What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-16 compared with 2022-03-10 · 583 added, 416 removed, 727 unchanged (58% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of GrowGeneration Corp.

Board of Directors and Stockholders

GrowGeneration Corp.

Opinion on the financial statements

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.

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

(the “Company”) as of December 31, 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2022, 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, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, 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, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 15, 2023 expressed an adverse opinion.

Basis for opinion

The Company's management is responsible for these financial statements.

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

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 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 audits in accordance with the standards of 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.

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.

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 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.

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 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.

(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

Consolidated Financial Statements - Impact of Internal Control over Financial Reporting

As described in Management’s Report on Internal Control Over Financial Reporting, material weaknesses were identified as of December 31, 2022.

The prevention, detection, and correction of material misstatements of the consolidated financial statements, is dependent, in part, on management (i) designing and maintaining an effective control environment, including maintaining sufficient resources within the accounting and financial reporting department to review complex financial reporting transactions;

and updating and distributing accounting policies and procedures across the organization (ii) designing and implementing effective information and communication process to identify and assess the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting and (iii) designing and implementing effective process-level control activities and general information technology controls related to financial reporting processes.

We identified the impact on our audit of the material weaknesses related to the control environment, information and communication, and control activities (“material weaknesses”), as further described in Management’s Report, as a critical audit matter.

The principal consideration for our determination that the impact on our audit of the material weaknesses is a critical audit matter is that especially challenging auditor judgment was required in designing audit procedures and evaluating audit evidence due to the ineffective system of internal control over financial reporting, which affects substantially all consolidated financial statement account balances and disclosures.

Our audit procedures related to the material weaknesses included the following, among others.

We determined the nature and extent of audit procedures that are responsive to the identified material weaknesses and evaluated the evidence obtained from the procedures performed.

We lowered the threshold used for investigating differences noted for recorded amounts.

We selected larger sample sizes for tests of details.

We substantively tested the accuracy and completeness of system-generated reports used in the audit and more extensively tested these reports.

We increased the extent of supervision over the execution of audit procedures.

/s/ Grant Thornton LLP

We have served as the Company’s auditor since 2022.

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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.

Board of Directors and Stockholders

GrowGeneration Corp.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of GrowGeneration Corp.

(the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, because of the effect of the material weaknesses described in the following paragraphs 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, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

A material weakness is a deficiency, or combination of control 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 has been identified and included in management’s assessment.

• Control Environment:

The Company did not maintain an effective control environment based on the criteria established in the COSO framework, which resulted in deficiencies in principles associated with the control environment.

In addition, the following material weaknesses were previously identified and contributed to the material weakness in the control environment:

• Insufficient resources within the accounting and financial reporting department to review the accounting of complex financial reporting transactions including areas such as business combinations, share based compensation and the related income tax reporting.

• Ineffective controls over updating and distributing accounting policies and procedures across the organization.

The control environment material weaknesses contributed to other material weaknesses within the Company’s system of internal controls over financial reporting related to the following COSO components:

• Risk Assessment:

The Company did not design and implement an effective risk assessment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the risk assessment component of the COSO framework.

• Information and Communication:

The Company did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting.

• Monitoring Activities:

The Company did not have effective monitoring activities to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness.

• Control Activities:

As a consequence of the material weaknesses described above, internal control deficiencies related to the design and operation of process-level controls and general information technology controls were determined to be pervasive throughout the Company’s financial reporting processes.

In addition, the following material weaknesses were previously identified and contributed to the material weakness in control activities:

• 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.

• Inadequate controls over physical inventory counts.

• Inadequate controls over valuations, inclusive of appropriate valuation model inputs and appropriate forecasting for prospective financial information.

• Inadequate segregation of duties within human resources, manual journal entry posting processes, and various bank accounts of the Company to prevent and detect unauthorized transactions in a timely manner.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022.

The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 15, 2023, which expressed an unqualified opinion on those financial statements.

Basis for opinion

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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.

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

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;

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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

/s/ Grant Thornton LLP

Denver, Colorado

March 15, 2023

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of GrowGeneration Corp and Subsidiaries

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 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.

(the “Company”) as of December 31, 2021, 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 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.

Basis for Opinion

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

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 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.

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 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.

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.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

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.

/s/ Connolly Grady & Cha, P.C

Certified Public Accountants

Springfield, Pennsylvania

March 27, 2020

We have served as the Company's auditor since 2014

/s/ Plante & Moran, PLLC

Denver, Colorado

March 9, 2022, except for the effects of the change in segments described in Notes 2, 6, 14 and 17, as to which the date is March 15, 2023

We served as the Company’s auditor from 2020-2022.

GROWGENERATION CORP.

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Marketable securities 31,852 39,793

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

Accounts receivable, net of allowance for doubtful accounts of $ 0.7 million and $ 0.6 million at December 31, 2022 and 2021

Notes receivable, current, net of allowance for doubtful accounts of $ 1,268 and $ 522 at December 31, 2022 and 2021

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Property and equipment, net 28,669 24,116

Operating leases right-of-use assets, net 43,730 12,088

Notes receivables, net of current portion — 1,200

Operating leases right-of-use assets 46,433 43,730

Intangible assets, net 30,878 48,402

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Sales tax payable 1,341 1,923

Current maturities of lease liability 6,858 3,001

Current maturities of operating lease liability 8,131 6,858

Current portion of long-term debt 50 92

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Long-term debt, net of current portion — 66

Other long-term liabilities 593 —

Total liabilities 77,046 88,047

Commitments and contingencies

Commitments and contingencies (Note 18)

Stockholders’ Equity:

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2022 2021 2020

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

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

Sales, net $ 278,166 $ 422,489 $ 193,365

Cost of sales (exclusive of depreciation and amortization shown below) 207,903 304,248 142,317

Gross profit 70,263 118,241 51,048

Operating expenses:

Store operations

49,742 18,724 10,095

Store operations and other operational expenses 54,680 49,742 18,724

Selling, general, and administrative 36,758 39,469 20,871

Bad debt expense 1,737 1,428 580

Depreciation and amortization

17,132 12,600 2,436

Impairment loss 127,831 — —

Total operating expenses

238,138 103,239 42,611

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

Income (Loss) from operations ( 167,875 ) 15,002 8,437

Other income (expense):

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1,243 227 142

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

Net income per share, diluted $ 0.21 $ 0.11 $ 0.04

Net income (loss) before taxes ( 166,632 ) 15,229 8,579

Benefit (provision) for income taxes 2,885 ( 2,443 ) ( 3,251 )

Net income (loss) $ ( 163,747 ) $ 12,786 $ 5,328

Net income (loss) per share, basic $ ( 2.69 ) $ 0.22 $ 0.12

Net income (loss) per share, diluted $ ( 2.69 ) $ 0.21 $ 0.11

Weighted average shares outstanding, basic 60,813 59,223 43,945

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

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

Share based compensation 0 $ 1,215 — 1,215

Common stock issued upon warrant exercise 1,758 2 $ 1,298 — 1,300

Common stock issued upon exercise of options 10 0 $ 6 — 6

Common stock issued upon cashless exercise of options 506 1 $ ( 1 ) — 0

Common stock issued in connection with business combinations 970 1 $ 3,624 — 3,625

Common stock issued upon conversion of convertible debt 1,259 1 $ 2,404 — 2,405

Common stock issued for services 203 0 $ 549 — 549

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

Net income — $ 0 1,322 1,322

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

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

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

Net income 0 0 5,328 5,328

Net income (loss) — — — 5,328 5,328

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

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

Net income — — — 12,786 12,786

Net income (loss) — — — 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.

Common stock issued in connection with business combinations 700 1 5,710 — 5,711

Adjustment for prior period acquisition — — 39 — 39

Common stock issued for share based compensation 339 — — — —

Share based compensation — — 4,514 — 4,514

Common stock redemption — — ( 1,618 ) — ( 1,618 )

Common stock issued upon exercise of options 9 — 33 — 33

Common stock issued upon cashless exercise of options 20 — — — —

Common stock issued upon cashless exercise of warrants 14 — — — —

Common stock issued in connection with asset acquisition 50 — 173 — 173

Net income (loss) — — — ( 163,747 ) ( 163,747 )

Balances, December 31, 2022 61,061 $ 61 $ 369,938 $ ( 153,603 ) $ 216,396

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

GROWGENERATION CORP.

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Cash Flows from Operating Activities:

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

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

Net income (loss) $ ( 163,747 ) $ 12,786 $ 5,328

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

Depreciation and amortization 17,132 12,600 2,436

Provision for doubtful accounts and notes receivable 619 214 172

Amortization of debt discount — — 356

Bad debt expense, net of recoveries 1,737 1,428 580

Stock based compensation 4,967 6,585 7,856

Deferred income taxes 1,609 750 —

Impairment loss 127,831 — —

Provision for deferred income taxes ( 2,359 ) 1,609 750

Loss on disposal of fixed assets 568 198 —

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Cash Flows from Investing Activities:

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

Assets acquired in business combinations, net of cash acquired ( 7,230 ) ( 80,784 ) ( 41,402 )

Purchase of property and equipment ( 12,896 ) ( 18,740 ) ( 3,401 )

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Maturities of marketable securities 46,633 35,207 —

Disposal of assets 612 — —

Purchase of intangibles — — ( 1,027 )

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Supplemental Information:

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

Common stock issued for intangible assets $ 173 $ 168 $ —

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

Debt converted to equity $ — $ — $ 2,311

Assets acquired by issuance of stock $ 5,710 $ 37,272 $ 39,282

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

(the “Company”, "we", "us", and "our") 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.

GrowGeneration is the largest chain of hydroponic garden centers in the U.S.

by management's estimates and is a marketer and distributor of nutrients, growing media, lighting, ventilation systems and other products for hydroponic and organic gardening.

The Company also engages in the distribution of private label products and commercial benching.

Currently, the Company owns and operates a chain of 59 retail hydroponic/gardening stores across 16 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.

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

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 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).

All amounts included in the accompanying notes 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.

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

These reclassifications had no effect on reported consolidated net income.

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Actual results could vary from the estimates that were used.

Risks and Uncertainties

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

Although the COVID-19 pandemic to date has resulted in supply chain delays of our inventory, higher operating costs and increased shipping costs, among other impacts, we have experienced minimal business interruption as a result of the COVID-19 pandemic.

Although many impacts of the COVID-19 pandemic appear to have alleviated, the pandemic has not yet been eliminated, and we cannot predict future impacts of the COVID-19 pandemic, if any, on markets generally or on our operations or the operations of our customers and suppliers.

It is possible that some impacts of the pandemic on markets will persist for some time.

These measures have negatively impacted, and may continue to impact, our business and financial condition as the responses to control COVID-19 continue.

GROWGENERATION CORP.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Immaterial out-of-period adjustments

During the year ended December 31, 2022, the Company recorded an immaterial out-of-period adjustment that impacted the prior year Consolidated Balance Sheets.

The adjustment related to a change in the calculation of operating lease right-of-use assets and operating lease liabilities.

This adjustment corrected an understatement of operating lease right-of-use assets of $ 1.3 million and an understatement of operating lease liabilities of $ 1.3 million as of December 31, 2021.

The Company assessed the materiality of this adjustment on the previously issued annual financial statements in accordance with SEC Staff Accounting Bulletin No.

The Company concluded that the changes were not material to any of the previously issued consolidated financial statements.

During the year ended December 31, 2022, the Company recorded an immaterial out-of-period adjustment that impacted the prior year Consolidated Balance Sheet related to the accumulation of errors that occurred over several periods.

This adjustment corrected an understatement of operating lease right-of-use assets of $ 1.4 million and an understatement of operating lease liabilities of $ 1.4 million as of December 31, 2021.

The Company assessed the materiality of this adjustment on the previously issued annual financial statements in accordance with SEC Staff Accounting Bulletin No.

The Company concluded that the changes were not material to any of the previously issued consolidated financial statements.

Segment Reporting

During the year ended December 31, 2022, the Company identified an omission regarding the disclosure of reportable segments under ASC 280 related to the year ended December 31, 2021.

During the year ended December 31, 2021 the Company inappropriately reported a single segment, aggregating multiple operating segments.

The impact at December 31, 2021 was that $ 17.1 million of revenue, $ 7.0 million of gross margin, and $ 2.9 million of operating income should have been reported as a separate “Distribution and other segment.

” The Company assessed the materiality of this omission on the previously issued interim and annual consolidated financial statements in accordance with SEC Staff Accounting Bulletin No.

The Company concluded that the omission was not material to any of the previously issued consolidated financial statements and began reporting segments results in accordance with ASC 280 on a prospective basis starting with the quarter ended March 31, 2022.

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.

The Company’s revenue is primarily generated from sales of branded and non-branded products through our retail locations, e-commerce platforms, and distribution centers.

In addition to these product sales, the Company sells and installs commercial fixtures.

The Company allocates transaction price to each distinct performance obligation and recognizes revenue, net of estimated returns and sales tax, at the time when it transfers control of the product to customers or when services are completed.

Revenues are measured based on the amount of consideration that the Company expects to receive as derived from a list price, reduced by estimates for variable consideration.

The variable consideration is based on the estimate of expected sales returns.

The majority of our returns come from retail sales.

Estimating future returns requires judgment based on current and historical trends and actual returns may vary from our estimates.

In evaluating the timing of the transfer of control of products to customers, the Company considers several control indicators, including significant risks and rewards of products, the Company’s right to payment and the legal title of the products.

Based on the assessment of control indicators, product sales are typically recognized when they are made available to the carrier or are picked up by the customer.

Promises related to product installation are considered a separate performance obligation from the product sale given the products can be used without customization or modification, and installation is not complex and can be performed by other vendors.

Installation revenue is recognized upon completion of the installation service to the customer.

The Company has applied the practical expedient to exclude the value of remaining performance obligations for contracts with an original term of one year or less.

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 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes Receivable and Concentration of Credit Risk below).

The Company accounts for shipping and handling activities as a fulfillment cost rather than as a separate performance obligation.

As such, the Company classifies such costs as a component of cost of sales on the consolidated statements of operations.

When the Company receives payment from customers before the customer obtains control 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.

Cost of Sales

Cost of sales includes cost of goods and shipping costs.

Cost of goods consists of cost of merchandise, inbound freight and other inventory-related costs, such as shrinkage costs and lower of cost or market adjustments.

Occupancy expenses, which consist of payroll, rent and other lease required costs, including common area maintenance and utilities, are included as a component of store operations and other operational expenses on the consolidated statements of operations.

Cash Equivalents

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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.

For the year ended December 31, 2022, 2021, and 2020, 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.

A reserve for uncollectible 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.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

deemed improbable.

A reserve for uncollectible 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.

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Any uncollectible interest previously accrued is also charged off.

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.

As of December 31, 2022 and 2021, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes receivable generally have terms of 12 months to 18 months and bear interest from 6 - 12 % per annum.

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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.

We are affected by general economic conditions in the U.S.

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, 2022 and 2021, 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.

Inventory consists primarily of gardening supplies and materials, fixtures, and equipment 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.

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

During the years ended December 31, 2022, 2021, and 2020, the Company recorded $ 7.8 million, $ 5.3 million, and $ 1.7 million to inventory write-downs due to shrink and obsolescence.

Property and Equipment

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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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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;

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• Costs incurred related to less significant modifications and enhancements as well as maintenance are expensed as incurred.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets Acquired in Business Combinations

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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 .

The estimated useful lives for trade names, customer relationships, non-compete agreements, and intellectual property are generally five years .

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

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

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

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

An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its 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 Company reviews the recoverability of long-lived assets, including buildings, furniture and fixtures, computers and equipment, leasehold improvements, right-of-use assets, 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.

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As of December 31, 2022, there were no indicators of impairment.

See Note 6, Goodwill and Intangible Assets , for discussion of current year impairment.

We account for leases in accordance with the FASB ASC 842, Leases .

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

Operating lease assets and operating

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Operating lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over the lease term at the lease start date.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease start date in determining the present value of future payments.

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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.

Valuation techniques used to measure fair value must maximize the use of observable inputs and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

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Marketable securities 2 $ 31,852 $ 39,793

Notes receivable impaired 3 $ 978 874

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.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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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 consolidated income tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any

GROWGENERATION CORP.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Advertising and promotional expenses for the years ended December 31, 2022, 2021, and 2020 amounted to $ 4.0 million, $ 4.0 million, and $ 996 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”).

The Company computes net earnings per share under ASC 260-10, Earnings Per Share .

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.

Diluted EPS is computed by dividing net income (loss) by the weighted-average of all potentially dilutive shares of common stock that were outstanding during the periods presented.

The treasury stock method is used in calculating diluted EPS for potentially dilutive stock options, restricted stock and share purchase warrants, which assumes that any proceeds received from the exercise of in-the-money stock options, restricted stock and share purchase warrants, would be used to purchase common shares at the average market price for the period.

Stock Based Compensation

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

The Company records stock-based compensation in accordance with FASB ASC 718, Compensation-Stock Compensation .

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

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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.

Forfeitures are recognized as they occur.

The Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

These awards entitle the employees to receive a specified dollar value of common stock on future dates ranging from June 15, 2023 through June 15, 2025.

The awards generally vest over three years subject to the employee’s continued employment and are expensed using the straight-line method over the life of the award.

For additional information see Note 9, Share Based Payments .

RECENT ACCOUNTING PRONOUNCEMENTS

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

We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements.

We have implemented all new accounting pronouncements that are in effect and that may impact our 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.

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.

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:

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

Distribution 17,087 — —

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

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

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, 2021 and 2020.

The Company has adopted this standard effective January 1,

GROWGENERATION CORP.

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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

Closing balance, 12/31/2021 8,181 11,686

The adoption of this standard primarily applied to the valuation of the Company’s accounts receivable.

Implementation of this standard did not have a material impact on our financial position.

REVENUE RECOGNITION

Disaggregation of Revenues

Sales are disaggregated by our segments, which represent our principal lines of business, as well as by our private label products versus distributed brands, or by commercial fixture revenue.

See Note 17, Segments , for disaggregated revenue by segment.

Contract Balances

Depending on the timing of when title of product transfers to a customer and when a customer makes payments for such product, the Company recognizes a accounts receivable (asset) or a customer deposit (liability).

The opening and closing balances of the Company’s accounts receivables and customer deposits are as follows:

Accounts Receivable Customer Deposits

Opening balance, January 1, 2022 $ 5,741 $ 11,686

Closing balance, December 31, 2022 8,336 4,338

Increase (decrease) $ 2,595 $ ( 7,348 )

Opening balance, 1/1/2020 $ 4,455 $ 2,504

Closing balance, 12/31/2020 7,713 5,155

Opening balance, January 1, 2021 $ 3,901 $ 5,155

Closing balance, December 31, 2021 5,741 11,686

Increase (decrease) $ 1,840 $ 6,531

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.

Of the total amount of customer deposit liability as of January 1, 2022, $ 11.1 million was reported as revenue during the year ended December 31, 2022.

Of the total amount of customer deposit liability as of January 1, 2021, $ 4.4 million was reported as revenue during the year ended December 31, 2021.

The Company also has notes receivables under longer term financing arrangements at interest rates typically ranging from 6 % to 12 % with repayment terms typically ranging for 12 to 18 months.

Notes receivable at December 31, 2022 and 2021 are as follows:

December 31, 2022 December 31, 2021

Note receivable $ 2,962 $ 4,104

Notes receivable $ 2,464 $ 2,962

Allowance for losses ( 1,250 ) ( 522 )

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2022 December 31,

Note receivable $ 1,500 $ 1,166

Allowance for loses ( 522 ) ( 292 )

Notes receivable $ 1,500 $ 1,500

Allowance for losses ( 1,250 ) ( 522 )

Notes receivable, net $ 250 978

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

PROPERTY AND EQUIPMENT

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Property and equipment, net $ 28,669 $ 24,116

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

Depreciation and amortization expense was $ 7.2 million, $ 3.7 million, and $ 1.6 million for the years ended December 31, 2022, 2021, and 2020, respectively.

GOODWILL AND INTANGIBLE ASSETS

The Company performs its goodwill impairment testing annually during the fourth quarter, or more frequently if events or if circumstances were to occur that would more likely than not reduce the fair value of our reporting units below its carrying amount.

The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill.

The adjusted carrying amount of goodwill shall be its new accounting basis.

During the second quarter of 2022, the Company’s market capitalization fell below total net assets.

In addition, financial performance continued to weaken during the quarter, which was contrary to prior experience.

Management reassessed business performance expectations, following persistent adverse developments in equity markets, deterioration in the environment in which we operate, inflation, lower than expected sales, and an increase in operating expenses.

These indicators, in the aggregate, required impairment testing for finite-lived intangible assets at the asset group level and goodwill at the reporting unit level.

Under ASC 360, we performed a cash recoverability test on the following intangible assets:

customer relationships, trade name, and non-compete.

The carrying amounts of any assets that are not within the scope of ASC 360-10, other than goodwill, were adjusted for impairment, as necessary, prior to testing long-lived assets and goodwill.

The Company recognized impairment losses as disclosed in the table below.

For goodwill impairment testing purposes, the Company determined four reporting units, three of which were subject to a quantitative assessment.

We determined fair value using the income approach, where estimated future cash flows are discounted to present value at an appropriate rate of return.

The Company completed its interim goodwill impairment test as of June 30, 2022 and recognized impairment losses as disclosed in the table below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The changes in goodwill are as follows:

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Goodwill additions and measurement period adjustments 7,234 62,450

Impairment ( 116,657 ) —

Balance, end of period $ 15,978 $ 125,401

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The goodwill balance and impairment by segment are as follows:

Retail E-commerce Distribution and other Total

Gross carrying value December 31, 2020 $ 55,181 $ 2,911 $ 4,859 $ 62,951

Acquisitions & measurement period adjustments 46,630 8,748 7,072 62,450

Gross carrying value December 31, 2021 101,811 11,659 11,931 125,401

Acquisitions & measurement period adjustments 1,418 ( 341 ) 6,157 7,234

Gross carrying value, December 31, 2022 $ 103,229 $ 11,318 $ 18,088 $ 132,635

Accumulated impairment losses December 31, 2020 $ — $ — $ — $ —

Impairment — — — —

Accumulated impairment losses December 31, 2021 — — — —

Impairment ( 103,094 ) ( 9,848 ) ( 3,715 ) ( 116,657 )

Accumulated impairment losses December 31, 2022 $ ( 103,094 ) $ ( 9,848 ) $ ( 3,715 ) $ ( 116,657 )

Net carrying value at December 31, 2021 $ 101,811 $ 11,659 $ 11,931 $ 125,401

Net carrying value at December 31, 2022 $ 135 $ 1,470 $ 14,373 $ 15,978

A summary of intangible assets as of follows:

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Intellectual property 3.16 years

Total 3.37 years

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Amount Accumulated

Amortization Gross

Amortization Net

Amount Accumulated

Amortization Net

Tradenames $ 28,774 $ ( 10,693 ) $ 18,081 $ 28,300 $ ( 4,948 ) $ 23,352

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Intellectual property 2,065 ( 758 ) 1,307 2,065 ( 344 ) 1,721

$ 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 $ 49,262 $ ( 18,559 ) $ 30,703 $ 57,024 $ ( 8,622 ) $ 48,402

Intangibles and impairment by segment are as follows:

Retail E-commerce Distribution and other Total

Gross carrying value December 31, 2020 $ 17,635 $ — $ 3,481 $ 21,116

Acquisitions & measurement period adjustments 20,190 2,501 13,217 35,908

Gross carrying value December 31, 2021 37,825 2,501 16,698 57,024

Acquisitions & measurement period adjustments 230 — 3,182 3,412

Gross carrying value, December 31, 2022 $ 38,055 $ 2,501 $ 19,880 $ 60,436

Accumulated amortization December 31, 2020 $ ( 540 ) $ — $ ( 27 ) $ ( 567 )

Amortization ( 5,745 ) ( 354 ) ( 1,956 ) ( 8,055 )

Accumulated amortization December 31, 2021 ( 6,285 ) ( 354 ) ( 1,983 ) ( 8,622 )

Amortization ( 5,897 ) ( 460 ) ( 3,580 ) ( 9,937 )

Accumulated amortization December 31, 2022 $ ( 12,182 ) $ ( 814 ) $ ( 5,563 ) $ ( 18,559 )

Accumulated impairment losses December 31, 2020 $ — $ — $ — $ —

Impairments — — — —

Accumulated impairment losses December 31, 2021 — — — —

Impairments ( 11,079 ) ( 95 ) — ( 11,174 )

Accumulated impairment losses December 31, 2022 $ ( 11,079 ) $ ( 95 ) $ — $ ( 11,174 )

Net carrying value at December 31, 2021 $ 31,540 $ 2,147 $ 14,715 $ 48,402

Net carrying value at December 31, 2022 $ 14,794 $ 1,592 $ 14,317 $ 30,703

GROWGENERATION CORP.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Amortization expense for the years ended December 31, 2022, 2021, and 2020 was $ 9.9 million, $ 8.9 million, and $ 789 thousand respectively.

Future amortization expense is as follows:

Thereafter 33

Total $ 30,703

The provision (benefit) for income taxes for the years ended December 31, 2022, 2021, and 2020 consisted of the following:

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$ ( 471 ) $ ( 115 ) $ 1,732

( 55 ) 949 768

Deferred tax (benefit)

( 2,179 ) 1,473 1,706

Valuation allowance

( 180 ) 136 227

Valuation allowance — — ( 1,182 )

$ ( 2,885 ) $ 2,443 $ 3,251

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of deferred tax assets and liabilities as of December 31, 2022 and 2021 is as follows:

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Deferred tax assets:

Net operating losses and attributes carryovers $ 7,655 $ —

Deferred right to use lease liabilities

12,200 11,573

Stock based compensation

Accumulated depreciation and amortization 27,288 —

Inventory reserves

1 unchanged sentence

Accruals and other

50,328 14,180

Deferred tax liabilities:

3 unchanged sentences

( 11,638 ) ( 16,539 )

( 16,539 ) ( 5,318 )

Deferred tax asset (liability) 38,689 ( 2,359 )

2 unchanged sentences

$ — $ ( 2,359 )

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, 2022, the Company had cumulative U.S.

Net Operating Losses ("NOLs") consisting of carryforwards for federal income tax of $ 30.0 million, which have an indefinite carryforward period.

As of December 31, 2022 and 2021 the Company had cumulative state net operating loss carryforwards of $ 28.0 million and $ 1.6 million.

State net operating loss carryforwards will begin to expire in calendar year 2035.

NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions.

This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.

The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change.

The Company has completed an analysis of any limitations on its tax attributes and has assigned a full valuation allowance against them as of December 31, 2022.

GROWGENERATION CORP.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The differences between the U.S.

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2 % 16 % 38 %

LONG-TERM DEBT

Long term debt is as follows:

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

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, 2021, 2020, and 2019 was $ 43 thousand, $ 14 thousand, and $ 45 thousand, respectively.

Uncertain Tax Benefits

The Company has not identified any uncertain tax positions as of December 31, 2022.

The Company recognizes interest and penalties accrued related to uncertain tax benefits in the income tax provision.

There were no Interest and penalties included in other long-term liabilities on the accompanying consolidated balance sheets for years ended December 31, 2022 and 2021.

The Company did not expect any significant changes in its unrecognized tax benefits within 12 months of the reporting date.

The Company files income tax returns in the U.S.

federal jurisdiction and various state jurisdictions.

No tax years for the Company are currently under examination by the IRS or state and local tax authorities for income tax purposes.

Generally, the Company’s 2019 through 2021 fiscal years remain open for examination and assessment.

For various states, the examination and assessment remain open for 2018 through 2021.

Years prior to 2018 remain open solely for purpose of examination of the Company’s loss and credit carryforwards.

We determine if a contract contains a lease at inception.

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Our leases generally have remaining terms of 1 - 9 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.

Generally, the lease term is the minimum of the non-cancelable 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 liabilities represent the present value of remaining lease payments over the lease term.

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

4 unchanged sentences

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.

Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in “Store operations and other operating expenses.” Facilities and assets which serve management and support functions are

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

expensed through "Selling, general, and administrative" expenses.

Cash paid for amounts included in the measurement of lease liabilities for operating leases were $ 10.3 million and $ 7.2 million for the years ended December 31, 2022 and 2021.

2022 December 31,

7 unchanged sentences

Year Ended December 31,

2022 2021 2020

Operating lease costs $ 10,936 $ 8,205 $ 2,801

3 unchanged sentences

The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2022:

2023 $ 10,689

Thereafter 16,478

2 unchanged sentences

Lease Liability at December 31, 2022 $ 48,790

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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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.

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, non-employee 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.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Awards under the 2014 Plan are made by the Board or a committee designated by the Board.

4 unchanged sentences

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 2018 Plan is 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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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 "non-statutory 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.

10 unchanged sentences

As of December 31, 2022, the Company had approximately $ 9.8 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 2.6 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

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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.

Restricted stock is valued using the Company's stock price on the grant date.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Restricted stock activity for the years ended December 31, 2022 and 2021 is presented in the following table:

24 unchanged sentences

There were no options or warrants issued during 2022.

The following table provides the assumptions used for stock option awards.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2022 2021 2020

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 %

Expected volatility N/A N/A 77.8 - 80.70 %

Expected dividends N/A N/A N/A

Expected term N/A N/A 2 - 5 years

Risk-free rate N/A N/A 1.64 % - 1.75 %

Options outstanding pursuant to 2014 Plan —

21 unchanged sentences

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.

In August 2022, the Company issued certain stock awards classified as liabilities based on the guidance set forth at ASC 480-10-25 and ASC 718-10-25.

These awards entitle the employees to receive a specified dollar value of common stock on future dates ranging from June 15, 2023, through June 15, 2025.

The awards generally vest over three years subject to the employee’s continued employment.

The aggregate face value of these awards as of December 31, 2022 amounted to $ 5.3 million.

During 2021, 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.

1 unchanged sentence

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.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company recognizes compensation expense for these awards over the requisite service period.

The expense related to liability awards for the years ended December 31, 2022, 2021, and 2020 was $ 0.5 million, $ 0.7 million, and $ 29.9 thousand.

STOCK PURCHASE WARRANTS

8 unchanged sentences

( 48 ) $ 3.50

Forfeited and settled ( 250 ) $ 26.57

Outstanding December 31, 2022 33 $ 15.82

On November 17, 2022, the Company settled 250,000 warrants for a cash payment of $ 10 thousand and 10,000 shares of common stock.

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, 2022, 2021, and 2020.

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,

2022 2021 2020

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

Net income (loss) $ ( 163,747 ) $ 12,786 $ 5,328

Weighted-average shares outstanding, basic 60,813 59,223 43,945

3 unchanged sentences

Dilutive income per share $ ( 2.69 ) $ 0.21 $ 0.11

The following potentially outstanding restricted stock and stock options were excluded from the computation of diluted earnings per share because the effect would have been antidilutive:

2022 2021 2020

Restricted stock 1,480 — —

Stock options and warrants 204 — —

Total 1,684 — —

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EMPLOYEE BENEFIT PLAN

1 unchanged sentence

The Company made matching contributions to the plan of $ 601 thousand, $ 419 thousand, and $ 169 thousand for the years ended December 31, 2022, 2021, and 2020, respectively.

VENDOR CONCENTRATIONS

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.

VENDOR AND CUSTOMER CONCENTRATIONS

One supplier represented 24 % and 28 % of our total vendor purchases for the years ended December 31, 2022 and 2021, and two suppliers represented 41 % of our total vendor purchases for the year ended December 31, 2020.

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, 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.

No customer accounted for more than 5% of revenues for the years ended December 31, 2022, 2021, and 2020.

Three customers represented 28 % of total accounts receivable as of December 31, 2022.

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.

1 unchanged sentence

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.

During the year ended December 31, 2022, our measurement period adjustments included increasing goodwill by $ 1.3 million offset with intangible assets.

As a result of these measurement period adjustments, we made an insignificant reduction in amortization expense.

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

1 unchanged sentence

2022 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.

On February 1, 2022, the Company purchased certain net assets of Horticultural Rep Group, Inc.

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

The total consideration for the purchase of the assets of HRG was approximately $ 13.4 million, including $ 6.8 million in cash and common stock valued at approximately $ 5.7 million.

The Asset Purchase Agreement also provides for an indemnity holdback to be settled in common stock of the Company valued at approximately $ 0.9 million.

Acquired goodwill of approximately $ 5.8 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

HRG is included in our Distribution and other segment.

On November 3, 2022, the Company purchased certain assets of St.

Louis Hydroponic Company ("STL"), a hydroponic retail store in St.

Louis, Missouri.

The total consideration for the purchase of the assets of STL was approximately $ 0.4

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

million in cash.

Acquired goodwill of approximately $ 0.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

STL is included in our Retail segment.

The table below represents the allocation of the purchase price to the acquired net assets during the year ended December 31, 2022.

HRG STL Total

Inventory $ 4,170 $ 279 $ 4,449

Prepaids and other current assets 76 10 86

Furniture and equipment 148 — 148

Operating lease right of use asset 666 — 666

Operating lease liability ( 666 ) — ( 666 )

Customer relationships 2,430 — 2,430

Trademark 496 — 496

Non-compete 255 — 255

Goodwill 5,816 135 5,951

Total $ 13,391 $ 424 $ 13,815

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

HRG STL Total

Cash $ 6,806 $ 424 $ 7,230

Indemnity stock holdback 875 — 875

Common stock 5,710 — 5,710

Total $ 13,391 $ 424 $ 13,815

The following table discloses the date of the acquisition noted above and the revenue and earnings included in the Consolidated Statement of Operations for the year ended December 31, 2022.

Revenue and earnings amounts include other proprietary brands now being included under HRG for operations.

HRG STL Total

Acquisition date February 1, 2022 November 3, 2022

Revenue $ 19,239 $ 178 $ 19,417

Net Income (loss) $ ( 629 ) $ 41 $ ( 588 )

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, 2022, 2021, and 2020.

2022 (Unaudited) December 31,

2021 (Unaudited) December 31,

2020 (Unaudited)

Revenue $ 280,897 $ 441,906 $ 212,782

Net income (loss) $ ( 162,156 ) $ 12,198 $ 4,740

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2021 Acquisitions

On January 25, 2021, the Company purchased the assets of Indoor Garden & Lighting, Inc ("Indoor Garden"), 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 of approximately $ 0.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Indoor Garden is included in our Retail segment.

On February 1, 2021, the Company purchased the assets of J.A.R.B., Inc d/b/a Grow Depot Maine ("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 of approximately $ 0.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Grow Depot Maine is included in our Retail segment.

On February 15, 2021, the Company purchased the assets of Grow Warehouse LLC ("Grow Warehouse"), 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 was approximately $ 17.8 million, including approximately $ 8.1 million in cash and common stock valued at approximately $ 9.7 million.

Acquired goodwill of approximately $ 11.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Grow Warehouse is included in our Retail segment.

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

The total consideration for the purchase of San Diego Hydro 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 $ 5.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

San Diego Hydro is included in our Retail segment.

On March 12, 2021, the Company purchased the assets of Charcoir Corporation ("Charcoir"), 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 of approximately $ 6.1 million 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.

Charcoir is included in our Distribution and other segment.

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

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

Acquired goodwill of approximately $ 3.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

55 Hydro is included in our Retail segment.

On March 15, 2021, the Company purchased the assets of Aquarius Hydroponics ("Aquarius"), 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.

Acquired goodwill of approximately $ 1.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Aquarius is included in our Retail segment.

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.

Acquired goodwill of approximately $ 8.7 million 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.

Agron is included in our E-commerce segment.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Acquired goodwill of approximately $ 2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Down River Hydro is included in our Retail segment.

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.

Acquired goodwill of approximately $ 4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Harvest is included in our Retail segment.

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.

Acquired goodwill of approximately $ 7.0 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Aqua Serene is included in our Retail segment.

On July 3, 2021, the Company purchased the assets of Mendocino Greenhouse & Garden Supply, Inc ("Mendocino"), 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.

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

Acquired goodwill of approximately $ 2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Mendocino is included in our Retail segment.

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

1 unchanged sentence

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.

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.

CGS is included in our Retail segment.

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

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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 Asset Purchase Agreement contains a contingent payment equal to $ 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

Acquired goodwill of approximately $ 4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

Hoagtech is included in our Retail segment.

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.

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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.

Acquired goodwill of approximately $ 0.5 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

All Seasons is included in our Retail segment.

On December 31, 2021, the Company purchased the assets of Mobile Media, Inc ("MMI"), a mobile shelving manufacturing and warehouse 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.

Acquired goodwill of approximately $ 1.2 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.

MMI is included in our Distribution and other segment.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Liabilities — — — — — ( 169 ) — — —

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

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

Operating lease liability ( 98 ) ( 108 ) ( 861 ) — ( 1,079 ) ( 641 ) ( 92 ) ( 137 ) ( 273 )

5 unchanged sentences

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total

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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 right of 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 )

10 unchanged sentences

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Harvest Aquaserene Mendocino CGS Hoagtech All Seasons MMI Total

3 unchanged sentences

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

Agron Aquarius 55 Hydro Charcoir San Diego Hydro Grow Warehouse LLC 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

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2021 (Unaudited) December 31,

2020 (Unaudited) December 31,

2020 (Unaudited)

2 unchanged sentences

2020 Acquisitions

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

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

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.

9 unchanged sentences

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On October 20, 2020 the Company acquired the assets of Big Green Tomato (“BGT”), a two -store chain in Battle Creek and Taylor, Michigan.

4 unchanged sentences

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.

On December 14, 2020, the Company acquired the assets of Grassroots Hydroponics, Inc.

("Grassroots"), 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.

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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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 total consideration for the purchase of Canopy 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 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

Hydro Health &

Harvest Total

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

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Canopy Grassroots GrowBiz BGT Hydro Depot Emerald

Hydro Health &

Harvest Total

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

1 unchanged sentence

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

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Canopy Grassroots GrowBiz BGT Hydro Depot Emerald

Hydro Health &

Harvest Total

Acquisition date 12/23/2020 12/14/2020 11/17/2020 10/20/2020 10/12/2020 8/10/2020 6/16/2020 2/26/2020

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

2020 (Unaudited) December 31,

2020 (Unaudited)

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Earnings $ 18,308

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.

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 $ 0.3 million for the year ended December 31, 2022.

As of December 31, 2022, there was an outstanding balance of $ 26 thousand due.

As discussed in Note 2, at December 31, 2021, the Company had two reportable segments which increased to three at March 31, 2022, based on quantitative and qualitative analyses.

The Company now also reports E-commerce as a reportable segment.

The Company has three primary reportable segments including retail operations, e-commerce and all other which includes the distribution of proprietary brands to wholesale accounts.

The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations.

The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources.

Shared services and other corporate costs are allocated to individual segments based on that segment's profitability.

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Prepaids and other current assets

Furniture and equipment

The core of our business strategy is to operate the largest chain of retail garden centers in the U.S.

The hydroponic retail landscape is fragmented, which allows us to acquire “best of breed” hydroponic retail operations and leverage efficiencies of a centralized organization.

During 2022, the Company acquired or opened 5 new locations and expanded its physical retail presence into 4 new states.

Our plan is to continue to acquire, open and operate garden centers and related businesses throughout the U.S.

However, in light of persistent difficult market conditions, the Company also closed 8 underperforming retail locations in 2022 and may consider additional store consolidation in 2023.

Some of our garden centers have multi-functions, with added capabilities that include warehousing, distribution and fulfillment for our online platforms and direct fulfillment to our commercial customers.

Our retail segment also includes our commercial sales organization, which is focused on selling products and services, including end-to-end solutions, for large commercial cultivators outside of the physical retail network.

When a commercial customers gain new cultivation licenses, they need lighting, benching, environmental control systems, irrigation, fertigation and other products to outfit their facilities.

Existing facilities also need consumable products for operations, as well as equipment updates from time to time.

Commercial customers typically purchase large dollar amounts and sizes of products.

We offer commercial customers volume pricing, terms and financing.

Our digital strategy is primarily focused on capturing the home, craft and commercial grower online.

GrowGeneration.com offers thousands of hydroponic products, all curated by our product team.

GrowGeneration.com offers customers the option to have their orders shipped directly to their locations, anywhere in North America.

GrowGeneration also sells its products through its distribution website, HRGdist.com, and online marketplaces such as Amazon and Walmart.

Distribution and other :

In December 2020, GrowGeneration purchased the business of Canopy Crop Management Corp., the developer of the popular PowerSi line of monosilicic acid products, a widely used nutrient additive for plants.

In March 2021, the Company purchased Charcoir, a line of premium coco pots, cubes and medium.

In December 2021, the Company purchased the assets of Mobile Media, Inc.

("MMI"), a mobile shelving and storage solutions developer and manufacturer.

In February 2022, the Company purchased the assets of Horticultural Rep Group, Inc.

("HRG"), a specialty marketing and sales organization of horticultural products.

The Company is in the process of combining the operations and management of these non-retail enterprises.

The products these companies provide are integrated into our retail, e-commerce, and direct sales activities and we receive incremental revenue from the sale of these products.

GROWGENERATION CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregated revenue by segment is presented in the following table:

2022 2021 2020

Private label sales $ 24,712 $ 22,077 $ 1,786

Non-private label sales 180,807 347,109 176,797

Total retail 205,519 369,186 178,583

Private label sales 1,168 802 —

Non-private label sales 13,903 35,410 14,482

Total e-commerce 15,071 36,212 14,482

Distribution and other

Private label sales 11,026 17,091 300

Non-private label sales 14,065 — —

Commercial fixture sales 32,485 — —

Total distribution and other 57,576 17,091 300

Total $ 278,166 $ 422,489 $ 193,365

Selected information by segment is presented in the following tables:

2022 2021 2020

Retail $ 205,519 $ 369,186 $ 178,583

E-Commerce 15,071 36,212 14,482

Distribution and other 57,576 17,091 300

Total $ 278,166 $ 422,489 $ 193,365

2022 2021 2020

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

Retail $ 48,804 $ 101,384 $ 47,127

E-Commerce 3,851 9,876 3,728

Distribution and other 17,608 6,981 193

Total $ 70,263 $ 118,241 $ 51,048

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

GROWGENERATION CORP.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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.

2022 2021 2020

Income (Loss) from operations

Retail $ ( 149,122 ) $ 13,098 $ 9,264

E-Commerce ( 12,589 ) ( 975 ) ( 999 )

Distribution and other ( 6,164 ) 2,879 172

Total $ ( 167,875 ) $ 15,002 $ 8,437

The Company does not evaluate segments by assets as it is not practical and does not inform any of our decision making processes.

The chief operating decision maker in the Company neither reviews nor requests this information.

GROWGENERATION CORP.

1 unchanged sentence

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.

COMMITMENTS AND CONTINGENCIES

Legal Matters

We are involved in lawsuits and claims which arise in the normal course of our business, including the initiation and defense of proceedings related to contract and employment disputes.

In our opinion, these claims individually and in the aggregate are not expected to have a material adverse effect on our financial condition, results of operations or cash flows.

In December 2021, the Company was sued in the U.S.

District Court for the Southern District of Texas related to a Promissory Note & Asset Acquisition Rights Option (“Note & Option”) with TGC Systems, LLC (“Total Grow”).

The Texas case has been dismissed and the parties are currently engaged in arbitration pursuant to the arbitration clause of the Note & Option.

Among other claims, Total Grow alleges that the Company is liable to Total Grow based on promissory estoppel and breach of contract for failing to consummate the acquisition of Total Grow by the Company.

The Company believes that the claims against it are without merit and is vigorously defending against them.

The Company is also counterclaiming for repayment of $ 1,500,000 principal plus interest loaned by the Company to Total Grow pursuant to the Note & Option.

The Company has accrued a reserve of $ 1.3 million against the Note & Option.

There can be no assurance that future developments related to pending claims or claims filed in the future, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material effect on the Company’s financial condition, results of operations or cash flows.

We believe that our assessment of contingencies is reasonable and that the related accruals, in the aggregate, are adequate;

however, there can be no assurance that the final resolution of these matters will not have a material effect on our financial condition, results of operations or cash flows.

Indemnifications

In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions.

As of December 31, 2022, the Company did not have any liabilities associated with indemnities.

In addition, the Company, as permitted under Colorado law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, in each case, as amended to date, indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity.

The duration of these indemnifications varies.

The Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid.

The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable.

No such losses have been recorded to date.

GROWGENERATION CORP.

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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

1 unchanged sentence

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