NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
GrowGeneration
Corp (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of Easylife Corp and changed its
name to GrowGeneration Corp. It maintains its principal office in Denver, Colorado.
GrowGeneration
Corp is engaged in the business of operating retail hydroponic stores through its wholly owned subsidiaries, GrowGeneration Pueblo
Corp, GrowGeneration California Corp, Grow Generation Nevada Corp and Ggen Distribution Corp. The company commenced operations
with the purchase of 4 retail hydroponic stores in Pueblo and Canon City, Colorado on May 30, 2014. The Company, currently owns
and operates a total of 12 stores and is actively engaged in seeking to acquire additional hydroponic retail stores.
Subsequent
Events
The
Company has evaluated events and transactions occurring subsequent to December 31, 2016, for items that should potentially be
recognized or disclosed in these consolidated financial statements. The evaluation was conducted through March 27, 2017, the date
these consolidated financial statements were issued.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation and Consolidation
The
Company’s financial statements are prepared on the accrual method of accounting. The accounting and reporting policies of
the Company conform with generally accepted accounting principles (GAAP). The consolidated financial statements of the Company
include the accounts of GrowGeneration Pueblo Corp, Grow Generation California Corp, Grow Generation Nevada Corp, and Ggen Distribution
Corp. Intercompany balances and transactions are eliminated in consolidation. Management makes significant operating decisions based upon the analysis of the entire Company and financial
performance is evaluated on a company-wide basis. Accordingly, the various products sold are aggregated into one reportable operating
segment as under guidance in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC or codification”) Topic 280 for segment reporting.
Use
of Estimates
Management
uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.
These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual
results could vary from the estimates that were used.
Revenue
Recognition
Revenue
on product sales is recognized upon delivery or shipment. Customer deposits/layaway sales are not reported as income unit final
payment is received and the merchandise is delivered.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Accounts
Receivable
Accounts
receivable are stated at the amount the Company expects to collect from balances outstanding at year-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 December 31, 2016 and 2015, the Company established
an allowance for doubtful accounts of $47,829 and $6,500, respectively.
Property
and Equipment
Expenditures
for maintenance and repairs are charged against operations. Renewals and betterment that materially extend the life of the asset
are capitalized. Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes
at rates based on the following estimated useful lives:
|
|
Estimated
Lives
|
|
Vehicle
|
5 years
|
|
Furniture and fixtures
|
5-7 years
|
|
Computers and equipment
|
3-5 years
|
|
Leasehold improvements
|
10 years
|
For
federal income tax purposes, depreciation is computed using the accelerated cost recovery system and the modified accelerated
cost recovery system.
Fair
Value of Financial Instruments
The
fair value of certain of our financial instruments including cash and cash equivalents, accounts receivable, prepaid assets, employee
advances, accounts payable, customer deposits, payroll and payroll tax liabilities, sales tax payable and notes payable approximate
their carrying amounts because of the short-term maturity of these instruments.
Income
Taxes
The
Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred income
taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences
relate principally to depreciation of property and equipment, reserve for obsolete inventory and bad debt. Deferred tax assets
and liabilities represent the future tax consequence for those differences, which will either be deductible or taxable when the
assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to
offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be
realized.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
2.
|
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 de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and
liabilities, and accounting for interest and penalties associated with tax positions. The Company’s tax returns are subject
to tax examinations by U.S. federal and state authorities until respective statute of limitation. Currently, the 2016, 2015, and
2014 tax years are open and subject to examination by taxing authorities. However, the Company is not currently under audit nor
has the Company been contacted by any of the taxing authorities. The Company does not have any accruals for uncertain tax positions
as of December 31, 2016. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within
12 months of the reporting date.
Presentation
of Sales Taxes
The
Company is required to collect sales tax for the State of Colorado, State of California, City of Pueblo, City of Canon City, City
of Colorado Springs, Pueblo County, Fremont County, Jefferson County, El Paso County, City & County of Denver, and City of
Santa Rosa; ranging from 3.9% to 8.25% on the Company's sales to nonexempt customers. The Company collects that sales tax from
customers and remits the entire amount to the corresponding taxing authorities. The Company's accounting policy is to exclude
the tax collected and remitted from revenue and cost of sales.
Advertising
The
Company expenses all advertising and promotional costs when incurred. Advertising and promotional expenses for the years ended
December 31, 2016 and 2015 amounted to $107,744 and $51,332, respectively.
Freight
and Shipping
It
is the Company's policy to classify freight and shipping costs as part of cost of sales. Total freight and shipping costs for
the years ended December 31, 2016 and 2015 was $66,856 and $35,836, respectively.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all unrestricted highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Concentration
of Risk
Financial
instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable,
which are generally not collateralized. Our policy is to place our cash and cash equivalents with high quality financial institutions,
in order to limit the amount of credit exposure. Accounts at each institution are insured by the Federal Deposit Insurance Corporation
(FDIC), up to $250,000. At December 31, 2016 and 2015, the Company had $8,332 and $-0-, respectively, in excess of the FDIC insurance
limit. The Company generally does not require collateral from its customers, but its credit extension and collection policies
include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively
pursuing delinquent accounts. The Company maintains allowance for potential credit losses. A significant portion of the Company’s
revenues are derived from the sales of products to the purveyors of cannabis products and services.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Goodwill
Goodwill
represents the excess of acquisition costs over the fair value of net tangible and intangible assets acquired in connection with
an acquisition. The Company accounts for goodwill in accordance with the provisions of FASB Accounting Standards Update (ASU)
2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. In accordance with FASB ASC Topic 350 for
Intangibles – Goodwill and Other, goodwill is not amortized but is reviewed for potential impairment on an annual basis,
or if events or circumstances indicate a potential impairment, at the reporting unit level. The Company’s review for impairment
includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying value, including goodwill. If it is determined that it is more likely than not that the fair value
of a reporting unit is less than its carrying value, including goodwill, the first step of the two-step quantitative goodwill
impairment test is performed, which compares the fair value of the reporting unit with its carrying amounts, including goodwill.
If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.
However, if the carrying amount of the reporting unit exceeds its fair value, an additional procedures must be performed. That
additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The carrying
value of goodwill is tested for impairment annually or more frequently if circumstances indicate that impairment may have occurred.
Inventory
Inventory
consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or market.
Earnings
(Loss) Per Share
The
Company computes net earnings (loss) per share under Accounting Standards Codification subtopic 260-10, “Earnings Per Share”
(“ASC 260-10”). Basic earnings or loss per share (“EPS”) is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by
dividing net income (loss) by the weighted-average of all potentially dilutive shares of common stock that were outstanding during
the periods presented.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
The
treasury stock method is used in calculating diluted EPS for potentially dilutive stock options and share purchase warrants, which
assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants, would be used
to purchase common shares at the average market price for the period.
Stock
Based Compensation
The
Company accounts for stock-based compensation issued to employees, and where appropriate, non-employees, at fair value. Under
fair value provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense over the appropriate vesting period using the straight-line method. The amount of stock-based compensation
recognized at any date must at least equal the portion of the grant date fair value of the award that is vested at that date and
as a result it may be necessary to recognize the expense using a ratable method. Determining the fair value of stock-based awards
at the date of grant requires judgment, including estimating the expected term of the stock options and the expected volatility
of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected
to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could
have a material effect on the Company’s consolidated financial statements.
|
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This
additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides
clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications,
(ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also
specifies when a contract should be considered “completed” for purposes of applying the transition guidance. The effective
date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance
previously issued in 2014, which is effective for interim and annual periods beginning on or after December 15, 2017. The Company
has not yet determined the impact that this new guidance will have on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments in this update change existing guidance related to accounting for employee share-based payments
affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the
statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of
the adoption of this standard.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS (Continued)
|
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December
15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is currently
evaluating the potential impact of the adoption of this standard.
In
January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments
in this update revise the accounting related to the classification and measurement of investments in equity securities and the
presentation of certain fair value changes for financial liabilities measured at fair value. The amendments are effective for
annual reporting periods after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted.
The Company is currently evaluating the potential impact of the adoption of this standard.
In
April 2015, the FASB issued ASU 2015-03, Interest- Imputation of Interest (Subtopic 835-30). This guidance is to simplify the
presentation of debt issuance costs by recognizing a debt liability in the balance sheet as a direct deduction from that debt
liability consistent with the presentation of a debt discount. The amendments in this update are effective for financial statements
issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company has adopted
this standard and the adoption did not have a material impact on the Company’s financial position.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern
within one year after the date that the financial statements are issued (or within one year after the date that the financial
statements are available to be issued when applicable) and to provide related footnote disclosures. The ASU provides guidance
to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and
content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The ASU is effective
for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016,
which for the Company is April 1, 2017. Early adoption is permitted. The adoption of this standard will not have a material impact
on the Company’s financial position or results of operations. The amendments also clarify that the guidance in Topic 275,
Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. The central feature of
the guidance on disclosure requirements is that required disclosures are limited to matters significant to a particular entity.
The disclosures focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial
statements in the near term or the near-term functioning of the reporting entity.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS (Continued)
|
Other
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.
|
4.
|
PREMISES
AND EQUIPMENT
|
Premises
and equipment at December 31, 2016 and 2015 consists of the following:
|
|
|
December
31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Vehicle
|
|
$
|
102,014
|
|
|
$
|
32,191
|
|
|
Leasehold
improvements
|
|
|
131,411
|
|
|
|
55,297
|
|
|
Furniture,
fixtures and equipment
|
|
|
389.396
|
|
|
|
203,753
|
|
|
|
|
|
622,821
|
|
|
|
291,241
|
|
|
Accumulated
depreciation
|
|
|
(72,967
|
)
|
|
|
(20,005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
549,854
|
|
|
$
|
271,236
|
|
Depreciation
expense amounted to $52,962 and $16,436 for the years ended December 31, 2016 and 2015. respectively.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
The
Company is subject to federal and state income taxes.
The
Company and subsidiaries file a consolidated federal income tax return. The Company’s consolidated provision for income
taxes for the years ended December 31, 2016 and 2015 consists of the following:
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Income Tax Expense (benefit)
|
|
|
|
|
|
|
|
Current federal tax expense
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
State
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Deferred
tax (benefit)
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
State
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Total
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
The
consolidated provision for income taxes for the years ended December 31, 2016 and 2015 differs from that computed by applying
federal statutory rates to income before federal income tax expense, as indicated in the following analysis:
|
|
|
Year
Ended
|
|
|
Year
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Expected
federal tax
provision (benefit) at 35%
rate
|
|
$
|
(150,935
|
)
|
|
$
|
(185,065
|
)
|
|
Surtax
exemption
|
|
|
21,562
|
|
|
|
26,438
|
|
|
Meals
and entertainment
|
|
|
6,416
|
|
|
|
2,724
|
|
|
Valuation
allowance
|
|
|
(19,967
|
)
|
|
|
171,493
|
|
|
State
income tax
|
|
|
142,924
|
|
|
|
(15,590
|
)
|
|
Total
income tax
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
A
summary of deferred tax assets and liabilities as of December 31, 2016 and 2015 is as follows:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Reserve for inventory obsolescence
|
|
$
|
15,930
|
|
|
$
|
18,008
|
|
|
Reserve for bad debt
|
|
|
16,563
|
|
|
|
2,251
|
|
|
Stock option compensation
|
|
|
172,797
|
|
|
|
108,963
|
|
|
Federal tax loss carryforward
|
|
|
258,219
|
|
|
|
135,562
|
|
|
State tax loss carryforward
|
|
|
39,852
|
|
|
|
20,923
|
|
|
Less valuation allowance
|
|
|
(398,676
|
)
|
|
|
(235,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Asset
|
|
|
104,685
|
|
|
|
50,164
|
|
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
5.
|
INCOME
TAXES (Continued)
|
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
(104,685
|
)
|
|
|
(50,164
|
)
|
|
Total
deferred tax liabilities
|
|
|
(104,685
|
)
|
|
|
(50,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
DEFERRED TAX
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
As
of December 31, 2016, the Company had $860,730 federal and state net operating loss carryforwards, which results in a Federal
and State deferred tax asset of $298,071, expiring in 2034, 2035 and 2036.
Management
assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use
the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred
since inception. Such objective evidence limits the ability to consider other subjective evidence such as our projections for
future growth.
On
the basis of this evaluation, as of December 31, 2016, a valuation allowance of $398,676 has been recorded to record only the
portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered
realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased
or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to
subjective evidence such as our projections for growth.
Long-term
debt is as follows:
|
|
|
December 31,
2016
|
|
|
8.0%, Hitachi
Capital, payable $631.13 monthly beginning September 2015 through August 2019, secured by delivery equipment with a book value
of $26,059
|
|
$
|
18,133
|
|
|
|
|
|
|
|
|
3.5%,
Wells Fargo Equipment Finance, payable $518.96 monthly beginning April 2016 through March 2021, secured by warehouse equipment
with a book value of $26,150
|
|
|
24,559
|
|
|
|
|
|
|
|
|
10.926%,
RMT Equipment, payable $1,154.79 monthly beginning June 2016 through October 2018, secured by delivery equipment with a book
value of $33,076
|
|
|
22,477
|
|
|
|
|
$
|
65,169
|
|
|
|
|
|
|
|
|
Less
Current Maturities
|
|
|
(23,443
|
)
|
|
Total
Long-Term Debt
|
|
$
|
41,726
|
|
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
6.
|
LONG-TERM
DEBT (Continued)
|
Future
Debt Maturities – A schedule of expected debt payments and the portion allocated to principal follows:
|
|
|
Total
|
|
|
Allocated
to
|
|
|
Year
Ending
December
31
|
|
Payment
|
|
|
Principal
|
|
|
2017
|
|
$
|
27,779
|
|
|
$
|
23,443
|
|
|
2018
|
|
|
24,634
|
|
|
|
23,369
|
|
|
2019
|
|
|
11,277
|
|
|
|
10,750
|
|
|
2020
|
|
|
6,228
|
|
|
|
6,058
|
|
|
2021
|
|
|
1,558
|
|
|
|
1,549
|
|
|
|
|
$
|
71,476
|
|
|
$
|
65,169
|
|
Interest expense for the years
ended December 31, 2016 and 2015 was $5,251 and $2,916, respectively.
On March 6, 2014, the Company’s
Board of Directors (the “Board”) approved the 2014 Equity Incentive stock plan pursuant to which the Company may grant
incentive and non-statutory options to employees, nonemployee members of the Board, consultants and other independent advisors
who provide services to the Corporation. The maximum shares of common stock which may be issued over the term of the plan shall
not exceed 2,500,000 shares. Awards under this plan are made by the Board or a committee of the Board. Options under the plan are
to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s
common stock which is required to be issued at a price not less than 110% of the fair market value on the day of the grant. Each
option is exercisable at such time or times, during such period and for such numbers of shares shall be determined by the Plan
Administrator. However, no option shall have a term in excess of 5 years from the date of grant.
On
March 6, 2014, the Company issued 650,000 options to its CEO, Darren Lampert, issued 400,000 options to its CFO, Irwin Lampert,
issued 400,000 options to its President, Michael Salaman and issued 200,000 options to its COO, Jason Dawson exercisable at prices
between $.60 and $.66 per share. On May 12, 2014, the Company issued 50,000 options to its director, Jody Kane and on May 14,
2014, the Company issued 50,000 options to its director, Steve Aiello, exercisable at prices between $.60 and $.66 per share.
On July 7, 2014, the Company issued 100,000 options to 8 of its employees, exercisable at prices between $.60 and $.66 per share.
On April 15, 2015 the Company issued 10,000 options to sales consultant, Duane Nunez and on October 8, 2015 it issued 25,000 options
to sales consultant Troy Sower. The options vest 1/3 immediately, 1/3 one year after date of issuance and 1/3 two years after
date of issuance. The options vest over a three year period. Compensation expense recorded for the year ended December 31, 2016
was $86,333.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
7.
|
STOCK
OPTIONS (Continued)
|
Each
stock option award is estimated as of the date of grant using a Black-Scholes Merton option valuation model that uses the assumptions
noted in the table below. To address the lack of historical volatility data for the Company, expected volatility is based on the
volatilities of peer companies. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve
in effect at the time of grant.
As
of December 31, 2016, there were 1,872,000 options issued and outstanding under the plan.
|
Expected volatility
|
|
|
141.26
|
%
|
|
Expected dividends
|
|
|
-0-
|
|
|
Expected term
|
|
|
3 years
|
|
|
Risk-free rate
|
|
|
2.0
|
%
|
A
summary of option activity as of December 31, 2016:
|
Options
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Term
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
1,885,000
|
|
|
$
|
.62
|
|
|
3 years
|
|
Granted
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
Exercised
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
Forfeited or expired
|
|
|
(13,000
|
)
|
|
|
-0-
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,872,000
|
|
|
|
.62
|
|
|
3 years
|
A
summary of the status of the Company’s nonvested shares as of December 31, 2016 and changes during the period then ended
is presented below:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
Nonvested shares
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2015
|
|
|
1,233,333
|
|
|
|
0.14
|
|
|
Granted
|
|
|
35,000
|
|
|
|
0.14
|
|
|
Vested
|
|
|
(628,334
|
)
|
|
|
0.14
|
|
|
Forfeited
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2016
|
|
|
639,999
|
|
|
|
0.14
|
|
|
Granted
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Vested
|
|
|
(626,999
|
)
|
|
|
0.14
|
|
|
Forfeited
|
|
|
(13,000
|
)
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
|
-0-
|
|
|
|
0.14
|
|
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
|
8.
|
STOCK
PURCHASE WARRANTS
|
As
of December 31, 2016, the Company granted 2,585,000 warrants to investors in a private placement of common shares. 50,000 warrants
were issued to “Placement Agents” for private placement of common stock. These warrants are exercisable for a period
of five years with an exercise price of $.70.
A
summary of the status of the Company’s outstanding stock warrants as of December 31, 2016 is as follows:
|
|
|
Weighted
|
|
|
Shares
Exercise
|
|
|
|
|
Average
|
|
|
Price
|
|
|
Outstanding
January 1, 2016
|
|
|
2,607,801
|
|
|
$
|
.70
|
|
|
Granted
|
|
|
2,635,000
|
|
|
|
.70
|
|
|
Exercised
|
|
|
(1,357,072
|
)
|
|
|
.70
|
|
|
Forfeited
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Outstanding
December 31, 2016
|
|
|
3,885,729
|
|
|
$
|
.70
|
|
As
of March 27, 2017, there were a total of 3,167,157 warrants issued and outstanding.
Common
Stock
The
Company’s current Certificate of Incorporation authorizes it to issue 100,000,000 shares of common stock, par value $0.001
per share. As of December 31, 2016, there were 11,742,834 shares of common stock outstanding. The number of shares of common stock
outstanding as of December 31, 2016 does not include (i) 3,885,729 shares of common stock issuable upon the exercise of warrants;
(ii) shares of our common stock issuable upon the exercise of 1,872,000 outstanding stock options.
As
of March 27, 2017, there were a total of 12,561,406 shares of common stock issued and outstanding.
The
following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings
per share computation for years ended December 31, 2016 and 2015.
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(431,244
|
)
|
|
$
|
(528,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average share outstanding basic
|
|
|
9,153,053
|
|
|
|
6,563,271
|
|
|
Effect of dilutive common stock equivalents
Adjusted weighted average shares outstanding – dilutive
|
|
|
9,153,053
|
|
|
|
6,563,271
|
|
|
Basic (loss) per share
|
|
$
|
(.05
|
)
|
|
$
|
(.08
|
)
|
|
Dilutive (loss) per share
|
|
$
|
(.05
|
)
|
|
$
|
(.08
|
)
|
The
effect of 1,872,000 stock options and 3,885,729 of warrants outstanding as of December 31, 2016 is antidilutive and therefore
not presented in the above table.
The
Company leases its store facilities under operating leases ranging from $900 to $5,600 per month. The following is a schedule
of future minimum rental payments required under the terms of the operating leases as of December 31, 2016:
|
Year Ending December 31
|
|
Amount
|
|
|
2017
|
|
$
|
476,182
|
|
|
2018
|
|
|
479,089
|
|
|
2019
|
|
|
437,745
|
|
|
2020
|
|
|
369,841
|
|
|
2021
|
|
|
332,937
|
|
|
Thereafter
|
|
|
81,162
|
|
|
|
|
$
|
2,176,956
|
|
Rent
expense under all operating leases for the year ended December 31, 2016 and 2015 was $306,115 and $105,269, respectively.
In
May 2014, the Company entered into employment agreements with its CEO and President of the Company. The agreements require payment
of monthly wages and benefits. These agreements expire May 2017.
GrowGeneration
Corp. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 and 2015
On
January 30, 2017, the Company entered into a commercial lease to rent certain premises located in Trinidad, Colorado, to be effective
from March 1, 2017 to February 28, 2022. This 7,383 square feet premises is used by the Company to open a new store to replace
and consolidate its existing 3,000 square feet store in Trinidad as part of the Company’s expansion plan.
On
February 1, 2017, the Company entered into a commercial lease to rent certain 12,837 square feet premises located in Denver, Colorado,
to be effective from February 1, 2017 to February 1, 2022. The premises is used by the Company to open a new store and as the
Company’s principal offices.
On
February 1, 2017, the Company’s wholly-owned subsidiary, GrowGeneration California Corp. (“GrowGeneration California”)
entered into an asset purchase agreement (“Asset Purchase Agreement”) with an individual to purchase certain assets
from the seller in connection with a retail hydroponic and garden supply business located in Santa Rosa, CA. The assets subject
to the sale under the Asset Purchase Agreement included inventories, fixed assets, tangible personal property, intangible personal
property, receivables and a custom list. In addition to the cash consideration for the purchase of such assets, GrowGeneration
California also agreed to make certain cash payments and 25,000 shares of common stock of the Company to the seller contingent
on the achievement of revenue goals by the business in 2017, 2018 and 2019. The closing of the asset purchase took place on February
8, 2017. In connection with the purchase of the assets, GrowGeneration California also entered into a commercial lease, to be
effective from March 1, 2017 to February 28, 2022, to rent the premises where the business is located. We closed our existing
store in Santa Rosa and consolidated it with a new store we opened in the new location.
On
March 10, 2017, the Company closed a private placement of a total of 825,000 units of its securities to 4 accredited investors.
Each unit consists of (i) one share of the Company’s common stock and (ii) one 5 year warrant to purchase one share of common
stock at an exercise price of $2.75 per share. The Company raised an aggregate of $1,650,000 gross proceeds in the offering.