PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
1,324,221
|
|
|
$
|
606,644
|
|
Accounts receivable, net of allowance for doubtful accounts of
$47,829 at March 31, 2017 and December 31, 2016
|
|
|
507,582
|
|
|
|
391,235
|
|
Inventory
|
|
|
3,517,440
|
|
|
|
2,574,438
|
|
Prepaid expenses and other current assets
|
|
|
31,765
|
|
|
|
35,256
|
|
Total current assets
|
|
|
5,381,008
|
|
|
|
3,607,573
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
653,260
|
|
|
|
549,854
|
|
Intangible assets, net
|
|
|
5,833
|
|
|
|
-
|
|
Goodwill
|
|
|
493,000
|
|
|
|
243,000
|
|
Other assets
|
|
|
65,704
|
|
|
|
42,526
|
|
TOTAL ASSETS
|
|
$
|
6,598,805
|
|
|
$
|
4,442,953
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
813,957
|
|
|
$
|
535,913
|
|
Payroll and payroll tax liabilities
|
|
|
97,333
|
|
|
|
77,068
|
|
Customer deposits
|
|
|
19,340
|
|
|
|
51,672
|
|
Sales tax payable
|
|
|
65,884
|
|
|
|
46,942
|
|
Short term borrowings
|
|
|
130,797
|
|
|
|
107,880
|
|
Current portion of long term debt
|
|
|
23,443
|
|
|
|
23,443
|
|
Total current liabilities
|
|
|
1,150,754
|
|
|
|
842,918
|
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current portion
|
|
|
35,931
|
|
|
|
41,726
|
|
Total liabilities
|
|
|
1,186,685
|
|
|
|
884,644
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock; $.001 par value; 100,000,000 shares authorized; 13,386,406 and 11,742,834 shares issued and outstanding 2017 and 2016
|
|
|
13,386
|
|
|
|
11,743
|
|
Additional paid-in capital
|
|
|
6,831,698
|
|
|
|
4,696,221
|
|
Accumulated deficit
|
|
|
(1,432,964
|
)
|
|
|
(1,149,655
|
)
|
Total stockholders’ equity
|
|
|
5,412,120
|
|
|
|
3,558,309
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
6,598,805
|
|
|
$
|
4,442,953
|
|
See Notes to the Unaudited Consolidated
Financial Statements.
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,583,925
|
|
|
$
|
1,541,599
|
|
Cost of sales
|
|
|
1,903,065
|
|
|
|
1,049,900
|
|
Gross Profit
|
|
|
680,860
|
|
|
|
491,699
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
525,879
|
|
|
|
288,569
|
|
Salaries and related expenses
|
|
|
437,139
|
|
|
|
281,421
|
|
Total operating expenses
|
|
|
963,018
|
|
|
|
569,990
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(282,158
|
)
|
|
|
(78,291
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,151
|
)
|
|
|
(553
|
)
|
Total non-operating expense, net
|
|
|
(1,151
|
)
|
|
|
(553
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(283,309
|
)
|
|
$
|
(78,844
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(.02
|
)
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
12,115,322
|
|
|
|
8,972,889
|
|
See Notes to the Unaudited
Financial Statements.
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(283,309
|
)
|
|
$
|
(78,844
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts receivable
|
|
|
-
|
|
|
|
279
|
|
Depreciation and amortization
|
|
|
20,522
|
|
|
|
9,902
|
|
Stock-based compensation expense
|
|
|
77,000
|
|
|
|
86,333
|
|
Inventory valuation reserve
|
|
|
-
|
|
|
|
(9,873
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(116,347
|
)
|
|
|
(76,859
|
)
|
Inventory
|
|
|
(943,002
|
)
|
|
|
(574,399
|
)
|
Prepaid expenses and other assets
|
|
|
(19,687
|
)
|
|
|
6,254
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
280,145
|
|
|
|
303,760
|
|
Payroll and payroll tax liabilities
|
|
|
20,265
|
|
|
|
13,363
|
|
Customer deposits
|
|
|
(32,332
|
)
|
|
|
6,924
|
|
Sales tax payable
|
|
|
18,942
|
|
|
|
9,009
|
|
Net cash used in operating activities
|
|
|
(977,803
|
)
|
|
|
(304,151
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of furniture and equipment
|
|
|
(123,648
|
)
|
|
|
(129,239
|
)
|
Purchase of intangibles
|
|
|
(256,113
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(379,761
|
)
|
|
|
(129,239
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on long term debt
|
|
|
(5,794
|
)
|
|
|
(1,860
|
)
|
Proceeds from short term financing
|
|
|
20,815
|
|
|
|
35,636
|
|
Proceeds from long term debt
|
|
|
-
|
|
|
|
28,527
|
|
Proceeds from the sale of common stock and warrants, net of expenses
|
|
|
2,060,120
|
|
|
|
322,000
|
|
Net cash provided by financing activities
|
|
|
2,075,141
|
|
|
|
384,303
|
|
Net increase (decrease) in cash
|
|
|
717,577
|
|
|
|
(49,087
|
)
|
Cash at the beginning of period
|
|
|
606,644
|
|
|
|
699,417
|
|
Cash at the end of period
|
|
$
|
1,324,221
|
|
|
$
|
650,330
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,151
|
|
|
$
|
553
|
|
Taxes paid
|
|
|
-
|
|
|
$
|
800
|
|
See Notes to the Unaudited Financial Statements.
GrowGeneration Corporation and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements
March 31, 2017
GrowGeneration Corp.
(the “Company”) was incorporated on March 6, 2014 in Colorado under the name of EasyLife Corp. and changed its name
to GrowGeneration Corp. It maintains its principal office in Denver, Colorado.
The Company is engaged
in the business of owning and operating retail hydroponic stores through its wholly owned subsidiaries, GrowGeneration Pueblo Corp,
GrowGeneration California Corp, GrowGeneration Nevada Corp, GrowGeneration Washington Corp, and GGen Distribution Corp. The Company
commenced operation with the purchase of four retail hydroponic stores in Pueblo and Canon City, Colorado on May 30, 2014. The
Company currently owns and operates a total of 12 stores and is actively engaged in seeking to acquire additional hydroponic retail
stores.
GrowGeneration Washington
Corp, formed in February 2017 and GGen Distribution Corp are relatively inactive at March 31, 2017.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
The Company’s financial
statements are prepared on the accrual method of accounting. The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP). The consolidated financial statements of the Company included the accounts of GrowGeneration
Pueblo Corp, GrowGeneration California Corp, GrowGeneration Nevada Corp, GrowGeneration Washington Corp and GGen Distribution Corp.
All material intercompany accounts, balances and transactions have been eliminated in consolidation.
The various products
sold support each other and are interrelated. Management makes significant operating decisions based upon the analysis of the entire
Company and financial performance is evaluated on a company-wide basis. Accordingly, the various products sold are aggregated into
one reportable operating segment as under guidance in the Financial Accounting Standards Board (the “FASB”) Accounting
Standards Codification (“ASC or “codification”) Topic 28 for segment reporting.
Basis of Presentation - Unaudited Interim Financial
Information
The accompanying interim condensed
consolidated financial statements are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all of the normal recurring adjustments necessary to present fairly the financial position and results
of operations as of and for the periods presented. The interim results are not necessarily indicative of the results to be expected
for the full year or any future period.
Certain information and footnote
disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The Company believes that the disclosures are adequate to make the interim information presented
not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto included in the Company’s Report on Form 10-K filed on March 31, 2017 for the
years ended December 31, 2016 and 2015.
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.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Income Taxes
The Company accounts
for income taxes in accordance with FASB ACS 740, Income Taxes, which requires the recognition of deferred income taxes for differences
between the basis of assets and liabilities for financial statement and income tax purposes. The differences related principally
to depreciation of property and equipment, reserve for obsolete inventory and bad debt. Deferred tax assets and liabilities represent
the future tax consequence for those differences, which will either be deductible or taxable when the assets and liabilities are
recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized.
The Company adopted the
provisions of FASB ACS 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement
of tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides guidance on recognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting
for interest and penalties associated with tax positions. The Company’s tax returns are subject to tax examinations by U.S.
federal and state authorities until respective statute of limitation. Currently, the 2016, 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 March 31, 2017. It is
not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In May 2014, the FASB issued
guidance creating the ASC Section 606, “Revenue from Contracts with Customers”. The new section will replace
Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized
transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued
International Financial Reporting Standards with previously differing treatment between United States practice and those of much
of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance
was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. On
July 9, 2015, the FASB approved a one year delay of the effective date. The Company will now adopt the new provisions of this accounting
standard at the beginning of fiscal year 2018.
In July 2015, the FASB issued
ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower
of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The
ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement.
ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Management is evaluating the provisions
of this statement and has not determined what impact the adoption of ASU 2015-11 will have on the Company’s financial position
or results of operations.
In November 2015, the FASB issued
ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance eliminates the requirement to separate
deferred income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities
and assets be classified as noncurrent in a classified statement of financial position. The updated guidance will be effective
for fiscal years beginning after December 15, 2016, including interim periods within those annual periods. The Company is in the
process of evaluating this guidance.
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
|
In January 2016, the FASB issued
Accounting Standards Update No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities
(“ASU 2016-01”), which requires that (i) all equity investments, other than equity-method
investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option
has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately
in other comprehensive income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The
new standard will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted for certain
provisions. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements
as well as whether to adopt certain provisions early.
In February 2016, the FASB issued
new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance.
The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease
terms of great than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the
first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of determining the effects the adoption
will have on its consolidated financial statements as well as whether to adopt the new guidance early.
In March 2016, the FASB issued
Accounting Standards Update 2016-09,
Improvements to Employee Share-Based Payment Accounting
(‘ASU 2016-09”),
which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 includes provisions intended to simplify various
aspects related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective
for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period.
Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year
of adoption. The Company is evaluating the impact of this standard on its financial statements.
The Company leases its
store facilities under operating leases ranging from $950 to $6,887 per month. The following is a schedule of future minimum rental
payments required under the term of the operating leases as of March 31, 2017:
|
Twelve Months Ending March 31,
|
|
Amount
|
|
|
2018
|
|
$
|
497,868
|
|
|
2019
|
|
|
479,995
|
|
|
2020
|
|
|
409,221
|
|
|
2021
|
|
|
357,802
|
|
|
2021
|
|
|
303,529
|
|
|
Thereafter
|
|
|
27,799
|
|
|
|
|
$
|
2,076,214
|
|
Rent expense under all
operating leases for the three months ending March 31, 2017 and 2016 was $118,968 and $59,959, respectively.
Effective May 2014, the
Company entered into employment agreements with its CEO and President. The agreements require payment of monthly wages and benefits.
6.
|
SHORT TERM DEBT-LONG-TERM DEBT
|
Short term
debt at March 31, 2017 and December 31, 2016 is comprised of balances owed on credit cards used for vendor purchase.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Long term debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0%, Hitachi Capital, payable $631.13 monthly beginning September 2015 through August 2019, secured by delivery equipment with a book value of $24,910
|
|
$
|
16,592
|
|
|
$
|
18,133
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $25,437
|
|
|
23,213
|
|
|
|
24,559
|
|
|
|
|
|
|
|
|
|
|
|
|
10.926%, RMT Equipment, payable 1154.79 monthly beginning June 2016 through October 2018, secured by delivery equipment with a book value of $31,130
|
|
|
19,569
|
|
|
|
22,477
|
|
|
|
|
$
|
59,374
|
|
|
$
|
65,169
|
|
|
Less Current Maturities
|
|
|
(23,443
|
)
|
|
|
(23,443
|
)
|
|
Total Long-Term Debt
|
|
$
|
35,931
|
|
|
$
|
41,726
|
|
Future Debt Maturities
– A schedule of expected debt payments and the portion allocated to principal follows:
|
Twelve Months Ending March 31
|
|
Total Payment
|
|
|
Allocated to Principal
|
|
|
2018
|
|
$
|
27,779
|
|
|
$
|
24,443
|
|
|
2019
|
|
|
21,140
|
|
|
|
19,833
|
|
|
2020
|
|
|
9,383
|
|
|
|
8,994
|
|
|
2021
|
|
|
6,229
|
|
|
|
6,104
|
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
64,531
|
|
|
$
|
59,374
|
|
Interest expense for
the three months ended March 31, 2017 and 2016 was $1,151 and $553, respectively.
On March 6, 2014, the
Company’s Board of Directors (the “Board”) and majority stockholders approved the 2014 Equity Incentive Plan
pursuant to which the Company may grant incentive and non-statutory options to employees, nonemployee members of the Board, consultants
and other independent advisors who provide services to the Company. The maximum shares of common stock which may be issued over
the term of the plan shall not exceed 2,500,000 shares. Awards under the 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.
On March 6, 2014, the
Company issued 650,000 options to its CEO, Darren Lampert, 400,000 options to its CFO, Irwin Lampert, 400,000 options to its President,
Michael Salaman and 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. On October 8, 2015, the Company issued 25,000 options to sales consultant
Troy Sowers. The options vest 1/3 immediately, 1/3 one year after date of issuance and 1/3 two years after date of issuance. Compensation
expense recorded for the three months ended March 31, 2017 and 2016 was $0 and $86,333, respectively.
7.
|
STOCK OPTIONS (Continued)
|
As of March 31, 2017,
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 March 31, 2017:
|
Options
|
|
Shares
|
|
|
Weight
- Average Exercise Price
|
|
|
Weighted
- Average Remaining Contractual Term
|
|
Outstanding at December 31, 2016
|
|
|
1,872,000
|
|
|
$
|
0.62
|
|
|
3 years
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
1,872,000
|
|
|
$
|
0.62
|
|
|
3 years
|
8.
|
STOCK PURCHASE WARRANTS
|
During the three months
ended March 31, 2017, the Company granted 825,000 warrants to investors in a private placement and 100,000 warrants to an advisor
pursuant to certain advisor agreement. These warrants are exercisable for a period of five years with an exercise price of $2.75.
A summary of the status
of the Company’s outstanding stock warrants as of March 31, 2017 is as follows:
|
|
|
Warrants
|
|
|
Weighted - Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2016
|
|
|
3,885,729
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
825,000
|
|
|
|
2.75
|
|
|
Exercised
|
|
|
(718,572
|
)
|
|
|
0.70
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding March 31, 2017
|
|
|
3,992,157
|
|
|
$
|
1.16
|
|
Common Stock
The Company’s current
Certificate of Incorporation authorizes the Company to issued 100,000,000 shares of common stock, par value $0.001 per share. As
of March 31, 2017, there were 13,386,406 shares of common stock outstanding. The number of shares of common stock outstanding as
of March 31, 2017 does not include (i) 3,992,157 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.
Basic net loss per share is
computed by dividing net loss by the weighted average number of shares of common stock outstanding. Diluted net loss per share
is computed by dividing net loss by the weighted average number of shares of common stock outstanding plus the number of shares
of common stock that would be issued assuming exercise or conversion of all potentially dilutive shares of common stock. Potentially
dilutive securities are excluded from the calculation when their effect would be anti-dilutive. For all periods presented in the
consolidated financial statements, all potentially dilutive securities have been excluded from the diluted share calculations as
they were anti-dilutive as a result of the net losses incurred for the respective periods. Accordingly, basic shares equal diluted
shares for all periods presented.
The following table sets
forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation
for the three months ended March 31, 2017 and 2016:
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net Loss
|
|
$
|
(283,309
|
)
|
|
$
|
(78,844
|
)
|
|
Weighted average shares outstanding
|
|
|
12,115,322
|
|
|
|
8,972,889
|
|
|
Effect of dilutive common stock equivalents
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted weighted average shares outstanding
|
|
|
12,115,322
|
|
|
|
8,972,889
|
|
|
Basic and dilutive loss per share
|
|
$
|
(.02
|
)
|
|
$
|
(.01
|
)
|
Potentially dilutive securities were comprised of
the following:
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Warrants
|
|
|
3,992,157
|
|
|
|
3,067,801
|
|
|
Options
|
|
|
1,872,000
|
|
|
|
1,885,000
|
|
|
|
|
|
5,864,157
|
|
|
|
4,952,801
|
|
In February 2017, the Company entered into an asset
purchase agreement for the purchase of a retail hydroponic and garden supply business located in Santa Rosa, CA. The total purchase
price was $572,000. The allocation of the purchase price was allocated as follows:
|
Inventory
|
|
$
|
272,000
|
|
|
Fixed assets
|
|
|
50,000
|
|
|
Goodwill
|
|
|
250,000
|
|
|
Total
|
|
$
|
572,000
|
|
The Company has evaluated
events and transaction occurring subsequent to March 31, 2017 up to the date of this filing of these consolidated financial statements.
These statements contain all necessary adjustments and disclosures resulting from that evaluation.
On April 3, 2017, the
Company entered into a consulting agreement (the “Consulting Agreement”) with Merida Capital Partners, LP (“Merida”)
in connection with a private offering of the Company’s securities in March 2017 in which Merida acted as the lead investor.
Pursuant to the Consulting Agreement, Merida was engaged by the Company on a non-exclusive basis to provide services of general
business consulting and board oversight to the Company. As consideration for the services to be provided by Merida, the Company
agreed to pay Merida (a) a cash fee of $60,000 per annum, payable quarterly, for 3 years; (b) 80,000 shares of the Company’s
common stock; and (c) 5 year warrants to purchase 150,000 shares of the Company’s common stock at a price of $2.75 per share.
Within 30 business days of the effective date of the Consulting Agreement, the Board of Directors of the Company shall appoint
a designee of Merida to the Board, and during the term of the Consulting Agreement shall nominate the designee of Merida for election
as a director of the Company in shareholder meetings held for the purpose of electing directors.
On April 10, 2017, the
Company entered into a 3-year executive employment agreement with Joe Prinzivalli, pursuant to which Mr. Prinzivalli agreed to
provide his services to the Company as Chief Operating Officer. In consideration of the services to be provided by Mr. Prinzivalli
under the agreement, the Company agreed to pay Mr. Prinzivalli a salary of $100,000 per annum with a 10% annual raise. The Company
also agreed to issue to Mr. Prinzivalli 50,000 shares of common stock as of the date of the agreement, 50,000 shares as of December
31, 2017 and 50,000 shares as of December 31, 2018.
On April 10, 2017, the
Company entered into a separation and release agreement (the “Separation Agreement”) with Jason Dawson, pursuant to
which the parties agreed to terminate that certain employment agreement under which Mr. Dawson provided his services to the Company
as Chief Operating Officer. As of the effective date of the Separation Agreement, Mr. Dawson resigned from the position of Chief
Operating Officer of the Company, as well as from any and all positions as an officer of any subsidiary of the Company. As of the
same date of the Separation Agreement, the Company and Mr. Dawson also entered into a consulting agreement (the “Consulting
Agreement”), pursuant to which Mr. Dawson agreed to provide consulting services to the Company as an independent contractor
for a period of six months. In consideration of the services to be provided by Mr. Dawson under the Consulting Agreement, the Company
agreed to pay Mr. Dawson an hourly fee of $60 and issue 50,000 shares of common stock to Mr. Dawson as of the date of the agreement.
On April 25, 2017, the
Company entered into a commercial lease through its wholly-owned subsidiary, GrowGeneration California Corp., to rent certain premises
located in San Bernardino, California, to be effective from May 1, 2017 to May 1, 2020. This premises will be used by the Company
to open a new store as part of the Company’s expansion plan. The new store is expected to commence operations in the later
part of May 2017.
On May 12, 2017 and May 15,
2017, the Company conducted closings of a private placement of a total of 950,000 units and 25,000 units of the Company’s
securities, respectively, to a total of 25 accredited investors. Each unit consists of (i) one share of the Company’s common
stock and (ii) one 5-year warrant to purchase one share of common stock at an exercise price of $2.75 per share. As of the date
of this filing, the Company raised an aggregate of $1,950,000 gross proceeds in the offering.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere
in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange
Commission (the “SEC”) on March 31, 2017. In connection with, and because we desire to take advantage of, the “safe
harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward
looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf,
whether or not in future filings with the SEC. Forward looking statements are statements not based on historical information and
which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily
based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject
to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially
from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward
looking statements, except as required by law.
OVERVIEW
GrowGeneration’s
mission is to become one of the largest retail hydroponic and organic specialty gardening retail outlets in the industry. Today,
GrowGeneration owns and operates a chain of twelve (12) retail hydroponic/gardening stores, with nine (9) located in the state
of Colorado, two (2) in the state of California and one (1) in the state of Nevada. Our plan is to open and operate hydroponic/gardening
stores throughout the United States.
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) commercial growers, and (ii) smaller growers who require a local store to fulfill their daily and weekly growing needs.
GrowGeneration
serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens
and plant-based medicines. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing
techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields without
having to compromise quality, regardless of the season or weather and drought conditions.
Our
target market segments include the commercial growers in the cannabis market (Dispensaries, Cultivators, Caregivers), the home
cannabis grower and to businesses and individuals who grow organically grown herbs and leafy green vegetables.
Sales
at our GrowGeneration stores have grown since we organized the business. Our growth has been fueled by frequent and higher dollar
transactions from commercial growers, individual home growers and gardeners who grow their own organic foods. We expect to continue
to experience significant growth over the next few years, primarily from existing and new stores that we open or acquire. Our
growth is likely to come from four distinct channels: establishing new stores in high-value markets, internal growths at existing
stores, acquiring existing stores with strong customer bases and strong operating histories and the creation of a business to
business e-commerce portal at www.GrowGeneration.com.
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 for this store was $1,000 per month for 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 4,427 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 in Fairplay, Colorado on August 1, 2016. In December 2016, the Company consolidated all the operations and business
of the store in Fairplay, Colorado into the store in Conifer, Colorado. Effective as of December 31, 2016, the lease agreement
for the retail store in Fairplay, Colorado was terminated.
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. This eleventh store of the Company began operations on
October 1, 2016.
On
October 6, 2016, the Company closed on the 2106 private placement, pursuant 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 has been approved to start trading its common stock on the OTCQB Marketplace under the ticker
symbol of “GRWG”.
The
lease of the Company store in Las Vegas, Nevada commenced on November 15, 2016 and continues through February 28, 2022 and requires
monthly payments of $6,776 through February 28, 2018, with annual increases of 4% for the balance of the term of the lease.
On
January 30, 2017, the Company entered into a commercial lease to rent certain premises located in Trinidad, Colorado, to be effective
from March 1, 2017 to February 28, 2022. This 7,383 square feet premises is used by the Company to open a new store to replace
and consolidate its existing 3,000 square feet store in Trinidad as part of the Company’s expansion plan.
On
February 1, 2017, the Company entered into a commercial lease to rent a12,837 square feet premises located in Denver, Colorado,
to be effective from February 1, 2017 to February 1, 2022. The premises is used by the Company to open a new store and as the
Company’s principal offices.
On
February 1, 2017, the Company’s wholly-owned subsidiary, GrowGeneration California Corp. (“GrowGeneration California”)
entered into an asset purchase agreement (“Asset Purchase Agreement”) with an individual to purchase certain assets
from the seller in connection with a retail hydroponic and garden supply business located in Santa Rosa, CA. The assets subject
to the sale under the Asset Purchase Agreement included inventories, fixed assets, tangible personal property, intangible personal
property, receivables and a custom list. In addition to the cash consideration for the purchase of such assets, GrowGeneration
California also agreed to make certain cash payments and 25,000 shares of common stock of the Company to the seller contingent
on the achievement of revenue goals by the business in 2017, 2018 and 2019. The closing of the asset purchase took place on February
8, 2017.
In
connection with the purchase of the assets, GrowGeneration California also entered into a commercial lease, effective from March
1, 2017 to February 28, 2022, to rent the premises where the former business was located. In connection therewith, we closed our
existing store in Santa Rosa and consolidated those operations with the GrowGeneration California operations opened at the new
location.
On
March 10, 2017, the Company closed a private placement of a total of 825,000 units of the Company’s securities to 4 accredited
investors. Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one
share of common stock at an exercise price of $2.75 per share. The Company raised an aggregate of $1,650,000 gross proceeds in
the offering.
On
April 26, 2017,
the Company entered into
a commercial lease,
to be effective from May 1, 2017 to May 1, 2020,
to
rent certain 8,000 square foot premises located in San Bernardino, California to open its thirteenth store, which
is expected
to commence operations in the later part of May 2017
.
On
April 10, 2017, the Company entered into a 3-year executive employment agreement with Joe Prinzivalli, pursuant to which Mr. Prinzivalli
agreed to provide his services to the Company as Chief Operating Officer. The Company also agreed to issue to Mr. Prinzivalli
50,000 shares of common stock as of the date of the agreement, 50,000 shares as of December 31, 2017 and 50,000 shares as of December
31, 2018.
On April 10, 2017, the Company entered into a separation and release agreement (the “Separation Agreement”)
with Jason Dawson, pursuant to which the parties agreed to terminate that certain employment agreement under which Mr. Dawson
provided his services to the Company as Chief Operating Officer. In consideration of the services to be provided by Mr. Dawson
under the Consulting Agreement, the Company agreed to pay Mr. Dawson an hourly fee of $60 for up to 20 hours a week and issue
50,000 shares of common stock to Mr. Dawson as of the date of the agreement. The Consulting Agreement has a term of six months.
On May 12, 2017 and May 15, 2017, the
Company conducted closings of a private placement of a total of 950,000 units and 25,000 units of its securities, respectively.
Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common
stock at an exercise price of $2.75 per share. As of the date of this filing, the Company raised an aggregate of $1,950,000 gross
proceeds in the offering.
RESULTS
OF OPERATIONS
Comparison
of the three months ended March 31, 2017 to March 31, 2016
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 March 31,
2017
|
|
|
Three Months Ended March 31,
2016
|
|
|
$ Variance
|
|
Net revenue
|
|
$
|
2,583,925
|
|
|
$
|
1,541,599
|
|
|
$
|
1,042,326
|
|
Cost of goods sold
|
|
|
1,903,065
|
|
|
|
1,049,900
|
|
|
|
853,165
|
|
Gross profit
|
|
|
680,860
|
|
|
|
491,699
|
|
|
|
189,161
|
|
Operating expenses
|
|
|
963,018
|
|
|
|
569,990
|
|
|
|
393,028
|
|
Operating income (loss)
|
|
|
(282,158
|
)
|
|
|
(78,291
|
)
|
|
|
(203,867
|
)
|
Other income (expense)
|
|
|
(1,151
|
)
|
|
|
(553
|
)
|
|
|
(598
|
)
|
Net income (loss)
|
|
$
|
(283,309
|
)
|
|
$
|
(78,844
|
)
|
|
$
|
(204,465
|
)
|
Revenue
Net
revenue for the three months ended March 31, 2017 increased $1,042,326, or 68%, to $2,583,925, as compared to $1,541,599 for
the three months ended March 31, 2016. The increase in revenues was not only due to an increase in same store sales, as noted
below, but also due to the addition of four additional stores that were not open for any part of the three months ended March
31, 2016. The additional new stores sales in the three months ended March 31, 2017 was $1,053,052. Sales from one Colorado
store that was closed on March 18, 2017 and consolidated with a nearby store was $50,625 for the three months ended March 31,
2017.
For
the three months ended March 31, 2017, the Company had 6 stores opened for over 12 months. These same stores generated $1,479,986
for the three months ended March 31, 2017, compared to $1,258,699 for the same period ended March 31, 2016, an increase of 18%.
|
|
6 Same Stores
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
|
March 31,
2017
|
|
|
|
Variance
|
|
Net revenue
|
|
$
|
1,258,699
|
|
|
$
|
1,479,986
|
|
|
$
|
221,287
|
|
Cost
of Goods Sold
Cost
of sales for the three months ended March 31, 2017 increased $853,165, or 81%, to $1,903,065, as compared to $1,049,900 for the
three months ended March 31, 2016. The increase was due to increased sales.
Gross
profit was $680,860 for the three months ended March 31, 2017, as compared to $491,699 for the three months ended March 31, 2016.
Gross profit percentage was 26% for the three months ended March 31, 2017, as compared to 32% for the three months ended March
31, 2016. The decrease in the gross profit percentage is due to the opening of new stores and the initial product discounting
to attract new customers, as well the increase of commercial accounts.
Operating
Expenses
Operating
expenses, which include store operating expenses as well as corporate office operating expenses, for the three months ended March
31, 2017 increased $393,028 to $963,018, as compared to $569,990 for the three months ended March 31, 2016. Operating cost constituted
37% of revenue for the three months ended March 31, 2017 and 2016. The increase was due mainly to an increase in the number of
stores operating from 9 in 2016 to 12 in 2017, increased payroll expenses, professional fees and travel expense.
Operating
expenses include non-cash expenses, consisting primarily of depreciation and stock based compensation, which was approximately
$97,500 for the three months ended March 31, 2017, compared to approximately $96,200 for the three months ended March 31, 2016.
Net
Income (Loss)
Net
loss for the three months ended March 31, 2017 increased $204,465 to $283,309, as compared to $78,844 for the three months ended
March 31, 2016. The increase in the net loss was primarily due to the opening of our Las Vegas and Denver South operations, acquisition
costs related to the Sonoma Hydro purchase, professional fees related to fund raising activities and our year end audit expense,
as well as a decrease in the gross profit percentage from 32% for the three months ended March 31, 2016 compared to 26% for the
three months ended March 31, 2017. Although gross profit increase $189,161 in 2017 the increase was offset by an increase in operating
expenses of $393,028.
Operating
Activities
Net
cash used in operating activities for the three months ended March 31, 2017 was $977,803. Cash provided by operating activities
is driven by our net loss and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments
primarily include depreciation, amortization of intangible assets and stock based compensation expense. Non-cash adjustment totaled
$97,522 and $86,641 for the three months ended March 31, 2017 and 2016, respectively, so non-cash adjustments had a slightly greater
impact on net cash provided by operating activities for the three months ended March 31, 2017 than 2016. The net cash from operating
activities was primarily related to the increase in the net loss of $204,465, an increase in inventory of $943,002, an increase
in accounts receivable of $116,347, offset by an increase in accounts payable and other current liabilities of $287,020.
Net
cash used in operating activities for the three months ended March 31, 2016 was $304,151. This amount was primarily related to
increases of inventory of $574,399, accounts receivable of $76,859 offset by an increase in accounts payable and other current
liabilities of $333,056.
LIQUIDITY
AND CAPITAL RESOURCES
As
at the date of this filing, we had cash of approximately $2.9 million. As of March 31, 2017, we had net working capital of approximately
$4.2 million, compared to working capital of approximately $2.8 million at December 31, 2016, an increase of approximately $1.4
million. The increase in working capital from December 31, 2016 to March 31, 2017 is due primarily from the proceeds from the
sale of common stock and exercise of warrants.
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.
Financing
Activities
2016
Private Placements
On
April 29, 2016, the Company closed on a private placement to which it sold 890,714 units to 10 accredited investors at a price
of $.70 per unit, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock
at an exercise price of $.70 per share. The warrants have a five-year life for gross proceeds of $623,500. We paid Cavu, our placement
agent, a total compensation for its services of (i) five-year warrants to purchase 50,000 shares of our common stock, at an exercise
price equal to $0.70 per share; and (ii) 50,000 shares of our common stock.
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 a cash fee of $22,050 and five-year warrants to purchase 31,500 shares of common stock, at an exercise
price equal to $0.70 per share, on proceeds of $315,000 raised by Cavu, in connection with this offering.
2017
Private Placements
On
March 10, 2017, the Company closed a private placement of a total of 825,000 units of its securities to 4 accredited investors.
Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common
stock at an exercise price of $2.75 per share. The Company raised an aggregate of $1,650,000 gross proceeds in the offering.
On May 12, 2017 and May 15, 2017, the
Company conducted closings of a private placement of a total of 950,000 units and 25,000 units of its securities, respectively.
Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common
stock at an exercise price of $2.75 per share. As of the date of this filing, the Company raised an aggregate of $1,950,000 gross
proceeds in the offering.
Critical
Accounting Policies, Judgments and Estimates
Use
of Estimates
The
preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United
States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include
the carrying amount of intangible assets; valuation allowances and reserves for receivables, inventory and deferred income taxes;
revenue recognition related to contracts accounted for under the percentage of completion method; share-based compensation; and
loss contingencies, including those related to litigation. Actual results could differ from those estimates.
Accounts
Receivable and Concentration of Credit Risk
Accounts
receivable are recorded at the invoiced amounts less an allowance for doubtful accounts and do not bear interest. The allowance
for doubtful accounts is based on our estimate of the amount of probable credit losses in our accounts receivable. We determine
the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment.
Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance
when we determine that the potential for recovery is remote. An allowance for doubtful accounts of approximately $47,800 has been
reserved as of March 31, 2017 and December 31, 2016.
We
are exposed to credit risk in the normal course of business, primarily related to accounts receivable. We are affected by general
economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition
of its customers and maintains an allowance for doubtful accounts. As of March 31, 2017 and December 31, 2016, we do not believe
that we have significant credit risk.
Fair
Value of Financial Instruments
The
carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which
approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third
parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based
on our current financial condition and liquidity. We believe the amounts due to related parties also approximate their fair value,
as their carried interest rates are consistent with those of our notes payable with third parties.
Long-lived
Assets
We
evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted
future cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the
difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning
the amount and timing of estimated future cash flows. No impairment was determined as of March 31, 2017 and December 31, 2016.
Revenue
Recognition
Revenue
on product sales is recognized upon delivery or shipment. Customer deposits and lay away sales are not reported as revenue until
final payment is received and the merchandise has been delivery.
Stock-based
Compensation
We
account for stock-based awards at fair value on the date of grant, and recognize compensation over the service period that they
are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing
model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration
estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately
vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted
for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.
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.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
May 2014, the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”. The
new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting
standards for specialized transactions and industries. The section is intended to conform revenue accounting principles
with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States
practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information.
The updated guidance was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within
those annual periods. On July 9, 2015, the FASB approved a one year delay of the effective date. The Company will now adopt
the new provisions of this accounting standard at the beginning of fiscal year 2018.
In
July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will
be measured at the “lower of cost and net realizable value” and options that currently exist for “market value”
will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016.
Management is evaluating the provisions of this statement and has not determined what impact the adoption of ASU 2015-11 will
have on the Company’s financial position or results of operations.
In
November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance
eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments
will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those
annual periods. The Company is in the process of evaluating this guidance.
In
January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities
(“ASU 2016-01”), which requires that (i) all equity investments,
other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii)
when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit
risk will be recognized separately in other comprehensive income. Additionally, the ASU 2016-01 changes the disclosure requirements
for financial instruments. The new standard will be effective for the Company starting in the first quarter of fiscal 2019. Early
adoption is permitted for certain provisions. The Company is in the process of determining the effects the adoption will have
on its consolidated financial statements as well as whether to adopt certain provisions early.
In
February 2016, the FASB issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes
the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets
for all leases with lease terms of great than 12 months. It also changes the definition of a lease and expands the disclosure
requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective
for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of determining
the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.
In
March 2016, the FASB issued Accounting Standards Update 2016-09,
Improvements to Employee Share-Based Payment Accounting
(‘ASU
2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 includes provisions intended
to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. ASU
2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within
that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning
of the fiscal year of adoption. The Company is evaluating the impact of this standard on its financial statements.
Other
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.