GrowGeneration Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Reports of Independent Registered Public Accounting Firms F-2 to F-3 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-5 Consolidated Statements of Equity for the Years Ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for Years Ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 to F-35 F- 1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of GrowGeneration Corp. 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 America. 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 our audit. 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 since 2020. Denver, Colorado March 28, 2021 F- 2 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 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. 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 Certified Public Accountants Springfield, Pennsylvania March 27, 2020 We have served as the Company's auditor since 2014 F- 3 GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 177,911,511 $ 12,979,444 Accounts receivable, net of allowance for doubtful accounts of $192,193 and $291,372 at December 31, 2020 and 2019 3,900,519 2,953,921 Notes receivable, current, net of allowance for doubtful accounts of $292,050 and $0 at December 31, 2020 and 2019 2,612,134 1,037,541 Inventory 54,024,491 21,576,609 Income tax receivable 655,253 - Prepaids and other current assets 11,124,752 2,549,559 Total current assets 250,228,660 41,097,074 Property and equipment, net 6,475,130 3,340,616 Operating leases right-of-use assets, net 12,088,390 7,628,591 Notes receivables, net of current portion 1,199,743 463,747 Intangible assets, net 21,489,544 233,280 Goodwill 62,951,461 17,798,932 Other assets 300,767 377,364 TOTAL ASSETS $ 354,733,695 $ 70,939,604 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 14,623,107 $ 6,024,750 Accrued liabilities 672,103 - Payroll and payroll tax liabilities 2,655,427 1,072,142 Customer deposits 5,154,524 2,503,785 Sales tax payable 1,160,752 533,656 Current maturities of lease liability 3,000,684 1,836,700 Current portion of long-term debt 82,877 110,231 Total current liabilities 27,349,474 12,081,264 Deferred tax liability 750,430 Operating lease liability, net of current maturities 9,478,553 5,807,266 Long-term debt, net of current portion 157,987 242,079 Total liabilities 37,736,444 18,130,609 Commitments and contingencies Stockholders’ Equity: Common stock; $.001 par value; 100,000,000 shares authorized; 57,150,998 and 36,876,305 shares issued and outstanding as of December 31, 2020 and 2019, respectively 57,152 36,876 Additional paid-in capital 319,581,657 60,742,055 Accumulated deficit (2,641,558 ) (7,969,936 ) Total stockholders’ equity 316,997,251 52,808,995 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 354,733,695 $ 70,939,604 The accompanying notes are an integral part of these audited consolidated financial statements. F- 4 GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2020 2019 Sales $ 193,365,479 $ 79,733,568 Cost of sales 142,317,178 57,728,683 Gross profit 51,048,301 22,004,885 Operating expenses: Store operations 18,723,794 10,095,422 General and administrative 5,009,710 3,172,019 Share based compensation 7,856,163 2,490,535 Depreciation and amortization 2,435,965 1,044,553 Salaries and related expenses 8,585,080 3,619,197 Total operating expenses 42,610,712 20,421,726 Net income from operations 8,437,589 1,583,159 Other income (expense): Miscellaneous income (expense) 111,807 (4,545 ) Interest income 43,926 144,725 Interest expense (14,053 ) (401,497 ) Total non-operating income (expense), net 141,680 (261,317 ) Net income before taxes 8,579,269 1,321,842 Provision for income taxes (3,250,891 ) - Net income $ 5,328,378 $ 1,321,842 Net income per share, basic $ .12 $ .04 Net income per share, diluted $ .11 $ .04 Weighted average shares outstanding, basic 43,944,879 32,833,594 Weighted average shares outstanding, diluted 46,456,249 33,910,154 The accompanying notes are an integral part of these audited consolidated financial statements. F- 5 GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 Additional Total Common Stock Paid-In Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balances, December 31, 2018 27,948,609 $ 27,949 38,796,562 $ (9,291,778 ) $ 29,523,733 Sale of Common stock and warrants, net of fees 4,123,254 4,123 12,639,510 - 12,643,633 Share based compensation 1,215,273 1,215,273 Common stock issued upon warrant exercise 1,757,913 1,758 1,298,141 1,299,899 Common stock issued upon exercise of options 10,000 10 5,990 6,000 Common stock issued upon cashless exercise of options 505,868 506 (506 ) - Common stock issued in connection with business combinations 969,553 969 3,624,411 - 3,625,380 Common stock issued upon conversion of convertible debt 1,258,608 1,259 2,404,010 2,405,269 Common stock issued for services 202,500 202 548,564 548,766 Common stock issued for accrued share-based compensation 100,000 100 210,100 210,200 Net income, As restated 1,321,842 1,321,842 Balances, December 31, 2019 36,876,305 $ 36,876 $ 60,742,055 $ (7,969,936 ) $ 52,808,995 Sale of common stock, net of fees 14,375,000 14,375 207,120,290 - 207,134,665 Common stock issued upon warrant exercise 1,369,754 1,370 3,840,401 3,841,771 Common stock issued upon cashless exercise of warrants 918,186 918 (918 ) - Common stock issued upon exercise of options 70,562 71 229,783 229,854 Common stock issued upon cashless exercise of options 694,281 694 (694 ) - Common stock issued in connection with business combinations 1,730,431 1,731 39,144,315 39,146,046 Common stock issued for assets 20,000 20 136,180 136,200 Common stock issued for services 50,000 50 (50 ) - Common stock issued for accrued payroll 324,674 325 717,206 717,531 Common stock issued for accrued share-based compensation 729,325 722 3,796,901 3,797,623 Common stock redemption (7,520 ) (118,785 ) (118,785 ) Share based compensation 3,974,973 3,974,973 Net income 5,328,378 5,328,378 Balances, December 31, 2020 57,150,998 $ 57,152 $ 319,581,657 $ (2,641,558 ) $ 316,997,251 The accompanying notes are an integral part of theses audited consolidated financial statements. F- 6 GROWGENERATION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2020 2019 Cash Flows from Operating Activities: Net income $ 5,328,378 $ 1,321,842 Adjustments to reconcile net income to net cash used in operating Activities: Depreciation and amortization 2,435,965 1,044,553 Provision for doubtful accounts and notes receivable 213,503 172,135 Inventory valuation reserve 4,390 429,126 Amortization of debt discount - 356,306 Stock based compensation 7,856,163 2,490,535 Deferred income taxes 750,430 - Other (126,694 ) (66,536 ) Changes in operating assets and liabilities: (Increase) decrease in: Accounts and notes receivable (3,470,690 ) (3,764,947 ) Inventory (19,192,401 ) (9,925,052 ) Prepaid expenses and other assets (9,237,416 ) (2,061,701 ) Increase (decrease) in: Accounts payable and accrued liabilities 9,987,990 4,165,188 Operating leases 375,472 15,375 Customer deposits 2,650,739 1,987,747 Payroll and payroll tax liabilities 1,583,285 154,471 Sales taxes payable 627,096 341,698 Net Cash and Cash Equivalents (Used In) Operating Activities (213,790 ) (3,339,260 ) Cash Flows from Investing Activities: Assets acquired in business combinations (41,400,900 ) (9,458,743 ) Purchase of property and equipment (3,401,755 ) (2,232,812 ) Purchase of intangibles (1,027,548 ) (119,125 ) 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 (111,445 ) (460,129 ) Stock redemptions (118,785 ) - Proceeds from the sales of common stock and exercise of warrants and options, net of expenses 211,206,290 13,949,532 Net Cash and Cash Equivalents Provided by Financing Activities 210,976,060 13,489,403 Net Increase (decrease) in Cash and Cash Equivalents 164,932,067 (1,660,537 ) Cash and Cash Equivalents at Beginning of year 12,979,444 14,639,981 Cash and Cash Equivalents at End of year $ 177,911,511 $ 12,979,444 Supplemental Information: Common stock and warrants issued for prepaid services $ - $ 96,000 Common stock issued for accrued payroll liability $ 717,531 $ 210,200 Debt converted to equity $ - $ 2,310,832 Assets acquired by issuance of stock $ 39,282,246 $ 3,625,380 Cash paid for interest $ 14,053 $ 45,191 Right to use assets acquired under new operating leases $ 7,887,344 $ 6,210,395 The accompanying notes are an integral part of these audited consolidated financial statements. F- 7 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 1. NATURE 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. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 U.S. (“GAAP”). The consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net income. Use of Estimates Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles. 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. F- 8 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued 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 of 2020. 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. F- 9 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 2. 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. A 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. Should 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 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. Property and Equipment Property 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. 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: Estimated Lives Vehicle 5 years Building 20 years Furniture and fixtures 5-7 years Computers and equipment 3-5 years Leasehold improvements 10 years not to exceed lease term F- 10 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Software and Website Development Costs The 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 The 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. The Company 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 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 goodwill. If the fair value of the reporting unit exceeds its 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. F- 11 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Leases 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 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. 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. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: ● Level 1—Quoted prices in active markets for identical assets or liabilities. ● Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. ● Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the outstanding balance and are reviewed for impairment at least annually. The fair value of impaired notes receivable are determined based on estimated future payments discounted back to present value using the notes effective interest rate. Level December 31, 2020 December 31, 2019 Cash equivalents 2 $ 163,418,055 - Notes receivable 2 2,937,499 1,501,288 Notes receivable impaired 3 874,378 - Accounts receivable 2 3,900,519 2,953,921 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%. Income Taxes 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. F- 12 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued 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 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 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. Advertising 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”). 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 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”). The Company 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. F- 13 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 3. RECENT ACCOUNTING PRONOUNCEMENTS From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations. As an emerging growth company, the Company is permitted to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. The Company has chosen to take advantage of the extended transition period for complying with new or revised accounting standards. 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. F- 14 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 3. RECENT ACCOUNTING PRONOUNCEMENTS, Continued Recently Issued Accounting Pronouncements – Pending Adoption 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 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 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 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.” F- 15 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 3. 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. 4. REVENUE RECOGNITION Disaggregation of Revenues The following table disaggregates revenue by source: Year Ended December 31, 2020 Year Ended December 31, 2019 Sales at company owned stores $ 182,736,434 $ 74,969,830 E-commerce sales 10,629,045 4,763,738 Total Revenues $ 193,365,479 $ 79,733,568 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: Receivables Customer Deposit Liability Opening balance, 1/1/2020 $ 4,455,209 $ 2,503,785 Closing balance, 12/31/2020 7,712,396 5,154,524 Increase (decrease) $ 3,257,187 2,650,739 Opening balance, 1/1/2019 $ 862,397 $ 516,038 Closing balance, 12/31/2019 4,455,209 2,503,785 Increase (decrease) $ 3,592,812 $ 1,987,747 F- 16 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 4. REVENUE RECOGNITION, Continued 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 $ 4,103,927 $ 1,501,288 Allowance for losses (292,050 ) - Notes receivable, net $ 3,811,877 1,501,288 The following table summarizes changes in notes receivable balances that have been deemed impaired. December 31, 2020 December 31, 2019 Note receivable $ 1,166,428 $ 1,501,288 Allowance for loses (292,050 ) - Notes receivable, net $ 874,378 1,501,288 5. PROPERTY AND EQUIPMENT Property and equipment at December 31, 2020 and 2019 consists of the following: December 31, 2020 2019 Vehicle $ 1,342,127 $ 1,148,993 Building 477,280 - Leasehold improvements 1,987,991 884,685 Furniture, fixtures and equipment 5,738,798 2,858,777 9,546,196 4,892,455 Accumulated depreciation and amortization (3,071,066 ) (1,551,839 ) Property and equipment, net $ 6,475,130 $ 3,340,616 Depreciation expense was $1,646,907 and $1,046,328 for the years ended December 31, 2020 and 2019, respectively. 6. GOODWILL AND INTANGIBLE ASSETS The changes in goodwill are as follows: December 31, 2020 December 31, 2019 Balance, beginning of period $ 17,798,932 $ 8,752,909 Goodwill additions 45,152,529 9,046,023 Impairments - - Balance, end of period $ 62,951,461 $ 17,798,932 F- 17 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 6. GOODWILL AND INTANGIBLE ASSETS, Continued Intangible assets on the Company’s consolidated balance sheets consist of the following: December 31, 2020 December 31, 2019 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Tradenames $ 13,923,000 $ (398,567 ) $ - $ - Patents, trademarks 100,000 (9,051 ) 100,000 - Customer relationships 6,297,000 (137,814 ) - --- Non-competes 796,000 (21,743 ) - - Capitalized software 1,162,603 (221,884 ) 138,280 (5,000 ) $ 22,278,603 $ (789,059 ) $ 238,280 $ (5,000 ) Amortization expense for the years ended December 31, 2020 and 2019 was $789,058 and $5,000, respectively. Future amortization expense is as follows: 2021 $ 4,378,876 2022 4,396,281 2023 4,169,321 2024 4,069,439 2025 3,563,940 2026 911,687 Total $ 21,489,544 F- 18 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 7. INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 consisted of the following: Year Ended December 31, 2020 December 31, 2019 Income Tax Expense (benefit) Current federal tax expense Federal $ 1,732,230 $ 479,000 State 768,231 - Deferred tax (benefit) Federal $ 1,705,540 $ (479,000 ) State 226,590 - Valuation allowance (1,181,700 ) Total $ 3,250,891 $ - A summary of deferred tax assets and liabilities as of December 31, 2020 and 2019 is as follows: Year Ended December 31, 2020 December 31, 2019 Deferred tax assets: Net operating losses $ - $ 1,033,300 Deferred right to use lease liabilities 3,248,501 1,671,700 Stock based compensation 756,789 354,800 Inventory reserves 235,612 - Warranty reserves 146,472 - Accruals and other 180,345 160,200 4,567,719 3,220,000 Deferred tax liabilities: Deferred right to use lease assets (3,146,758 ) (1,678,300 ) Accumulated depreciation and amortization $ (2,171,391 ) $ (360,000 ) (5,318,149 ) 2,038,300 Gross deferred tax asset (liability) (750,430 ) 1,181,700 Valuation Allowance - (1,181,700 ) Deferred tax asset (liability), net $ (750,430 ) $ - We recorded a valuation allowance 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. F- 19 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 7. INCOME TAXES, Continued 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, 2020 and 2019: Years Ended December 31, 2020 2019 Federal statutory tax rate 21 % 21 % State and local income taxes (net of federal tax benefit) 6 % 4 % 27 % 25 % Other 6 % - Non-deductible compensation 3 % - Incentive stock options 4 % Basis adjustments 12 % - Valuation allowance (14 )% (25 )% 38 % 0 % 8. LONG-TERM DEBT December 31, 2020 2019 Long term debt is as follows: Wells Fargo Equipment Finance, interest at 3.5% per annum, payable in monthly installments of $518.96 beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $25,437 $ 1,032 $ 7,109 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 - 24,997 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 239,832 320,204 $ 240,864 $ 352,310 Less Current Maturities (82,877 ) (110,231 ) Total Long-Term Debt $ 157,987 $ 242,079 Debt maturities as of December 31, 2020 are as follows: 2021 $ 82,877 2022 99,184 2023 58,803 $ 240,864 Interest expense for the years ended December 31, 2020 and 2019 was $14,053 and $45,191, respectively. F- 20 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 9. LEASES We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1-10 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 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. 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. Lease 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 expenses. December 31, 2020 December 31, 2019 Right to use assets, operating lease assets $ 12,088,390 $ 7,628,591 Current lease liability $ 3,000,684 $ 1,836,700 Non-current lease liability 9,478,553 5,807,266 $ 12,479,237 $ 7,643,966 December 31, 2020 December 31, 2019 Weighted average remaining lease term 3.5 years 3.9 years Weighted average discount rate 7.6 % 7.6 % Year Ended December 31, 2020 2019 Operating lease costs $ 2,800,535 $ 1,914,161 Variable lease costs 1,071,089 525,292 Short-term lease costs 94,561 29,400 Total operating lease costs $ 3,966,185 $ 2,468,853 F- 21 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 9. LEASES, Continued The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2020: 2021 $ 4,118,220 2022 3,542,939 2023 3,025,729 2024 2,041,096 2025 1,676,619 Thereafter 2,379,935 Total lease payments 16,784,538 Less: Imputed interest (4,305,301 ) Lease Liability at December 31, 2020 $ 12,479,237 10. CONVERTIBLE DEBT 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 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. 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 remaining. 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. F- 22 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 11. SHARE BASED PAYMENTS The Company maintains long-term incentive plans for employee, non-employee members of our Board of Directors and consultants. The Plans allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards). On 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 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. 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. 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 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 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. F- 23 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 11. 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. December 31, 2020 2019 Restricted stock $ 5,164,133 $ 1,419,323 Stock options 2,250,662 1,071,212 Warrants 441,368 - Total $ 7,856,163 $ 2,490,535 As 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. The awards generally vest on the second or third anniversary of the date of grant, subject to the employee’s continuing employment as of that date. Restricted stock activity for the years ended December 31, 2020 and 2019 is presented in the following table: Shares Weighted Average Grant Date Fair Value Nonvested, January 1, 2019 55,000 $ 3.35 Granted 353,500 2.50 Vested (201,000 ) 3.02 Forfeited (3,500 ) 5.91 Nonvested, December 31, 2019 204,000 $ 3.82 Granted 1,293,000 4.90 Vested (799,833 ) 5.16 Forfeited (66,667 ) 4.15 Nonvested, December 31, 2020 630,500 $ 4.51 F- 24 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 11. SHARE BASED PAYMENTS, Continued Stock Option Awards issued under the 2014 Plan as of December 31, 2020 are summarized below: 2020 Total Shares available for issuance pursuant to the 2014 Plan 2,500,000 Options outstanding, December 31 2020 (50,000 ) Total options exercised under 2014 Plan (2,058,833 ) Total shares issued pursuant to the 2014 Plan (375,000 ) Awards available for issuance under the 2014 Plan, December 31, 2020 16,167 2020 Total Shares available for issuance pursuant to the 2018 Plan, as amended 5,000,000 Options outstanding, December 31 2020 (1,486,438 ) Total options exercised under 2018 Plan (438,895 ) Total shares issued pursuant to the 2018 Plan (1,112,979 ) Awards available for issuance under the 2018 Plan, December 31, 2020 1,961,688 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. 2020 2019 Expected volatility 77.75-80.7 % 87.8%-92.7 % Expected dividends None None Expected term 2-5 years 2-5 years Risk-free rate 1.64-1.75 % 1.64 % Options outstanding pursuant to 2014 Plan 50,000 Options outstanding pursuant to 2018 Plan 1,486,438 Options issued outside of 2014 and 2018 Plans 266,670 Total options outstanding December 31, 2020 1,803,108 F- 25 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 11. SHARE BASED PAYMENTS, Continued The table below summarizes all the options granted by the Company during years ended December 31, 2020 and 2019: Options Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Weighted- Average Grant Date Fair Value Outstanding at January 1, 2019 1,815,500 $ 1.66 2.65 years $ .78 Granted 795,000 $ 3.42 $ 2.31 Exercised (667,500 ) $ .72 $ .16 Forfeited or expired (17,667 ) $ 2.78 $ 1.49 Outstanding at December 31, 2019 1,925,333 $ 2.71 3.60 years $ 1.71 Vested and exercisable at December 31, 2019 1,346,333 $ 2.36 3.25 years $ 1.32 Outstanding at January 1, 2020 1,925,333 $ 2.71 3.60 years $ 1.71 Granted 891,500 $ 4.75 $ 2.67 Exercised (983,725 ) $ 2.59 $ 1.35 Forfeited or expired (30,000 ) $ 2.75 $ 1.63 Outstanding at December 31, 2020 1,803,108 $ 3.92 3.47 years $ 2.38 Vested and exercisable at December 31, 2020 1,057,734 $ 3.55 3.13 Years $ 2.00 12. 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 Exercise Price Outstanding January 1, 2019 3,295,667 $ 1.94 Granted/issued 2,061,629 $ 3.50 Exercised (1,643,610 ) $ .79 Forfeited - Outstanding December 31, 2019 3,713,686 $ 3.25 Granted/issued 305,000 $ 24.66 Exercised (2,468,963 ) $ 3.05 Forfeited (250,000 ) 5.75 Outstanding December 31, 2020 1,299,723 $ 8.03 F- 26 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 13. 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. Year Ended December 31, 2020 2019 Net income $ 5,328,378 $ 1,321,842 Weighted average shares outstanding, basic 43,944,879 32,833,594 Effect of dilutive outstanding warrants and stock options 2,511,370 1,076,560 Adjusted weighted average shares outstanding, dilutive 46,456,249 33,910,154 Basic income per shares $ .12 $ .04 Dilutive income per share $ .11 $ .04 14. EMPLOYEE BENEFIT PLAN The 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. 15. 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. 16. ACQUISITIONS 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. To date 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. F- 27 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 16. 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. Acquired 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 Oregon. 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. F- 28 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 16. ACQUISITIONS, Continued The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2020. Canopy Grassroots GrowBiz BGT Hydro Depot Emerald City H2O Hydro LLC Health & Harvest LLC Total Inventory $ 898,700 $ 2,348,200 $ 6,285,900 $ 1,595,000 $ 333,300 $ 150,000 $ 497,600 $ 1,053,900 $ 13,162,600 Prepaids and other current assets - - - - 4,600 - 4,600 Building - - - 477,300 - - - - 477,300 Furniture and equipment - 150,000 200,000 250,000 25,000 10,000 50,000 51,000 736,000 Operating lease right to use asset - 1,436,800 3,640,700 245,500 - - 902,000 192,600 6,417,600 Operating lease liability - (1,436,800 ) (3,640,700 ) (245,500 ) - - (902,000 ) (192,600 ) (6,417,600 ) Customer relationships 2,267,000 767,000 1,910,000 601,000 148,000 208,000 150,000 246,000 6,297,000 Trade name 1,138,000 2,138,000 7,745,000 2,025,000 212,000 - 234,000 431,000 13,923,000 Non-compete 113,000 133,000 374,000 94,000 19,000 14,000 43,000 6,000 796,000 Goodwill 4,822,900 4,464,000 28,271,400 4,001,600 798,500 620,000 1,007,700 1,065,600 45,051,700 Total $ 9,239,600 $ 10,000,200 $ 44,786,300 $ 9,043,900 $ 1,535,800 $ 1,000,000 $ 1,986,900 $ 2,853,500 $ 80,446,200 The table below represents the consideration paid for the net assets acquired in business combinations. Canopy Grassroots GrowBiz BGT Hydro Depot Emerald City H2O Hydro LLC Health & Harvest LLC Total Cash $ 5,423,600 $ 7,498,900 $ 17,486,900 $ 5,972,300 $ 987,500 $ 1,000,000 $ 1,281,700 $ 1,750,000 $ 41,400,900 Common stock 3,816,000 2,501,300 27,299,400 3,071,600 548,300 - 705,200 1,103,500 39,045,300 Total $ 9,239,600 $ 10,000,200 $ 44,786,300 $ 9,043,900 $ 1,535,800 $ 1,000,000 $ 1,986,900 $ 2,853,500 $ 80,446,200 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. Canopy Grassroots GrowBiz BGT Hydro Depot Emerald City H2O Hydro LLC Health & Harvest LLC Total Acquisition date 12/23/2020 12/14/2020 11/17/2020 10/20/2020 10/12/2020 8/10/2020 6/16/2020 2/26/2020 Revenue $ 300,500 $ 531,800 $ 3,852,100 $ 1,859,200 $ 1,244,600 $ 5,634,800 $ 2,418,100 $ 8,994,900 $ 24,836,000 Net Income $ 141,100 $ 74,400 $ 735,900 $ 187,800 $ 148,800 $ 1,005,000 $ 561,800 $ 1,065,600 $ 3,920,400 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. December 31, 2020 (Unaudited) December 31, 2019 (Unaudited) Revenue $ 116,120,116 $ 71,649,931 Net income $ 12,979,881 $ 689,728 F- 29 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 16. ACQUISITIONS, Continued The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2019. Grow World LLC Grand Rapids Hydro Green Life Garden Chlorophyll Reno Hydroponics Palm Springs Hydroponics Total Inventory $ 553,900 $ 1,453,100 $ 1,038,600 $ 1,441,000 $ 238,000 $ 465,500 $ 5,190,100 Prepaids and other current assets - 14,100 22,000 - 36,100 Furniture and equipment 35,000 50,000 100,000 100,000 25,000 25,000 335,000 Goodwill 696,900 2,376,900 2,305,900 2,596,100 516,300 554,000 9,046,100 Total $ 1,285,800 $ 3,880,000 $ 3,458,600 $ 4,159,100 $ 779,300 $ 1,044,500 $ 14,607,300 The table below represents the consideration paid for the net assets acquired in business combinations. Grow World LLC Grand Rapids Hydro Green Life Garden Chlorophyll Reno Hydroponics Palm Springs Hydroponics Total Cash $ 1,000,000 $ 2,350,000 $ 2,647,700 $ 3,659,100 $ 525,000 $ 800,000 $ 10,981,800 Common stock 285,800 1,530,000 810,900 500,000 254,300 244,500 3,625,500 Total $ 1,285,800 $ 3,880,000 $ 3,458,600 $ 4,159,100 $ 779,300 $ 1,044,500 $ 14,607,300 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. Grow World LLC Grand Rapids Hydro Green Life Garden Chlorophyll Reno Hydroponics Palm Springs Hydroponics Total Acquisition date 12/16/19 9/3/2019 5/14/2019 1/21/2019 2/11/2019 2/7/2019 Revenue $ 153,900 $ 2,412,700 $ 4,829,800 $ 6,030,500 $ 2,106,900 $ 3,075,300 $ 18,609,100 Earnings $ 6,400 $ 444,500 $ 998,700 $ 936,600 $ 366,742 $ 651,400 $ 3,404,342 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. December 31, 2019 (Unaudited) December 31, 2018 (Unaudited) Revenue $ 31,300,425 $ 59,650,900 Earnings $ 4,750,591 $ (2,087,900 ) F- 30 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 17. STOCKHOLDERS EQUITY 2020 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. 2019 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. 18. CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS Revision During the fourth quarter of 2020, we identified amounts presented in our inventory and costs of sales reported in prior years that required revision. The revised amounts resulted from an accumulation of errors related to rebates issued from vendors. We 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. F- 31 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 18. 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 Adjustment Revised ASSETS Current assets: Cash and cash equivalents $ 12,979,444 $ 12,979,444 Accounts receivable, net 2,953,921 2,953,921 Notes receivable, net 1,037,541 1,037,541 Inventory 22,659,357 (1,082,748 ) 21,576,609 Prepaids and other current assets 2,549,559 2,549,559 Total current assets 42,171,822 41,097,074 Property and equipment, net 3,340,616 3,340,616 Operating leases right-of-use assets, net 7,628,591 7,628,591 Notes receivable 463,747 463,747 Intangible assets, net 233,280 233,280 Goodwill 17,798,932 17,798,932 Other assets 377,364 377,364 TOTAL ASSETS $ 72,022,352 $ 70,939,604 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,024,750 6,024,750 Payroll and payroll tax liabilities 1,072,142 1,072,142 Customer deposits 2,503,785 2,503,785 Sales tax payable 533,656 533,656 Current maturities of right-of-use assets 1,836,700 1,836,700 Current portion of long-term debt 110,231 110,231 Total current liabilities 12,081,264 12,081,264 Operating leases right-of-use assets, net of current maturities 5,807,266 5,807,266 Long-term debt, net of current portion 242,079 242,079 Total liabilities 18,130,609 18,130,609 Stockholders’ Equity: Common stock; $.001 par value; 100,000,000 shares 36,876,305 shares issued and outstanding as of December 31, 2019 36,876 36,876 Additional paid-in capital 60,742,055 60,742,055 Accumulated deficit (6,887,188 ) (1,082,748 ) (7,969,936 ) Total stockholders’ equity 53,891,743 52,808,995 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 72,022,352 $ 70,939,604 F- 32 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 18. CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued Year Ended December 31, 2019 As Previously Reported Adjustment Revised Sales $ 79,733,568 $ 79,733,568 Cost of sales 57,171,721 556,962 57,728,683 Gross profit 22,561,847 22,004,885 Operating expenses: Store operations 10,095,422 10,095,422 General and administrative 3,172,019 3,172,019 Share based compensation 2,490,535 2,490,535 Depreciation and amortization 1,044,553 1,044,553 Salaries and related expenses 3,619,197 3,619,197 Total operating expenses 20,421,726 20,421,726 Net income from operations 2,140,121 1,583,159 Other income (expense): Miscellaneous income (expense) (4,545 ) (4,545 ) Interest income 144,725 144,725 Interest expense (401,497 ) (401,497 ) Total non-operating income (expense), net (261,317 ) (261,317 ) Net income before taxes 1,878,804 1,321,842 Provision for income taxes 0 0 Net income $ 1,878,804 1,321,842 Net income per share, basic $ 0.06 $ 0.04 Net income per share, diluted $ 0.06 $ 0.04 Weighted average shares outstanding, basic 32,833,594 32,833,594 Weighted average shares outstanding, diluted 33,910,154 33,910,154 F- 33 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 18. CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued For The Year Ended December 31, 2019 Cash Flows from Operating Activities: As Previously Reported Adjustment Revised Net income $ 1,878,804 (556,962 ) $ 1,321,842 Adjustments to reconcile net income to net cash used in operating Activities: - Depreciation and amortization 1,044,553 1,044,553 Provision for doubtful accounts receivable 172,135 172,135 Inventory valuation reserve 429,126 429,126 Amortization of debt discount 356,306 356,306 Stock based compensation 2,490,535 2,490,535 Other (66,536 ) (66,536 ) Changes in operating assets and liabilities: - (Increase) decrease in: - Accounts receivable (3,764,947 ) (3,764,947 ) Inventory (10,482,014 ) 556,962 (9,925,052 ) Prepaid expenses and other assets (2,061,701 ) (2,061,701 ) Increase (decrease) in: - Accounts payable and accrued liabilities 4,165,188 4,165,188 Operating leases 15,375 15,375 Customer deposits 1,987,747 1,987,747 Income taxes - - Payroll and payroll tax liabilities 154,471 154,471 Sales taxes payable 341,698 341,698 Net Cash and Cash Equivalents (Used In) Operating Activities (3,339,260 ) (3,339,260 ) Cash Flows from Investing Activities: Assets acquired in business combinations (9,458,743 ) (9,458,743 ) Purchase of property and equipment (2,232,812 ) (2,232,812 ) Purchase of goodwill and other intangibles (119,125 ) (119,125 ) Net Cash and Cash Equivalents (Used In) Investing Activities (11,810,680 ) (11,810,680 ) Cash Flows from Financing Activities: Principal payments on long term debt (460,129 ) (460,129 ) Stock redemptions - - Proceeds from the sales of common stock and exercise of warrants and options, net of expenses 13,949,532 13,949,532 Net Cash and Cash Equivalents Provided by Financing Activities 13,489,403 13,489,403 Net Increase(decrease) in Cash and Cash Equivalents (1,660,537 ) (1,660,537 ) Cash and Cash Equivalents at Beginning of year 14,639,981 14,639,981 Cash and Cash Equivalents at End of year $ 12,979,444 $ 12,979,444 19. 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 $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. F- 34 GROWGENERATION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019 19. 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 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. 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. F- 35 ITEM 9. 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.