ITEM
1. FINANCIAL STATEMENTS
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
8,762,663
|
|
|
$
|
1,215,265
|
|
Accounts receivable, net of allowance for doubtful accounts of $97,829 at March 31, 2018 and December 31, 2017
|
|
|
745,116
|
|
|
|
653,568
|
|
Inventory
|
|
|
6,712,771
|
|
|
|
4,585,341
|
|
Prepaid expenses and other current assets
|
|
|
576,331
|
|
|
|
711,852
|
|
Total current assets
|
|
|
16,796,881
|
|
|
|
7,166,026
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,297,621
|
|
|
|
1,259,483
|
|
Intangible assets, net
|
|
|
60,531
|
|
|
|
53,286
|
|
Goodwill
|
|
|
2,717,785
|
|
|
|
592,500
|
|
Other assets
|
|
|
165,650
|
|
|
|
183,113
|
|
TOTAL ASSETS
|
|
$
|
21,038,468
|
|
|
$
|
9,254,408
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,472,677
|
|
|
$
|
1,067,857
|
|
Other accrued liabilities
|
|
|
507
|
|
|
|
70,029
|
|
Payroll and payroll tax liabilities
|
|
|
155,254
|
|
|
|
247,887
|
|
Customer deposits
|
|
|
456,388
|
|
|
|
92,350
|
|
Sales tax payable
|
|
|
113,396
|
|
|
|
73,220
|
|
Current portion of long term debt
|
|
|
315,271
|
|
|
|
41,707
|
|
Total current liabilities
|
|
|
2,513,493
|
|
|
|
1,593,050
|
|
|
|
|
|
|
|
|
|
|
Long-term convertible debt, net of debt discount and debt issuance costs
|
|
|
4,361,475
|
|
|
|
-
|
|
Long-term debt, net of current portion
|
|
|
319,459
|
|
|
|
82,537
|
|
Total liabilities
|
|
|
7,194,427
|
|
|
|
1,675,587
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock; $.001 par value; 100,000,000 shares authorized; 19,294,270 and 16,846,835 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
|
|
|
19,284
|
|
|
|
16,846
|
|
Additional paid-in capital
|
|
|
18,470,424
|
|
|
|
11,254,212
|
|
Accumulated deficit
|
|
|
(4,645,667
|
)
|
|
|
(3,692,237
|
)
|
Total stockholders’ equity
|
|
|
13,844,041
|
|
|
|
7,578,821
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
21,038,468
|
|
|
$
|
9,254,408
|
|
See
Notes to the Unaudited Consolidated Financial Statements.
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
(Unaudited)
|
|
Three Month Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,381,018
|
|
|
$
|
2,583,925
|
|
Cost of sales
|
|
|
3,191,402
|
|
|
|
1,903,065
|
|
Gross profit
|
|
|
1,189,616
|
|
|
|
680,860
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Store operations
|
|
|
892,858
|
|
|
|
541,902
|
|
General and administrative
|
|
|
363,778
|
|
|
|
187,153
|
|
Share based compensation
|
|
|
216,200
|
|
|
|
77,000
|
|
Depreciation and amortization
|
|
|
45,012
|
|
|
|
20,523
|
|
Salaries and related expenses
|
|
|
331,732
|
|
|
|
136,440
|
|
Total operating expenses
|
|
|
1,849,580
|
|
|
|
963,018
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(659,964
|
)
|
|
|
(282,158
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Other income
|
|
|
31,807
|
|
|
|
-
|
|
Other expense
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
(317,255
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(8,018
|
)
|
|
|
(1,151
|
)
|
Total non-operating expense, net
|
|
|
(293,466
|
)
|
|
|
(1,151
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(953,430
|
)
|
|
$
|
(283,309
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per shares, basic and diluted
|
|
$
|
(.05
|
)
|
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
18,419,519
|
|
|
|
12,115,322
|
|
See
Notes to the Unaudited Consolidated Financial Statements.
GROWGENERATION
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
|
|
For the three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(953,430
|
)
|
|
$
|
(283,309
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
45,011
|
|
|
|
20,522
|
|
Amortization of debt discount
|
|
|
317,255
|
|
|
|
-
|
|
Stock-based compensation expense
|
|
|
216,200
|
|
|
|
77,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(91,548
|
)
|
|
|
(116,347
|
)
|
Inventory
|
|
|
(2,127,430
|
)
|
|
|
(943,002
|
)
|
Prepaid expenses and other assets
|
|
|
54,103
|
|
|
|
(19,687
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
335,298
|
|
|
|
300,960
|
|
Payroll and payroll tax liabilities
|
|
|
15,787
|
|
|
|
20,265
|
|
Customer deposits
|
|
|
364,038
|
|
|
|
(32,332
|
)
|
Sales tax payable
|
|
|
40,176
|
|
|
|
18,942
|
|
Net cash used in operating activities
|
|
|
(1,784,540
|
)
|
|
|
(956,988
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of furniture and equipment
|
|
|
(53,613
|
)
|
|
|
(123,648
|
)
|
Purchase of intangibles
|
|
|
(607,410
|
)
|
|
|
(256,113
|
)
|
Net cash used in investing activities
|
|
|
(661,023
|
)
|
|
|
(379,761
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on long term debt
|
|
|
(82,770
|
)
|
|
|
(5,794
|
)
|
Proceeds from issuance of convertible debt, net of expenses
|
|
|
8,915,573
|
|
|
|
-
|
|
Proceeds from the sale of common stock and exercise of warrants, net of expenses
|
|
|
1,160,158
|
|
|
|
2,060,120
|
|
Net cash provided by financing activities
|
|
|
9,992,961
|
|
|
|
2,054,326
|
|
Net increase in cash
|
|
|
7,547,398
|
|
|
|
717,577
|
|
Cash at the beginning of period
|
|
|
1,215,265
|
|
|
|
606,644
|
|
Cash at the end of period
|
|
$
|
8,762,663
|
|
|
$
|
1,324,221
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
8,018
|
|
|
$
|
1,151
|
|
Common stock issued for accrued payroll
|
|
$
|
108,420
|
|
|
|
-
|
|
Debt converted to equity
|
|
$
|
632,353
|
|
|
|
-
|
|
Warrants issued for debt discount
|
|
$
|
4,239,000
|
|
|
|
-
|
|
Acquisition of vehicles with debt financing
|
|
$
|
29,256
|
|
|
$
|
-
|
|
Assets acquired by issuance of common stock
|
|
$
|
961,400
|
|
|
|
-
|
|
Acquisition of assets with seller financing
|
|
$
|
564,000
|
|
|
|
-
|
|
See
Notes to the Unaudited Consolidated Financial Statements.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
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, GrowGeneration Washington Corp, GrowGeneration Rhode Island
Corp, GrowGeneration Michigan Corp, GGen Distribution Corp and GrowGeneration Management Corp. The Company commenced operations
with the purchase of four retail hydroponic stores in Pueblo and Canon City, Colorado on May 30, 2014. The Company, currently
owns and operates a total of 16 stores and is actively engaged in seeking to acquire additional hydroponic retail stores.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The
financial statements are prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 105-10,
Generally Accepted Accounting Principles
, in accordance with accounting principles generally
accepted in the U.S. (“GAAP”).
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation.
Basis
of Presentation - Unaudited Interim Financial Information
The
accompanying interim condensed consolidated financial statements are unaudited. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all of the normal recurring adjustments necessary to present fairly
the financial position and results of operations as of and for the periods presented. The interim results are not necessarily
indicative of the results to be expected for the full year or any future period.
Certain
information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). The Company believes that the disclosures are adequate to make the interim
information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s
audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed
on March 27, 2018 for the years ended December 31, 2017 and 2016.
Reclassifications
Certain
amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications
had no effect on reported consolidated net income (loss).
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES, continued
|
Segment
Reporting
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 FASBASC Topic 280 for segment reporting.
Use
of Estimates
Management
uses estimates and assumptions in preparing these financial statements in accordance with GAAPs. 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.
Income
Taxes
The
Company accounts for income taxes in accordance with FASB ACS 740, Income Taxes, which requires the recognition of deferred income
taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences
related principally to depreciation of property and equipment, reserve for obsolete inventory and bad debt. Deferred tax assets
and liabilities represent the future tax consequence for those differences, which will either be deductible or taxable when the
assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to
offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be
realized.
The
Company adopted the provisions of FASB ACS 740-10-25, which prescribes a recognition threshold and measurement attribute for the
recognition and measurement of tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides
guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
and accounting for interest and penalties associated with tax positions. The Company’s tax returns are subject to tax examinations
by U.S. federal and state authorities until respective statute of limitation. Currently, the 2016, 2015 and 2014 tax years are
open and subject to examination by taxing authorities. However, the Company is not currently under audit nor has the Company been
contacted by any of the taxing authorities. The Company does not have any accrual for uncertain tax positions as of March 31,
2018. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting
date.
3.
|
RECENTLY
ISSUED OR ADOPTED ACCOUNTING STANDARDS
|
In
May 2014, the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”. The
new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting
standards for specialized transactions and industries. The section is intended to conform revenue accounting principles
with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States
practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information.
The updated guidance was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within
those annual periods. On July 9, 2015, the FASB approved a one-year delay of the effective date. The Company adopted the
new provisions of this accounting standard at the beginning of fiscal year 2018 and its adoption did not have a material impact
on the consolidated financial statements.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
3.
|
RECENTLY
ISSUED OR ADOPTED ACCOUNTING STANDARDS, continued
|
In
July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.”
Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently
exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.”
No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods
beginning after December 15, 2016. This update was adopted by the Company in the first quarter of fiscal year 2017. There was
no material impact on the Company's consolidated financial statements as a result of the adoption of this accounting standard.
In
November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance
eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments
will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those
annual periods. The adoption of this standard did not have a material impact on the consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities
, which requires that (i) all equity investments, other than equity-method investments, in unconsolidated
entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial
liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive
income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be
effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted for certain provisions. The
Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as
whether to adopt certain provisions early.
In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities
for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application
is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make
payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one
of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability,
measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and
liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception
that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions,
the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating
the impact of adopting this guidance.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic
718, Compensation – Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to
how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public entities
for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption
is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.
We adopted this guidance effective January 2, 2017, and the adoption did not have a material effect on our consolidated financial
statements.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
3.
|
RECENTLY
ISSUED OR ADOPTED ACCOUNTING STANDARDS, continued
|
In
January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance
eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment
test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying
amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting
periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates
after January 1, 2017. We are currently evaluating the impact of the new guidance on our goodwill impairment testing process and
consolidated financial statements.
On
August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,” which better aligns risk management
activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance
for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting
for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the
effects of the hedging instrument and the hedged item in the financial statements. The new standard will be effective for the
Company as of January 1, 2019. Early adoption is permitted. We do not believe the adoption of this new standard will have
any impact on our consolidated financial statements and footnote disclosures.
4.
|
PROPERTY
AND EQUIPMENT
|
|
|
|
March 31, 2018
|
|
|
December 31,
2017
|
|
|
Vehicles
|
|
$
|
281,687
|
|
|
$
|
243,264
|
|
|
Leasehold improvements
|
|
|
234,422
|
|
|
|
181,724
|
|
|
Furniture, fixtures and equipment
|
|
|
1,049,650
|
|
|
|
1,057,902
|
|
|
|
|
|
1,565,759
|
|
|
|
1,482,890
|
|
|
(Accumulated depreciation)
|
|
|
(268,138
|
)
|
|
|
(223,407
|
)
|
|
Property and Equipment, net
|
|
$
|
1,297,621
|
|
|
$
|
1,259,483
|
|
Depreciation
expense for the three months ended March 31, 2018 and 2017 was $44,732 and $20,523 respectively.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Long term debt is as follows:
|
|
|
|
|
|
|
|
Chrysler Capital, interest ranging from 9.8% and 10.9% per annum, payable in monthly installments of $1,889.59 beginning May 2017 through June 2022, secured by vehicles with a book value of $128,800
|
|
$
|
76,319
|
|
|
$
|
79,479
|
|
|
|
|
|
|
|
|
|
|
|
|
Hitachi Capital, interest at 8.0% per annum, payable in monthly installments of $631.13 beginning September 2015 through August 2019, secured by delivery equipment with a book value of $24,910
|
|
|
10,112
|
|
|
|
11,781
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
17,711
|
|
|
|
18,641
|
|
|
|
|
|
|
|
|
|
|
|
|
RMT Equipment, interest at 10.9% per annum, payable in monthly installments of $1,154.79 beginning June 2016 through October 2018, secured by delivery equipment with a book value of $31,130
|
|
|
7,317
|
|
|
|
10,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable insurance premium financing, interest at 4.74% per annum, payable in 10 installments of $3,441, due January 2018
|
|
|
27
|
|
|
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued in connection with seller financing of assets acquired, interest at 6%, payable in 24 installments of $24,996, due February 2020
|
|
|
523,244
|
|
|
|
-
|
|
|
|
|
$
|
634,730
|
|
|
$
|
124,244
|
|
|
Less Current Maturities
|
|
|
(315,271
|
)
|
|
|
(41,707
|
)
|
|
Total Long-Term Debt
|
|
$
|
319,459
|
|
|
$
|
82,537
|
|
Interest
expense for the three months ended March 31, 2018 and 2017 was $8,018 and $1,151, respectively.
On
January 12, 2018, the Company completed a private placement (the “Offering”) of a total of 36 units (the “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 (each, a “Note”), and (ii)
a 3-year warrant (each, a “Warrant”) entitling the holder to purchase 37,500 shares of the Company’s common
stock, par value $.001 per share (the “Common Stock”), at a price of $.01 per share or through cashless exercise.
The
convertible debt has 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 the “Conversion Price”).
Principal due and interested accrued on the Note 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.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
6.
|
CONVERTIBLE
DEBT, continued
|
In
relation to this transaction, the Company recorded a debt discount of $4,239,000 related to the fair market value of warrants
issued as noted above. The debt discount, which was based on an imputed interest rate, is being amortized on a straight-line basis
over the life of the convertible debt.
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Convertible debt
|
|
|
7,825,000
|
|
|
|
-
|
|
|
Remaining unamortized debt discount and debt issue costs
|
|
|
(3,463,525
|
)
|
|
|
-
|
|
|
Convertible debt, net of debt discount and debt issue costs
|
|
$
|
4,361,475
|
|
|
|
-
|
|
Amortization
of debt discount for the three months ended March 31, 2018 was $317,225.
7.
|
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.
The
following table presents share-based payment expense and new shares issued for the three months ended March 31, 2018 and 2017.
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Restricted shares issued
|
|
|
|
|
-
|
|
|
Shares based expense from issuance of common stock
|
|
$
|
61,900
|
|
|
$
|
77,000
|
|
|
Shares based expense from issuance of common stock options
|
|
$
|
77,050
|
|
|
|
-
|
|
|
Subtotal shares issued for services and options issued
|
|
$
|
138,950
|
|
|
$
|
77,000
|
|
|
Warrants issued for services
|
|
|
77,250
|
|
|
|
-
|
|
|
Total non-cash compensation
|
|
$
|
216,200
|
|
|
$
|
77,000
|
|
On
March 6, 2014, the Company’s Board of Directors (the “Board”) and majority stockholders approved the 2014 Equity
Incentive Plan (the “2014 Plan”) pursuant to which the Company may grant incentive and non-statutory options to employees,
nonemployee members of the Board, consultants and other independent advisors who provide services to the Company. The maximum
shares of Common Stock which may be issued over the term of the 201 Plan shall not exceed 2,500,000 shares. Awards under the 2014
Plan are made 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. However, no option shall have a term in excess of
5 years from the date of grant.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
7.
|
SHARE
BASED PAYMENTS AND STOCK OPTIONS, continued
|
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. 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.
The
Board may delegate authority to the chief executive officer and/or other executive officers to grant options and other awards
to employees (other than themselves), subject to applicable law and the 2018 Plan. 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. The maximum shares of common stock which may be issued over the term of the plan shall not exceed 2,500,000 shares. Options
granted under the 2018 Plan may be either “incentive stock options” that are intended to meet the requirements of
Section 422 of 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 ten-percent stockholder). No option may be exercisable
for more than ten years (five years in the case of an incentive stock option granted to a ten-percent stockholder) from the date
of grant.
Options
outstanding at March 31, 2018 are as follows:
|
Options
|
|
Shares
|
|
|
Weight - Average Exercise Price
|
|
|
Weighted - Average Remaining Contractual Term
|
|
Weighted - Average Grant Date Fair Value
|
|
|
Outstanding at December 31, 2017
|
|
|
2,622,000
|
|
|
$
|
.99
|
|
|
2.35 years
|
|
$
|
.32
|
|
|
Granted
|
|
|
105,000
|
|
|
$
|
3.48
|
|
|
|
|
$
|
1.89
|
|
|
Exercised
|
|
|
(118,333
|
)
|
|
$
|
.69
|
|
|
|
|
$
|
.11
|
|
|
Forfeited or expired
|
|
|
(116,667
|
)
|
|
$
|
.77
|
|
|
|
|
$
|
.17
|
|
|
Outstanding at March 31, 2018
|
|
|
2,492,000
|
|
|
$
|
1.12
|
|
|
2.28 years
|
|
$
|
.40
|
|
|
Options vested at March 31, 2018
|
|
|
1,863,998
|
|
|
$
|
.82
|
|
|
1.56 years
|
|
$
|
.20
|
|
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
8.
|
STOCK
PURCHASE WARRANTS
|
A
summary of the status of the Company’s outstanding stock warrants as of March 31, 2018 is as follows:
|
|
|
Warrants
|
|
|
Weighted - Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
3,605,728
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(1,286,728
|
)
|
|
$
|
.84
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at March 31, 2018
|
|
|
2,319,000
|
|
|
$
|
2.34
|
|
The
Company’s current Certificate of Incorporation authorizes the Company to issued 100,000,000 shares of Common Stock. As of
March 31, 2018, there were 19,284,270 shares of Common Stock outstanding.
2018
Equity Transactions
During
the quarter ended March 31, 2018, the Company issued 1,446,433 shares of Common Stock upon exercise of common stock warrants.
During
the quarter ended March 31, 2018, the Company issued 455,000 shares of Common Stock valued at approximately $941,000 in connection
with assets acquired in business combinations.
During
the quarter ended March 31, 2018, the Company issued 391,668 shares of Common Stock upon conversion of $1,175,000 in convertible
debt at $3.00 per share.
During
the quarter ended March 31, 2018, the Company issued 118,334 shares of Common Stock upon the exercise of common stock options.
During
the quarter ended March 31, 2018, the Company issued 26,000 share of Common Stock, valued at approximately $108,000, for employee
bonuses accrued at December 31, 2017.
2017
Equity Transactions
During
the quarter ended March 31, 2017, the Company sold 825,000 shares of Common Stock in a private placement receiving net proceeds
of $1,557,000.
During
the quarter ended March 31, 2017, the Company issued 718,572 shares of Common Stock upon the exercise of common stock warrants
receiving net proceeds of $503,000.
During
the quarter ended March 31, 2017, the Company issued 100,000 shares of Common Stock, valued at $70,000, for services.
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
Basic
net loss per share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding. Diluted
net loss per share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding plus
the number of shares of Common Stock that would be issued assuming exercise or conversion of all potentially dilutive shares of
Common Stock. Potentially dilutive securities are excluded from the calculation when their effect would be anti-dilutive. For
all periods presented in the consolidated financial statements, all potentially dilutive securities have been excluded from the
diluted share calculations as they were anti-dilutive as a result of the net losses incurred for the respective periods. Accordingly,
basic shares equal diluted shares for all periods presented.
Potentially
dilutive securities were comprised of the following:
|
|
|
Three months ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Stock purchase warrants
|
|
|
2,319,000
|
|
|
|
3,992,157
|
|
|
Convertible debt warrant
|
|
|
1,155,000
|
|
|
|
-
|
|
|
Options
|
|
|
2,492,000
|
|
|
|
1,872,000
|
|
|
|
|
|
5,966,000
|
|
|
|
5,864,157
|
|
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 table below represents
the allocation of the preliminary purchase price to the acquired net assets.
|
|
|
Acquisition 1
|
|
|
Acquisition 2
|
|
|
Total
|
|
|
Inventory
|
|
$
|
1,002,300
|
|
|
$
|
389,800
|
|
|
$
|
1,392,100
|
|
|
Prepaids and other current assets
|
|
|
30,200
|
|
|
|
-
|
|
|
|
30,200
|
|
|
Furniture and equipment
|
|
|
-
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
Goodwill
|
|
|
1,351,000
|
|
|
|
654,000
|
|
|
|
2,005,000
|
|
|
Total
|
|
$
|
2,383,500
|
|
|
$
|
1,073,800
|
|
|
$
|
3,457,300
|
|
GrowGeneration
Corporation and Subsidiaries
Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
The
Company has evaluated events and transaction occurring subsequent to March 31, 2018 up to the date of this filing of these consolidated
financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.
On
April 12, 2018, the Company entered into an asset purchase agreement (the “Purchase Agreement”) through its
wholly-owned subsidiary, GrowGeneration Michigan Corp., with Superior Growers Supply, Inc. (the “Seller”), to purchase
substantially all of the assets of the Seller’s business located in Michigan.
The
assets subject to the sale under the Purchase Agreement included inventories, fixed assets, tangible personal property, intangible
personal property and contracts. The Company agreed to pay the Seller approximately a total of $817,950 and 75,000 shares of Common
Stock of the Company, valued at approximately $290,000, as consideration for the assets.
On May 9, 2018, the Company completed
a private placement of a total of 33.33 units of the Company’s securities at the price of $300,000 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 consists of (i) 100,000
shares of the Company’s $.001 par value common stock and (ii) 50,000 3-year warrants, each entitling the holder to purchase
one share of the Company’s common stock, at a price of $.35 per share or through cashless exercise. The Company raised a
total of $10,000,000 from three accredited investors.
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, 2017 filed with the SEC on March 27,
2018. 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’s
mission is to become one of the largest retail hydroponic and organic specialty gardening retail outlets in the industry. Today,
GrowGeneration owns and operates a chain of sixteen (16) retail hydroponic/gardening stores, with six (6) located in the state
of Colorado, three (3) in the state of California, three (3) in the state of Michigan, two (2) in the state of Nevada, one (1)
in the state of Washington and one (1) in the state of Rhode Island. Our plan is to open and operate hydroponic/gardening stores
throughout the United States.
Our
stores sell thousands of products, such as organic nutrients and soils, advanced lighting technology, state of the art hydroponic
and aquaponic equipment, and other products needed to grow indoors and outdoors. Our strategy is to target two distinct verticals;
namely (i) commercial growers, and (ii) smaller growers who require a local store to fulfill their daily and weekly growing needs.
GrowGeneration
serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens
and plant-based medicines. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing
techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields without
having to compromise quality, regardless of the season or weather and drought conditions.
Our
target market segments include the commercial growers in the cannabis market (dispensaries, cultivators and caregivers), the home
cannabis grower and to businesses and individuals who grow organically grown herbs and leafy green vegetables.
Sales
at our stores have grown since we commenced our business in May 2014, as noted below. Our growth has been fueled by frequent and
higher dollar transactions from commercial growers, individual home growers and gardeners who grow their own organic foods. We
expect to continue to experience significant growth over the next few years, primarily from existing and new stores that we open
or acquire. Our growth is likely to come from four distinct channels: establishing new stores in high-value markets, internal
growth at existing stores, acquiring existing stores with strong customer bases and strong operating histories and the creation
of a business to business e-commerce portal at www.GrowGeneration.com.
Our
business commenced in May 2014 when we acquired the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics),
which owned and operated four retail stores. The acquisition was completed on May 29, 2014, through our wholly-owned subsidiary,
GrowGeneration Pueblo Corp., a Colorado corporation. The purchase price was $499,976, consisting of $243,000 in goodwill and $273,000
in inventory, $35,000 in fixed assets, $5,286 in accounts receivable and $1,320 in prepaid expenses offset by $57,275 in accounts
payable and $355 in customer deposits. From February 2015 to the date of this report, the Company has acquired or opened
12 additional retail locations.
RESULTS
OF OPERATIONS
Comparison
of the three months ended March 31, 2018 to March 31, 2017
The
following table presents certain consolidated statement of operations information and presentation of that data as a percentage
of change from year-to-year.
|
|
Three Months Ended
March 31,
2018
|
|
|
Three Months Ended
March 31,
2017
|
|
|
$ Variance
|
|
Net revenue
|
|
$
|
4,381,018
|
|
|
$
|
2,583,925
|
|
|
$
|
1,797,093
|
|
Cost of goods sold
|
|
|
3,191,402
|
|
|
|
1,903,065
|
|
|
|
1,288,337
|
|
Gross profit
|
|
|
1,189,616
|
|
|
|
680,860
|
|
|
|
508,756
|
|
Operating expenses
|
|
|
1,849,580
|
|
|
|
963,018
|
|
|
|
886,562
|
|
Operating income (loss)
|
|
|
(659,964
|
)
|
|
|
(282,158
|
)
|
|
|
(377,806
|
)
|
Other income (expense)
|
|
|
(293,466
|
)
|
|
|
(1,151
|
)
|
|
|
(292,315
|
)
|
Net income (loss)
|
|
$
|
(953,430
|
)
|
|
$
|
(283,309
|
)
|
|
$
|
(670,121
|
)
|
Revenue
Net
revenue for the three months ended March 31, 2018 increased approximately $1.8 million, or 70%, to approximately $4.4 million,
compared to approximately $2.6 million for the three months ended March 31, 2017. The increase in revenues was not only due to
an increase in same store sales, as noted below, but also due to the addition of four retail stores in 2017 for which there were
no sales for the three months ended March 31, 2017 and the addition of two retail stores in January 2018 that had no sales for
the three months ended March 31, 2017. Sales of the four stores opened after March 31, 2017 were approximately $563,000 for the
three months ended March 31, 2018, compared to $0 for the three months ended March 31, 2017. Sales for the two stores acquired
in January 2018 were approximately $1,262,000 for the three months ended March 31, 2018. The Company also had store closures in
early 2017 that had sales of $112,330 for the three months ended March 31, 2017 and $0 for the three months ended March 31, 2018.
While revenues in the Nevada and California markets have increased comparing 2018 to 2017, revenues in the Colorado market have
declined comparing the three months ended March 31, 2018 to the same period in 2017. In the Colorado market, we are not seeing
additional commercial grows as this market has matured and is going through a consolidation.
The
Company had the same 9 stores opened for the entire three months ended March 31, 2018 and 2017. These same stores generated $2.6
million in sales for the three months ended March 31, 2018, compared to $2.5 million in sales for the same period ended March
31, 2017, an increase of 3.4%.
|
|
9 Same Stores
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
|
Variance
|
|
Net revenue
|
|
$
|
2,556,599
|
|
|
$
|
2,471,595
|
|
|
$
|
85,004
|
|
Cost
of Goods Sold
Cost
of goods sold for the three months ended March 31, 2018 increased approximately $1.3 million, or 68%, to approximately $3.2 million,
as compared to $1.9 million for the three months ended March 31, 2017. The increase in cost of goods sold was due to the 70% increase
in sales comparing the three months ended March 31, 2018 to the same period in 2017.
Gross
profit was approximately $1.2 million for the three months ended March 31, 2018, compared to approximately $.68 million for the
three months ended March 31, 2017, an increase of approximately $509,000 or 75%. Gross profit as a percentage of sales was 27.2%
for the three months ended March 31, 2018, compared to 26.3% for the three months ended March 31, 2017. The slight increase in
the gross profit percentage is due to more advantageous pricing with vendors do to our increasing purchasing power.
Operating
Expenses
Operating expenses are comprised of store operations,
primarily payroll, rent and utilities, and corporate overhead. Store operating costs were $892,858 for the three months ended March
31, 2018 and $541,902 for the three months ended March 31, 2017, an increase of $350,956 or 65%. The increase in store operating
costs was directly attributable to the 70% increase in sales and the addition of six (6) locations that were not open for any portion
of the three months ended March 31, 2017. Of the six locations added since the first quarter of 2017, four (4) were added in 2017
and two (2) were added by acquisition in January 2018. Store operating costs as a percentage of sales were 20.4% for the three
months ended March 31, 2018, compared to 21% for the three months ended March 31, 2017. Operating costs as a percentage of revenue
are affected by seasonality. The first quarter and fourth quarter are generally lower revenue months due to the shorter growing
season. While store operating costs were negatively impacted by the effects of seasonality they were positively affected by the
acquisition of the two stores which have a lower percentage of operating costs to revenues due to their larger size. The net impact,
as noted above, was lower store operating costs as a percentage of revenues. Corporate overhead was 21.8% of revenue for the three
months ended March 31, 2018 and 16.3% for the three months ended March 31, 2017. Corporate overhead is comprised of general and
administrative costs, share based compensation, depreciation and amortization and corporate salaries and related expenses and was
$956,722 for the three months ended March 31, 2018, compared to $421,116 for the three months ended March 31, 2017. The increase
in salaries and related expense from 2017 to 2018 was due primarily to the increase in corporate staff to support operations including,
accounting and finance, purchasing, sales to increase our outside sales efforts. Corporate salaries and related costs as a percentage
of sales were 7.6% for the three months ended March 31, 2018 compared to 5.3% for the three months ended March 31, 2017. General
& administrative expenses, comprised mainly of advertising and promotions, travel & entertainment, professional fees and
insurance, were $363,778 for the three months ended March 31, 2018 and $187,153 for the three months ended March 31, 2017, with
a majority of the increase related to advertising and promotion and travel and entertainment. General and administrative costs
as a percentage of revenue were 8.3% for the three months ended March 31, 2018, compared to 7.2% for the three months ended March
31, 2017. As noted earlier, corporate overhead includes non-cash expenses, consisting primarily of depreciation and share based
compensation, which was approximately $261,212 for the three months ended March 31, 2018, compared to approximately $97,523 for
the three months ended March 31, 2017. The increase in share-based compensation from $77,000 in 2017 to $216,200 in 2018 is due
to an increase in 1) non-cash compensation to consultants, 2) stock issued to employees, and 3) the fair market value of options
issued to employees.
Net
Income (Loss)
The
net loss for the three months ended March 31, 2018 was $953,430, compared to a net loss of $283,309 for the three months ended
March 31, 2017. The increase in the net loss from 2017 to 2018 of $670,121 was primarily due to increases in non-cash expenses,
share based compensation and amortization of debt discount which accounted for $456,455 of the increase. Non-cash shares-based
compensation increased $139,200 and non-cash amortization of debt discount increased $317,255. Other increases in corporate overhead
as discussed above accounted for the remaining $213,666 increase.
Operating
Activities
Net
cash used in operating activities for the three months ended March 31, 2018 was approximately $1.8 million compared to $1 million
for three months ended March 31, 2017. Cash provided by operating activities is driven by our net loss and adjusted by non-cash
items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization
of intangible assets, share based compensation expense and amortization of debt discount. Non-cash adjustment totaled $578,466
and $97,522 for the three months ended March 31, 2018 and 2017, respectively, so non-cash adjustments had a greater positive impact
on net cash provided by operating activities for the three months ended March 31, 2018 than the same period in 2017. The increase
in the net cash used in operating activities was related to the increase in the net loss of $670,121 comparing the three months
ended March 31, 2017 to the three months ended March 31, 2018, an increase in inventory of $2,127,430 (primarily due to acquisitions
in January 2018), an increase in accounts receivable of $91,548, offset by an increase in accounts payable and other current liabilities
of $755,299.
Net
cash used in operating activities for the three months ended March 31, 2017 was $956,988. This amount was primarily related to
increases of inventory of 943,002, accounts receivable of $116,347, offset by an increase in accounts payable and other current
liabilities of $307,835. The increase in inventory and a corresponding increase in trade payables was attributable to both an
increase in revenues and an increase in the number of operating stores between December 31, 2016 and March 31, 2017.
Net
cash used in investing activities was $661,023 for the three months ended March 31, 2018 and $379,761 for the three months ended
March 31, 2017. Investing activities in 2018 were attributable to two store acquisitions in January 2018. Investing activities
in 2017 related the purchase of vehicles and store equipment to support new store operations. Between January 31, 2017 and March
31, 2017, the Company opened 4 new locations.
Net
cash provided by financing activities for the three months ended March 31, 2018 was approximately $10 million and represented
$9 million in proceeds from a convertible debt offering which closed in January 2018, proceeds from the exercise of warrants and
common stock options of approximately $1.2 million. Net cash provided by financing activities for the three months ended March
31, 2017 was $2.1 million and was primarily from proceeds from the sales of Common Stock, net of offering costs.
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
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Net income (loss)
|
|
$
|
(953,430
|
)
|
|
$
|
(283,309
|
)
|
Interest
|
|
|
8,018
|
|
|
|
1,151
|
|
Depreciation and Amortization
|
|
|
45,012
|
|
|
|
20,523
|
|
EBITDA
|
|
|
(900,400
|
)
|
|
|
(261,635
|
)
|
Share based compensation (option comp, warrant comp, stock issued for services)
|
|
|
216,200
|
|
|
|
77,000
|
|
Amortization of debt discount
|
|
|
317,255
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(366,945
|
)
|
|
$
|
(184,635
|
)
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of March 31, 2018, we had working capital of approximately $14.3 million, compared to working capital of approximately $5.6 million
as of December 31, 2017, an increase of approximately $8.7 million. The increase in working capital from December 31, 2017 to
March 31, 2018 was due primarily to the receipt of proceeds from a convertible debt offering of $9 million and proceeds from the
exercise of warrants and options of $1.2 million. At March 31, 2018, we had cash and cash equivalents of approximately $8.8 million.
We believe that existing cash and cash equivalents are sufficient to fund existing operations for the next twelve months.
We
anticipate that we will need additional financing in the future to continue to acquire and open new stores. To date we have financed
our operations through the issuance and sale of common stock, convertible notes and warrants.
Financing
Activities
2017
Private Placements
On
March 10, 2017, the Company closed a private placement of a total of 825,000 units of its securities to 4 accredited investors.
Each unit consisted 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 15, 2017, the Company closed a private placement of a total of 1,000,000 units of its securities through GVC Capital LLC (“GVC
Capital”) as its placement agent. Each unit consisted 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 as follows: (i)
it issued GVC 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 (for which GVC paid $100), (ii) it paid GVC a cash fee of $150,000, (iii) it paid GVC a non-accountable expense allowance
of $60,000, and (iv) it agreed to pay GVC a warrant exercise fee equal to 3% of all sums received by the Company from the exercise
of 750,000 warrants (excluding the 250,000 warrants issued to Merida Capital Partners, LP) when they are exercised.
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 consisted of (i) a .1% unsecured convertible promissory note in 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, subsequent to the quarter ended
March 31, 2018, the Company completed a private placement of a total of 33.33 units of the Company’s securities at the price
of $300,000 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 consists of (i) 100,000 shares of the Company’s $.001 par value common stock and (ii) 50,000 3-year warrants
, each entitling the holder to purchase one share of the Company’s common stock, at a price of $.35 per share or through
cashless exercise. The Company raised a total of $10,000,000 from three accredited investors.
Critical
Accounting Policies, Judgments and Estimates
Use
of Estimates
The
preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United
States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include
the carrying amount of intangible assets; valuation allowances and reserves for receivables, inventory and deferred income taxes;
revenue recognition related to contracts accounted for under the percentage of completion method; share-based compensation; and
loss contingencies, including those related to litigation. Actual results could differ from those estimates.
Accounts
Receivable and Concentration of Credit Risk
Accounts
receivable are recorded at the invoiced amounts less an allowance for doubtful accounts and do not bear interest. The allowance
for doubtful accounts is based on our estimate of the amount of probable credit losses in our accounts receivable. We determine
the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment.
Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance
when we determine that the potential for recovery is remote. An allowance for doubtful accounts of approximately $97,829 has been
reserved as of March 31, 2018 and December 31, 2017.
We
are exposed to credit risk in the normal course of business, primarily related to accounts receivable. We are affected by general
economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition
of its customers and maintains an allowance for doubtful accounts. As of March 31, 2018, and December 31, 2017, we do not believe
that we have significant credit risk.
Fair
Value of Financial Instruments
The
carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which
approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third
parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based
on our current financial condition and liquidity. We believe the amounts due to related parties also approximate their fair value,
as their carried interest rates are consistent with those of our notes payable with third parties.
Long-lived
Assets
We
evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted
future cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the
difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning
the amount and timing of estimated future cash flows. No impairment was determined as of March 31, 2018 and December 31, 2017.
Revenue
Recognition
Revenue
on product sales is recognized upon delivery or shipment. Customer deposits and lay away sales are not reported as revenue until
final payment is received and the merchandise has been delivery.
Stock-based
Compensation
We
account for stock-based awards at fair value on the date of grant and recognize compensation over the service period that they
are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing
model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration
estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately
vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted
for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
RECENTLY
ISSUED OR ADOPTED ACCOUNTING STANDARDS
In
May 2014, the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”. The
new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting
standards for specialized transactions and industries. The section is intended to conform revenue accounting principles
with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States
practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information.
The updated guidance was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within
those annual periods. On July 9, 2015, the FASB approved a one-year delay of the effective date. The Company adopted the
new provisions of this accounting standard at the beginning of fiscal year 2018 and its adoption did not have a material impact
on the consolidated financial statements.
In
July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.”
Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently
exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.”
No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods
beginning after December 15, 2016. This update was adopted by the Company in the first quarter of fiscal year 2017. There was
no material impact on the Company's consolidated financial statements as a result of the adoption of this accounting standard.
In
November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance
eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments
will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those
annual periods. The adoption of this standard did not have a material impact on the consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities
, which requires that (i) all equity investments, other than equity-method investments, in unconsolidated
entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial
liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive
income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be
effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted for certain provisions. The
Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as
whether to adopt certain provisions early.
In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities
for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application
is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make
payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one
of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability,
measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and
liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception
that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions,
the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating
the impact of adopting this guidance.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic
718, Compensation – Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to
how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public entities
for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption
is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.
We adopted this guidance effective January 2, 2017, and the adoption did not have a material effect on our consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance
eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment
test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying
amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting
periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates
after January 1, 2017. We are currently evaluating the impact of the new guidance on our goodwill impairment testing process and
consolidated financial statements.
On
August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,” which better aligns risk management
activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance
for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting
for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the
effects of the hedging instrument and the hedged item in the financial statements. The new standard will be effective for the
Company as of January 1, 2019. Early adoption is permitted. We do not believe the adoption of this new standard will have
any impact on our consolidated financial statements and footnote disclosures.