | 4,239,000 | ||||||
Acquisition of vehicles with debt financing | - | 56,174 | ||||||
Interest paid during the period | $ | 45,191 | $ | 23,565 | ||||
Acquisition of assets with seller financing | - | 1,087,000 |
SeeThe accompanying notes toare an integral part of these audited consolidated financial statements.
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ EquityNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 6, 2014) to DecemberFOR THE YEARS ENDED DECEMBER 31, 2014
Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
Shares | Amount | Capital | (Deficit) | Equity | ||||||||||||||||
Issuance of common stock at $.0077142 per share | 1,750,000 | $ | 1,750 | $ | 10,750 | $ | $ | 12,500 | ||||||||||||
Issuance of common stock at $.0125 per share | 2,000,000 | 2,000 | 23,000 | 25,000 | ||||||||||||||||
Issuance of common stock at $.01 per share | 1,250,000 | 1,250 | 11,250 | 12,500 | ||||||||||||||||
Issuance of common stock at $.60 per share | 1,000,000 | 1,000 | 599,000 | 600,000 | ||||||||||||||||
Stock option expense | 86,333 | 86,333 | ||||||||||||||||||
Net (loss) | (189,655 | ) | (189,655 | ) | ||||||||||||||||
Balances, December 31, 2014 | 6,000,000 | $ | 6,000 | $ | 730,333 | $ | (189,655 | ) | $ | 546,678 |
See accompanying notes to consolidated financial statements.
GrowGeneration Corp2019 and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2015 and For the Period March 6, 2014 to December 31, 20142018
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 Pueblo,Denver, Colorado.
GrowGeneration Corp is engagedthe 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. As of March 27, 2020, the Company owns and operates a chain of twenty seven (27) retail hydroponic/gardening stores, with five (5) located in the businessstate of operating retail hydroponicColorado, four (4) 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, one (1) in the state of Oregon, four (4) in the State of Oklahoma, one (1) in the state of Rhode Island, three (3) in Maine, (1) in Florida, one (1) distribution center in California and organic specialty an online e-commerce store, GrowGen.Pro. In addition, we operate a warehouse out of Sacramento, CA. Our plan is to acquire, open and operate hydroponic/gardening retail 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, GrowGeneration Florida Corp and GrowGeneration CaliforniaManagement Corp. The company commenced operations with the purchase of 4 retail hydroponic stores in Pueblo and Canon City, Colorado on May 30, 2014. The Company, currently owns and operates a total of 9 stores and is actively engaged in seeking to acquire additional hydroponic retail stores.
Subsequent Events
The Company has evaluated events and transactions occurring from December 31, 2015 through June 27, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Consolidation
The Company’s financial statements are prepared onunder the accrual method of accounting. TheFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 105-10,Generally Accepted Accounting Principles, in accordance with accounting and reporting policies of the Company conform withprinciples generally accepted accounting principles (GAAP)in the U.S. (“GAAP”).
The consolidated financial statements ofinclude the Company include the accounts of GrowGeneration Pueblo Corp and Grow Generation California Corp. Intercompanyits wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The various products sold support each other
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).
Use of Estimates
Management uses estimates and are interrelated. assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.
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 Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC or codification”) 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. 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.
Revenue Recognition
Revenue on product sales is recognized upon delivery or shipment. Customer deposits/layaway sales are not reported as income unit final payment is received and the merchandise is delivered.
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152019 and For the Period March 6, 2014 to December 31, 20142018
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Revenue Recognition
The Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives services. When the Company receives payment from customers before the customer has taken possession of the merchandise or the service has been performed, the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete.
Vendor Allowances
Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels. These vendor allowances are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based on estimates of purchases.
Volume rebates, when earned, are recorded as a reduction in Cost of Sales.
Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company’s cash equivalents are carried at fair market value and consist primarily of money market funds.
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect from balances outstanding at year-end. Basedyear-end, based on the Company'sCompany’s assessment of the credit history with customers having outstanding balances and current relationships with them. A reserve for uncollectable receivables is established when collection of amounts due is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, client cash flow difficulties or ongoing service or billing disputes. Credit is generally extended on a short-term basis thus receivables do not bear interest. At December 31, 20152019 and 2014,2018, the Company established an allowance for doubtful accounts of $6,500$291,372 and $2,887,$133,288, respectively.
Inventory
Inventory consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or market. The company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.
Property and Equipment
Expenditures for maintenanceProperty and repairsequipment are charged against operations.carried at cost. Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement, whichever is shorter. Renewals and betterment that materially extend the life of the asset are capitalized. Expenditures for maintenance and repairs are charged against operations. Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
Estimated Lives | |||
Vehicle | 5 years | ||
Furniture and fixtures | 5-7 years | ||
Computers and equipment | 3-5 years | ||
Leasehold improvements | 10 years not to exceed lease term |
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
For incomeLeases
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.
Fair Value of Financial Instruments
The fair value of certain of our financial instruments including cash and cash equivalents, accounts receivable, prepaid assets, employee advances, accounts payable, customer deposits, payroll and payroll tax purposes, depreciation is computed usingliabilities, sales tax payable and notes payable approximate their carrying amounts because of the accelerated cost recovery system and the modified accelerated cost recovery system.short-term maturity of these instruments.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 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 relate 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 ASC 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 de-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 20142018, 2017, and 2016 tax year isyears 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 accruals for uncertain tax positions as of December 31, 2015.2019. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
Concentration of Risk
GrowGeneration CorpFinancial instruments that potentially expose us to concentrations of risk consist primarily of cash and Subsidiariescash equivalents and accounts receivable, which are generally not collateralized. Our policy is to place our cash and cash equivalents with high quality financial institutions, in order to limit the amount of credit exposure. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000. At December 31, 2019 and 2018, the Company had $11,229,444 and $12,962,958, respectively, in excess of the FDIC insurance limit. The Company generally does not require collateral from its customers, but its credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. The Company maintains allowance for potential credit losses.
GROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152019 and For the Period March 6, 2014 to December 31, 20142018
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Presentation of Sales Taxes
The Company is required to collect sales tax for the State of Colorado and California, City of Pueblo, City of Canon City, Pueblo County, Fremont County, City & County of Denver, and the City of Santa Rosa; ranging from 2.9% to 8.75 % on the Company's sales to nonexempt customers. The Company collects sales taxes from customers and remits to the corresponding taxing authorities. The Company's accounting policy is to exclude the tax collected and remitted from revenue and cost of sales.
Advertising
The Company expenses all advertising and promotional costs when incurred. Advertising and promotional expenses for the yearyears ended December 31, 20152019 and for the period from inception (March 6, 2014) to December 31, 20142018 amounted to $51,332$736,656 and $16,189,$269,550, respectively.
Freight and Shipping
It is the Company's policy to classify freight and shipping costs as part of cost of sales. Total freight and shipping costs for the year ended December 31, 2015 and for the period from inception (March 6, 2014) to December 31, 2014 was $13,419 and $9,321, respectively.
Cash and CashEquivalents
For purposes of the statement of cash flows, the Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Goodwill
Goodwill represents the excess of acquisition costspurchase price over the fair value of net tangible and intangible assets acquired in connection with an acquisition.assets. The Company accounts for goodwill in accordance with the provisions of FASB Accounting Standards Update (ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. In accordance with FASB ASC Topic 350 for Intangibles – Goodwill and Other, goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. The Company’s review for impairment includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than itsits´ carrying value, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is less than itsits´ carrying value, including goodwill, the first step of the two-step quantitative goodwill impairment test is performed, which compares the fair value of the reporting unit with itsits´ carrying amounts, including goodwill. If the fair value of the reporting unit exceeds itsits´ carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, an additional procedures must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The carrying value of goodwill is tested for impairment annually or more frequently if circumstances indicate that impairment may have occurred.
InventoryEarnings (Loss) Per Share
Inventory consists primarilyThe Company computes net earnings (loss) per share under Accounting Standards Codification subtopic 260-10, “Earnings Per Share” (“ASC 260-10”). Basic earnings or loss per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of gardening suppliescommon shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted-average of all potentially dilutive shares of common stock that were outstanding during the periods presented.
The treasury stock method is used in calculating diluted EPS for potentially dilutive stock options and materialsshare purchase warrants, which assumes that any proceeds received from the exercise of in-the-money stock options and is recordedshare purchase warrants, would be used to purchase common shares at the lower of cost (first-in, first-out method) or market.
GrowGeneration Corp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2015 and Foraverage market price for the Period March 6, 2014 to December 31, 2014period.
Stock Based Compensation
The Company accounts forrecords stock-based compensation issued to employees, and where appropriate, non-employees, at fair value. Under fair value provisions, stock-based compensation cost is measured at the grant date based onin accordance with FASB ASC Topic 718,Compensation-Stock Compensation (“ASC 718”). The Company estimates the fair value of stock options using the award andBlack-Scholes option pricing model. The fair value of stock options granted is recognized as an expense over the appropriate vesting periodrequisite service period. Stock-based compensation expense for all share-based payment awards are recognized using the straight-line single-option method.
The amountBlack-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of stock-based compensation recognized atoptions granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any date must at least equalparticular grant is based on the portionU.S. Treasury rate that corresponds to the expected life of the grant date fair valueeffective as of the award that is vested at that date and as a result it may be necessary to recognize the expense using a ratable method. Determining the fair value of stock-based awards at the date of grant requires judgment, including estimating the grant. The expected term ofvolatility is based on the stock options and the expectedhistorical volatility of the Company’s stock. In addition, judgment is requiredstock price. These factors could change in estimating the amountfuture, affecting the determination of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s consolidated financial statements.compensation expense in future periods.
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
3. | RECENT ACCOUNTING PRONOUNCEMENTS |
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.
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 May 2014,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 No. 2014-09, Revenue from Contracts with Customers,2016-01,Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which providesrequires 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 revenue recognition.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.
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
3. | RECENT ACCOUNTING PRONOUNCEMENTS, Continued |
Recently Issued Accounting Pronouncements – Pending Adoption
In June 2016, the FASB issued ASU 2014-092016-13,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 supersede and replace nearly all existing U.S. GAAP revenue recognition guidance. ASU 2014-09 establishesbe required to use a new control-based revenueforward-looking expected loss model that generally will result in the earlier recognition model, changesof allowances for losses. For available-for-sale debt securities with unrealized losses, the basis for deciding when revenuelosses will be recognized as allowances rather than as reductions in the amortized cost of the securities. This guidance is recognized over time or at a point of time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016. Non public entities are required to apply the guidance for2019, including interim periods within those years, with early adoption permitted only as of annual reporting periods beginning after December 15, 2017. Early application is not permitted for public entities.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 2014-092018-13 will have a material impact on the Company'sCompany’s consolidated financial statements andor related financial statement disclosures.
The Company leases its store facilities under operating leases ranging from $900 to $5,600 per month. The following is a schedule of future minimum rental payments required under the terms of the operating leases as of December 31, 2015:
Year Ending December 31 | Amount | ||||
2016 | $ | 153,510 | |||
2017 | 147,740 | ||||
2018 | 111,120 | ||||
2019 | 93,500 | ||||
2020 | 52,800 | ||||
$ | 558,670 |
GrowGeneration Corp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2015 and For the Period March 6, 2014 to December 31, 2014
4. |
RentProperty and equipment at December 31, 2019 and 2018 consists of the following:
December 31, | ||||||||
2019 | 2018 | |||||||
Vehicle | $ | 1,148,993 | $ | 535,857 | ||||
Leasehold improvements | 884,685 | 441,725 | ||||||
Furniture, fixtures and equipment | 2,858,777 | 1,417,061 | ||||||
4,892,455 | 2,394,643 | |||||||
Accumulated depreciation and amortization | (1,551,839 | ) | (573,822 | ) | ||||
Property and equipment, net | $ | 3,340,616 | $ | 1,820,821 |
Depreciation expense under all operating leaseswas $1,046,328 and $350,415 for the years ended December 31, 2019 and 2018, respectively.
5. | INCOME TAXES |
On December 22, 2017, the U.S. President signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”). The Tax Legislation significantly revised the U.S. tax code by, (i) lowering the U.S federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”), (iv) requiring a current inclusion of global intangible low taxed income (“GILTI”) of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax (“BEAT”) regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property, and (vii) limiting deductibility of interest and executive compensation expense, among other changes. The Company has computed its 2018 current tax benefit using the U.S. federal statutory rates of 21% while it has computed its deferred tax expense using the new statutory rate effective on January 1, 2018 of 21%.
Other provisions of the new legislation that were not applicable to the Company until the year ended December 31, 2018 include, but are not limited to, limiting deductibility of interest and executive compensation expense. These additional items have been considered in our income tax provision for the year ended December 31, 20152019 and for the period from inception (March 6, 2014)impact was not material to December 31, 2014 was $105,269 and $33,975, respectively.
In May 2014, the Company entered into employment agreements with its CEO and President of the Company. The agreements require payment of monthly wages and benefits. The maximum compensation for wages under these agreements is approximately $200,000. These agreements expire May 2017.
In April 2015, the Company acquired approximately $30,000 of inventory from Green Growers, Inc., a retail store located in Canon City, Colorado. In connection therewith, the Company engaged the CEO of Green Growers, Inc. as a sales consultant for a period of two years expiring April 2017. The agreement requires a base fee of $1,200 per month during the first year and $600 per month during the second year, together with incentive compensation for any new business generated, in an amount equal to 25% of the gross profit on such business. The Company also issued this consultant 10,000 three (3) year options, exercisable at a price of $.60 per share, as additional compensation under his consulting agreement.
In June 2015, the Company acquired approximately $68,000 of inventory from Happy Grow Lucky, Inc., a retail store located in Conifer, Co. In connection therewith, the Company engaged the two principals as sales consultants for a period of one year expiring June 2016. Each consultant is paid $420 per month, together with incentive compensation for any new business they generate, in an amount equal to 25% of the gross profit on such business. In addition, the Company executed a new three year lease for the premises in Conifer, Co. at a rate of $2,400 per month.
On October 8, 2015, the Company completed an inventory purchase of approximately $169,000 of inventory and $25,000 of fixed assets from Sweet Leaf Hydroponics Inc., a retail store located in Santa Rosa, Ca. In connection therewith, the Company engaged one of the principals as a sales consultant for a period of one year expiring October 2016. The agreement requires a payment of $1,000 per month for one year, together with incentive compensation for any new business generated in the amount equal to 25% of the gross profit on such business.
On November 28, 2015, the Company acquired $35,000 of inventory of Greenhouse Tech Inc., a retail store located in Colorado Springs, Colorado. The Company engaged the principal of Greenhouse Tech as a sales consultant for 1 year, at $13 per hour, together with incentive compensation for any new business generated in the amount equal to 20% of the gross profit on such business.
GrowGeneration Corp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2015 and For the Period March 6, 2014 to December 31, 2014
The Company is subject to federal and state income taxes.overall financial statements.
The Company and subsidiaries file a consolidated federal income tax return. The Company’s consolidated provision (benefit) for income taxes for the yearyears ended December 31, 20152019 and for the period from inception (March 6, 2014) to December 31, 2014 consists2018 consisted of the following:
Year Ended December 31, 2015 | For the Period from Inception (March 6, 2014) to December 31, 2014 | ||||||||
Income Tax Expense (benefit) | |||||||||
Current federal tax expense | |||||||||
Federal | $ | -0- | $ | -0- | |||||
State | -0- | -0- | |||||||
Deferred tax (benefit) | |||||||||
Federal | $ | -0- | $ | -0- | |||||
State | -0- | -0- | |||||||
Total | $ | -0- | $ | -0- |
Year Ended | Year Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
Income Tax Expense (benefit) | ||||||||
Current federal tax expense | ||||||||
Federal | $ | 479,000 | $ | -0- | ||||
State | -0- | -0- | ||||||
Deferred tax (benefit) | ||||||||
Federal | $ | (479,000 | ) | $ | -0- | |||
State | -0- | -0- | ||||||
Total | $ | -0- | $ | -0- |
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
5. |
A summary of deferred tax assets and liabilities as of December 31, 2019 and 2018 is as follows:
Year Ended December 31, 2015 | For the Period from Inception (March 6, 2014) to December 31, 2014 | ||||||||
Expected federal tax provision (benefit) at 35% rate | $ | (185,065 | ) | $ | (66,380 | ) | |||
Surtax exemption | 26,438 | 9,483 | |||||||
Meals and entertainment | 2,724 | 1,410 | |||||||
Valuation allowance | 171,493 | 64,050 | |||||||
State income tax | (15,590 | ) | (8,563 | ) | |||||
Total income tax (benefit) | $ | -0- | $ | -0- | |||||
Effective tax rate (benefit) | 0.0 | % | 0.0 | % |
Year Ended | Year Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
Deferred tax assets: | ||||||||
Net operating losses | 1,033,300 | $ | 2,165,100 | |||||
Deferred right to use lease liabilities | 1,671,700 | - | ||||||
Stock based compensation | 354,800 | 663,300 | ||||||
Amortization of debt discount | - | 346,400 | ||||||
Accruals, reserves and other | 160,200 | 66,100 | ||||||
3,220,000 | 3,240,900 | |||||||
Deferred tax liabilities: | ||||||||
Deferred right to use lease assets | 1,678,300 | - | ||||||
Accumulated depreciation and amortization | $ | 360,000 | $ | 358,000 | ||||
2,038,300 | 358,000 | |||||||
Gross deferred tax asset | 1,181,700 | 2,882,900 | ||||||
Valuation Allowance | (1,181,700 | ) | (2,882,900 | ) | ||||
Deferred tax asset (liability), net | $ | 0 | $ | -0 |
As of December 31, 2019, the Company had approximately $4.7 million of operating loss carryforwards, which results in a Federal and State deferred tax asset of approximately $1.03 million, expiring in 2037 through 2038.
We recorded a valuation allowance against all of our deferred tax assets as of both December 31, 2019, and December 31, 2018. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve
The differences between the U.S. Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years ended December 31, 2019 and 2018:
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Federal statutory tax rate | 21 | % | 21 | % | ||||
State and local income taxes (net of federal tax benefit) | - | - | ||||||
21 | % | 21 | ||||||
Valuation allowance | (21 | ) | (21 | ) | ||||
0 | % | 0 | % |
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152019 and For the Period March 6, 2014 to December 31, 20142018
Deferred tax assets: | Year Ended December 31, 2015 | For the Period from Inception (March 6, 2014) to December 31, 2014 | |||||||
Reserve for inventory obsolescence | $ | 18,008 | $ | 4,675 | |||||
Reserve for bad debt | 2,251 | 1,000 | |||||||
Stock option compensation | 108,963 | 29,897 | |||||||
Federal tax loss carryforward | 135,562 | 32,791 | |||||||
State tax loss carryforward | 20,923 | 5,061 | |||||||
Total deferred tax assets | 285,707 | 73,424 | |||||||
Valuation Allowance | (235,543 | ) | (64,050 | ) | |||||
Deferred tax liabilities: | |||||||||
Accumulated depreciation and amortization | (50,164 | ) | (9,374 | ) | |||||
Total deferred tax liabilities | (50,164 | ) | (9,374 | ) | |||||
NET DEFERRED TAX ASSETS | $ | -0- | $ | -0- |
|
GrowGeneration Corp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2015 and For the Period March 6, 2014 to December 31, 2014
LONG-TERM DEBT |
Long-term debt consists of the following at December 31, 2015:
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 | 7,109 | 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 | 24,997 | 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 | 320,204 | 392,252 | ||||||
$ | 352,310 | $ | 812,439 | |||||
Less Current Maturities | (110,231 | ) | (436,813 | ) | ||||
Total Long-Term Debt | $ | 242,079 | $ | 375,626 |
Note payable to Hitachi Capital America Corp. | |||||
Secured by equipment with a book value of $30,658 payable in 48 monthly installments of $631.13, including interest at 8.0% through August 2019 | $ | 23,999 | |||
Less Current Maturities | (5,866 | ) | |||
Total Long-Term Debt | $ | 18,133 |
Future Debt Maturities – A schedule of expected debt payments and the portion allocated to principal follows:
Year Ending December 31 | Total Payment | Allocated to Principal | |||||||
2016 | $ | 7,574 | $ | 5,866 | |||||
2017 | 7,574 | 6,353 | |||||||
2018 | 7,574 | 6,880 | |||||||
2019 | 5,049 | 4,900 | |||||||
$ | 27,771 | $ | 23,999 |
Debt maturities as of December 31, 2019 are as follows: | ||||
2020 | $ | 110,231 | ||
2021 | 84,714 | |||
2022 | 91,860 | |||
2023 | 65,505 | |||
$ | 352,310 |
Interest expense for the years ended December 31, 2019 and 2018 was $45,191 and $23,565, respectively.
7. | 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.
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
7. | LEASES, Continued |
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.
December 31, | ||||
2019 | ||||
Right to use assets, operating lease assets | $ | 7,628,591 | ||
Current lease liability | $ | 1,836,700 | ||
Non-current lease liability | 5,807,266 | |||
$ | 7,643,966 |
December 31, | ||||
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 |
Maturities of lease liabilities | ||||
2020 | $ | 2,496,070 | ||
2021 | 2,525,468 | |||
2022 | 2,078,123 | |||
2023 | 1,596,229, | |||
2024 | 813,984 | |||
2025 | 654,160 | |||
2026 | 352,955 | |||
2027 | 152,637 | |||
Total lease payments | 10,669,626 | |||
Less: Imputed interest | (3,025,660 | ) | ||
Lease Liability at December 31, 2019 | $ | 7,643,966 |
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
8. | 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 thereunder. 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, 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 year ended December 31, 20152019, convertible debt and accrued interest of $2,405,269, net of unamortized debt discount of $674,581, was converted into 1,258,608 shares of common stock at the conversion rate of $3.00 per share.
During the year ended December 31, 2018, convertible debt and accrued interest of $5,927,677, net of unamortized debt discount of $2,305,746, was converted into 2,013,294 shares of common stock at the conversion rate of $3.00 per share.
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 period from inception March 6, 2014 throughyears ended December 31, 20142019 and 2018 was $2,916$356,306 and $671,$998,601, respectively.
At December 31, 2019 and 2018 there were 131,250 and 536,250 warrants outstanding, respectively, related to the issuance of convertible debt.
9. | SHARE BASED PAYMENTS AND STOCK OPTIONS |
On March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive stock planPlan (“2014 Plan) pursuant to which the Company may grant incentive, and non-statutory options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock or cash awards to employees, nonemployee members of theour Board, consultants and other independent advisors who provide services to the Corporation.Company. The maximum shares of common stock which may be issued over the term of the plan shall not exceed 2,500,000 shares. Awards under this plan are made by the Board or a committee ofdesignated by the Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s common stock which is required to be issued at a price not less than 110% of the 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, noplan administrator. No option shall havemay be exercisable for more than ten years (five years in the case of an incentive stock option granted to a term in excess of 5 years10% stockholder) from the date of grant.
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152019 and For the Period March 6, 2014 to December 31, 20142018
9. | SHARE BASED PAYMENTS AND STOCK OPTIONS, |
On March 6, 2014,January 7, 2018, the Company issued 650,000Board adopted the 2018 Equity Compensation Plan (the “2018 Plan”) and on April 20, 2018, the shareholders approved the 2018 Plan. On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable thereunder from 2,500,000 to 5,000,000, which amendment is pending shareholder approval. The 2018 Plan will be administered by the Board. The Board may grant options to its CEO, Darren Lampert, issued 400,000 optionspurchase 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 also has broad authority to its CFO, Irwin Lampert, issued 400,000 options to its President, Michael Salamandetermine the terms and issued 200,000 options to its COO, Jason Dawson exercisable at prices between $.60conditions of each option or other kind of equity award, adopt, amend and $.66 per share. On May 12, 2014, the Company issued 50,000 options to its director, Jody Kanerescind rules and on May 14, 2014, the Company issued 50,000 options to its director, Steve Aiello, exercisable at prices between $.60 and $.66 per share. On July 7, 2014, the Company issued 100,000 options to 8 of its employees, exercisable at prices between $.60 and $.66 per share. The options vest 1/3 immediately, 1/3 one year after date of issuance and 1/3 two years after date of issuance. On April 15, 2015 the Company issued 10,000 options to sales consultant, Duane Nunez and on October 8, 2015 it issued 25,000 options to sales consultant Troy Sower, exercisable at $.60 per share. The options vest over a three year period. Compensation expense recordedregulations for the year ended December 31, 2015administration of the 2018 Plan and for the period from inception (March 6, 2014) to December 31, 2014 was $87,967amend or modify outstanding options, grants and $86,333, respectively.awards.
Each option is estimatedNo 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. The maximum shares of Common Stock which may be issued over the term of the plan, as amended shall not exceed 5,000,000 shares. 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, using a Black-Scholes Mertonper share of our Common Stock issuable upon exercise of the option valuation model that uses the assumptions noted(or 110% of fair market value in the table below. To addresscase of incentive options granted to a ten-percent stockholder). No option may be exercisable for more than ten years (five years in the lackcase of historical volatility data foran incentive stock option granted to a 10% stockholder) from the Company, expected volatility is based on the volatilitiesdate of peer companies.grant.
2019 | ||||
Awards issued under the 2014 Plan as of December 31, 2019 are summarized below: | ||||
Total Shares available for issuance pursuant to the 2014 Plan | 2,500,000 | |||
Options outstanding, December 31 2019 | (995,500 | ) | ||
Total options exercised under 2014 Plan | (1,118,333 | ) | ||
Total shares issued pursuant to the 2014 Plan | (375,000 | ) | ||
Awards available for issuance under the 2014 Plan, December 31, 2019 | 11,167 |
As
Awards issued under the 2018 Plan as of December 31, 2015, there were 1,885,000 options issued and outstanding under the plan.2019 are summarized below:
2019 | |||||
Total Shares available for issuance pursuant to the 2018 Plan, prior to amendment | |||||
) | |||||
A summary of option activity as of December 31, 2015:
Options | Shares | Weighted-Average Exercise Price | |||||||
Outstanding at March 6, 2014 | -0- | $ | |||||||
Granted | 1,850,000 | $ | .62 | ||||||
Exercised | |||||||||
Forfeited or expired | |||||||||
Outstanding at January 1, 2015 | 1,850,000 | $ | .62 | ||||||
Granted | 35,000 | $ | .62 | ||||||
Exercised | |||||||||
Forfeited or expired | |||||||||
Outstanding at December 31, 2015 | 1,885,000 | $ | .62 |
Awards available for issuance under the 2018 Plan, December 31, 2019 | 2,209,000 |
2019 | 2018 | |||||||
Expected volatility | 87.8%-92.7 | % | 72.91%-90.81 | % | ||||
Expected dividends | None | None | ||||||
Expected term | 2-5 years | 2.5 years | ||||||
Risk-free rate | 1.64 | % | 1.64 | % |
F-36
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152019 and For the Period March 6, 2014 to December 31, 20142018
9. | SHARE BASED PAYMENTS AND STOCK OPTIONS, |
A summary ofThe table below summarizes all the status ofoptions granted by the Company’s nonvested shares as ofCompany during years ended December 31, 20152019 and changes during the period then ended is presented below:2018:
Nonvested shares | Shares | Weighted-Average Fair Market Value | |||||||
Nonvested at March 1, 2014 | -0- | $ | |||||||
Granted | 1,850,000 | $ | 0.14 | ||||||
Vested | (616,667 | ) | $ | 0.14 | |||||
Forfeited | -0- | $ | -0- | ||||||
Nonvested at January 1, 2015 | 1,233,333 | $ | 0.14 | ||||||
Granted | 35,000 | $ | 0.14 | ||||||
Vested | (628,334 | ) | $ | 0.14 | |||||
Forfeited | -0- | $ | -0- | ||||||
Nonvested at December 31, 2015 | 639,999 | $ | 0.14 |
Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Weighted- Average Grant Date Fair Value | ||||||||||
Outstanding at January 1, 2018 | 2,622,000 | $ | .99 | $ | .32 | |||||||||
Granted | 386,500 | $ | 3.21 | $ | 1.91 | |||||||||
Exercised | (1,068,333 | ) | $ | .67 | $ | .12 | ||||||||
Forfeited or expired | (124,667 | ) | $ | .76 | $ | .16 | ||||||||
Outstanding at December 31, 2018 | 1,815,500 | $ | 1.66 | 2.65 years | $ | .78 | ||||||||
Vested and exercisable at December 31 2018 | 1,393,831 | $ | 1.39 | 2.22 years | ||||||||||
Outstanding at January 1, 2019 | 1,815,500 | $ | 1.66 | 2.65 years | $ | .78 | ||||||||
Granted | 1,380,000 | $ | 3.25 | $ | 2.18 | |||||||||
Exercised | (667,500 | ) | $ | .72 | $ | .16 | ||||||||
Forfeited or expired | (11,667 | ) | $ | 3.05 | $ | 1.63 | ||||||||
Outstanding at December 31, 2019 | 2,516,333 | $ | 2.78 | 3.81 years | $ | 1.71 | ||||||||
Vested and exercisable at December 31, 2019 | 1,346,333 | $ | 2.35 | 3.25 years | $ | 1.32 |
Share-based payment expense to officers, directors and employees and the years ended December 31, 2019 and 2018 was approximately $2,223,100 and $901,900, respectively.
Expense related to issuance of shares, options and warrants to consultants for the years ended December 31, 2019 and 2018 was approximately $267,400 and $501,800, respectively.
10. | STOCK PURCHASE WARRANTS |
As of December 31, 2015, the Company granted 2,465,001 warrants to investors in a private placement of common shares. These warrants are exercisable for a period of five years with an exercise price of $.70. In October 2015, 142,800 warrants were issued to “Placement Agents” for private placement of common stock.
Each warrant is estimated as of the date of grant using a Black-Scholes Merton option valuation model that uses the assumptions noted in the table below. To address the lack of historical volatility data for the Company, expected volatility is based on the volatilities of peer companies.
As of December 31, 2015, there were 2,607,801 warrants granted.
A summary of the status of the Company’s outstanding stock warrants as of December 31, 20152019 is as follows:
Weighted Average | Weighted- | ||||||||||||
Shares | Exercise Price | Fair Market Value | |||||||||||
Outstanding January 1, 2015 | -0- | $ | -0- | $ | -0- | ||||||||
Granted | 2,607,801 | $ | .70 | $ | .07 | ||||||||
Exercised | -0- | $ | -0- | $ | -0- | ||||||||
Forfeited | -0- | $ | -0- | $ | -0- | ||||||||
Outstanding December 31, 2015 | 2,607,801 | $ | .70 | $ | .07 |
Weighted Average | ||||||||
Exercise Price | ||||||||
Outstanding January 1, 2018 | 3,605,728 | $ | 1.84 | |||||
Granted/issued | 1,916,500 | $ | 1.01 | |||||
Exercised | (2,242,728 | ) | $ | 1.16 | ||||
Forfeited | - | |||||||
Outstanding December 31, 2018 | 3,279,500 | $ | 1.94 | |||||
Granted/issued | 2,061,629 | $ | 3.50 | |||||
Exercised | (1,643,610 | ) | $ | .79 | ||||
Forfeited | - | |||||||
Outstanding December 31, 2019 | 3,697,519 | $ | 3.25 |
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152018 and For the Period March 6, 2014 to December 31, 20142017
On May 29, 2014, the Company’s subsidiary, Grow Generation Pueblo Corp, entered into an agreement to purchase the assets and certain liabilities of Southern Colorado Garden Supply Corporation in order to commence operations in the retail hydroponic and organic specialty gardening industry. Southern Colorado Garden Supply Corporation remains a separate entity. There were no related acquisition costs. The purchase price of $499,976 was paid in cash on May 31, 2014 and consisted of the following:
Fixed assets | $ | 35,000 | |||
Inventory | 273,000 | ||||
Accounts receivable | 5,286 | ||||
Prepaid expenses | 1,320 | ||||
Total assets | 314,606 | ||||
Accounts payable | 57,275 | ||||
Customer deposits | 355 | ||||
Total liabilities | 57,630 | ||||
Fair value of assets acquired | 256,976 | ||||
Cash paid | 499,976 | ||||
Goodwill recognized on acquisition | $ | 243,000 |
The fair value of the assets acquired less cash paid resulted in an amount of $243,000, which has been recorded as Goodwill on the Company’s consolidated balance sheet. Goodwill consists of customer lists, the value of the Company’s human capital and management, and the Company’s future growth potential.
The purchase agreement also required an employment agreement with the seller until February 23, 2018. The agreement requires monthly wages and benefits. The compensation for wages under this agreement is $84,000 per annum, with annual increases of 10% of the Executive’s s base salary. The Executive also receives 100,000 common shares for each year employed. The employment agreement also requires the Company to issue the seller 200,000 shares of stock options, exercisable at prices between $.60 and $.66 per share. The purchase agreement also had the seller sign a covenant not to compete in a similar business as an owner, manager or employee within a period of 1 year.
11. | STOCKHOLDERS’ EQUITY |
Common Stock
The Company’s current Certificate of Incorporation authorizes it to issue 100,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2015,2019, and 2018, there were 8,967,83436,876,305 and 27,948,609 shares of common stock outstanding. The number ofissued and outstanding, respectively.
2019
During the year ended December 31, 2019, the Company sold 4,123,254 shares of common stock outstanding asfor net proceeds of $12,643,634.
During the year ended December 31, 2015 does not include (i) 2,465,0012019, the Company issued 1,757,913 shares of common stock issuable upon the exercise of warrants; (ii) shares of our common stock issuable upon the exercise of 1,885,000 outstanding stock options; and (iii) 142,800 warrants issuedresulting in proceeds to the Placement Agent in connection with our 2015 Private Placement pursuant to which it can acquire 142,800Company of $1,299,899.
During the year ended December 31, 2019, the Company issued 515,868 shares of common stock upon exercise of 667,500 options resulting in proceeds to the Company of $6,000. Of the total options exercised, 657,500 options we exercised in a cashless option exercise.
During the year ended December 31, 2019, the Company issued 1,258,608 shares of common stock upon conversion of convertible debt and accrued interest. (See Note 7)
During the year ended December 31, 2019, the Company issued 969,553 shares of common stock in connection with business combinations. (See Note 14)
During the year ended December 31, 2019, the Company issued 152,500 shares of common stock to employees valued at a purchase price$452,766, issued 100,000 shares of $.70 per share.common stock to employees for accrued employee awards valued at $210,200 and 50,000 shares of common stock to consultants valued at $96,000.
2018
During the year ended December 31, 2018, the Company sold 3,333,333 shares of common stock for net proceeds of $9,959,877.
During the year ended December 31, 2018, the Company issued 3,076,461 shares of common stock upon exercise of 3,056,478 warrants resulting in proceeds to the Company of $2,593,694.
During the year ended December 31, 2018, the Company issued 995,186 shares of common stock upon exercise of 1,068,333 options resulting in proceeds to the Company of $321,701.
During the year ended December 31, 2018, the Company issued 2,013,294 shares of common stock upon conversion of convertible debt and accrued interest. (See Note 7)
During the year ended December 31, 2018, the Company issued 1,550,000 shares of common stock in connection with business combinations. (See Note 14)
During the year ended December 31, 2018, the Company issued 123,500 shares of common stock to employees valued at $463,922 and issued 10,000 shares of common stock to consultants valued at $45,001.
GrowGeneration Corp and SubsidiariesGROWGENERATION CORP. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberFOR THE YEARS ENDED DECEMBER 31, 20152019 and For the Period March 6, 2014 to December 31, 20142018
12. | EARNINGS PER SHARE |
Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares. Potentially dilutive securities are excluded from the calculation when their effect would be antidilutive. For the year ended December 31, 2018 all potentially dilutive securities have been excluded from the diluted share calculations as they were anti-dilutive as a result of the net loss incurred. Accordingly, basic shares equal diluted shares for the year ended December 31, 2018.
Potentially dilutive securities were comprised of the following:
December 31, 2019 | December 31, 2018 | |||||||
Warrants | 3,697,519 | 3,279,500 | ||||||
Convertible debt warrants | 131,250 | 536,250 | ||||||
Options | 2,516,333 | 1,815,500 | ||||||
Total | 6,345,102 | 5,631,250 |
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for yearthe years ended December 31, 20152019 and for the period from inception (March 6, 2014) to December 31, 2014.2018.
Year Ended December 31, 2015 | from For the Period Inception (March 6, 2014) to December 31, 2014 | ||||||||
Net Loss | $ | (528,756 | ) | $ | (189,655 | ) | |||
Weighted average share outstanding basic | 6,563,271 | 6,000,000 | |||||||
Effect of dilutive common stock equivalents | |||||||||
Adjusted weighted average shares outstanding – dilutive | 6,563,271 | 6,000,000 | |||||||
Basic loss per share | $ | (.08 | ) | $ | (.03 | ) | |||
Dilutive loss per share | $ | (.08 | ) | $ | (.03 | ) |
December 31, 2019 | December 31, 2018 | |||||||
Net income (loss) | $ | 1,878,804 | $ | (5,073,755 | ) | |||
Weighted average shares outstanding, basic | 32,883,594 | 23,492,650 | ||||||
Effect of dilutive common stock equivalents | 6,345,102 | - | ||||||
Adjusted weighted average shares outstanding, dilutive | 39,228,696 | 23,492,650 | ||||||
Basic net income (loss) per share | $ | .06 | $ | (.22 | ) | |||
Dilutive net income (loss) per share | $ | .05 | $ | (.22 | ) |
13. | VENDOR CONCENTRATIONS |
The effect of 1,885,000 stock options and 2,607,801 warrants outstanding asAs of December 31, 2015 is antidilutive2019, and therefore2018, two suppliers represent 51% and 56% of our purchases, respectively. Although the Company expects to maintain relationships with these vendors, the loss of either supplier would not presented inhave a material adverse impact on our business, because both suppliers provide the above table.same products.
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
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 year ended December 31, 2019.
Grow World LLC | Grand Rapids Hydro | Green Life Garden | Chlorophyll | Reno Hydroponics | Palm Springs Hydroponics | Total | ||||||||||||||||||||||
Inventory | $ | 553,900 | $ | 1,453,100 | $ | 1,038,600 | $ | 1,441,000 | $ | 238,000 | $ | 465,500 | $ | 5,190,100 | ||||||||||||||
Prepaids and other current assets | - | 14,100 | 22,000 | - | 36,100 | |||||||||||||||||||||||
Furniture and equipment | 35,000 | 50,000 | 100,000 | 100,000 | 25,000 | 25,000 | 335,000 | |||||||||||||||||||||
Goodwill | 696,900 | 2,376,900 | 2,305,900 | 2,596,100 | 516,300 | 554,000 | 9,046,100 | |||||||||||||||||||||
Total | $ | 1,285,800 | $ | 3,880,000 | $ | 3,458,600 | $ | 4,159,100 | $ | 779,300 | $ | 1,044,500 | $ | 14,607,300 |
The table below represents the consideration paid for the net assets acquired in business combinations.
Grow World LLC | Grand Rapids Hydro | Green Life Garden | Chlorophyll | Reno Hydroponics | Palm Springs Hydroponics | Total | ||||||||||||||||||||||
Cash | $ | 1,000,000 | $ | 2,350,000 | $ | 2,647,700 | $ | 3,659,100 | $ | 525,000 | $ | 800,000 | $ | 10,981,800 | ||||||||||||||
Common stock | 285,800 | 1,530,000 | 810,900 | 500,000 | 254,300 | 244,500 | 3,625,500 | |||||||||||||||||||||
Total | $ | 1,285,800 | $ | 3,880,000 | $ | 3,458,600 | $ | 4,159,100 | $ | 779,300 | $ | 1,044,500 | $ | 14,607,300 |
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 December 31, 2019.
Grow World LLC | Grand Rapids Hydro | Green Life Garden | Chlorophyll | Reno Hydroponics | Palm Springs Hydroponics | Total | ||||||||||||||||||||||
Acquisition date | 12/16/19 | 9/3/2019 | 5/14/2019 | 1/21/2019 | 2/11/2019 | 2/7/2019 | ||||||||||||||||||||||
Revenue | $ | 153,900 | $ | 2,412,700 | $ | 4,829,800 | $ | 6,030,500 | $ | 2,106,900 | $ | 3,075,300 | $ | 18,609,100 | ||||||||||||||
Earnings | $ | 6,400 | $ | 444,500 | $ | 998,700 | $ | 936,600 | $ | 366,742 | $ | 651,400 | $ | 3,404,342 |
The following represents the unaudited pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the year ended December 31, 2018. These unaudited pro forma results are presented for information purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the earliest period presented, nor are they indicative of future results of operations.
December 31, 2018 | ||||
Revenue | $ | 59,650,900 | ||
Earnings | $ | (2,087,900 | ) |
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
15. | SUBSEQUENT EVENTS |
On March 1, 2016,February 26, 2020 the Company entered into a three year leasepurchased the assets of Healthy Harvest LLC for 4,498 square feet$1,750,000 and 250,000 shares of retail spacethe Company’s common stock valued at $1,102,500. Healthy Harvest has been in business since 2011 and opened its 9th store, locatedis the largest hydroponic operation in Denver, Colorado at a monthly lease rate of $3,650 through March 2017, $3,750 through March 2018, $3,873 through March 2019.the Southeast region.
On April 1, 2016,February 7, 2020, the Company entered into a new lease agreement for 3,300 square feetBoard approved the amendment and restatement of retail space for their California store located in Santa Rosa at a monthly lease ratethe 2018 Plan to increase the number of $5,600 through December 2016, $6,000 through December 2017.shares issuable thereunder from 2,500,000 to 5,000,000, which amendment is pending shareholder approval.
On April 29, 2016, the company closed on the 2016 private placement to which they sold 890,714 units to 10 accredited investors at a price of $.70 per unit, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $623,500.
On April 29, 2016, the Company issued 50,000 common shares and 50,000 warrants to the Placement Agent in connection with our 2016 Private Placement.
GROWGENERATION CORP$35,000,000
8,011,430 Shares
Common Stock
PRELIMINARY PROSPECTUS
Sole Book-Running Manager
Oppenheimer & Co.
June 30, 2016Co-Managers
Ladenburg Thalmann | Lake Street |
, 2020
PART II
– INFORMATION NOT REQUIRED IN PROSPECTUS
ITEMItem 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONOther Expenses of Issuance and Distribution
Our estimatedThe following table sets forth the expenses in connection with this registration statement. All of such expenses are estimates, other than the issuancefiling fees payable to the Securities and distribution of the securities being registered are:Exchange Commission.
SEC Registration Fee | $ | 462 | ||
Accounting Fees and Expenses | $ | 15,000 | ||
Legal Fees and Expenses | $ | 45,000 | ||
Miscellaneous Fees and Expenses | $ | 9,538 | ||
Total | $ | 70,000 |
Amount to be paid | ||||
SEC registration fee | $ | 5,224.45 | ||
FINRA filing fees | $ | * | ||
Transfer agent and registrar fees | $ | * | ||
Accounting fees and expenses | $ | * | ||
Legal fees and expenses | $ | * | ||
Blue sky qualification fees and expenses | $ | * | ||
Printing expenses | $ | * | ||
Miscellaneous expenses | $ | * | ||
Total | $ | * |
ITEM* To be completed by amendment.
Item 14. INDEMNIFICATION OF OFFICERS AND DIRECTORSIndemnification of Directors and Officers
The Colorado Business Corporation Act (the “CBCA”) generally provides that a corporation may indemnify a person made party to a proceeding because the person is or was a director against liability incurred in the proceeding if: the person’s conduct was in good faith; the person reasonably believed, in the case of conduct in an official capacity with the corporation, that such conduct was in the corporation’s best interests, and, in all other cases, that such conduct was at least not opposed to the corporation’s best interests; and, in the case of any criminal proceeding, the person had no reasonable cause to believe that the person’s conduct was unlawful. The CBCA prohibits such indemnification in a proceeding by or in the right of the corporation in which the person was adjudged liable to the corporation, or in connection with any other proceeding in which the person was adjudged liable for having derived an improper personal benefit. The CBCA further provides that, unless limited by its articles of incorporation, a corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director or officer of the corporation, against reasonable expenses incurred by the person in connection with the proceeding. In addition, a director or officer, who is or was a party to a proceeding, may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. The CBCA allows a corporation to indemnify and advance expenses to an officer, employee, fiduciary or agent of the corporation to the same extent as a director.
As permitted by the CBCA, the Company’s articles of incorporation and bylaws generally provide that the Company shall indemnify its directors and officers to the fullest extent permitted by the CBCA. In addition, the Company may also indemnify and advance expenses to an officer who is not a director to a greater extent, not inconsistent with public policy, and if provided for by its bylaws, general or specific action of the Company’s board of director or shareholders.
The Company has entered into substantively identical Indemnification Agreementsindemnification agreements, or agreements containing an indemnification clause, with its current directors and officers (the “Indemnitees”), which generally provide that, to the fullest extent permitted by Colorado law, the Company shall indemnify such Indemnitee if the Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the Indemnitee is or was or has agreed to serve at the Company’s request as a director, officer, employee or agent of the Company, or while serving as a director or officer of the Company, is or was serving or has agreed to serve at the Company’s request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity or by reason of the imposition upon such officer or director of any federal and/or state income tax obligation (inclusive of any interest and penalties, if applicable), that is imposed on such officer or director with respect to income, “phantom income,” rescinded or unconsummated transactions, or any other allegedly taxable event for which no benefit was received by such officer or director. The indemnification obligation includes, without limitation, claims for monetary damages against an Indemnitee in respect of an alleged breach of fiduciary duties and generally covers expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by an Indemnitee or on an Indemnitee’s behalf in connection with such action, suit or proceeding and any appeal therefrom, but shall only be provided if the Indemnitee acted in good faith; and, in the case of conduct in an official capacity with the corporation, if such conduct was in the Company’s best interests, and, in all other cases, if such conduct was at least not opposed to the Company’s best interests; and, with respect to any criminal action, suit or proceeding, if the Indemnitee had no reasonable cause to believe the Indemnitee’s conduct was unlawful.
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Section 7-108-402(1) of the CBCA permits a corporation to include in its articles of incorporation a provision eliminating or limiting the personal liability of directors to the corporation or its shareholders for monetary damages for any breach of fiduciary duty as a director (except for breach of a director’s duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, unlawful distributions, or any transaction from which the director derived improper personal benefit). Further, Section 7-108-402(2) of the CBCA provides that no director or officer shall be personal liable for any injury to persons or property arising from a tort committed by an employee, unless the director or officer was either personally involved in the situation giving rise to the litigation or committed a criminal offense in connection with such situation.
As permitted by the CBCA, the Company’s articles of incorporation provide that the personal liability of the Company’s directors to the Company or its shareholders is limited to the fullest extent permitted by the CBCA. The Indemnification Agreements described above also provide that the Company’s indemnification obligation includes, without limitation, claims for monetary damages against the Indemnitee in respect of an alleged breach of fiduciary duties to the fullest extent permitted by the CBCA.
Section 7-109-108 of the CBCA provides that a corporation may purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary or agent of the corporation, or who, while a director, officer, employee, fiduciary or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of another entity or an employee benefit plan, against liability asserted against or incurred by the person in that capacity or arising from the person’s status as a director, officer, employee, fiduciary or agent, whether or not the corporation would have power to indemnify the person against the same liability under the CBCA.
As permitted by the CBCA, the Company’s bylaws authorize the Company to purchase and maintain such insurance. The Company currently maintains a directors and officers insurance policy insuring its past, present and future directors and officers, within the limits and subject to the limitations of the policy, against expenses in connection with the defense of actions, suits or proceedings, and certain liabilities that might be imposed as a result of such actions, suits or proceedings.
ITEMItem 15. RECENT SALES OF UNREGISTERED SECURITIESRecent Sales of Unregistered Securities.
Between March 2014 and April 29, 2016, the Company made sales of the following unregistered securities:
Original Issuances of Stock
Formation of GrowGeneration Corp.
In connection with our formation in March 2014, we sold an aggregate of 5,000,000 shares of our common stock to our founders Darren Lampert, Michael Salaman and Irwin Lampert, for an aggregate of $50,000 ($0.001 per share). All of such issuances were believed to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
2014 Private Placement
In March 2014, we raised $600,000 from the sale of 1,000,000 shares of our common stock to seventeen (17) accredited investors, at a price of $.60 per share. All securities sold in the 2014 Private Placement were arranged by officers and directors and no commissions or other remuneration was paid to any person in connection with such sales. Proceeds from this sale were utilized to effect the acquisition of the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which we completed on May 29, 2014, through our wholly-owned subsidiary, GrowGeneration Pueblo Corp., a Colorado corporation. The purchase price was $499,976, consisting of $243,000 in goodwill and $273,000 in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts payable and $355 in customer deposits.
20152017 Private Placements
In April 2015, we raised $180,000 fromOn March 10, 2017, the sale of 300,000 shares of our common stock to four (4) accredited investors, atCompany closed a price of $.60 per share. All securities sold in this private placement were arranged by officers and directors and no commissions or other remuneration was paidof a total of 825,000 units of its securities to any person in connection with such sales. We used the proceeds raised in this offering for inventory purchases and working capital.
On March 12, 2015 we entered into an agreement with Cavu Securities LLC, a FINRA Member broker dealer (“Cavu”), pursuant to which we engaged Cavu on a non-exclusive basis to act as our lead placement agent for the sale of up to $4,200,000 of our units.4 accredited investors. Each unit was offered at a price of $.70 per unit. Each unit consistedconsists of (i) one share of ourthe Company’s common stock and (ii) one 5 year5-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 16, 2017, the Company closed a private placement of a total of 1,000,000 units of its securities to 27 accredited investors through GVC Capital LLC (“GVC Capital”) as its placement agent. Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common stock at an exercise price of $2.75 per share. The Company raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital total compensation for its services, (i) for a price of $100, 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75 per share, (ii) a cash fee of $150,000, (iii) a non-accountable expense allowance of $60,000, and (iv) a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants (not including 250,000 warrants issued to one investor) when they are exercised.
2018 Private Placements
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 consists 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 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.
On May 9, 2018, the Company completed a private placement of a total of 33.33 units of its securities at a price of $300,000 per unit to 3 accredited investors. Each unit consists of (i) 100,000 share of the Company’s Common Stock and (ii) 50,000 3-year warrant to purchase one share of Common Stock at an exercise price of $0.70$.35 per share.The units were offered and sold on a “best-effort” basis. On October 30, 2015, we closed the private placement with a totalCompany raised an aggregate of 2,465,001 units sold and realized$10,000,000 gross proceeds of $1,725,501. We paid Cavu total compensation for its services of (i) $73,295 in commissions; (ii) five-year warrants to purchase 142,800 shares of our common stock, at an exercise price equal to $0.70 per share; and (iii) 77,833 shares of our common stock.the offering.
20162019 Private Placement
On April 29, 2016,June 26, 2019, the Company closed oncompleted a private placement to which it sold 890,714of a total of 4,123,254 units to 10 accredited investorsof the Company’s securities at athe price of $.70$3.10 per unit with each unit consisting of one share of common stock and one warrantpursuant to purchase one share of common stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $623,500. We paid Cavu, our placement agent, a total compensation for its services of (i) five-year warrants to purchase 50,000 shares of our common stock, at an exercise price equal to $0.70 per share; and (ii) 50,000 shares of our common stock.
Stock Options
Since our inception, we have granted stock options under our 2014 Equity Compensation Plan to purchase an aggregate of 1,880,000 shares at exercise prices ranging from $0.60 to $.66 per share.
Securities Act Exemptions
We deemed all of the above offers, sales and issuances of our shares of common stock and warrants to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act including Regulation D and Rule 506 promulgated thereunder, relative to transactions by an issuer not involving a public offering. All purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they were accredited investors and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registeredpromulgated under the Securities ActAct. Each unit consisted of (i) one share of Common Stock and that any resale must be made pursuant(ii) one 3-year warrant, each entitling the holder to purchase one half share of Common Stock, at a registration statement or an available exemptionprice of $3.5 per share. The Company raised a total of $12,782,099 from such registration.
We deemed the grants of stock options and issuances of common stock upon exercise of such options described above under “—Stock Options” to be exempt from registration under the Securities Act in reliance on Rule 701 of the Securities Act as offers and sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us.
All certificates representing the securities issued in the transactions described in this Item 15 included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth in this Item 15. Cavu Securities LLC acted as Placement Agent for some of the securities sold in the our private placements closed in October 2015 and April 2016.19 accredited investors.
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ITEMItem 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESExhibits and Financial Statement Schedules.
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To be filed by amendment. |
ITEMItem 17. UNDERTAKINGSUndertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrantRegistrant pursuant to the foregoing provisions, or otherwise, the registrantRegistrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrantRegistrant of expenses incurred or paid by a director, officer or controlling person of the registrantRegistrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrantRegistrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance on Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, State of New York on June 30, 2016.9, 2020.
GROWGENERATION CORP. | ||
By: | /s/ Darren Lampert | |
Name: Darren Lampert | ||
Title: Chief Executive Officer | ||
By: | /s/ | |
Name: | ||
Title: Chief Financial Officer |
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors GrowGeneration Corp., a Colorado corporation (the “Company”), do hereby constitute and appoint Darren Lampert and Monty Lamirato, and each of them, as his or herthe true and lawful attorney-in-factattorneys-in-fact and agent,agents of the undersigned, with full power of substitution and re-substitution,resubstitution, for him and in histhe name, place and stead of the undersigned, to sign in any and all capacities to sign(including, without limitation, the capacities listed below), the registration statement, any and all amendments (including post-effective amendments, exhibits thereto and other documents in connection therewith)amendments) to this Registration Statementthe registration statement and any subsequentand all successor registration statement filed bystatements of the registrant, including any filings pursuant to Rule 462(b) ofunder the Securities Act of 1933, as amended, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agenthereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite andanything necessary to be done in connection therewith,to enable the registrant to comply with the provisions of the Securities Act and all the requirements of the Securities and Exchange Commission, as fully to all intents and purposes as hethe undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-factattorneys-in-fact and agent,agents, or any of them, or their or his or her substitute, or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration statement has been signed below by the following persons in the capacities set forth opposite their names and on the dates indicated.
Person | Date | |||
/s/ Darren Lampert | Chief Executive Officer and Director | June | ||
Darren Lampert | (Principal Executive Officer) | |||
/s/ | Chief Financial Officer | June | ||
(Principal Financial and Accounting Officer) | ||||
/s/ Michael Salaman | President and Director | June | ||
Michael Salaman | ||||
/s/ Stephen Aiello | Director | June | ||
Stephen Aiello | ||||
/s/ | Director | June | ||
/s/ Paul Ciasullo | Director | June 9, 2020 | ||
Paul Ciasullo |
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