What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-10 compared with 2021-03-29 · 806 added, 1110 removed, 337 unchanged (85% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reports of Independent Registered Public Accounting Firms

Reports of Independent Registered Public Accounting Firms (PCAOB ID 166 and 1537 )

Consolidated Balance Sheets as of December 31, 202 1 and 20 20

3 unchanged sentences

Notes to Consolidated Financial Statements

Report of Independent Registered Public

Accounting Firm

To the Stockholders and Board of Directors of GrowGeneration

F- 11 to F- 38

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

We have audited the accompanying consolidated balance sheets of GrowGeneration Corp.

(the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 9, 2022 expressed an adverse opinion thereon.

Basis for Opinion

The Company's management is responsible

for these financial statements.

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

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

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

federal securities laws and the applicable

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

We conducted our audit in accordance with

the standards of the PCAOB.

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

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

The Company is not required to have,

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

As part of our audit we are required

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

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

Accordingly, we express no such opinion.

Our audit included performing procedures

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

that respond to those risks.

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

in the financial statements.

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

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

We believe that our audit provides a reasonable

basis for our opinion.

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 audits.

We are a public accounting firm registered with the 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 financial statements are free of material misstatement, whether due to error or fraud.

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 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matter Description

As described in Notes 2 and 16 to the consolidated financial statements, the Company completed 16 business acquisitions during the year.

Management estimated the fair value of the intangible assets using discounted cash flow analyses, which were based on the Company’s best estimates of future sales, earnings, and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance.

Determining the fair value of the intangible assets acquired required significant judgment, including the amount and timing of expected future cash flows, selected discount rates, expected future sales to existing customers, customer attrition, and royalty rates.

We identified the Company's assumptions used to estimate the fair value of acquired intangible assets as a critical audit matter.

The principal considerations for our determination include the inherent judgment involved in estimating these amounts.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to audit this critical audit matter included the following:

• We obtained an understanding of the Company's accounting and control procedures for acquired intangible assets within both IT and manual systems by which those transactions are initiated, authorized, recorded, processed, corrected as necessary, transferred to the general ledger, and reported in the financial statements.

• We tested the effectiveness of controls over the valuation of intangibles, including management’s controls over the amount and timing of expected future cash flows and the selection of discount rates.

• We assessed the reasonableness of management’s forecasts of future cash flows by performing inquiries of appropriate individuals outside of the finance organization, and comparing the projections to historical results, contractual agreements, certain peer companies, third-party industry forecasts, and reviewing internal communications to management and the board of directors.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the calculated amount of fair value of the intangible assets and goodwill.

Specifically, we considered both the valuation methodology and the discount rates utilized, including testing the source information underlying the determination of the discount rates, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates selected by management.

• We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit.

• We evaluated the Company’s disclosures related to the business combinations.

/s/ Plante & Moran, PLLC

We have served as the Company’s auditor

We have served as the Company’s auditor since 2020.

Denver, Colorado

March 9, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of GrowGeneration Corp.

Adverse Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting as of December 31, 2021 of GrowGeneration Corp.

(the “Company”), based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).

In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in the COSO framework.

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified and included in management’s assessment.

Management has identified material weaknesses in controls related to (1) ineffective controls in accounting and financial reporting for complex financial reporting transactions including areas such as business combinations, share based compensation, and the related income tax reporting, (2) the design of its controls to consider segregation of duties within the various bank accounts, internal technology, human resources, and manual journal entry posting processes, (3) inadequate information and technology general controls, including segregation of duties, change management, and user access which were inadequate to support financial reporting applications and support automated controls and functionality, and (4) inadequate controls over physical inventory counts.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2021 financial statements, and this report does not affect our report dated March 9, 2022, on those financial statements.

We also have audited the accompanying consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”), in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Our report dated March 9, 2022, expresses an unqualified opinion.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We are a public accounting firm registered with the 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 effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Charcoir Corporation, Agron LLC, and MMI, which were acquired during 2021.

These acquisitions constituted 10% of total assets and 5% of total revenues as of and for the year ended December 31, 2021.

Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Charcoir Corporation, Agron, LLC, and MMI.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and

procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Plante & Moran, PLLC

Denver, Colorado

March 9, 2022

We have served as the Company’s auditor since 2020.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

1 unchanged sentence

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.

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.

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.

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

6 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(in thousands except shares)

2021 December 31,

Current assets:

Cash and cash equivalents $ 41,372 $ 177,912

$ 177,911,511

Marketable securities 39,793 —

Accounts receivable, net of allowance for doubtful accounts of $ 581 and $ 192 at December 31, 2021 and 2020

Notes receivable, current, net of allowance for doubtful accounts of $ 522 and $ 292 at December 31, 2021 and 2020

Income tax receivable

Inventory 105,571 54,024

Prepaid income taxes 5,856 655

Prepaids and other current assets 16,116 11,125

4 unchanged sentences

Intangible assets, net 48,402 20,549

$ 354,733,695

LIABILITIES & STOCKHOLDERS’

Goodwill 125,401 62,951

Other assets 800 301

TOTAL ASSETS $ 459,338 $ 354,734

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:

12 unchanged sentences

Commitments and contingencies

Stockholders’

Stockholders’ Equity:

Common stock;

3 unchanged sentences

Additional paid-in capital 361,087 319,582

Accumulated deficit

Total stockholders’

TOTAL LIABILITIES AND STOCKHOLDERS’

$ 354,733,695

The accompanying notes are an integral

part of these audited consolidated financial statements.

Retained earnings (deficit) 10,144 ( 2,642 )

Total stockholders’ equity 371,291 316,997

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 459,338 $ 354,734

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

GROWGENERATION CORP.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended

(in thousands, except per share)

For the Years Ended December 31,

2021 2020 2019

Sales $ 422,489 $ 193,365 $ 79,734

Cost of sales 304,248 142,317 57,729

Gross profit 118,241 51,048 22,005

Operating expenses:

Store operations

General and administrative

Share based compensation

49,742 18,724 10,095

Selling, general, and administrative 40,897 21,451 9,282

Depreciation and amortization

Salaries and related expenses

12,600 2,436 1,045

Total operating expenses

Net income from operations

103,239 42,611 20,422

Income from operations 15,002 8,437 1,583

Other income (expense):

Miscellaneous income (expense)

( 216 ) 112 ( 5 )

Interest income

Interest expense

( 43 ) ( 14 ) ( 401 )

Total non-operating income (expense), net

227 142 ( 261 )

Net income before taxes 15,229 8,579 1,322

Provision for income taxes ( 2,443 ) ( 3,251 ) —

Net income $ 12,786 $ 5,328 $ 1,322

Net income per share, basic $ 0.22 $ 0.12 $ 0.04

2 unchanged sentences

Weighted average shares outstanding, diluted 60,464 46,456 33,910

The accompanying

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

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

GROWGENERATION CORP.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

FOR THE YEARS ENDED DECEMBER 31, 2020

Stockholders’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2021, 2020, and 2019

(in thousands)

Common Stock Additional

Capital Retained Earnings (Deficit) Total

Stockholders’

Shares Amount

Balances, December 31, 2018 27,949 $ 28 $ 38,797 $ ( 9,292 ) $ 29,533

$ (9,291,778 )

Sale of Common stock and warrants, net of fees 4,123 4 $ 12,640 — 12,644

7 unchanged sentences

Common stock issued for accrued share-based compensation 100 0 $ 210 — 210

Net income, As restated

Net income — $ 0 1,322 1,322

Balances, December 31, 2019 36,878 $ 37 $ 60,742 $ ( 7,970 ) $ 52,809

$ (7,969,936 )

Sale of common stock, net of fees 14,375 14 207,120 — 207,134

8 unchanged sentences

Common stock issued for accrued share-based compensation 729 1 3,797 — 3,798

Common stock redemption

Share based compensation

Share based compensation, net of shares withheld for employee tax liability ( 8 ) — 3,856 — 3,856

Net income 0 0 5,328 5,328

Balances, December 31, 2020 57,152 $ 57 $ 319,582 $ ( 2,642 ) $ 316,997

$ 319,581,657

$ (2,641,558 )

$ 316,997,251

The accompanying notes are an integral part

of theses audited consolidated financial statements.

Common stock issued upon warrant exercise 256 — 335 — 335

Common stock issued upon cashless exercise of warrants 657 1 ( 1 ) — —

Common stock issued upon exercise of options 469 1 1,757 — 1,758

Common stock issued upon cashless exercise of options 325 — — — —

Common stock issued in connection with business combinations 807 1 37,271 — 37,272

Common stock issued in connection with purchase of intangible assets 4 — 168 — 168

Common stock issued for share based compensation 204 — — — —

Common stock issued for services 145 — 717 — 717

Common stock redeemed in litigation settlement ( 90 ) — — — —

Share based compensation, net of shares withheld for employee tax liability — — 1,258 — 1,258

Net income — — — 12,786 12,786

Balances, December 31, 2021 59,929 $ 60 $ 361,087 $ 10,144 $ 371,291

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

GROWGENERATION CORP.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended December 31,

2021 2020 2019

Cash Flows from Operating Activities:

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

Net income $ 12,786 $ 5,328 $ 1,322

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

Depreciation and amortization 12,600 2,436 1,045

Provision for doubtful accounts and notes receivable 619 214 172

Inventory valuation reserve

Amortization of debt discount — — 356

1 unchanged sentence

Deferred income taxes 1,609 750 —

Loss on disposal of fixed assets 198 — —

Other — ( 127 ) ( 67 )

Changes in operating assets and liabilities:

1 unchanged sentence

Accounts and notes receivable ( 1,087 ) ( 3,471 ) ( 3,765 )

(19,192,401 )

Inventory ( 34,690 ) ( 19,188 ) ( 9,496 )

Prepaid expenses and other assets ( 9,937 ) ( 9,236 ) ( 2,062 )

5 unchanged sentences

Sales taxes payable 762 627 342

Net Cash and Cash Equivalents (Used In) Operating Activities

Net Cash and Cash Equivalents Provided By (Used In) Operating Activities 5,159 ( 213 ) ( 3,340 )

Cash Flows from Investing Activities:

Assets acquired in business combinations ( 80,784 ) ( 41,402 ) ( 9,459 )

(41,400,900 )

Purchase of property and equipment ( 18,740 ) ( 3,401 ) ( 2,233 )

Purchase of marketable securities ( 75,000 ) — —

Maturities of marketable securities 35,207 — —

Purchase of intangibles — ( 1,027 ) ( 119 )

Net Cash and Cash Equivalents (Used In) Investing Activities ( 139,317 ) ( 45,830 ) ( 11,811 )

(45,830,203 )

(11,810,680 )

Cash Flows from Financing Activities:

Principal payments on long term debt ( 83 ) ( 111 ) ( 460 )

Stock redemptions

Payments to tax authorities for stock-based compensation ( 4,391 ) ( 119 ) —

Proceeds from the sales of common stock and exercise of warrants and options, net of expenses 2,092 211,206 13,950

Net Cash and Cash Equivalents Provided by Financing Activities

Net Cash and Cash Equivalents (Used In) Provided by Financing Activities ( 2,382 ) 210,976 13,490

Net Increase (decrease) in Cash and Cash Equivalents ( 136,540 ) 164,933 ( 1,661 )

1 unchanged sentence

Cash and Cash Equivalents at End of year $ 41,372 $ 177,912 $ 12,979

$ 177,911,511

Supplemental Information:

Common stock and warrants issued for prepaid services $ — $ — $ 96

Common stock issued for intangible assets $ 168 $ — $ —

Common stock issued for accrued payroll liability $ — $ 718 $ 210

3 unchanged sentences

Right to use assets acquired under new operating leases $ 32,875 $ 7,887 $ 6,210

The accompanying notes are an integral part

of these audited consolidated financial statements.

Cash paid for income taxes $ 6,072 $ 3,156 $ —

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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

OF OPERATIONS

GrowGeneration Corp (the “Company”)

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

its principal office in Denver, Colorado.

GrowGeneration is the largest chain of hydroponic garden centers

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

ventilation systems and accessories for hydroponic gardening.

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

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

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

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

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

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

stores and related businesses throughout the United States and Canada.

The Company engages in its business

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

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

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

Florida Corp and GrowGeneration Management Corp.

OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and

Consolidation

The financial statements are

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

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

(“GAAP”).

The consolidated financial statements

include the Company and its wholly-owned subsidiaries.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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 62 retail hydroponic/gardening stores across 13 states, an online e-commerce platform, and propriety businesses that market grow solutions through our platforms and other wholesale customers.

The Company’s plan is to continue to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States and Canada.

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.

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

All intercompany balances and transactions are eliminated in consolidation.

All amounts included in the accompanying footnotes to the consolidated financial statements, except per share data, are in thousands (000).

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.

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

These reclassifications had no effect on reported consolidated net income.

Use of Estimates

Management uses estimates and

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

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

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

results could vary from the estimates that were used.

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.

The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations.

As a result, if the pandemic or its effects persist or worsen, our accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time).

The Company has experienced minimal business interruption as a result of the COVID-19 pandemic.

We have been deemed an “essential” business by state and local authorities in the areas in which we operate and as such have not been subject to business closures.

The COVID-19 pandemic to date has resulted in temporary supply chain delays of our inventory and increased shipping cost among other impacts.

As events surrounding the COVID-19 pandemic can change rapidly we cannot predict how it may disrupt our operations or the full extent of the disruption.

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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

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

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.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

reportable operating segment as under guidance in the Financial Accounting Standards Board Accounting Standards 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 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.

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 a 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.

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.

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 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, 2021 and 2020, the Company had approximately $ 38 million and $ 174 million, respectively, in excess of the FDIC insurance limit.

The Company classifies its commercial paper and debt securities as marketable securities.

Marketable securities with available fair market values are stated at fair market values.

Unrealized gains and losses on these marketable securities are reported, net of applicable income taxes, in other comprehensive income.

Realized gains or losses on sale of marketable securities are computed using primarily the moving average cost and reported in net income.

For the year ended December 31, 2021, there were no significant unrealized gains or losses incurred.

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.

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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES, Continued

Cash Equivalents

The Company considers all highly

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

The Company’s cash

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

Financial instruments that potentially

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

not collateralized.

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

limit the amount of credit exposure.

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

up to $250,000.

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

of the FDIC insurance limit.

Accounts Receivable, Notes

Receivable and Concentration of Credit Risk

Accounts receivable are stated at the amount the Company expects

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

having outstanding balances and current relationships with them.

A reserve for uncollectable receivables is established when collection

of amounts due is deemed improbable.

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

flow difficulties or ongoing service or billing disputes.

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

not bear interest.

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

At December 31, 2020 and

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

Notes receivable are stated

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

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

A reserve for uncollectable

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

Indicators of improbable collection include client

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

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

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

The accrual of interest on the instrument ceases when

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

Any payment received on

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

The note is reclassified as accrual-basis

once interest and principal payments become current.

The Company periodically reviews the value of the underlying collateral for

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

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

an allowance is necessary.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

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 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.

As of December 31, 2021 and 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 recogniz ed allowance.

Notes receivable generally have terms of 12 months to 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.

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, 2021 and 2020, we do not believe that we have significant credit risk.

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

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

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

Property and Equipment

Property and equipment are carried

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

life of the improvement, whichever is shorter.

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.

With respect to constructed assets, all materials, direct labor, contract services as well as certain indirect costs are capitalized.

Expenditures for maintenance and repairs are charged against operations.

Depreciation of property and equipment is provided on

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

Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:

Estimated Lives

Furniture and fixtures

Computers and equipment

Leasehold improvements

10 years not to exceed lease term

Vehicles 5 years

Buildings 20 years

Furniture and fixtures 5 - 7 years

Computers and equipment 3 - 5 years

Leasehold improvements 5 years not to exceed lease term

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,

Software and Website Development Costs

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

Goodwill and Other .

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

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

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

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

and stock-based compensation expenses;

costs of computer hardware and software;

and costs incurred in developing features and functionality.

These capitalized costs are included in intangible assets on the consolidated

balance sheets.

● The Company expenses

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

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

● Software costs

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

project is ready for its intended use.

● Costs incurred related to less significant

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

As of December 31, 2020 and

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

respectively.

Intangible Assets Acquired

in Business Combinations

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

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

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

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

of the acquired businesses.

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

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

of amortization.

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

generally, five to six years.

Goodwill represents the excess

of purchase price over the fair value of net assets.

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

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

The Company’s review for

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

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

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

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

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

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

These capitalized costs are included in property and equipment 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.

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, and intellectual property.

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, and intellectual property are generally, five to six years .

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

Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level.

The Company’s review for impairment includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill.

If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill, a 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

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.

Long-lived assets

The Company reviews the recoverability of long-lived assets, including buildings, furniture and fixtures, computers and equipment, leasehold improvements, and other intangible assets, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable.

The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations.

If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value.

The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.

As of December 31, 2021, there were no indicators of impairment.

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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,

We account for leases in accordance

with the FASB ASC 842, Leases.

We assess whether an arrangement is a lease at inception.

Leases with an initial term of 12 months

or less are not recorded on the balance sheet.

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

for all assets.

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

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

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

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

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

incentives and initial direct costs incurred.

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

certain that we will exercise that option.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

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 is defined as the

exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous

market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques

used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

Financial assets

and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value

hierarchy, of which the first two are considered observable and the last is considered unobservable:

● Level 1—Quoted

prices in active markets for identical assets or liabilities.

● Level 2—Observable

inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted

prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can

be corroborated by observable market data.

● Level 3—Unobservable

inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets

or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination

of fair value requires more judgment.

Accordingly, the degree of judgment exercised by the Company in determining fair value is

greatest for instruments categorized in Level 3.

A financial instrument’s level within the fair value hierarchy is based

on the lowest level of any input that is significant to the fair value measurement.

The carrying amounts of cash

and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to their

short-term nature.

The fair value of notes receivable approximates the outstanding balance and are reviewed for impairment at least

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

value using the notes effective interest rate.

December 31, 2020

December 31, 2019

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, 2021 December 31, 2020

Cash equivalents 2 $ 41,372 177,912

$ 163,418,055

Notes receivable

Marketable securities 2 $ 39,793 —

Notes receivable impaired 3 $ 978 874

Accounts receivable

For the Level 3 assets measured

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

interest rate of 10%.

The Company accounts for income

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

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

and their respective tax bases and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax

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

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

the enactment date.

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

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

not be determined to be more likely than not.

For the Level 3 assets measured at fair value on a non-recurring basis at December 31, 2021, the significant unobservable inputs include the notes receivable effective interest rates of 8 % to 10 %.

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis 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.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,

The Company adopted the provisions

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

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

FASB ASC 740-10-25 also provides guidance on 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.

and state authorities until their respective statute of limitation.

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

to examination by taxing authorities.

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

of the taxing authorities.

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

The Company expenses advertising

and promotional costs when incurred.

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

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

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized.

To the extent that a determination was made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.

From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty.

Significant judgment is required in assessing and estimating the tax consequences of these transactions.

The Company prepares and files tax returns based on its interpretation of tax laws and regulations.

In the normal course of business, the tax returns are subject to examination by various taxing authorities.

Such examinations may result in future tax, interest and penalty assessments by these taxing authorities.

In determining the Company’s income tax provision for financial reporting purposes, the Company establishes a reserve for uncertain income tax positions unless such positions are determined to be more likely than not of being sustained upon examination, based on their technical merits.

That is, for financial reporting purposes, the Company only recognizes tax benefits taken on the tax return that the Company believes are more likely than not of being sustained upon examination.

There is considerable judgment involved in determining whether a position taken on the tax return is more likely than not of being sustained.

The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations.

The consolidated income tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest and penalties.

The Company’s policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of its income tax provision

The Company expenses advertising and promotional costs when incurred.

Advertising and promotional expenses for the years ended December 31, 2021, 2020, and 2019 amounted to $ 4.0 million, $ 996 thousand, and $ 737 thousand respectively.

Earnings Per Share

The Company computes net earnings

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

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

weighted average number of common shares outstanding for the period.

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

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

The treasury stock method is

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

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

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

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”).

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 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.

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

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

These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, the Financial

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

the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”).

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.

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

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

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

The Company made an accounting

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

The Company will recognize those

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

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

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

On January 1, 2019, the Company

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

ASU 2018-07 more closely aligns

the accounting for employee and nonemployee share-based payments.

The amendment is effective commencing in 2019 with early

adoption permitted.

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

In August 2018, the SEC adopted

amendments to certain disclosure requirements in Securities Act Release No.

33-10532, Disclosure Update and Simplification.

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

Among the amendments is the requirement

to present an analysis of changes in stockholders’

equity in the interim financial statements included in Quarterly Reports

on Form 10-Q.

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

quarter and year-to-date interim periods.

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

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

In August 2018, the FASB issued

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

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value

Measurement .

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

The amendments

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

December 15, 2019.

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

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

2016-13, “Financial Instruments —

Credit Losses (Topic 326),”

changing the impairment model for most

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

currently by the other-than-temporary impairment model.

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

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

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

In November 2019, the FASB issued ASU No.

2019-10, changing

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

The Company is required to adopt

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

We are currently evaluating

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

In January 2017, the FASB issued

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

Simplifying the Test for Goodwill Impairment.

The guidance in ASU 2017-04

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

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

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

the reporting unit’s fair value.

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

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

The Company is currently evaluating the impact

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

In December 2019, the FASB issued

ASU 2019-02, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions

to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity

financial statements and interim recognition of enactment of tax laws or rate changes.

The standard will be effective for annual

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

We are currently

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

In August 2020, the FASB issued

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

Accounting for Convertible Instruments and Contracts in an Entity’s

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

instruments and contracts on an entity’s own equity.

ASU 2020-06 removes from U.S.

GAAP the separation models for (1) convertible

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

ASU 2020-06 requires

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

how the instruments

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

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

GROWGENERATION

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

RECENT ACCOUNTING PRONOUNCEMENTS, Continued

ASU 2020-06 is effective for

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

periods within those fiscal years.

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

2023 and interim periods within those fiscal years.

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

on our condensed consolidated financial statements.

We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.

Recently Adopted Accounting Pronouncements

As of January 1, 2019, the Company adopted the FASB ASU 2016-2, 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.

Recently Issued Accounting Pronouncements – Pending Adoption

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.

The Company is in the process of evaluating the impact of this standard.

REVENUE RECOGNITION

Disaggregation of Revenues

The following table disaggregates

revenue by source:

The following table disaggregates revenue by source:

Year Ended December 31,

2021 Year Ended December 31,

2020 Year Ended December 31,

Sales at company owned stores $ 369,199 $ 182,736 $ 74,970

$ 182,736,434

Distribution 17,087 — —

E-commerce sales 36,203 10,629 4,764

Total Revenues $ 422,489 $ 193,365 $ 79,734

$ 193,365,479

Contract Balances

Depending on the timing of when

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

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

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

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

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

The opening and closing balances

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

Customer Deposit Liability

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, 2021 and 2020.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

REVENUE RECOGNITION, Continued

The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:

Receivables Customer Deposit Liability

Opening balance, 1/1/2021 $ 7,713 $ 5,155

4 unchanged sentences

Increase (decrease) $ 3,258 $ 2,651

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

REVENUE RECOGNITION,

The Company also has customer

trade receivables under longer term financing arrangements at interest rates ranging from 9% to 12% with repayment terms ranging

for 12 to 18 months.

Long term trade receivables at December 31, 2020 and 2019 are as follows:

December 31, 2020

December 31, 2019

The Company also has customer trade receivables under longer term financing arrangements at interest rates ranging from 8 % to 12 % with repayment terms ranging for 12 to 18 months.

Notes receivable at December 31, 2021 and 2020 are as follows:

December 31, 2021 December 31, 2020

Note receivable $ 2,962 $ 4,104

1 unchanged sentence

Notes receivable, net $ 2,440 $ 3,812

The following table summarizes

changes in notes receivable balances that have been deemed impaired.

The following table summarizes changes in notes receivable balances that have been deemed impaired.

2021 December 31,

Note receivable $ 1,500 $ 1,166

1 unchanged sentence

Notes receivable, net $ 978 874

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

PROPERTY AND EQUIPMENT

Property and equipment at December

31, 2020 and 2019 consists of the following:

Property and equipment at December 31, 2021 and 2020 consists of the following:

Vehicles $ 2,258 $ 1,342

Buildings 1,187 477

Leasehold improvements 9,186 1,988

Furniture, fixtures and equipment 10,992 5,739

Capitalized software 4,753 1,163

Construction-in-progress 2,948 —

31,324 10,709

Accumulated depreciation and amortization ( 7,208 ) ( 3,293 )

Property and equipment, net $ 24,116 $ 7,416

Depreciation expense was $1,646,907

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

Depreciation expense was $ 3.7 million, $ 1.6 million, and $ 1.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.

GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill

are as follows:

The changes in goodwill are as follows:

2021 December 31,

Balance, beginning of period $ 62,951 $ 17,799

Goodwill additions

Goodwill additions and measurement period adjustments $ 62,450 $ 45,152

Balance, end of period $ 125,401 $ 62,951

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

GOODWILL AND INTANGIBLE ASSETS, Continued

Intangible assets on the Company’s consolidated

balance sheets consist of the following:

December 31, 2020

December 31, 2019

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

A summary of intangible assets as of follows:

Weighted-Average

Amortization Period

of Intangible Assets

as of December 31, 2021

Tradenames 4.15 years

Patents, trademarks 4.08 years

Customer relationships 5.30 years

Non-competes 3.74 years

Intellectual property 4.16 years

Intangible assets on the Company’s consolidated balance sheets consist of the following:

December 31, 2021 December 31, 2020

Amount Accumulated

Amortization Gross

Amount Accumulated

Tradenames $ 28,300 $ ( 4,948 ) $ 13,923 $ ( 398 )

Patents, trademarks 100 ( 42 ) 100 ( 9 )

Customer relationships 25,175 ( 3,055 ) 6,297 ( 138 )

Capitalized software

Amortization expense for the

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

Non-competes 1,384 ( 233 ) 796 ( 22 )

Intellectual property 2,065 ( 344 ) — —

$ 57,024 $ ( 8,622 ) $ 21,116 $ ( 567 )

Amortization expense for the years ended December 31, 2021, 2020, and 2019 was $ 8.9 million, $ 789 thousand, and $ 5 thousand respectively.

Future amortization expense is as follows:

2022 $ 10,597

Thereafter 1,254

Total $ 48,402

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

The provision (benefit) for

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

FOR THE YEARS ENDED DECEMBER 31, 2020 and DECEMBER 31, 2019

The provision (benefit) for income taxes for the years ended December 31, 2021 and 2020 consisted of the following:

2021 December 31,

2020 December 31,

Income Tax Expense (benefit)

Current federal tax expense

Current federal tax expense (benefit)

$ ( 115 ) $ 1,732 $ 479

Deferred tax (benefit)

1,473 1,706 ( 479 )

Valuation allowance

A summary of deferred tax assets

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

— ( 1,182 ) —

$ 2,443 $ 3,251 $ —

A summary of deferred tax assets and liabilities as of December 31, 2021 and 2020 is as follows:

2021 December 31,

Deferred tax assets:

Net operating losses

Deferred right to use lease liabilities

5 unchanged sentences

Deferred right to use lease assets

( 11,147 ) ( 3,147 )

Accumulated depreciation and amortization

( 5,392 ) ( 2,171 )

Gross deferred tax asset (liability)

( 16,539 ) ( 5,318 )

Deferred tax asset (liability) ( 2,359 ) ( 750 )

Valuation Allowance

Deferred tax asset (liability), net

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.

$ ( 2,359 ) $ ( 750 )

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 was 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.

As of December 31, 2021 and 2020 the Company had cumulative state net operating loss carryforwards of $ 1.6 million and $ 0.1 million.

State net operating loss carryforwards will begin to expire in calendar year 2036.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

INCOME TAXES, Continued

The differences between the

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

2020 and 2019:

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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, 2021 and 2020, and 2019:

Years Ended December 31,

2021 2020 2019

Federal statutory tax rate 21 % 21 % 21 %

State and local income taxes (net of federal tax benefit) 7 % 6 % 4 %

Non-deductible compensation

Incentive stock options

Basis adjustments

28 % 27 % 25 %

Other — % 6 % — %

Stock-based compensation ( 8 ) % 7 % — %

Return to provision adjustments ( 4 ) % 12 % — %

Valuation allowance — % ( 14 ) % ( 25 ) %

16 % 38 % — %

LONG-TERM DEBT

1 unchanged sentence

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

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

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

Less Current Maturities

( 92 ) ( 83 )

Total Long-Term Debt

Debt maturities as of December 31, 2021 are as follows:

Interest expense for the years

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

Interest expense for the years ended December 31, 2021, 2020, and 2019 was $ 43 thousand, $ 14 thousand, and $ 45 thousand, respectively.

We determine if a contract contains a lease at inception.

Our material operating leases consist of retail and warehouse locations as well as office space.

Our leases generally have remaining terms of 1 - 7 years, most of which include options to extend the leases for additional 3 to 5-year periods.

Generally, the lease term is the minimum of the 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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

We determine if a contract contains

a lease at inception.

Our material operating leases consist of retail and warehouse locations as well as office space.

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

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

renewal periods.

Operating lease assets and liabilities

are recognized at the lease commencement date.

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

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

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

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

the maturities of the leases.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

LEASES, Continued

payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases.

Our leases typically contain rent escalations over the lease term.

We recognize expense for these

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

We have elected the practical

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

Short-term disclosures include

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

over the lease term.

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

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

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

Where assets are used

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

costs.”

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

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 expenses 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.

2021 December 31,

Right to use assets, operating lease assets $ 43,730 $ 12,088

1 unchanged sentence

Non-current lease liability 38,546 9,479

Weighted average remaining lease term

$ 45,404 $ 12,480

2021 December 31,

Weighted average remaining lease term 7.1 years 3.5 years

Weighted average discount rate 6.5 % 7.6 %

4 unchanged sentences

Total operating lease costs $ 10,540 $ 3,967

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

LEASES, Continued

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

The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2021:

Thereafter 18,466

Total lease payments 57,051

1 unchanged sentence

Lease Liability at December 31, 2021 $ 45,404

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

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

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

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

The convertible debt had a maturity

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

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

Principal due and interest accrued on the notes will automatically

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

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

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

During the year ended December

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

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

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

Amortization of debt discount

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

At December 31, 2020 and 2019

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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

CONVERTIBLE DEBT, Continued

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 was 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 automatically converted 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 $ 2.4 million, net of unamortized debt discount of $ 675 thousand, 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.

There was no amortization of debt discount for the years ended December 31, 2021 and 2020.

Amortization of debt discount for the years ended December 31, 2019, was $ 0.4 million.

At December 31, 2021 and 2020 there were 93,750 and 93,750 warrants outstanding, respectively, related to the issuance of convertible debt.

SHARE BASED PAYMENTS

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

allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units,

restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards).

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

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

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

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

The maximum shares of common stock

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

Awards under the 2014 Plan are made by the

Board or a committee designated by the Board.

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

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

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

Each option is exercisable at such time

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

No option may be exercisable

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

On January 7, 2018, the Board

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

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

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

The 2018 Plan will be administered

by the Board.

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

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

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

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

grants and awards.

No options, stock purchase rights

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

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

the 2018 Plan.

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

that are intended to meet

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

stock options”

that 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.

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.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS, Continued

The Company accounts for share-based

payments through the measurement and recognition of compensation expense for share-based payment awards made to employees and directors

of the Company, including stock options and restricted shares.

The Company also issues share based payments in the form of common

stock warrants to non-employees.

The following table presents

share-based payment expense for the years ended December 31, 2020 and 2019.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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.

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, 2021, 2020, and 2019.

2021 2020 2019

Restricted stock $ 4,349 $ 5,164 $ 1,420

Stock options 781 2,251 1,071

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.

Warrants 1,455 441 —

Total $ 6,585 $ 7,856 $ 2,491

As of December 31, 2021, the Company had approximately $ 7.9 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 2.9 years.

As of December 31, 2021, the Company also had approximately $ 2.5 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 1.91 years.

Restricted Stock

The Company issues shares of

restricted stock to eligible employees, which are subject to forfeiture until the end of an applicable vesting period.

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

of that date.

Restricted stock activity for the years ended December

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

Weighted Average Grant Date Fair Value

Nonvested, January 1, 2019

Nonvested, December 31, 2019

Nonvested, December 31, 2020

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 is valued using market value on the grant date.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS, Continued

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

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

Restricted stock activity for the years ended December 31, 2021 and 2020 is presented in the following table:

Shares Weighted Average Grant Date Fair Value

Nonvested, January 1, 2020 204 $ 3.82

Granted 1,293 4.90

Vested ( 800 ) 5.16

Forfeited ( 67 ) 4.15

Nonvested, December 31, 2020 630 $ 4.51

Granted 265 36.98

Vested ( 360 ) 8.47

Forfeited ( 51 ) 18.54

Nonvested, December 31, 2021 484 $ 20.19

Awards issued under the 2014 and 2018 Plan as of December 31, 2021 are summarized below:

Total shares available for issuance pursuant to the 2014 Plan 2,500

8 unchanged sentences

Awards available for issuance under the 2018 Plan, December 31, 2021 1,698

The fair value of each stock

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

The assumptions used

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

and the Company’s experience.

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

is considered to be the requisite service period.

Expected volatility

Expected dividends

Expected term

Risk-free rate

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.

There were no options or warrants issued during 2021.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

2021 2020 2019

Expected volatility N/A 77.75 - 80.7 %

87.8 - 92.70 %

Expected dividends N/A None None

Expected term N/A 2 - 5 years

Risk-free rate N/A 1.64 - 1.75 %

Options outstanding pursuant to 2014 Plan 20

2 unchanged sentences

Total options outstanding December 31, 2021 906

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SHARE BASED PAYMENTS, Continued

The table below summarizes all

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

The table below summarizes all the options granted by the Company during years ended December 31, 2021 and 2020:

Options Shares Weighted-

Average Exercise

Weighted- Average Remaining Contractual Term

Price Weighted- Average Remaining

Contractual Term Weighted-

Average Grant Date Fair Value

Outstanding at January 1, 2019

Outstanding at January 1, 2020 1,925 $ 2.71 3.60 years $ 1.71

Granted 892 $ 4.75 $ 2.67

Exercised ( 984 ) $ 2.59 $ 1.35

Forfeited or expired ( 30 ) $ 2.75 $ 1.63

Outstanding at December 31, 2019

Vested and exercisable at December 31, 2019

Outstanding at January 1, 2020

Outstanding at December 31, 2020 1,803 $ 3.92 3.47 years $ 2.38

Vested and exercisable at December 31, 2020 1,058 $ 3.55 3.13 years $ 2.00

Outstanding at January 1, 2021 1,803 $ 3.92 3.47 years $ 2.38

Granted 0 $ 0.00 $ 0.00

Exercised ( 822 ) $ 3.20 $ 1.71

Forfeited or expired ( 75 ) $ 7.60 $ 4.53

Outstanding at December 31, 2020

Vested and exercisable at December 31, 2020

Outstanding at December 31, 2021 906 $ 4.38 2.85 years $ 2.45

Vested and exercisable at December 31, 2021 836 $ 4.36 2.81 years $ 2.45

Liability Awards

The Company issued stock awards classified as liabilities based on guidance set forth at ASC 480-10-25 and ASC 718-10-25.

These awards entitled the employees to receive a specified dollar value of common stock on the vesting date and generally vested between 8 and 14 months, subject to the employee’s continuing employment as of that date.

Due to their short-term nature these awards were all valued at the face value of the award.

All liability awards vested at December 31, 2021 and resulted in the issuance of 34,538 shares of common stock.

The expense related to the liability awards for the years ended December 31, 2021 and 2020, was $ 0.7 million and $ 29.9 thousand.

There was zero expense related to liability awards for the year ended December 31, 2019.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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:

A summary of the status of the Company’s outstanding stock warrants as of December 31, 2021 and 2020 is as follows:

Weighted Average

1 unchanged sentence

Granted/issued 305 $ 24.66

Exercised ( 2,469 ) $ 3.05

Forfeited ( 250 ) $ 5.75

Outstanding December 31, 2020 1,300 $ 8.03

Granted/issued

( 969 ) $ 2.84

Outstanding December 31, 2021 331 $ 22.14

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

EARNINGS PER SHARE

The following table sets forth

the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for

the years ended December 31, 2020 and 2019.

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, 2021, 2020, and 2019.

For the year ended December 31, 2021, there were no anti-dilutive shares outstanding that were excluded from the dilutive income per share calculation.

For the years ended December 31, 2020 and 2019, options to purchase 30 thousand and 220 thousand shares of common stock were excluded from the dilutive income per share calculation because including such shares would be anti-dilutive.

Year Ended December 31,

2021 2020 2019

Net income $ 12,786 $ 5,328 $ 1,322

Weighted-average shares outstanding, basic 59,223 43,945 32,834

Effect of dilutive outstanding warrants and stock options 1,241 2,511 1,076

Adjusted weighted average shares outstanding, dilutive

Basic income per shares

Weighted-average shares outstanding, dilutive 60,464 46,456 33,910

Basic income per share $ 0.22 $ 0.12 $ 0.04

Dilutive income per share $ 0.21 $ 0.11 $ 0.04

EMPLOYEE BENEFIT PLAN

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

requirements and provides for an employee elective contribution.

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

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

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 $ 419 thousand, $ 169 thousand, and $ 83 thousand for the years ended December 31, 2021, 2020, and 2019, respectively.

VENDOR CONCENTRATIONS

As of December 31, 2020, and

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

Although the Company expects to maintain

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

both suppliers provide the same products.

Our acquisition strategy is

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

or in markets where it is increasing its market presence.

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

Combinations.”

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

estimated fair values, as of the acquisition date.

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

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

period as valuations are finalized.

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

results or financial position.

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

in the consolidated statements of operations.

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

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

The Company issued 23,892 shares

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

On February 26, 2020 we acquired

certain assets of Health & Harvest LLC in a transaction valued at approximately $2.85 million.

Acquired goodwill of approximately

$1.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market

for the Company.

Cash consideration was funded from the Company’s existing working capital.

One supplier represented 28 % of our total vendor purchases for the year ended December 31, 2021, and two suppliers represented 41 % and 51 % of our total vendor purchases for the years ended December 31, 2020 and 2019, respectively.

Although the Company expects to maintain relationships with these vendors, the loss of either supplier would not be expected to have a material adverse impact on our business, because of the competitive nature of the products that we sell.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

ACQUISITIONS, Continued

On June 16, 2020 we acquired

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

goodwill of approximately $1 million represents the value expected to rise from organic growth and an opportunity to expand into

a well-established market for the Company.

Cash consideration was funded from the Company’s existing working capital.

On August 10, 2020 we acquired

certain assets of Benzakry Family Corp, d/b/a Emerald City Garden (“Emerald City”), in a transaction valued at $1 million.

Acquired goodwill of approximately $620,000 represents the value expected to rise from organic growth and an opportunity to expand

into a well-established market for the Company.

Cash consideration was funded from the Company’s existing working capital.

On October 12, 2020, the Company

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

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

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

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

On October 20, 2020 the Company

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

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

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

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

On November 17, 2020, the Company

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

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

valued at approximately $27.3 million.

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

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

On December 14, 2020, the Company

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

The total consideration for the purchase of Grassroots was

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

Acquired goodwill of approximately

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

for the Company.

On December 23, 2020, the Company

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

SI brand of silicic acid-enriched fertilizers.

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

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

Acquired goodwill of approximately $4.9 million represents

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

for the Company.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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.

The Company has made adjustments to the preliminary valuations of the acquisition based on valuation analysis prepared by independent third-party valuation consultants.

During the year ended December 31, 2021, our measurement period adjustments included reducing intangible assets by $ 1.0 million and increasing goodwill by the same amount.

As a result of these measurement period adjustments, we made an insignificant reduction in amortization expense which is included in the income statement.

All acquisition costs are expensed as incurred and recorded in general and administrative expenses in the consolidated statements of operations.

Acquisition costs were approximately $ 0.7 million, $ 0.2 million, and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019.

2021 Acquisitions

On January 25, 2021, the Company purchased the assets of Indoor Garden & Lighting, Inc, a two -store chain of hydroponic and equipment and indoor gardening supply stores serving the Seattle and Tacoma, Washington area.

The total consideration for the purchase of Garden & Lighting was approximately $ 1.7 million, including approximately $ 1.2 million in cash and common stock valued at approximately $ 0.5 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On 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 approximately $ 1.7 million in cash and common stock valued at approximately $ 0.4 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On 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 approximately $ 8.1 million in cash and common stock valued at approximately $ 9.7 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On February 22, 2021, the Company purchased the assets of San Diego Hydroponics & Organics, a four -store chain of hydroponic and organic garden stores in San Diego, California.

The total consideration for the purchase of San Diego Hydroponics was approximately $ 9.3 million, including approximately $ 4.8 million in cash and common stock valued at approximately $ 4.5 million.

Acquired goodwill of approximately represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On March 12, 2021, the Company purchased the assets of Charcoir Corporation, which sells an RHP-certified growing medium made from the highest-grade coconut fiber.

The total consideration for the purchase of Charcoir was approximately $ 16.4 million, including approximately $ 9.9 million in cash and common stock valued at approximately $ 6.5 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established distribution market for the Company of a proprietary brand.

On March 15, 2021, the Company purchased the assets of 55 Hydroponics, a hydroponic and organic superstore located in Santa Ana, California.

The total consideration for the purchase of 55 Hydroponics was approximately $ 6.5 million, including approximately $ 5.3 million in cash and common stock valued at approximately $ 1.1 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

ACQUISITIONS, Continued

The table below represents the

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

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

On March 15, 2021, the Company purchased the assets of Aquarius Hydroponics, a hydroponic and organic garden store in Springfield, Massachusetts.

The total consideration for the purchase of Aquarius was approximately $ 3.6 million, including approximately $ 2.3 million in cash and common stock valued at approximately $ 1.2 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On 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 $ 11.2 million, including approximately $ 6.0 million in cash and common stock valued at approximately $ 5.3 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established e-commerce market for the Company targeting the commercial customer.

On April 19, 2021, the Company purchased the assets of Grow Depot LLC ("Down River Hydro"), a hydroponic and indoor gardening supply store in Brownstown, Michigan.

The total consideration for the purchase of Down River Hydro was approximately $ 4.4 million, including approximately $ 3.2 million in cash and common stock valued at approximately $ 1.2 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On May 24, 2021, the Company purchased the assets of The Harvest Company ("Harvest"), a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity Counties.

The total consideration for the purchase of Harvest was approximately $ 8.3 million, including approximately $ 5.6 million in cash and common stock valued at approximately $ 2.8 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On July 19, 2021, the Company purchased the assets of Aqua Serene, Inc., ("Aqua Serene"), an Oregon corporation which consists of an indoor/outdoor garden center with stores in Eugene and Ashland, Oregon.

The total consideration for the purchase was approximately $ 11.7 million, including approximately $ 9.9 million in cash and common stock valued at approximately $ 1.8 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On July 3, 2021, the Company purchased the assets of Mendocino Greenhouse & Garden Supply, Inc, a Northern California-based hydroponic garden center located in Mendocino, California.

The purchase agreement was modified on July 19, 2021 to amend the purchase price.

The total consideration for the purchase was approximately $ 4.0 million in cash.

This acquisition allows the Company to expand its footprint in the Northern California.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.

On August 24, 2021, the Company purchased the assets of Commercial Grow Supply, Inc.

("CGS"), a hydroponic superstore located in Santa Clarita, California.

The total consideration for the purchase was approximately $ 7.2 million, including approximately $ 6.0 million in cash and common stock valued at approximately $ 1.3 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On August 23, 2021 the Company purchased the assets of Hoagtech Hydroponics, Inc.

("Hoagtech"), a Washington -based corporation consisting of a hydroponic and garden supply center serving the Bellingham, Washington area.

The total consideration for the purchase was approximately $ 3.9 million in cash.

The Asset Purchase Agreement contains a contingent payment equal to approximately $ 0.6 million to be settled in common stock of the Company if this garden supply center reaches $ 8.0 million in revenue within a 12-month calendar period from the date of close.

The Company used a third-party specialist to value this contingent consideration.

The probability that the target will be reached was determined to be 5 % which resulted in a value of approximately $ 28.5 thousand of contingent consideration which was added to goodwill.

This acquisition expands our footprint in the Pacific Northwest.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

On October 15, 2021, the Company purchased the assets of Indoor Store, LLC ("All Seasons Gardening"), an indoor-outdoor garden supply center specializing in hydroponics systems, lighting, and nutrients.

All Seasons Gardening is the largest hydroponics retailer in New Mexico.

The total consideration for the purchase was approximately $ 0.9 million, including approximately $ 0.7 million in cash and common stock valued at approximately $ 0.2 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

On December 31, 2021, the Company purchased the assets of Mobile Media, Inc and MMI Agriculture ("MMI"), a mobile shelving design and build facility.

The total consideration for the purchase was approximately $ 9.1 million, including approximately $ 8.3 million in cash and common stock valued at approximately $ 0.8 million.

Acquired goodwill represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

The measurement of the intangible assets for MMI is still provisional and may be subject to future adjustments as the Company obtains additional information to finalize the accounting for the acquisition.

The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2021:

Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse Grow Depot Maine Indoor Garden Downriver

Inventory $ — $ 957 $ 780 $ 839 $ 1,400 $ 2,450 $ 326 $ 372 $ 824

Prepaids and other current assets 46 12 29 534 36 30 3 — 3

Furniture and equipment 29 63 50 — 315 250 25 94 50

Liabilities — — — — — ( 169 ) — — —

Operating lease right to use asset 98 108 861 — 1,079 641 92 137 273

1 unchanged sentence

Customer relationships 832 339 809 5,712 605 1,256 549 210 634

The table below represents the

consideration paid for the net assets acquired in business combinations.

The following table discloses

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

of acquisition to the period ended December 31, 2020.

Acquisition date

The following represents the

pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for

the entire period for the year ended December 31, 2020 and 2019.

$ 116,120,116

Trade name 1,530 485 870 1,099 1,192 2,748 344 353 698

Non-compete 139 — 26 — 6 94 36 2 16

Intellectual property — — — 2,065 — — — — —

Goodwill 8,673 1,702 3,915 6,119 5,728 11,120 866 661 2,126

Total $ 11,249 $ 3,558 $ 6,479 $ 16,368 $ 9,282 $ 17,779 $ 2,149 $ 1,692 $ 4,351

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

ACQUISITIONS, Continued

The table below represents the

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

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total

Inventory $ 1,204 1,696 753 875 751 100 3,530 $ 16,857

Prepaids and other current assets 7 2 1 1 37 1 — 742

Furniture and equipment 100 500 160 100 144 25 328 2,233

The table below represents the

consideration paid for the net assets acquired in business combinations.

The following table discloses

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

of acquisition to the period ended December 31, 2019.

Liabilities — — — — ( 29 ) — ( 250 ) ( 448 )

Operating lease right to use asset 3,782 1,177 408 746 1,569 37 2,332 13,340

Operating lease liability ( 3,782 ) ( 1,177 ) ( 408 ) ( 746 ) ( 1,569 ) ( 37 ) ( 2,332 ) ( 13,340 )

Customer relationships 1,016 1,235 575 1,382 493 154 2,964 18,765

Trade name 1,392 1,231 414 852 428 117 1,039 14,792

Non-compete — 11 6 11 3 — 238 588

Intellectual property — — — — — — — 2,065

Goodwill 4,606 6,976 2,091 4,027 2,105 545 1,202 62,462

Total $ 8,325 11,651 4,000 $ 7,248 3,932 942 $ 9,051 $ 118,056

The table below represents the consideration paid for the net assets acquired in business combinations during 2021:

Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse Grow Depot Maine Indoor Garden Downriver

Cash $ 5,973 $ 2,331 $ 5,347 $ 9,902 $ 4,751 $ 8,100 $ 1,738 $ 1,165 $ 3,177

Common stock 5,276 1,227 1,132 6,466 4,531 9,679 411 527 1,174

Total $ 11,249 $ 3,558 $ 6,479 $ 16,368 $ 9,282 $ 17,779 $ 2,149 $ 1,692 $ 4,351

Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total

Cash $ 5,561 $ 9,860 $ 4,000 $ 5,976 $ 3,932 $ 701 $ 8,270 $ 80,784

Common stock 2,764 1,791 — 1,272 — 241 781 37,272

Total $ 8,325 $ 11,651 $ 4,000 $ 7,248 $ 3,932 $ 942 $ 9,051 $ 118,056

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, 2021.

Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse Grow Depot Maine Indoor Garden Downriver

Acquisition date 3/19/2021 3/15/2021 3/15/2021 3/12/2021 2/22/2021 2/15/2021 2/1/2021 1/25/2021 3/31/2021

The following represents the pro forma

consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire

period for the years ended December 31,2019 and 2018.

2019 (Unaudited)

2018 (Unaudited)

Revenue $ 14,403 $ 9,640 $ 6,017 $ 6,840 $ 7,173 $ 13,147 $ 6,655 $ 6,265 $ 3,663

Net Income (loss) $ ( 305 ) $ 1,679 $ 399 $ 1,039 $ 906 $ 2,175 $ 1,132 $ 1,088 $ 297

Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total

Acquisition date

5/3/21 7/19/21 7/19/21 8/24/21 8/23/21 10/15/21 12/31/21

$ 6,706 $ 2,742 $ 1,455 $ 1,534 $ 1,564 $ 187 $ — $ 87,991

Net Income (loss) $ 924 $ 445 $ 106 $ 15 $ 141 $ 52 $ — $ 10,093

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

STOCKHOLDERS EQUITY

On December 11, 2020, the Company

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

the exercise in full of the underwriters’

option to purchase an additional 750,000

shares of common stock to cover over-allotments.

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

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

and other offering expenses .

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

$162.5 Million.

On July 2, 2020, the Company

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

the exercise in full of the underwriters’

option to purchase an additional 1,125,000

shares of common stock to cover over-allotments.

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

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

and other offering expenses .

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

$44.6 Million.

On June 26, 2019, the

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

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

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

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

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

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS

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

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

determined these errors accumulated in 2019 and prior years.

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

the impact of the error on prior periods.

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

Pursuant to the guidance of

Staff Accounting Bulletin No.

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

financial statements.

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

revision relating to this error.

This revision did not have any material effect on income from

operations, net income, or cash flows.

This revision had no effect on our cash balances.

The following table compares

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

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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, 2021, 2020, and 2019.

2021 (Unaudited) December 31,

2020 (Unaudited) December 31,

2019 (Unaudited)

Revenue $ 452,126 $ 310,947 $ 197,315

Net income $ 13,511 $ 18,480 $ 14,475

2020 Acquisitions

On February 26, 2020, the Company purchased the assets of Health & Harvest LLC.

The total consideration for the purchase was approximately $ 2.9 million, including approximately $ 1.8 million in cash and common stock valued at approximately $ 1.1 million.

Acquired goodwill represents the value expected to rise from organic growth and the opportunity to expand into a well-established market for the Company.

On June 16, 2020, we acquired certain assets of H2O Hydroponics, LLC (“H2O Hydro”).

The total consideration for the purchase was approximately $ 2.0 million, including approximately $ 1.3 million in cash and common stock valued at approximately $ 0.7 million.

Acquired goodwill represents the value expected to rise from organic growth and the opportunity to expand into a well-established market for the Company.

On August 10, 2020, we acquired certain assets of Benzakry Family Corp, d/b/a Emerald City Garden (“Emerald City”).

The total consideration for the purchase was approximately $ 1.0 million.

Acquired goodwill represents the value expected to rise from organic growth and the opportunity to expand into a well-established market for the Company.

On October 12, 2020, the Company acquired the assets of Hydroponics Depot, LLC (“Hydro Depot”), a single store located in Phoenix, AZ.

The total consideration for the purchase was approximately $ 1.5 million, including approximately $ 1.0 million in cash and common stock valued at approximately $ 0.5 million.

Acquired goodwill represents the value expected to rise from organic growth and the 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.

The total consideration was approximately $ 9.0 million, including approximately $ 6.0 million in cash and shares of common stock valued at approximately $ 3.1 million.

Acquired goodwill of approximately $ 4.0 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 $ 44.8 million, including approximately $ 17.5 million in cash and common stock valued at approximately $ 27.3 million.

Acquired goodwill of approximately $ 28.5 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 14, 2020, the Company acquired the assets of Grassroots Hydroponics, Inc., a three -store chain in California.

The total consideration for the purchase of Grassroots was approximately $ 10.0 million, approximately $ 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, including approximately $ 5.4 million in cash and common stock valued at approximately $ 3.8 million.

Acquired goodwill of approximately $ 4.9 million represents the value

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued

The revised consolidated financial statements for the year ended

December 31, 2019 with the adjustment is detailed below.

December 31, 2019

As Previously Reported

Current assets:

Cash and cash equivalents

Accounts receivable, net

Notes receivable, net

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

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

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

Inventory $ 899 $ 2,348 $ 6,286 $ 1,595 $ 333 $ 150 $ 498 $ 1,054 $ 13,163

Prepaids and other current assets — — — — — — 4 — 4

Total current assets

Property and equipment, net

Operating leases right-of-use assets, net

Notes receivable

Intangible assets, net

LIABILITIES & STOCKHOLDERS’

Current liabilities:

Accounts payable

Payroll and payroll tax liabilities

Customer deposits

Sales tax payable

Current maturities of right-of-use assets

Current portion of long-term debt

Total current liabilities

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

Long-term debt, net of current portion

Total liabilities

Stockholders’

Building — — — 477 — — 0 — 477

Furniture and equipment — 150 200 250 25 10 50 51 736

Operating lease right to use asset — 1,437 3,641 246 — 140 906 324 6,694

Operating lease liability — ( 1,437 ) ( 3,641 ) ( 246 ) — ( 140 ) ( 906 ) ( 324 ) ( 6,694 )

Customer relationships 2,274 768 1,969 634 148 212 150 255 6,410

Trade name 1,094 2,140 7,483 1,953 212 — 234 357 13,473

Non-compete 113 133 372 96 19 14 43 6 796

Goodwill 4,860 4,461 28,476 4,039 799 614 1,008 1,131 45,388

Total $ 9,240 $ 10,000 $ 44,786 $ 9,044 $ 1,536 $ 1,000 $ 1,987 $ 2,854 $ 80,447

The table below represents the consideration paid for the net assets acquired in business combinations during 2020:

Canopy Grassroots GrowBiz BGT Hydro Depot Emerald

Cash $ 5,424 $ 7,499 $ 17,487 $ 5,972 $ 988 $ 1,000 $ 1,282 $ 1,750 $ 41,402

Common stock 3,816 2,501 27,299 3,072 548 — 705 1,104 39,045

$.001 par value;

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

Additional paid-in capital

Accumulated deficit

Total stockholders’

TOTAL LIABILITIES AND STOCKHOLDERS’

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued

Year Ended December 31, 2019

As Previously Reported

Cost of sales

Operating expenses:

Store operations

General and administrative

Share based compensation

Depreciation and amortization

Salaries and related expenses

Total operating expenses

Net income from operations

Other income (expense):

Miscellaneous income (expense)

Interest income

Interest expense

Total non-operating income (expense), net

Net income before taxes

Provision for income taxes

Net income per share, basic

Net income per share, diluted

Weighted average shares outstanding, basic

Weighted average shares outstanding, diluted

Total $ 9,240 $ 10,000 $ 44,786 $ 9,044 $ 1,536 $ 1,000 $ 1,987 $ 2,854 $ 80,447

Canopy Grassroots GrowBiz BGT Hydro Depot Emerald

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 $ 301 $ 532 $ 3,852 $ 1,859 $ 1,245 $ 5,635 $ 2,418 $ 8,995 $ 24,837

Net Income $ 141 $ 74 $ 736 $ 188 $ 149 $ 1,005 $ 562 $ 1,066 $ 3,921

2020 (Unaudited) December 31,

2019 (Unaudited)

Revenue $ 309,486 $ 195,854

Earnings $ 18,308 $ 14,302

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

CORRECTION OF ERROR IN PREVIOUSLY REPORTED CONSOLIDATED FINANCIAL STATEMENTS, Continued

For The Year Ended December 31, 2019

Cash Flows from Operating

As Previously Reported

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

Depreciation and amortization

Provision for doubtful accounts receivable

Inventory valuation reserve

Amortization of debt discount

Stock based compensation

Changes in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2019:

Garden Chlorophyll Reno

Hydroponics Palm

Hydroponics Total

$ 554 $ 1,453 $ 1,039 $ 1,441 $ 238 $ 466 $ 5,191

Prepaid expenses and other assets

Increase (decrease) in:

Accounts payable and accrued liabilities

Operating leases

Customer deposits

Payroll and payroll tax liabilities

Sales taxes payable

Net Cash and Cash Equivalents (Used In) Operating Activities

Cash Flows from Investing Activities:

Assets acquired in business combinations

Purchase of property and equipment

Purchase of goodwill and other intangibles

Net Cash and Cash Equivalents (Used In) Investing Activities

Prepaids and other current assets

Furniture and equipment

35 50 100 100 25 25 335

697 2,377 2,306 2,596 516 554 9,046

Cash Flows from Financing Activities:

Principal payments on long term debt

Stock redemptions

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

Net Cash and Cash Equivalents Provided by Financing Activities

Net Increase(decrease) in Cash and Cash Equivalents

Cash and Cash Equivalents at Beginning of year

Cash and Cash Equivalents at End of year

SUBSEQUENT EVENTS

The Company has evaluated events

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

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

For all acquisitions subsequent

to year end the Company’s initial accounting for the business combination has not been completed because the valuations

have not yet been received from the Company’s independent valuation firm.

On January 25, 2021 the Company

purchased the assets of Indoor Garden & Lighting, Inc, a two-store chain of hydroponic and equipment

and indoor gardening supply stores serving the Seattle and Tacoma, Washington area.

The total consideration for the purchase

of Garden & Lighting was approximately $1.63 million, including $1.1 million in cash and common stock valued at approximately

On February 1, 2021 the Company

purchased the assets of J.A.R.B., Inc d/b/a Grow Depot Maine, a two-store chain in Auburn

and Augusta, Maine.

The total consideration for the purchase of Grow Depot Maine was approximately $2.1 million, including

$1.7 million in cash and common stock valued at approximately $411,000.

$ 1,286 $ 3,880 $ 3,459 $ 4,159 $ 779 $ 1,045 $ 14,608

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

Garden Chlorophyll Reno Hydroponics Palm

Hydroponics Total

Cash $ 1,000 $ 2,350 $ 2,648 $ 3,659 $ 525 $ 800 $ 10,982

Common stock 286 1,530 811 500 254 245 3,626

Total $ 1,286 $ 3,880 $ 3,459 $ 4,159 $ 779 $ 1,045 $ 14,608

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

Garden Chlorophyll Reno

Hydroponics Palm

Hydroponics Total

Acquisition date 12/16/19 09/03/19 05/14/19 01/21/19 02/11/19 02/07/19

Revenue $ 154 $ 2,413 $ 4,830 $ 6,031 $ 2,107 $ 3,075 $ 18,610

Earnings $ 6 $ 445 $ 999 $ 937 $ 367 $ 651 $ 3,405

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 (Unaudited) December 31,

2018 (Unaudited)

Revenue $ 31,300 $ 59,651

Earnings $ 4,751 $ ( 2,088 )

STOCKHOLDERS EQUITY

On December 11, 2020, the Company consummated an underwritten public offering of 5,750,000 shares of its common stock (the “Shares”), which included the exercise in full of the underwriters’ option to purchase an additional

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020

SUBSEQUENT EVENTS, Continued

On February 15, 2021 the Company

purchased the assets of Grow Warehouse LLC, a four-store chain of hydroponic and organic

garden stores in Colorado (3) and Oklahoma (1).

The total consideration for the purchase of Grow Warehouse LLC was approximately

$17.8 million, including $8.1 million in cash and common stock valued at approximately $9.7 million.

On February 22, 2021 the Company

purchased the assets of San Diego Hydroponics & Organics, a four-store chain of hydroponic

and organic garden stores in San Diego, CA.

The total consideration for the purchase of San Diego Hydroponics was approximately

$9.3 million, including $4.8 million in cash and common stock valued at approximately $4.5 million.

On March 12, 2021 the Company

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

from the highest-grade coconut fiber.

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

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

On March 15, 2021 the Company

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

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

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

On March 15, 2021 the Company

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

The total consideration for the purchase of Aquarius was approximately $3.6 million, including $2.4 million in cash and common

stock valued at approximately $1.2 million.

On March 19, 2021 the Company

purchased the assets of Agron, LLC, an online seller of growing equipment.

The total consideration for the purchase of Agron was

approximately $11.3 million, including $6 million in cash and common stock valued at approximately $5.3 million.

CHANGES AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE

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

2020 regarding change in Accountants.

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

750,000 shares of common stock to cover over-allotments.

The Shares were sold at a public offering price of $ 30 per share, generating gross proceeds of $ 172.5 million, before deducting the underwriting discounts and commissions and other offering expenses.

Net proceeds from the sales of common stock, net of all offering costs and expenses, was approximately $ 162.5 million.

On July 2, 2020, the Company consummated an underwritten public offering of 8,625,000 shares of its common stock (the “Shares”), which included the exercise in full of the underwriters’ option to purchase an additional 1,125,000 shares of common stock to cover over-allotments.

The Shares were sold at a public offering price of $ 5.60 per share, generating gross proceeds of $ 48.3 million, before deducting the underwriting discounts and commissions and other offering expenses .

Net proceeds from the sales of common stock, net of all offering costs and expenses, was approximately $ 44.6 million.

On June 26, 2019, the Company completed a private placement of a total of 4,123,257 units of the Company’s securities at the price of $ 3.10 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act.

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.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

RELATED PARTIES

The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner.

The firm provides certain legal services.

Amounts paid to that firm in total were approximately $ 0.8 million for the year ended December 31, 2021.

As of December 31, 2021, there was an outstanding balance of $ 14 thousand due.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 and DECEMBER 31, 2020

SUBSEQUENT EVENTS

The Company has evaluated events and transaction occurring subsequent to December 31, 2021 up to the date of this filing of these consolidated financial statements.

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

For all acquisitions subsequent to 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 31, 2022, the Company acquired Horticultural Rep Group, Inc ("HRG").

HRG is a specialty marketing and sales organization of horticultural products based in Ogden, Utah.

HRG represents hundreds of product SKU's for GrowGeneration and other companies that are popular brands in the hydroponics market.

In addition, HRG has participated in the sourcing of products across the horticultural and hydroponics industry.

Total consideration for the purchase was $ 12.3 million, including $ 6.8 million in cash and common stock valued at approximately $ 5.5 million.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

See report on Form 8-K filed on March 27, 2020 regarding change in Accountants.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data