This Prospectus Supplement
No. 1 updates, amends, and supplements the information previously included in the Prospectus dated April 24, 2018 (the “Prospectus”),
relating to the offer for sale of up to an aggregate of 2,123,911 shares of common stock of GrowGeneration Corp. (the “Company”)
by the selling stockholders named therein.
On May 9, 2018, we
filed a Current Report on Form 8-K with the Securities and Exchange Commission (the “SEC”) to announce the completion
of a private offering of the Company’s shares of common stock and warrants. The material portions of that Form 8-K are set
forth below.
“On May 9, 2018, GrowGeneration
Corp. (the “Company”) completed a private placement (the “Offering”) of a total of 33.33 units (the “Units”)
of the Company’s securities at the price of $300,000 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 consists
of (i) 100,000 shares of the Company’s $.001 par value common stock (the “Shares”) and (ii) 50,000 3-year warrants
(the “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.
Pursuant to a side letter entered
into by and between the Company and an investor, Gotham Green Fund 1, L.P. (“Gotham Green”), for so long as Gotham
Green, together with its affiliated funds, continues to hold a number of shares of common stock of the Company that represents
at least 50% of the Shares purchased by Gotham Green in the Offering, the Company agrees to (x) nominate a designee of Gotham Green
for election as a director of the Company and (y) use its best efforts to cause the election of such designee to the Board of Directors
of the Company at each shareholder meeting held for the purpose of electing directors, or if earlier, at such time as a vacancy
exists on the Company’s Board of Directors.”
This Prospectus Supplement
No. 1 incorporates into our Prospectus the information contained in our attached Quarterly Report on Form 10-Q for the quarter
ended March 31, 2018, which was filed with the SEC on May 15, 2018.
This Prospectus Supplement
No. 1 is not complete without, and may not be delivered or used except in connection with, our Prospectus, including all amendments
and supplements thereto.
The date of this Prospectus Supplement
No. 1 is May 24, 2018.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes
☒
No
☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
☒
No
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☒
PART I – FINANCIAL INFORMATION
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company and
are not required to provide the information under this item pursuant to Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls
and Procedures
Management maintains “disclosure
controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
In connection with the preparation of this
Quarterly Report on Form 10-Q, an evaluation was carried out by management, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of March 31, 2018.
Based on that evaluation, management concluded,
that our disclosure controls and procedures were effective as of March 31, 2018 in recording, processing, summarizing, and reporting
information required to be disclosed, within the time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
Changes in Internal Controls over
Financial Reporting
As of the end of the period covered by
this report, there have been no changes in the internal controls over financial reporting that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting subsequent to the date of management’s last evaluation.