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.
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Use of Non-GAAP
Financial Information
The Company believes
that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation
charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance
across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP
measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from
non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation
or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.
As previously note, the Company has not been materially impacted
by COVID, as such EBITDA has been adjusted to show the impact of covid costs which we believe to be non-recurring.
Set forth below is a reconciliation
of Adjusted EBITDA to net income (loss):
Year ended
Adjusted EBITDA per share, basic $ .44 $ .16
Adjusted EBITDA per share, diluted $ .41 $ .16
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LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2020, we had
working capital of approximately $222.9 million, compared to working capital of approximately $29 million as of December 31,
2019, an increase of approximately $193.9 million. The increase in working capital from December 31, 2019 to December 31,
2020 was due primarily to the net proceeds from the sale of Common Stock of $207.1 million and exercise of warrants totaling
approximately $3.8 million. At December 31, 2020, we had cash and cash equivalents of approximately $177.9 million.
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 may need to raise additional capital in the future through equity offerings and/or debt
financings. We believe that some of our store acquisitions and new store openings can come from cash flow from
operations.
We anticipate that we will need additional
financing in the future to continue to acquire and open new stores. To date we have financed our operations through the issuance
of the sale of Common Stock, warrants and convertible debentures.
Financing Activities
On December 11, 2020 the Company consummated
an underwritten public offering of 5,750,000 shares of its common stock, which included the exercise in full of the underwriters’
option to purchase an additional 750,000 shares of common stock to cover over-allotments.
The shares were sold at a public offering price of $30 per share, generating gross proceeds of $172.5 million, before
deducting the underwriting discounts and commissions and other offering expenses. Net proceeds from the sales of common
stock, net of all offering costs and expenses was approximately $162.5 million.
On July 2, 2020 the Company consummated
an underwritten public offering of 8,625,000 shares of its common stock, which included the exercise in full of the underwriters’
option to purchase an additional 1,125,000 shares of common stock to cover over-allotments.
The shares were sold at a public offering price of $5.60 per share, generating gross proceeds of $48.3 million, before
deducting the underwriting discounts and commissions and other offering expenses. Net proceeds from the sales of common
stock, net of all offering costs and expenses was approximately $44.6 million.
2019 Offerings
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.
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.
26
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently Adopted Accounting Pronouncements
As of January 1, 2019, the Company adopted
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 an initial term of 12 months or less off the balance sheet. The Company will recognize those lease payments
on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease
assets and liabilities on January 1, 2019 of $3.2 million.
On January 1, 2019, the Company also adopted
ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 more closely aligns the accounting
for employee and nonemployee share-based payments. The amendment is effective commencing in 2019 with early adoption permitted.
The adoption of this new guidance did not have a material impact on our Financial Statements.
In August 2018, the SEC adopted amendments
to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments
eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to
present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports
on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative
quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. The Company
adopted these amendments in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.
The new guidance modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are
effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
The adoption of this new guidance, effective January 1, 2020, did not have a material impact on our Financial Statements.
Recently Issued Accounting Pronouncements
– Pending Adoption
As an emerging growth company, the Company
is permitted to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies.
The Company has chosen to take advantage of the extended transition period for complying with new or revised accounting standards.
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 required to adopt
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.
27
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 ASU 2019-02,
Simplifying the Accounting for Income Taxes, 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 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.
In August 2020, the FASB issued ASU 2020-06,
Debt with Conversion and Other Options: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which
simplifies the accounting for certain instruments with characteristics of liabilities and equity, including convertible instruments
and contracts on an entity’s own equity. ASU 2020-06 removes from U.S. GAAP the separation models for (1) convertible debt
with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. ASU 2020-06 requires entities
to provide expanded disclosures about “the terms and features of convertible instruments,” how the instruments have
been reported in the entity’s financial statements, and “information about events, conditions, and circumstances that
can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments.”
ASU 2020-06 is effective for public business
entities that are not smaller reporting companies for fiscal years beginning after December 15, 2021 and interim periods within
those fiscal years. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 and interim
periods within those fiscal years. We are currently evaluating the impact of adopting this new accounting guidance on our condensed
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Reports of Independent Registered Public Accounting Firms F-2 to F-3
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4
Notes to Consolidated Financial Statements F-8 to F-35
F-1
Report of Independent Registered Public
Accounting Firm
To the Stockholders and Board of Directors of GrowGeneration
Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of GrowGeneration Corp. (the “Company”) as of December 31, 2020, the related consolidated statements
of operations, stockholders' equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash
flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
The Company's management is responsible
for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on
our audit. 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 audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable
basis for our opinion.
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor
since 2020.
Denver, Colorado
March 28, 2021
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of GrowGeneration Corp and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of GrowGeneration Corp and Subsidiaries (the Company) as of December 31, 2019, and the related consolidated statements
of operations, changes in stockholders’ equity, and cash flows for the year then ended and the 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, 2019, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the 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 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, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are
required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Connolly Grady & Cha, P.C
Certified Public Accountants
Springfield, Pennsylvania
March 27, 2020
We have served as the Company's auditor since 2014
F-3
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Income tax receivable 655,253 -
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Operating lease liability, net of current maturities 9,478,553 5,807,266
Commitments and contingencies
Stockholders’ Equity:
The accompanying notes are an integral
part of these audited consolidated financial statements.
F-4
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
Operating expenses:
Other income (expense):
Provision for income taxes (3,250,891 ) -
Net income per share, basic $ .12 $ .04
Net income per share, diluted $ .11 $ .04
The accompanying
notes are an integral part of these audited consolidated financial statements.
F-5
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020
and 2019
Additional Total
Common Stock Paid-In Accumulated Stockholders’
Shares Amount Capital Deficit Equity
Common stock issued upon cashless exercise of options 505,868 506 (506 ) -
Common stock issued upon cashless exercise of warrants 918,186 918 (918 ) -
Common stock issued upon cashless exercise of options 694,281 694 (694 ) -
Common stock issued for services 50,000 50 (50 ) -
The accompanying notes are an integral part
of theses audited consolidated financial statements.
F-6
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash used in operating Activities:
Provision for doubtful accounts and notes receivable 213,503 172,135
Amortization of debt discount - 356,306
Deferred income taxes 750,430 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Increase (decrease) in:
Cash Flows from Investing Activities:
Cash Flows from Financing Activities:
Supplemental Information:
Common stock and warrants issued for prepaid services $ - $ 96,000
Common stock issued for accrued payroll liability $ 717,531 $ 210,200
Debt converted to equity $ - $ 2,310,832
Right to use assets acquired under new operating leases $ 7,887,344 $ 6,210,395
The accompanying notes are an integral part
of these audited consolidated financial statements.
F-7
GROWGENERATION CORP. AND SUBSIDIARIES