ITEM 1A. RISK FACTORS
The risks and uncertainties described below
could materially and adversely affect our business, financial condition and results of operations and could cause actual results
to differ materially from our expectations and projections. You should read these Risk Factors in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements
and related notes in Item 8. There also may be other factors that we cannot anticipate or that are not described in this report
generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from
our expectations.
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 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:
● voluntary or mandatory quarantines;
● restrictions on travel;
● limiting gatherings of people in public places: and
Congestion
at all ports, product delays from overseas.
Although we have been deemed an “essential”
business by state and local authorities in the 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 rapidly 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 our suppliers, customers and markets will persist for some time after
governments ease their restrictions. These measures have negatively impacted, and may continue to impact, our business and financial
condition as the responses to control COVID-19 continue.
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Economic conditions could adversely
affect our business.
Uncertain global economic conditions, in
particular in light of 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 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 competition that could prohibit
us from developing or increasing our customer base.
The specialty gardening and hydroponic
product industry is highly competitive. 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 increasing revenues and maintaining and/or increasing market share.
In addition, increased competition may lead to reduced prices and/or margins for products we sell.
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, and our Chief Operating Officer, 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, our business may be severely disrupted, and we may incur additional
expenses to recruit and retain new officers.
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.
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.
We sell 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 subject to varying, inconsistent,
and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer
perceptions. For example, certain countries and 34 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.
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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
failure 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 acquire. 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
harm our business generally.
Our acquisitions could also result in dilutive
issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization 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 materialize.
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:
● decreased demand for products that we may offer for sale;
● injury to our reputation;
● costs to defend the related litigation;
● a diversion of management’s time and our resources;
● substantial monetary awards to trial participants or patients;
● a decline in our stock price.
We do not maintain any product liability
insurance. 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 developed. 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.
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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
businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous
difficulties in developing, manufacturing and/or marketing 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
There are risks, including stock market
volatility, inherent in owning our common stock.
The market price and volume of our common
stock have been, and may continue to be, subject to significant fluctuations. These fluctuations may arise from general stock market
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 be outside our immediate control.
The shares of our common stock may
experience substantial dilution by exercises of outstanding warrants and options.
As of the date hereof, we had outstanding
warrants to purchase an aggregate of 1,393,472 shares of our common stock at a weighted average exercise price of $7.49 per share,
and options to purchase an aggregate of 1,803,108 shares of our common stock (out of which 1,057,734 are vested as of this date)
at a weighted average exercise prices of $3.92 per share. The exercise of such outstanding options and warrants will result in
substantial dilution of your investment. In addition, our shareholders may experience additional dilution if we issue common stock
in the future. Any of such dilution may have adverse effect on the price of our common stock.
We are an “emerging growth
company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging growth companies,”
which could make our common stock less attractive to investors.
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.
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.”
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Additionally, we are a “smaller reporting
company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of
certain reduced disclosure obligations, including, 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 ordinary
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 the market value of our ordinary shares held by non-affiliates exceeds $700 million as of the prior
June 30. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements
with other public 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
or the timing of such costs.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Description of Property
Our principal offices are located at 930
W 7th Ave, Suite A., Denver, CO 80204. Currently, we lease ten (10) facilities in the State of Colorado, twenty (20)
in the State of California, three (3) in the State of Nevada, two (2) in the State of Washington, two (2) in the State of Oregon,
two (2) in the state of Arizona, one (1) in the State of Rhode Island, five (5) in the State of Oklahoma, six (6) in the State
of Michigan, five (5) in the State of Maine, three (3) in the State of Florida, all for our corporate and retail operations. In
total the Company currently leases approximately 800,000 square feet of space, which consists primarily of 9,000 feet of corporate
office space, 100,000 square feet of warehouse space and 691,000 square feet of store space. The Company also owns a 10,000 square foot store in Battle Creek, MI acquired in 2020.
Number of Locations Square feet Lease Expiration Dates
ITEM 3. LEGAL PROCEEDINGS
There are no current, past, pending or
threatened legal proceedings or administrative actions either by or against the issuer that could have a material effect on the
issuer’s business, financial condition, or operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company commenced trading on the Nasdaq
Capital Market on December 2, 2019 under the symbol “GRWG”. Prior to that date, our stock traded on the OTCQX Best
Market since October 10, 2017, prior to which it was traded on the OTCQB Market since November 11, 2016.
The following table sets forth, for each
quarter for the years ended December 31, 2020 and 2019, the reported high and low bid prices of our Common Stock.
Quarter Ended High Bid Low Bid
Future sales of substantial amounts 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
The approximate number of stockholders
of record as of March 24, 2021 was 114. The number of stockholders of record does not include beneficial owners of our
Common Stock, whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
DIVIDEND POLICY
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
to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or
credit financings may preclude us from paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES
2019 Private Placement
On June 26, 2019, the Company completed
a private placement of a total of 4,123,257 units of the Company’s securities at the price of $3.10 per unit pursuant to
Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Each unit consisted of
(i) one share of Common Stock and (ii) one 3-year warrant, each entitling the holder to purchase one half share of Common Stock,
at a price of $3.50 per share. The Company raised a total of $12,782,099 from 19 accredited investors.
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2018 Private Placement
On January 17, 2018, the Company completed
a private placement of a total of 36 units of its securities at the price of $250,000 per unit. Each unit 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 $.35 per share. The Company raised an aggregate of $10,000,000 gross proceeds in the offering.
Stock Options and Stock Awards
The Company has a 2014 Equity Compensation
Plan (the “2014 Plan”) and an Amended and Restated 2018 Equity Compensation Plan (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.
From inception to December 31, 2020, we
have granted stock options under our 2014 Plan to purchase an aggregate of 2,113,833 shares at exercise prices ranging from $0.60
to $5.11 per share. Of the total options granted as of December 31, 2020, 2,058,833 have been exercised and 5,000 have been forfeited,
resulting in 50,000 options outstanding. In addition, as of December 31, 2020, 375,000 stock awards have been issued under our
2014 Plan.
From inception to December 31, 2020, we
have granted stock options under our 2018 Plan to purchase an aggregate of 1,963,000 shares at exercise prices ranging from $2.25
to $17.39 per share. As of December 31, 2020, 438,895 options have been exercised and 37,667 forfeited under the 2018 Plan. In
addition, as of December 31, 2020, 1,112,979 stock awards have been issued under our 2018 Plan.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
15
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 report. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements
as a result of various factors, including those discussed below and elsewhere in this report, particularly those under “Risk
Factors.” Dollars in tabular format are presented in thousands, except per share data, or otherwise indicated.
OVERVIEW
GrowGeneration Corp. (together with all
of its wholly owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado
in 2014 and 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, environmental control systems and accessories for hydroponic gardening.
GrowGeneration also owns and operates e-commerce platforms,www.growgeneration.com and www.agron.io, Canopy Crop Management Corp,
CharCoir Inc, and several proprietary private-label brands across multiple product categories from LED lighting to nutrients and
additives and environmental control systems for indoor cultivation.
2020 Store Footprint
Currently, the Company owns and operates a chain of fifty two
(52) retail hydroponic/gardening stores, with eighteen (18) in the state of California, six (6) in the state of Michigan, eight
(8) located in the state of Colorado, five (5) in the State of Oklahoma, five (5) in Maine, two (2) in the state of Nevada, two
(2) in the state of Washington, two (2) in the state of Oregon, one (1) in the state of Rhode Island, one (1) in the state of Florida,
one (1) in the state of Arizona, one (1) in the state of Massachusetts, an online e-commerce store, GrowGeneration.com and a B2B e-commerce platform, agron.io We recently announced the signing of two leases in downtown Los Angeles and Rancho Dominguez,
CA, which are our 53rd and 54th locations. Our plan is to continue to acquire, open and operate hydroponic/gardening
stores and related businesses throughout North America. Revenue in 2020 was up 142.5% year over year, to $193.4 million. Adjusted
EBITDA, for 2020 was approximately $19.2 million an increase of approximately $13.9 million over 2019, a 265% increase. We saw
significant revenue increases in all key markets, Maine was up 144%, Oklahoma was up 255%, Michigan was up 243%, and Rhode Island
was up 150%. Same store revenues include 13 stores that generated $72.3 million in revenues for the year ended December 31, 2020,
compared to $44.3 million in revenues for 2019, an increase of 63%.
Store Acquisitions and New Store Openings
Core to our growth strategy is to expand the number of our retail
garden centers throughout North America. The hydroponic retail landscape is fragmented, which allows us to acquire the “best
of breed” hydroponic operations. In addition to the 12 states we are currently operating, we have identified new market opportunities
in states that include Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi and Missouri. In 2020, we opened a second
hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and completed eight
(8) acquisitions, adding 14 locations in 2020. To-date, the Company has acquired 14 new locations in the first quarter of 2021
and has an active target pipeline of acquisitions for the remainder of the year.
Commercial Sales Division
Our commercial division is focused on selling
end-to-end solutions for large commercial cultivators. When a commercial customer gains a new cultivation license, they will need
to purchase lighting, benching, environmental control systems, irrigation, fertigation and other products to outfit their cultivation
facility. Commercial customers typically purchase larger amounts and sizes of products. We offer commercial customers volume pricing,
terms and financing. Our commercial team manages thousands of commercial accounts across North America. Our commercial division
collectively contributed approximately $49 million in revenue for 2020 compared to approximately $17 million for 2019, a 189% year
over year increase. We have identified over 15,000 active licensed growers in North America and believe there is significant room
for us to expand our base of commercial customers.
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E-Commerce/Omni Channel Division
Our digital strategy is focused on capturing
the home, craft and commercial growers online. GrowGeneration.com offers over 10,000 hydroponic products all curated by our product
team. GrowGeneration.com offer customers the option to have their orders shipped directly to their locations, anywhere in North
America or alternatively customers can buy online and pick up in store. Revenues for 2020 was approximately $10.6 million compared
to $4.8 million for 2019, an increase of 123%. New visitors to our website were 1.2 million versus 477,000, an increase of 152%
year over year. Our online garden center closed 17,000 transaction versus 6,300, an increase of 170%. On March 19, 2021, the Company
purchased the business-to-business ERP platform, Agron.io. a leading wholesale agriculture portal that allows commercial growers
to manage their purchasing and logistics in one platform. Agron.io offers commercial pricing, real-time inventory, and the largest product catalog in the industry, with over 10,000 products
in over 60 categories, including greenhouses, extraction, hemp, and commercial equipment. The platform manages real-time product
updates, tier-pricing changes, case quantities, pallet quantities, profit margin projections, hazmat fees, ETL/UL listings and
state chemical regulations, as well as guarantees the latest shipping rates using API Pallet.
Supply Chain
Our supply chain currently spans approximately 800,000 sq. ft.
of retail and warehouse space, across 52 locations and 12 states. Today, we operate distribution and fulfillment out of our 60,000
sq. ft location in Sacramento, CA and 40,000 sq. ft. in Tulsa, OK. We announced on March 9, 2021, the addition of a total of 122,000
sq. ft., including 52,000 sq. ft. in downtown Los Angeles, CA and 70,000 sq. ft. in Rancho Dominguez, CA that will serve as distribution
and fulfillment locations for the Company. We are in the process of building several additional locations that will serve as fulfillment
service centers, that includes a 25,000 sq. ft. location in Phoenix, AZ. and a 58,000 sq. ft. location in Medley, FL. We expect
these locations to be opened by the summer of 2021.
Proprietary
Brands and Private Label
GrowGeneration purchased Canopy Crop Management
Corp., in December 2020, the developer of the popular Power Si line of monosilicic acids products, a nutrient additive for plants
On March 12, 2021, the Company purchased Char Coir, a line of premium coco pots, cubes and medium. Both Power Si and Char Coir
are brands that generate over $10,000,000 in annual sales. We believe that expanding our private label offerings will have a positive
impact on our margins and profitability in the near term. We use various trademarks, trade names and service marks in our private-
label business, including Ion Lighting, Sunleaves, powder nutrient and additive line, Optilume Bulbs, Blueprint controllers and
timers, Growxcess pots and containers, Harvest Edge, pruners, trellis and other gardening accessories, and Durabreeze fans and
dehumidifiers. Both GrowGeneration and Where the Pros Go to Grow are the trademarks used brand and market our garden centers across
North America.
2020 Financial Results
Revenue in 2020 was up 142.5% year over year, to $193.4 million.
Adjusted EBITDA, for 2020 was approximately $19.2 million an increase of approximately $13.9 million or 265% over 2019. Adjusted
EBITDA per basic share, for 2020 was $0.44 compared to $0.16 for 2019. Our same store sales were up approximately 63% year over
year. Store income as a percentage of revenue increased from 14.9% of revenues in 2019 to 16.7 % of revenues in 2020. Income from
store operations increased $20.4 million, from $11.9 million in 2019 to $32.3 million in 2020. We saw significant revenue increases
in all key markets, Maine up 144%, Oklahoma up 255%, Michigan up 243%, and Rhode Island up 150%. Our e-commerce store, GrowGeneration.com
had revenues of approximately $10.6 million in 2020 up 123% from 2019. Our commercial division generated approximately $49 million
in revenue all of which is reflected in store revenues versus $17 million in 2019, an increase of 188%. With our significant top
line revenue growth, we reduced our store operating expenses to 9.7% of revenues in 2020 compared to 12.7% in 2019 and our corporate
overhead, excluding non-cash share-based compensation and depreciation, declined to 7% as a percentage of our revenue for 2020
compared to 8.5% of revenues for 2019.
Acquisitions
The Company purchased a total of 14 stores
in 2020 and 12 stores in 2021, as of March 19, 2021. The Company also completed the acquisitions of two leading product companies,
Canopy Crop Management in December 2020 and Char Coir in March 2021.
On February 26, 2020, the Company entered
into an asset purchase agreement through its wholly owned subsidiary, GrowGeneration Florida Corp, to purchase the assets of Healthy
& Harvest, LLC, with one location in Pembroke Pines, FL. In connection with the purchase of the assets, the Company also entered
a three-year commercial lease for warehouse space, effective February 26, 2020 and subleased the store space whose current lease
expires July 31, 2020.
On June 16, 2020 we acquired certain assets
of H2O Hydroponics, LLC in a transaction valued at approximately $1.99 million. Acquired intangibles and goodwill of approximately
$1.4 million 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.
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On August 10, 2020 we acquired certain
assets of Benzakry Family Corp, d/b/a Emerald City Garden, in a transaction valued at $1 million. Acquired intangibles and goodwill
of approximately $840,000 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.
On October 20, 2020 the Company acquired
the assets of Big Green Tomato (“BGT”), a two-store chain in Battle Creek and Taylor,
Michigan. The total consideration for the purchase of BGT was approximately $9.1 million, including $6.0
in cash and common stock valued at approximately $3.1 million.
On October 12, 2020, the Company acquired
the assets of Hydroponics Depot, LLC, a single store located in Phoenix Arizona. The total
consideration for the purchase of Hydroponics Depots LLC was approximately $1.54 million, including $987,500 in cash and common stock valued
at approximately $548,000.
On November 17, 2020, the Company acquired the assets of The
GrowBiz, a five-store chain with four stores in California and one store in Oregon. The total consideration for the purchase of
The GrowBiz was approximately $44.7 million, including $17.4 million in cash and common stock valued at approximately $27.3 million.
On December 14, 2020, the Company acquired
the assets of Grassroots, a three-store chain in California. The total consideration for the purchase of Grassroots was approximately
$10 million, including $7.5 million in cash and common stock valued at approximately $2.5 million.
On December 23, 2020, the Company acquired
the assets of Canopy Crop Management and its complete portfolio of products including the Power SI brand of mono-silicic acid-enriched
fertilizers. The total consideration for the purchase of Canopy Crop was approximately $9.2 million, including $5.4 million in
cash and common stock valued at approximately $3.8 million.
On January 25, 2021, the Company purchased
the assets of Indoor Garden & Lighting, Inc, a two-store chain of hydroponic and equipment
and indoor gardening supply stores serving the Seattle and Tacoma, Washington area. The total consideration for the purchase
of Garden & Lighting was approximately $1.63 million, including $1.1 million in cash and common stock valued at approximately
$526,000.
On February 1, 2021, the Company purchased
the assets of J.A.R.B., Inc d/b/a Grow Depot Maine, a two-store chain in Auburn and Augusta,
Maine. The total consideration for the purchase of Grow Depot Maine was approximately $2.1 million, including $1.7 million
in cash and common stock valued at approximately $411,000.
On February 15, 2021, the Company purchased
the assets of Grow Warehouse LLC, a four-store chain of hydroponic and organic garden stores
in Colorado (3) and Oklahoma (1). The total consideration for the purchase of Grow Warehouse LLC was approximately $17.8
million, including $8.1 million in cash and common stock valued at approximately $9.7 million.
On February 22, 2021, the Company purchased the assets of San
Diego Hydroponics & Organics, a four-store chain of hydroponic and organic garden stores
in San Diego, CA. The total consideration for the purchase of San Diego Hydroponics was approximately $9.3 million, including
$4.8 million in cash and common stock valued at approximately $4.5 million.
On March 12, 2021 the Company purchased
the assets of Charcoir Corporation, who sells an RHP-certified growing medium made from the
highest-grade coconut fiber. The total consideration for the purchase of Charcoir was approximately $16.3 million, including
$9.8 million in cash and common stock valued at approximately $6.5 million.
On March 15, 2021 the Company purchased
the assets of 55 Hydroponics, a hydroponic and organic superstore located in Santa Ana, CA.
The total consideration for the purchase of 55 Hydroponics was approximately $6.1 million, including $5 million in cash and common
stock valued at approximately $1.1 million.
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On March 15, 2021 the Company purchased
the assets of Aquarius, a hydroponic and organic garden store in Springfield, MA.
The total consideration for the purchase of Aquarius was approximately $3.6 million, including $2.4 million in cash and common
stock valued at approximately $1.2 million.
On March 19, 2021 the Company purchased
the assets of Agron, LLC, an online seller of growing equipment. The total consideration for the purchase of Agron was approximately
$11.3 million, including $6 million in cash and common stock valued at approximately $5.3 million.
CONDENSED RESULTS OF OPERATIONS
For the Year Ended Year to Year Comparison
December 31, Increase/ Percentage
Revenue
Net revenues for the year ended December
31, 2020 were approximately $193.4 million, compared to approximately $79.7 million for the year ended December 31, 2019, an increase
of approximately $113.6 million, or 142.5%. The increase in revenues is due to 1) the addition of 14 new retail stores opened or
acquired during 2020 for which revenues were $31 million, 2) 11 stores opened or acquired at various times during 2019 that were
open for all of 2020 which had an increase in revenues of $51 million, 3) same store sales which increase 63% comparing 2020 to
2019, which had an increase in revenues of approximately $28 million, 4) an increase in our ecommerce sales of $5.9 million from
2019 to 2020 and 5) revenues of $300,000 from Canopy Crop Management Corp/Power SI, acquired in later December 2020.
While the Company continues to focus on
the 11 geographic markets noted below and the growth opportunities that exist in each market, we also are focusing on new store
acquisitions, proprietary products, private label products, and developing our online revenues with GrowGeneration.com and Amazon
revenues.
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Revenue by Market
Year Ended December 31, 2020 Year Ended December 31, 2019 Variance % Variance
Overall revenues in the Colorado market
increased approximately $4.2 million or 27%, as noted above, comparing the year ended December 31, 2020 to the year ended December
31, 2019. The increase in revenues was due to our continued focus on selling efforts in building growth in this market primarily
the commercial market.
Our revenues in the California market have
seen growth of approximately $11.4 million or 74% and the increase was primarily from 1) the addition of 8 new stores through acquisitions
during 2020 that contributed $5 million in revenues, 2) 3 stores that comprise same store sales that had an increase in revenues
of $4.4 million and 3) 1 store acquired in 2019 that had an increase in revenues of $2 million. The California market is the largest
market in the US and is a continuous focus of the Company relative to its growth strategy.
Revenues in the Rhode Island market increased
approximately $12.6 million or 150%. The primary reason for the increase in revenues in the Rhode Island market was primarily due
to an increase in commercial sales with new regional and multi-state commercial customers.
Revenues in the Michigan market increased
approximately $22.6 million or 244%. The increase was primarily from 1) increase in same store sales of $4.6 million, 2) two new
stores acquired in 2020, that had revenues of $1.9 million, 3) one acquisition in the third quarter of 2019 that resulted in an
increase in revenues of $9.7 million and 4) an acquisition of a new store in Lansing in 2020 that was consolidated with an existing
store in Lansing that had an increase in revenues of $6.4 million.
Revenues in the Maine market increased
approximately $8.9 million or 144%. Maine was a new market in 2019 as a result of a new store opening in February 2019 and the
acquisition of two stores in May 2019. 2020 represented a full year of revenues for the three stores.
Our revenues in the Nevada market increased
by approximately $590,000 or 13.5%, with the increase pretty evenly split between or Las Vegas and Reno stores.
Revenues in the Washington market increased
$262,000 or 21%, as the Company continues to focus on adding commercial customers in this market.
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The Company opened its first store in Oklahoma
in October 2018, followed by new store openings in February 2019, November 2019 and March 2021. Oklahoma has been a significant
new market for the Company contributing sales of $41.8 million in 2020 compared to $11.8 million for 2019, an increase for $30
million or 255%. The Company has a very strong presence in this market and has generated strong sales in both commercial and non-commercial
customers.
Florida was a new market for us in 2020
as a result of an acquisition in that market in February 2020. Revenues were approximately $9 million for 2020. The market serves
a large number of commercial customers.
Revenues in the Oregon market were $8.2
million in 2020 compared to $154,000 in 2019. Oregon was a new market with an acquisition in late December 2019, and an additional
acquisition in November 2020.
Arizona was also a new market for the Company
in 2020, with an acquisition in October 2020. Revenues were $2.4 million, and we service both commercial and retail customers from
this location.
The ecommerce revenues generated for GrowGeneration.com
had an increase in revenue in 2020 of approximately $5.9 million or 123% from $4.8 million in 2019 to $10.6 million in 2020. The
ecommerce growth is a result of marketing driving a significant number of new customers to the website.
Same Store Sales
The Company had the same 13 stores (4 in
Colorado, 3 in California, 2 in Michigan, 1 in Washington, 1 in Oklahoma, 1 in Rhode Island and 1 in Nevada) opened for the entire
year ended December 31, 2020 and 2019. These same stores generated $72.3 million in revenues for the year ended December 31, 2020,
compared to $44.3 million in revenues for 2019, an increase of 63%. The increase in revenues in these 13 same store sales was primarily
an increase in commercial sales and from an increase in walk in traffic.
13 Same Stores
Year ended Year ended
Cost of Sales
Cost of sales for the year ended December
31, 2020 increased approximately $84.6 million or 146.5%, to approximately $142.3 million, compared to $57.7 million for the year
ended December 31, 2019. The increase in cost of goods sold was directly attributable to the 142.5% increase in revenues, as detailed
above, comparing the year ended December 31, 2020 to 2019.
Gross profit was $51 million for the year
ended December 31, 2020, as compared to $22 million for the year ended December 31, 2019, an increase of approximately $29 million
or 132%. Gross profit as a percentage of sales was 26.4% for the year ended December 31, 2020, compared to 27.6% for the year ended
December 31, 2019. The decrease in the gross profit margin percentage in 2020 was due to a greater percentage of commercial and
ecommerce revenues as a percent of total revenue both of which have lower margins than in retail sales. Commercial and ecommerce
represented 31% of all revenues for the year ended December 31, 2020 compared to 28% for the year ended December 31, 2019.
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Operating Expenses
Operating expenses are comprised of store
operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $18.7 million
for the year ended December 31, 2020 and approximately $10.1 million for the year ended December 31, 2019, an increase of approximately
$8.6 million or 85%. The increase in store operating costs was directly attributable to 1) the addition of 14 new retail stores
opened or acquired during 2020 and 2) 11 stores opened or acquired at various times during 2019 that were open for all of 2020.
The addition of these stores, as discussed above, were the primary reasons for the increase in store operating costs. Store operating
costs as a percentage of revenues were 9.7% for the year ended December 31, 2020, compared to 12.7% for the year ended December
31, 2019, a 24% reduction. Store operating costs were positively impacted by 1) the opening of new and acquired stores throughout
2020 which have lower percentage of operating costs to revenues due to their larger size and higher volume and 2) same store revenues
increased 63% comparing the year ended December 31, 2020 to the year ended December 31, 2019, which also contributed significantly
to lowering of the store operating costs as a percentage of revenues since the majority of store operating costs are fixed.
Corporate overhead, comprised of general
and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $23.9
million for the year ended December 31, 2020, compared to approximately $10.3 million for the year ended December 31, 2019. Corporate
overhead was 12.4% of revenue for the year ended December 31, 2020 and 13% for the year ended December 31, 2019. Corporate overhead,
excluding non-cash share-based compensation and depreciation and amortization, was 7.0% of revenues compared to 8.5% of revenues
for 2019 shows that non-cash expenses was a larger component of overhead cost in 2020 compared to 2019. Non-cash costs included
in corporate overhead was 5.3% of revenues for 2020 compared to 4.4% of revenues for 2019. The increase in non-cash expenses in
corporate overhead as a percentage of revenues for the year ended December 31, 2020 was primarily due to 1) the increase in non-cash
share-based compensation from approximately $2.5 million for the year ended December 31, 2019 to approximately $7.9 million for
the year ended December 31, 2020, an increase of $5.4 million and 2) the increase in depreciation and amortization from approximately
$1 million for the year ended December 31, 2019 to approximately $2.4 million for the year ended December 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, which resulted in the vesting of common stock and common stock options at the start of the first 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 three months of 2020, due
to vesting, and 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 2020 than they will be in the periods subsequent to 2020. The increase in depreciation and amortization
is due to the significant increase in both depreciable assets and acquired intangible assets being amortized over their useful
lives. Salaries as a percentage of revenues were 4.4% for 2020 and 4.5% for 2019. The increase in salaries expense from 2019 to
2020, which increased $5.0 million, from $3.6 million for the year ended December 31, 2019 to $8.6 million for the year ended December
31, 2020 was due primarily to the increase in corporate staff to support expanding store operations, including management, purchased
store integrations, accounting and finance, information systems, purchasing and commercial revenues support staff. It should be
noted that when we consummate a new acquisition, purchasing and back-office accounting functions are stripped from the new acquisitions
and those functions are absorbed into our existing centralized purchasing and centralized accounting and finance departments, thus
delivering cost savings.
General and administrative expenses comprised
mainly of marketing, travel & entertainment, professional fees and insurance, was approximately $5 million for the year ended
December 31, 2020 and approximately $3.2 million for the year ended December 31, 2019, with a majority of the increase related
to marketing, insurance (both property and casualty and director and officers liability insurance), professional and legal fees.
The increase in professional and legal fees was due to the increase in acquisitions in 2020 and consulting fees for SOX 404 compliance.
General and administrative costs as a percentage of revenue were 2.6% for the year ended December 31, 2020, and 4% for the year
ended December 31, 2019.
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Net Income
Net income for the year ended
December 31, 2020 was approximately $5.3 million, compared to net income of approximately $1.3 million for the year ended
December 31, 2019, an increase of $4 million. Net income for 2020 compared to 2019 was primarily impacted by a 142.5%
increase in revenues, offset slightly by an increase in cost of goods sold of 147%. Store operating costs as a percentage of
revenue was 9.7% in 2020 compared to 12.7% offsetting the increase in cost of goods sold. Store income as a percentage of
revenue increased from 14.9% of revenues in 2019 to 16.7 % of revenues in 2020. Income from store operations increased $20.4
million, from $11.9 million in 2019 to $32.3 million in 2020. Corporate overhead, including non-cash costs, increased $13.6
million from $10.3 million in 2019 to $23.9 million in 2020. In addition, net income was impacted by the provision for income
taxes which was $3.3 million for 2020 compared to $0 for 2019. The Company had significant net operating loss carryforwards
which offset taxable income in 2019 thus resulting in no provision for income taxes.
CONDENSED Q4 2020 AND Q4 2019 RESULTS
OF OPERATIONS
For the Quarter Ended Year to Year Comparison
December 31, Increase/ Percentage
Adjusted EBITDA per share, basic $ .11 $ .02 $ .09 450 %
Highlights of Results of Operations
Comparing Q4 2020 to Q4 2019.
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Cash Flow
Net cash used in operating activities
for the year ended December 31, 2020 was approximately $214,000, compared to $3.3 million for the year ended December 31,
2019, a decrease of approximately $3.1 million. Cash provided by operating activities is driven by our net income 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 $11.1 million and approximately $4.4 million for the years ended December 31, 2020
and 2019, respectively, so non-cash adjustments had a greater positive impact on net cash used in operating activities for
the year ended December 31, 2020 than the same period in 2019. Despite net income of approximately $5.3 million and non-cash
adjustments of $11.1 million for 2020, these positive adjustments were offset by increases in inventory of $19.2 million,
increases in trade accounts and notes receivable of $3.5 million and increases in prepaids and other current assets of $9
million, offset by increases in trade accounts payable of $10 million, customer deposits of $2.6 million and other current
liabilities of $3.3 million. Despite net income of $1.3 million for the year ended December 31, 2019 and non-cash adjustments
totaling $4.4 million, these positive adjustments were offset by increases in inventory of $10 million, increases in trade
receivable of $3.8 million and increases in prepaids and 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 $495,000.
Net cash used in investing activities was
approximately $45.8 million for the year ended December 31, 2020 and approximately $11.8 million for the year ended December 31,
2019. The increase in 2020 was due to the multiple asset acquisitions throughout 2020, 8 in total, in which we acquired inventory,
fixed assets, goodwill and other intangibles of $40.8 million and the purchase of vehicles and store equipment to support new store
operations of approximately $4 million. During 2019, we acquired 8 new stores in which we purchased inventory, fixed assets, goodwill
and other intangibles of $9.5 million and the purchase of vehicles and store equipment to support new store operations of approximately
$2.2 million.
Net cash provided
by financing activities for the year ended December 31, 2020 was approximately $211 million and represented proceeds from the sale
of Common Stock and exercise of warrants, net of offering costs of $211.2 million, offset by payments of long-term debt of approximately
$114,400 and stock redemptions of approximately $118,800. Net cash provided by financing activities for the year ended December
31, 2019 was approximately $13.5 million and was comprised of primarily proceeds from the sales of Common Stock and exercise of
warrants, net of offering costs of $13.9 million, net of payments of long-term debt of $460,000.
24
Use of Non-GAAP
Financial Information
The Company believes
that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation
charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance