--12-31false00016048682021Q300016048682021-01-012021-09-30xbrli:shares00016048682021-11-05iso4217:USD00016048682021-09-3000016048682020-12-3100016048682021-07-012021-09-3000016048682020-07-012020-09-3000016048682020-01-012020-09-30iso4217:USDxbrli:shares0001604868us-gaap:CommonStockMember2020-12-310001604868us-gaap:AdditionalPaidInCapitalMember2020-12-310001604868us-gaap:RetainedEarningsMember2020-12-310001604868us-gaap:CommonStockMember2021-01-012021-03-310001604868us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-3100016048682021-01-012021-03-310001604868us-gaap:RetainedEarningsMember2021-01-012021-03-310001604868us-gaap:CommonStockMember2021-03-310001604868us-gaap:AdditionalPaidInCapitalMember2021-03-310001604868us-gaap:RetainedEarningsMember2021-03-3100016048682021-03-310001604868us-gaap:CommonStockMember2021-04-012021-06-300001604868us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-3000016048682021-04-012021-06-300001604868us-gaap:RetainedEarningsMember2021-04-012021-06-300001604868us-gaap:CommonStockMember2021-06-300001604868us-gaap:AdditionalPaidInCapitalMember2021-06-300001604868us-gaap:RetainedEarningsMember2021-06-3000016048682021-06-300001604868us-gaap:CommonStockMember2021-07-012021-09-300001604868us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001604868us-gaap:RetainedEarningsMember2021-07-012021-09-300001604868us-gaap:CommonStockMember2021-09-300001604868us-gaap:AdditionalPaidInCapitalMember2021-09-300001604868us-gaap:RetainedEarningsMember2021-09-300001604868us-gaap:CommonStockMember2019-12-310001604868us-gaap:AdditionalPaidInCapitalMember2019-12-310001604868us-gaap:RetainedEarningsMember2019-12-3100016048682019-12-310001604868us-gaap:CommonStockMember2020-01-012020-03-310001604868us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-3100016048682020-01-012020-03-310001604868us-gaap:RetainedEarningsMember2020-01-012020-03-310001604868us-gaap:CommonStockMember2020-03-310001604868us-gaap:AdditionalPaidInCapitalMember2020-03-310001604868us-gaap:RetainedEarningsMember2020-03-3100016048682020-03-310001604868us-gaap:CommonStockMember2020-04-012020-06-300001604868us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-3000016048682020-04-012020-06-300001604868us-gaap:RetainedEarningsMember2020-04-012020-06-300001604868us-gaap:CommonStockMember2020-06-300001604868us-gaap:AdditionalPaidInCapitalMember2020-06-300001604868us-gaap:RetainedEarningsMember2020-06-3000016048682020-06-300001604868us-gaap:CommonStockMember2020-07-012020-09-300001604868us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001604868us-gaap:RetainedEarningsMember2020-07-012020-09-300001604868us-gaap:CommonStockMember2020-09-300001604868us-gaap:AdditionalPaidInCapitalMember2020-09-300001604868us-gaap:RetainedEarningsMember2020-09-3000016048682020-09-30grwg:storegrwg:state0001604868us-gaap:FairValueInputsLevel2Member2021-09-300001604868us-gaap:FairValueInputsLevel2Member2020-12-310001604868us-gaap:FairValueInputsLevel3Member2021-09-300001604868us-gaap:FairValueInputsLevel3Member2020-12-310001604868grwg:SalesAtCompanyOwnedStoresMember2021-07-012021-09-300001604868grwg:SalesAtCompanyOwnedStoresMember2020-07-012020-09-300001604868grwg:SalesAtCompanyOwnedStoresMember2021-01-012021-09-300001604868grwg:SalesAtCompanyOwnedStoresMember2020-01-012020-09-300001604868grwg:DistributionMember2021-07-012021-09-300001604868grwg:DistributionMember2020-07-012020-09-300001604868grwg:DistributionMember2021-01-012021-09-300001604868grwg:DistributionMember2020-01-012020-09-300001604868grwg:EcommerceSalesMember2021-07-012021-09-300001604868grwg:EcommerceSalesMember2020-07-012020-09-300001604868grwg:EcommerceSalesMember2021-01-012021-09-300001604868grwg:EcommerceSalesMember2020-01-012020-09-300001604868grwg:ReceivablesMember2020-12-310001604868grwg:CustomerDepositLiabilityMember2020-12-310001604868grwg:ReceivablesMember2021-09-300001604868grwg:CustomerDepositLiabilityMember2021-09-300001604868grwg:ReceivablesMember2021-01-012021-09-300001604868grwg:CustomerDepositLiabilityMember2021-01-012021-09-300001604868grwg:ReceivablesMember2019-12-310001604868grwg:CustomerDepositLiabilityMember2019-12-310001604868grwg:ReceivablesMember2020-09-300001604868grwg:CustomerDepositLiabilityMember2020-09-300001604868grwg:ReceivablesMember2020-01-012020-09-300001604868grwg:CustomerDepositLiabilityMember2020-01-012020-09-30xbrli:pure0001604868srt:MinimumMember2021-01-012021-09-300001604868srt:MaximumMember2021-01-012021-09-300001604868us-gaap:TradeAccountsReceivableMember2021-09-300001604868us-gaap:TradeAccountsReceivableMember2020-12-310001604868us-gaap:NotesReceivableMember2021-09-300001604868us-gaap:NotesReceivableMember2020-12-310001604868us-gaap:FairValueInputsLevel2Membergrwg:AdjustedCostBasisMember2021-09-300001604868us-gaap:FairValueInputsLevel2Membergrwg:UnrealizedGainLossMember2021-09-300001604868us-gaap:FairValueInputsLevel2Membergrwg:RecordedBasisMember2021-09-300001604868grwg:AdjustedCostBasisMember2021-09-300001604868grwg:UnrealizedGainLossMember2021-09-300001604868grwg:RecordedBasisMember2021-09-300001604868us-gaap:VehiclesMember2021-09-300001604868us-gaap:VehiclesMember2020-12-310001604868us-gaap:BuildingMember2021-09-300001604868us-gaap:BuildingMember2020-12-310001604868us-gaap:LeaseholdImprovementsMember2021-09-300001604868us-gaap:LeaseholdImprovementsMember2020-12-310001604868us-gaap:FurnitureAndFixturesMember2021-09-300001604868us-gaap:FurnitureAndFixturesMember2020-12-310001604868us-gaap:ConstructionInProgressMember2021-09-300001604868us-gaap:ConstructionInProgressMember2020-12-3100016048682020-01-012020-12-310001604868us-gaap:TradeNamesMember2021-09-300001604868us-gaap:TradeNamesMember2020-12-310001604868us-gaap:PatentsMember2021-09-300001604868us-gaap:PatentsMember2020-12-310001604868us-gaap:CustomerRelationshipsMember2021-09-300001604868us-gaap:CustomerRelationshipsMember2020-12-310001604868grwg:NonCompetesMember2021-09-300001604868grwg:NonCompetesMember2020-12-310001604868us-gaap:IntellectualPropertyMember2021-09-300001604868us-gaap:IntellectualPropertyMember2020-12-310001604868grwg:CapitalizedSoftwareMember2021-09-300001604868grwg:CapitalizedSoftwareMember2020-12-310001604868grwg:WellsFargoEquipmentFinanceMember2021-09-300001604868grwg:WellsFargoEquipmentFinanceMember2021-01-012021-09-300001604868grwg:WellsFargoEquipmentFinanceMember2020-12-310001604868grwg:NotesPayableIssuedInConnectionWithSellerFinancingMember2021-09-30grwg:installment0001604868grwg:NotesPayableIssuedInConnectionWithSellerFinancingMember2021-01-012021-09-300001604868grwg:NotesPayableIssuedInConnectionWithSellerFinancingMember2020-12-310001604868srt:MinimumMember2021-09-300001604868srt:MaximumMember2021-09-300001604868us-gaap:RestrictedStockMember2021-01-012021-09-300001604868us-gaap:RestrictedStockMember2020-01-012020-09-300001604868grwg:StockOptionsMember2021-01-012021-09-300001604868grwg:StockOptionsMember2020-01-012020-09-300001604868us-gaap:WarrantMember2021-01-012021-09-300001604868us-gaap:WarrantMember2020-01-012020-09-300001604868us-gaap:StockOptionMember2021-01-012021-09-300001604868us-gaap:RestrictedStockMember2020-12-310001604868us-gaap:RestrictedStockMember2021-09-300001604868grwg:IndoorGardenLightingIncMember2021-01-252021-01-250001604868grwg:IndoorGardenLightingIncMember2021-01-250001604868grwg:GrowDepotMaineMember2021-02-012021-02-010001604868grwg:GrowDepotMaineMember2021-02-010001604868grwg:GrowWarehouseLLCMember2021-02-152021-02-150001604868grwg:GrowWarehouseLLCMember2021-02-150001604868grwg:SanDiegoHydroponicsOrganicsMember2021-02-222021-02-220001604868grwg:SanDiegoHydroponicsOrganicsMember2021-02-220001604868grwg:CharcoirCorporationMember2021-03-122021-03-120001604868grwg:CharcoirCorporationMember2021-03-120001604868grwg:HydroponicsMember2021-03-152021-03-150001604868grwg:HydroponicsMember2021-03-150001604868grwg:AquariusMember2021-03-152021-03-150001604868grwg:AquariusMember2021-03-150001604868grwg:AgronLLCMember2021-03-192021-03-190001604868grwg:AgronLLCMember2021-03-190001604868grwg:DownRiverHydroMember2021-04-192021-04-190001604868grwg:DownRiverHydroMember2021-04-190001604868grwg:HarvestMember2021-05-242021-05-240001604868grwg:HarvestMember2021-05-240001604868grwg:AquaSereneMember2021-07-012021-07-010001604868grwg:AquaSereneMember2021-07-192021-07-190001604868grwg:MendocinoGreenhouseGardenSupplyIncMember2021-07-032021-07-030001604868grwg:CommercialGrowSupplyIncMember2021-08-232021-08-230001604868grwg:HoagtechHydroponicsIncMember2021-08-232021-08-230001604868grwg:AgronMember2021-09-300001604868grwg:AquariusMember2021-09-300001604868grwg:AquaSereneMember2021-09-300001604868grwg:HydroMember2021-09-300001604868grwg:CharcoirMember2021-09-300001604868grwg:SanDiegoHydroMember2021-09-300001604868grwg:MendocinoGreenhouseGardenSupplyIncMember2021-09-300001604868grwg:HoagtechHydroponicsIncMember2021-09-300001604868grwg:CommercialGrowSupplyIncMember2021-09-300001604868grwg:GrowWarehouseMember2021-09-300001604868grwg:GrowDepotMaineMember2021-09-300001604868grwg:IndoorGardenMember2021-09-300001604868grwg:DownRiverHydroMember2021-09-300001604868grwg:HarvestMember2021-09-300001604868grwg:AgronMember2021-01-012021-09-300001604868grwg:AquariusMember2021-01-012021-09-300001604868grwg:AquaSereneMember2021-01-012021-09-300001604868grwg:HydroMember2021-01-012021-09-300001604868grwg:CharcoirMember2021-01-012021-09-300001604868grwg:SanDiegoHydroMember2021-01-012021-09-300001604868grwg:MendocinoGreenhouseGardenSupplyIncMember2021-01-012021-09-300001604868grwg:HoagtechHydroponicsIncMember2021-01-012021-09-300001604868grwg:CommercialGrowSupplyIncMember2021-01-012021-09-300001604868grwg:GrowWarehouseMember2021-01-012021-09-300001604868grwg:GrowDepotMaineMember2021-01-012021-09-300001604868grwg:IndoorGardenMember2021-01-012021-09-300001604868grwg:DownRiverHydroMember2021-01-012021-09-300001604868grwg:HarvestMember2021-01-012021-09-300001604868grwg:HealthHarvestLLCMember2020-02-260001604868grwg:H2OHydroponicsLLCMember2020-06-160001604868grwg:EmeraldCityGardensMember2021-08-102021-08-100001604868grwg:EmeraldCityGardensMember2021-08-100001604868grwg:EmeraldCityGardensMember2020-09-300001604868grwg:H2OHydroponicsLLCMember2020-09-300001604868grwg:HealthHarvestLLCMember2020-09-300001604868grwg:EmeraldCityGardensMember2020-08-102020-09-300001604868grwg:H2OHydroponicsLLCMember2020-06-262020-09-300001604868grwg:HealthHarvestLLCMember2020-02-262020-09-3000016048682020-02-262020-09-300001604868grwg:ConsolidatedMember2019-07-012019-09-3000016048682019-01-012019-09-300001604868us-gaap:ImmediateFamilyMemberOfManagementOrPrincipalOwnerMember2021-07-012021-09-300001604868us-gaap:ImmediateFamilyMemberOfManagementOrPrincipalOwnerMember2021-01-012021-09-300001604868grwg:AllSeasonsGardeningMemberus-gaap:SubsequentEventMember2021-10-122021-10-120001604868us-gaap:SubsequentEventMember2021-10-122021-10-12

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-207889
 
GROWGENERATION CORP.
(Exact name of small business issuer as specified in its charter)
 
Colorado   46-5008129
(State of other jurisdiction
of incorporation)
  (IRS Employer
ID No.)
 
5619 DTC Parkway, Suite 900
Greenwood Village, Colorado 80111
(Address of principal executive offices)
 
(800) 935-8420
(Issuer’s Telephone Number)
 
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class   Trading symbol   Name of each exchange on which registered
Common Stock, par value $0.001 per share   GRWG   The NASDAQ Stock Market LLC
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of November 5, 2021 there were 59,807,922 shares of the registrant’s common stock issued and outstanding. 




TABLE OF CONTENTS
 
    Page No.
     
   
     
1
 
1
 
2
 
3
 
5
 
5
     
     
 

i


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

  September 30,
2021
December 31,
2020
  (Unaudited)  
ASSETS    
Current assets:    
Cash and cash equivalents $ 63,035  $ 177,912 
Marketable securities 29,961  — 
Accounts receivable, net 6,953  3,901 
Notes receivable, current 7,734  2,612 
Inventory, net 113,281  54,024 
Prepaid income taxes 2,546  655 
Prepaids and other current assets 28,169  11,125 
Total current assets 251,679  250,229 
Property and equipment, net 16,755  6,475 
Operating leases right-of-use assets, net 36,155  12,088 
Notes receivables, net of current portion 550  1,200 
Intangible assets, net 49,397  21,490 
Goodwill 123,875  62,951 
Other assets 777  301 
TOTAL ASSETS $ 479,188  $ 354,734 
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 39,627  $ 14,623 
Accrued liabilities 2,716  672 
Payroll and payroll tax liabilities 6,705  2,655 
Customer deposits 13,743  5,155 
Sales tax payable 3,376  1,161 
Income taxes payable —  — 
Current maturities of lease liability 6,205  3,001 
Current portion of long-term debt 111  83 
Total current liabilities 72,483  27,350 
Deferred tax liability 2,351  750 
Operating lease liability, net of current maturities 31,355  9,479 
Long-term debt, net of current portion 92  158 
Total liabilities 106,281  37,737 
Stockholders’ Equity:
Common stock 60  57 
Additional paid-in capital 358,602  319,582 
Retained earnings (deficit) 14,245  (2,642)
Total stockholders’ equity 372,907  316,997 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 479,188  $ 354,734 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
1


GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
  For the Three Months Ended September 30, For the Nine Months Ended September 30,
  2021 2020 2021 2020
Sales $ 116,003  $ 55,007  $ 331,910  $ 131,440 
Cost of sales 81,940  40,436  236,757  96,338 
Gross profit 34,063  14,571  95,153  35,102 
Operating expenses:
Store operations 14,842  5,008  35,648  12,524 
Selling, general, and administrative 11,007  4,017  28,975  15,513 
Depreciation and amortization 3,539  443  8,510  1,270 
Total operating expenses 29,388  9,468  73,133  29,307 
Income from operations 4,675  5,103  22,020  5,795 
Other income (expense):
Other expense 78  (14) 32  (75)
Interest income 395  48  435  73 
Interest expense (25) —  (31) (20)
Total non-operating income (expense), net 448  34  436  (22)
Net income before taxes 5,123  5,137  22,456  5,773 
Provision for income taxes (1,096) (1,799) (5,569) (1,955)
Net income $ 4,027  $ 3,338  $ 16,887  $ 3,818 
Net income per share, basic $ 0.07  $ 0.07  $ 0.29  $ 0.09 
Net income per share, diluted $ 0.07  $ 0.06  $ 0.28  $ 0.09 
Weighted average shares outstanding, basic 58,531  47,878  58,994  41,477 
Weighted average shares outstanding, diluted 59,490  51,626  60,108  44,224 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
2


GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(in thousands)
(Unaudited) 
  
Common Stock Additional
Paid-In Capital
Retained
Earnings (Deficit)
Total
Stockholders’ Equity
  Shares Amount
Balances, December 31, 2020 57,151  $ 57  $ 319,582  $ (2,642) $ 316,997 
Common stock issued upon warrant exercise 40  —  111  —  111 
Common stock issued upon cashless warrant exercise 535  (1) —  — 
Common stock issued upon exercise of options —  — 
Common stock issued upon cashless exercise of options —  —  —  — 
Common stock issued in connection with business combinations 548  —  29,249  —  29,249 
Common stock issued for share based compensation 300  —  —  —  — 
Common stock redeemed in litigation settlement (90) —  —  —  — 
Common stock redemption (96) —  (3,954) —  (3,954)
Share based compensation —  —  1,187  —  1,187 
Net income —  —  —  6,147  6,147 
Balances, March 31, 2021 58,394  $ 58  $ 346,176  $ 3,505  $ 349,739 
Common stock issued upon warrant exercise 216  —  224  —  224 
Common stock issued upon cashless warrant exercise 119  —  —  —  — 
Common stock issued upon exercise of options 460  1,729  —  1,730 
Common stock issued upon cashless exercise of options 272  —  —  —  — 
Common stock issued in connection with business combinations 101  3,938  —  3,939 
Share based compensation —  —  1,508  —  1,508 
Net income —  —  —  6,713  6,713 
Balances, June 30, 2021 59,562  $ 60  $ 353,575  $ 10,218  $ 363,853 
Common stock issued upon cashless warrant exercise —  —  —  — 
Common stock issued upon exercise of options —  22  —  22 
Common stock issued upon cashless exercise of options 47  —  —  —  — 
Common stock issued in connection with business combinations 87  —  3,063  —  3,063 
Common stock issued for share based compensation 61  —  220  —  220 
Share based compensation —  —  1,722  —  1,722 
Net income —  —  —  4,027  4,027 
Balances, September 30, 2021 59,770  $ 60  $ 358,602  $ 14,245  $ 372,907 
 
3


Common Stock Additional
Paid-In Capital
Retained
Earnings (Deficit)
Total
Stockholders’ Equity
  Shares Amount
Balances, December 31, 2019 36,876  $ 37  $ 60,742  $ (7,970) $ 52,809 
Common stock issued upon warrant exercise 191  —  510  —  510 
Common stock issued upon cashless warrant exercise 19  —  —  —  — 
Common stock issued upon cashless exercise of options 280  —  —  —  — 
Common stock issued in connection with business combinations 250  —  1,102  —  1,102 
Common stock issued for assets 24  —  101  —  101 
Common stock issued for services 50  —  —  —  — 
Common stock issued for share based compensation 519  1,760  —  1,761 
Share based compensation —  —  2,209  —  2,209 
Net loss —  —  —  (2,094) (2,094)
Balances, March 31, 2020 38,209  $ 38  $ 66,424  $ (10,064) $ 56,398 
Common stock issued upon warrant exercise 81  —  282  —  282 
Common stock issued upon cashless warrant exercise 78  —  —  —  — 
Common stock issued upon cashless exercise of options 30  —  —  —  — 
Common stock issued in connection with business combinations 108  —  705  —  705 
Common stock issued for assets 10  —  67  —  67 
Common stock issued for services 325  —  717  —  717 
Common stock issued for share based compensation —  25  —  25 
Share based compensation —  —  1,162  —  1,162 
Net income —  —  —  2,574  2,574 
Balances, June 30, 2020 38,846  $ 38  $ 69,382  $ (7,490) $ 61,930 
Sale of common stock, net of offering costs 8,625  44,611  —  44,620 
Common stock issued upon warrant exercise 88  —  272  —  272 
Common stock issued upon cashless warrant exercise 570  (1) —  — 
Common stock issued upon cashless exercise of options 164  —  —  —  — 
Common stock issued for share based compensation 120  —  44  —  44 
Share based compensation —  —  978  —  978 
Net income —  —  —  3,338  3,338 
Balances, September 30, 2020 48,413  $ 48  $ 115,286  $ (4,152) $ 111,182 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4


GROWGENERATION CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) 
  Nine Months Ended September 30,
  2021 2020
Cash flows from operating activities:    
Net income $ 16,887  $ 3,818 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 8,510  1,270 
Stock-based compensation expense 5,347  6,324 
Bad debt expense, net of recoveries 304  94 
Gain on asset disposition —  (28)
Deferred taxes 1,601  — 
Changes in operating assets and liabilities:
Accounts and notes receivable (7,828) (885)
Inventory (46,030) (13,421)
Prepaid expenses and other assets (18,960) (3,092)
Accounts payable and accrued liabilities 26,338  6,265 
Operating leases 1,013  220 
Payroll and payroll tax liabilities 4,050  871 
Income taxes payable —  1,928 
Customer deposits 8,419  (34)
Sales tax payable 2,215  368 
Net cash provided by operating activities 1,866  3,698 
Cash flows from investing activities:    
Assets acquired in business combinations (71,813) (4,027)
Purchase of marketable securities (75,000) — 
Maturities from marketable securities 45,039  — 
Purchase of property and equipment (10,756) (2,115)
Purchase of intangibles (2,311) (797)
Net cash used in investing activities (114,841) (6,939)
Cash flows from financing activities:    
Principal payments on long term debt (38) (75)
Common stock redeemed (3,954) — 
Proceeds from the sale of common stock and exercise of warrants, net of expenses 2,090  45,684 
Net cash provided by (used in) financing activities (1,902) 45,609 
Net change (114,877) 42,368 
Cash and cash equivalents at the beginning of period 177,912  12,979 
Cash and cash equivalents at the end of period $ 63,035  $ 55,347 
Supplemental disclosures of non-cash activities:    
Cash paid for interest $ 31  $ 20 
Common stock issued for accrued payroll $ —  $ 718 
Common stock issued for business combination $ 36,250  $ 1,808 
Assets acquired by issuance of common stock $ —  $ 168 
Right to use assets acquired under new operating leases $ 26,115  $ 2,173 
Cash paid for income taxes $ 4,275  $ — 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GrowGeneration Corp. and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
 
1.GENERAL
 
GrowGeneration Corp. (the “Company”, “we”, or “our”) is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting,
5


ventilation systems and accessories for hydroponic gardening. Currently, the Company owns and operates a chain of sixty-one (61) retail hydroponic/gardening stores across 12 states, an online e-commerce platform, and proprietary businesses that market grow solutions through our platforms and other wholesale customers. The Company’s plan is to continue to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States. 

Basis of Presentation
 
The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.  The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.
 
All amounts included in the accompanying footnotes to the consolidated financial statements, except per share data, are in thousands (000).
 
Risk and Uncertainties
 
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations. As a result, if the pandemic or its effects persist or worsen, our accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time). The Company has experienced minimal business interruption as a result of the COVID-19 pandemic. We have been deemed an “essential” business by state and local authorities in the areas in which we operate and as such have not been subject to business closures. The COVID-19 pandemic to date has resulted in temporary supply chain delays of our inventory and increased shipping cost among other impacts. As events surrounding the COVID-19 pandemic can change rapidly we cannot predict how it may disrupt our operations or the full extent of the disruption.

New Accounting Policies Adopted During the Nine Months Ended September 30, 2021
 
Securities
 
The Company classifies its commercial paper and debt securities as marketable securities. Marketable securities with available fair market values are stated at fair market values. Unrealized gains and unrealized losses on these marketable securities are reported, net of applicable income taxes, in other comprehensive income. Realized gains or losses on sale of marketable securities are computed using primarily the moving average cost and reported in net income. For the nine months ended September 30, 2021, there were no significant unrealized gains or losses recorded.
 


6

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
2.FAIR VALUE MEASUREMENTS
 
Fair Value Measurements
 
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
 
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
 
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
 
The carrying amounts of cash and cash equivalents, accounts receivable, available for sales securities, accounts payable and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the outstanding balance and are reviewed for impairment at least annually. The fair value of impaired notes receivable is determined based on estimated future payments discounted back to present value using the notes effective interest rate.
 
  Level September 30,
2021
December 31,
2020
Cash equivalents 2 $ 63,035  $ 177,912 
Marketable securities 2 $ 29,961  $ — 
Notes receivable impaired 3 $ —  $ 875 


7

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
3.RECENT ACCOUNTING PRONOUNCEMENTS
 
New Accounting Pronouncements
 
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification ("ASC") are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations. 
 
As an emerging growth company, the Company is permitted to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. The Company has chosen to take advantage of the extended transition period for complying with new or revised accounting standards.
 
Refer to Note 3 to the Consolidated Financial Statements reported in Form 10-K for the year ended December 31, 2020 for recently issued accounting pronouncements that are pending adoption. 
 
Recently Adopted Accounting Pronouncements
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this new guidance, effective January 1, 2020, did not have a material impact on our Financial Statements.
 
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The standard was effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those periods. There was no material impact on our consolidated financial statements and related disclosures as a result of adopting this standard.
 
4.REVENUE RECOGNITION
 
The following table disaggregates revenue by source:
  Three Months Ended
September 30, 2021
Three Months Ended
September 30, 2020
Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Sales at company owned stores $ 100,799  $ 51,684  $ 290,937  $ 123,991 
Distribution 4,696  —  12,519  — 
E-commerce sales 10,508  3,323  28,454  7,449 
Total Revenues $ 116,003  $ 55,007  $ 331,910  $ 131,440 
 
8

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
4.REVENUE RECOGNITION, continued

The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:
 
  Receivables Customer Deposit Liability
Opening balance, January 1, 2021 $ 7,713  $ 5,155 
Closing balance, September 30, 2021
15,237  13,743 
Increase (decrease) $ 7,524  $ 8,588 
Opening balance, January 1, 2020 $ 4,455  $ 2,504 
Closing balance, September 30, 2020
5,247  2,470 
Increase (decrease) $ 792  $ (34)
 
Of the total amount of customer deposit liability as of January 1, 2021, $3,708 was reported as revenue during the nine months ended September 30, 2021. Of the total amount of customer deposit liability as of January 1, 2020, $1,599 was reported as revenue during the nine months ended September 30, 2020.
 
The Company also has customer trade receivables under longer term financing arrangements at interest rates ranging from 9% to 12% with repayment terms ranging for 12 to 18 months. Long term trade receivables as of September 30, 2021 and December 31, 2020 are as follows:
 
  September 30,
2021
December 31,
2020
Note receivable $ 8,402  $ 4,104 
Allowance for losses (118) (292)
Notes receivable, net $ 8,284  3,812 
 
The following table summarizes changes in notes receivable balances that have been deemed impaired.
 
  September 30,
2021
December 31,
2020
Note receivable $ 118  $ 1,166 
Allowance for losses (118) (291)
Notes receivable, net $ —  875 

9

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
5.INVESTMENTS
 
Marketable securities have maturities of less than one year as of September 30, 2021. There were no significant realized or unrealized gains or losses for the nine months ended September 30, 2021.

The components of investments, available for sales securities, as of September 30, 2021 were as follows:
 
  Fair Value Level Adjusted Cost Basis Unrealized Gain (Loss) Recorded
Basis
Commercial paper Level 2 $ 9,998  $ —  $ 9,998 
Corporate notes and bonds Level 2 19,963  —  19,963 
Marketable securities   $ 29,961  $ —  $ 29,961 
 
6.NOTES RECEIVABLE
 
Notes receivable include customer trade receivables under long term financing arrangements and other note receivables not associated with customer transactions.
 
  September 30,
2021
December 31,
2020
Trade receivables under longer term financing arrangements $ 8,284  $ 3,812 
Note receivable, non-customer related —  — 
Subtotal 8,284  3,812 
Less, current portion (7,734) (2,612)
Notes receivable, noncurrent $ 550  1,200 
 
7.PROPERTY AND EQUIPMENT
 
  September 30,
2021
December 31,
2020
Vehicles $ 2,455  $ 1,342 
Building 1,187  477 
Leasehold improvements 5,485  1,988 
Furniture, fixtures and equipment 9,106  5,739 
Construction-in-progress 3,966  — 
Total property and equipment, gross 22,199  9,546 
Accumulated depreciation and amortization (5,444) (3,071)
Property and equipment, net $ 16,755  $ 6,475 
 
Depreciation expense for the three and nine months ended September 30, 2021 was $932 thousand and $2.4 million, respectively. Depreciation expense for the three and nine months ended September 30, 2020 was $400 thousand and $1.1 million, respectively.

10

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
8.GOODWILL AND INTANGIBLE ASSETS
 
The changes in goodwill are as follows:
 
  September 30, 2021 December 31,
2020
Balance, beginning of period $ 62,951  $ 17,799 
Goodwill additions and measurement period adjustments 60,924  45,152 
Balance, end of period $ 123,875  $ 62,951 
 
Intangible assets consist of the following:
 
  September 30, 2021 December 31, 2020
  Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Tradenames $ 27,144  $ (3,584) $ 13,923  $ (398)
Patents, trademarks 100  (38) 100  (9)
Customer relationships 22,057  (2,130) 6,297  (138)
Non-competes 1,146  (175) 796  (22)
Intellectual property 2,065  (241) —  — 
Capitalized software 3,811  (758) 1,163  (222)
  $ 56,323  $ (6,926) $ 22,279  $ (789)
 
Amortization expense for the three months ended September 30, 2021 and 2020 was $2.6 million and $44.1 thousand, respectively.

Amortization expense for the nine months ended September 30, 2021 and 2020 was $6.1 million and $0.2 million, respectively.
 
Future amortization expense is as follows:  
2021, remainder $ 2,718 
2022 11,002 
2023 10,707 
2024 10,356 
2025 9,459 
Thereafter 5,155 
Total $ 49,397 
 
11

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
9.LONG-TERM DEBT
 
September 30,
2021
December 31,
2020
Long term debt is as follows:    
Wells Fargo Equipment Finance, interest at 3.5% per annum, payable in monthly installments of $518.96 beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $25
$ —  $
Notes payable issued in connection with seller financing of assets acquired, interest at 8.125%, payable in 60 installments of $8,440.00, due August 2023
203  240 
  $ 203  $ 241 
Less Current Maturities (111) (83)
Total Long-Term Debt $ 92  $ 158 
 
Interest expense for the three months ended September 30, 2021 and 2020 was $25 thousand and $0, respectively. 
  
Interest expense for the nine months ended September 30, 2021 and 2020 was $31 thousand and $20 thousand, respectively. 

10.LEASES
 
We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1-7 years, most of which include options to extend the leases for additional 3 to 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.
 
  September 30,
2021
December 31,
2020
Right to use assets, operating lease assets $ 36,155  $ 12,088 
Current lease liability $ 6,205  $ 3,001 
Non-current lease liability 31,355  9,479 
  $ 37,560  $ 12,480 
 
  September 30,
2021
September 30,
2020
Weighted average remaining lease term 6.89 years 2.98 years
Weighted average discount rate 6.5  % 7.6  %
 
  Nine Months Ended
September 30,
  2021 2020
Operating lease costs $ 5,687  $ 2,660 
Short-term lease costs 192  22 
Total operating lease costs $ 5,879  $ 2,682 
 
12

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
10.LEASES, continued

The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2021: 

2021 (remainder of the year) $ 2,248 
2022 8,116 
2023 7,548 
2024 6,320 
2025 5,330 
Thereafter 17,128 
Total lease payments 46,690 
Less: Imputed interest (9,130)
Lease Liability at September 30, 2021
$ 37,560 
 
11.SHARE BASED PAYMENTS
 
The Company maintains long-term incentive plans for employee, non-employee members of our Board of Directors and consultants. The plans allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards).
 
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 Company also issues share based payments in the form of common stock warrants to non-employees.
 
The following table presents share-based payment expense for the nine months ended September 30, 2021 and 2020.
 
  Nine months ended September 30,
  2021 2020
Restricted stock $ 3,511  $ 3,966 
Stock options 721  2,358 
Warrants 1,115  — 
Total $ 5,347  $ 6,324 
  
As of September 30, 2021, the Company had approximately $9.7 million of unamortized share-based compensation for option awards and restricted stock awards, which is expected to be recognized over a weighted average period of approximately 3.1 years. As of September 30, 2021, the Company also had approximately $2.9 million of unamortized share-based compensation for common stock warrants issued to consultants, which is expected to be recognized over a weighted average period of 2.3 years.
 
Restricted Stock
 
The Company issues shares of restricted stock to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest on the second or third anniversary of the date of grant, subject to the employee’s continuing employment as of that date.
 
13

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
11.SHARE BASED PAYMENTS AND STOCK OPTIONS, continued

Restricted stock activity for the nine months ended September 30, 2021 is presented in the following table:
 
  Shares Weighted Average Grant Date Fair Value
Nonvested, December 31, 2020
630  $ 4.15 
Granted 250  $ 40.56 
Vested (355) $ 4.48 
Forfeited (9) $ 18.54 
Nonvested, September 30, 2021
516  $ 19.92 
 
The table below summarizes all option activity under all plans during the nine months ended September 30, 2021:
 
Options Shares Weight -
Average
Exercise
Price
Weighted -
Average
Remaining
Contractual
Term
Weighted -
Average
Grant Date
Fair Value
Outstanding at December 31, 2020
1,803  $ 3.92  3.47 $ 2.38 
Granted —  —  —  — 
Exercised (821) 3.20  —  1.71 
Forfeited or expired (51) 4.12  —  2.26 
Outstanding at September 30, 2021
931  $ 4.55  3.12 $ 2.62 
Options vested at September 30, 2021
595  $ 4.27  3.01 $ 2.51 
   
A summary of the status of the Company’s outstanding stock purchase warrants for the nine months ended September 30, 2021 is as follows:
 
  Warrants Weighted Average
Exercise Price
Outstanding at December 31, 2020
1,393  $ 7.49 
Issued —  — 
Exercised (968) $ 2.84 
Forfeited —  — 
Outstanding at September 30, 2021
425  $ 17.25 
 
14

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
12.EARNINGS PER SHARE
   
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for the three and nine months ended September 30, 2021 and 2020.
 
  Three Months Ended
  September 30,
2021
September 30,
2020
Net income $ 4,027  $ 3,338 
Weighted average shares outstanding, basic 58,531  47,878 
Effect of dilution 959  3,748 
Adjusted weighted average shares outstanding, dilutive 59,490  51,626 
Basic earnings per share $ 0.07  $ 0.07 
Dilutive earnings per share $ 0.07  $ 0.06 
  Nine Months Ended
  September 30,
2021
September 30,
2020
Net income $ 16,887  $ 3,818 
Weighted average shares outstanding, basic 58,994  41,477 
Effect of dilution 1,114  2,747 
Adjusted weighted average shares outstanding, dilutive 60,108  44,224 
Basic earnings per share $ 0.29  $ 0.09 
Dilutive earnings per share $ 0.28  $ 0.09 

13.ACQUISITIONS
 
Our acquisition strategy is primarily to acquire (i) well established profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence; and (ii) proprietary brands and private label brands. The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. The Company has made adjustments to the preliminary valuations of the acquisition based on valuation analysis prepared by independent third-party valuation consultants. During the nine months ended September 30, 2021 our measurement period adjustments included reducing intangible assets by $1.0 million and increasing goodwill by the same amount. As a result of these measurement period adjustments, we made an insignificant reduction in amortization expense which is included in the income statement. All acquisition costs are expensed as incurred and recorded in general and administrative expenses in the consolidated statements of operations.
 
Acquisitions during the nine months ended September 30, 2021
 
On January 25, 2021, the Company purchased the assets of Indoor Garden & Lighting, Inc, a two-store chain of hydroponic and equipment and indoor gardening supply stores serving the Seattle and Tacoma, Washington area. The total consideration for the purchase of Garden & Lighting was approximately $1.7 million, including $1.2 million in cash and common stock valued at approximately $0.5 million. Acquired goodwill of approximately $0.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
 
On February 1, 2021, the Company purchased the assets of J.A.R.B., Inc d/b/a Grow Depot Maine, a two-store chain in Auburn and Augusta, Maine. The total consideration for the purchase of Grow Depot Maine was approximately $2.1 million, including $1.7 million in cash and common stock valued at approximately $0.4 million. Acquired goodwill of approximately $0.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
 

15

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021



13.ACQUISITIONS, continued

On February 15, 2021, the Company purchased the assets of Grow Warehouse LLC, a four-store chain of hydroponic and organic garden stores in Colorado (3) and Oklahoma (1). The total consideration for the purchase of Grow Warehouse LLC was approximately $17.8 million, including $8.1 million in cash and common stock valued at approximately $9.7 million. Acquired goodwill of approximately $11.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
 
On February 22, 2021, the Company purchased the assets of San Diego Hydroponics & Organics, a four-store chain of hydroponic and organic garden stores in San Diego, California. The total consideration for the purchase of San Diego Hydroponics was approximately $9.3 million, including $4.8 million in cash and common stock valued at approximately $4.5 million. Acquired goodwill of approximately $5.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
 
On March 12, 2021, the Company purchased the assets of Charcoir Corporation, which sells an RHP-certified growing medium made from the highest-grade coconut fiber. The total consideration for the purchase of Charcoir was approximately $16.4 million, including $9.9 million in cash and common stock valued at approximately $6.5 million. Acquired goodwill of approximately $6.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established distribution market for the Company of a proprietary brand.
 
On March 15, 2021, the Company purchased the assets of 55 Hydroponics, a hydroponic and organic superstore located in Santa Ana, California. The total consideration for the purchase of 55 Hydroponics was approximately $6.5 million, including $5.4 million in cash and common stock valued at approximately $1.1 million. Acquired goodwill of approximately $3.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
 
On March 15, 2021, the Company purchased the assets of Aquarius, a hydroponic and organic garden store in Springfield, Massachusetts. The total consideration for the purchase of Aquarius was approximately $3.6 million, including $2.4 million in cash and common stock valued at approximately $1.2 million. Acquired goodwill of approximately $1.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
 
On March 19, 2021, the Company purchased the assets of Agron, LLC, an online seller of growing equipment. The total consideration for the purchase of Agron was approximately $11.3 million, including $6 million in cash and common stock valued at approximately $5.3 million. Acquired goodwill of approximately $8.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established e-commerce market for the Company targeting the commercial customer.

On April 19, 2021, the Company purchased the assets of Grow Depot LLC ("Down River Hydro"), a hydroponic and indoor gardening supply store in Brownstown, Michigan. The total consideration for the purchase of Down River Hydro was approximately $4.4 million, including approximately $3.2 million in cash and common stock valued at approximately $1.2 million. Acquired goodwill of approximately $2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.

On May 24, 2021, the Company purchased the assets of The Harvest Company ("Harvest"), a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity Counties. The total consideration for the purchase of Harvest was approximately $8.3 million, including approximately $5.6 million in cash and common stock valued at approximately $2.8 million. Acquired goodwill of approximately $4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.
 
On July 19, 2021, the Company purchased the assets of Aqua Serene, Inc., ("Aqua Serene") an Oregon corporation which consists of an indoor/outdoor garden center with stores in Eugene and Ashland, Oregon. The total consideration for the purchase was $11.7 million, including approximately $9.9 million in cash and common stock valued at approximately $1.8 million. Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.

16

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021

13.ACQUISITIONS, continued

On July 3, 2021, the Company purchased the assets of Mendocino Greenhouse & Garden Supply, Inc, a Northern California-based hydroponic garden center located in Mendocino, California. The purchase agreement was modified on July 19, 2021 to amend the purchase price. The total consideration for the purchase was $4.0 million in cash. This acquisition allows the Company to expand its footprint in the Northern California.

On August 24, 2021, the Company purchased the assets of Commercial Grow Supply, Inc. ("CGS"), a hydroponic superstore located in Santa Clarita, California. The total consideration for the purchase was $7.2 million, including approximately $6.0 million in cash and common stock valued at approximately $1.3 million. Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.

On August 23, 2021 the Company purchased the assets of Hoagtech Hydroponics, Inc. ("Hoagtech"), a Washington -based corporation consisting of a hydroponic and garden supply center serving the Bellingham, Washington area. The total consideration for the purchase was $3.9 million in cash. The Asset Purchase Agreement contains a contingent payment equal to $0.6 million to be settled in GrowGen common stock if this garden supply center reaches $8.0 million in revenue within a 12-month calendar period from the date of close. The Company used a third-party specialist to value this contingent consideration. The probability that the target will be reached was determined to be 5% which resulted in a value of approximately $29 thousand of contingent consideration which was offset against goodwill. This acquisition expands our footprint in the Pacific Northwest. Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.

The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2021.

  Agron Aquarius Aqua Serene 55 Hydro Charcoir San Diego Hydro Mendocino Hoagtech
Inventory $ —  $ 957  $ 1,696  $ 780  $ 839  $ 1,400  753  751 
Prepaids and other current assets 29  12  29  534  36  37 
Furniture and equipment 46  63  500  50  —  315  160  144 
Liabilities —  —  —  —  —  —  —  — 
Operating lease right to use asset 98  108  1,177  861  —  1,079  408  1,569 
Operating lease liability (98) (108) (1,177) (861) —  (1,079) (408) (1,569)
Customer relationships 832  339  1,235  809  5,712  605  575  493 
Trade name 1,530  485  1,231  870  1,099  1,192  449  428 
Non-compete 139  —  11  26  — 
Intellectual property —  —  —  —  2,065  —  —  — 
Goodwill 8,673  1,702  6,976  3,915  6,119  5,728  2,056  2,076 
Total $ 11,249  $ 3,558  $ 11,651  $ 6,479  $ 16,368  $ 9,282  $ 4,000  $ 3,932 
 
CGS Grow Warehouse Grow Depot Maine Indoor Garden Down River Hydro Harvest Total
Inventory 875  $ 2,450  $ 326  $ 372  $ 824  $ 1,204  $ 13,227 
Prepaids and other current assets 30  —  724 
Furniture and equipment 100  250  25  94  50 100  1,897 
Liabilities —  (169) —  —  —  —  (169)
Operating lease right to use asset 746  641  92  137  273  3,782  10,971 
Operating lease liability (746) (641) (92) (137) (273) (3,782) (10,971)
Customer relationships 1,382  1,256  549  210  634  1,016  15,647 
Trade name 852  2,748  344  353  698  1,392  13,671 
Non-compete 11  94  36  16  —  350 
Intellectual property —  —  —  —  —  —  2,065 
Goodwill 4,027  11,120  866  661  2,126  4,606  60,651 
Total $ 7,248  $ 17,779  $ 2,149  $ 1,692  $ 4,351  $ 8,325  $ 108,063 
 

17

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
The table below represents the consideration paid for the net assets acquired in business combinations.
 
  Agron Aquarius Aqua Serene 55 Hydro Charcoir San Diego Hydro Mendocino Hoagtech
Cash $ 5,973  $ 2,331  $ 9,860  $ 5,347  $ 9,902  $ 4,751  $ 4,000  $ 3,932 
Common stock 5,276  1,227  1,791  1,132  6,466  4,531  —  — 
Total $ 11,249  $ 3,558  $ 11,651  $ 6,479  $ 16,368  $ 9,282  $ 4,000  $ 3,932 
  

  CGS Grow Warehouse Grow
Depot Maine
Indoor Garden Down River Hydro Harvest Total
Cash 5,976  $ 8,100  $ 1,738  $ 1,165  $ 3,177  $ 5,561  $ 71,813 
Common stock 1,272  9,679  411  527  1,174  2,764  36,250 
Total $ 7,248  $ 17,779  $ 2,149  $ 1,692  $ 4,351  $ 8,325  $ 108,063 
  
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement for the period ended September 30, 2021.

 
  Agron Aquarius Aqua Serene 55 Hydro Charcoir San Diego Hydro Mendocino Hoagtech
Acquisition date
3/19/2021 3/15/2021 7/19/21 3/15/2021 3/12/2021 2/22/2021 7/19/21 8/23/21
Revenue $ 10,587  $ 5,555  $ 1,590  $ 4,482  $ 4,048  $ 5,525  $ 1,085  $ 483 
Net Income $ 149  $ 1,145  $ 331  $ 393  $ 723  $ 839  $ 158  $ 36 
 
  CGS Grow Warehouse Grow Depot Maine Indoor Garden Down River Hydro Harvest Total
Acquisition date
8/24/21 2/15/2021 2/1/2021 1/25/2021 4/19/2021 5/24/21
Revenue $ 447  $ 10,153  $ 4,660  $ 4,508  $ 2,460  $ 4,444  $ 60,027 
Net Income $ (1) $ 1,812  $ 907  $ 520  $ 277  $ 756  $ 8,045 
 

18

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
13.ACQUISITIONS, continued

The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the three and nine months ended September 30, 2021 and 2020.
 
Three Months Ended Nine Months Ended
  September 30, 2021
(Unaudited)
September 30, 2021
(Unaudited)
Revenue $ 146,030  $ 361,937 
Net income $ 5,299  $ 23,276 


Three Months Ended Nine Months Ended
  September 30, 2020
(Unaudited)
September 30, 2020
(Unaudited)
Revenue $ 121,809  $ 222,193 
Net income $ 6,412  $ 15,681 
 
Acquisitions during the nine months ended September 30, 2020
 
On February 26, 2020, we acquired certain assets of Health & Harvest LLC in a transaction valued at approximately $2.85 million. Acquired goodwill of approximately $1.1 million represented the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital.

On June 16, 2020, we acquired certain assets of H2O Hydroponics, LLC in a transaction valued at approximately $2.0 million. Acquired goodwill of approximately $1.0 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company's existing working capital.

On August 10, 2020, we acquired certain assets of Benzakry Family Corp, d/b/a Emerald City Garden, in a transaction valued at $1.0 million. Acquired goodwill of approximately $0.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital.

The table below represents the allocation of the purchase price to the acquired net assets during the nine months ended September 30, 2020.
 
  Emerald City Garden H2O Hydroponics LLC Health & Harvest LLC Total
Inventory $ 150  $ 498  $ 1,054  $ 1,702 
Prepaids and other current assets —  — 
Furniture and equipment 10  50  51  111 
Right to use asset 140  906  324  1,370 
Lease liability (140) (906) (324) (1,370)
Customer relationships 212  150  255  617 
Trade name —  234  357  591 
Non-compete 14  43  63 
Goodwill 614  1,008  1,130  2,752 
Total $ 1,000  $ 1,987  $ 2,853  $ 5,840 
 
19

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
The table below represents the consideration paid for the net assets acquired in business combinations.
 
  Emerald City Garden H2O Hydroponics LLC Health & Harvest LLC Total
Cash $ 1,000  $ 1,282  $ 1,750  $ 4,032 
Common stock —  705  1,103  1,808 
Total $ 1,000  $ 1,987  $ 2,853  $ 5,840 
 
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date of acquisition to the nine months ended September 30, 2020.
 
  Emerald City Gardens H2O Hydroponics LLC Health & Harvest LLC Total
Acquisition date 8/10/20 6/26/20 2/26/2020
Revenue $ 472  $ 2,769  $ 5,887  $ 9,128 
Earnings $ 74  $ 504  $ 831  $ 1,409 


The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the nine months ended September 30, 2019.
 
Pro forma consolidated income statement:
 
Three Months Ended Nine Months Ended
  September 30, 2019
(Unaudited)
September 30, 2019
(Unaudited)
Revenue $ 24,651  $ 61,176 
Earnings $ 1,220  $ 2,603 

14.RELATED PARTIES

The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner. The firm provides certain legal services. Amounts paid for to that firm in total were approximately $32.0 thousand and $457.8 thousand for the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, there was no outstanding balance due.


15.SUBSEQUENT EVENTS
 
The Company has evaluated events and transaction occurring subsequent to September 30, 2021 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. 
 
For all acquisitions subsequent to the end of the quarter, the Company’s initial accounting for the business combination has not been completed because the valuations have not yet been received from the Company’s independent valuation firm.

On October 12, 2021, the Company purchased the assets of All Seasons Gardening, an indoor-outdoor garden supply center specializing in hydroponics systems, lighting, and nutrients. All Seasons Gardening is the largest hydroponics retailer in New Mexico. The total consideration for the purchase was $1.0 million, including approximately $0.7 million in cash and common stock valued at approximately $0.3 million.

20

GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
September 30, 2021
On October 12, 2021, the Company terminated a series of asset purchase agreements (the “Asset Purchase Agreements”) entered into on July 27, 2021 through its wholly-owned subsidiary, GrowGeneration Michigan Corp., to purchase the assets from subsidiaries of HGS Hydro (“HGS Hydro”). The termination of the Asset Purchase Agreement was mutually agreed to by both parties. In connection with the termination, the Company reimbursed HGS Hydro of a transaction fee of $300,000.


21


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 29, 2021, as amended on April 14, 2021. 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 us, 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 Corp. (together with all of its wholly-owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014 and is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems and accessories for hydroponic gardening. GrowGeneration also owns and operates e-commerce platforms www.growgeneration.com and www.agron.io, Canopy Crop Management Corp, CharCoir Inc, and several proprietary private-label brands across multiple product categories from LED lighting to nutrients and additives and environmental control systems for indoor cultivation.
 
Markets
 
GrowGeneration sells thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, vertical benching and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are designed and intended for growing a wide range of plants. In addition, vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other severe weather conditions and insect pests.
 
Our retail operations are driven by a wide selection of all hydroponic products, service and solutions driven staff and pick, pack and ship distribution and fulfillment capabilities. We employed approximately 748 employees as of September 30, 2021, a majority of them we have branded as “Grow Pros.” Currently, our operations span over 950,000 square feet of retail and warehouse space.
 
We operate our business through the following business units:
 
Retail: 61 operating hydroponic/gardening centers focused on serving growers and cultivators.

Commercial: Sales to commercial customers, including large multi-state operators and cultivators.

E-Commerce/Omni-channel: Our e-commerce operation, includes GrowGeneration.com and Agron.io, a business-to-business (B2B) online portal for commercial growers. GrowGeneration.com is currently adding “Buy online/Pick up in store” same day pick up service.

Proprietary Brands and Private Label: GrowGeneration sells a variety of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, vertical benching, environmental control systems and accessories for hydroponic gardening.
 
Competitive Advantages
 
As the largest chain of hydroponic garden centers by revenue and number of stores in the United States based on management’s estimates, we believe that we have the following core competitive advantages over our competitors:
 
22


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

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

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

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

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

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

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

Growth Strategy - Store Acquisitions and New Store Openings
 
Core to our growth strategy is to expand the number of our retail garden centers throughout North America. The hydroponic retail landscape is fragmented, which allows us to acquire the “best of breed” hydroponic operations. In addition to the 12 states we are currently operating in, we have identified new market opportunities in states that include Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi and Missouri. In 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and completed eight (8) acquisitions, adding 14 new locations. The Company acquired 17 new locations in the first half of 2021, three additional locations in July 2021 and two in August 2021, and has an active target pipeline of acquisitions which are planned to close in 2021.

RESULTS OF OPERATIONS
 
Comparison of the three months ended September 30, 2021 and 2020.
 
Net revenue for the three months ended September 30, 2021 was approximately $116.0 million, compared to $55.0 million for the three months ended September 30, 2020, an increase of approximately $61.0 million or 111%. This increase included an increase of approximately $59.2 million related to same store sales which represented 15.7% growth year over year. Distributed sales was $4.7 million from the acquisitions of Power Si and Charcoir. E-commerce sales increased from $3.9 million to $10.5 million which can be explained by $6.0 million growth in owned e-commerce sites and $4.5 million from the Agron acquisition.

Cost of Goods Sold
 
Cost of goods sold for the three months ended September 30, 2021 was approximately $81.9 million, compared to approximately $40.4 million for the three months ended September 30, 2020, an increase of approximately $41.5 million or 103%. The increase in cost of goods sold was primarily due to the 111% increase in sales comparing the three months ended September 30, 2021 to the three months ended September 30, 2020.
 
Gross profit was approximately $34.1 million for the three months ended September 30, 2021, compared to approximately $14.6 million for the three months ended September 30, 2020, an increase of approximately $19.5 million or 134%. The increase in gross profit is primarily related to the 111% increase in revenues comparing the quarter ended September 30, 2021 to the quarter ended September 30, 2020. Gross profit as a percentage of revenues was 29.4% for the three months ended September 30, 2021, compared to 26.5% for the three months ended September 30, 2020. The increase in the gross profit margin percentage is primarily due to higher increases in revenues from both private label products and distributed products which were 8.7% of revenues for the quarter ended September 30, 2021 and approximately than 2% of revenues for the quarter ended September 30, 2020.

Operating Expenses
 
Operating expenses are comprised of store operations, selling, general, and administrative and depreciation and amortization. Operating costs were approximately $29.4 million for the three months ended September 30, 2021 and approximately $9.5 million for the three months ended September 30, 2020, an increase of approximately $19.9 million or 210%.
23


 
Store operating costs were approximately $14.8 million for the three months ended September 30, 2021, compared to $5.0 million for the quarter ended September 30, 2020, an increase of $9.8 million or 196%. The increase in store operating costs was directly attributable to the 111% increase in revenues, the addition of 32 locations that were added after September 30, 2020 contributed $5.0 million of additional operating costs, and 2 locations added during the quarter ended September 30, 2020 that were open for the entire quarter ended September 30, 2021. We also incurred $0.9 million of pre-opening expenses related to new stores.
 
Total corporate overhead was approximately $14.5 million for the three months ended September 30, 2021, compared to $4.5 million for the quarter ended September 30, 2020, an increase of $10.1 million or 226%. Selling, general, and administrative costs were approximately $11.0 million for the three months ended September 30, 2021, compared to approximately $4.0 million for the three months ended September 30, 2020. Salaries expense increased to $5.2 million from $2.2 million primarily due to an increase in corporate staff and general and administrative expenses increased to $3.7 million from $0.8 million to support expanding operations. Share-based compensation increased to $2.1 million from $1.0 million primarily due to expanding corporate staff to support the increased operations. Depreciation expense for the period was $0.9 million compared to $0.4 million in the prior year. The increase in depreciation expense is attributable to the addition of new stores, an expanded fleet of vehicles to support commercial sales, and leasehold improvements to retail locations. Amortization expense for the period was $2.6 million compared to $44.1 thousand which was driven by the acquisition of 32 retail stores.

Other income/expense

Total other income expense was approximately $0.4 million for the three months ended September 30, 2021, compared to $34 thousand for the quarter ended September 30, 2020. This increase is primarily attributable to interest on notes receivable of $0.4 million.

Income taxes

Income tax expense was $1.1 million for the three months ended September 30, 2021, compared to $1.8 million for the quarter ended September 30, 2020. Effective tax rate is impacted by differences in timing of expenses for share based compensation, depreciation, amortization and the impact of 162m on deductible wages. As such, the Company’s taxable income varies from reported income in a material way. In addition, 25.9% of revenue for the Company is in California with a significantly higher income tax rate than other USA jurisdictions.

Net Income
 
Net income for the three months ended September 30, 2021 was approximately $4.0 million, compared to net income of approximately $3.3 million for the three months ended September 30, 2020, a increase of approximately $0.7 million.

Comparison of the nine months ended September 30, 2021 and 2020.
 
Net revenue for the nine months ended September 30, 2021 was approximately $331.9 million, compared to $131.4 million for the nine months ended September 30, 2020, an increase of approximately $200.5 million or 153%. The increase included an increase of approximately $164.3 million related to same store sales which represented 38.6% growth year over year. Distributed sales was $12.5 million from the acquisitions of Power Si and Charcoir. E-commerce sales increased from $9.9 million to $28.5 million which can be explained by $17.9 million growth in owned e-commerce sites and $10.6 million from the Agron acquisition.

Cost of Goods Sold

Cost of goods sold for the nine months ended September 30, 2021 was approximately $236.8 million, compared to approximately $96.3 million for the nine months ended September 30, 2020, an increase of approximately $140.4 million or 146%. The increase in cost of goods sold was primarily due to the 153% increase in sales comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020.

Gross profit was approximately $95.2 million for the nine months ended September 30, 2021, compared to approximately $35.1 million for the nine months ended September 30, 2020, an increase of approximately $60.1 million or 171%. The increase in gross profit is primarily related to the 153% increase in revenues comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020. Gross profit as a percentage of revenues was 28.7% for the nine months ended September 30, 2021, compared to 26.7% for the nine months ended September 30, 2020. The increase in the gross profit margin
24


percentage is primarily due to higher increases in revenues from both private label products and distributed products which were 7.5% of revenues for the nine months ended September 30, 2021 and approximately 1% of revenues for the nine months ended September 30, 2020.

Operating Expenses

Operating expenses are comprised of store operations, selling, general, and administrative and depreciation and amortization. Operating costs were approximately $73.1 million for the nine months ended September 30, 2021 and approximately $29.3 million for the nine months ended September 30, 2020, an increase of approximately $43.8 million or 150%.
 
Store operating costs were approximately $35.6 million for the nine months ended September 30, 2021, compared to $12.5 million for the nine months ended September 30, 2020, an increase of $23.1 million or 185%. The increase in store operating costs was directly attributable to the 153% increase in revenues, the addition of 32 locations that were added after September 30, 2020, and 16 locations added during the nine months ended September 30, 2020 that were open for the entire quarter ended September 30, 2021 generated an additional $11.5 million of store operating expenses. We also incurred $0.9 million of pre-opening expenses for new stores opened during the period.
 
Total corporate overhead was approximately $37.5 million for the nine months ended September 30, 2021, compared to $16.8 million for the nine months ended September 30, 2020, an increase of $20.7 million or 123%. Selling, general, and administrative costs were approximately $29.0 million for the nine months ended September 30, 2021, compared to approximately $15.5 million for the nine months ended September 30, 2020. Salaries expense increased to $14.9 million from $5.9 million primarily due to an increase in corporate staff and general and administrative expenses increased to $8.8 million from $3.2 million to support expanding operations. These increases were partially offset by a decrease in share-based compensation to $5.3 million from $6.3 million primarily due to new executive compensation agreements effective January 1, 2020 that had front loaded vesting provisions for shares and options that vested January 1, 2020 for which the remaining vesting was over a two-year period.

Other income/expense

Total other income/expense was approximately $0.4 million for the nine months ended September 30, 2021, compared to expense of $22.0 thousand for the nine months ended September 30, 2020. This increase is primarily attributable to interest on notes receivable of $0.4 million.

Income taxes

Income tax expense was $5.6 million for the nine months ended September 30, 2021, compared to $2.0 million for the nine months ended September 30, 2020. Effective tax rate is impacted by differences in timing of expenses for share based compensation, depreciation, amortization and the impact of 162m on deductible wages. As such, the company’s taxable income varies from reported income in a material way. In addition, 26.4% of revenue for the company is in California with a significantly higher income tax rate than other USA jurisdictions.

Net Income

Net income for the nine months ended September 30, 2021 was approximately $16.9 million, compared to a net income of approximately $3.8 million for the nine months ended September 30, 2020, a increase of approximately $13.1 million.

Operating Activities
 
Net cash provided by operating activities for nine months ended September 30, 2021 was approximately $1.9 million compared to $3.7 million for the nine months ended September 30, 2020. Cashed used in inventory increase was primarily attributable to our additional store count, $13.0 million associated with growing the offerings of private label. In addition, we have used our capital capabilities to secure production of product overseas through prepaid inventory purchase commitments with long lead times in advance of spring 2022 needs. Cash used in accounts and notes receivable increases were primarily driven by our increased store count and related increase in store count. The increase in cash used for prepaids and other assets is primarily driven by an increase in prepayments for inventory not yet received at warehouse or store locations.
 
Net cash used in investing activities was approximately $114.8 million for the nine months ended September 30, 2021 and approximately $6.9 million for the nine months ended September 30, 2020. Investing activities in 2021 were primarily attributable to acquisitions of $71.8 million, purchase of marketable securities of $75.0 million, vehicles and store equipment
25


purchases $10.8 million and intangible asset purchases of $2.3 million. Investing activities for the nine months ended September 30, 2020 were primarily related to store acquisitions of $4.0 million, the purchase of vehicles and store equipment to support new store operations of $2.1 million and intangible assets of $0.8 million. 
 
Net cash used in financing activities for the nine months ended September 30, 2021 was approximately $1.9 million and was primarily attributable to stock redemptions partially offset by the proceeds from the sales of common stock and exercise of warrants. Net cash provided by financing activities for nine months ended September 30, 2020 was $45.6 million and was primarily from proceeds from the sale of common stock and exercise of warrants.
 
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 September 30,
  2021 2020
  (000) (000)
Net income $ 4,027  $ 3,338 
Income taxes 1,096  1,799 
Interest expense 25  — 
Depreciation and Amortization 3,539  443 
EBITDA $ 8,687  $ 5,580 
Share based compensation (option compensation, warrant compensation, stock issued for services) 2,106  1,022 
Adjusted EBITDA $ 10,793  $ 6,602 
Adjusted EBITDA per share, basic $ 0.18  $ 0.14 
Adjusted EBITDA per share, diluted $ 0.18  $ 0.13 


 
Set forth below is a reconciliation of Adjusted EBITDA to net income (loss):
 
26


  Nine Months Ended
September 30,
  2021 2020
  (000) (000)
Net income $ 16,887  $ 3,818 
Income taxes 5,569  1,955 
Interest 31  20 
Depreciation and Amortization 8,510  1,270 
EBITDA $ 30,997  $ 7,063 
Share based compensation (option compensation, warrant compensation, stock issued for services) 5,347  6,324 
Adjusted EBITDA 36,344  $ 13,387 
Adjusted EBITDA per share, basic $ 0.62  $ 0.32 
Adjusted EBITDA per share, diluted $ 0.60  $ 0.30 

LIQUIDITY AND CAPITAL RESOURCES
 
As of September 30, 2021, we had working capital of approximately $179.2 million, compared to working capital of approximately $222.9 million as of December 31, 2020, a decrease of approximately $43.7 million. The decrease in working capital from December 31, 2020 to September 30, 2021 was due primarily to business acquisition completed during the nine months ended September 30, 2021 for which the cash consideration was approximately $71.8 million. This decrease in working capital related to business acquisitions was partially offset by an increase in inventory associated with more locations and our ability to leverage greater bulk purchasing due to our growth. At September 30, 2021, we had cash and cash equivalents of approximately $63.0 million and available for sale debt securities of $30.0 million. Currently, we have no extraordinary demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth and acquisitions. Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings. We believe that some of our store acquisitions and new store openings can come from cash flow from operations.
 
We anticipate that we may need additional financing in the future to continue to acquire and open new stores and related businesses. To date we have financed our operations through the issuance and sale of common stock, convertible notes and warrants.
 
Critical Accounting Policies, Judgements and Estimates
 
For a summary of the Company’s significant accounting policies, please refer to Note 2 to our Consolidated Financial Statements filed on our Form 10-K for the year ended December 31, 2020.

OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.
 
ITEM 4. CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
Management maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our
27


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 making this assessment, management used the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on evaluation under these criteria, management determined, based upon the existence of the material weaknesses described below, that we did not maintain effective internal control over financial reporting as of September 30, 2021.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
 
The Company did not design and implement effective control activities based on the criteria established in the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
 
The following were contributing factors to the material weaknesses in control activities:

Insufficient resources within the accounting and financial reporting department to review the accounting implications of complex transactions.

Inadequate segregation of duties within the bank accounts.

Ineffective information technology general controls (ITGCs) in the areas of user access over certain information technology (IT) systems that support the Company’s financial reporting processes.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the implementation of remediation plans for the deficiency to address the material weakness identified.
 
Remediation Plan and Status
 
Our remediation efforts are ongoing and we will continue our initiatives to implement and document policies, procedures, and internal controls. Remediation efforts will include but are not limited to new hires in critical positions to improve segregation of duties, supervision and oversight, as well as implementation of technologies to improve effective controls.
 
Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
 
While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.
 
Inherent Limitations on Effectiveness of Controls
 
Management, including our CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a
28


control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected.
 
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.

29


PART II – OTHER INFORMATION

Item 1. Legal Proceedings
 
None.
 
Item 1A. Risk Factors
 
The COVID-19 coronavirus pandemic could have a material negative effect on our results of operations, cash flows, financial position, and business operations.
 
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations.
 
We are unable to predict the impact that COVID-19 will have on our results of operations, cash flows, financial position, and business operations due to numerous uncertainties. These uncertainties include, but are not limited to: the severity of the virus; the duration of the pandemic; governmental actions which include restrictions on our operations up to and including potential closure of our stores and distribution centers; the duration and degree of quarantine or shelter-in-place measures, including additional measures that may still occur; impacts on our supply chain which include suppliers of our products and our transportation vendors; the health of our workforce and our ability to maintain staffing needs to operate our business; how macroeconomic factors evolve including unemployment rates and recessionary pressures; the impact of the crisis on consumer shopping patterns, both during and after the crisis; volatility in the economy as well as the credit and financial markets during and after the pandemic; the incremental costs of doing business during the crisis as well as on a long-term basis; potential increases in insurance premiums, medical claims costs, and workers’ compensation claim costs; unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; potential delays in growth initiatives including the timing of new store openings; potential adverse effects on our internal control environment and information security as a result of changes to a remote work environment; and the long-term impact of the crisis on our business.
 
In addition, we cannot predict the impact that the pandemic will have on our manufacturers and suppliers of our products and other business partners such as service vendors; however, any material effect on these parties could adversely impact our results of operations and our ability to operate our business effectively.
 
The COVID-19 coronavirus pandemic could have a material negative effect on our supply chain.
 
Circumstances surrounding and related to the COVID-19 pandemic have created unprecedented impacts on the global supply chain. Our business relies on an efficient and effective supply chain, including the manufacture and transportation of our products as well as the effective functioning of our distribution centers. Impacts related to the COVID-19 pandemic are placing strain on the domestic and international supply chain that could negatively affect the flow or availability of our products and result in higher out-of-stock inventory positions due to difficulties in timely obtaining product from the manufacturers and suppliers of our products as well as transportation of those products to our distribution centers and stores. Further, we may have to source products from different manufacturers or geographic locations which could result in, among other things, higher product costs, increased transportation costs, delays in receiving products or lower quality of the products.
 
Any of these circumstances could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation.
 
Actions taken to protect the health and safety of our team members and customers during the COVID-19 coronavirus pandemic have increased our operating costs and may not be sufficient to protect against operational or reputational harm to our business.
 
In response to the COVID-19 pandemic, we have taken a number of actions across our business to help protect our team members, customers, and others in the communities we serve. These measures include personal protective equipment for our team members, a requirement to wear masks in our facilities, increased staffing in order to provide contact-free curbside pickup from stores, expansion of our capabilities to support delivery to customer homes, increased cleaning and sanitizing measures, and monitoring for “social distancing” directives, as well as additional cleaning materials in our facilities. Additionally, we have provided appreciation bonuses as well as permanent increases in compensation and benefits for our team members in our stores and distribution centers to further support them during and after the COVID-19 pandemic. Actions such as these have
30


resulted in significant incremental costs and we expect that we will continue to incur these costs for the foreseeable future, which in turn will have an adverse impact on our results of operations.
 
The health and safety of our team members and customers are of primary concern to our management team. However, due to the unpredictable nature of this virus and the consequences of our actions, we may see unexpected outcomes notwithstanding our added safety measures. For instance, if we do not respond appropriately to the pandemic, or if our customers do not participate in “social distancing” and other safety measures, the well-being of our team members and customers could be jeopardized. Furthermore, any failure to appropriately respond, or the perception of an inadequate response, could cause reputational harm to our brand and subject us to claims and litigation from team members, customers and service providers.
 
Additionally, an outbreak of confirmed cases of COVID-19 in our stores or distribution centers could result in temporary or sustained workforce shortages or facility closures which would negatively impact our underlying business and results of operations.

There may be limitations on the effectiveness of our internal controls. Failure of our internal control over financial reporting could harm our business and financial results.

Proper systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.

Moreover, we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially adversely impact us.

In connection with the evaluation of our internal control over financial reporting as of December 31, 2020 that was undertaken by management, management identified the following material weaknesses in our control activities: i) insufficient resources within the accounting and financial reporting department to review the accounting for warrant compensation accounting, share-based compensation accounting, and accounting for rebates; ii) inadequate segregation of duties within the bank accounts; and ineffective information technology general controls (ITGCs) in the areas of user access over certain information technology (IT) systems that support the Company’s financial reporting processes. Based upon the existence of such material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020.

We have adopted a remediation plan and are in the process of implementing such plan. Remediation efforts will include but are not limited to new hires in critical positions to improve segregation of duties, supervision and oversight, as well as implementation of technologies to improve effective controls. Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.
31



If we are unable to assert that our internal control over financial reporting is effective, or, if applicable, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Common Stock to decline.

We are subject to collection risk that can impact the results of our operations.

The Company extends credit to customers in the ordinary course of its business in the form of accounts receivable and promissory notes. The Company seeks to ensure its customers are creditworthy before extending credit, but the Company cannot guarantee it will receive repayment in full. The industries we serve are also newer and more fragmented, and some of our counter parties are smaller and/or newer businesses and therefore may be higher credit risk. In addition, the company may seek to strategically deploy capital in new markets into which, or with new business partners with whom, the company intends to expand its business, which new markets or partners may present higher risk.

 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On July 1, 2021, the Company purchased the assets of Aqua Serene, Inc., ("Aqua Serene") an Oregon corporation which consists of an indoor/outdoor garden center with stores in Eugene and Ashland, Oregon. The total consideration for the purchase was $11.7 million, including approximately $9.9 million in cash and 46,554 shares of common stock valued at approximately $1.8 million.

On August 23, 2021, the Company purchased the assets of Commercial Grow Supply, Inc. ("CGS"), a hydroponic superstore located in Santa Clarita, California. The total consideration for the purchase was $7.2 million, including approximately $6.0 million in cash and common stock valued at approximately $1.3 million.
 
On October 12, 2021, the Company purchased the assets of All Seasons Gardening, an indoor-outdoor garden supply center specializing in hydroponics systems, lighting, and nutrients. All Seasons Gardening is the largest hydroponics retailer in New Mexico. The total consideration for the purchase was $1.0 million, including approximately $0.7 million in cash and common stock valued at approximately $0.3 million.

The above issuances were made by the Company pursuant to registration exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

Item 3. Defaults upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
On October 12, 2021, the Company terminated a series of asset purchase agreements (the “Asset Purchase Agreements”) entered into on July 27, 2021 through its wholly-owned subsidiary, GrowGeneration Michigan Corp., to purchase the assets from subsidiaries of HGS Hydro (“HGS Hydro”). The termination of the Asset Purchase Agreement was mutually agreed to by both parties. In connection with the termination, the Company reimbursed HGS Hydro of a transaction fee of $300,000.
32


Item 6. Exhibits
 
The following exhibits are included and filed with this report.
 
Exhibit Exhibit Description
3.1 Certificate of Incorporation of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed on November 9, 2015)
3.2 Bylaws of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 as filed on November 9, 2015)
10.1
10.2
10.3
10.4
10.5
10.6
10.7
31.1
31.2
32.1
32.2
101 Interactive Data Files
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL