Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
As of December 31, 2021, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Our management concluded that as of December 31, 2021, our disclosure controls and procedures were not effective, because of the material weaknesses in our internal control over financial reporting described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP.
As permitted by the Securities and Exchange Commission guidance, management excluded from its assessment of internal control for Charcoir, which was acquired March 12, 2021, which accounted for 4% of total assets and 2% of total revenues for the year ended December 31, 2021, Agron, which was acquired March 19, 2021, which accounted for 3% of total assets and 3% of total revenues for the year ended December 31, 2021, and MMI which accounted for 3% of total assets and zero% of total revenues for the year ended December 31, 2021.
As of December 31, 2021, we concluded that our disclosure controls and procedures were not effective due to a material weakness. We have concluded that significant progress has been made toward mitigating the control weakness as of December 31, 2021, but we have not been able to adequately confirm the design and confirm the control weakness has been remediated as of the date of this report. In making this assessment, management used the criteria set forth by the COSO framework.
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Controls Environment
The following were contributing factors to the material weaknesses in control activities as of December 31, 2021, several of which also were determined to be the material weaknesses at December 31, 2020:
• Insufficient resources within the accounting and financial reporting department to review the accounting for complex financial reporting transactions including areas such as business combinations, share based compensation, and the related income tax reporting.
• There are inadequate segregation of duties within the various bank accounts of the Company to prevent and detect unauthorized transactions in a timely manner. Additionally, there are deficiencies in the segregation of duties issues within IT, human resources, and manual journal entry posting processes.
• There are 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.
• There are inadequate controls over physical inventory counts.
Deficiencies in control activities contributed to material accounting errors identified and corrected through 2021 and prior years. These design deficiencies in control activities contributed to the potential for there to have been material accounting errors in multiple financial statement account balances and disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the implementation of remediation plans to address the material weakness identified below.
Material Weakness Remediation Plan and Status
Our remediation efforts are ongoing and we will continue our initiatives to implement and document policies, procedures, and internal controls. In 2021, the Company completed the following remedial actions:
• Hired and trained additional resources within the accounting and financial reporting departments to review the accounting for warrant compensation accounting, share-based compensation accounting, and rebates.
• Hired and trained additional resources to specifically manage cash and ensure adequate segregation of duties.
• Implemented numerous general and access controls over all information technology (IT) systems that supports the Company's financial reporting processes.
• Implementation and redesign of controls over inventory count procedures.
Our management believes that these actions, and additional actions to be taken, are reasonably designed to remediate the control deficiencies identified and strengthen our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or modify certain of the remediation measures described above.
Remediation of the identified material weaknesses and strengthening our internal control environment will continue throughout 2022 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Inherent Limitations on Effectiveness of Controls
Management, including our CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, including the possibility of human error,
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the circumvention or overriding of controls, or fraud, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
Item 9B. Other Information.
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Other than as provided below, the information required by Items 401, 405, 406 and 407 (c)(3); (d)(4) and (d)(5) of Regulation S-K is incorporated into this Annual Report on Form 10-K by reference to the Company’s Definitive Proxy Statement for its 2022 Annual Meeting of Shareholders to be filed within 120 days following December 31, 2021.
All directors of the Company hold office for one-year terms until the election and qualification of their successors. Officers are appointed by our Board and serve at the discretion of the Board, subject to applicable employment agreements. The following table sets forth information regarding our executive officers and the members of our Board.
Name Age Position
Darren Lampert 61 Chief Executive Officer and Director
Michael Salaman 59 President and Director
Jeff Lasher 57 Chief Financial Officer
Paul Rutenis 55 Chief Merchant Officer
Eula Adams 72 Director
Stephen Aiello 61 Director
Paul Ciasullo 63 Director
Sean Stiefel 34 Director
Darren Lampert has been our Chief Executive Officer and a Director since our inception in 2014. Mr. Lampert began his career in 1986 as a founding member of the law firm of Lampert and Lampert (1986-1999), where he concentrated on securities litigation, NASD (now FINRA) compliance and arbitration and corporate finance matters. Mr. Lampert has represented clients in actions and investigations brought before government agencies and self-regulatory bodies. From 1999 to 2014, Mr. Lampert worked as a portfolio manager and proprietary trader at a number of broker-dea;ler firms. From 2010 to 2014, Mr. Lampert was a private investor. Mr. Lampert graduated in 1982 with a Bachelor of Science degree in business administration from Ithaca College. Mr. Lampert received a Juris Doctor degree from Bridgeport University School of Law in 1985. Mr. Lampert was admitted to practice law in New York in 1986 and is also admitted to practice before the United States District Courts for the Southern and Eastern Districts of New York.
Michael Salaman has been our President and a Director since our inception. Mr. Salaman served as the Chairman of Skinny Nutritional Corp. from January 2002 to March 2014 and as Chief Executive Officer and President of Skinny Nutritional Corp. from June 2010 to March 2014. He also served as Chief Executive Officer of Skinny Nutritional Corp. Skinny Nutritional Corp. filed for Chapter 11 Bankruptcy protection in 2013 and the assets were sold to a private equity firm in March 2014. Mr. Salaman has over 20 years’ experience in the area of start-ups, new product development, distribution and marketing. Mr. Salaman began his business career as Vice President of Business Development for National Media Corp., an infomercial marketing company in the United States from 1985-1993. From 1995-2001, Mr. Salaman started a Digital Media company called American Interactive Media, Inc., a developer of Web TV set-top boxes and ISP services. In 2002, Mr. Salaman became the principal officer of that entity and directed its operations as a marketing and distribution company and in 2005 focused its efforts in the enhanced water business. Mr. Salaman received a Bachelor of Business Administration degree in business from Temple University in 1986.
Jeff Lasher joined the Company as Chief Financial Officer in April 2021. Mr. Lasher was CFO at Crocs from 2009 to 2015, which grew from $700 million to $1.2 billion during this time. At West Marine, (formerly Nasdaq: WMAR), then a publicly traded $700 million specialty retailer of boating supplies, apparel, and accessories with 250 stores in 38 states, he became CFO in November of 2015 and then became interim CEO. He helped lead the Company's sale to Monomoy Capital, which was finalized in September 2017. Most recently, Jeff was the CFO at a private equity backed multi-unit services company, International Car Wash Group, Inc. now a division of Driven Brands, Inc. (Nasdaq: DRVN), with over 900 car washes in 14 countries. Directly prior to his start with GrowGeneration, he has served as CFO of Coravin, Inc. Mr. Lasher is a graduate of the University of Alabama and received an MBA from Pennsylvania State University.
Paul Rutenis joined the company in June 2022 as Chief Merchant. He started his career at the May Company in 1991 as an Executive trainee and held many buying and management positions at Foleys Departments stores within the company before it was sold to Federated Department Stores. From there Paul joined Dicks Sporting Goods in 2005 leading the outdoor division in Camping, Water Sports and Wheeled Sports helping Dicks Sporting goods go from 120 stores location to over 400 in 2010. Paul has held similar roles at JCPenney and RadioShack . In 2015, Paul joined as Chief Merchant of
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West Marine. At West Marine, (formerly Nasdaq: WMAR), then a publicly traded $700 million specialty retailer of boating supplies, apparel, and accessories with 250 stores in 38 states. West Marine was sold to Monomoy Capital partners in 2017. Paul left the company in 2018 and was a professor at the University of North Texas teaching retail and marketing courses prior to Grow Generation. Paul is a graduate of Clemson University and received an MBA from St. Louis University.
Eula Adams has been a Director of the Company since September 2021. Mr. Adams also currently serves on the boards of Intrado Corporation, Harvest Health & Recreation (HRV/HRVSF- TSV/OTC), Volunteers of America, CareerWise Colorado, and the Transportation Commission of Colorado since November 2019. Mr. Adams served recently as Chief Executive Officer of Neuromonics, Inc., a global medical device company providing standalone and cloud based software and hardware solutions for the treatment of tinnitus. He previously served as President and Chief Operating Officer of Xcore Corporation, a computer hardware design, assembly, and distribution company. Mr. Adams has an extensive background leading large, diverse organizations. He was Senior Vice President of Sun MicroSystems from 2004 to 2007, Chief Operating Officer of Pay By Touch and Western Union, and President of numerous divisions of First Data (now part of Fiserv) from 1991 to 2003. Within First Data, he held the positions of President of Merchant Services, President of Card Issuer Services, and President of Teleservices. Earlier in his career, from 1972 to 1991, Mr. Adams spent 19 years with Deloitte, in the greater Atlanta area and in New York City, where he was an Audit Partner. Adams holds a Bachelor of Science degree from Morris Brown College in Atlanta and a Master of Business Administration degree from Harvard University. He is a licensed Certified Public Accountant in the state of Colorado.
Stephen Aiello has been a Director of the Company since May 2014. Mr. Aiello was a partner at Jones and Company from 2004-2008. From 2001-2003, he worked at 033 Asset Management. From 1986-2001, he was a partner at Montgomery Securities. Mr. Aiello received a B.A. in Psychology from Ithaca College and an MBA from Fordham University. Since 2010, Mr. Aiello has been a private investor and owner of real estate properties.
Paul Ciasullo has been a Director of the Company since May 2020. He has also been a board member of Leafline Labs, LLC since 2018, which is a provider, manufacturer and distributor of medical cannabis in Minnesota. In 2010, Mr. Ciasullo founded Wallstreet Research Solutions, LLC, which provided sales, marketing and customer account services primarily in partnership with and to build a fixed income research firm specializing in bond and loan covenants called Covenant Review, LLC (with which he had been working to build the business since 2007). Covenant Review and Wallstreet Research Solutions merged and later re-branded as Fulcrum Financial Data LLC and Mr. Ciasullo acted as President of Global Marketing and Sales and was a board member from 2014 to 2018 when the company was sold to Fitch Ratings Services. While working with Covenant Review, Mr. Ciasullo built a sales force in the U.S. and London including assimilation of the purchase of a UK company Capital Structure Ltd where he was also on the Board. From 2005 to 2006, Mr. Ciasullo was a Managing Director at Soleil Securities Group Inc., responsible for developing a strategy for bringing alternative research such as industry knowledge into a stock research environment. In 2000, Mr. Ciasullo was a founder of and acted as President of CreditSights, Inc., an institutional investment research firm specializing in fixed income research for institutional investors where, until 2004, he built a global salesforce after overseeing the design and build of the original website which was amongst the first in the industry to deliver research over the internet. Prior to that, Mr Ciasullo held a number of Managing Director positions as head of trading at large brokerage firms. Mr. Ciasullo graduated from Brown University in 1981 with a Bachelor of Arts in Economics and International Relations.
Sean Stiefel has been a Director of the Company since January 2018. Mr. Stiefel founded Navy Capital LLC in 2014, where he is currently a Portfolio Manager and is responsible for all aspects of stock selection, investment due diligence and portfolio construction. Mr. Stiefel launched the Navy Capital Green Fund, LP in 2017 as a global public equity focused cannabis dedicated fund. Navy Capital has been involved in cannabis related investing since early 2016. Prior to founding Navy Capital, Mr. Stiefel was a research analyst and trader for Northwoods Capital Management Partners, a global equity fund with a fundamental value and special situations investment strategy. Mr. Stiefel had previously served as an associate within an equity long/short fund at Millennium Partners, and he began his career as an equities trading analyst for Barclays Capital. He is a graduate of the University of Southern California’s Marshall school of Business.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated into this Annual Report Form 10-K by reference to the Definitive Proxy Statement for its 2022 Annual Meeting of Shareholders to be filed within 120 days following December 31, 2021.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 201(d) and Item 403 of Regulation S-K is incorporated into this Annual Report Form 10-K by reference to the Definitive Proxy Statement for its 2022 Annual Meeting of Shareholders to be filed within 120 days following December 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Items 404 and 407(a) of Regulation S-K is incorporated into this Annual Report Form 10-K by reference to the Definitive Proxy Statement for its 2022 Annual Meeting of Shareholders to be filed within 120 days following December 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A is incorporated into this Annual Report Form 10-K by reference to the Definitive Proxy Statement for its 2022 Annual Meeting of Shareholders to be filed within 120 days following December 31, 2021.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
3.1 Certificate of Incorporation of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed on November 9, 2015)
3.2 Amended and Restated Bylaws of GrowGeneration Corp. (Incorporated by reference to Exhibit 3(ii) to Form 8-K filed on March 11, 2020)
10.1 GrowGeneration Corp. 2014 Equity Incentive Plan (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 as filed on November 9, 2015)
10.2 Form of GrowGeneration Corp. Stock Option Agreement in connection with the 2014 Equity Incentive Plan (Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 as filed on November 9, 2015)
10.3 GrowGeneration Corp. Amended and Restated 2018 Equity Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for fiscal year ended December 31, 2019 as filed on March 27, 2020)
10.4 Form of GrowGeneration Corp. Stock Option Agreement in connection with the Amended and Restated 2018 Equity Incentive Plan (Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for fiscal year ended December 31, 2019 as filed on March 27, 2020)
10.5 Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 as filed on November 9, 2015)
10.6 Form of Asset Purchase Agreement, dated November 28, 2018, by and among GrowGeneration Corp., GrowGeneration Pueblo Corp. and Chlorophyll, Inc. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on January 22, 2019)
10.7 Form of Asset Purchase Agreement, dated January 26, 2019, by and among GrowGeneration Corp., GrowGeneration California Corp. and Palm Springs Hydroponics, Inc. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on February 12, 2019)
10.8 Form of Asset Purchase Agreement, dated January 26, 2019, by and among GrowGeneration Corp., GrowGeneration Nevada Corp. and Reno Hydroponics, Inc. (Incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K as filed on February 12, 2019)
10.9 Form of Asset Purchase Agreement, dated April 23, 2019, by and among GrowGeneration Corp., GrowGeneration Rhode Island Corp. and GreenLife Garden Supply Corp (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on May 14, 2019)
10.10 Form of Subscription Agreement for 2019 private placement (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on June 26, 2019)
10.11 Form of Subscription Warrant to Purchase Common Stock (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K as filed on June 26, 2019)
10.12 Asset Purchase Agreement, dated as of October 29, 2020, by and among GrowGeneration Corp. and GrowGeneration California Corp. and Yeleko, LLC, Yeleko GUI, LLC, Healthy Harvest Hydro-Organics LLC, and Oregon Hydro-Organics LLC. (Incorporated by reference to Exhibit 2.01 to the Current Report on Form 8-K as filed on November 2, 2020)
10.13 Underwriting Agreement, dated June 29, 2020, by and between GrowGeneration Corp. and Oppenheimer & Co. Inc. as representative of the several underwriters named therein (Incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K as filed on July 6, 2020)
10.14 Underwriting Agreement, dated December 8, 2020, by and between GrowGeneration Corp. and Oppenheimer & Co. Inc. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed on December 9, 2020)
10.15 Form of Employment Agreement dated March 23, 2020 between GrowGeneration Corp and Darren Lampert (Incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K as filed on March 27, 2020)
10.16 Form of Employment Agreement dated March 23, 2020 between GrowGeneration Corp and Michael Salaman (Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K as filed on March 27, 2020)
10.17 Form of Employment Agreement dated March 21, 2021 between GrowGeneration Corp. and Jeffrey Lasher (Incorporated by reference to Exhibit 10.27 to the Amendment No. 1 to Annual Report on Form 10-K/A as filed on April 14, 2021)
21.1 List of Subsidiaries of GrowGeneration Corp. (Filed herewith.)
23.1 Consent of Connolly Grady & Cha, P.C. (Filed herewith)
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23.2 Consent of Plante Moran, PLLC (Filed herewith)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (Filed herewith.)
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer (Filed herewith.)
32.1 Section 1350 Certification of Principal Executive Officer (Filed herewith.)
32.2 Section 1350 Certification of Principal Financial and Accounting Officer (Filed herewith.)
101.INS XBRL Instance Document (Filed herewith.)
101.SCH XBRL Taxonomy Extension Schema Document (Filed herewith.)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (Filed herewith.)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (Filed herewith.)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (Filed herewith.)
101.DEF XBRL Taxonomy Extension Definition Linkbase Definition (Filed herewith.)
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 9, 2022.
GROWGENERATION CORP.
By: /s/ Darren Lampert
Name: Darren Lampert
Title: Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jeff Lasher
Name: Jeff Lasher
Title: Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors GrowGeneration Corp., a Colorado corporation (the “Registrant”), do hereby constitute and appoint Darren Lampert and Jeff Lasher, and each of them, as his or her true and lawful attorney-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Person Capacity Date
/s/ Darren Lampert Chief Executive Officer and Director
(Principal Executive Officer)
March 9, 2022
Darren Lampert
/s/ Jeff Lasher Chief Financial Officer
(Principal Financial and Accounting Officer)
March 9, 2022
Jeff Lasher
/s/ Michael Salaman President and Director March 9, 2022
Michael Salaman
/s/ Stephen Aiello Director March 9, 2022
Stephen Aiello
/s/ Paul Ciasullo Director March 9, 2022
Paul Ciasullo
/s/ Sean Stiefel Director March 9, 2022
Sean Stiefel
/s/ Eula Adams Director March 9, 2022
Eula Adams
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