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Item 8. Financial Statements and Supplementary Data

2021-03-29 compared with 2020-03-27 · 1236 added, 641 removed, 211 unchanged (90% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of December 31, 2020 and 2019

3 unchanged sentences

Notes to Consolidated Financial Statements

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

the Board of Directors and

of GrowGeneration Corp

on the Financial Statements

have audited the accompanying consolidated balance sheets of GrowGeneration Corp and Subsidiaries (the Company) as of

December 31, 2019 and 2018, and the related consolidated statements of operations, stockholder s’

equity, and cash

flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to

as the financial statements).

Report of Independent Registered Public

Accounting Firm

To the Stockholders and Board of Directors of GrowGeneration

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of GrowGeneration Corp.

(the “Company”) as of December 31, 2020, the related consolidated statements

of operations, stockholders' equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred

to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all

material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash

flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of

Basis for Opinion

The Company's management is responsible

for these financial statements.

Our responsibility is to express an opinion on the Company’s financial statements based on

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have,

nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required

to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the

effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable

basis for our opinion.

/s/ Plante & Moran, PLLC

We have served as the Company’s auditor

Denver, Colorado

March 28, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Board of Directors and

Stockholders of GrowGeneration Corp and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of GrowGeneration Corp and Subsidiaries (the Company) as of December 31, 2019, and the related consolidated statements

of operations, changes in stockholders’

equity, and cash flows for the year then ended and the related notes (collectively

referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the

financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for

each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted

in the United States of America.

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s

financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight

Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements

are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to

perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then

ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based

on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required

to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are

required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion

on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

included performing procedures to assess the risks of

material misstatement of the financial statements, whether due to

error or fraud, and performing procedures that respond to those risks.

Such procedures included examining,

on a tes t basis ,

evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting

principles used and significant estimates made by management , as

well as evaluating the overall

presentation of the financial statement s.

We believe that our audits provide a reasonable basis

for our opinion.

Our audits included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates

made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide

a reasonable basis for our opinion.

/s/ Connolly Grady & Cha, P.C

Public Accountants

We have served

as the Company's aud it o r

Certified Public Accountants

Springfield, Pennsylvania

GrowGeneration

March 27, 2020

We have served as the Company's auditor since 2014

GROWGENERATION CORP.

AND SUBSIDIARIES

BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

Current assets:

Cash and cash equivalents

$ 177,911,511

Accounts receivable, net of allowance for doubtful accounts of $192,193 and $291,372 at December 31, 2020 and 2019

Prepaids and other current

Notes receivable, current, net of allowance for doubtful accounts of $292,050 and $0 at December 31, 2020 and 2019

Income tax receivable

Prepaids and other current assets

Total current assets

1 unchanged sentence

Operating leases right-of-use assets, net

Notes receivables, net of current portion

Intangible assets, net

$ 354,733,695

LIABILITIES & STOCKHOLDERS’

5 unchanged sentences

Sales tax payable

Current maturities of right-of-use assets

Current maturities of lease liability

Current portion of long-term debt

Total current liabilities

Long-term convertible debt, net of debt discount and debt issuance costs

Operating leases right-of-use assets, net of current maturities

Deferred tax liability

Operating lease liability, net of current maturities

Long-term debt, net of current portion

10 unchanged sentences

TOTAL LIABILITIES AND STOCKHOLDERS’

accompanying notes are an integral part of these audited consolidated financial statements.

GrowGeneration

$ 354,733,695

The accompanying notes are an integral

part of these audited consolidated financial statements.

GROWGENERATION CORP.

AND SUBSIDIARIES

STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended

$ 193,365,479

Cost of sales

6 unchanged sentences

Total operating expenses

Net income (loss) from operations

Net income from operations

Other income (expense):

2 unchanged sentences

Interest expense

Amortization of debt discount

Total non-operating income (expense), net

Net income (loss)

$ (5,073,755 )

Net income (loss) per share, basic

Net income (loss) per share, diluted

Net income before taxes

Provision for income taxes

Net income per share, basic

Net income per share, diluted

Weighted average shares outstanding, basic

Weighted average shares outstanding, diluted

accompanying notes are an integral part of these audited consolidated financial statements.

GrowGeneration

The accompanying

notes are an integral part of these audited consolidated financial statements.

GROWGENERATION CORP.

AND SUBSIDIARIES

STATEMENTS OF STOCKHOLDERS’

THE YEARS ENDED DECEMBER 31, 2019 and 2018

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

FOR THE YEARS ENDED DECEMBER 31, 2020

Stockholders’

2 unchanged sentences

Sale of Common stock and warrants, net of fees

Warrants issued for services

Stock option expense

Share based compensation

Common stock issued upon warrant exercise

Common stock issued upon exercise of options

Common stock issued upon cashless exercise of options

Common stock issued in connection with business combinations

Common stock issued upon conversion of convertible debt

Warrants issued with convertible debt

Common stock issued for services

Common stock issued for accrued share-based compensation

Net income, As restated

Balances, December 31, 2019

$ (7,969,936 )

Sale of Common stock and warrants, net of fees

Share based compensation

Sale of common stock, net of fees

Common stock issued upon warrant exercise

Common stock issued upon cashless exercise of warrants

Common stock issued upon exercise of options

1 unchanged sentence

Common stock issued in connection with business combinations

Common stock issued upon conversion of convertible debt

Common stock issued for assets

Common stock issued for services

Common stock issued for accrued payroll

Common stock issued for accrued share-based compensation

Common stock redemption

Share based compensation

Balances, December 31, 2020

$ 319,581,657

accompanying notes are an integral part of theses audited consolidated financial statements.

GrowGeneration

$ (2,641,558 )

$ 316,997,251

The accompanying notes are an integral part

of theses audited consolidated financial statements.

GROWGENERATION CORP.

AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

Cash Flows from Operating Activities:

Net income (loss)

$ (5,073,755 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Adjustments to reconcile net income to net cash used in operating Activities:

Depreciation and amortization

Provision for doubtful accounts receivable

Provision for doubtful accounts and notes receivable

Inventory valuation reserve

1 unchanged sentence

Stock based compensation

Noncash operating lease expense

Deferred income taxes

Changes in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable

Accounts and notes receivable

(19,192,401 )

2 unchanged sentences

Accounts payable and accrued liabilities

Operating leases

Customer deposits

1 unchanged sentence

Sales taxes payable

Net Cash (Used In) Operating Activities

Net Cash and Cash Equivalents (Used In) Operating Activities

Cash Flows from Investing Activities:

Assets acquired in business combinations

(41,400,900 )

Purchase of property and equipment

Purchase of goodwill and other intangibles

Net Cash (Used In) Investing Activities

Purchase of intangibles

Net Cash and Cash Equivalents (Used In) Investing Activities

(45,830,203 )

(11,810,680 )

Cash Flows from Financing Activities:

Principal payments on long term debt

Proceeds from issuance of convertible debt, net of expenses

Stock redemptions

Proceeds from the sales of common stock and exercise of warrants and options, net of expenses

Net Cash Provided by Financing Activities

Net Cash and Cash Equivalents Provided by Financing Activities

Net Increase (decrease) in Cash and Cash Equivalents

1 unchanged sentence

Cash and Cash Equivalents at End of year

$ 177,911,511

Supplemental Information:

3 unchanged sentences

Assets acquired by issuance of stock

Warrants issued for debt discount

Acquisition of vehicles with debt financing

Interest paid during the period

Acquisition of assets with seller financing

accompanying notes are an integral part of these audited consolidated financial statements.

GROWGENERATION

Cash paid for interest

Right to use assets acquired under new operating leases

The accompanying notes are an integral part

of these audited consolidated financial statements.

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

OF OPERATIONS

GrowGeneration

Corp (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of Easylife Corp and changed its

name to GrowGeneration Corp.

It maintains its principal office in Denver, Colorado.

GrowGeneration

is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing

media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening.

As of March 27,

2020, the Company owns and operates a chain of twenty seven (27) retail hydroponic/gardening stores, with five (5) located in

the state of Colorado, four (4) in the state of California, four (4) in the state of Michigan, two (2) in the state of Nevada,

one (1) in the state of Washington, one (1) in the state of Oregon, four (4) in the State of Oklahoma, one (1) in the state of

Rhode Island, three (3) in Maine, (1) in Florida, one (1) distribution center in California and an online e-commerce store, GrowGen.Pro.

In addition, we operate a warehouse out of Sacramento, CA.

Our plan is to acquire, open and operate hydroponic/gardening stores

and related businesses throughout the United States and Canada.

Company engages in its business through its wholly owned subsidiaries, GrowGeneration Pueblo Corp, GrowGeneration California Corp,

Grow Generation Nevada Corp, GrowGeneration Washington Corp, GrowGeneration Rhode Island Corp, GrowGeneration Oklahoma Corp, GrowGeneration

Canada, GrowGeneration HG Corp, GrowGeneration Hemp Corp, GGen Distribution Corp, GrowGeneration Michigan Corp, GrowGeneration

New England Corp, GrowGeneration Florida Corp and GrowGeneration Management Corp.

GrowGeneration Corp (the “Company”)

was incorporated on March 6, 2014 in Colorado under the name of Easylife Corp and changed its name to GrowGeneration Corp.

its principal office in Denver, Colorado.

GrowGeneration is the largest chain of hydroponic garden centers

in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting,

ventilation systems and accessories for hydroponic gardening.

Currently, the Company owns and operates a chain of fifty two (52)

retail hydroponic/gardening stores across 12 states, with eighteen (18) in the state of California, six (6) in the state of Michigan,

eight (8) located in the state of Colorado, five (5) in the State of Oklahoma, five (5) in Maine, two (2) in the state of Nevada,

two (2) in the state of Washington, two (2) in the state of Oregon, one (1) in the state of Rhode Island, one (1) in the state

of Florida, one (1) in the state of Massachusetts, one (1) in the state of Arizona, an online e-commerce store, GrowGeneration.com

and a commercial e-commerce platform, Agron.io The Company’s plan is to continue to acquire, open and operate hydroponic/gardening

stores and related businesses throughout the United States and Canada.

The Company engages in its business

through its wholly-owned subsidiaries, GrowGeneration Pueblo Corp, GrowGeneration California Corp, GrowGeneration Nevada Corp,

GrowGeneration Washington Corp, GrowGeneration Rhode Island Corp, GrowGeneration Oklahoma Corp, GrowGeneration Canada, GrowGeneration

HG Corp, GrowGeneration Hemp Corp, GGen Distribution Corp, GrowGeneration Michigan Corp, GrowGeneration New England Corp, GrowGeneration

Florida Corp and GrowGeneration Management Corp.

OF SIGNIFICANT ACCOUNTING POLICIES

of Presentation and Consolidation

financial statements are prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

(“ASC”) Topic 105-10, Generally Accepted Accounting Principles , in accordance with accounting principles generally

accepted in the U.S.

Basis of Presentation and

Consolidation

The financial statements are

prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

Topic 105-10, Generally Accepted Accounting Principles , in accordance with accounting principles generally accepted in the

(“GAAP”).

consolidated financial statements include the Company and its wholly-owned subsidiaries.

All intercompany balances and transactions

are eliminated in consolidation.

The consolidated financial statements

include the Company and its wholly-owned subsidiaries.

All intercompany balances and transactions are eliminated in consolidation.

Reclassifications

amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

These reclassifications

had no effect on reported consolidated net income (loss).

uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting

These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent

assets and liabilities at the date of the consolidated financial statements, and the reported revenues and expenses during the

reporting period.

Actual results could vary from the estimates that were used.

makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on

a company-wide basis.

Accordingly, the various products sold are aggregated into one reportable operating segment as under guidance

in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC or codification”)

Topic 280 for segment reporting.

GROWGENERATION

Certain amounts in the prior

period financial statements have been reclassified to conform to the current period presentation.

These reclassifications had no

effect on reported consolidated net income.

Use of Estimates

Management uses estimates and

assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles.

estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities

at the date of the consolidated financial statements, and the reported revenues and expenses during the reporting period.

results could vary from the estimates that were used.

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or

receives services.

When the Company receives payment from customers before the customer has taken possession of the merchandise

or the service has been performed, the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance

Sheets until the sale or service is complete.

allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels.

allowances are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over

the incentive period based on estimates of purchases.

Volume rebates, when earned, are

recorded as a reduction in Cost of Sales.

Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

The Company’s cash equivalents are carried at fair market value and consist primarily of money market funds.

receivable are stated at the amount the Company expects to collect from balances outstanding at year-end, based on the Company’s

assessment of the credit history with customers having outstanding balances and current relationships with them.

A reserve for

uncollectable receivables is established when collection of amounts due is deemed improbable.

Indicators of improbable collection

include client bankruptcy, client litigation, client cash flow difficulties or ongoing service or billing disputes.

generally extended on a short-term basis thus receivables do not bear interest.

At December 31, 2019 and 2018, the Company established

an allowance for doubtful accounts of $291,372 and $133,288, respectively.

consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or market.

The company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on

its assessment of market conditions.

Use of Estimates, continued

Additionally, the full impact

of COVID-19 is unknown and cannot be reasonably estimated.

However, we have made appropriate accounting estimates based on the

facts and circumstances available as of the reporting date.

To the extent there are differences between these estimates and actual

results, our consolidated financial statements may be materially affected.

As we continue to monitor the

COVID-19 situation, the Company is considered an “essential”

supplier to the agricultural industry, suppling the nutrients

and nourishment required to feed their plants.

The Company has remained open during this difficult time.

We have plans and procedures

in place to ensure our customers and employees stay safe during this time of uncertainty.

As a result of COVID-19 we reduced some

hours of operations at the store level and some stores were closed on the weekends, primarily in the later part of the first quarter

There have been some minor delays in vendor shipments as their warehouses and supply chain were affected by staffing shortages.

The Company successfully implemented a will call and curb side pick-up process that is working well.

Other than what has been disclosed

above, we have not experienced adverse effects from COVID-19.

Segment Reporting

Management makes significant

operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis.

Accordingly, the various products sold are aggregated into one reportable operating segment as under guidance in the Financial

Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC or codification”) Topic

280 for segment reporting.

Revenue Recognition

The Company recognizes

revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives

services at which point, the performance obligation is satisfied.

Sales and other taxes collected concurrent with revenue

producing activities are excluded from revenue.

In the normal course of business, the Company does not accept product returns

unless the item is defective as manufactured.

The Company monitors provisions for estimated returns.

Payment for goods and

services sold by the Company is typically due upon satisfaction of the performance obligations.

Under certain circumstances,

the Company does provide goods and services to customers on a credit basis (see Accounts Receivable, Notes Receivable and

Concentration of Credit Risk below).

The Company accounts for shipping and handling activities as a fulfillment costs

rather than as a separate performance obligation.

When the Company receives payment from customers before the customer has

taken possession of the merchandise or the service has been performed, the amount received is recorded as customer deposit in

the accompanying consolidated balance sheets until the sale or service is complete.

Vendor Allowances

Vendor allowances primarily

consist of volume rebates that are earned as a result of attaining certain purchase levels.

These vendor allowances are accrued

as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based

on estimates of purchases.

Volume rebates, when earned, are recorded as a reduction in

cost of sales or cost of inventory.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES, Continued

Cash Equivalents

The Company considers all highly

liquid investments purchased with original maturities of three months or less to be cash equivalents.

The Company’s cash

equivalents are carried at fair market value and consist primarily of money market funds.

Financial instruments that potentially

expose us to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally

not collateralized.

Our policy is to place our cash and cash equivalents with high quality financial institutions, in order to

limit the amount of credit exposure.

Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC),

up to $250,000.

At December 31, 2020 and 2019, the Company had approximately $174 million and $11 million, respectively, in excess

of the FDIC insurance limit.

Accounts Receivable, Notes

Receivable and Concentration of Credit Risk

Accounts receivable are stated at the amount the Company expects

to collect from balances outstanding at period-end, based on the Company’s assessment of the credit history with customers

having outstanding balances and current relationships with them.

A reserve for uncollectable receivables is established when collection

of amounts due is deemed improbable.

Indicators of improbable collection include client bankruptcy, client litigation, client cash

flow difficulties or ongoing service or billing disputes.

Credit is generally extended on a short-term basis thus receivables do

not bear interest.

Interest on past due balances are subject to an interest charge of 1.5% per month.

At December 31, 2020 and

2019, the Company established an allowance for doubtful accounts of $192,193 and $291,372, respectively.

Notes receivable are stated

at the amount the Company expects to collect from balances outstanding at period-end, based on the Company’s assessment of

the credit history with customers having outstanding balances and current relationships with them.

A reserve for uncollectable

receivables is established when collection of amounts due is deemed improbable.

Indicators of improbable collection include client

bankruptcy, client litigation, client cash flow difficulties or ongoing service or billing disputes.

note is placed on non-accrual status when management determines, after considering economic and business conditions and collection

efforts, that the note is impaired or collection of interest is doubtful.

The accrual of interest on the instrument ceases when

there is concern that principal or interest due according to the note agreement will not be collected.

Any payment received on

such non-accrual notes are recorded as interest income when the payment is received.

The note is reclassified as accrual-basis

once interest and principal payments become current.

The Company periodically reviews the value of the underlying collateral for

the note receivable and evaluates whether the value of the collateral continues to provide adequate security for the note.

the value of the underlying collateral become less than the outstanding principal and interest, the Company will determine whether

an allowance is necessary.

Any uncollectible interest previously accrued is also charged off.

As of December 31, 2020,

the Company believes the value of the underlying collateral for each of the notes to be sufficient and in excess of the respective

outstanding principal and accrued interest, net of recognized allowance.

Notes receivable, generally

have terms of 12-18 months and bear interest from 9-12% per annum.

Generally, product sales that are the basis for the note receivable

are collateral on the note receivable until the note is paid off.

At December 31, 2020 and 2019, the Company established an allowance

for doubtful accounts of $292,050 and $0, respectively.

We are exposed to credit

risk in the normal course of business, primarily related to accounts and notes receivable.

We are affected by general

economic conditions in the United States.

To limit credit risk, management periodically reviews and evaluates the financial

condition of its customers and maintains an allowance for doubtful accounts.

As of December 31, 2020 and 2019, we do not

believe that we have significant credit risk.

Inventory consists primarily

of gardening supplies and materials and is recorded at the lower of cost (weighted average cost method) or net realizable value.

The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its

assessment of market conditions.

Write-downs and write-offs are charged to cost of goods sold.

and Equipment

and equipment are carried at cost.

Leasehold Improvements are amortized using the straight-line method over the original term

of the lease or the useful life of the improvement, whichever is shorter.

Renewals and betterment that materially extend the life

of the asset are capitalized.

Property and Equipment

Property and equipment are carried

Leasehold improvements are amortized using the straight-line method over the original term of the lease or the useful

life of the improvement, whichever is shorter.

Renewals and betterment that materially extend the life of the asset are capitalized.

Expenditures for maintenance and repairs are charged against operations.

Depreciation of property

and equipment is provided on the straight-line method for financial reporting purposes at rates based on the following estimated

useful lives:

Depreciation of property and equipment is provided on

the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:

Estimated Lives

3 unchanged sentences

10 years not to exceed lease term

GROWGENERATION

GROWGENERATION CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,

Software and Website Development Costs

Company accounts for the costs of computer software obtained or developed for internal use in accordance with FASB ASC 350, Intangibles —

Goodwill and Other .

Computer software development costs and website development costs are expensed as incurred, except for

internal use software or website development costs that qualify for capitalization as described below, and include certain employee

related expenses, including salaries, bonuses, benefits and stock-based compensation expenses;

costs of computer hardware and software;

and costs incurred in developing features and functionality.

These capitalized costs are included in intangible assets on the consolidated

balance sheets.

● The Company expenses

costs incurred in the preliminary project and post-implementation stages of software development and capitalizes costs incurred

in the application development stage and costs associated with significant enhancements to existing internal use software applications.

● Software costs

are amortized using the straight-line method over an estimated useful life of three years commencing when the software

project is ready for its intended use.

● Costs incurred related to less significant

modifications and enhancements as well as maintenance are expensed as incurred.

As of December 31, 2020 and

2019, capitalized software cost were $1,162,603 and $138,280, respectively, before accumulated amortization of $221,885 and $5,000,

respectively.

Intangible Assets Acquired

in Business Combinations

Company values assets acquired and liabilities assumed on each acquisition accounted for as a business combination, and allocates

the purchase price to the tangible and intangible assets acquired and liabilities assumed based on its best estimate of fair value.

Acquired intangible assets include, trade names, customer relationships, non-compete agreements.

determines the appropriate useful life of intangible assets by performing an analysis of cash flows based on historical experience

of the acquired businesses.

Intangible assets are amortized over their estimated useful lives based on the pattern in which the

economic benefits associated with the asset are expected to be consumed, which to date has approximated the straight-line method

of amortization.

The estimated useful lives for trade names, customer relationships, non-compete agreements are

generally, five to six years.

Goodwill represents the excess

of purchase price over the fair value of net assets.

Goodwill is not amortized but is reviewed for potential impairment on an annual

basis, or if events or circumstances indicate a potential impairment, at the reporting unit level.

The Company’s review for

impairment includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of

a reporting unit is less than its carrying value, including goodwill.

If it is determined that it is more likely than not that

the fair value of a reporting unit is less than its carrying value, including goodwill, the first step of the two-step quantitative

goodwill impairment test is performed, which compares the fair value of the reporting unit with its carrying amounts, including

If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not

However, if the carrying amount of the reporting unit exceeds its fair value, additional procedures must be performed.

That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that

An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

assess whether an arrangement is a lease at inception.

Leases with an initial term of 12 months or less are not recorded on the

balance sheet.

We have elected the practical expedient to not separate lease and non-lease components for all assets.

lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over

the lease term at the lease start date.

As most of our leases do not provide an implicit rate, we use our incremental borrowing

rate based on the information available at the lease start date in determining the present value of future payments.

The operating

lease asset is increased by any lease payments made at or before the lease start date and reduced by lease incentives and initial

direct costs incurred.

The lease term includes options to renew or terminate the lease when it is reasonably certain that we will

exercise that option.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,

We account for leases in accordance

with the FASB ASC 842, Leases.

We assess whether an arrangement is a lease at inception.

Leases with an initial term of 12 months

or less are not recorded on the balance sheet.

We have elected the practical expedient to not separate lease and non-lease components

for all assets.

Operating lease assets and operating lease liabilities are calculated based on the present value of the future

minimum lease payments over the lease term at the lease start date.

As most of our leases do not provide an implicit rate, we use

our incremental borrowing rate based on the information available at the lease start date in determining the present value of future

The operating lease asset is increased by any lease payments made at or before the lease start date and reduced by lease

incentives and initial direct costs incurred.

The lease term includes options to renew or terminate the lease when it is reasonably

certain that we will exercise that option.

The exercise of lease renewal options is at our sole discretion.

The depreciable life of lease assets and

leasehold improvements are limited by the lease term.

Lease expense for operating leases is recognized on a straight-line basis

over the lease term.

Value of Financial Instruments

fair value of certain of our financial instruments including cash and cash equivalents, accounts receivable, prepaid assets, employee

advances, accounts payable, customer deposits, payroll and payroll tax liabilities, sales tax payable and notes payable approximate

their carrying amounts because of the short-term maturity of these instruments.

Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred income

taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes.

The differences

relate principally to depreciation of property and equipment, reserve for obsolete inventory and bad debt.

Deferred tax assets

and liabilities represent the future tax consequence for those differences, which will either be deductible or taxable when the

assets and liabilities are recovered or settled.

Deferred taxes are also recognized for operating losses that are available to

offset future taxable income.

Valuation allowances are established to reduce deferred tax assets to the amount expected to be

The depreciable life

of lease assets and leasehold improvements are limited by the lease term.

Lease expense for operating leases is recognized on a

straight-line basis over the lease term.

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.

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, 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

The fair value of impaired notes receivable are determined based on estimated future payments discounted back to present

value using the notes effective interest rate.

December 31, 2020

December 31, 2019

Cash equivalents

$ 163,418,055

Notes receivable

Notes receivable impaired

Accounts receivable

For the Level 3 assets measured

at fair value on a non-recurring base at December 31, 2020, the significant unobservable inputs include the notes receivable effective

interest rate of 10%.

The Company accounts for income

taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for

future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities

and their respective tax bases and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax

rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes

the enactment date.

In 2019 and as of September 30, 2020, a valuation allowance was provided for the amount of deferred tax assets

that would otherwise be recorded for income tax benefits primarily relating to operating loss carryforwards as realization could

not be determined to be more likely than not.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,

The Company adopted the provisions

of FASB ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement

of tax positions taken or expected to be taken in income tax returns.

FASB ASC 740-10-25 also provides guidance on de-recognition

of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting

for interest and penalties associated with tax positions.

of FASB ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement of

tax positions taken or expected to be taken in income tax returns.

FASB ASC 740-10-25 also provides guidance on recognition of

income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for

interest and penalties associated with tax positions.

The Company’s tax returns are subject to tax examinations by U.S.

federal and state authorities until respective statute of limitation.

Currently, the 2018, 2017, and 2016 tax years are open and

subject to examination by taxing authorities.

However, the Company is not currently under audit nor has the Company been contacted

by any of the taxing authorities.

The Company does not have any accruals for uncertain tax positions as of December 31, 2019.

It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting

Concentration

instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable,

which are generally not collateralized.

Our policy is to place our cash and cash equivalents with high quality financial institutions,

in order to limit the amount of credit exposure.

Accounts at each institution are insured by the Federal Deposit Insurance Corporation

(FDIC), up to $250,000.

At December 31, 2019 and 2018, the Company had $11,229,444 and $12,962,958, respectively, in excess of

the FDIC insurance limit.

The Company generally does not require collateral from its customers, but its credit extension and collection

policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and

aggressively pursuing delinquent accounts.

The Company maintains allowance for potential credit losses.

GROWGENERATION

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Company expenses advertising and promotional costs when incurred.

Advertising and promotional expenses for the years ended December

31, 2019 and 2018 amounted to $736,656 and $269,550, respectively.

represents the excess of purchase price over the fair value of net assets.

The Company accounts for goodwill in accordance with

the provisions of FASB Accounting Standards Update (ASU) 2014-02, Intangibles –

Goodwill and Other (Topic 350) Accounting

for Goodwill.

In accordance with FASB ASC Topic 350 for Intangibles –

Goodwill and Other, goodwill is not amortized but

is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the

reporting unit level.

The Company’s review for impairment includes an assessment of qualitative factors to determine whether

it is more likely than not that the fair value of a reporting unit is less than its´

carrying value, including goodwill.

If it is determined that it is more likely than not that the fair value of a reporting unit is less than its´

carrying value,

including goodwill, the first step of the two-step quantitative goodwill impairment test is performed, which compares the fair

value of the reporting unit with its´

carrying amounts, including goodwill.

If the fair value of the reporting unit exceeds

carrying amount, goodwill of the reporting unit is considered not impaired.

However, if the carrying amount of the

reporting unit exceeds its fair value, additional procedures must be performed.

That additional procedure compares the implied

fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

An impairment loss is recorded to

the extent that the carrying amount of goodwill exceeds its implied fair value.

(Loss) Per Share

Company computes net earnings (loss) per share under Accounting Standards Codification subtopic 260-10, “Earnings Per Share”

(“ASC 260-10”).

Basic earnings or loss per share (“EPS”) is computed by dividing net income (loss) available

to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted EPS is computed by

dividing net income (loss) by the weighted-average of all potentially dilutive shares of common stock that were outstanding during

the periods presented.

treasury stock method is used in calculating diluted EPS for potentially dilutive stock options and share purchase warrants, which

assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants, would be used

to purchase common shares at the average market price for the period.

Based Compensation

Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC

The Company estimates the fair value of stock options using the Black-Scholes option pricing model.

value of stock options granted is recognized as an expense over the requisite service period.

Stock-based compensation expense

for all share-based payment awards are recognized using the straight-line single-option method.

Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time

to exercise, which greatly affect the calculated values.

The expected term of options granted is derived from historical data

on employee exercises and post-vesting employment termination behavior.

The risk-free rate selected to value any particular grant

is based on the U.S.

Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant.

expected volatility is based on the historical volatility of the Company’s stock price.

These factors could change in the

future, affecting the determination of stock-based compensation expense in future periods.

GROWGENERATION

and state authorities until their respective statute of limitation.

Currently, the 2019, 2018 and 2017 tax years are open and subject

to examination by taxing authorities.

However, the Company is not currently under audit nor has the Company been contacted by any

of the taxing authorities.

The Company does not have any accrual for uncertain tax positions as of December 31, 2020.

The Company expenses advertising

and promotional costs when incurred.

Advertising and promotional expenses for the years ended December 31, 2020 and 2019 amounted

to $996,420 and $736,656, respectively.

Earnings Per Share

The Company computes net earnings

per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”).

earnings or loss per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the

weighted average number of common shares outstanding for the period.

Diluted EPS is computed by dividing net income by the weighted-average

of all potentially dilutive shares of common stock that were outstanding during the periods presented.

The treasury stock method is

used in calculating diluted EPS for potentially dilutive stock options, restricted stock and share purchase warrants, which assumes

that any proceeds received from the exercise of in-the-money stock options, restricted stock and share purchase warrants, would

be used to purchase common shares at the average market price for the period.

Stock Based Compensation

The Company records stock-based

compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”).

estimates the fair value of stock options and warrants using the Black-Scholes option pricing model.

The fair value of stock

options and warrants granted is recognized as an expense over the requisite service period.

Stock-based compensation expense for

all share-based payment awards is recognized using the straight-line single-option method.

The Black-Scholes option pricing

model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect

the calculated values.

The expected term of options granted is derived from historical data on employee exercises and post-vesting

employment termination behavior.

The risk-free rate selected to value any particular grant is based on the U.S.

Treasury rate that

corresponds to the expected life of the grant effective as of the date of the grant.

The expected volatility is based on the historical

volatility of the Company’s stock price.

These factors could change in the future, affecting the determination of stock-based

compensation expense in future periods.

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

ACCOUNTING PRONOUNCEMENTS

time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, the Financial

Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements.

the FASB Accounting Standards Codification 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.

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.

Recently Adopted Accounting

Pronouncements

Updates to the FASB Accounting Standards Codification 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

We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our

financial position or results of operations.

Adopted Accounting Pronouncements

the first quarter of 2019, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02,

Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those

leases classified as operating leases under previous guidance.

The Company has adopted the new lease standard using the new transition

option issued under the amendments in ASU 2018-11, Leases , which allowed the Company to continue to apply the legacy guidance

in Accounting Standards Codification (ASC) 840, Leases , in the comparative periods presented in the year of adoption.

Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among

other things, allowed the Company to carry forward the historical lease classification.

The Company made an accounting policy

election to keep leases with an initial term of 12 months or less off the balance sheet.

The Company will recognize those lease

payments on a straight-line basis over the lease term.

The impact of the adoption was an increase to the Company’s operating

lease assets and liabilities on January 1, 2019 of $3.2 million.

January 1, 2019, the Company also adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.”

ASU 2018-07 more closely aligns the accounting for employee and nonemployee share-based payments.

The amendment is effective

commencing in 2019 with early adoption permitted.

The adoption of this new guidance did not have a material impact on our Financial

August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No.

33-10532, Disclosure

Update and Simplification.

These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules.

Among the amendments is the requirement to present an analysis of changes in stockholders’

equity in the interim financial

statements included in Quarterly Reports on Form 10-Q.

The analysis, which can be presented as a footnote or separate statement,

is required for the current and comparative quarter and year-to-date interim periods.

The amendments are effective for all filings

made on or after November 5, 2018.

The Company adopted these amendments in its Quarterly Report on Form 10-Q for the quarter ended

September 30, 2019.

January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall:

Recognition and Measurement of Financial Assets and

Financial Liabilities , which requires that (i) all equity investments, other than equity-method investments, in unconsolidated

entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial

liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive

Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments.

The new standard was effective

for the Company starting in the first quarter of fiscal 2019.

The adoption of this standard on January 1, 2019 did not have any

effect on the consolidated financial statements and footnote disclosure.

August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,”

which better aligns risk management

activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance

for qualifying hedging relationships and the presentation of hedge results.

The amendments expand and refine hedge accounting

for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the

effects of the hedging instrument and the hedged item in the financial statements.

The new standard was effective for the Company

as of January 1, 2019.

The adoption of this new standard on January 1, 2019 did not have any impact on our consolidated financial

statements and footnote disclosures.

GROWGENERATION

As of January 1, 2019, the Company

adopted the FASB ASU 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and

lease liabilities by lessees for those leases classified as operating leases under previous guidance.

The Company has adopted the

new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases , which allowed the

Company to continue to apply the legacy guidance in ASC 840, Leases , in the comparative periods presented in the year of

The Company elected the package of practical expedients permitted under the transition guidance within the new standard,

which among other things, allowed the Company to carry forward the historical lease classification.

The Company made an accounting

policy election to keep leases with an initial term of 12 months or less off the balance sheet.

The Company will recognize those

lease payments on a straight-line basis over the lease term.

The impact of the adoption was an increase to the Company’s

operating lease assets and liabilities on January 1, 2019 of $3.2 million.

On January 1, 2019, the Company

also adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.”

ASU 2018-07 more closely aligns

the accounting for employee and nonemployee share-based payments.

The amendment is effective commencing in 2019 with early

adoption permitted.

The adoption of this new guidance did not have a material impact on our Financial Statements.

In August 2018, the SEC adopted

amendments to certain disclosure requirements in Securities Act Release No.

33-10532, Disclosure Update and Simplification.

amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules.

Among the amendments is the requirement

to present an analysis of changes in stockholders’

equity in the interim financial statements included in Quarterly Reports

on Form 10-Q.

The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative

quarter and year-to-date interim periods.

The amendments are effective for all filings made on or after November 5, 2018.

adopted these amendments in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

In August 2018, the FASB issued

ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value

Measurement .

The new guidance modifies the disclosure requirements on fair value measurements in Topic 820.

The amendments

in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

The adoption of this new guidance, effective January 1, 2020, did not have a material impact on our Financial

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

ACCOUNTING PRONOUNCEMENTS, Continued

Issued Accounting Pronouncements –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

RECENT ACCOUNTING PRONOUNCEMENTS, Continued

Recently Issued Accounting

Pronouncements –

Pending Adoption

June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses:

Measurement of Credit Losses on Financial Instruments ,

which changes the impairment model for most financial assets and certain other instruments.

For trade receivables and other instruments,

entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition

of allowances for losses.

For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances

rather than as reductions in the amortized cost of the securities.

This guidance is effective for annual reporting periods beginning

after December 15, 2019, including interim periods within those years, with early adoption permitted only as of annual reporting

periods beginning after December 15, 2018.

The Company is currently evaluating the impact of the adoption of this guidance on

the Company’s consolidated financial statements.

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 Company does not anticipate that the adoption of ASU 2018-13 will have a

material impact on the Company’s consolidated financial statements or related financial statement disclosures.

AND EQUIPMENT

and equipment at December 31, 2019 and 2018 consists of the following:

In October 2020, the Financial

Accounting Standards Board (“FASB”) issued new guidance that updates various codification topics by clarifying or improving

disclosure requirements.

The standard is effective for annual periods beginning after December 15, 2020.

The Company does not expect

the adoption of this new guidance to have a material impact on the Company’s financial conditions, results or operations,

cash flows or disclosures.

In June 2016, the FASB issued

2016-13, “Financial Instruments —

Credit Losses (Topic 326),”

changing the impairment model for most

financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required

currently by the other-than-temporary impairment model.

The ASU will apply to most financial assets measured at amortized cost

and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities,

net investments in leases, and off-balance-sheet credit exposures.

In November 2019, the FASB issued ASU No.

2019-10, changing

effective dates for the new standards to give implementation relief to certain types of entities.

The Company is required to adopt

the new standards no later than January 1, 2023 according to ASU 2019-10, with early adoption allowed.

We are currently evaluating

the impact of adopting this new accounting guidance on our consolidated financial statements.

In January 2017, the FASB issued

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment.

The guidance in ASU 2017-04

eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill

Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the

reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds

the reporting unit’s fair value.

ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years

beginning after December 15, 2022 and should be applied on a prospective basis.

The Company is currently evaluating the impact

of adopting this guidance on the Company’s consolidated financial statements.

In December 2019, the FASB issued

ASU 2019-02, 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 will be effective for annual

reporting periods beginning after December 15, 2020, including interim reporting periods within those periods.

We are currently

evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.

In August 2020, the FASB issued

ASU 2020-06, Debt with Conversion and Other Options:

Accounting for Convertible Instruments and Contracts in an Entity’s

Own Equity, which simplifies the accounting for certain instruments with characteristics of liabilities and equity, including convertible

instruments and contracts on an entity’s own equity.

ASU 2020-06 removes from U.S.

GAAP the separation models for (1) convertible

debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature.

ASU 2020-06 requires

entities to provide expanded disclosures about “the terms and features of convertible instruments,”

how the instruments

have been reported in the entity’s financial statements, and “information about events, conditions, and circumstances

that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments.”

GROWGENERATION

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

RECENT ACCOUNTING PRONOUNCEMENTS, Continued

ASU 2020-06 is effective for

public business entities that are not smaller reporting companies for fiscal years beginning after December 15, 2021 and interim

periods within those fiscal years.

For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15,

2023 and interim periods within those fiscal years.

We are currently evaluating the impact of adopting this new accounting guidance

on our condensed consolidated financial statements.

REVENUE RECOGNITION

Disaggregation of Revenues

The following table disaggregates

revenue by source:

Sales at company owned stores

$ 182,736,434

E-commerce sales

Total Revenues

$ 193,365,479

Contract Balances

Depending on the timing of when

a customer takes possession of product and when a customer makes payments for such product, the Company recognizes a customer trade

receivable (asset) or a customer deposit (liability).

The difference between the opening and closing balances of the Company’s

customer trade receivables and the customer deposit liability results from timing differences between the Company’s performance

and the customer’s payment and due to the acquisitions for the years ended December 31, 2020 and 2019.

The opening and closing balances

of the Company’s customer trade receivables and customer deposit liability are as follows:

Customer Deposit Liability

Opening balance, 1/1/2020

Closing balance, 12/31/2020

Increase (decrease)

Opening balance, 1/1/2019

Closing balance, 12/31/2019

Increase (decrease)

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

REVENUE RECOGNITION,

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 at December 31, 2020 and 2019 are as follows:

December 31, 2020

December 31, 2019

Note receivable

Allowance for losses

Notes receivable, net

The following table summarizes

changes in notes receivable balances that have been deemed impaired.

Note receivable

Allowance for loses

Notes receivable, net

PROPERTY AND EQUIPMENT

Property and equipment at December

31, 2020 and 2019 consists of the following:

Leasehold improvements

2 unchanged sentences

Property and equipment, net

expense was $1,046,328 and $350,415 for the years ended December 31, 2019 and 2018, respectively.

On December 22, 2017, the U.S.

President signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”).

The Tax Legislation

significantly revised the U.S.

tax code by, (i) lowering the U.S federal statutory income tax rate from 35% to 21%,

(ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign

subsidiaries (“Transition Tax”), (iv) requiring a current inclusion of global intangible low taxed income (“GILTI”)

of certain earnings of controlled foreign corporations in U.S.

federal taxable income, (v) creating the base erosion anti-abuse

tax (“BEAT”) regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property,

and (vii) limiting deductibility of interest and executive compensation expense, among other changes.

The Company has computed

its 2018 current tax benefit using the U.S.

federal statutory rates of 21% while it has computed its deferred tax expense

using the new statutory rate effective on January 1, 2018 of 21%.

Other provisions of the new legislation

that were not applicable to the Company until the year ended December 31, 2018 include, but are not limited to, limiting deductibility

of interest and executive compensation expense.

These additional items have been considered in our income tax provision for the

year ended December 31, 2019 and the impact was not material to the overall financial statements.

The provision (benefit) for income

taxes for the years ended December 31, 2019 and 2018 consisted of the following:

Depreciation expense was $1,646,907

and $1,046,328 for the years ended December 31, 2020 and 2019, respectively.

GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill

are as follows:

Balance, beginning of period

Goodwill additions

Balance, end of period

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

GOODWILL AND INTANGIBLE ASSETS, Continued

Intangible assets on the Company’s consolidated

balance sheets consist of the following:

December 31, 2020

December 31, 2019

Patents, trademarks

Customer relationships

Capitalized software

Amortization expense for the

years ended December 31, 2020 and 2019 was $789,058 and $5,000, respectively.

Future amortization expense is as follows:

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

The provision (benefit) for

income taxes for the years ended December 31, 2020 and 2019 consisted of the following:

Income Tax Expense (benefit)

1 unchanged sentence

Deferred tax (benefit)

GROWGENERATION

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

TAXES, Continued

summary of deferred tax assets and liabilities as of December 31, 2019 and 2018 is as follows:

Valuation allowance

A summary of deferred tax assets

and liabilities as of December 31, 2020 and 2019 is as follows:

Deferred tax assets:

2 unchanged sentences

Stock based compensation

Amortization of debt discount

Accruals, reserves and other

Inventory reserves

Warranty reserves

Accruals and other

Deferred tax liabilities:

Deferred right to use lease

Deferred right to use lease assets

Accumulated depreciation and amortization

Gross deferred tax asset

$ (2,171,391 )

Gross deferred tax asset (liability)

Valuation Allowance

asset (liability), net

As of December 31, 2019, the Company

had approximately $4.7 million of operating loss carryforwards, which results in a Federal and State deferred tax asset of approximately

$1.03 million, expiring in 2037 through 2038.

Deferred tax asset (liability), net

We recorded a valuation allowance

against all of our deferred tax assets as of both December 31, 2019, and December 31, 2018.

We intend to continue maintaining a

full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion

of these allowances.

However, given our current earnings and anticipated future earnings, we believe that there is a reasonable

possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion

that a significant portion of the valuation allowance will no longer be needed.

Release of the valuation allowance would result

in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.

However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability

that we are able to actually achieve

The differences between the U.S.

Federal statutory

income tax rate and the Company’s effective tax rate were as follows for the years ended December 31, 2019 and 2018:

against all of our deferred tax assets as of December 31, 2019.

Given our current earnings and anticipated future earnings, we

believe that there was sufficient positive evidence available that allowed us to reach the conclusion that the valuation allowance

will no longer be needed as of December 31, 2020.

Release of the valuation allowance in 2020 resulted in the recognition of certain

deferred tax assets and a decrease to income tax expense for the period the release is recorded.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

INCOME TAXES, Continued

The differences between the

Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years ended December 31,

2020 and 2019:

Years Ended December 31,

1 unchanged sentence

State and local income taxes (net of federal tax benefit)

Non-deductible compensation

Incentive stock options

Basis adjustments

Valuation allowance

GROWGENERATION

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

LONG-TERM DEBT

Long term debt is as follows:

Hitachi Capital, interest at 8.0% per annum, payable in monthly installments of $631.13 beginning September 2015 through August 2019, secured by delivery equipment with a book value of $24,910

Wells Fargo Equipment Finance, interest at 3.5% per annum, payable in monthly installments of $518.96 beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $25,437

Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 24 installments of $24,996, due February 2020

Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 12 installments of $6,003, due September 2019

Notes payable issued in connection with seller financing of assets acquired, interest at 1%, payable in 24 installments of $24,996, due and paid in full in February 2020

Notes payable issued in connection with seller financing of assets acquired, interest at 8.125%, payable in 60 installments of $8,440, due August 2023

2 unchanged sentences

Debt maturities as of December 31, 2020 are as follows:

expense for the years ended December 31, 2019 and 2018 was $45,191 and $23,565, respectively.

determine if a contract contains a lease at inception.

Our material operating leases consist of retail and warehouse locations

as well as office space.

Our leases generally have remaining terms of 1- 5 years, most of which include options to extend the

leases for additional 3 to 5 year periods.

Generally, the lease term is the minimum of the noncancelable period of the lease or

the lease term inclusive of reasonably certain renewal periods.

lease assets and liabilities are recognized at the lease commencement date.

Operating lease liabilities represent the present

value of lease payments not yet paid.

Operating lease assets represent our right to use an underlying asset and are based upon

the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and

impairment of operating lease assets.

To determine the present value of lease payments not yet paid, we estimate incremental secured

borrowing rates corresponding to the maturities of the leases.

Our leases typically contain rent escalations over the lease term.

We recognize expense for these leases on a straight-line basis over the lease term.

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

lease assets.

GROWGENERATION

Interest expense for the years

ended December 31, 2020 and 2019 was $14,053 and $45,191, respectively.

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

have elected the short-term lease recognition exemption for all applicable classes of underlying assets.

Short-term disclosures

include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line

basis over the lease term.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

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.

generally have remaining terms of 1-10 years, most of which include options to extend the leases for additional 3 to 5-year periods.

Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain

renewal periods.

Operating lease assets and liabilities

are recognized at the lease commencement date.

Operating lease liabilities represent the present value of lease payments not yet

Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities

adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets.

To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to

the maturities of the leases.

Our leases typically contain rent escalations over the lease term.

We recognize expense for these

leases on a straight-line basis over the lease term.

We have elected the practical

expedient to account for lease and non-lease components as a single component for our entire population of leases.

Short-term disclosures include

only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis

over the lease term.

Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying

asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

expense is recorded within our consolidated statements of operations based upon the nature of the assets.

Where assets are used

to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in “store operating

costs.”

Facilities and assets which serve management and support functions are expensed through general and administrative

Right to use assets, operating lease assets

3 unchanged sentences

Weighted average discount rate

Operating lease assets obtained for operating lease liabilities

Maturities of lease liabilities

Year Ended December 31,

Operating lease costs

Variable lease costs

Short-term lease costs

Total operating lease costs

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

LEASES, Continued

The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2020:

Total lease payments

1 unchanged sentence

Lease Liability at December 31, 2020

GROWGENERATION

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

January 12, 2018, the Company completed a private placement of a total of 36 units of the Company’s securities at the price

of $250,000 per unit pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”)

and Rule 506 of Regulation D promulgated thereunder.

Each unit consisted of (i) a .1% unsecured convertible promissory note of

the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of the Company’s

common stock, par value $.001 per share, at a price of $.01 per share or through cashless exercise.

convertible debt has a maturity date of January 12, 2021 and the principal balance and any accrued interest is convertible by

the holder at any time into Common Stock of the Company at conversion price of $3.00 a share.

Principal due and interest

accrued on the notes will automatically convert into shares of Common Stock, at the conversion price, if at any time during the

term of the notes, commencing twelve (12) months from the date of issuance, the Common Stock trades minimum daily volume of at

least 50,000 shares for twenty (20) consecutive days with a volume weighted average price of at least $4.00 per share.

relation to this transaction, the Company recorded a debt discount of $4,239,000 related to the fair market value of warrants

issued as noted above.

The debt discount, which was based on an imputed interest rate, is being amortized on a straight-line basis

over the life of the convertible debt.

the year ended December 31, 2019, convertible debt and accrued interest of $2,405,269, net of unamortized debt discount of $674,581,

was converted into 1,258,608 shares of common stock at the conversion rate of $3.00 per share.

the year ended December 31, 2018, convertible debt and accrued interest of $5,927,677, net of unamortized debt discount of $2,305,746,

was converted into 2,013,294 shares of common stock at the conversion rate of $3.00 per share.

CONVERTIBLE DEBT

Remaining unamortized debt discount and debt issue costs

Convertible debt, net of debt discount and debt issue costs

of debt discount for the years ended December 31, 2019 and 2018 was $356,306 and $998,601, respectively.

December 31, 2019 and 2018 there were 131,250 and 536,250 warrants outstanding, respectively, related to the issuance of convertible

BASED PAYMENTS AND STOCK OPTIONS

March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive Plan (“2014

Plan) pursuant to which the Company may grant incentive, non-statutory options, stock appreciation rights, restricted stock, restricted

stock units, performance shares, performance units and other stock or cash awards to employees, nonemployee members of our Board,

consultants and other independent advisors who provide services to the Company.

The maximum shares of common stock which may be

issued over the term of the plan shall not exceed 2,500,000 shares.

Awards under this plan are made by the Board or a committee

designated by the Board.

Options under the plan are to be issued at the market price of the stock on the day of the grant except

to those issued to holders of 10% or more of the Company’s common stock which is required to be issued at a price not less

than 110% of the fair market value on the day of the grant.

Each option is exercisable at such time or times, during such period

and for such numbers of shares shall be determined by the plan administrator.

No option may be exercisable for more than ten years

(five years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant.

GROWGENERATION

On January 12, 2018, the Company

completed a private placement of a total of 36 units of the Company’s securities at the price of $250,000 per unit pursuant

to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated

Each unit consisted of (i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii)

a 3-year warrant entitling the holder to purchase 37,500 shares of the Company’s common stock, par value $.001 per share,

at a price of $.01 per share or through cashless exercise.

The convertible debt had a maturity

date of January 12, 2021 and the principal balance and any accrued interest is convertible by the holder at any time into Common

Stock of the Company at conversion price of $3.00 a share.

Principal due and interest accrued on the notes will automatically

convert into shares of Common Stock, at the conversion price, if at any time during the term of the notes, commencing twelve (12)

months from the date of issuance, the Common Stock trades minimum daily volume of at least 50,000 shares for twenty (20) consecutive

days with a volume weighted average price of at least $4.00 per share.

During the year ended December

31, 2019, convertible debt and accrued interest of $2,405,269, net of unamortized debt discount of $674,581, was converted into

1,258,608 shares of common stock at the conversion rate of $3.00 per share.

As of December 31, 2019, there was no convertible debt

Amortization of debt discount

for the years ended December 31, 2020 and 2019 was $0 and $356,306, respectively.

At December 31, 2020 and 2019

there were 93,750 and 131,250 warrants outstanding, respectively, related to the issuance of convertible debt.

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

BASED PAYMENTS AND STOCK OPTIONS, Continued

January 7, 2018, the Board adopted the 2018 Equity Compensation Plan (the “2018 Plan”) and on April 20, 2018, the

shareholders approved the 2018 Plan.

On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to

increase the number of shares issuable thereunder from 2,500,000 to 5,000,000, which amendment is pending shareholder approval.

The 2018 Plan will be administered by the Board.

The Board may grant options to purchase shares of Common Stock, stock appreciation

rights, restricted stock units, restricted or unrestricted shares of Common Stock, performance shares, performance units, other

cash-based awards and other stock-based awards.

The Board also has broad authority to determine the terms and conditions of each

option or other kind of equity award, adopt, amend and rescind rules and regulations for the administration of the 2018 Plan and

amend or modify outstanding options, grants and awards.

options, stock purchase rights or awards may be made under the 2018 Plan on or after the ten-year anniversary of the adoption

of the 2018 Plan by the Board, but the 2018 Plan will continue thereafter while previously granted options, stock appreciation

rights or awards remain subject to the 2018 Plan.

The maximum shares of Common Stock which may be issued over the term of the

plan, as amended shall not exceed 5,000,000 shares.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS

Company maintains long-term incentive plans for employee, non-employee members of our Board of Directors and consultants.

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).

March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive Plan (“2014

Plan”) pursuant to which the Company may grant incentive, non-statutory options, stock appreciation rights, restricted stock,

restricted stock units, performance shares, performance units and other stock or cash awards to employees, nonemployee members

of our Board, consultants and other independent advisors who provide services to the Company.

The maximum shares of common stock

which may be issued over the term of the 2014 Plan shall not exceed 2,500,000 shares.

Awards under the 2014 Plan are made by the

Board or a committee designated by the Board.

Options under the 2014 Plan are to be issued at the market price of the stock on

the day of the grant except to those issued to holders of 10% or more of the Company’s common stock which is required to

be issued at a price not less than 110% of the fair market value on the day of the grant.

Each option is exercisable at such time

or times, during such period and for such numbers of shares shall be determined by the plan administrator.

No option may be exercisable

for more than ten years (five years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant.

On January 7, 2018, the Board

adopted the 2018 Equity Compensation Plan (the “2018 Plan”) and on April 20, 2018, the shareholders approved the 2018

On February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable

thereunder from 2,500,000 to 5,000,000, which amendment was approved by shareholders on May 11, 2020.

The 2018 Plan will be administered

by the Board.

The Board may grant options to purchase shares of common stock, stock appreciation rights, restricted stock units,

restricted or unrestricted shares of common stock, performance shares, performance units, other cash-based awards and other stock-based

The Board also has broad authority to determine the terms and conditions of each option or other kind of equity award,

adopt, amend and rescind rules and regulations for the administration of the 2018 Plan and amend or modify outstanding options,

grants and awards.

No options, stock purchase rights

or awards may be made under the 2018 Plan on or after the ten-year anniversary of the adoption of the 2018 Plan by the Board, but

the 2018 Plan will continue thereafter while previously granted options, stock appreciation rights or awards remain subject to

the 2018 Plan.

Options granted under the 2018 Plan may be either “incentive stock options”

that are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)

or “nonstatutory stock options”

that are intended to meet

the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) or “nonstatutory

stock options”

that do not meet the requirements of Section 422 of the Code.

The Board will determine

the exercise price of options granted under the 2018 Plan.

The exercise price of stock options may not be less than the fair market

value, on the date of grant, per share of our Common Stock issuable upon exercise of the option (or 110% of fair market value

in the case of incentive options granted to a ten-percent stockholder).

No option may be exercisable for more than ten years (five

years in the case of an incentive stock option granted to a 10% stockholder) from the date of grant.

The Board will determine the exercise price

of options granted under the 2018 Plan.

The exercise price of stock options may not be less than the fair market value, on the

date of grant, per share of our Common Stock issuable upon exercise of the option (or 110% of fair market value in the case of

incentive options granted to a 10% stockholder).

No option may be exercisable for more than ten years (five years in the case of

an incentive stock option granted to a 10% stockholder) from the date of grant.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS, Continued

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 years ended December 31, 2020 and 2019.

Restricted stock

Stock options

of December 31, 2020, the Company had approximately $3.7 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 two years.

As of December

31, 2020, the Company also had approximately $4 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 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.

generally vest on the second or third anniversary of the date of grant, subject to the employee’s continuing employment as

of that date.

Restricted stock activity for the years ended December

31, 2020 and 2019 is presented in the following table:

Weighted Average Grant Date Fair Value

Nonvested, January 1, 2019

Nonvested, December 31, 2019

Nonvested, December 31, 2020

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS, Continued

Awards issued under the 2014 Plan as of December 31, 2020 are summarized below:

4 unchanged sentences

Awards available for issuance under the 2014 Plan, December 31, 2020

issued under the 2018 Plan as of December 31, 2019 are summarized below:

Total Shares available for issuance pursuant to the 2018 Plan, prior to amendment

Total Shares available for issuance pursuant to the 2018 Plan, as amended

Options outstanding, December 31 2020

2 unchanged sentences

Awards available for issuance under the 2018 Plan, December 31, 2020

The fair value of each stock

option and warrant granted is estimated on the grant date using the Black-Scholes option valuation model.

The assumptions used

to calculate the fair value of options and warrants granted are evaluated and revised, as necessary, to reflect market conditions

and the Company’s experience.

Stock options and warrants are expensed on a straight-line basis over the vesting period, which

is considered to be the requisite service period.

Expected volatility

72.91%-90.81 %

Expected dividends

1 unchanged sentence

Risk-free rate

GROWGENERATION

Options outstanding pursuant to 2014 Plan

Options outstanding pursuant to 2018 Plan

Options issued outside of 2014 and 2018 Plans

Total options outstanding December 31, 2020

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

BASED PAYMENTS AND STOCK OPTIONS, Continued

table below summarizes all the options granted by the Company during years ended December 31, 2019 and 2018:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS, Continued

The table below summarizes all

the options granted by the Company during years ended December 31, 2020 and 2019:

Average Exercise

9 unchanged sentences

Vested and exercisable at December 31, 2020

payment expense to officers, directors and employees and the years ended December 31, 2019 and 2018 was approximately $2,223,100

and $901,900, respectively.

related to issuance of shares, options and warrants to consultants for the years ended December 31, 2019 and 2018 was approximately

$267,400 and $501,800, respectively.

PURCHASE WARRANTS

summary of the status of the Company’s outstanding stock warrants as of December 31, 2019 is as follows:

STOCK PURCHASE WARRANTS

A summary of the status of the

Company’s outstanding stock warrants as of December 31, 2020 and 2019 is as follows:

Weighted Average

4 unchanged sentences

Outstanding December 31, 2020

GROWGENERATION

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2018 and 2017

STOCKHOLDERS’

Company’s current Certificate of Incorporation authorizes it to issue 100,000,000 shares of common stock, par value $0.001

As of December 31, 2019, and 2018, there were 36,876,305 and 27,948,609 shares of common stock issued and outstanding,

respectively.

the year ended December 31, 2019, the Company sold 4,123,254 shares of common stock for net proceeds of $12,643,634.

During the year ended December

31, 2019, the Company issued 1,757,913 shares of common stock upon exercise of warrants resulting in proceeds to the Company of

During the year ended December 31,

2019, the Company issued 515,868 shares of common stock upon exercise of 667,500 options resulting in proceeds to the Company of

Of the total options exercised, 657,500 options we exercised in a cashless option exercise.

During the year ended December 31,

2019, the Company issued 1,258,608 shares of common stock upon conversion of convertible debt and accrued interest.

During the year ended December 31,

2019, the Company issued 969,553 shares of common stock in connection with business combinations.

(See Note 14)

During the year ended December 31,

2019, the Company issued 152,500 shares of common stock to employees valued at $452,766, issued 100,000 shares of common stock

to employees for accrued employee awards valued at $210,200 and 50,000 shares of common stock to consultants valued at $96,000.

the year ended December 31, 2018, the Company sold 3,333,333 shares of common stock for net proceeds of $9,959,877.

the year ended December 31, 2018, the Company issued 3,076,461 shares of common stock upon exercise of 3,056,478 warrants resulting

in proceeds to the Company of $2,593,694.

the year ended December 31, 2018, the Company issued 995,186 shares of common stock upon exercise of 1,068,333 options resulting

in proceeds to the Company of $321,701.

the year ended December 31, 2018, the Company issued 2,013,294 shares of common stock upon conversion of convertible debt and

accrued interest.

the year ended December 31, 2018, the Company issued 1,550,000 shares of common stock in connection with business combinations.

(See Note 14)

the year ended December 31, 2018, the Company issued 123,500 shares of common stock to employees valued at $463,922 and issued

10,000 shares of common stock to consultants valued at $45,001.

GROWGENERATION

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

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 years ended December 31, 2020 and 2019.

Basic net income (loss) per share

is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares

Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders

by the weighted average number of common shares outstanding plus the number of common shares that would be issued assuming exercise

or conversion of all potentially dilutive common shares.

Potentially dilutive securities are excluded from the calculation when

their effect would be antidilutive.

For the year ended December 31, 2018 all potentially dilutive securities have been excluded

from the diluted share calculations as they were anti-dilutive as a result of the net loss incurred.

Accordingly, basic shares

equal diluted shares for the year ended December 31, 2018.

dilutive securities were comprised of the following:

Convertible debt warrants

following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings

per share computation for the years ended December 31, 2019 and 2018.

Net income (loss)

$ (5,073,755 )

Year Ended December 31,

Weighted average shares outstanding, basic

Effect of dilutive common stock equivalents

Effect of dilutive outstanding warrants and stock options

Adjusted weighted average shares outstanding, dilutive

Basic net income (loss) per share

Dilutive net income (loss) per share

CONCENTRATIONS

of December 31, 2019, and 2018, two suppliers represent 51% and 56% of our purchases, respectively.

Although the Company expects

to maintain relationships with these vendors, the loss of either supplier would not have a material adverse impact on our business,

because both suppliers provide the same products.

GROWGENERATION

Basic income per shares

Dilutive income per share

EMPLOYEE BENEFIT PLAN

Company has a 401(k) Savings Retirement Plan that covers substantially all full-time employees who meet the plan’s eligibility

requirements and provides for an employee elective contribution.

The Company made matching contributions to the plan of $169,327

and $83,158 for the years ended December 31, 2020 and 2019, respectively.

VENDOR CONCENTRATIONS

As of December 31, 2020, and

2019, two suppliers represent 41% and 51% of our total vendor purchases, respectively.

Although the Company expects to maintain

relationships with these vendors, the loss of either supplier would not have a material adverse impact on our business, because

both suppliers provide the same products.

Our acquisition strategy is

to acquire well established profitable hydroponic garden centers in markets where the Company does not have a market presence

or in markets where it is increasing its market presence.

The Company accounts for acquisitions in accordance with ASC 805 “Business

Combinations.”

Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheets at their

estimated fair values, as of the acquisition date.

For all acquisitions, the preliminary allocation of the purchase price was

based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement

period as valuations are finalized.

Any changes to these estimates may have a material impact on the Company’s operating

results or financial position.

All acquisition costs are expensed as incurred and recorded in general and administrative expenses

in the consolidated statements of operations.

Transaction cost were approximately $227,000 for all acquisitions in 2020.

all goodwill recorded as a result of business combinations is deductible for income tax purposes.

The Company issued 23,892 shares

of common stock valued at $100,829 to settle as contingent consideration related to the Heavy Gardens 2018 business combination.

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 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.

GROWGENERATION CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

ACQUISITIONS, Continued

On June 16, 2020 we acquired

certain assets of H2O Hydroponics, LLC (“H2O Hydro”) in a transaction valued at approximately $1.99 million.

goodwill of approximately $1 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 (“Emerald City”), in a transaction valued at $1 million.

Acquired goodwill of approximately $620,000 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 October 12, 2020, the Company

acquired the assets of Hydroponics Depot, LLC (“Hydro Depot”), a single store located in Phoenix Arizona for $987,500

in cash and shares of the Company’s common stock valued at approximately $548,000.

Acquired goodwill of approximately $798,000 represents the value expected to rise from organic growth

and an opportunity to expand into a well-established market for the Company.

On October 20, 2020 the Company

acquired the assets of Big Green Tomato (“BGT”), a two-store chain in Battle

Creek and Taylor, Michigan for approximately $6.0 in cash and shares of common stock valued at approximately $3.1 million.

Acquired goodwill of approximately $4 million represents the value expected to rise from organic growth and an opportunity

to expand into a well-established market for the Company.

On November 17, 2020, the Company

acquired the assets of The GrowBiz (“GrowBiz”), a five-store chain with four stores in California and one store in

The total consideration for the purchase of GrowBiz was approximately $44.7 million, $17.4 million in cash and common stock

valued at approximately $27.3 million.

Acquired goodwill of approximately $28.3 million represents the value expected to rise from

organic growth and an opportunity to expand into a well-established market for the Company.

On December 14, 2020, the Company

acquired the assets of Grassroots, a three-store chain in California.

The total consideration for the purchase of Grassroots was

approximately $10 million, $7.5 million in cash and common stock valued at approximately $2.5 million.

Acquired goodwill of approximately

$4.5 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market

for the Company.

On December 23, 2020, the Company

acquired the assets of Canopy Crop Management (“Canopy”) and its complete portfolio of products including the Power

SI brand of silicic acid-enriched fertilizers.

The total consideration for the purchase of Canopy Crop was approximately $9.2 million,

$5.4 million in cash and common stock valued at approximately $3.8 million.

Acquired goodwill of approximately $4.9 million represents

the value expected to rise from organic growth and an opportunity to expand into a well-established product distribution market

for the Company.

GROWGENERATION CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

ACQUISITIONS, Continued

The table below represents the

allocation of the purchase price to the acquired net assets during the year ended December 31, 2020.

Prepaids and other current assets

Furniture and equipment

Operating lease right to use asset

Operating lease liability

Customer relationships

The table below represents the

consideration paid for the net assets acquired in business combinations.

The following table discloses

the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date

of acquisition to the period ended December 31, 2020.

Acquisition date

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 year ended December 31, 2020 and 2019.

$ 116,120,116

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.”

Assets acquired and liabilities

assumed are recorded in the accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date.

For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s

estimates and assumptions are subject to change within the measurement period as valuations are finalized.

The Company has not

made any adjustments to the preliminary valuations.

The table below represents the allocation of the preliminary purchase price

to the acquired net assets during the year ended December 31, 2019.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

ACQUISITIONS, Continued

The table below represents the

allocation of the purchase price to the acquired net assets during the year ended December 31, 2019.

Prepaids and other current assets

Furniture and equipment

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

following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income

statement from the date of acquisition to the period ended December 31, 2019.

The table below represents the

consideration paid for the net assets acquired in business combinations.

The following table discloses

the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date

of acquisition to the period ended December 31, 2019.

Acquisition date

following represents the unaudited pro forma consolidated income statement as if the acquisitions had been included in the consolidated

results of the Company for the year ended December 31, 2018.

These unaudited pro forma results are presented for information purposes

only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the

acquisition had occurred at the beginning of the earliest period presented, nor are they indicative of future results of operations.

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 years ended December 31,2019 and 2018.

2019 (Unaudited)

2018 (Unaudited)

$ (2,087,900 )

GROWGENERATION

GROWGENERATION CORP.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

THE YEARS ENDED DECEMBER 31, 2019 and 2018

February 26, 2020 the Company purchased the assets of Healthy Harvest LLC for $1,750,000 and 250,000 shares of the Company’s

common stock valued at $1,102,500.

Healthy Harvest has been in business since 2011 and is the largest hydroponic operation in

the Southeast region.

February 7, 2020, the Board approved the amendment and restatement of the 2018 Plan to increase the number of shares issuable

thereunder from 2,500,000 to 5,000,000, which amendment is pending shareholder approval.

CHANGES AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

STOCKHOLDERS EQUITY

On December 11, 2020, the Company

consummated an underwritten public offering of 5,750,000 shares of its common stock (the “Shares”), which included

the exercise in full of the underwriters’

option to purchase an additional 750,000

shares of common stock to cover over-allotments.

The Shares were sold at a public offering price of $30 per share, generating

gross proceeds of $172.5 Million, before deducting the underwriting discounts and commissions

and other offering expenses .

Net proceeds from the sales of common stock, net of all offering costs and expenses was approximately

$162.5 Million.

On July 2, 2020, the Company

consummated an underwritten public offering of 8,625,000 shares of its common stock (the “Shares”), which included

the exercise in full of the underwriters’

option to purchase an additional 1,125,000

shares of common stock to cover over-allotments.

The Shares were sold at a public offering price of $5.60 per share, generating

gross proceeds of $48.3 Million, before deducting the underwriting discounts and commissions

and other offering expenses .

Net proceeds from the sales of common stock, net of all offering costs and expenses was approximately

$44.6 Million.

On June 26, 2019, the

Company completed a private placement of a total of 4,123,257 units of the Company’s securities at the price of $3.10 per

unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act.

unit consisted of (i) one share of Common Stock and (ii) one 3-year warrant, each entitling the holder to purchase one half share

of Common Stock, at a price of $3.50 per share.

The Company raised a total of $12,782,099 from 19 accredited investors.

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS

the fourth quarter of 2020, we identified amounts presented in our inventory and costs of sales reported in prior years that required

The revised amounts resulted from an accumulation of errors related to rebates issued from vendors.

determined these errors accumulated in 2019 and prior years.

Retained earnings as of January 1, 2019, was also revised to reflect

the impact of the error on prior periods.

The impact of the error for periods prior 2019 was $525,786.

Pursuant to the guidance of

Staff Accounting Bulletin No.

99, Materiality, we concluded that the errors were not material to any of our prior year consolidated

financial statements.

The accompanying consolidated balance sheet and income statement as of December 31, 2019 includes a cumulative

revision relating to this error.

This revision did not have any material effect on income from

operations, net income, or cash flows.

This revision had no effect on our cash balances.

The following table compares

previously reported balances, adjustments, and revised balances as of December 31, 2019.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued

The revised consolidated financial statements for the year ended

December 31, 2019 with the adjustment is detailed below.

December 31, 2019

As Previously Reported

Current assets:

Cash and cash equivalents

Accounts receivable, net

Notes receivable, net

Prepaids and other current assets

Total current assets

Property and equipment, net

Operating leases right-of-use assets, net

Notes receivable

Intangible assets, net

LIABILITIES & STOCKHOLDERS’

Current liabilities:

Accounts payable

Payroll and payroll tax liabilities

Customer deposits

Sales tax payable

Current maturities of right-of-use assets

Current portion of long-term debt

Total current liabilities

Operating leases right-of-use assets, net of current maturities

Long-term debt, net of current portion

Total liabilities

Stockholders’

Common stock;

$.001 par value;

100,000,000 shares 36,876,305 shares issued and outstanding as of December 31, 2019

Additional paid-in capital

Accumulated deficit

Total stockholders’

TOTAL LIABILITIES AND STOCKHOLDERS’

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued

Year Ended December 31, 2019

As Previously Reported

Cost of sales

Operating expenses:

Store operations

General and administrative

Share based compensation

Depreciation and amortization

Salaries and related expenses

Total operating expenses

Net income from operations

Other income (expense):

Miscellaneous income (expense)

Interest income

Interest expense

Total non-operating income (expense), net

Net income before taxes

Provision for income taxes

Net income per share, basic

Net income per share, diluted

Weighted average shares outstanding, basic

Weighted average shares outstanding, diluted

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued

For The Year Ended December 31, 2019

Cash Flows from Operating

As Previously Reported

Adjustments to reconcile net income to net cash used in operating Activities:

Depreciation and amortization

Provision for doubtful accounts receivable

Inventory valuation reserve

Amortization of debt discount

Stock based compensation

Changes in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable

(10,482,014 )

Prepaid expenses and other assets

Increase (decrease) in:

Accounts payable and accrued liabilities

Operating leases

Customer deposits

Payroll and payroll tax liabilities

Sales taxes payable

Net Cash and Cash Equivalents (Used In) Operating Activities

Cash Flows from Investing Activities:

Assets acquired in business combinations

Purchase of property and equipment

Purchase of goodwill and other intangibles

Net Cash and Cash Equivalents (Used In) Investing Activities

(11,810,680 )

Cash Flows from Financing Activities:

Principal payments on long term debt

Stock redemptions

Proceeds from the sales of common stock and exercise of warrants and options, net of expenses

Net Cash and Cash Equivalents Provided by Financing Activities

Net Increase(decrease) in Cash and Cash Equivalents

Cash and Cash Equivalents at Beginning of year

Cash and Cash Equivalents at End of year

SUBSEQUENT EVENTS

The Company has evaluated events

and transaction occurring subsequent to December 31, 2020 up to the date of this filing of these consolidated financial statements.

These statements contain all necessary adjustments and disclosures resulting from that evaluation.

For all acquisitions subsequent

to year end 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 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 $1.63 million, including $1.1 million in cash and common stock valued at approximately

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 $411,000.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUBSEQUENT EVENTS, 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.

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, CA.

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.

On March 12, 2021 the Company

purchased the assets of Charcoir Corporation, who sells an RHP-certified growing medium made

from the highest-grade coconut fiber.

The total consideration for the purchase of Charcoir was approximately $16.3 million,

including $9.8 million in cash and common stock valued at approximately $6.5 million.

On March 15, 2021 the Company

purchased the assets of 55 Hydroponics, a hydroponic and organic superstore located in Santa

The total consideration for the purchase of 55 Hydroponics was approximately $6.1 million, including $5 million

in cash and common stock valued at approximately $1.1 million.

On March 15, 2021 the Company

purchased the assets of Aquarius, a hydroponic and organic garden store in Springfield, MA.

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.

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.

CHANGES AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE

See report on Form 8-K filed on March 27,

2020 regarding change in Accountants.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data