GrowGeneration Corp. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION The Company commenced trading on the Nasdaq Capital Market on December 2, 2019 under the symbol “GRWG”. Prior to that date, our stock traded on the OTCQX Best Market since October 10, 2017, prior to which it was traded on the OTCQB Market since November 11, 2016. The following table sets forth, for each quarter for the years ended December 31, 2020 and 2019, the reported high and low bid prices of our Common Stock. Quarter Ended High Bid Low Bid December 31, 2020 $ 43.14 $ 14.52 September 30, 2020 $ 22.88 $ 6.47 June 30, 2020 $ 7.81 $ 3.06 March 31, 2020 $ 6.78 $ 2.62 December 31, 2019 $ 5.06 $ 3.45 September 30, 2019 $ 5.75 $ 3.10 June 30, 2019 $ 3.79 $ 2.53 March 31, 2019 $ 3.62 $ 2.18 Future sales of substantial amounts of our shares in the public market could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. HOLDERS The approximate number of stockholders of record as of March 24, 2021 was 114. The number of stockholders of record does not include beneficial owners of our Common Stock, whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries. DIVIDEND POLICY We have never paid any cash dividends on our Common Stock. We anticipate that we will retain funds and future earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit financings may preclude us from paying dividends. RECENT SALES OF UNREGISTERED SECURITIES 2019 Private Placement 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. Each 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. 14 2018 Private Placement On January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000 per unit. Each unit consists 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 Common Stock, at a price of $.01 per share or through cashless exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering. On May 9, 2018, the Company completed a private placement of a total of 33.33 units of its securities at a price of $300,000 per unit to 3 accredited investors. Each unit consists of (i) 100,000 share of the Company’s Common Stock and (ii) 50,000 3-year warrant to purchase one share of Common Stock at an exercise price of $.35 per share. The Company raised an aggregate of $10,000,000 gross proceeds in the offering. Stock Options and Stock Awards The Company has a 2014 Equity Compensation Plan (the “2014 Plan”) and an Amended and Restated 2018 Equity Compensation Plan (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 was approved by shareholders on May 11, 2020. From inception to December 31, 2020, we have granted stock options under our 2014 Plan to purchase an aggregate of 2,113,833 shares at exercise prices ranging from $0.60 to $5.11 per share. Of the total options granted as of December 31, 2020, 2,058,833 have been exercised and 5,000 have been forfeited, resulting in 50,000 options outstanding. In addition, as of December 31, 2020, 375,000 stock awards have been issued under our 2014 Plan. From inception to December 31, 2020, we have granted stock options under our 2018 Plan to purchase an aggregate of 1,963,000 shares at exercise prices ranging from $2.25 to $17.39 per share. As of December 31, 2020, 438,895 options have been exercised and 37,667 forfeited under the 2018 Plan. In addition, as of December 31, 2020, 1,112,979 stock awards have been issued under our 2018 Plan. ITEM 6. SELECTED FINANCIAL DATA Not applicable. 15 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly those under “Risk Factors.” Dollars in tabular format are presented in thousands, except per share data, or otherwise indicated. OVERVIEW GrowGeneration Corp. (together with all of its wholly owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014 and is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems and accessories for hydroponic gardening. GrowGeneration also owns and operates e-commerce platforms,www.growgeneration.com and www.agron.io, Canopy Crop Management Corp, CharCoir Inc, and several proprietary private-label brands across multiple product categories from LED lighting to nutrients and additives and environmental control systems for indoor cultivation. 2020 Store Footprint Currently, the Company owns and operates a chain of fifty two (52) retail hydroponic/gardening stores, 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 Arizona, one (1) in the state of Massachusetts, an online e-commerce store, GrowGeneration.com and a B2B e-commerce platform, agron.io We recently announced the signing of two leases in downtown Los Angeles and Rancho Dominguez, CA, which are our 53 rd and 54 th locations. Our plan is to continue to acquire, open and operate hydroponic/gardening stores and related businesses throughout North America. Revenue in 2020 was up 142.5% year over year, to $193.4 million. Adjusted EBITDA, for 2020 was approximately $19.2 million an increase of approximately $13.9 million over 2019, a 265% increase. We saw significant revenue increases in all key markets, Maine was up 144%, Oklahoma was up 255%, Michigan was up 243%, and Rhode Island was up 150%. Same store revenues include 13 stores that generated $72.3 million in revenues for the year ended December 31, 2020, compared to $44.3 million in revenues for 2019, an increase of 63%. Store Acquisitions and New Store Openings Core to our growth strategy is to expand the number of our retail garden centers throughout North America. The hydroponic retail landscape is fragmented, which allows us to acquire the “best of breed” hydroponic operations. In addition to the 12 states we are currently operating, we have identified new market opportunities in states that include Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi and Missouri. In 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and completed eight (8) acquisitions, adding 14 locations in 2020. To-date, the Company has acquired 14 new locations in the first quarter of 2021 and has an active target pipeline of acquisitions for the remainder of the year. Commercial Sales Division Our commercial division is focused on selling end-to-end solutions for large commercial cultivators. When a commercial customer gains a new cultivation license, they will need to purchase lighting, benching, environmental control systems, irrigation, fertigation and other products to outfit their cultivation facility. Commercial customers typically purchase larger amounts and sizes of products. We offer commercial customers volume pricing, terms and financing. Our commercial team manages thousands of commercial accounts across North America. Our commercial division collectively contributed approximately $49 million in revenue for 2020 compared to approximately $17 million for 2019, a 189% year over year increase. We have identified over 15,000 active licensed growers in North America and believe there is significant room for us to expand our base of commercial customers. 16 E-Commerce/Omni Channel Division Our digital strategy is focused on capturing the home, craft and commercial growers online. GrowGeneration.com offers over 10,000 hydroponic products all curated by our product team. GrowGeneration.com offer customers the option to have their orders shipped directly to their locations, anywhere in North America or alternatively customers can buy online and pick up in store. Revenues for 2020 was approximately $10.6 million compared to $4.8 million for 2019, an increase of 123%. New visitors to our website were 1.2 million versus 477,000, an increase of 152% year over year. Our online garden center closed 17,000 transaction versus 6,300, an increase of 170%. On March 19, 2021, the Company purchased the business-to-business ERP platform, Agron.io. a leading wholesale agriculture portal that allows commercial growers to manage their purchasing and logistics in one platform. Agron.io offers commercial pricing, real-time inventory, and the largest product catalog in the industry, with over 10,000 products in over 60 categories, including greenhouses, extraction, hemp, and commercial equipment. The platform manages real-time product updates, tier-pricing changes, case quantities, pallet quantities, profit margin projections, hazmat fees, ETL/UL listings and state chemical regulations, as well as guarantees the latest shipping rates using API Pallet. Supply Chain Our supply chain currently spans approximately 800,000 sq. ft. of retail and warehouse space, across 52 locations and 12 states. Today, we operate distribution and fulfillment out of our 60,000 sq. ft location in Sacramento, CA and 40,000 sq. ft. in Tulsa, OK. We announced on March 9, 2021, the addition of a total of 122,000 sq. ft., including 52,000 sq. ft. in downtown Los Angeles, CA and 70,000 sq. ft. in Rancho Dominguez, CA that will serve as distribution and fulfillment locations for the Company. We are in the process of building several additional locations that will serve as fulfillment service centers, that includes a 25,000 sq. ft. location in Phoenix, AZ. and a 58,000 sq. ft. location in Medley, FL. We expect these locations to be opened by the summer of 2021. Proprietary Brands and Private Label GrowGeneration purchased Canopy Crop Management Corp., in December 2020, the developer of the popular Power Si line of monosilicic acids products, a nutrient additive for plants On March 12, 2021, the Company purchased Char Coir, a line of premium coco pots, cubes and medium. Both Power Si and Char Coir are brands that generate over $10,000,000 in annual sales. We believe that expanding our private label offerings will have a positive impact on our margins and profitability in the near term. We use various trademarks, trade names and service marks in our private- label business, including Ion Lighting, Sunleaves, powder nutrient and additive line, Optilume Bulbs, Blueprint controllers and timers, Growxcess pots and containers, Harvest Edge, pruners, trellis and other gardening accessories, and Durabreeze fans and dehumidifiers. Both GrowGeneration and Where the Pros Go to Grow are the trademarks used brand and market our garden centers across North America. 2020 Financial Results Revenue in 2020 was up 142.5% year over year, to $193.4 million. Adjusted EBITDA, for 2020 was approximately $19.2 million an increase of approximately $13.9 million or 265% over 2019. Adjusted EBITDA per basic share, for 2020 was $0.44 compared to $0.16 for 2019. Our same store sales were up approximately 63% year over year. Store income as a percentage of revenue increased from 14.9% of revenues in 2019 to 16.7 % of revenues in 2020. Income from store operations increased $20.4 million, from $11.9 million in 2019 to $32.3 million in 2020. We saw significant revenue increases in all key markets, Maine up 144%, Oklahoma up 255%, Michigan up 243%, and Rhode Island up 150%. Our e-commerce store, GrowGeneration.com had revenues of approximately $10.6 million in 2020 up 123% from 2019. Our commercial division generated approximately $49 million in revenue all of which is reflected in store revenues versus $17 million in 2019, an increase of 188%. With our significant top line revenue growth, we reduced our store operating expenses to 9.7% of revenues in 2020 compared to 12.7% in 2019 and our corporate overhead, excluding non-cash share-based compensation and depreciation, declined to 7% as a percentage of our revenue for 2020 compared to 8.5% of revenues for 2019. Acquisitions The Company purchased a total of 14 stores in 2020 and 12 stores in 2021, as of March 19, 2021. The Company also completed the acquisitions of two leading product companies, Canopy Crop Management in December 2020 and Char Coir in March 2021. On February 26, 2020, the Company entered into an asset purchase agreement through its wholly owned subsidiary, GrowGeneration Florida Corp, to purchase the assets of Healthy & Harvest, LLC, with one location in Pembroke Pines, FL. In connection with the purchase of the assets, the Company also entered a three-year commercial lease for warehouse space, effective February 26, 2020 and subleased the store space whose current lease expires July 31, 2020. On June 16, 2020 we acquired certain assets of H2O Hydroponics, LLC in a transaction valued at approximately $1.99 million. Acquired intangibles and goodwill of approximately $1.4 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. 17 On August 10, 2020 we acquired certain assets of Benzakry Family Corp, d/b/a Emerald City Garden, in a transaction valued at $1 million. Acquired intangibles and goodwill of approximately $840,000 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 20, 2020 the Company acquired the assets of Big Green Tomato (“BGT”), a two-store chain in Battle Creek and Taylor, Michigan. The total consideration for the purchase of BGT was approximately $9.1 million, including $6.0 in cash and common stock valued at approximately $3.1 million. On October 12, 2020, the Company acquired the assets of Hydroponics Depot, LLC, a single store located in Phoenix Arizona. The total consideration for the purchase of Hydroponics Depots LLC was approximately $1.54 million, including $987,500 in cash and common stock valued at approximately $548,000. On November 17, 2020, the Company acquired the assets of The GrowBiz, a five-store chain with four stores in California and one store in Oregon. The total consideration for the purchase of The GrowBiz was approximately $44.7 million, including $17.4 million in cash and common stock valued at approximately $27.3 million. 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, including $7.5 million in cash and common stock valued at approximately $2.5 million. On December 23, 2020, the Company acquired the assets of Canopy Crop Management and its complete portfolio of products including the Power SI brand of mono-silicic acid-enriched fertilizers. The total consideration for the purchase of Canopy Crop was approximately $9.2 million, including $5.4 million in cash and common stock valued at approximately $3.8 million. 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 $526,000. 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. 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 Ana, CA. 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. 18 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. CONDENSED RESULTS OF OPERATIONS For the Year Ended Year to Year Comparison December 31, Increase/ Percentage 2020 2019 (decrease) Change Sales $ 193,365,479 $ 79,733,568 $ 113,631,911 142.5 % Cost of Sales 142,317,178 57,728,683 84,588,495 146.5 % Gross profit 51,048,301 22,004,885 29,043,416 132.0 % Operating expenses 42,610,712 20,421,726 22,188,986 108.7 % Income from operations 8,437,589 1,583,159 6,854,430 433.0 % Other income (expense) 141,680 (261,317 ) 402,997 Pre-tax net income $ 8,579,269 $ 1,321,842 $ 7,257,427 549.0 % Income taxes (3,250,891 ) - (3,250,891 ) Net income $ 5,328,378 $ 1,321,842 4,006,536 303.1 % Revenue Net revenues for the year ended December 31, 2020 were approximately $193.4 million, compared to approximately $79.7 million for the year ended December 31, 2019, an increase of approximately $113.6 million, or 142.5%. The increase in revenues is due to 1) the addition of 14 new retail stores opened or acquired during 2020 for which revenues were $31 million, 2) 11 stores opened or acquired at various times during 2019 that were open for all of 2020 which had an increase in revenues of $51 million, 3) same store sales which increase 63% comparing 2020 to 2019, which had an increase in revenues of approximately $28 million, 4) an increase in our ecommerce sales of $5.9 million from 2019 to 2020 and 5) revenues of $300,000 from Canopy Crop Management Corp/Power SI, acquired in later December 2020. While the Company continues to focus on the 11 geographic markets noted below and the growth opportunities that exist in each market, we also are focusing on new store acquisitions, proprietary products, private label products, and developing our online revenues with GrowGeneration.com and Amazon revenues. 19 Revenue by Market Year Ended December 31, 2020 Year Ended December 31, 2019 Variance % Variance Colorado market $ 19,642,710 $ 15,446,094 $ 4,196,616 27.2 % California market 26,791,509 15,409,573 11,381,936 73.9 % Rhode Island market 20,970,993 8,395,123 12,575,870 149.8 % Michigan market 31,834,740 9,268,460 22,566,280 243.5 % Maine market 15,159,115 6,203,649 8,955,466 144.4 % Nevada market 4,950,223 4,360,012 590,211 13.5 % Washington market 1,545,641 1,283,169 262,472 20.5 % Oklahoma market 41,837,827 11,793,303 30,044,524 254.8 % Florida market 8,994,926 - 8,994,926 - Oregon market 8,237,695 153,856 8,083,839 5454.2 % Arizona market 2,418,102 - 2,418,102 - E-commerce site 10,629,045 4,763,738 5,865,307 123.1 % Distribution 300,459 - 300,549 - Hemp market - 1,583,176 (1,583,176 ) - Closed/consolidated locations 52,494 1,073,415 (1,020,921 ) 95.1 % Total revenues $ 193,365,479 $ 79,733,568 $ 113,631,911 142.5 % Overall revenues in the Colorado market increased approximately $4.2 million or 27%, as noted above, comparing the year ended December 31, 2020 to the year ended December 31, 2019. The increase in revenues was due to our continued focus on selling efforts in building growth in this market primarily the commercial market. Our revenues in the California market have seen growth of approximately $11.4 million or 74% and the increase was primarily from 1) the addition of 8 new stores through acquisitions during 2020 that contributed $5 million in revenues, 2) 3 stores that comprise same store sales that had an increase in revenues of $4.4 million and 3) 1 store acquired in 2019 that had an increase in revenues of $2 million. The California market is the largest market in the US and is a continuous focus of the Company relative to its growth strategy. Revenues in the Rhode Island market increased approximately $12.6 million or 150%. The primary reason for the increase in revenues in the Rhode Island market was primarily due to an increase in commercial sales with new regional and multi-state commercial customers. Revenues in the Michigan market increased approximately $22.6 million or 244%. The increase was primarily from 1) increase in same store sales of $4.6 million, 2) two new stores acquired in 2020, that had revenues of $1.9 million, 3) one acquisition in the third quarter of 2019 that resulted in an increase in revenues of $9.7 million and 4) an acquisition of a new store in Lansing in 2020 that was consolidated with an existing store in Lansing that had an increase in revenues of $6.4 million. Revenues in the Maine market increased approximately $8.9 million or 144%. Maine was a new market in 2019 as a result of a new store opening in February 2019 and the acquisition of two stores in May 2019. 2020 represented a full year of revenues for the three stores. Our revenues in the Nevada market increased by approximately $590,000 or 13.5%, with the increase pretty evenly split between or Las Vegas and Reno stores. Revenues in the Washington market increased $262,000 or 21%, as the Company continues to focus on adding commercial customers in this market. 20 The Company opened its first store in Oklahoma in October 2018, followed by new store openings in February 2019, November 2019 and March 2021. Oklahoma has been a significant new market for the Company contributing sales of $41.8 million in 2020 compared to $11.8 million for 2019, an increase for $30 million or 255%. The Company has a very strong presence in this market and has generated strong sales in both commercial and non-commercial customers. Florida was a new market for us in 2020 as a result of an acquisition in that market in February 2020. Revenues were approximately $9 million for 2020. The market serves a large number of commercial customers. Revenues in the Oregon market were $8.2 million in 2020 compared to $154,000 in 2019. Oregon was a new market with an acquisition in late December 2019, and an additional acquisition in November 2020. Arizona was also a new market for the Company in 2020, with an acquisition in October 2020. Revenues were $2.4 million, and we service both commercial and retail customers from this location. The ecommerce revenues generated for GrowGeneration.com had an increase in revenue in 2020 of approximately $5.9 million or 123% from $4.8 million in 2019 to $10.6 million in 2020. The ecommerce growth is a result of marketing driving a significant number of new customers to the website. Same Store Sales The Company had the same 13 stores (4 in Colorado, 3 in California, 2 in Michigan, 1 in Washington, 1 in Oklahoma, 1 in Rhode Island and 1 in Nevada) opened for the entire year ended December 31, 2020 and 2019. These same stores generated $72.3 million in revenues for the year ended December 31, 2020, compared to $44.3 million in revenues for 2019, an increase of 63%. The increase in revenues in these 13 same store sales was primarily an increase in commercial sales and from an increase in walk in traffic. 13 Same Stores Year ended Year ended December 31, 2020 December 31, 2019 Variance Net revenue $ 72,262,535 $ 44,311,920 $ 27,950,615 Cost of Sales Cost of sales for the year ended December 31, 2020 increased approximately $84.6 million or 146.5%, to approximately $142.3 million, compared to $57.7 million for the year ended December 31, 2019. The increase in cost of goods sold was directly attributable to the 142.5% increase in revenues, as detailed above, comparing the year ended December 31, 2020 to 2019. Gross profit was $51 million for the year ended December 31, 2020, as compared to $22 million for the year ended December 31, 2019, an increase of approximately $29 million or 132%. Gross profit as a percentage of sales was 26.4% for the year ended December 31, 2020, compared to 27.6% for the year ended December 31, 2019. The decrease in the gross profit margin percentage in 2020 was due to a greater percentage of commercial and ecommerce revenues as a percent of total revenue both of which have lower margins than in retail sales. Commercial and ecommerce represented 31% of all revenues for the year ended December 31, 2020 compared to 28% for the year ended December 31, 2019. 21 Operating Expenses Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $18.7 million for the year ended December 31, 2020 and approximately $10.1 million for the year ended December 31, 2019, an increase of approximately $8.6 million or 85%. The increase in store operating costs was directly attributable to 1) the addition of 14 new retail stores opened or acquired during 2020 and 2) 11 stores opened or acquired at various times during 2019 that were open for all of 2020. The addition of these stores, as discussed above, were the primary reasons for the increase in store operating costs. Store operating costs as a percentage of revenues were 9.7% for the year ended December 31, 2020, compared to 12.7% for the year ended December 31, 2019, a 24% reduction. Store operating costs were positively impacted by 1) the opening of new and acquired stores throughout 2020 which have lower percentage of operating costs to revenues due to their larger size and higher volume and 2) same store revenues increased 63% comparing the year ended December 31, 2020 to the year ended December 31, 2019, which also contributed significantly to lowering of the store operating costs as a percentage of revenues since the majority of store operating costs are fixed. Corporate overhead, comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $23.9 million for the year ended December 31, 2020, compared to approximately $10.3 million for the year ended December 31, 2019. Corporate overhead was 12.4% of revenue for the year ended December 31, 2020 and 13% for the year ended December 31, 2019. Corporate overhead, excluding non-cash share-based compensation and depreciation and amortization, was 7.0% of revenues compared to 8.5% of revenues for 2019 shows that non-cash expenses was a larger component of overhead cost in 2020 compared to 2019. Non-cash costs included in corporate overhead was 5.3% of revenues for 2020 compared to 4.4% of revenues for 2019. The increase in non-cash expenses in corporate overhead as a percentage of revenues for the year ended December 31, 2020 was primarily due to 1) the increase in non-cash share-based compensation from approximately $2.5 million for the year ended December 31, 2019 to approximately $7.9 million for the year ended December 31, 2020, an increase of $5.4 million and 2) the increase in depreciation and amortization from approximately $1 million for the year ended December 31, 2019 to approximately $2.4 million for the year ended December 31, 2020. The increase in non-cash share-based compensation was primarily the result of several new executive employment agreements which became effective January 1, 2020, which resulted in the vesting of common stock and common stock options at the start of the first quarter, as well as options issued in 2018 and 2019 for options vesting in 2020. The share-based awards associated with the new executive employment agreements resulted in approximately one-third of the award being recognized as an expense in the first three months of 2020, due to vesting, and the remaining two-thirds on the share-based awards are being recognized over a 24-month period commencing January 2020 and ending December 2021, based on shared based award vesting in future periods. The vesting of these shares and options was significantly higher in 2020 than they will be in the periods subsequent to 2020. The increase in depreciation and amortization is due to the significant increase in both depreciable assets and acquired intangible assets being amortized over their useful lives. Salaries as a percentage of revenues were 4.4% for 2020 and 4.5% for 2019. The increase in salaries expense from 2019 to 2020, which increased $5.0 million, from $3.6 million for the year ended December 31, 2019 to $8.6 million for the year ended December 31, 2020 was due primarily to the increase in corporate staff to support expanding store operations, including management, purchased store integrations, accounting and finance, information systems, purchasing and commercial revenues support staff. It should be noted that when we consummate a new acquisition, purchasing and back-office accounting functions are stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and centralized accounting and finance departments, thus delivering cost savings. General and administrative expenses comprised mainly of marketing, travel & entertainment, professional fees and insurance, was approximately $5 million for the year ended December 31, 2020 and approximately $3.2 million for the year ended December 31, 2019, with a majority of the increase related to marketing, insurance (both property and casualty and director and officers liability insurance), professional and legal fees. The increase in professional and legal fees was due to the increase in acquisitions in 2020 and consulting fees for SOX 404 compliance. General and administrative costs as a percentage of revenue were 2.6% for the year ended December 31, 2020, and 4% for the year ended December 31, 2019. 22 Net Income Net income for the year ended December 31, 2020 was approximately $5.3 million, compared to net income of approximately $1.3 million for the year ended December 31, 2019, an increase of $4 million. Net income for 2020 compared to 2019 was primarily impacted by a 142.5% increase in revenues, offset slightly by an increase in cost of goods sold of 147%. Store operating costs as a percentage of revenue was 9.7% in 2020 compared to 12.7% offsetting the increase in cost of goods sold. Store income as a percentage of revenue increased from 14.9% of revenues in 2019 to 16.7 % of revenues in 2020. Income from store operations increased $20.4 million, from $11.9 million in 2019 to $32.3 million in 2020. Corporate overhead, including non-cash costs, increased $13.6 million from $10.3 million in 2019 to $23.9 million in 2020. In addition, net income was impacted by the provision for income taxes which was $3.3 million for 2020 compared to $0 for 2019. The Company had significant net operating loss carryforwards which offset taxable income in 2019 thus resulting in no provision for income taxes. CONDENSED Q4 2020 AND Q4 2019 RESULTS OF OPERATIONS For the Quarter Ended Year to Year Comparison December 31, Increase/ Percentage 2020 2019 (decrease) Change Sales $ 61,924,659 $ 25,384,476 $ 36,540,183 144 % Cost of Sales 45,978,711 19,338,013 26,590,698 137 % Gross profit 15,945,948 5,996,463 9,949,485 166 % Operating expenses 13,303,502 7,068,866 6,234,636 88 % Income (loss) from operations 2,642,446 (1,072,403 ) 3,714,849 346 % Other income (expense) 163,952 53,125 110,827 Pre-tax net income $ 2,806,398 $ (1,019,278 ) $ 3,825,676 375 % Income taxes (1,295,778 ) - (1,295,7789 ) Net income $ 1,510,620 $ (1,019,278 ) 2,529,898 248 % Adjusted EBITDA $ 5,604,131 $ 910,662 $ 4,693,469 515 % Adjusted EBITDA per share, basic $ .11 $ .02 $ .09 450 % Highlights of Results of Operations Comparing Q4 2020 to Q4 2019. ● Revenues in Q4 2020 were $62 million, an increase of 144% primarily the result of the addition of 14 stores in 2020 and an increase in same store sales of 58% ● Margins were 25.8% in Q4 2020 compared to 23.6% Q4 2019. Q4 2020 had lower write-offs from physical inventories, resulting in slightly higher margins. ● Operating cost, both store operating costs and corporate overhead decreased substantially as a percentage of revenue. Store operating costs were 10% of revenues for Q4 2020 compared to 10.8% for Q4 2019. The decrease is due to a 58% increase in same store sales which reduces stores operating costs as a percentage of revenues. Corporate overhead was 11.5% of revenues for Q4 2020 compared to 17.1% for Q4 2019, a decrease of 33%, and corporate overhead costs do not rise commensurate with the increase in revenues. ● Pre-tax net income was 4.5% of revenue for Q4 2020 compared to -4% for Q4 2019. The increase in margin and the decrease in both store operating costs and corporate overhead as a percentage of revenues resulted in the pre-tax net income of 4.5% of revenue. ● Adjusted EBITDA was $5.6 million for Q4 2020 compared to $911,000 for Q4 2019, an increase of 515% 23 Cash Flow Net cash used in operating activities for the year ended December 31, 2020 was approximately $214,000, compared to $3.3 million for the year ended December 31, 2019, a decrease of approximately $3.1 million. Cash provided by operating activities is driven by our net income and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets, share based compensation expense and changes in valuation allowances. Non-cash adjustment totaled approximately $11.1 million and approximately $4.4 million for the years ended December 31, 2020 and 2019, respectively, so non-cash adjustments had a greater positive impact on net cash used in operating activities for the year ended December 31, 2020 than the same period in 2019. Despite net income of approximately $5.3 million and non-cash adjustments of $11.1 million for 2020, these positive adjustments were offset by increases in inventory of $19.2 million, increases in trade accounts and notes receivable of $3.5 million and increases in prepaids and other current assets of $9 million, offset by increases in trade accounts payable of $10 million, customer deposits of $2.6 million and other current liabilities of $3.3 million. Despite net income of $1.3 million for the year ended December 31, 2019 and non-cash adjustments totaling $4.4 million, these positive adjustments were offset by increases in inventory of $10 million, increases in trade receivable of $3.8 million and increases in prepaids and other current assets of $2.1 million, offset by increases in trade accounts payable of $4.2 million, customer deposits of $2 million and other current liabilities of $495,000. Net cash used in investing activities was approximately $45.8 million for the year ended December 31, 2020 and approximately $11.8 million for the year ended December 31, 2019. The increase in 2020 was due to the multiple asset acquisitions throughout 2020, 8 in total, in which we acquired inventory, fixed assets, goodwill and other intangibles of $40.8 million and the purchase of vehicles and store equipment to support new store operations of approximately $4 million. During 2019, we acquired 8 new stores in which we purchased inventory, fixed assets, goodwill and other intangibles of $9.5 million and the purchase of vehicles and store equipment to support new store operations of approximately $2.2 million. Net cash provided by financing activities for the year ended December 31, 2020 was approximately $211 million and represented proceeds from the sale of Common Stock and exercise of warrants, net of offering costs of $211.2 million, offset by payments of long-term debt of approximately $114,400 and stock redemptions of approximately $118,800. Net cash provided by financing activities for the year ended December 31, 2019 was approximately $13.5 million and was comprised of primarily proceeds from the sales of Common Stock and exercise of warrants, net of offering costs of $13.9 million, net of payments of long-term debt of $460,000. 24 Use of Non-GAAP Financial Information The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles. As previously note, the Company has not been materially impacted by COVID, as such EBITDA has been adjusted to show the impact of covid costs which we believe to be non-recurring. Set forth below is a reconciliation of Adjusted EBITDA to net income (loss): Year ended December 31, 2020 December 31, 2019 Net Income $ 5,328,378 $ 1,321,842 Income taxes 3,250,891 - Interest 14,053 401,497 Depreciation and Amortization 2,435,965 1,044,553 EBITDA 11,029,287 2,767,892 COVID costs 293,152 - Share based compensation (option compensation, warrant compensation, stock issued for services) 7,856,163 2,490,535 Adjusted EBITDA $ 19,178,602 $ 5,258,427 Adjusted EBITDA per share, basic $ .44 $ .16 Adjusted EBITDA per share, diluted $ .41 $ .16 25 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2020, we had working capital of approximately $222.9 million, compared to working capital of approximately $29 million as of December 31, 2019, an increase of approximately $193.9 million. The increase in working capital from December 31, 2019 to December 31, 2020 was due primarily to the net proceeds from the sale of Common Stock of $207.1 million and exercise of warrants totaling approximately $3.8 million. At December 31, 2020, we had cash and cash equivalents of approximately $177.9 million. Currently, we have no demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth and acquisitions. Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings. We believe that some of our store acquisitions and new store openings can come from cash flow from operations. We anticipate that we will need additional financing in the future to continue to acquire and open new stores. To date we have financed our operations through the issuance of the sale of Common Stock, warrants and convertible debentures. Financing Activities On December 11, 2020 the Company consummated an underwritten public offering of 5,750,000 shares of its common stock, 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, 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. 2019 Offerings 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. Each 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. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. 26 RECENTLY ISSUED ACCOUNTING STANDARDS Recently Adopted Accounting Pronouncements 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 adoption. 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. 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 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 Statements. Recently Issued Accounting Pronouncements – Pending Adoption 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. In June 2016, the FASB issued ASU No. 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 condensed consolidated financial statements. 27 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 impairment. 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.” 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 28