PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
511,474
|
|
|
$
|
699,417
|
|
Accounts receivable, net of allowance of $6,500
|
|
|
365,023
|
|
|
|
37,554
|
|
Employee Advances
|
|
|
4,883
|
|
|
|
2,950
|
|
Inventory
|
|
|
2,387,949
|
|
|
|
1,311,639
|
|
Prepaid Expenses
|
|
|
10,610
|
|
|
|
17,036
|
|
Total Current Assets
|
|
|
3,279,939
|
|
|
|
2,068,596
|
|
Fixed Assets
|
|
|
|
|
|
|
|
|
Furniture and Equipment
|
|
|
531,624
|
|
|
|
291,241
|
|
Accumulated Depreciation
|
|
|
(58,186
|
)
|
|
|
(20,005
|
)
|
Total Fixed Assets, Net
|
|
|
473,438
|
|
|
|
271,236
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Security Deposits
|
|
|
33,653
|
|
|
|
27,230
|
|
Goodwill
|
|
|
243,000
|
|
|
|
243,000
|
|
Total Other Assets
|
|
|
276,653
|
|
|
|
270,230
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,030,030
|
|
|
$
|
2,610,062
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
569,094
|
|
|
$
|
292,078
|
|
Short term borrowings
|
|
|
99,503
|
|
|
|
56,184
|
|
Customer Deposits
|
|
|
26,843
|
|
|
|
18,410
|
|
Payroll Liabilities
|
|
|
57,532
|
|
|
|
43,925
|
|
Sales Tax Payable
|
|
|
47,152
|
|
|
|
22,093
|
|
Current portion long-term debt
|
|
|
23,443
|
|
|
|
5,866
|
|
Total Current Liabilities
|
|
|
823,567
|
|
|
|
438,556
|
|
Long Term Liabilities
|
|
|
|
|
|
|
|
|
RMT-2005 Mitsubishi
|
|
|
25,289
|
|
|
|
|
|
Wells Fargo Equipment - Forklift
|
|
|
25,449
|
|
|
|
|
|
Hitachi Capital America Corp
|
|
|
19,644
|
|
|
|
23,999
|
|
Less current portion long-term debt
|
|
|
(23,443
|
)
|
|
|
(5,866
|
)
|
Total Long Term Liabilities
|
|
|
46,939
|
|
|
|
18,133
|
|
Total Liabilities
|
|
|
870,506
|
|
|
|
456,689
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock .001 par value, 100,000,000 shares authorized; 10,584,262 shares issued and outstanding at September 30, 2016 and 8,967,834 shares issues and
outstanding at December 31, 2015
|
|
|
10,585
|
|
|
|
8,968
|
|
Additional Paid In Capital
|
|
|
4,079,032
|
|
|
|
2,862,816
|
|
Accumulated deficit
|
|
|
(930,093
|
)
|
|
|
(718,411
|
)
|
Total Equity
|
|
|
3,159,524
|
|
|
|
2,153,373
|
|
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
|
|
$
|
4,030,030
|
|
|
$
|
2,610,062
|
|
See
Notes to the Unaudited Consolidated Financial Statements.
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
(Unaudited)
|
|
Three Months
Ended
September 30,
2016
|
|
|
Three Months
Ended
September 30,
2015
|
|
|
Nine Months
Ended
September 30,
2016
|
|
|
Nine Months
Ended
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,169,129
|
|
|
$
|
921,913
|
|
|
$
|
5,617,726
|
|
|
$
|
2,330,773
|
|
Cost of sales
|
|
|
(1,560,359
|
)
|
|
|
(576,406
|
)
|
|
|
(3,947,352
|
)
|
|
|
(1,514,931
|
)
|
Gross profit
|
|
|
608,770
|
|
|
|
345,507
|
|
|
|
1,670,374
|
|
|
|
815,842
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotion
|
|
|
15,675
|
|
|
|
6,143
|
|
|
|
42,478
|
|
|
|
24,657
|
|
Alarm and security
|
|
|
1,190
|
|
|
|
1,241
|
|
|
|
3,303
|
|
|
|
2,395
|
|
Automobile expense
|
|
|
8,956
|
|
|
|
4,668
|
|
|
|
25,110
|
|
|
|
10,342
|
|
Bad debt expense
|
|
|
30
|
|
|
|
1,369
|
|
|
|
3,688
|
|
|
|
1,369
|
|
Bank service charges
|
|
|
5,966
|
|
|
|
1,605
|
|
|
|
15,477
|
|
|
|
5,023
|
|
Cash (over) short
|
|
|
(1,365
|
)
|
|
|
(1,526
|
)
|
|
|
(1,050
|
)
|
|
|
(866
|
)
|
Credit card fees
|
|
|
13,165
|
|
|
|
7,108
|
|
|
|
36,678
|
|
|
|
18,542
|
|
Computer and internet expenses
|
|
|
5,711
|
|
|
|
3,453
|
|
|
|
16,084
|
|
|
|
6,471
|
|
Depreciation expense
|
|
|
17,158
|
|
|
|
5,074
|
|
|
|
38,181
|
|
|
|
10,214
|
|
Donations
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dues and subscriptions
|
|
|
70
|
|
|
|
|
|
|
|
169
|
|
|
|
45
|
|
Insurance expense
|
|
|
9,672
|
|
|
|
1,908
|
|
|
|
18,927
|
|
|
|
5,724
|
|
Interest expense
|
|
|
1,384
|
|
|
|
172
|
|
|
|
3,050
|
|
|
|
172
|
|
Finance charges
|
|
|
201
|
|
|
|
1,029
|
|
|
|
374
|
|
|
|
2,139
|
|
Janitorial expense
|
|
|
50
|
|
|
|
162
|
|
|
|
661
|
|
|
|
324
|
|
Licenses & permits
|
|
|
557
|
|
|
|
191
|
|
|
|
3,637
|
|
|
|
514
|
|
Meals and entertainment
|
|
|
11,310
|
|
|
|
3,495
|
|
|
|
30,826
|
|
|
|
13,099
|
|
Office supplies
|
|
|
6,479
|
|
|
|
4,740
|
|
|
|
22,335
|
|
|
|
10,695
|
|
Stock compensation
|
|
|
|
|
|
|
75,000
|
|
|
|
98,000
|
|
|
|
75,000
|
|
Stock option compensation
|
|
|
|
|
|
|
64,750
|
|
|
|
86,333
|
|
|
|
64,750
|
|
Officer salary
|
|
|
83,100
|
|
|
|
53,500
|
|
|
|
240,950
|
|
|
|
126,500
|
|
Salary and wages other
|
|
|
223,128
|
|
|
|
119,268
|
|
|
|
615,906
|
|
|
|
279,096
|
|
Payroll tax and benefits
|
|
|
26,025
|
|
|
|
15,684
|
|
|
|
79,153
|
|
|
|
39,856
|
|
Postage and delivery
|
|
|
3,956
|
|
|
|
261
|
|
|
|
6,860
|
|
|
|
747
|
|
Accounting & audit fees
|
|
|
14,304
|
|
|
|
11,055
|
|
|
|
39,304
|
|
|
|
26,875
|
|
Legal fees
|
|
|
9,056
|
|
|
|
30,000
|
|
|
|
38,083
|
|
|
|
40,000
|
|
Commissions & other professional fees
|
|
|
99
|
|
|
|
30,590
|
|
|
|
36,398
|
|
|
|
30,590
|
|
Regulatory filing fees and services
|
|
|
6,122
|
|
|
|
|
|
|
|
6,122
|
|
|
|
|
|
Rent expense
|
|
|
75,557
|
|
|
|
25,150
|
|
|
|
204,349
|
|
|
|
64,050
|
|
Repairs and maintenance
|
|
|
3,184
|
|
|
|
1,112
|
|
|
|
10,953
|
|
|
|
3,839
|
|
Supplies
|
|
|
6,823
|
|
|
|
2,576
|
|
|
|
17,364
|
|
|
|
3,949
|
|
Telephone expense
|
|
|
8,378
|
|
|
|
3,837
|
|
|
|
22,344
|
|
|
|
9,672
|
|
Training
|
|
|
1,060
|
|
|
|
|
|
|
|
2,479
|
|
|
|
300
|
|
Travel expense
|
|
|
25,342
|
|
|
|
8,740
|
|
|
|
74,944
|
|
|
|
27,641
|
|
Utilities
|
|
|
16,083
|
|
|
|
8,563
|
|
|
|
40,988
|
|
|
|
22,822
|
|
Total expense
|
|
|
597,926
|
|
|
|
490,918
|
|
|
|
1,880,458
|
|
|
|
926,546
|
|
Net ordinary income (loss)
|
|
|
10,844
|
|
|
|
(145,411
|
)
|
|
|
(210,084
|
)
|
|
|
(110,704
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Startup costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,220
|
)
|
Net Income (Loss) before income taxes
|
|
|
10,844
|
|
|
|
(145,411
|
)
|
|
|
(210,082
|
)
|
|
|
(121,924
|
)
|
Federal income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax expense
|
|
|
|
|
|
|
|
|
|
|
(1,600
|
)
|
|
|
|
|
Income Tax Benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
10,844
|
|
|
|
(145,411
|
)
|
|
|
(211,682
|
)
|
|
|
(121,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
$
|
.001
|
|
|
|
(.02
|
)
|
|
|
(.02
|
)
|
|
|
(.02
|
)
|
See
Notes to the Unaudited Consolidated Financial Statements.
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
|
|
Nine Months
Ended
September 30,
2016
|
|
|
Nine Months
Ended
September 30,
2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(211,682
|
)
|
|
$
|
(121,924
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock & Option compensation
|
|
|
184,333
|
|
|
|
139,750
|
|
Commissions
|
|
|
35,000
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,181
|
|
|
|
10,214
|
|
Bad debt expense
|
|
|
3,688
|
|
|
|
1,369
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(331,157
|
)
|
|
|
(15,215
|
)
|
Employee advances
|
|
|
(1,933
|
)
|
|
|
(2,700
|
)
|
Inventory
|
|
|
(1,076,310
|
)
|
|
|
(665,745
|
)
|
Prepaid expenses
|
|
|
6,426
|
|
|
|
(5,517
|
)
|
Security deposits
|
|
|
(6,423
|
)
|
|
|
(13,840
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
277,016
|
|
|
|
109,751
|
|
Customer deposits
|
|
|
8,432
|
|
|
|
(5,180
|
)
|
Payroll liabilities
|
|
|
13,607
|
|
|
|
21,629
|
|
Sales tax payable
|
|
|
25,059
|
|
|
|
8,296
|
|
Net Cash Flow Used by Operating Activities
|
|
|
(1,035,763
|
)
|
|
|
(539,112
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of furniture and equipment
|
|
|
(240,383
|
)
|
|
|
(161,598
|
)
|
Net Cash Flow Used by Investing Activities
|
|
|
(240,383
|
)
|
|
|
(161,598
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Short term borrowings
|
|
|
43,319
|
|
|
|
(12,482
|
)
|
Proceeds from long-term debt
|
|
|
57,324
|
|
|
|
25,852
|
|
Principal payments on long-term debt
|
|
|
(10,940
|
)
|
|
|
(459
|
)
|
Issuance of common stock
|
|
|
998,500
|
|
|
|
1,052,500
|
|
Net Cash Flow Provided by Financing Activities
|
|
|
1,088,203
|
|
|
|
1,065,411
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(187,943
|
)
|
|
|
364,701
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of period
|
|
|
699,417
|
|
|
|
110,559
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of period
|
|
$
|
511,474
|
|
|
|
475,260
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Interest paid during period
|
|
$
|
3,050
|
|
|
|
172
|
|
Taxes paid during period
|
|
$
|
|
|
|
|
|
|
See
Notes to the Unaudited Financial Statements.
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
Retained
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
Earnings
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
(Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2015
|
|
|
8,967,834
|
|
|
|
8,968
|
|
|
|
2,862,816
|
|
|
(718,411
|
)
|
|
|
2,153,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock at $.70 per share
|
|
|
1,476,428
|
|
|
|
1,477
|
|
|
|
928,673
|
|
|
|
|
|
|
930,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued at $.70 per share
|
|
|
|
|
|
|
|
|
|
|
103,350
|
|
|
|
|
|
|
103,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
86,333
|
|
|
|
|
|
|
86,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation at $.70 per share
|
|
|
140,000
|
|
|
|
140
|
|
|
|
97,860
|
|
|
|
|
|
|
98,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211,682
|
)
|
|
|
(211,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2016
|
|
|
10,584,262
|
|
|
|
10,585
|
|
|
|
4,079,032
|
|
|
(930,093
|
)
|
|
|
3,159,524
|
|
See
Notes to the Unaudited Financial Statements.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
September
30, 2016
GrowGeneration
Corp (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of Easylife and changed its name
to GrowGeneration Corp. It maintains its principal office in Pueblo, Colorado.
GrowGeneration
Corp is engaged in the business of owning and operating retail hydroponic stores through wholly owned subsidiaries. It currently
owns Grow Generation Pueblo Corp. which operates retail hydroponic stores in Colorado located in Pueblo, Canon City, Trinidad,
Conifer, Colorado Springs and Denver, Fairplay and Castle Rock; and Grow Generation California Corp. which operates a retail store
in Santa Rosa California. The Company today owns and operates 11 stores and is actively engaged in seeking to acquire additional
hydroponic retail stores. The Company’s financial statement has been prepared in accordance with generally accepted accounting
principles.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP). However, all adjustments that are, in the opinion
of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were
of a normal recurring nature. The results of operations for the nine month period ended September 30, 2016 are not necessarily
indicative of the results that may be expected for the entire year or any other interim period.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation and Consolidation
The
Company’s financial statements are prepared on the accrual method of accounting. The accounting and reporting policies of
the Company conform to generally accepted accounting principles (GAAP). The consolidated financial statements of the Company included
the accounts of GrowGeneration Pueblo Corp. Intercompany balances and transactions are eliminated in consolidation.
Use
of Estimates
Management
uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.
These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual
results could vary from the estimates that were used.
Revenue
Recognition
Revenue
on product sales is recognized upon delivery or shipment. Customer deposits/layaway sales are not reported as income until final
payment is received and the merchandise is delivered.
Accounts
Receivable
Accounts
receivable are stated at the amount the Company expects to collect from balances outstanding at September 30, 2016. Based on the
Company's assessment of the credit history with customers having outstanding balances and current relationships with them. At
September 30, 2016, the Company established an allowance for doubtful accounts of $6,500.
GrowGeneration
Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
September 30, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Property
and Equipment
Expenditures
for maintenance and repairs are charged against operations. Renewals and betterment that materially extend the life of the asset
are capitalized. Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes
at rates based on the following estimated useful lives:
|
|
Estimated
Lives
|
|
Vehicle
|
5
years
|
|
Furniture
and fixtures
|
5-7
years
|
|
Computers
and equipment
|
3-5
years
|
|
Leasehold
improvements
|
10
years
|
For
federal income tax purposes, depreciation is computed using the accelerated cost recovery system and the modified accelerated
cost recovery system.
Income
Taxes
The
Company accounts for income taxes in accordance with FASB ACS 740, Income Taxes, which requires the recognition of deferred income
taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences
related principally to depreciation of property and equipment, reserve for obsolete inventory and bad debt. Deferred tax assets
and liabilities represent the future tax consequence for those differences, which will either be deductible or taxable when the
assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to
offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be
realized.
The
Company adopted the provisions of FASB ACS 740-10-25, which prescribes a recognition threshold and measurement attribute for the
recognition and measurement of tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides
guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
and accounting for interest and penalties associated with tax positions. The Company’s tax returns are subject to tax examinations
by U.S. federal and state authorities until respective statute of limitation. Currently, the 2015 and 2014 tax years are open
and subject to examination by taxing authorities. However, the Company is not currently under audit nor has the Company been contacted
by any of the taxing authorities. The Company does not have any accrual for uncertain tax positions as of September 30, 2016.
It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 month of the reporting
date.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
September
30, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Presentation
of Sales Taxes
The
Company is required to collect sales tax for the State of Colorado, State of California, City of Pueblo, City of Canon City, City
of Colorado Springs, Pueblo County and Fremont County, Jefferson County, El Paso County, City & County of Denver, City of
Santa Rosa ranging from 3.9% to 8.25% on the Company's sales to nonexempt customers. The Company collects that sales tax from
customers and remits the entire amount to the corresponding taxing authorities. The Company's accounting policy is to exclude
the tax collected and remitted from revenue and cost of sales.
Advertising
The
Company expenses all advertising and promotional costs when incurred. Advertising and promotional expense for the nine months
ending September 30, 2016 amounted to $42,478.
Freight
and Shipping
It
is the Company's policy to classify freight and shipping costs as part of cost of sales. Total freight and shipping costs for
the nine months ending September 30, 2016 was $35,386.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all unrestricted highly liquid investments with a maturity of three
months or less when acquired to be cash equivalents.
Goodwill
Goodwill
represents the excess of acquisition costs over the fair value of net tangible and intangible assets acquired in connection with
an acquisition. The Company accounts for goodwill in accordance with the provisions of FASB Accounting Standards Update (ASU)
2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. provisions of FASB Accounting Standards Update
(ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. In accordance with FASB ASC Topic 350
for Intangibles – Goodwill and Other, goodwill is not amortized but is reviewed for potential impairment on an annual basis,
or if events or circumstances indicate a potential impairment, at the reporting unit level. The Company’s review for impairment
includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying value, including goodwill. If it is determined that it is more likely than not that the fair value
of a reporting unit is less than its carrying value, including goodwill, the first step of the two-step quantitative goodwill
impairment test is performed, which compares the fair value of the reporting unit with its carrying amounts, including goodwill.
If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.
However, if the carrying amount of the reporting unit exceeds its fair value, an additional procedures must be performed. That
additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The carrying
value of goodwill is tested for impairment at least annually.
Inventory
Inventory
consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or market.
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition.
ASU 2014-09 will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance. ASU 2014-09 establishes a new
control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point of
time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. The guidance
in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016. Non public entities
are required to apply the guidance for annual periods beginning after December 15, 2017. Early application is not permitted for
public entities. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company's financial
statements and disclosures.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
September
30, 2016
On
July 19, 2016 the Company entered into a 2 year lease agreement for its tenth retail store in Fairplay, Colorado. The Company
began operations in Fairplay, Colorado on August 1, 2016. The lease agreement requires monthly rental payments of $1,085 through
July 31, 2018.
On
September 27, 2016 the Company entered into a lease agreement for its eleventh retail store in Castle Rock, Colorado. The term
of the lease is October 1, 2016 through September 30, 2019 and requires monthly payments of $1,775 through September 30, 2017;
$1,980 through September 30, 2018 and $2,138 through September 30, 2019.
The
Company leases its store facilities under operating leases ranging from $850 to $5,600 per month. The following is a schedule
of future minimum rental payments required under the term of the operating leases as of September 30, 2016:
|
12
months Ending September 30,
|
Amount
|
|
2017
|
$
|
344,265
|
|
2018
|
|
261,851
|
|
2019
|
|
196,083
|
|
2020
|
|
117,476
|
|
2021
|
|
53,966
|
|
Thereafter
|
|
53,397
|
|
|
$
|
1,027,038
|
Rent
expense under all operating leases for the nine months ending September 30, 2016 and 2015 was $204,349 and $64,050, respectively.
|
Long term debt is as follows:
|
|
September 30, 2016
|
|
|
|
|
|
|
|
8.0%, Hitachi Capital, payable $631.13 monthly beginning September 2015 through August 2019, secured by delivery equipment with a book value of $29,508
|
|
$
|
19,644
|
|
|
|
|
|
|
|
|
3.5%, Wells Fargo Equipment Finance, payable $518.96 monthly beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $28,527
|
|
|
25,449
|
|
|
|
|
|
|
|
|
10.926%, RMT Equipment, payable 1154.79 monthly beginning September 2016 through October 2018, security be delivery equipment with a book value of $37,523
|
|
|
25,289
|
|
|
|
|
|
|
|
|
|
|
$
|
70,382
|
|
|
Less Current Maturities
|
|
|
(23,443
|
)
|
|
Total Long-Term Debt
|
|
$
|
46,939
|
|
Future
Debt Maturities – A schedule of expected debt payments and the portion allocated to principal follows:
|
Twelve Months Ending September 30,
|
|
Total
Payment
|
|
|
Allocated to
Principal
|
|
|
2017
|
|
$
|
27,779
|
|
|
$
|
23,443
|
|
|
2018
|
|
|
27,779
|
|
|
|
25,508
|
|
|
2019
|
|
|
13,520
|
|
|
|
12,835
|
|
|
2020
|
|
|
6,228
|
|
|
|
6,023
|
|
|
2021
|
|
|
2,596
|
|
|
|
2,573
|
|
|
|
|
$
|
77,902
|
|
|
$
|
70,382
|
|
On
March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive stock plan
pursuant to which the Company may grant incentive and non-statutory options to employees, nonemployee members of the Board, consultants
and other independent advisors who provide services to the Corporation. The maximum shares of common stock which may be issued
over the term of the plan shall not exceed 2,500,000 shares. Awards under this plan are made by the Board or a committee of the
Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued
to holders of 10% or more of the Company’s common stock which is required to be issued at a price not less than 110% of
the fair market value on the day of the grant. Each option is exercisable at such time or times, during such period and for such
numbers of shares shall be determined by the Plan Administrator. However, no option shall have a term in excess of 5 years from
the date of grant.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
September
30, 2016
6.
|
STOCK
OPTIONS (Continued)
|
On
March 6, 2014, the Company issued 650,000 options to its CEO, Darren Lampert, issued 400,000 options to its CFO, Irwin Lampert,
issued 400,000 options to its President, Michael Salaman and issued 200,000 options to its COO, Jason Dawson exercisable at prices
between $.60 and $.66 cents per share. On May 12, 2014, the Company issued 50,000 options to its director, Jody Kane and on May
14, 2014, the company issued 50,000 options to its director, Stephen Aiello, exercisable at prices between $.60 and $.66 cents
per share. On July 7, 2014, the Company issued 100,000 options to 8 of its employees, exercisable at prices between $.60 and $.66
cents per share. On April 15, 2015, the Company issued 10,000 options to sales consultant Duane Nunez and on October 8, 2015,
the Company issued 25,000 options to sales consultant Troy Sowers. The options vest 1/3 immediately, 1/3 one year after date of
issuance and 1/3 two years after date of issuance. Compensation expense recorded for the nine months ended September 30, 2016
was $86,333. Each stock option is estimated as of the date of grant using a Black-Scholes Merton option valuation model that uses
the assumptions noted in the table below. To address the lack of historical volatility data for the Company, expected volatility
is based on the volatilities of peer companies.
As
of September 30, 2016, there were 1,872,000 options issued and outstanding under the plan.
|
Expected
volatility
|
|
141.26
|
%
|
|
Expected
dividends
|
|
0.00
|
|
|
Expected
term
|
|
3
years
|
|
|
Risk-free
rate
|
|
2.0
|
%
|
A
summary of option activity as of September 30, 2016:
|
Options
|
|
Shares
|
|
|
Weight Average Exercise Price
|
|
|
Weighted-
Average Remaining Contractual Term
|
|
Outstanding at December 31, 2015
|
|
|
1,885,000
|
|
|
$
|
.62
|
|
|
years
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
1,885,000
|
|
|
$
|
.62
|
|
|
3 years
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Forfeited or expired
|
|
|
13,000
|
|
|
|
-
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
1,872,000
|
|
|
$
|
.62
|
|
|
3 years
|
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
September
30, 2016
6.
|
STOCK
OPTIONS (Continued)
|
A
summary of the status of the Company’s nonvested shares as of September 30, 2016 and changes during the nine months then
ended September 30, 2016 is presented below:
|
Nonvested shares
|
|
Shares
|
|
|
Weighted-
Average
Fair Market Value
|
|
|
Nonvested at December 31, 2015
|
|
|
639,999
|
|
|
$
|
.14
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(626,999
|
)
|
|
|
.14
|
|
|
Forfeited
|
|
|
(13,000
|
)
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
-0-
|
|
|
$
|
.14
|
|
7.
|
STOCK
PURCHASE WARRANTS
|
During
the nine months ended September 30, 2016, the Company granted 1,426,428 warrants to investors in a private placement of common
shares and 50,000 warrants were issued to “Selling Agents” for private placement of common stock. In the months of
September and December 2015, the Company granted 2,465,001 warrants to investors in a private placement of common shares. These
warrants are exercisable for a period of five years with an exercise price of $.70. In October 2015, 142,800 warrants were issued
to “Selling Agents” for private placement of common stock. Each warrant is estimated as of the date of grant using
a Black-Scholes Merton warrant valuation model that uses the assumptions noted in the table below. To address the lack of historical
volatility data for the Company, expected volatility is based on the volatilities of peer companies.
A
summary of the status of the Company’s outstanding stock warrants as of September 30, 2016 is as follows:
|
|
|
Shares
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Weighted-
Average Fair Market
Value
|
|
|
Outstanding December 31, 2015
|
|
|
2,607,801
|
|
|
$
|
.70
|
|
|
$
|
.70
|
|
|
Granted
|
|
|
1,476,428
|
|
|
|
.70
|
|
|
|
.70
|
|
|
Exercised
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at September 30, 2016
|
|
|
4,084,229
|
|
|
$
|
.70
|
|
|
$
|
.70
|
|
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
September
30, 2016
Common
Stock
The
Company’s current Certificate of Incorporation authorizes the Company to issued 100,000,000 shares of common stock, par
value $0.001 per share. As of September 30, 2016 there were 10,584,262 shares of common stock outstanding. The number of shares
of common stock outstanding as of September 30, 2016 does not include (i) 4,084,229 shares of common stock issuable upon the exercise
of warrants; (ii) shares of our common stock issuable upon the exercise of 1,872,000 outstanding stock options.
On
January 4, 2016, the Company offered for sale 3,000,000 units at $.70, with gross proceeds of $2,100,000. Each unit consists of
one share of common stock and one warrant to purchase one share of common stock at an exercise price of $.70 per share. The warrants
have a five year life for gross proceeds of $2,100,000.
On
March 31, 2016, the Company sold 460,000 units to four accredited investors at a price of $.70 per unit, with each unit consisting
of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $.70 per share. The
warrants have a five year life for gross proceeds of $322,000.
On
April 29, 2016, the Company closed on the 2016 private placement, to which they sold 890,714 units to 10 accredited investors
at a price of $.70 per unit, with each unit consisting of one share of common stock and on warrant to purchase one share of common
stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $623,500.
As
of September 30, 2016, the Company has a total of 10,548,262 shares of common stock outstanding, 4,084,229 warrants exercised
at $.70 per share and 1,872,000 stock options.
The
following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings
per share computation for the three and nine months ended September 30, 2016.
|
|
|
Three Months Ended September 30, 2016
|
|
|
Three
Months
Ended September 30,
2015
|
|
|
Nine
Months Ended September 30, 2016
|
|
|
Nine
Months Ended September 30, 2015
|
|
|
Net Income (Loss)
|
|
$
|
10,844
|
|
|
$
|
(145,411
|
)
|
|
$
|
(211,682
|
)
|
|
$
|
(121,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average share outstanding basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common stock equivalents
|
|
|
10,584,262
|
|
|
|
6,563,271
|
|
|
|
10,584,262
|
|
|
|
6,563,271
|
|
|
Adjusted weighted average shares outstanding-
dilutive
|
|
|
10,584,262
|
|
|
|
6,563,271
|
|
|
|
10,584,262
|
|
|
|
6,563,271
|
|
|
Basic loss per share
|
|
|
.001
|
|
|
|
(.02
|
)
|
|
|
(.02
|
)
|
|
|
(.02
|
)
|
|
Dilutive loss per share
|
|
|
.001
|
|
|
|
(.02
|
)
|
|
|
(.02
|
)
|
|
|
(.02
|
)
|
The
effective of the 1,872,000 stock option and the 4,084,229 of warrants outstanding as of September 30, 2016 is antidilutive and
therefore not presented in the above table.
On
October 6, 2016, the Company closed on the 2106 private placement, to which it sold 1,000,000 units to 8 accredited investors
at a price of $.70 per unit, with each unit consisting of one share of common stock and one warrant to purchase one share of common
stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $700,000.
Effective as of October 19,
2016, the Company was approved to start trading its common stock on the OTCQB Marketplace under the ticker symbol of “GRWG”.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated financial statements and notes thereto included herein.
In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and
elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities
and Exchange Commission (the “SEC”). Forward looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily
based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject
to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially
from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward
looking statements, except as required by law.
OVERVIEW
GrowGeneration
Corp.’s mission is to become one of the largest retail hydroponic and organic specialty gardening retail outlets in the
United States. Today, GrowGeneration owns and operates a chain of ten (10) retail hydroponic/gardening stores in Colorado and
one (1) in California. GrowGeneration Corp operates its retail hydroponic stores through wholly owned subsidiaries. It currently
owns Grow Generation Pueblo Corp. which operates retail hydroponic stores in Colorado located in Pueblo, Canon City, Trinidad,
Conifer, Colorado Springs and Denver; and Grow Generation California Corp. which operates a retail store in Santa Rosa California.
The Company today owns and operates 11 stores and is actively engaged in seeking to acquire additional hydroponic retail stores.
Our
increase in sales to date has been fueled by opening new stores and by frequent and higher dollar transactions in our stores from
commercial growers, individual home growers, and gardeners. We expect to continue to experience sales growth over the next few
years in existing stores and by increasing the number of stores that we operate, which will depend on our ability to increase
our capital. Our growth is likely to come from three distinct channels: establishing new stores in high-value markets, acquiring
existing stores with strong customer bases and strong operating histories, building a business to business sales team and the
creation of a branded e-commerce portal at www.GrowGeneration.com.
Our
stores sell thousands of products, such as organic nutrients and soils, advanced lighting technology, state of the art hydroponic
and aquaponic equipment, and other products needed to grow indoors and outdoors. Our strategy is to target two distinct verticals,
namely i) professional growers, and ii) smaller growers who require a local store to fulfill their daily and weekly growing needs.
We are of the belief that our retail outlets provide a superior level of customer service to our customers through a well trained
staff.
On
February 15, 2015, we opened our first non-acquired GrowGeneration store in Trinidad, Colorado. This store is 3,000 square feet
and was initially stocked with $100,000 in inventory. Our lease obligation is $1,000 per month for the next 3 years.
In
April 2015, we acquired approximately $30,000 of inventory at cost from Green Growers, Inc., a retail store located in Canon City,
Colorado. In connection therewith, we engaged the CEO of Green Growers, Inc. as a sales consultant for a period of two years.
We pay this individual a base fee of $1,200 per month during the first year and $600 per month during the second year of his consulting
agreement, together with incentive compensation for any new business he generates, in an amount equal to 25% of the gross profit
on all such business. We also issued this consultant 10,000 three (3) year options, exercisable at a price of $.60 per share,
as additional compensation under his consulting agreement.
In
June 2015, we acquired approximately $68,000 of inventory at cost from Happy Grow Lucky, Inc., a retail store located in Conifer,
Colorado. In connection therewith, we engaged the 2 principals as sales consultants for a period of one year. We will pay each
sales consultant $420 per month, together with incentive compensation for any new business they generate, in an amount equal to
25% of the gross profit of such business. In addition, we executed a new 3 year lease for the premises in Conifer, Colorado. at
a rate of $2,400 per month.
On
September 1, 2015, we signed a 5 year lease, at a rate of $3,780 to open our Colorado Springs, Colorado store.
On
October 28, 2015, we purchase approximately $169,000 of inventory, at cost, from Sweet Leaf Hydroponics Inc., a retail store located
in Santa Rosa, California. In connection therewith, we also acquired some equipment from the seller for $25,000. We have entered
into a one-year agreement with one of the principals to act as a sales consultant for us for a period of one year, at a cost of
$1,000 per month. We executed a two year lease with the landlord of Sweet Leaf Hydroponics Inc. for $5,300 per month through December
2017. We also issued this consultant 25,000 three (3) year options, exercisable at a price of $.60 per share, as additional compensation
under his consulting agreement.
On
November 28, 2015, the Company acquired $35,000 of inventory of Greenhouse Tech Inc., a retail store located in Colorado. The
Company engaged the principal of Greenhouse Tech as a sales consultant for 1 year, at $13 per hour and 20% of the gross profits
on all sales generated by sales consultant.
On
March 1, 2016, we signed a 3 year lease, at a rate of $3,650 for the first year, 4,498 square feet, located in Denver, Colorado.
On
July 15, 2016 the company entered into a new lease agreement for its Canon City, Colorado location. The Canon City Store completed
its move to its new location on July 25, 2016. The new store is approximately 4427 square feet.
On
July 19, 2016 the Company entered into a 2 year lease agreement for its tenth retail store in Fairplay, Colorado. The store began
operations on August 1, 2016.
On
September 27, 2016, the Company entered into a commercial lease to rent certain premises located in Castle Rock, Colorado, to
be effective from October 1, 2016 to September 30, 2019. The lease requires monthly payments of $1,775 through September 30, 2017;
$1,980 through September 30, 2018 and $2,138 through September 30, 2019. The store began operations on October 1, 2016.
On
October 6, 2016, the Company closed on the 2106 private placement, to which they sold 1,000,000 units to 8 accredited investors
at a price of $.70 per unit, with each unit consisting of one share of common stock and one warrant to purchase one share of common
stock at an exercise price of $.70 per share. The warrants have a five year life for gross proceeds of $700,000.
Effective as of
October 19, 2016, the Company was approved to start trading its common stock on the OTCQB Marketplace under the ticker symbol
of “GRWG”.
RESULTS
OF OPERATIONS
Comparison
of the three months ended September 30, 2016 to September 30, 2015
The
following table presents certain consolidated statement of operations information and presentation of that data as a percentage
of change from year-to-year.
|
|
Three Months Ended
September 30,
2016
|
|
|
Three Months Ended September 30,
2015
|
|
|
$ Variance
|
|
Net revenue
|
|
$
|
2,169,129
|
|
|
$
|
921,913
|
|
|
$
|
1,247,216
|
|
Cost of goods sold
|
|
|
1,560,359
|
|
|
|
576,406
|
|
|
|
983,953
|
|
Gross profit
|
|
|
608,770
|
|
|
|
345,507
|
|
|
|
263,263
|
|
General and administrative expenses
|
|
|
597,926
|
|
|
|
490,918
|
|
|
|
107,008
|
|
Operating income (loss)
|
|
|
10,844
|
|
|
|
(145,411
|
)
|
|
|
156,255
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes - current benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,844
|
|
|
$
|
(145,411
|
)
|
|
$
|
156,255
|
|
Revenue
Net
revenue for the three months ended September 30, 2016 increased $1,247,216 to $2,169,129 as compared to $921,913 for the three
months ended September 30, 2015. The increase was due to revenue from the retail stores that we acquired and opened during that
period and the growth from our existing stores.
Cost
of Goods Sold
Cost
of sales for the three months ended September 30, 2016 increased $983,953 to $1,560,359 as compared to $576,406 for the three
months ended September 30, 2015. The increase was due to increased sales.
Gross
profit was $608,770 for the three months ended September 30, 2016 as compared to $345,507 for the three months ended September
30, 2015.
General
and Administrative Expenses
General
and administrative expenses for the three months ended September 30, 2016 increased $107,008 to $597,926 as compared to $490,918
for the three months ended September 30, 2015. The increase was due mainly to increased payroll expenses, professional fees, broker
commissions, travel expense and stock based compensation related to stock option grants and stock compensation for stock issued
to employees.
Non-cash
general and administrative expenses for the three months ended September 30, 2016 totaled $17,158, with (i) depreciation of $17,158.
Net
Income
Net
income for the three months ended September 30, 2016 was $10,844 as compared to a net loss of ($145,411) for the three months
ended September 30, 2015. The increase in income was primarily due to the increase in sales.
Operating
Activities
Net
cash used in operating activities for the three months was $295,658. This amount was primarily related to increases of inventory
of $237,669, accounts receivable of $217,503 and increases in accounts payable of $120,924 and customer deposits of $15,980 offset
by non-cash expenses of $17,158 consisting of depreciation of $17,158.
Comparison
of the nine months ended September 30, 2016 to September 30, 2015
The
following table presents certain consolidated statement of operations information and presentation of that data as a percentage
of change from year-to-year.
|
|
Nine Months Ended
September 30,
2016
|
|
|
Nine Months Ended September 30,
2015
|
|
|
$ Variance
|
|
Net revenue
|
|
$
|
5,617,726
|
|
|
$
|
2,330,773
|
|
|
$
|
3,286,953
|
|
Cost of goods sold
|
|
|
3,947,352
|
|
|
|
1,514,931
|
|
|
|
2,432,421
|
|
Gross profit
|
|
|
1,670,374
|
|
|
|
815,842
|
|
|
|
854,532
|
|
General and administrative expenses
|
|
|
1,880,458
|
|
|
|
926,546
|
|
|
|
953,912
|
|
Operating income (loss)
|
|
|
(210,084
|
)
|
|
|
(110,704
|
)
|
|
|
(99,380
|
)
|
Other income (expense)
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
(Loss) before income taxes
|
|
|
(210,082
|
)
|
|
|
(110,704
|
)
|
|
|
(99,378
|
)
|
Income taxes - current expense
|
|
|
1,600
|
|
|
|
|
|
|
|
1,600
|
|
Net (loss)
|
|
$
|
(211,682
|
)
|
|
$
|
(110,704
|
)
|
|
$
|
(100,978
|
)
|
Revenue
Net
revenue for the nine months ended September 30, 2016 increased $3,286,953 to $5,617,726 as compared to $2,330,773 for the nine
months ended September 30, 2015. The increase was due to revenue from the retail stores that we acquired and opened during that
period and the growth from our existing stores.
For
the nine months ended September 30, 2015, the Company added two additional store to its existing 4 stores, for a total of 6 stores
that generated net revenue of $2,330,773, as compared to net revenue of $ 4,151,282, for the Company's 6 existing stores in the
same period in 2016.
In
the nine months ended September 30, 2016, the Company opened 4 new stores that generated net revenue of $ 1,466,444.
|
|
6 Existing Stores
|
|
|
4 New Stores
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
$ Variance
|
|
|
September 30, 2016
|
|
|
Total
$ Variance
|
|
Net revenue
|
|
$
|
2,330,773
|
|
|
$
|
4,151,282
|
|
|
$
|
1,820,509
|
|
|
$
|
1,466,444
|
|
|
$
|
3,286,953
|
|
|
|
6 Existing Stores
|
|
|
4 New Stores
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
$ Variance
|
|
|
September 30, 2016
|
|
|
Total
$ Variance
|
|
Net revenue
|
|
$
|
921
,
9
1
3
|
|
|
$
|
1
,
386
,
318
|
|
|
$
|
464
,
405
|
|
|
$
|
782
,
811
|
|
|
$
|
1
,
247
,
21
6
|
|
Cost
of Goods Sold
Cost
of sales for the nine months ended September 30, 2016 increased $2,432,421 to $3,947,352 as compared to $1,514,931 for the nine
months ended September 30, 2015. The increase was due to increased sales.
Gross
profit was $1,670,374 for the nine months ended September 30, 2016 as compared to $815,842 for the nine months ended September
30, 2015.
General
and Administrative Expenses
General
and administrative expenses for the nine months ended September 30, 2016 increased $953,912 to $1,880,458 as compared to $926,546
for the nine months ended September 30, 2015. The increase was due mainly to increased payroll expenses, professional fees, broker
commissions, travel expense, expenses incurred in the opening of new stores and stock based compensation related to stock option
grants and stock compensation for stock issued to employees.
Non-cash
general and administrative expenses for the nine months ended September 30, 2016 totaled $261,202, with (i) depreciation of $38,181,
(ii) stock option compensation and broker commissions of $184,333, and (iii) bad debt expense of $3,688, and (iv) commission of
$35,000.
Net
(Loss)
Net
loss for the nine months ended September 30, 2016 was $211,682 as compared to a net loss of $110,704 for the nine months ended
September 30, 2015. The increase in loss was primarily due to the increase in stock based compensation, payroll expenses, broker
commissions, expenses incurred in the opening of new stores and professional fees.
Operating
Activities
Net
cash used in operating activities for the nine months ended September 30, 2016 was $1,035,763. This amount was primarily related
to an increase of inventory of $1,076,310 and accounts receivable of $331,157 offset by increases in account payable of $277,016,
payroll and sales tax liabilities of $38,666 and non-cash expenses of $261,202 consisting of $184,333 stock option compensation
and commissions, and depreciation of $38,181 and $3,688 bad debt expense and $35,000 commissions.
LIQUIDITY
AND CAPITAL RESOURCES
As
at the date of this filing, we had cash of approximately $625,000. As of September 30,2016 the company had net working capital
of approximately $3,218,594.
We
will need to obtain additional financing in the future to continue to acquire and open new stores. We have financed our operations
through the issuance of the sale of common stock.
Financing
Activities
2014
Private Placement
In
March 2014, we raised $600,000 from the sale of 1,000,000 shares of our common stock to seventeen (17) accredited investors, at
a price of $.60 per share. All securities sold in the 2014 Private Placement were arranged by officers and directors and no commissions
or other remuneration was paid to any person in connection with such sales. Proceeds from this sale were utilized to effect the
acquisition of the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics), which we completed on May 29, 2014,
through our wholly-owned subsidiary, GrowGeneration Pueblo Corp., a Colorado corporation. The purchase price was $499,976, consisting
of $243,000 in goodwill and $273,000 in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid
expenses offset by $57,275 in accounts payable and $355 in customer deposits.
2015
Private Placements
In
April 2015, we raised $180,000 from the sale of 300,000 shares of our common stock to four (4) accredited investors, at a price
of $.60 per share. All securities sold in this private placement were arranged by officers and directors and no commissions or
other remuneration was paid to any person in connection with such sales. We used the proceeds raised in this offering for inventory
purchases and working capital.
On
March 12, 2015 we entered into an agreement with Cavu Securities LLC, a FINRA Member broker dealer (“Cavu”), pursuant
to which we engaged Cavu on a non-exclusive basis to act as our lead placement agent for the sale of up to $4,200,000 of our units.
Each unit was offered at a price of $.70 per unit. Each unit consisted of (i) one share of our common stock and (ii) one 5 year
warrant to purchase one share of Common Stock at an exercise price of $0.70 per share. The units were offered and sold on a “best-effort”
basis. On October 30, 2015, we closed the private placement with a total of 2,465,001 units sold and realized gross proceeds of
$1,725,501. We paid Cavu total compensation for its services of (i) $73,295 in commissions; (ii) five-year warrants to purchase
142,800 shares of our common stock, at an exercise price equal to $0.70 per share; and (iii) 77,833 shares of our common stock.
2016
Private Placements
On
April 29, 2016, the Company sold 890,714 units to 10 accredited investors at a price of $0.70 per unit, with each unit consisting
of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $.70 per share. The
warrants have a five year life for gross proceeds of $623,500. We paid Cavu, the placement agent for the offering, a total compensation
for its services of (i) five-year warrants to purchase 50,000 shares of our common stock, at an exercise price equal to $0.70
per share; and (ii) 50,000 shares of our common stock.
On
October 6, 2016, the Company closed a private placement of a total of 1,000,000 units of its securities sold to 8 accredited investors
at a price of $0.70 per unit. Each unit consists of one share of common stock and one 5 year warrant to purchase one share of
common stock at an exercise price of $0.70 per share. The Company raised an aggregate of $700,000 gross proceeds in the offering.
The Company agreed to pay Cavu, the placement agent for the offering, a cash fee of $22,050 and five-year warrants to purchase
31,500 shares of our common stock, at an exercise price equal to $0.70 per share, on proceeds of $315,000 raised by Cavu in connection
with the offering.
Our
contractual cash obligations as of September 30, 2016 are summarized in the table below:
Contractual
Cash Obligations
|
|
Total
|
|
|
Less
Than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
Greater
Than 5 Years
|
|
Operating
leases
|
|
$
|
1,027,038
|
|
|
$
|
344,265
|
|
|
$
|
261,851
|
|
|
$
|
367,525
|
|
|
$
|
53,397
|
|
Note
payable
|
|
|
77,902
|
|
|
|
27,779
|
|
|
|
27,779
|
|
|
|
22,344
|
|
|
|
-0-
|
|
|
|
$
|
1,104,940
|
|
|
$
|
372,044
|
|
|
$
|
289,630
|
|
|
$
|
389,869
|
|
|
$
|
53,397
|
|
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments
based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or conditions.
Cash
and Cash Equivalents
- We classify highly liquid temporary investments with an original maturity of three months or less
when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At September 30, 2016 all deposit balances were
fully insured by the FDIC. We have not experienced any losses in such accounts and management believes it is not exposed to any
significant risk for cash on deposit.
Accounts
Receivable and Revenue -
Revenue is recognized on the sale of a product when the product is shipped, which is when the
risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured.
A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of
our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically
for collectability.
Inventories
-
Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods
and components held for resale. Inventory is valued at the lower of cost or market. The reserve for obsolete inventory was $52,000
at September 30, 2016 and December 31, 2015, respectively.
Property
and Equipment -
Property and equipment are stated at cost. Assets acquired held under capital leases are initially recorded
at the lower of the present value of the minimum lease payments discounted at the implicit interest rate (8% for assets currently
held under capital lease) or the fair value of the asset. Major improvements and betterments are capitalized. Maintenance and
repairs are expensed as incurred. Depreciation is computed using the straight-line method over an estimated useful life based
on the particular asset. Assets acquired under capital lease are depreciated over the lesser of the useful life or the lease term.
At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Goodwill
and Intangible Assets -
We evaluate the carrying value of goodwill, intangible assets, and long-lived assets during the
fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than
not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited
to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) an adverse action
or assessment by a regulator, (4) continued losses from operations, (5) continued negative cash flows from operations, and (6)
the suspension of trading of the Company’s securities. When evaluating whether goodwill is impaired, we compare the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill.
The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the
market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair
value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied
fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill,
the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair
values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied
fair value of goodwill.
The
result of our 2015 annual goodwill impairment testing validates that the value of the goodwill has not been impaired as of December
31, 2015. The Company based its testing on the following factors:
1.
Our stores which we purchased in 2014 began operations in 2008;
2.
The stores grew from 1-4 stores from 2008-2014 and at the end of 2015, we had 8 total stores;
3.
A loyal customer base expanded in 2015;
4.
A list of reliable suppliers are all in good standing; and
5.
Our business is growing and expanding.
Long
Lived Assets
– We reviews our long-lived assets for impairment annually or when changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the
lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential
to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the
asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
Fair
Value Measurements and Financial Instruments -
ASC Topic 820 defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements
for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as follows:
Level 1
- Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
- Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3
- Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The
carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related
party, notes payable, and convertible notes approximates their fair values due to their short-term maturities.
Derivative
financial instruments -
We evaluate all of its financial instruments to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities,
the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in
the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company
uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within
twelve months of the balance sheet date.
Stock
Based Compensation
– We have share-based compensation plans under which employees, consultants, suppliers and directors
may be granted restricted stock, as well as options and warrants to purchase shares of our common stock at the fair market value
at the time of grant. Stock-based compensation cost to employees is measured by us at the grant date, based on the fair value
of the award, over the requisite service period under ASC 718. For options issued to employees, we recognize stock compensation
costs utilizing the fair value methodology over the related period of benefit. Grants of stock to non-employees and
other parties are accounted for in accordance with the ASC 505.