U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Under the Securities Exchange Act of 1934

 

For Quarter Ended: June 30, 2020

 

Commission File Number: 333-207889

 

GROWGENERATION CORPORATION

(Exact name of small business issuer as specified in its charter)

 

Colorado   46-5008129
(State of other jurisdiction
of incorporation)
  (IRS Employer
ID No.)

 

930 W 7th Ave, Suite A

Denver, Colorado 80204

(Address of principal executive offices)

 

(800)935-8420

(Issuer’s Telephone Number)

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Title of each class   Trading symbol   Name of each exchange on which registered
Common Stock, par value $0.001 per share   GRWG   The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of August 12, 2020, there were 47,677,772 shares of the registrant’s common stock issued and outstanding. 

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
   
  PART I FINANCIAL INFORMATION  
     
Item 1. Unaudited Interim Consolidated Financial Statements 1
  Condensed Consolidated Balance Sheet as of June 30, 2020 (unaudited) and December 31, 2019 1
  Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2020 and 2019 (Unaudited) 2
  Consolidated Statement of Shareholders Equity for the three months and six months ended June 30, 2020 and 2019 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited) 4
  Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 39
     
PART II OTHER INFORMATION
     
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 40
Item 6. Exhibits 41
  Signatures 42

 

i

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    June 30,
2020
    December 31,
2019
 
    (Unaudited)        
ASSETS            
Current assets:            
Cash   $ 14,823,541     $ 12,979,444  
Accounts receivable (net of allowance for credit losses of $465,420 and $291,372, respectively)     3,608,966       4,455,209  
Inventory, net     30,429,958       22,659,357  
Prepaid expenses and other current assets     5,166,060       2,549,559  
Total current assets     54,028,525       42,643,569  
                 
Property and equipment, net     4,015,982       3,340,616  
Operating leases right-of-use assets, net     7,630,644       7,628,591  
Deferred income taxes             -  
Intangible assets, net     820,507       233,280  
Goodwill     21,085,084       17,798,932  
Other assets     294,718       377,364  
TOTAL ASSETS   $ 87,875,460     $ 72,022,352  
                 
LIABILITIES & STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 11,933,154     $ 6,024,750  
Other accrued liabilities     107,568       -  
Payroll and payroll tax liabilities     1,343,696       1,072,142  
Customer deposits     2,334,861       2,503,785  
Sales tax payable     878,174       533,656  
Income taxes payable     156,000       -  
Current maturities of operating leases liability     1,959,124       1,836,700  
Current maturities of long-term debt     91,128       110,231  
Total current liabilities     18,803,705       12,081,264  
                 
Operating leases liability, net of current maturities     5,843,739       5,807,266  
Long-term debt, net of current maturities     213,930       242,079  
Total liabilities     24,861,374       18,130,609  
                 
Commitments and contingencies                
                 
Stockholders’ Equity:                
Common stock; $.001 par value; 100,000,000 shares authorized; 38,844,819 and 36,876,305 shares issued and outstanding, respectively     38,845       36,876  
Additional paid-in capital     69,382,004       60,742,055  
Accumulated deficit     (6,406,763 )     (6,887,188 )
Total stockholders’ equity     63,014,086       53,891,743  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 87,875,460     $ 72,022,352  

  

See Notes to the Unaudited Consolidated Financial Statements.

1

 

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2020     2019     2020     2019  
                         
Sales   $ 43,451,840     $ 19,483,383     $ 76,433,345     $ 32,570,605  
Cost of sales     31,866,503       13,663,173       55,901,760       23,063,764  
Gross profit     11,585,337       5,820,210       20,531,585       9,506,841  
                                 
Operating expenses:                                
Store operations     3,999,280       2,734,788       7,516,329       4,616,326  
General and administrative     1,150,435       549,129       2,424,647       1,124,313  
Share based compensation     1,186,905       390,898       5,301,972       522,243  
Depreciation and amortization     467,677       150,842       826,820       291,132  
Salaries and related expenses     1,971,391       820,842       3,769,151       1,429,106  
Total operating expenses     8,775,688       4,646,499       19,838,919       7,983,120  
                                 
Income from operations     2,809,649       1,173,711       692,666       1,523,721  
                                 
Other income (expense):                                
Interest expense     (13,240 )     (120,311 )     (20,421 )     (250,786 )
Interest income     200       15,433       25,042       34,283  
Other income (loss)     (66,666 )     (6,833 )     (60,862 )     (15,797 )
Total non-operating income (expense), net     (79,706 )     (111,711 )     (56,241 )     (232,300 )
                                 
Net income before taxes     2,729,943       1,062,000       636,425       1,291,421  
Provision for income taxes    

(156,000

)     -      

(156,000

)     -  
Net Income   $ 2,573,943     $ 1,062,000     $ 480,425     $ 1,291,421  
                                 
Net income per shares, basic   $ .07     $ .04     $ .01     $ .04  
Net income per shares, diluted   $ .06     $ .03     $ .01     $ .04  
                                 
Weighted average shares outstanding, basic     38,616,610       30,326,304       38,224,109       29,389,636  
Weighted average shares outstanding, diluted     41,016,392       31,426,757       40,241,292       30,455,282  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

2

 

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 and 2019

(Unaudited) 

 

          Additional           Total  
    Common Stock     Paid-In     Accumulated     Stockholders’  
    Shares     Amount     Capital     (Deficit)     Equity  
Balances, December 31, 2019     36,876,305     $ 36,876     $ 60,742,055     $ (6,887,188 )   $ 53,891,743  
Common stock issued upon warrant exercise     191,235       191       509,928               510,119  
Common stock issued upon cashless warrant exercise     18,712       19       (19 )             -  
Common stock issued upon cashless exercise of options     279,823       280       (280 )             -  
Common stock issued in connection with business combinations     250,000       250       1,102,250               1,102,500  
Common stock issued for assets    

23,982

     

24

     

100,800

             

100,824

 
Common stock issued for services     50,000       50       (50 )             -  
Common stock issued for share based compensation     519,333       519       1,759,913               1,760,432  
Share based compensation             -       2,208,646               2,208,646  
Net loss                             (2,093,518 )     (2,093,518 )
Balances, March 31, 2020     38,209,300     $ 38,209     $ 66,423,243     $ (8,980,706 )   $ 57,480,746  
                                         
Common stock issued upon warrant exercise     80,646       81       282,180               282,261  
Common stock issued upon cashless exercise of warrants     77,907       78       (78 )             -  
Common stock issued upon cashless exercise of options     29,792       30       (30 )             -  
Common stock issued in connection with business combinations     107,500       107       705,093               705,200  
Common stock issued for assets     10,000       10       67,490               67,500  
Common stock issued for accrued compensation     324,674       325       717,206               717,531  
Common stock issued for share-based compensation     5,000       5       24,845               24,850  
Share-based compensation                     1,162,055               1,162,055  
Net income                             2,573,943       2,573,943  
Balances, June 30 2020     38,844,819     $ 38,845     $ 69,382,004     $ (6,406,763 )   $ 63,014,086  
                                         
Balances, December 31, 2018     27,948,609     $ 27,949     $ 38,796,562     $ (8,765,992 )   $ 30,058,519  
Common stock issued upon warrant exercise     172,500       172       1,552               1,724  
Common stock issued upon cashless exercise of options     228,890       229       (229 )             -  
Common stock issued in connection with business combinations     344,553       345       998,406               998,751  
Common stock issued for prepaid services     50,000       50       95,950               96,000  
Common stock issued for accrued share-based compensation     100,000       100       210,100               210,200  
Share based compensation                     (8,951 )             (8,951 )
Net income                             229,421       229,421  
Balances, March 31, 2019     28,844,552     $ 28,845     $ 40,093,390     $ (8,536,571 )   $ 31,585,664  
                                         
Sales of common stock, net of fees     4,123,254       4,123       12,661,866               12,665,989  
Common stock issued upon warrant exercise     1,250,000       1,250       436,250               437,500  
Common stock issued upon cashless exercise of options     241,154       241       (241 )             -  
Common stock issued in connection with business combinations     250,000       250       810,630               810,880  
Common stock issued for convertible debt     83,451       83       189,485               189,568  
Common stock issued for share-based compensation     42,500       42       35,758               35,800  
Share-based compensation                     103,275               103,275  
Net income                             1,062,000       1,062,000  
Balances, June 30, 2019     34,834,911     $ 34,834     $ 54,330,413     $ (7,474,571 )   $ 46,890,676  

 

See Notes to the Unaudited Consolidated Financial Statements.

3

 

 

GROWGENERATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

    For the Six Months Ended June 30,  
    2020     2019  
Cash flows from operating activities:            
Net income   $ 480,425     $ 1,291,421  
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     826,820       291,132  
Amortization of debt discount     -       242,096  
Stock-based compensation expense     5,301,972       522,243  
Bad debt     194,680       -  
Changes in operating assets and liabilities:                
(Increase) decrease in:                
Accounts receivable     651,563       (557,836 )
Inventory     (6,153,633 )     (3,076,386 )
Prepaid expenses and other assets     (2,550,244 )     (1,080,372 )
Increase (decrease) in:                
Accounts payable and accrued liabilities     6,608,503       1,042,991  
Operating leases     156,844       82,556  
Payroll and payroll tax liabilities     271,554       227,893  
Income taxes payable     156,000       -  
Customer deposits     (168,924     (79,723
Sales tax payable     344,518       233,834  
Net cash provided by (used in) operating activities     6,120,078       (860,151 )
Cash flows from investing activities:                
Assets acquired in business combinations     (3,031,696 )     (7,631,775 )
Purchase of furniture and equipment     (1,280,666 )     (1,052,892 )
Purchase of intangibles     (708,747 )     (112,050 )
Net cash used in investing activities     (5,021,109 )     (8,796,717 )
Cash flows from financing activities:                
Principal payments on long term debt     (47,252 )     (228,855 )
Proceeds from the sale of common stock and exercise of warrants, net of expenses     792,380       13,105,214  
Net cash provided by (used in) financing activities     745,128       12,876,359  
Net increase in cash     1,844,097       3,219,491  
Cash at the beginning of period     12,979,444       14,639,981  
Cash at the end of period   $ 14,823,541     $ 17,859,472  
                 
Supplemental disclosures of non-cash financing activities:                
Cash paid for interest   $ 20,421      $ 8,690  
Common stock issued for accrued payroll   $ 717,531      $ 210,200  
Common stock issued for prepaid services   $ -      $ 96,000  
Common stock issued for business combination   $ 1,807,700     $ 1,809,631  
Debt converted to equity   $ -     $ 189,217  
Assets acquired by issuance of common stock   $ 168,324      $ 1,809,631  
Right to use assets acquired under new operating leases   $ 1,094,595      $ 6,210,395  

 

See Notes to the Unaudited Consolidated Financial Statements.

4

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

1. NATURE OF OPERATIONS

 

GrowGeneration is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening. Currently, the Company owns and operates a chain of twenty eight (28) retail hydroponic/gardening stores, with five (5) located in the state of Colorado, five (5) in the state of California, four (4) in the state of Michigan, two (2) in the state of Nevada, one (1) in the state of Washington, one (1) in the state of Oregon, four (4) in the State of Oklahoma, one (1) in the state of Rhode Island, three (3) in Maine, (1) in Florida, one (1) distribution center in California and an online e-commerce store, GrowGeneration.com. In addition, we operate a warehouse out of Sacramento, CA. Our plan is to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States and Canada.

 

The Company engages in its business through its wholly-owned subsidiaries, GrowGeneration Pueblo Corp, GrowGeneration California Corp, GrowGeneration Nevada Corp, GrowGeneration Washington Corp, GrowGeneration Rhode Island Corp, GrowGeneration Oklahoma Corp, GrowGeneration Canada, GrowGeneration HG Corp, GrowGeneration Hemp Corp, GGen Distribution Corp, GrowGeneration Michigan Corp, GrowGeneration New England Corp, GrowGeneration Florida Corp and GrowGeneration Management Corp.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. All significant intercompany balances and transactions are eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

 

These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (“Annual Report”) filed on March 27, 2020, and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the six months ended June 30, 2020.

 

5

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Use of Estimates

 

Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.

 

Additionally, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.

 

As we continue to monitor the COVID-19 situation, the Company is considered an “essential” supplier to the agricultural industry, suppling the nutrients and nourishment required to feed their plants. The Company has been opened during this difficult time. We have plans and procedures in place to ensure our customers and employees stay safe during this time of uncertainty. As a result of COVID-19 we reduced some hours of operations at the store level and some stores were closed on the weekends, primarily in the later part of the first quarter of 2020. There have been some minor delays in vendor shipments as their warehouses and supply chain were affected by staffing shortages. The Company successfully implemented a will call and curb side pick-up process that is working well. Other than what has been disclosed above, we have not experienced adverse effects from COVID-19.

 

Leases

 

We assess whether an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We have elected the practical expedient to not separate lease and non-lease components for all assets. Operating lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over the lease term at the lease start date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease start date in determining the present value of future payments. The operating lease asset is increased by any lease payments made at or before the lease start date and reduced by lease incentives and initial direct costs incurred. The lease term includes options to renew or terminate the lease when it is reasonably certain that we will exercise that option. The exercise of lease renewal options is at our sole discretion. The depreciable life of lease assets and leasehold improvements are limited by the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

  

Income Taxes

 

The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. In 2019 and as of June 20, 2020, a valuation allowance was provided for the amount of deferred tax assets that would otherwise be recorded for income tax benefits primarily relating to operating loss carryforwards as realization could not be determined to be more likely than not.

 

6

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The Company adopted the provisions of FASB ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. The Company’s tax returns are subject to tax examinations by U.S. federal and state authorities until their respective statute of limitation. Currently, the 2019, 2018 and 2017 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 June 30, 2020.

 

Revenue Recognition

 

The Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives services at which point, the performance obligation is satisfied. Sales and other taxes collected concurrent with revenue producing activities are excluded from revenue. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The Company monitors provisions for estimated returns. Payment for goods and services sold by the Company is typically due upon satisfaction of the performance obligations. Under certain circumstances, the Company does provide goods and services to customers on a credit basis (see Accounts Receivable below). The Company accounts for shipping and handling activities as a fulfillment costs rather than as a separate performance obligation. When the Company receives payment from customers before the customer has taken possession of the merchandise or the service has been performed, the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete.

 

Accounts Receivable

 

Accounts receivable are stated at the amount the Company expects to collect from balances outstanding at period-end, based on the Company’s assessment of the credit history with customers having outstanding balances and current relationships with them. A reserve for uncollectable receivables is established when collection of amounts due is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, client cash flow difficulties or ongoing service or billing disputes. Credit is generally extended on a short-term basis thus receivables do not bear interest. At June 30, 2020 and December 31, 2019, the Company established an allowance for doubtful accounts of $465,420 and $291,372, respectively.

 

Inventory

 

Inventory consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or net realizable value. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.

 

7

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Property and Equipment

 

Property and equipment are carried at cost. Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement, whichever is shorter. Renewals and betterment that materially extend the life of the asset are capitalized. Expenditures for maintenance and repairs are charged against operations. Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:

 

    Estimated Lives
Vehicle   5 years
Furniture and fixtures   5-7 years
Computers and equipment   3-5 years
Leasehold improvements   10 years not to
exceed lease term

 

Goodwill

 

Goodwill represents the excess of purchase price over the fair value of net assets. 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, additional procedures must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

 

Stock Based Compensation

 

The Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as an expense over the requisite service period. Stock-based compensation expense for all share-based payment awards are recognized using the straight-line single-option method.

 

The Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

 

8

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

New Accounting Pronouncements

 

As an emerging growth company, the Company is permitted to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. The Company has chosen to take advantage of the extended transition period for complying with new or revised accounting standards.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements

 

During the first quarter of 2019, the Company adopted the FASB ASU 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in ASC 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. The Company will recognize those lease payments on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $3.2 million.

 

On January 1, 2019, the Company also adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 more closely aligns the accounting for employee and nonemployee share-based payments. The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.

 

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in Quarterly Reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. The Company adopted these amendments in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this new guidance, effective January 1, 2020, did not have a material impact on our Financial Statements.

 

9

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

3. RECENT ACCOUNTING PRONOUNCEMENTS, continued

 

Recently Issued Accounting Pronouncements – Pending Adoption

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326),” changing the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The ASU will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. In November 2019, the FASB issued ASU No. 2019-10, changing effective dates for the new standards to give implementation relief to certain types of entities. The Company is required to adopt the new standards no later than January 1, 2023 according to ASU 2019-10, with early adoption allowed. We are currently evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2022 and should be applied on a prospective basis. The Company is currently evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The standard will be effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those periods. We are currently evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.

 

10

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

4. REVENUE RECOGNITION

 

Disaggregation of Revenues

 

The following table disaggregates revenue by source:

 

    Three Months
Ended
June 30,
2020
    Three Months
Ended
June 30,
2019
 
Sales at company owned stores   $ 40,875,647     $ 18,447,050  
                 
E-commerce sales     2,576,193       1,036,333  
Total Revenues   $ 43,451,840     $ 19,483,383  

 

    Six Months
Ended
June 30,
2020
    Six Months
Ended
June 30,
2019
 
Sales at company owned stores   $ 71,912,313     $ 30,852,773  
                 
E-commerce sales     4,521,032       1,717,632  
Total Revenues   $ 76,433,345     $ 32,570,405  

 

Contract Balances

 

Depending on the timing of when a customer takes possession of product and when a customer make payments for such product, the Company recognizes a customer trade receivable (asset) or a customer deposit (liability). The difference between the opening and closing balances of the Company’s customer trade receivables and the customer deposit liability results from timing differences between the Company’s performance and the customer’s payment.

 

The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:

 

    Receivables     Customer Deposit Liability  
Opening balance, 1/1/2020   $ 4,455,209     $ 2,503,785  
Closing balance, 6/30/2020     3,608,966       2,334,861  
Increase (decrease)   $ (846,243 )     (168,924 )
                 
Opening balance, 1/1/2019   $ 862,397     $ 516,038  
Closing balance, 6/30/2019     1,420,233       436,315  
Increase (decrease)   $ 557,836       (79,723 )

 

 

11

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

5. PROPERTY AND EQUIPMENT

 

    June 30,
2020
    December 31,
2019
 
Vehicles   $ 969,115     $ 702,447  
Leasehold improvements     1,301,410       884,685  
Furniture, fixtures and equipment     3,972,018       3,305,323  
      6,242,543       4,892,455  
(Accumulated depreciation)     (2,226,561 )     (1,551,839 )
Property and Equipment, net   $ 4,015,982     $ 3,340,616  

 

Depreciation expense for the three months ended June 30, 2020 and 2019 was $373,975 and $150,842, respectively.

 

Depreciation expense for the six months ended June 30, 2020 and 2019 was $705,299 and $291,132, respectively.

 

6. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill: The changes in goodwill are as follows:

 

    June 30,
2020
    December 31,
2019
 
Balance, beginning of period   $ 17,798,932     $ 8,752,909  
Goodwill additions     3,286,152       9,046,023  
Impairments     -       -  
Balance, end of period   $ 21,085,084     $ 17,798,932  

 

Intangible assets on the Company’s consolidated balance sheets consist of the following:

 

    June 30,
2020
    December 31,
2019
 
    Gross
Carrying
Amount
    Accumulated
Amortization
    Gross
Carrying
Amount
    Accumulated
Amortization
 
Other Intangibles   $ 100,000     $ -     $ 100,000     $ -  
Capitalized software     843,802       123,295       135,030       1,750  
    $ 943,802     $ 123,295     $ 235,030     $ 1,750  

 

Amortization expense for the three months ended June 30, 2020 and 2019 was $93,702 and $0, respectively.

 

Amortization expense for the six months ended June 30, 2020 and 2019 was $121,520 and $0, respectively.

 

12

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

7. LONG-TERM DEBT

 

    June 30,     December 31,  
    2020     2019  
Long term debt is as follows:            
Wells Fargo Equipment Finance, interest at 3.5% per annum, payable in monthly installments of $518.96 beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $25,437   $ 4,098     $ 7,109  
                 
Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 24 installments of $24,996, due February 2020     -       24,997  
                 
Notes payable issued in connection with seller financing of assets acquired, interest at 8.125%, payable in 60 installments of $8,440, due August 2023     300,960       320,204  
    $ 305,058     $ 352,310  
Less Current Maturities     (91,128 )     (110,231 )
Total Long-Term Debt   $ 213,930     $ 242,079  

 

Interest expense for the three months ended June30, 2020 and 2019 was $13,240 and $3,161, respectively.

 

Interest expense for the six months ended June 30, 2020 and 2019 was $20,421 and $8,690, respectively.

 

8. LEASES

 

We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1- 5 years, most of which include options to extend the leases for additional 3 to 5 year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.

 

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term.

 

We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.

 

We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

 

13

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

8. LEASES, continued

 

Lease expense is recorded within our consolidated statements of operations based upon the nature of the assets. Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in “cost of sales.” Facilities and assets which serve management and support functions are expensed through general and administrative expenses.

 

    June 30,
2020
    December 31,
2019
 
Right to use assets, operating lease assets   $ 7,630,644     $ 7,628,591  
                 
Current lease liability   $ 1,959,124     $ 1,836,700  
Non-current lease liability     5,843,739       5,807,266  
    $ 7,802,863     $ 7,643,966  

 

    June 30,
2020
    June 30,
2019
 
Weighted average remaining lease term     3.44 years       3.75 years  
Weighted average discount rate     7.6 %     7.6 %

 

    June 30,
2020
    June 30,
2019
 
Operating lease costs   $ 1,713,505     $ 1,136,339  
Short-term lease costs     31,932       19,114  
Total operating lease costs   $ 1,745,437     $ 1,155,453  

 

The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2020:      
       
2020 (remainder of the year)   $ 1,360,110  
2021     2,721,296  
2022     2,276,428  
2023     1,737,060  
2024     945,391  
Thereafter     2,191,974  
Total lease payments     11,232,259  
Less: Imputed interest     (3,429,396 )
Lease Liability at June 30, 2020   $ 7,802,863  

 

14

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

9. CONVERTIBLE DEBT

 

On January 12, 2018, the Company completed a private placement of a total of 36 units of the Company’s securities at the price of $250,000 per unit pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated under the Securities Act. Each Unit consisted of (i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of the Company’s common stock, par value $.001 per share, at a price of $.01 per share or through cashless exercise.

 

The convertible debt had a maturity date of January 12, 2021 and the principal balance and any accrued interest is convertible by the holder at any time into common stock of the Company at conversion price of $3.00 a share. Principal due and interest accrued on the notes will automatically convert into shares of common stock, at the conversion price, if at any time during the term of the notes, commencing twelve (12) months from the date of issuance, the common stock trades minimum daily volume of at least 50,000 shares for twenty (20) consecutive days with a volume weighted average price of at least $4.00 per share. As of August 21, 2019, all remaining convertible debt and accrued interest had been converted to equity and no convertible debt remains outstanding.

 

During the six months ended June 30, 2019, convertible debt and accrued interest of $250,356, net of unamortized debt discount of $60,783 was converted into 83,451 shares of common stock, at the conversion rate of $3.00 per share.

 

During the six months ended June 30, 2019, 172,500 warrants issued in connection with the convertible debt were exercised, resulting in the issuance of 172,500 shares of common stock.

 

During the six months ended June 30, 2020, 18,712 shares were issued upon cashless exercise of convertible debt warrants.

 

10. SHARE BASED PAYMENTS AND STOCK OPTIONS

 

The Company accounts for share-based payments through the measurement and recognition of compensation expense for share-based payment awards made to employees and directors of the Company, including stock options and restricted shares.

 

During the three months ended June 30, 2020 the Company issued 10,000 shares of common stock (stock-based awards) to employees that vested immediately resulting in compensation expense of approximately $39,200. During the three months ended June 30, 2019 the Company issued 17,500 shares of common stock (stock-based awards) to employees that vested immediately resulting in compensation expense of approximately $35,800.

 

During the six months ended June 30, 2020 the Company issued 528,333 shares of common stock (stock-based awards) to employees that vested immediately resulting in compensation expense of approximately $2,169,832. During the six months ended June 30, 2019 the Company issued 17,500 shares of common stock (stock-based awards) to employees that vested immediately resulting in compensation expense of approximately $35,800.

 

During the three months and six months ended June 30, 2020, the Company recorded $125,000 of share-based compensation to executives that is included in payroll and payroll tax liabilities. During the three months and six months ended June 30, 2019, the Company recorded $69,500 and $245,000, respectively, of share-based compensation to executives that is included in payroll and payroll tax liabilities.

 

15

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

10. SHARE BASED PAYMENTS AND STOCK OPTIONS, continued

 

The following table presents share-based payment expense and new shares issued for the three months ended June 30, 2020 and 2019.

 

    Three Months Ended
June 30,
 
    2020     2019  
Total non-cash share-based compensation   $ 1,186,905     $ 390,898  

 

The following table presents share-based payment expense and new shares issued for the six months ended June 30, 2020 and 2019.

 

    Six Months Ended
June 30,
 
    2020     2019  
Total non-cash share-based compensation   $ 5,301,972     $ 522,243  

 

On March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive Plan (“2014 Plan”) pursuant to which the Company may grant incentive, non-statutory options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock or cash awards to employees, nonemployee members of our 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 this plan are made by the Board or a committee designated by the Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s common stock which is required to be issued at a price not less than 110% of the fair market value on the day of the grant. Each option is exercisable at such time or times, during such period and for such numbers of shares shall be determined by the plan administrator. No option may be exercisable for more than ten years (five years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant.

 

On January 7, 2018, the Board adopted the 2018 Equity Compensation Plan (the “2018 Plan”) and on April 20, 2018, the shareholders approved the 2018 Plan. On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable thereunder from 2,500,000 to 5,000,000, which amendment was approved by shareholders on May 11, 2020. The 2018 Plan will be administered by the Board. The Board may grant options to purchase shares of common stock, stock appreciation rights, restricted stock units, restricted or unrestricted shares of common stock, performance shares, performance units, other cash-based awards and other stock-based awards. The Board also has broad authority to determine the terms and conditions of each option or other kind of equity award, adopt, amend and rescind rules and regulations for the administration of the 2018 Plan and amend or modify outstanding options, grants and awards.

 

16

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

10. SHARE BASED PAYMENTS AND STOCK OPTIONS, continued

 

No options, stock purchase rights or awards may be made under the 2018 Plan on or after the ten-year anniversary of the adoption of the 2018 Plan by the Board, but the 2018 Plan will continue thereafter while previously granted options, stock appreciation rights or awards remain subject to the 2018 Plan. Options granted under the 2018 Plan may be either “incentive stock options” that are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) or “nonstatutory stock options” that do not meet the requirements of Section 422 of the Code. The Board will determine the exercise price of options granted under the 2018 Plan. The exercise price of stock options may not be less than the fair market value, on the date of grant, per share of our Common Stock issuable upon exercise of the option (or 110% of fair market value in the case of incentive options granted to a 10% stockholder). No option may be exercisable for more than ten years (five years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant.

 

As of June 30, 2020, there was approximately $4.1 million of unrecognized compensation costs related to non-vested share-based compensation granted under that share option plans, which is expected to be recognized over the next two years.

 

Awards issued under the 2014 Plan as of June 30, 2020 are summarized below:

 

    2020  
Total shares available for issuance pursuant to the 2014 Plan     2,500,000  
Options outstanding, June 30, 2020     (198,000 )
Total options exercised under 2014 Plan     (1,915,833 )
Total shares issued pursuant to the 2014 Plan     (375,000 )
Awards available for issuance under the 2014 Plan, June 30, 2020     11,167  

 

Awards issued under the 2018 Plan as of June 30, 2020 are summarized below: 

 

    2020  
Total shares available for issuance pursuant to the 2018 Plan, after amendment     5,000,000  
Options outstanding, June 30, 2020     (1,837,500 )
Total options exercised under 2018 Plan     (49,833 )
Total shares issued pursuant to the 2018 Plan     (693,333 )
Awards available for issuance under the 2018 Plan, June 30, 2020     2,419,334  

  

The table below summarizes all the options granted by the Company under all plans during the six months ended June 30, 2020:

 

Options   Shares     Weight -
Average
Exercise
Price
    Weighted -
Average
Remaining
Contractual
Term
  Weighted -
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2019     1,916,333     $ 2.78     3.81 years   $ 1.71  
Granted     837,500       3.51         $ 2.22  
Exercised     (451,663 )   $ 1.80         $ .83  
Forfeited or expired     -                      
Outstanding at June 30, 2020     2,302,170     $ 3.16     3.16 years   $ 1.99  
Options vested at June 30, 2020     1,373,174     $ 2.89     2.83 years   $ 1.76  

 

17

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

10. SHARE BASED PAYMENTS AND STOCK OPTIONS, continued

 

    June 30,
2020
 
Options outstanding pursuant to 2014 Plan     198,000  
Options outstanding pursuant to 2018 Plan     1,837,500  
Options issued outside of 2014 and 2018 Plans     266,670  
      2,302,170  

 

11. STOCK PURCHASE WARRANTS

 

A summary of the status of the Company’s outstanding stock purchase warrants as of June 30, 2020 is as follows:

 

    Warrants     Weighted -
Average
Exercise
Price
 
             
Outstanding at December 31, 2019     3,849,935     $ 3.14  
Issued     -          
Exercised     (448,856 )   $ 3.16  
Forfeited     (250,000 )     5.75  
Outstanding at June 30, 2020     3,151,079     $ 2.94  

 

12. EARNINGS PER SHARE

   

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 and six months ended June 30, 2020 and 2019.

 

    Three months ended  
    June 30,
2020
    June 30,
2019
 
Net income   $ 2,573,943     $ 1,062,000  
Weighted average shares outstanding, basic     38,616,610       30,326,304  
Effect of dilutive outstanding warrants and stock options     2,399,782       1,097,453  
Adjusted weighted average shares outstanding, dilutive     41,016,392       31,426,757  
Basic income per shares   $ .07     $ .04  
Dilutive income per share   $ .06     $ .03  

 

18

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

12. EARNINGS PER SHARE, continued

 

    Six months ended  
    June 30,
2020
    June 30,
2019
 
Net income   $ 480,425     $ 1,291,421  
Weighted average shares outstanding, basic     38,224,109       29,389,636  
Effect of dilutive outstanding warrants and stock options     2,017,183       1,065,646  
Adjusted weighted average shares outstanding, dilutive     40,241,292       30,455,282  
Basic income per shares   $ .01     $ .04  
Dilutive income per share   $ .01     $ .04  

 

13. ACQUISITIONS

 

Our acquisition strategy is to acquire well established profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence. The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. The Company has not made any adjustments to the preliminary valuations.

 

On February 26, 2020 we acquired certain assets of Health & Harvest LLC in a transaction valued at approximately $2.85 million. Acquired goodwill of approximately $1.75 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital. Transaction costs incurred in connection with this acquisition were not significant.

 

On June 16, 2020 we acquired certain assets of H2O Hydroponics, LLC in a transaction valued at approximately $1.99 million. Acquired goodwill of approximately $1.4 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital. Transaction costs incurred in connection with this acquisition were not significant.

 

The table below represents the allocation of the purchase price to the acquired net assets.

 

    H2O
Hydroponics
LLC
    Health &
Harvest
LLC
    Total  
Inventory   $ 497,600     $ 1,051,900     $ 1,549,500  
Prepaids and other current assets     4,600       -       4,600  
Furniture and equipment     50,000       50,000       100,000  
Right to use asset     902,000       192,600       1,094,600  
Lease liability     (902,000 )     (192,600 )     (1,094,600 )
Goodwill     1,434,700       1,750,600       3,185,300  
Total     1,986,900     $ 2,852,500     $ 4,839,400  

 

19

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

13. ACQUISITIONS, continued

 

The table below represents the consideration paid for the net assets acquired in business combinations.

 

    H2O
Hydroponics
LLC
    Health &
Harvest
LLC
    Total  
Cash   $ 1,281,700     $ 1,750,000     $ 3,031,700  
Common stock     705,200       1,102,500       1,807,700  
Total   $ 1,986,900     $ 2,852,500     $ 4,839,400  

 

The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date of acquisition to the period ended June 30, 2020.

 

    H2O
Hydroponics
LLC
    Health &
Harvest
LLC
    Total  
Acquisition date   6/26/2020     2/26/2020        
Revenue   $ 227,100     $ 2,299,600     $ 2,526,700  
Earnings   $ 27,800     $ 461,500     $ 489,300  

 

The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the three months and six months ended June 30, 2019.

 

    Three Months
Ended
June 30,
2019
    Six Months
Ended
June 30,
2019
 
Revenue   $ 2,275,700     $ 4,551,478  
Earnings   $ 87,200     $ 174,476  

 

The table below represents the allocation of the preliminary purchase price to the acquired net assets during the six months ended June 30, 2019.

 

    Green Life
Garden
    Chlorophyll     Reno
Hydroponics
    Palm
Springs
Hydroponics
    Total  
Inventory   $ 1,038,600     $ 1,441,000     $ 238,000     $ 465,500     $ 3,183,100  
Prepaids and other current assets     14,100       22,000       -               36,100  
Furniture and equipment     100,000       100,000       25,000       25,000       250,000  
Right to use asset     809,600       701,900       -       329,300       1,840,800  
Lease liability     (809,600 )     (701,900 )     -       (329,300 )     (1,840,800 )
Goodwill     2,305,900       2,596,100       516,300       554,000       5,972,300  
Total   $ 3,458,600     $ 4,159,100     $ 779,300     $ 1,044,500     $ 9,441,500  

 

20

 

 

GrowGeneration Corporation and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

June 30, 2020

 

13. ACQUISITIONS, continued

 

The table below represents the consideration paid for the net assets acquired in business combinations for the period ended June 30, 2019. 

 

    Green Life
Garden
    Chlorophyll     Reno
Hydroponics
    Palm
Springs
Hydroponics
    Total  
Cash   $ 2,647,700     $ 3,659,100     $ 525,000     $ 800,000     $ 7,631,800  
Common stock     810,900       500,000       254,300       244,500       1,809,700  
Total   $ 3,458,600     $ 4,159,100     $ 779,300     $ 1,044,500     $ 9,441,500  

 

The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date of acquisition to the period ended June 30, 2019. 

 

    Green Life
Garden
    Chlorophyll     Reno
Hydroponics
    Palm
Springs
Hydroponics
    Total  
Acquisition date   5/14/2019     1/21/2019     2/11/2019     2/7/2019        
Revenue   $ 1,056,200     $ 3,450,600     $ 880,400     $ 1,326,400     $ 6,713,600  
Earnings   $ 234,700     $ 613,000     $ 151,100     $ 271,600     $ 1,270,400  

 

The following represents the proforma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the three months and six months ended June 30, 2018.

 

    Three Months
Ended
June 30,
2018
    Six Months Ended
June 30,
2018
 
Revenue   $ 4,937,000     $ 9,873,500  
Earnings   $ 537,000     $ 1,073,800  

 

14. SUBSEQUENT EVENTS

 

The Company has evaluated events and transaction occurring subsequent to June 30, 2020 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. 

 

On July 2, 2020 the Company consummated an underwritten public offering (the “Offering”) of 8,625,000 shares of its common stock (the “Shares”), which included the exercise in full of the underwriters’ option to purchase an additional 1,125,000 shares of common stock to cover over-allotments, pursuant to a Registration Statement on Form S-1 (File No. 333-239058) (the “Registration Statement”) which was declared effective by the U.S. Securities and Exchange Commission on June 29, 2020 and another Registration Statement on Form S-1 (File No. 333-239545) filed on June 29, 2020 related to the Registration Statement to upsize the Offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended. The Shares were sold at a public offering price of $5.60 per share, generating gross proceeds of $48.3 million, before deducting the underwriting discounts and commissions and other offering expenses. Net proceeds from the sales of common stock, net of all offering costs and expenses was approximately $44.6 million.

 

On August 10, 2020 the Company purchased the assets of Emerald City Garden located in Concord, CA. for $1 million. Following this acquisition, the Company opened a new store in the state of California.

 

21

 

 

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, 2019 filed with the SEC on March 27, 2020. 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, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, 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 believes it is the largest chain of hydroponic garden centers in North America by revenue and number of stores. We also believe we are a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening. Currently the Company owns and operates a chain of twenty eight (28) retail hydroponic/gardening stores, with five (5) located in the state of Colorado, five (5) in the state of California, four (4) in the state of Michigan, two (2) in the state of Nevada, one (1) in the state of Washington, one (1) in the state of Oregon, four (4) in the State of Oklahoma, one (1) in the state of Rhode Island, three (3) in Maine, (1) in Florida, one (1) distribution center in California and an online e-commerce store, growgeneration.com. In addition, we operate a warehouse out of Sacramento, CA.

 

Market

 

Our stores sell thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that serve multi-purposes and are designed and intended for growing a wide range of plants. Hydroponics is a specialized method of growing plants using mineral nutrient solutions in a water solvent, as opposed to soil. This method is typically used inside greenhouses to give growers the ability to better regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. Hydroponic growers benefit from these techniques by producing crops faster and with higher crop yields per acre as compared to traditional soil-based growers. Indoor growing techniques and hydroponic products are being utilized in new and emerging industries or segments, including the growing of cannabis and hemp. In addition, vertical farms producing organic fruits and vegetables are also beginning to utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other severe weather conditions and insect pests.

 

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 plant-based medicine market, the home grower and businesses and individuals who grow organically grown herbs and leafy green vegetables. The landscape for hydroponic retail stores is very fragmented, with numerous single stores which we consider very ripe for our roll up strategy. Further, the products we sell are in demand due to the ever-increasing legalization of plant-based medicines, primarily cannabis and hemp, and the number of licensed cultivation facilities in both the US and Canada. Total sales for the hydroponic equipment industry were well over $8 billion in 2019, projected to surpass $16 billion by 2025.

 

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Our retail operations are driven by our high-quality products, value-add knowledgeable staff and fast distribution capabilities. We employ horticulturists that we have branded as “Grow Pros”. Our operations span over 300,000 square feet of retail and warehouse space. During COVID-19, we have been deemed an “essential” supplier to the agricultural industry and, as such, we remained open and continued our operations. In the second quarter of 2020, our revenue was $43.5 million, which increased 123% from the same period of the prior year. For the six months ended June 30, 2020, our revenue was $76 million, which increased 135% compared to the same period 2019. There was a 49% increase in our same store sales comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. The Company performed well in all markets, most notably sales in the Oklahoma market up 348%, Michigan market was up 322%, Maine market up 146%, all attributable to gaining more commercial and walk in business in these growth markets. Income from store operations was $7.6 million for the second quarter of 2020, compared to $3.1 million for the second quarter 2019, an increase of 146%. Net income from store operations was approximately $13 million for the six months ended June 30, 2020, compared to approximately $4.9 million for the six months ended June 30, 2019.

 

Adjusted EBITDA was $4.6 million for the second quarter of 2020 compared to $1.7 million the same period of 2019, an increase of 166%. There was a 50% increase in walk-in transaction, averaging 10,000 per week from the end of the first quarter 2020 to the end of the second quarter 2020.

 

We operate our business through the following sales channels:

 

Retail: 28 retail and commercial hydroponic/gardening centers focused on serving growers and cultivators.

 

Commercial: Sales to commercial customers, including expert growers and cultivators, and provide them with advice from sales representatives with the requisite expertise (whom we brand as “GrowPros”) to serve their specific needs.

 

E-Commerce: Our existing e-commerce operation, growgeneration.com (previously HeavyGarden.com and GrowGen.pro), is currently being developed and rebranded into an omni-channel sales approach to enable e-commerce at all of our locations, which we intend to launch in September 2020.

 

Distribution: The majority of our stores are also functioning as warehouse, distribution and fulfillment centers for directing products to our store locations and to the retail, wholesale and mass hydroponic markets.

 

Growth Strategy - Store Acquisitions and New Store Openings

 

Our growth strategy is to expand the number of our retail and commercial operations throughout the United States. The hydroponic retail landscape is fragmented, which we believe has allowed us to acquire the “best of breed” locations in the United States. In addition, we have a two-year roadmap to open a number of new locations in markets that we believe are underserved throughout the country. In addition to the 10 states where we are currently operating, we have identified Arizona, Illinois, Pennsylvania, New York, New Jersey and Missouri as new markets where we plan to open a new operation. In the first quarter of 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and acquired Healthy Harvest located outside of Miami, FL. On June 16, 2020, we acquired the assets of H2O Hydroponics LLC, a hydroponic garden center in Lansing, MI. In connection with this acquisition, we have consolidated and relocated our current West Lansing location into a newly built 14,000 square foot hydroponic garden center. On August 10, 2020, we purchased the assets of Emerald City Garden located in Concord, CA for $1 million, following which acquisition we opened a new store in the state of California. We have set a target to be at 50 stores and operate in 15 states by the end of 2021.

 

Commercial Sales Division

 

In 2019, we created a commercial division with a dedicated sales and support team to sell and service large commercial customers, who are primarily licensed growers of medicinal and non-medicinal cannabis. As of the second quarter of 2020, our commercial division services over 700 commercial accounts, who collectively contributed $9.2 million in revenue or approximately 21% of our sales. For the six-month period ended June 30,2020, the commercial division generated $17.7 million compared to $6.3 million for the same period in 2019, a 181% increase. We have identified over 14,000 licensed hemp and cannabis growers in the United States and believe there is significant room for us to expand our base of commercial customers.

 

23

 

 

E-Commerce Strategy

 

Our online sales for the second quarter of 2020 was approximately $2.6 million compared to $1.0 million for the same period in 2019, an increase of 149%. For the six months ended June 30, 2020, our online sales were approximately $4.5 million compared to $1.7 million for the same period in 2019, an increase of 163%. New visitors to our website are now approaching 100,000 per month. We are currently developing and rebranding our existing e-commerce operation, HeavyGarden.com and GrowGen.Pro, as growgeneration.com, which will be an omni-channel sales approach to enable e-commerce at all of our locations, providing our customers convenient ways to shop when and how they feel comfortable. We intend to launch this strategy in September 2020. This omni-channel approach will provide 24/7 availability of products and allow our customers to “Buy Online and Pick Up In Store.” Customers will be able to shop online in all product departments and access descriptions, reviews and pictures of our products. Our customers can order online and they can choose to either have their products delivered directly to their growing facility (usually within 48 hours) or they can pick up the products at one of our stores (usually within 24 hours). We believe that this omni-channel initiative will result in a more seamless, convenient shopping experience for our customers and will drive financial results.

 

Distribution Channel

 

We have built a supply chain that currently spans through 28 locations across 10 states. We are in the process of building several 20,000 square foot store operations that will serve as fulfillment service centers, in addition to serving the local retail and commercial customers. These stores and fulfillment centers will ship directly to a farm or home as well as to any commercial hydroponic store (including ours and others) in the United States. We have a fleet of trucks that allow us to deliver within the proximity of any of these locations.

 

Products and Private Label Strategy

 

We sell a variety of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products. Our supply chain includes several thousand stock keeping units (“SKUs”) across 12 product departments. Many of our products are consumables leading to repeat orders by our customers. Consumable products are mainly nutrients and additives that feed the plants on a recurring basis. Our strategy is to supply products to two groups of customers: commercial growers and smaller growers that require a local center to fulfill their daily and weekly growing needs.

 

We are also actively developing a line of private label products that we intend to sell through our garden centers under brands we own or control. Our strategy is to deliver high-quality products at a lower cost, and higher margin to us. To further our private label strategy, we acquired various trademarks in March 2019 to aid in branding our ‘in house’ products to our customers.  We introduced our first private labeled products under the Sunleaves brand in first quarter of 2020. Sales in the second quarter of 2020 for the line of Sunleaves products is now approaching $100,000 per month. This initial offering encompassed a broad variety of products ranging from trellis netting to plastic pots and organic nutrients. We intend to introduce additional private label products during 2020 and 2021. We believe that expanding our private label offerings will have a positive impact on our margins and profitability in the near term. We use various trademarks, trade names and service marks in our business, including Blueprint Controllers, Carbide, DuraBreeze, Elemental Solutions, GrowGeneration, GrowXcess, GuardenWare, Harvester’s Edge, HeavyGardens, Ion, MixSure+, OptiLUME, Power Matrix, Smart Support, Sunleaves, Sunspot, The Fountain for Automation, VitaPlant, and Where The Pros Go To Grow. For convenience, we may not include the SM, ® or symbols, but such omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law. Any other trademarks, trade names or service marks referred to in this filing are the property of their respective owners.

 

24

 

 

As we continue to monitor the COVID-19 situation, we are considered an “essential” supplier to the agricultural industry, suppling the nutrients and nourishment required to feed their plants. The Company has been opened during this difficult time. We have plans and procedures in place to ensure our customers and employees stay safe during this time of uncertainty. As a result of COVID-19 we reduced some hours of operations at the store level and some stores were closed on the weekends, starting in the later part of the first quarter of 2020. There have been some minor delays in vendor shipments as their warehouses and supply chain were affected by staffing shortages. The Company successfully implemented a will call and curb side pick-up process that is working well. All of us at GrowGeneration remain committed to the safety and well-being of our customers and employees. To do our part, GrowGeneration has committed to donate up to $500,000 of free product to local communities that have been severely affected.

 

As the largest chain of stand-alone hydroponic garden centers by revenue and number of stores in the United States based on management’s estimates, we believe that we have the following core competitive advantages over our competitors:

 

We offer a one-stop shopping experience to all types of growers by providing “selection, service, and solutions”;

 

We provide end-to-end solutions for our commercial customers from capex built-out to consumables to nourish their plants;

 

We have a knowledge-based sales team, all with horticultural experience;

 

We offer the options to transact online, in store, or buy online and pick up;

 

We consider ourselves to be a leader of the products we offer, from launching new technologies to the development of our private label products;

 

We have a professional team for mergers and acquisitions to acquire and open new locations and successfully add them to our company portfolio; and

 

We offer a program of issuing credit to licensed commercial customers based on a credit evaluation process.

 

The Company has recently announced its partnership with Whole Cities Foundation. Founded by Whole Foods Market in 2014, the independent, nonprofit organization is based in Austin, Texas, and has partnered with more than 190 community organizations in 100 cities across the U.S. to build thriving local food systems and improve health. The first project, with Whole Cities, through its Fresh, Healthy Food Access Grant program, has been with Newark Science & Sustainability and Greater Newark Conservancy over the past 4 years.  Both organizations had identified hydroponic growing as a goal for their community plans.  Each group will benefit from an equipment grant. These first two opportunities are part of a pilot that we expect will yield learnings over the course of the next year. GrowGeneration will provide equipment and expertise and partner with Whole Cities to evaluate community impact.

 

As we have built a national chain of hydroponic garden centers, it has always been our mission to give back to the local communities. In our day to day operations, we see the results growing hydroponically. We could not be prouder to partner with Whole Cities to donate hydroponic equipment and supplies to their local communities to help them with their gardens and increase the quality of their food production. Our staff of over 250 dedicated team members, the majority have tremendous knowledge on how to grow hydroponically, are energized to lend a hand and their personal time to support Whole Cities. It is rewarding to watch a community, come together, parents and children, and produce the largest tomatoes and produce in their community!

 

How We Evaluate Our Operations

 

Sales

 

We earn our sales primarily from the sale of hydroponic garden products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products. Revenue on product sales is recognized upon delivery or shipment. Customer deposits and lay away sales are not reported as revenue until final payment is received and the merchandise has been delivery.

 

Our sales depend on the type of products we sell and the mix between consumables and non-consumables. Due to their nature, purchases of consumables results in repeat orders as customers seek to replenish their supplies. In 2019, approximately 60% of our sales were consumables. Generally, in markets where legalization of plant-based medicines is recent and licensors are ramping up their grow operations, there are more purchases of non-consumables for build-outs compared to purchases of consumables. In more mature markets, there are generally more purchases of consumables than non-consumables. Our sales are also impacted by our customer mix of commercial and non-commercial customers, as larger commercial customers may receive volume discounts. More than a majority of our sales is derived from our commercial customers.

 

Gross Profit

 

We calculate gross profit as sales less cost of goods sold. Cost of goods sold consists of cost of product sold and freight. Gross profit excludes depreciation and amortization, which is presented separately in our consolidated statements of operations.

 

25

 

 

Gross Profit Margin

 

Our overall gross profit margin varies with our product mix, in particular the percentage of sales of consumable products versus non-consumables, such as in connection with build-outs, during a particular quarter. In addition, our customer mix impacts gross profit margin due to larger commercial customers receiving discounts.

 

Operating Expenses

 

Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Corporate overhead is comprised of share-based compensation, depreciation and amortization, general and administrative costs and corporate salaries and related expenses. General and administrative expenses (“G&A”) consist mainly of advertising and promotions, travel & entertainment, professional fees and insurance. G&A as a percentage of sales does not increase commensurate with an increase in sales. Our largest expenses are payroll and rent and these are largely fixed and not variable. Our advertising and marketing expenses are controllable and variable depending on the particular market.

 

Same-Store Sales

 

We assess the organic growth of our sales on a same-store basis. We believe that our assessment on a same-store basis represents an important indicator of comparative financial results and provides relevant information to assess our performance. New and acquired stores become eligible for inclusion in the comparable store base if the store has been under our ownership for the entire period in the same-store base periods for which we are including the store. For example, our same store sales for the three months ended June 30, 2020 and 2019 includes stores that operated for the entire quarter in both 2020 and 2019. We do not include any stores that were closed or consolidated during a particular period.

 

Adjusted EBITDA

 

We define Adjusted EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, further adjusted for other items such as non-cash equity compensation charges. See “Use of Non-GAAP Financial Measure” for more information and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

26

 

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended June 30, 2020 and 2019

 

The following table presents certain consolidated statement of operations information and presentation of that data as a dollar and percentage change from year-to-year.

 

    Three Months
Ended
June 30, 2020
    Three Months
Ended
June 30, 2019
    $
Variance
   

%
Variance

 
Net revenue   $ 43,451,840     $ 19,483,383     $ 23,968,457       123 %
Cost of goods sold     31,866,503       13,663,173       18,203,330       133 %
Gross profit     11,585,337       5,820,210       5,765,127       99 %
Store operating costs     3,999,280       2,734,788       1,264,492       46 %
Income from store operation     7,586,057       3,085,422       4,500,635       146 %
Corporate operating expenses     4,776,408       1,911,711       2,864,697       150 %
Operating income     2,809,649       1,173,711       1,635,938       139 %
Other income (expense)     (79,707 )     (111,711 )     32,004          
Net income, before taxes   $ 2,729,943     $ 1,062,000     $ 1,667,942       157 %
Provision for income taxes     (156,000 )     -       (156,000 )        
Net income     2,573,943       1,062,000       1,511,943       142 %

 

Net revenue for the three months ended June 30, 2020 was approximately $43.5 million, compared to approximately $19.5 million for the three months ended June 30, 2019 an increase of approximately $24 million or 123%. The increase in revenues in 2020 was primarily due to 1) 6 new stores opened or acquired at various times after June 30, 2019 that had revenues of $13.5 million for the quarter ended June 30, 2020 for which there were no revenues for the quarter ended June 30, 2019, 2) 2 stores opened or acquired in May 2019, that had revenues of $2.25 million for the quarter ended June 30, 2020, compared to revenues of $1 million for the quarter ended June 30, 2019, 3) an increase in same store sales of 49% comparing revenues for the quarter ended June 30, 2020 to the quarter ended June 30, 2019, and 4) an increase in e-commerce revenues of $1.5 million or 149% comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. As noted in the chart below, the 19 same stores contributed revenue of $25.1 million for the quarter ended June 30, 2020, compared to revenues of $16.9 million for the quarter ended June 30, 2019, a 49% increase.

 

The Company operated the same 19 stores for the entire three months ended June 30, 2020 and 2019: five (5) in Colorado, four (4) in California, three (3) in Michigan, two (2) in Nevada, one (1) in Rhode Island, one (1) in Washington, one (1) in Maine and one (2) in Oklahoma. As the chart shows below, these same stores generated approximately $25.1 million in revenues for the three months ended June 30, 2020, compared to approximately $16.9 million in revenues for the three months ended June 30, 2019, an increase of 49%, primarily due to an increase in the number of commercial customers in those markets. Same store sales increased in all of the markets as noted below comparing June 30, 2020 to June 30, 2019 except for Washington and Nevada. Las Vegas, Nevada has been impacted by COVID-19 and revenue increases in our Reno store were offset by revenue decreases in our Las Vegas store.

 

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    19 Same Stores All Markets        
    Three Months Ended     Three Months Ended              
    June 30,
2020
    June 30,
2019
    Variance     %
Variance
 
Colorado market   $ 4,632,417     $ 3,915,664       716,753       18 %
Rhode Island     3,281,117       2,056,590       1,224,527       60 %
Michigan     3,413,882       1,610,802       1,803,080       112 %
Oklahoma     5,151,142       2,506,769       2,644,373       105 %
California market     5,942,121       4,978,009       964,112       19 %
Washington market     300,533       350,244       (49,711 )     -14 %
Maine market     1,457,676       506,333       951,343       188 %
Nevada market     952,390       952,344       46       -  
Net revenue, all markets   $ 25,131,278     $ 16,876,755     $ 8,254,523       49 %

 

The Company currently continues to focus on ten (10) markets and e-commerce noted below and the growth opportunities that exist in each market. We continue to focus on new store acquisitions and openings, proprietary products and the continued development of our online omni-channel and Amazon sales.

  

    Sales by Market        
    Three Months Ended
June 30,
2020
    Three Months Ended
June 30,
2019
     Variance      %
Variance
 
Colorado   $ 4,632,417     $ 3,915,664     $ 716,753       18 %
California     5,942,121       4,978,009       964,112       19 %
Rhode Island     3,281,117       2,056,590       1,224,527       60 %
Michigan     6,790,444       1,610,802       5,179,642       322 %
Nevada     952,390       952,344       46       0 %
Washington     300,533       350,244       (49,711 )     -14 %
Oregon     1,587,307       -       1,587,307       -  
Oklahoma     11,239,366       2,506,769       8,732,597       348 %
Maine     3,709,126       1,509,285       2,199,841       146 %
Florida     2,443,082       -       2,443,082       -  
E-commerce     2,576,293       1,036,334       1,539,959       149 %
Closed/consolidated locations     (2,356 )     567,342       (569,698 )        
Total revenues   $ 43,451,840     $ 19,483,383     $ 23,968,457       123 %

 

Revenues in the Colorado market increased approximately $717,000 or 18% comparing the quarter ended June 30, 2020 to June 30, 2019. The increase in sales in the Colorado market is due to 1) the Company’s continued focus on increasing commercial sales, and 2) the acquisition of a new store in mid-January 2019. 

 

Revenues in the California market increased approximately $1 million, or 19%. Same store revenues in the California market increased approximately $1 million over the same quarter in 2019 and the Palm Springs acquisition in mid-February 2019 had revenues of approximately $1.4 million, a $464,000 increase or 50%.

 

Revenues in the Rhode Island market increased approximately $1.2 million or 60% primarily from its increased focus on commercial and multi-state commercial customers.

 

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Revenues in the Michigan market increased approximately $5.2 million or 322% due to 1) the acquisition of Grand Rapids in September 2019 that contributed $3.1 million in revenue in the quarter ended June 30, 2020, 2) the acquisition of the Lansing store in mid-June 2020, that contributed revenues of $227,000 for the quarter ended June 30, 2020, and 3) the increase in same store revenues which increased $1.8 million or 112% primarily due to the increase in commercial accounts.

 

Revenues in the Nevada market were flat. Las Vegas, Nevada has been impacted by COVID-19 and revenue increases in our Reno store were offset by revenue decreases in our Las Vegas store.

 

Revenues in the Washington market decrease 14% comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. Washington currently is our smallest market.

 

Revenues in Oregon were approximately $1.6 million and represents a new market from an acquisition in mid-December 2019.

 

Currently we have 4 stores in the Oklahoma market. Revenues in the Oklahoma market increased $8.7 million or 348% comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. Same stores revenues increased 105% comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. The increase in revenues is primarily related to the addition of two new stores in November 2019 and one new store in March 2020.

 

Revenues in Maine have increased $2.2 million or 146% comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. The increase was primarily due to a new store opened January 31, 2019 and two new stores acquired in May 2019. The new store opened in early 2019 had revenues of $1.5 million in the quarter ended June 30, 2020, compared to $506,000 for the quarter ended June 30, 2019. The two new stores acquired in May 2019, contributed $2.3 million in revenues for the quarter ended June 30, 2020, compared to revenues of $1 million for the quarter ended June 30, 2019.

 

Florida was a new market resulting from an acquisition in February 2020. Revenues in this market were $2.4 million for the quarter ended June 30, 2020. 

 

Cost of Goods Sold

 

Cost of goods sold for the three months ended June 30, 2020 was approximately $31.9 million compared to approximately $13.7 million for the three months ended June 30, 2019 and increase of approximately $18.2 million or 133%. The increase in cost of goods sold was primarily due to the 123% increase in sales comparing the three months ended June 30, 2020 to the three months ended June 30, 2019. The increase in cost of goods sold is directly attributable to the increase in the number of stores open during the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, as discussed in detail above. The increase in cost of goods sold as a percentage of revenues is due to increased commercial and e-commerce revenues as a percentage to total revenues. Both commercial sales and e-commerce sales have lower margins than retail sales.

 

Gross profit was approximately $11.6 million for the three months ended June 30, 2020, compared to approximately $5.8 million for the three months ended June 30, 2019, an increase of approximately $5.8 million or 99%. The increase in cost of goods sold is primarily related to the 123% increase in revenues comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. Gross profit as a percentage of revenues was 26.7% for the three months ended June 30, 2020, compared to 29.9% for the three months ended June 30, 2019. The decrease in the gross profit margin percentage is due to 1) a greater percentage of our revenues for the quarter ended June 30, 2020 in commercial and e-commerce revenues as a percentage of overall revenues that have lower margins and 2) in the first quarter of 2019 we acquired a significant amount of inventory from a vendor at a substantial discount, sales of this product in the second quarter of 2019 accounted for 5% of our overall revenue and high margins, resulting in an 1.3 basis points increase in margin. Commercial and e-commerce accounted for approximately 26% of overall sales for the quarter ended June 30, 2020, resulting in a margin reduction of approximately 0.8%.

 

29

 

 

Operating Expenses

 

Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Operating costs were approximately $8.8 million for the three months ended June 30, 2020 and approximately $4.6 million for the three months ended June 30, 2019, an increase of approximately $4.1 million or 89%. Store operating costs were $4 million for the three months ended June 30, 2020 compared to $2.7 million for the quarter ended June 30, 2019, an increase of 46%. The increase in store operating costs was directly attributable to 1) the addition of six (6) new locations that were added after June 30, 2019, and 2) two (2) locations added at various times in the quarter ended June 30, 2019 that were open for the entire quarter ended June 30, 2020. The addition of these 8 stores, discussed above, and a new warehouse facility were the primary reasons for the increase in store operating costs. Store operating costs as a percentage of sales were 9.2% for the three months ended June 30, 2020, compared to 14% for the three months ended June 30, 2019, a 34% reduction. Store operating costs were positively impacted by 1) the opening of new and acquired stores throughout 2019 and 2020 which have lower percentage of operating costs to revenues due to their larger size and higher volume, and 2) a 49% increase in same store sales.

 

Corporate overhead, comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $4.8 million for the three months ended June 30, 2020, compared to approximately $1.9 million for the three months ended June 30, 2019. Corporate overhead was 11% of revenue for the three months ended June 30, 2020 and 9.8% for the three months ended June 30, 2019. The increase in corporate overhead as a percentage of revenues for the quarter ended June 30, 2020 was primarily due to the increase in all components of corporate overhead as noted below. The increase in non-cash share based compensation from approximately $391,000 for the quarter ended June 30, 2019 to approximately $1.2 million for the quarter ended June 30, 2020, an increase of approximately $796,000 was primarily the result of several new executive employment agreements which became effective January 1, 2020. The increase in the non-cash share-based compensation in 2020 over 2019 was approximately 1.8% of revenues. The increase in salaries expense from approximately $821,000 in the second quarter of 2019 to $2 million for the second quarter of 2020 was due primarily to the increase in corporate staff to support expanding operations, including purchased store manager integrations, accounting and finance, information systems, purchasing and commercial sales staff. It should be noted that when we consummate a new acquisition, purchasing and back office accounting functions are stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and accounting and finance departments, thus delivering cost savings. Corporate salaries and related payroll costs as a percentage of sales were 4.5% for the three months ended June 30, 2020 compared to 4.2% for the three months ended June 30, 2019. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees insurance, and bad debt expense was approximately $1.2 million for the three months ended June 30, 2020 and approximately $549,000 for the three months ended June 30, 2019, with a majority of the increase related to advertising and promotion, professional and legal fees, insurance and bad debt reserve expense of $180,000. General and administrative costs as a percentage of revenue were 2.6% for the three months ended June 30, 2020, and 2.8% for the three months ended June 30, 2019. As noted earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation, was approximately $1.6 million for the three months ended June 30, 2020, compared to approximately $542,000 for the three months ended June 30, 2019.

 

30

 

 

Net Income

 

Net income for the three months ended June 30, 2020 was approximately $2.6 million, compared to net income of approximately $1.1 million for the three months ended June 30, 2019, a positive change of nearly $1.5 million. The increase in net income for the quarter ended June 30, 2020 was primarily due to the 123% increase in revenues while store operating costs increased only 46%. Net income from store operations which was approximately $7.6 million for the quarter ended June 30, 2020, compared to approximately $3.1 million for the quarter ended June 30, 2019, an increase of 146%. The increase in income from store operations were offset by increased corporate overhead which was approximately $4.8 million for the quarter ended June 30, 2020, compared to approximately $1.9 million for the quarter ended June 30, 2019, an increase of $2.9 million of which non-cash share based compensation and depreciation was approximately $1.1 million of that increase. Increases in G&A and salaries in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 accounted for the remaining increase.

 

Comparison of the six months ended June 30, 2020 and 2019

 

The following table presents certain consolidated statement of operations information and presentation of that data as a dollar and percentage change from year-to-year.

 

    Six Months
Ended
June 30,
2020
    Six Months
Ended
June 30,
2019
    $
Variance
   

%
Variance

 
Net revenue   $ 76,433,345     $ 32,570,605     $ 43,862,740       135 %
Cost of goods sold     55,901,760       23,063,764       32,837,996       142 %
Gross profit     20,531,585       9,506,841       11,024,744       116 %
Store operating costs     7,516,329       4,616,326       2,900,003       63 %
Income from store operations     13,015,256       4,890,515       8,124,741       166 %
Corporate operating expenses     12,322,590       3,366,794       8,955,796       266 %
Operating income     692,666       1,523,721       (831,055 )     -55 %
Other income (expense)     (56,241 )     (232,300 )     176,058          
Net income, before taxes   $ 636,425     $ 1,291,421     $ (654,996 )        
Provision for income taxes     (156,000 )     -       (156,000 )        
Net income   $ 480,425     $ 1,291,421     $ (810,996 )     -63 %

 

Net revenue for the six months ended June 30, 2020 was approximately $76 million, compared to approximately $33 million for the six months ended June 30, 2019 an increase approximately $44 million or 135%. The increase in revenues in 2020 was primarily due to 1) 6 new stores opened or acquired after June 30, 2019 which had revenues of $20 million for the six months ended June 30, 2020 for which there were no revenues for the six months ended June 30, 2019, 2) 7 stores opened or acquired in early 2019, that had revenues of $19 million for the six months ended June 30, 2020 compared to revenues of $7.7 million for the six months ended June 30, 2019, 3) an increase in same store sales of 48% comparing revenues for the six months ended June 30, 2020 to the six months ended June 30, 2019 and 4) an increase in e-commerce sales of $2.8 million or 163% comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. As noted in the chart below, the 14 same stores contributed revenue of $32.7 million for the six months ended June 30, 2020 compared to revenues of $22.1 million for the six months ended June 30, 2019, a 48% increase.

 

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The Company operated the same 14 stores for the entire six months ended June 30, 2020 and 2019: four (4) in Colorado, six (3) in California, three (3) in Michigan, one (1) in Nevada, one (1) in Rhode Island, one (1) in Washington and one (1) in Oklahoma. These same stores generated approximately $32.7 million in revenues for the six months ended June 30, 2020, compared to approximately $22.1 million in revenues for the six months ended June 30, 2019, an increase of 48%, primarily due to an increase in the number of commercial customers in those markets. Same store sales increased in all of the markets, except for Washington, as noted below comparing June 30, 2020 to June 30, 2019. 

 

    14 Same Stores All Markets        
    Six Months
Ended
    Six Months
Ended
             
    June 30,
2020
    June 30,
2019
    Variance     %
Variance
 
Colorado market   $ 6,258,352     $ 4,464,378       1,793,974       40 %
Rhode Island     7,062,487       3,554,572       3,507,915       99 %
Michigan     6,458,619       3,153,654       3,304,965       105 %
Oklahoma     3,398,593       2,895,652       502,941       17 %
California market     7,824,274       6,444,762       1,379,512       21 %
Washington market     665,980       677,540       (11,560 )     -2 %
Nevada market     983,330       939,304       44,026       5 %
Net revenue, all markets   $ 32,651,635     $ 22,129,862     $ 10,521,773       48 %

 

The Company currently continues to focus on ten (10) markets and the new e-commerce site noted below and the growth opportunities that exist in each market. We continue to focus on new store acquisitions and openings, proprietary products and the continued development of our online omni-channel and Amazon revenues.

  

    Sales by Market        
    Six Months Ended
June 30,
2020
    Six Months Ended
June 30,
2019
     Variance      %
Variance
 
Colorado   $ 8,760,926     $ 7,245,611     $ 1,515,315       21 %
California     10,224,433       7,771,180       2,453,253       32 %
Rhode Island     7,062,487       3,554,572       3,507,915       99 %
Michigan     12,587,025       3,153,654       9,433,371       299 %
Nevada     2,145,645       1,819,934       325,711       18 %
Washington     665,980       677,540       (11,560 )     -2 %
Oregon     3,243,158       -       3,243,158       -  
Oklahoma     17,532,932       4,059,518       13,473,414       332 %
Maine     6,689,664       1,563,350       5,126,314       328 %
Florida     3,002,421       -       3,002,421       -  
E-commerce     4,521,032       1,717,632       2,803,400       163 %
Closed/consolidated locations     (2,358 )     1,007,614       (1,009,972 )        
Total revenues   $ 76,433,345     $ 32,570,605     $ 41,059,740       135 %

 

Revenues in the Colorado market increased approximately $1.5 million or 21% comparing the six months ended June 30, 2020 to June 30, 2019. The increase in revenues in the Colorado market is due to 1) the Company’s continued focus on increasing commercial revenues, and 2) the acquisition of a new store in mid-January 2019. Same store revenues in Colorado increased approximately $1.8 million.

 

Revenues in the California market increased approximately $2.5 million, or 32%. Same store revenues in the California market increased approximately $1.4 million or 21% over the same six months in 2019 and the Palm Springs acquisition in mid-February 2019 had revenues of approximately $2.4 million for 2020 compared to $1.3 million for 2019.

 

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Revenues in the Rhode Island market increased approximately $3.5 million or 99% primarily from its increased focus on commercial and multi-state commercial customers.

 

Revenues in the Michigan market increased approximately $9.4 million or 299% due to 1) an acquisition in September 2019 that contributed $5.9 million in revenue in the six months ended June 30, 2020, 2) an acquisition in mid-June 2020 that contributed $227,000 in revenues in the six months ended June 30, 2020, and 3) the increase in same store revenues which increased $3.3 million or 105% primarily due to the increase in commercial accounts.

 

Revenues in the Nevada market increased 18% due to 1) the acquisition of our Reno store in February 2019 which had revenues of $1.2 million in the six months ended June 30, 2020 compared to revenues of 881,000 for the six months ended June 30, 2019, and 2) a 5% increase in same store revenues in the Las Vegas store.

 

Revenues in the Washington market decreased by 2% comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. Washington currently is our smallest market.

 

Revenues in Oregon were approximately $3.2 million and represents a new market from an acquisition in mid-December 2019.

 

Currently we have 4 stores in the Oklahoma market. Revenues in the Oklahoma market increased $13.5 million or 332% comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. Same stores revenues increased 17% in Oklahoma City, the first store opened in October 2018.

 

Revenues in Maine have increased $5.1 million or 328% comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. The increase was primarily due to a new store opened January 31, 2019 and two new stores acquired in May 2019. The new store opened in early 2019 had revenues of $2.2 million in the six months ended June 30, 2020, compared to $560,000 for the six months ended June 30, 2019. The two new stores acquired in May 2019, contributed $4.5 million in revenues for the six months ended June 30, 2020, compared to $1 million for the six months ended June 30, 2019.

 

Florida was a new market resulting from an acquisition in February 2020. Revenues in this market were $3 million for the six months ended June 30, 2020. 

 

Cost of Goods Sold

 

Cost of goods sold for the six months ended June 30, 2020 was approximately $56 million compared to approximately $23 million for the six months ended June 30, 2019 an increase of approximately $33 million or 142%. The increase in cost of goods sold was primarily due to the 135% increase in revenues comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. The increase in cost of goods sold is directly attributable to the increase in the number of stores open during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, as discussed in detail above.

 

Gross profit was approximately $20.5 million for the six months ended June 30, 2020, compared to approximately $9.5 million for the six months ended June 30, 2019, an increase of approximately $11 million or 116%. The increase in cost of goods sold is primarily related to the 135% increase in revenues comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. Gross profit as a percentage of revenues was 26.8% for the six months ended June 30, 2020, compared to 29.2% for the six months ended June 30, 2019. The decrease in the gross profit margin percentage is due to 1) a greater percentage of our sale for the six months ended June 30, 2020 in commercial and e-commerce revenues with lower margins, and 2) in the first quarter of 1 2019 we acquired a significant amount of inventory from a vendor at a substantial discount, sales of this product during the six months ended 2019 accounted for 4% of our overall revenue and high margins, resulting in an 1.1 basis points increase in margin. Commercial and e-commerce accounted for approximately 30% of overall revenues for the six months ended June 30, 2020.

 

33

 

 

Operating Expenses

 

Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $19.8 million for the six months ended June 30, 2020 and approximately $8 million for the six months ended June 30, 2019, an increase of approximately $11.9 million or 149%. The increase in store operating costs was directly attributable to 1) the addition of six (6) new locations that were added after June 30, 2019, and 2) six (6) locations added at various times in the six months ended June 30, 2019 that were open for the entire six months ended June 30, 2020. The addition of these 12 new stores, discussed above, and the new warehouse facility were the primary reasons for the increase in store operating costs. Store operating costs as a percentage of revenues were 9.8% for the six months ended June 30, 2020, compared to 14.2% for the six months ended June 30, 2019, a 31% reduction. Store operating costs were positively impacted by the opening of new and acquired stores throughout 2019 and acquisitions in February and June of 2020 which have lower percentage of operating costs to revenues due to their larger size and higher volume. As noted above, same store revenues increased 48% comparing the six months ended June 30, 2020 to the six months ended June 30, 2019, which also contributed to lowering of the store operating costs as a percentage of revenues.

 

Corporate overhead, comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $12.3 million for the six months ended June 30, 2020, compared to approximately $3.4 million for the six months ended June 30, 2019. Corporate overhead was 16.1% of revenue for the six months ended June 30, 2020 and 10.3% for the six months ended June 30, 2019. The increase in corporate overhead as a percentage of revenues for the six months ended June 30, 2020 was primarily due to the increase in non-cash share base compensation from approximately $522,000 for the six months ended June 30, 2019 to approximately $5.3 million for the six months ended June 30, 2020, an increase of $4.8 million. The increase in non-cash share-based compensation was primarily the result of several new executive employment agreements which became effective January 1, 2020 which resulted in the vesting of common stock and common stock options at the start of the quarter, as well as options issued in 2018 and 2019 for options vesting in 2020. The shares based awards associated with the new executive employment agreements resulted in approximately one-third of the award being recognized as an expense in the first six months of 2020, due to vesting, and the remaining two-thirds on the share-based awards are being recognized over a 24 month period commencing January 2020 and ending December 2021, based on shared based award vesting in future periods. The vesting of these shares and options was significantly higher in the first six months of 2020 than they will be in the periods subsequent to June 30, 2020. The increase in salaries expense from 2019 to 2020 was due primarily to the increase in corporate staff to support expanding operations, including purchased store manager integrations, accounting and finance, information systems, purchasing and commercial revenues staff. It should be noted that when we consummate a new acquisition, purchasing and back office accounting functions are stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and accounting and finance departments, thus delivering cost savings. Corporate salaries and related payroll costs as a percentage of revenues were 4.9% for the six months ended June 30, 2020 compared to 4.4% for the six months ended June 30, 2019. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional fees and insurance, was approximately $2.4 million for the six months ended June 30, 2020 and approximately $1.1 million for the six months ended June 30, 2019, with a majority of the increase related to advertising and promotion, travel and entertainment and legal fees. General and administrative costs as a percentage of revenue were 3.2% for the six months ended June 30, 2020, and 3.5% for the six months ended June 30, 2019. As noted earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation, was approximately $6.2 million for the six months ended June 30, 2020, compared to approximately $813,000 for the six months ended June 30, 2019, an increase of $5.3 million.

 

34

 

 

Net Income

 

Net income for the six months ended June 30, 2020 was approximately $480,000, compared to net income of approximately $1.3 million for the six months ended June 30, 2019, a change of approximately $(811,000). Net income from store operations which was approximately $13 million for the six months ended June 30, 2020, compared to approximately $4.9 million for the six months ended June 30, 2019.

 

The net income for the six months ended June 30, 2020 was primarily due to the 1) a 135% increase in revenues, 2) a 166% in income from store operations, offset by 3) an increase in share-based compensation from approximately $522,000 in 2019 to $5.3 million for the six months ended June 30, 2020, and 4) income tax expense of $156,000. The total of non-cash expense, share-based compensation and depreciation was $6.1 million for the six months ended June 30, 2020 compared to $813,000 for the six months ended June 30, 2019.

 

Operating Activities

 

Net cash provided by operating activities for six months ended June 30, 2020 was approximately $6.1 million compared to net cash used by operating activities of approximately $860,000 for six months ended June 30, 2019. Cash used in operating activities is driven by our net income and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets, share based compensation expense and amortization of debt discount. Non-cash adjustments totaled approximately $6.3 million and approximately $1.1 million for the six months ended June 30, 2020 and 2019, respectively, so non-cash adjustments had a far greater positive impact on net cash provided by operating activities for the six months ended June 30, 2020 than the same period in 2019. The net cash provided by operating activities, $6.1 million, for the six months ended June 30, 2020 compared to the net cash used in operating activities, $(860,000) for six months ended June 30, 2019, a positive difference of $7 million, was primarily related to1) the net income of approximately $636,000 for the six months ended June 30, 2020, 2) net increases in inventory and prepaids of approximately $8.8 million offset by 3) positive non-cash adjustments of approximately $6.3 million and 4) increases in accounts payable, customer deposits and other current liabilities of approximately $7.5 million.

 

Net cash used in operating activities for the six months ended June 30, 2019 was approximately $860,000. This amount was primarily related to 1) net income of approximately $1.3 million, 2) positive non-cash adjustments of approximately $1.1 million, 3) increase in accounts payable and other current liabilities of approximately $1.5 million offset by 4) increases of inventory of approximately $3 million, accounts receivable of approximately $558,000 and prepaids of approximately $1.1 million.

 

Net cash used in investing activities was approximately $5 million for the six months ended June 30, 2020 and approximately $8.8 million for the six months ended June 30, 2019. Investing activities in 2020 were primarily attributable to a store acquisition ($3 million) and vehicles, store equipment purchases ($1.3 million) and intangible assets $(.7 million). Investing activities in for the six months ended June 30, 2019 were primarily related to store acquisitions for which we paid approximately $7.6 million and the purchase of vehicles and store equipment to support new store operations of approximately $1.1 million. 

 

Net cash provided by financing activities for the six months ended June 30, 2020 was approximately $745,000 and was primarily attributable to proceeds from the exercise of warrants of approximately $792,000, offset by debt principal payments of approximately $47,000. Net cash used in financing activities for six months ended June 30, 2019 was $12.9 million and was primarily from proceeds from the sale of common stock and exercise of warrants of $13.1 million, offset by debt principal payments of approximately $229,000.

 

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Use of Non-GAAP Financial Information

 

The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.

 

Set forth below is a reconciliation of Adjusted EBITDA to net income (loss):

 

    Three Months Ended  
    June 30,
2020
    June 30,
2019
 
Net income   $ 2,573,943     $ 1,062,000  
Income taxes     156,000       -  
Interest     13,240       3,161  
Depreciation and Amortization     467,677       150,842  
EBITDA     3,210,860       1,216,003  
Share based compensation (option compensation, warrant compensation, stock issued for services)     1,186,905       390,898  
Bad debt reserve allowance     194,680       -  
Amortization of debt discount     -       117,150  
                 
Adjusted EBITDA   $ 4,592,445     $ 1,724,051  
                 
Adjusted EBITDA per share, basic   $ .12     $ .06  
Adjusted EBITDA per share, diluted   $ .11     $ .05  

 

    Six Months Ended  
    June 30,
2020
    June 30,
2019
 
Net income   $ 480,425     $ 1,291,421  
Income taxes     156,000       -  
Interest     20,421       8,690  
Depreciation and Amortization     826,820       291,132  
EBITDA     1,483,666       1,591,243  
Share based compensation (option compensation, warrant compensation, stock issued for services)     5,301,972       522,243  
Bad debt reserve allowance     194,680       -  
Amortization of debt discount     -       242,096  
                 
Adjusted EBITDA   $ 6,980,318     $ 2,355,582  
                 
Adjusted EBITDA per share, basic   $ .18     $ .08  
Adjusted EBITDA per share, diluted   $ .17     $ .08  

 

36

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2020, we had working capital of approximately $35.2 million, compared to working capital of approximately $30.6 million as of December 31, 2019, an increase of approximately $4.6 million. The increase in working capital from December 31, 2019 to June 30, 2020 was due primarily to 1) proceeds from the exercise of warrants totaling approximately $792,000 during the six months ended June 30, 2020 and 2) the increase in net cash provided by operations. At June 30, 2020, we had cash and cash equivalents of approximately $14.8 million. Currently, we have no demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth and acquisitions. Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings. We believe that some of our store acquisitions and new store openings can come from cash flow from operations.

 

We anticipate that we may need additional financing in the future to continue to acquire and open new stores and related businesses. To date we have financed our operations through the issuance and sale of common stock, convertible notes and warrants.

 

Financing Activities

 

2020 Public Offering

 

On July 2, 2020 the Company consummated an underwritten public offering of 8,625,000 shares of its common stock (the “Shares”), which included the exercise in full of the underwriters’ option to purchase an additional 1,125,000 shares of common stock to cover over-allotments. The Shares were sold at a public offering price of $5.60 per share, generating gross proceeds of $48.3 million, before deducting the underwriting discounts and commissions and other offering expenses. Net proceeds from the sales of common stock, net of all offering costs and expenses was approximately $44.6 million.

 

2019 Private Placement

 

On June 26, 2019, the Company completed a private placement of a total of 4,123,257 units of the Company’s securities at the price of $3.10 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Each unit consisted of (i) one share of common stock and (ii) one 3-year warrant, each entitling the holder to purchase one half share of common stock, at a price of $3.50 per share. The Company raised a total of $12,782,099 from 19 accredited investors. 

 

2018 Private Placement

 

On January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000 per unit. Each unit consists of (i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of common stock, at a price of $.01 per share or through cashless exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering. 

 

On May 9, 2018, the Company completed a private placement of a total of 33.33 units of its securities at a price of $300,000 per unit to 3 accredited investors. Each unit consists of (i) 100,000 share of the Company’s common stock and (ii) 50,000 3-year warrant to purchase one share of common stock at an exercise price of $.35 per share. The Company raised an aggregate of $10,000,000 gross proceeds in the offering.

 

2017 Private Placements

 

On March 10, 2017, the Company completed 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 16, 2017, the Company completed a private placement of a total of 1,000,000 units of its securities to 27 accredited investors through GVC Capital LLC (“GVC Capital”) as its placement agent. Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common stock at an exercise price of $2.75 per share. The Company raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital total compensation for its services, (i) for a price of $100, 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75 per share, (ii) a cash fee of $150,000, (iii) a non-accountable expense allowance of $60,000, and (iv) a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants (not including 250,000 warrants issued to one investor) when they are exercised.

 

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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; 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 $465,420 and $291,372 has been reserved as of June 30, 2020 and December 31, 2019, respectively.

 

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 June 30, 2020, and December 31, 2019, 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.

 

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 June 30, 2020 and December 31, 2019.

 

Revenue Recognition

 

Revenue on product revenues is recognized upon delivery or shipment. Customer deposits and lay away revenues 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.

 

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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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Management maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2020.

 

Based upon this evaluation, management concluded that our disclosure controls and procedures were not effective due to a deficiency in our internal control over financial reporting. The deficiency relates to proper accounting and valuation of equity instruments recorded within share-based compensation expense.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that a reasonable possibility exists that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The deficiency described above constitutes a material weakness given its potential impact on our financial reporting and internal control over financial reporting.

 

Management has evaluated remediation plans for the deficiency and has implemented changes to address the material weakness identified.

 

However, remedial controls must operate for a sufficient period of time for a definitive conclusion, through testing, that the deficiency has been fully remediated and, as such, we can give no assurance that the measures we have undertaken have fully remediated the material weakness that we have identified. We will continue to monitor the effectiveness of these and other processes, procedures, and controls and will make any further changes that management determines to be appropriate.

 

Notwithstanding the material weakness described above, management has concluded that our consolidated financial statements included in the Quarterly Report on Form 10-Q for the three-month period ended June 30, 2020 are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented and that these financial statements may be relied upon.

 

Changes in Internal Controls over Financial Reporting

 

As of the end of the period covered by this report, other than as described below, there have been no changes in the internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to the date of management’s last evaluation. Management has implemented additional controls to address and remediate the material weakness identified as discussed above.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

40

 

  

Item 6. Exhibits

 

The following exhibits are included and filed with this report.

 

Exhibit   Exhibit Description
3.1   Certificate of Incorporation of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed on November 9, 2015)
3.2   Bylaws of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 as filed on November 9, 2015)
31.1   Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
31.2   Rule 13a-14(a)/15d-14(a) certification of principal financial and accounting officer
32.1   Section 1350 certification of Chief Executive Officer*
32.2   Section 1350 certification of principal financial and accounting officer*
101   Interactive Data Files
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Definition

 

  * Furnished and not filed.

  

41

 

   

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on August 13, 2020.

 

  GrowGeneration Corporation
     
  By: /s/ Darren Lampert
    Darren Lampert, Chief Executive Officer
(Principal Executive Officer)
     
  By: /s/ Monty Lamirato
    Monty Lamirato, Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer) 

 

 

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