UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 2017
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 333-207889
GROWGENERATION CORP.
(Exact name of registrant as specified in its charter)
Colorado
(State or Other Jurisdiction of
Incorporation or Organization)
1000 W Mississippi Ave
Denver, Colorado
(Address of Principal Executive Offices)
46-5008129
(I.R.S. Employer
Identification No.)
80223
(Zip Code)
(800) 935-8420
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Not Applicable
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☒
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging Growth Company
☐
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of June 30, 2017: $21,312,812.
As of March 27, 2018, the Company had 19,332,120 shares of its common stock issued and outstanding, par value $0.001 per share.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Signatures
Page
1
5
13
13
13
13
14
17
17
25
F-1
26
26
26
27
31
40
41
41
42
45
PART I
Forward-Looking Information
This Annual Report of GrowGeneration Corp. on Form 10-K contains forward-looking statements, particularly those identified with the words, “anticipates,” “believes,”
“expects,” “plans,” “intends,” “objectives,” and similar expressions. These statements reflect management’s best judgment based on factors known at the time of such
statements. The reader may find discussions containing such forward-looking statements in the material set forth under “Management’s Discussion and Analysis and Plan of
Operations,” generally, and specifically therein under the captions “Liquidity and Capital Resources” as well as elsewhere in this Annual Report on Form 10-K. Actual events
or results may differ materially from those discussed herein. The forward-looking statements specified in the following information have been compiled by our management on
the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no
representation, guaranty, or warranty is to be inferred from those forward-looking statements. The assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances.
As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives
require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly,
no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking
statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Unless the context otherwise requires, the terms “we”, “our”, “ours” “us” and “GrowGeneration”, refer to GrowGeneration Corp. and its subsidiaries, including
GrowGeneration Pueblo Corp, GrowGeneration California Corp., Grow Generation Nevada Corp., GrowGeneration Washington Corp., GrowGeneration Rhode Island Corp.,
GGen Distribution Corp. and GrowGeneration Management Corp., on a combined basis.
ITEM 1. BUSINESS
Background
GrowGeneration Corp. (“GrowGeneration” or the “Company”) was incorporated in Colorado in 2014 in order to acquire 4 existing hydroponic supply stores. As of December
31, 2017, we have grown into a chain of thirteen (13) retail hydroponic/gardening stores, with eight (8) located in the state of Colorado, two (2) in the state of California, two (2)
in the state of Nevada and one (1) in Washington. In January 2018, we acquired two (2) additional stores located in Warwick, RI and Arcata, CA, respectively. The
hydroponic/gardening industry is fragmented, in which typical retail stores are small family owned businesses, usually consisting of a single location. This is particularly true in
Colorado, California, Nevada, Rhode Island and Washington where we currently operate. We intend to open or acquire additional retail stores to increase and expand our
footprint in these states.
Products
GrowGeneration stores offer essential supplies to the hydroponic and gardening industry, including medium (i.e., farming soil), industry-leading hydroponic equipment, power-
efficient lighting, plant nutrients, and thousands of additional products used by professional growers and specialty cultivation operations. We offer our products through our
retail stores and e-commerce website. GrowGeneration is also actively seeking the establishment of a brand of private labeled products, which will be sold through
GrowGeneration outlets.
1
Markets
GrowGeneration serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines.
Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments.
This enables them to produce crops at higher yields without having to compromise quality, regardless of the season or weather and drought conditions.
Our target market segments include home growers of organic vegetable and fruit growers (small farms, home garden growers, restaurants growers, farmer markets), the Do-it
Yourselfers (home flower and plant growers) and mass market and growers in the cannabis related market.
Indoor growing techniques have primarily been used to cultivate plant-based medicines. Plant-based medicines often require high-degree of regulation and controls including
government compliance, security, and crop consistency, making indoor growing techniques a preferred method. Cultivators of plant-based medicines often make a significant
investment to design and build-out their facilities. They look to work with companies such as GrowGeneration that understand their specific needs and can help mitigate risks
that could jeopardize their crops. Plant-based medicines are believed to be among the fastest-growing market in the U.S. and several industry pundits believe that plant-based
medicines may even displace prescription pain medication by providing patients with a safer, more affordable alternative.
Indoor growing techniques, however, are not limited to plant-based medicines. Vertical farms producing organic fruits and vegetables are beginning to emerge in the market due
to a rising shortage of farmland, and environmental vulnerabilities including drought, other severe weather conditions and insect pests. Indoor growing techniques enable
cultivators to grow crops all-year-round in urban areas and take up less ground while minimizing environmental risks. Indoor growing techniques typically require a more
significant upfront investment to design and build-out these facilities than traditional farmlands. If new innovations lower the costs for indoor growing, and the costs to operate
traditional farmlands continue to rise, then indoor growing techniques may be a compelling alternative for the broader agricultural industry.
Research and Development
The company has not incurred any research and development expenses during the period covered by this report.
Customers and Suppliers
Our key customers vary by state and are expected to be more defined as the Company moves from its retail walk-in purchasing sales strategy to serving cultivation facilities
directly and under predictable purchasing activity. Currently, none of our customers accounted for more than 5% of our sales in 2017.
Our key suppliers include distributors such as HydroFarm, BWGS and Sunlight Supply to product specific suppliers such as Emerald Harvest, General Hydroponics and Can
Fan USA. All the products purchased and resold are applicable to indoor and outdoor growing for organics, greens, and plant-based medicines. As of December 31, 2017, two
suppliers represent 61% of our purchases. The loss of either supplier would not have a material adverse impact on our business, because both suppliers provide the same
products and the Company maintains direct manufacturing agreements with vendors.
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Demand for Products
Demand for indoor and outdoor growing equipment is currently high due to legalization of plant-based medicines, primarily Cannabis, which requires equipment purchases for
build-out and repeat purchases of consumable nutrients needed during the growing period. This demand is projected to continue to increase as a result of laws in 29 states and
the District of Columbia. Continued innovation and more efficient build-out technologies along with larger and consolidated cultivation facilities are expected to further expand
market demand for GrowGeneration products and services. We expect the market to continue to segment into urban farmers serving groups of individuals, community
cultivators, and large-scale cultivation facilities across the states. Each segment will be optimized to different distribution channels that GrowGeneration currently provides. We
are of the opinion that as our volume increases, we will obtain volume discounts on purchasing that should allow us to maximize our revenues and maintain gross margins.
E-Commerce Strategy
The Company has developed its e-commerce website and portal, www.growgeneration.com. Once fully operational, the site will offer for sale hydroponic, specialty and organic
gardening products. Online shoppers will be able to shop from product departments, from nutrients to lighting to hydroponic and greenhouse equipment, delivering an easy and
quick method to find the products that they want to purchase. Our e-commerce site is designed to appeal to the professional grower. Each product listed on the site contains
product descriptions, product reviews and a picture so the customer can make an informed and educated purchase. Our product filters will allow the customer to search by
brand, manufacturer, or by function such as wattage. Designed as an information portal as well as an e-commerce store, the customer will find videos, articles, blogs and other
relevant content, all generated by GrowGeneration’s internal staff, which we call our “Grow Pros”. The GrowGeneration customer are able to shop and order online 24/7 and,
choose to receive products delivered directly to their grow operation, or for pick up at one of the GrowGeneration retail stores. In addition, customers may simply use our site
as a resource and shop with our Grow Pros at one of our retail locations. Google advertising, social media and in store advertising are the primary advertising tools we use to
drive traffic to www.growgeneration.com
Goals and Strategy
Our goal is to become one of the nation's largest providers of equipment and supplies for growing organics, herbs and greens and plant-based medicines. We intend to achieve
our goal by implementing the following strategies:
1. Engage with cultivation facilities and secure exclusive supplier contracts;
2. Own, operate and expand regional retail stores to service and support the operations of professional and home growers;
3. Develop and grow our e-commerce platform;
4. Establish a national sales team;
5. Establish a brand of “house” or white-labeled products which we would sell exclusively;
6. Assemble the most knowledgeable staff and leadership team; and
7. Acquire additional products and services that are essential to our customers and deliver high-margins.
Seasonality
Our business is subject to seasonal influences. Generally, our highest volume of sales occurs in our second and third fiscal quarter, and the lowest volume occurs during our first
or fourth fiscal quarter.
3
Competition
Our key competitors include many local and national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, as well as
online product resellers and large online marketplaces such as Amazon.com and eBay. Our industry, generally referred to “Hydroponic Gardening Stores”, is a highly
fragmented industry with over 1,000 retail outlets throughout the U.S. The industry is highly competitive. We compete with companies that have greater capital resources,
facilities and diversity of product lines. Additionally, if demand for our hydroponic growing equipment continues to grow and if the cannabis industry continues to develop, we
expect many new competitors to enter the market, as there are no significant barriers to retail sales of hydroponic growing equipment. More established hydroponic companies
with much greater financial resources which do not currently compete with us may be able to easily adapt their existing operations to sales of hydroponic growing equipment.
Increased competition may lead to reduced prices and/or margins for products we sell. Our competitors may also introduce new hydroponic growing equipment, manufacturers
may sell equipment direct to consumers, and our distributers could cease sales of product to us.
Notwithstanding the foregoing, we do believe that our pricing, inventory and product availability and overall customer service provide us with the ability to compete in this
marketplace. In addition, as we increase our number of stores and inventory per store, we expect to be able to purchase larger amounts of inventory at lower volume sale prices,
which we expect will enable us to price competitively and deliver the products that our customers are seeking. We also believe, that as we develop the consistency of a national
brand with operations in multiple states, our customers will have the confidence to shop with us.
Based on our knowledge and communication with our suppliers, we do not believe our suppliers sell directly to the retail market or our customers.
Intellectual Property and Proprietary Rights
Our intellectual property consists of our brands and their related trademarks, domain names and websites, customer lists and affiliations, product know-how and technology, and
marketing intangibles. We also hold rights to website addresses related to our business including websites that are actively used in our day-to-day business such as
www.GrowGeneration.com. We own the federally registered trademark for “GrowGeneration”. We also own a federal register trademark “Where the Pros Go to Grow”.
We have a policy of entering into confidentiality and non-disclosure agreements with our employees and some of our vendors and customers as necessary.
Government Regulation
While there is no governmental regulation relating to the sale of hydroponic equipment or soil and nutrients that we sell, there are laws and regulations governing the cultivation
and sale of cannabis and related products. Currently, there are over 29 states plus the District of Columbia that have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. About a dozen other states are considering legislation to similar effect.
As of the date of this report, the policy and regulations of the federal government and its agencies is that cannabis has no medical benefit and a range of activities including
cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of state law. Active enforcement of the
current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers of GrowGeneration to invest in or
buy products from GrowGeneration. Active enforcement of the current federal regulatory position on cannabis may thus directly or indirectly adversely affect GrowGeneration
operations.
Employees
As of the December 31, 2017, we have 50 full time employees and 8 part-time employees. No employees are subject to collective bargaining agreements. We plan to add sales
representatives in all states in which we operate a retail store.
Principal Offices
Our principal offices are located at 1000 W Mississippi Ave., Denver, CO 80223. We lease eight (8) facilities in the State of Colorado, three (3) in the State of California, two
(2) in the State of Nevada, one (1) in the State of Washington and one (1) in the State of Rhode Island for our retail operations. Information relating to our stores is set forth in
the table below:
Colorado
California
Nevada
Washington
Rhode Island
Number of Locations
8
3
2
1
1
4
Square feet
2,000-12,500
2,625-8,000
5,000-8,800
3,200
9,000
Lease Expiration Dates
February 2018 to October 2022
May 2020 to February 2022
November 2021 to February 2022
April 2020
January 2023
ITEM 1A. RISK FACTORS
The risks and uncertainties described below could materially and adversely affect our business, financial condition and results of operations and could cause actual results to
differ materially from our expectations and projections. You should read these Risk Factors in conjunction with "Management’s Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and our Consolidated Financial Statements and related notes in Item 8. There also may be other factors that we cannot anticipate or that
are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations.
We face intense competition that could prohibit us from developing or increasing our customer base and generating revenue.
The industry within which we compete is highly competitive. We compete with companies that have greater capital resources, facilities and diversity of product lines. We
compete in the specialty gardening industry, selling hydroponic and organic nutrients, soils and other gardening related products. Additionally, if demand for our hydroponic
growing equipment and products continues to grow, we expect many new competitors to enter the market, as there are no significant barriers to retail sales of hydroponic
growing equipment and related gardening products. More established gardening companies with much greater financial resources which do not currently compete with us may
be able to easily adapt their existing operations to sales of hydroponic growing equipment. Due to this competition, there is no assurance that we will not encounter difficulties in
generating or increasing revenues and capturing market share. In addition, increased competition may lead to reduced prices and/or margins for products we sell. Our
competitors may also introduce new hydroponic growing equipment, manufacturers may sell equipment direct to consumers, and our distributers could cease sales of product to
us.
If we need additional capital to fund our operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
If adequate additional financing is not available on reasonable terms, we may not be able to expand our retail or online operations and we may be forced to modify our business
plans accordingly. There is no assurance that additional financing will be available to us. In connection with our growth strategies, we may experience increased capital needs
and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors,
including (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in sales and marketing; and (iv) new store openings
and or acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs. If we cannot obtain additional funding, we may be required to:
(i) limit our expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and
our ability to compete. Moreover, even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that
are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. We cannot give
you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
Our business depends substantially on the continuing efforts of our executive officers and our business may be severely disrupted if we lose their services.
Our future success depends substantially on the continued services of our executive officers, especially our Chief Executive Officer, Darren Lampert, our President, Michael
Salaman, our Chief Operating Officer, Joseph Prinzivalli and our Chief Financial Officer, Monty Lamirato. We do not maintain key man life insurance on any of our executive
officers and directors. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all.
Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers.
5
If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive hydroponics and gardening industry depends in large part upon our ability to attract highly qualified managerial and sales
personnel. In order to induce valuable employees to come and work for us or to remain with us, we intend to provide employees with stock options that vest over time. The
value to employees of stock options that vest over time will be significantly affected by movements in our stock price that we will not be able to control and may at any time be
insufficient to counteract more lucrative offers from other companies. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior,
mid-level, and senior personnel.
In order to increase our sales and marketing infrastructure, we will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As we continue to work to open and/or acquire additional retail store locations, we will need to expand the size of our employee base for managerial, operational, sales,
marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit,
maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day
activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to continue to grow our operation and
compete in the hydroponics industry effectively will depend, in part, on our ability to effectively manage any future growth.
Litigation may adversely affect our business, financial condition and results of operations.
From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole
or may negatively affect our operating results if changes to our business operation are required. The cost to defend such litigation may be significant and may require a
diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether
the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations.
We may not obtain insurance coverage to adequately cover all significant risk exposures.
We will be exposed to liabilities that are unique to the products we provide. We currently maintain property and casualty, automobile, and business interruption insurance and
there can be no assurance that we will acquire or maintain insurance for certain risks, that the amount of our insurance coverage will be adequate to cover all claims or liabilities,
or that we will not be forced to bear substantial costs resulting from risks and uncertainties of business. It is also not possible to obtain insurance to protect against all
operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business,
financial condition and results of operations.
Federal practices could change with respect to providers of equipment potentially usable by participants in the medical cannabis industry, which could adversely impact us.
Cannabis growers utilize various products that we offer for sale. While we are not aware of any threatened or current federal or state law enforcement actions against any retailer
of hydroponic equipment that might be used for cannabis growing or use we have heard that a number of years ago, law enforcement authorities did initiate raids at some retail
stores where operators evidently knew they were selling hydroponic equipment directly to customers who indicated they intended to use it for the cultivation of recreational
cannabis. Those raids took place in a different legal landscape, well before the legalization of medical or recreational cannabis by any state. We are unaware of any threatened
or actual law enforcement activity, ever, against manufacturers or retailers of supplies marketed for usage by participants in the emerging cannabis industry.
6
A theoretical risk exists that our activities could be deemed to be facilitating the selling or distribution of cannabis in violation of the Federal Controlled Substances Act, or to
constitute aiding or abetting, or being an accessory to, a violation of that Act. We believe, however, that such a risk is relatively low. Federal authorities have not focused their
resources on such tangential or secondary violations of the Act, nor have they threatened to do so, with respect to the sale of equipment that might be used by cannabis
gardeners, or with respect to any supplies marketed to participants in the emerging medical cannabis industry. We are unaware of such a broad application of the Controlled
Substances Act by federal authorities, and we believe that such an attempted application would be unprecedented. Even though the Company sells hydroponic and garden
supplies it may encounter difficulty in obtaining bank accounts with financial institutions because we are an ancillary business that service the cannabis industry.
If the federal government were to change its practices or were to expend its resources attacking providers of equipment that could be usable by participants in the medical or
recreational cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products.
Cannabis remains illegal under federal law and a change in federal enforcement practices could significantly and negatively affect our cannabis cultivation and production
business.
State laws legalizing medicinal and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule-I controlled substance
and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that the Federal government has the right to regulate and
criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. While the prior Obama
Administration has effectively stated that it is not an efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state-
designated laws allowing the use and distribution of medical and recreational cannabis, on January 4, 2018, the United States Attorney General announced the rescission of the
Obama Administration’s policy, which indirectly negatively impacted our business.
Continued federal intervention in certain segments of the cannabis industry is disruptive to the industry and may have a negative impact on us.
Our products are sold to growers of various crops, including cannabis. Disruption to the cannabis industry could cause some potential customers to be more reluctant to invest in
growing equipment, including equipment we sell. Currently, 29 states and the District of Columbia allow its citizens to use medical cannabis. Additionally, Alaska, California,
Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington, and the District of Columbia have legalized cannabis for adult recreational use, and additional recreational
measures are expected to be pursued by other states in the future. Continued development of the cannabis industry is dependent upon continued legislative authorization of
cannabis at the state level. Any number of factors could slow or halt progress in this area. Further, progress in the cannabis industry, while encouraging, is not assured. While
there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of cannabis, which
would negatively impact our business.
There can be no assurance that our intended operations will not violate state or federal law.
We have not requested or obtained any opinion of counsel or ruling from any authority to determine if our intended operations are in compliance with or violate any state or
federal laws or whether we are assisting others to violate a state or federal law. In the event that our intended operations are deemed to violate any laws or if we are deemed to
be others to violate a state or federal law, we could have liability that could cause us to modify or cease our operations.
7
Our past private placements were made pursuant to an exemption from registration.
Since 2014, various private placements conducted by the Company were made in reliance upon the so-called "private placement" exemption from registration with the
Securities and Exchange Commission (the “SEC”) provided by Sections 4(a)(2) of the 1933 Securities Act, by Regulation D, Rule 506 adopted there under, and the exemptions
from registration provided by the Blue-Sky laws of states in which our securities are offered. However, reliance upon these exemptions is highly technical and should not be
viewed as a guarantee that such exemptions are indeed available. If for any reason the private placement exemption is not available for past private placements and no other
exemption from registration is found to be available, the sale of the securities in such private placements would be deemed to have been made in violation of the applicable
laws, thus requiring registration of those securities. As a remedy for such a violation, each investor would have the right to rescind its purchase and to have its full investment
returned. If an investor requests return of its investment, it is possible that funds would not be available to us for that purpose, and that liquidation of us may be required. Any
refunds made would reduce funds available to us for our operations. A significant number of requests for rescission would probably leave us without funds sufficient to respond
to such requests or to proceed successfully with its activities.
There are a significant number of shares of common stock eligible for sale, which could depress the market price of such shares.
Our Registration Statement on Form S-1 has registered a total of 4,166,429 shares of our common stock, which includes 2,058,572 shares of common stock being sold by our
shareholders and 2,107,857 shares of common stock underlying the warrants with an exercise price of $0.70 per share, available for sale in the public market. The availability of
such a large number of shares of common stock for sale in the public market could harm the market price of the stock. Further, shares may be offered from time to time in the
open market pursuant to Rule 144, and these sales may have a depressive effect as well.
We are under the obligation to repay our convertible promissory notes upon maturity.
On January 17, 2018, the Company completed a private placement of units of its securities and raised gross proceeds of $9,000,000 from certain accredited investors in the
offering. Each unit consists of (i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase
37,500 shares of Common Stock, at a price of $.01 per share or through cashless exercise. The principal and interest of the promissory notes will be due and payable by the
Company in three years from the date of issuance. Inability to repay the promissory notes on maturity, if the promissory notes are neither converted nor extended, will result in
the financial condition of the Company to be materially adversely affected.
The promissory notes are convertible into shares of the Company’s Common Stock at the holders’ option at $3 per share. If a large number of holders choose to convert their
promissory notes, it may cause substantial dilution on other shareholders’ ownership of the Company’s securities.
If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse
impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.
8
If product liability lawsuits are brought against us, we may incur substantial liabilities.
We face a potential risk of product liability as a result of any of the products that we offer for sale. For example, we may be sued if any product we sell allegedly causes injury
or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in
manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under
state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities. Even successful defense would
require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
●
●
●
●
●
●
●
decreased demand for products that we may offer for sale;
injury to our reputation;
costs to defend the related litigation;
a diversion of management's time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions; and
a decline in our stock price.
We do not maintain any product liability insurance. Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential
product liability claims could prevent or inhibit the commercialization of products we develop. e. Even if we obtain product liability insurance in the future, we may have to pay
amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to
obtain, sufficient capital to pay such amounts.
We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.
We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing
business. If we acquire businesses with promising markets or products, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully
integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and/or marketing any new products
resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following
any such acquisition, we will achieve the expected synergies to justify the transaction.
Risks Related to Our Common Stock
Our officers and directors will control our company for the foreseeable future, including the outcome of matters requiring stockholder approval.
At of the date hereof, our officers and directors collectively beneficially own approximately 18% of our outstanding shares of Common Stock on a primary basis and 23.44% of
our outstanding shares in Common Stock if they exercise all their options and warrants. Certain of these individuals also have significant control over our business, policies and
affairs as officers or directors of our company. Therefore, you should not invest in reliance on your ability to have any control over our company.
9
An investment in our company should be considered illiquid.
An investment in our company requires a long-term commitment, with no certainty of return. Currently there is only a very limited market for our common stock and we cannot
guarantee that a liquid market for our common stock will develop in the near future. Moreover, we do not expect security analysts of brokerage firms to provide coverage of our
company in the near future. In addition, investment banks may be less likely to agree to underwrite primary or secondary offerings on behalf of our company or its stockholders
in the future than they would if we were to become a public reporting company by means of an initial public offering of common stock. If all or any of the foregoing risks
occur, it would have a material adverse effect on our company.
Limited public market for our common stock currently exists, and an active trading market may not develop or be sustained.
As we are in our early stages, an investment in our company will likely require a long-term commitment, with no certainty of return. The Company was approved to start trading
its common stock on the OTCQB Marketplace as of October 19, 2016, and commenced trading on November 11, 2016. On October 10, 2017, the Company’s common stock
started trading on OTCQX Best Market. There is currently is a limited public market for our common stock and there is no guarantee that any sustained trading market will
develop in the near future or at all. In the absence of an active trading market:
investors may have difficulty buying and selling or obtaining market quotations;
●
● market visibility for shares of our common stock may be limited; and
●
a lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common stock.
The OTCQX Best Market is a relatively unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than NASDAQ or the NYSE American
(formerly NYSE MKT, formerly NYSE AMEX). The market for our Common Stock may be illiquid and you may be unable to dispose of your shares of common stock at
desirable prices or at all. Moreover, there is a risk that our common stock could be delisted from the OTCQX Best Market, in which case it might be listed on the so called
“Pink Sheets”, which is even more illiquid than the OTCQX Best Market
The lack of an active market impairs your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may
also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair
our ability to acquire additional intellectual property assets by using our shares as consideration.
The market price of our common stock may be significantly volatile.
The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:
●
●
●
●
●
actual or anticipated fluctuations in our quarterly or annual operating results;
changes in financial or operational estimates or projections;
conditions in markets generally;
changes in the economic performance or market valuations of companies similar to ours; and
general economic or political conditions in the United States or elsewhere.
The securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.
These market fluctuations may also materially and adversely affect the market price of shares of our common stock.
10
Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less
than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current
price and volume information with respect to transactions in such securities is provided by the exchange or system). The OTCBB and OTCQX Best Market do not meet such
requirements and if the price of our common stock is less than $5.00, our common stock will be deemed penny stocks. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny
stock rules require that prior to effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written
agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for our common stock, and therefore stock holders may have difficulty selling their shares.
FINRA sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the
customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about
the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability
such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that
their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our
share price.
Our shareholders may face significant restrictions on the resale of their shares due to state “blue sky” laws.
Each state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s residents unless the securities are registered in that state or
qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is
sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that
state.
We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those
broker-dealers, if any, who agree to serve as market makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and
on purchasers to buy, our securities. The resale market for our common stock could be limited, as the holders of our common stock may be unable to resell their shares without
the significant expense of state registration or qualification.
The shares of our common stock may experience substantial dilution by exercises of outstanding warrants and options.
As of the date hereof, we had outstanding warrants to purchase an aggregate of 2,319,000, shares of our common stock at a weighted average exercise price of $2.34 per share,
and options to purchase an aggregate of 1,923,000 shares of our common stock (out of which 1,733,498 are vested as of this date) at a weighted average exercise prices of $.79
per share. The 1,733,498 vested options have a weighted average exercise price of $.73 per share (the first $100,000 of options granted to each of our officers and directors may
be deemed to be incentive stock options. The exercise of such outstanding options and warrants will result in substantial dilution of your investment. In addition, you may
experience additional dilution if we issue common stock in the future. Any of such dilution may have adverse effect on the price of our common stock.
11
We are an “emerging growth company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging growth companies,” which could
make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for as long as we continue to be an “emerging growth
company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to “emerging growth
companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on
executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years,
or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as
defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last
business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding
three year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock
less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
We incurred significantly increased costs and devote substantial management time as a result of operating as a public company, particularly after we are no longer deemed
an “emerging growth company.”
As a public company, we incurred significant legal, accounting and other expenses that we did not incur as a private company. For example, we are required to comply with
certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently
implemented by the Securities and Exchange Commission, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate
governance practices. In addition, our management and other personnel need to divert attention from operational and other business matters to devote substantial time to these
public company requirements.
However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We
have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised
accounting standards as other public companies that are not “emerging growth companies.”
After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements
applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act.
We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
There may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may materially harm our company.
Proper systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. As we are a start-up company, we are at the very
early stages of establishing, and we may be unable to effectively establish such systems, especially in light of the fact that we expect to operate as a publicly reporting company.
This would leave us without the ability to reliably assimilate and compile financial information about our company and significantly impair our ability to prevent error and
detect fraud, all of which would have a negative impact on our company from many perspectives.
12
Moreover, we do not expect that disclosure controls or internal control over financial reporting, even if established, will prevent all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems
to prevent error or fraud could materially adversely impact us.
We do not currently intend to pay dividends on our common stock in the foreseeable future, and consequently, your ability to achieve a return on your investment will
depend on appreciation in the price of our common stock.
We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.
Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their
investments. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Upon dissolution of our company, you may not recoup all or any portion of your investment.
In the event of a liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, the proceeds and/or assets of our company remaining after giving
effect to such transaction, and the payment of all of our debts and liabilities will be distributed to the stockholders of common stock on a pro rata basis. There can be no
assurance that we will have available assets to pay to the holders of common stock, or any amounts, upon such a liquidation, dissolution or winding-up of our Company. In this
event, you could lose some or all of your investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Description of Property
Our principal offices are located at 1000 W Mississippi Ave., Denver, CO 80223. We lease eight (8) facilities in the State of Colorado, three (3) in the State of California, two
(2) in the State of Nevada, one (1) in the State of Washington and one (1) in the State of Rhode Island for our retail operations. Information relating to our stores is set forth in
the table below:
State
Colorado
California
Nevada
Washington
Rhode Island
Number of Locations
8
3
2
1
1
Square feet
2,000-12,500
2,625-8,000
5,000-8,800
3,200
9,000
ITEM 3. LEGAL PROCEEDINGS
Lease Expiration Dates
February 2018 to October 2022
May 2020 to February 2022
November 2021 to February 2022
April 2020
January 2023
There are no current, past, pending or threatened legal proceedings or administrative actions either by or against the issuer that could have a material effect on the issuer’s
business, financial condition, or operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET INFORMATION
We received approval from the OTCQB Market to trade our common stock, par value $.001 per share (the “Common Stock”) under the ticker symbol of “GRWG” as of
October 19, 2016, and, commenced trading on November 11, 2016. On October 10, 2017, the Common Stock started trading on OTCQX Best Market. There is currently
limited trading volume for our Common Stock and there is no guarantee that any sustained trading market will develop in the future.
The following table sets forth, for each quarter from November 11, 2016 to December 31, 2017, the reported high and low bid prices of our Common Stock.
Quarter Ended
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
High Bid
Low Bid
$
$
$
$
$
4.23 $
2.13 $
2.35 $
2.60 $
3.43 $
1.60
1.50
1.73
1.50
1.50
Future sales of substantial amounts of our shares in the public market could adversely affect market prices prevailing from time to time and could impair our ability to raise
capital through the sale of our equity securities.
HOLDERS
The approximate number of stockholders of record as of December 31, 2017 is 101. The number of stockholders of record does not include beneficial owners of our Common
Stock, whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
DIVIDEND POLICY
We have never paid any cash dividends on our Common Stock. We anticipate that we will retain funds and future earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of
our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In
addition, the terms of any future debt or credit financings may preclude us from paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES
2015 Private Placements
In April 2015, the Company raised $180,000 from the sale of 300,000 shares of its Common Stock to four (4) accredited investors, at a price of $.60 per share. All securities
sold in this private placement were arranged by officers and directors and no commissions or other remuneration was paid to any person in connection with such sales. The
Company used the proceeds raised in this offering for inventory purchases and working capital.
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On March 12, 2015 the Company entered into an agreement with Cavu Securities LLC, a FINRA Member broker dealer (“Cavu”), pursuant to which the Company engaged
Cavu on a non-exclusive basis to act as its lead placement agent for the sale of up to $4,200,000 of our units. Each unit was offered at a price of $.70 per unit. Each unit
consisted of (i) one share of Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an exercise price of $0.70 per share. The units were offered
and sold on a “best-effort” basis. On October 30, 2015, the Company closed the private placement with a total of 2,465,001 units sold and realized gross proceeds of
$1,725,501. The Company paid Cavu total compensation for its services of (i) $73,295 in commissions; (ii) five-year warrants to purchase 142,800 shares of Common Stock, at
an exercise price equal to $0.70 per share; and (iii) 77,833 shares of Common Stock.
2016 Private Placements
On April 29, 2016, the Company completed a private placement to which it sold 890,714 units to 10 accredited investors at a price of $.70 per unit, with each unit consisting of
one share of common stock and one warrant to purchase one share of Common Stock at an exercise price of $.70 per share. The warrants have a five-year life for gross
proceeds of $623,500. We paid Cavu, our placement agent, a total compensation for its services of (i) five-year warrants to purchase 50,000 shares of our Common Stock, at an
exercise price equal to $0.70 per share; and (ii) 50,000 shares of our Common Stock.
On October 6, 2016, the Company completed a private placement of a total of 1,000,000 units of its securities sold to 8 accredited investors at a price of $0.70 per unit. Each
unit consists of one share of Common Stock and one 5-year warrant to purchase one share of Common Stock at an exercise price of $0.70 per share. The Company raised an
aggregate of $700,000 gross proceeds in the offering. The Company agreed to pay Cavu a cash fee of $22,050 and five-year warrants to purchase 31,500 shares of Common
Stock, at an exercise price equal to $0.70 per share, on proceeds of $315,000 raised by Cavu in connection with this offering.
2017 Private Placements
On March 10, 2017, the Company completed a private placement of a total of 825,000 units of its securities to 4 accredited investors. Each unit consists of (i) one share of the
Company’s Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an exercise price of $2.75 per share. The Company raised an aggregate of
$1,650,000 gross proceeds in the offering.
On May 16, 2017, the Company completed a private placement of a total of 1,000,000 units of its securities to 27 accredited investors through GVC Capital LLC (“GVC
Capital”) as its placement agent. Each unit consists of (i) one share of the Company’s Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an
exercise price of $2.75 per share. The Company raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital total compensation for its
services, (i) for a price of $100, 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75 per share, (ii) a cash fee of
$150,000, (iii) a non-accountable expense allowance of $60,000, and (iv) a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000
warrants (not including 250,000 warrants issued to one investor) when they are exercised.
2018 Private Placement
On January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000 per unit. Each unit consists of (i) a .1%
unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of Common Stock, at a price
of $.01 per share or through cashless exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering.
15
Stock Options and Stock Awards
From inception to December 31, 2017, we have granted stock options under our 2014 Equity Compensation Plan to purchase an aggregate of 2,176,500 shares at exercise prices
ranging from $0.60 to $3.35 per share. Of the total options granted as of December 31, 2017, 50,000 have been exercised and 43,000 have been forfeited, resulting in 2,083,500
options outstanding. In addition, as of December 31, 2017, 331,500 stock awards have been issued under our 2014 Equity Compensation Plan.
Securities Act Exemptions
We deemed all of the above offers, sales and issuances of our shares of Common Stock and warrants to be exempt from registration under the Securities Act in reliance on
Section 4(a)(2) of the Securities Act, including Regulation D and/or Rule 506 promulgated thereunder, relative to transactions by an issuer not involving a public offering. All
purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they were accredited investors and were acquiring the shares for
investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the
securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale
must be made pursuant to a registration statement or an available exemption from such registration.
We deemed the grants of stock options and issuances of Common Stock upon exercise of such options described above under “Stock Options” which were issued prior to July
15, 2016 to be exempt from registration under the Securities Act in reliance on Rule 701 of the Securities Act as offers and sales of securities under compensatory benefit plans
and contracts relating to compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had
adequate access, through employment, business or other relationships, to information about us. On July 10, 2017, we filed a Registration Statement on Form S-8 (the “Form S-
8”) to register an aggregate of 2,500,000 shares of common stock issuable under our 2014 Equity Compensation Plan. The shares of Common Stock underlying the options and
shares of Common Stock issued after July 10, 2017 are deemed registered under the Form S-8.
PENNY STOCK REGULATION
Shares of our Common Stock is subject to rules adopted the SEC that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks are
generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in those securities is provided by the exchange or system). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the SEC, which contains the
following:
●
●
●
●
●
●
a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;
a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other
requirements of securities’ laws;
a brief, clear, narrative description of a dealer market, including “bid” and “ask” prices for penny stocks and the significance of the spread between the “bid” and “ask”
price;
a toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and
such other information and is in such form (including language, type, size and format), as the SEC shall require by rule or regulation.
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Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following:
the bid and offer quotations for the penny stock;
the compensation of the broker-dealer and its salesperson in the transaction;
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
●
●
●
● monthly account statements showing the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a
written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Holders of shares of our Common Stock may have difficulty
selling those shares because our Common Stock will probably be subject to the penny stock rules.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the
other financial information included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report,
particularly those under "Risk Factors." Dollars in tabular format are presented in thousands, except per share data, or otherwise indicated.
OVERVIEW
GrowGeneration’s mission is to become one of the largest retail hydroponic and organic specialty gardening retail outlets in the industry. Today, GrowGeneration owns and
operates a chain of fifteen (15) retail hydroponic/gardening stores, with eight (8) located in the state of Colorado, three (3) in the state of California, two (2) in the state of
Nevada, one (1) in the state of Washington and one (1) in the state of Rhode Island. Our plan is to own and operate hydroponic/gardening stores throughout the United States.
Our primary strategic plan is to grow by acquisition of hydroponic/garden stores and rely on organic growth. As noted in Footnote 15 to our consolidated financial statements we
acquired two hydroponic/gardening stores in January 2018. In addition, we closed on a private placement in January 2018 that provides us additional capital to continue our
acquisition strategy.
Our stores sell thousands of products, such as organic nutrients and soils, advanced lighting technology, state of the art hydroponic and aquaponic equipment, and other products
needed to grow indoors and outdoors. Our strategy is to target two distinct verticals; namely (i) commercial growers, and (ii) smaller growers who require a local store to fulfill
their daily and weekly growing needs.
GrowGeneration serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines.
Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments.
This enables them to produce crops at higher yields without having to compromise quality, regardless of the season or weather and drought conditions.
Our target market segments include the commercial growers in the cannabis market, the home cannabis grower and to businesses and individuals who grow organically grown
herbs and leafy green vegetables.
17
Sales at our same stores have grown since we organized the business. Our growth has been fueled by frequent and higher dollar transactions from commercial growers,
individual home growers and gardeners who grow their own organic foods. We expect to continue to experience significant growth over the next few years, primarily from
existing and new stores that we open or acquire. Our growth is likely to come from four distinct channels: establishing new stores in high-value markets, internal growths at
existing stores, acquiring existing stores with strong customer bases and strong operating histories and the creation of a business to business e-commerce portal at
www.GrowGeneration.com.
On March 1, 2016, we signed a 3-year lease for 4,498 square feet, located in Denver, Colorado.
On July 15, 2016, the Company entered into a new lease agreement for its Canon City, Colorado location. The Canon City Store completed its move to its new location on July
25, 2016. The new store is approximately 4,427 square feet.
On July 19, 2016 the Company entered into a 2-year lease agreement for its tenth retail store in Fairplay, Colorado. The store began operations in Fairplay, Colorado on August
1, 2016. In December 2016, the lease was terminated, and the Company consolidated all the operations and business of the store in Fairplay, Colorado into the store in Conifer,
Colorado.
On September 27, 2016, the Company entered into a commercial lease to rent certain premises located in Castle Rock, Colorado. This store commenced operations on October
1, 2016 but the store was closed in August 2017 because the store was under-performing.
On October 6, 2016, the Company closed on the 2106 private placement, pursuant to which it sold 1,000,000 units to 8 accredited investors at a price of $.70 per unit, with each
unit consisting of one share of Common Stock and one warrant to purchase one share of Common Stock at an exercise price of $.70 per share. The warrants have a five-year
life for gross proceeds of $700,000.
On October 19, 2016, the Company was approved to start trading its Common Stock on the OTCQB Marketplace under the ticker symbol of “GRWG”.
The Company entered into a new lease for its new store in Las Vegas, Nevada which commenced on November 15, 2016 and continues through February 28, 2022.
On January 30, 2017, the Company entered into a commercial lease to rent certain premises located in Trinidad, Colorado, to be effective from March 1, 2017 to February 28,
2022. This 7,383 square feet premises is used by the Company to open a new store to replace and consolidate its existing 3,000 square feet store in Trinidad as part of the
Company’s expansion plan.
On February 1, 2017, the Company entered into a commercial lease to rent certain 12,837 square feet premises located in Denver, Colorado, to be effective from February 1,
2017 to February 1, 2022. The premises is used by the Company for a new retail store, warehouse space and as the Company’s principal offices.
On February 1, 2017, the Company’s wholly-owned subsidiary, GrowGeneration California Corp. (“GrowGeneration California”) entered into an asset purchase agreement with
an individual to purchase certain assets in connection with a retail hydroponic and garden supply business located in Santa Rosa, CA. The assets subject to the sale under the
asset purchase agreement included inventories, fixed assets, tangible personal property, intangible personal property, receivables and a custom list. In addition to the cash
consideration for the purchase of such assets, GrowGeneration California also agreed to make certain cash payments and 25,000 shares of Common Stock of the Company to
the seller contingent on the achievement of revenue goals by the business in 2017, 2018 and 2019. The closing of the asset purchase took place on February 8, 2017. The
contingent consideration for achieving certain revenue goals in 2017 were achieved and the cash payment of $10,000 and the issuance of 25,000 shares of Common Stock were
issued to the seller.
18
In connection with the purchase of the assets, GrowGeneration California also entered into a commercial lease, effective from March 1, 2017 to February 28, 2022, to rent the
premises where the former business was located. In connection therewith, we closed our existing store in Santa Rosa and consolidated those operations with the
GrowGeneration California operations opened at the new location.
On March 10, 2017, the Company closed a private placement of a total of 825,000 units of the Company’s securities to 4 accredited investors. Each unit consists of (i) one share
of the Company’s Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an exercise price of $2.75 per share. The Company raised an
aggregate of $1,650,000 gross proceeds in the offering.
On April 25, 2017, the Company entered into a commercial lease through GrowGeneration California to rent certain premises located in San Bernardino, California, to be
effective from May 1, 2017 to May 1, 2020. The premises is used by the Company to operate as a new store.
On May 16, 2017, the Company closed a private placement of a total of 1,000,000 units of its securities to 27 accredited investors through GVC Capital LLC (“GVC Capital”)
as its placement agent. Each unit consists of (i) one share of the Company’s Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an exercise
price of $2.75 per share. The Company raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital total compensation for its services, (i)
for a price of $100, 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75 per share, (ii) a cash fee of $150,000,
(iii) a non-accountable expense allowance of $60,000, and (iv) a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants
(not including 250,000 warrants issued to one investor) when they are exercised.
On August 15, 2017, the Company entered into a commercial lease to rent certain premises located in Boulder, Colorado, to be effective from September 1, 2017 to August 31,
2019 and opened a new store.
On September 19, 2017, the Company entered into a commercial lease, effective from October 1, 2017 to November 30, 2021, to rent certain office and warehouse space
located in North Las Vegas, Nevada, to open its fourteenth store.
Effective as of October 10, 2017, the Company’s Common Stock started trading on OTCQX Best Market.
On October 25, 2017, the Company entered into an asset purchase agreement through GrowGeneration California to purchase all of the assets of a retail hydroponic store,
Humboldt Depot, located in Arcata, CA. The closing of the asset purchase took place on January 30, 2018. In connection with the purchase of the assets, the Company also
entered into two commercial leases, to be effective from February 1, 2018 to January 31, 2021, to rent the premises where the store is located.
On December 22, 2017, the Company entered into an asset purchase agreement to purchase all of the assets of a retail hydroponic store, East Coast Hydroponic Warehouse,
located in Warwick, RI. The closing of the asset purchase took place on January 23, 2018. In connection with the purchase of the assets, the Company also entered into a
commercial lease, to be effective from January 24, 2018 to January 23, 2023, to rent the premises where the store is located.
Effective as of December 31, 2017, we consolidated our store located in Denver north with our Denver south store and warehouse facility we leased on February 1, 2017.
On January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000 per unit. Each unit consists of (i) a .1%
unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of Common Stock, at a price
of $.01 per share or through cashless exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering.
19
RESULTS OF OPERATIONS
The following table sets forth information from our statements of operations for the years ended December 31, 2017 and 2016:
Sales
Cost of Sales
Gross profit
Operating expenses
Loss from operations
Other income (expense)
Net loss
Revenue
For the Year Ended
December 31,
2017
2016
Year to Year Comparison
Increase/
(decrease)
Percentage
Change
$
14,363,886 $
11,094,331
7,980,471 $
5,776,194
6,383,415
5,318,137
3,269,555
2,204,277
1,065,278
6,120,068
2,630,270
3,489,798
(2,850,513)
(425,993)
(2,424,520)
307,931
(5,251)
313,182
80%
92%
48%
133%
(569%)
$
(2,542,582)
(431,244) $
(12,111,338)
(490%)
Net revenue for the year ended December 31, 2017 were approximately $14.4 million, compared to approximately $8 million for the year ended December 31, 2016, an
increase of $6.4 million, or 80%. The increase in revenues was not only due to an increase in same store sales, as noted in the table below, but also due to the addition of 5 retail
stores in 2017 for which there were no sales for the year ended December 31, 2016 and one retail store which was open for all of 2017 but only for a portion of 2016. Sales in
these stores for the year ended December 31, 2017 were approximately $5.6 million compared to approximately $1.1 million for the year ended December 31, 2016. The
Company also had store closures and store consolidations in early 2017 that had sales of approximately $117,777 for the year ended December 31, 2017 and approximately
$456,746 for the year ended December 31, 2016.
In October 2017, our Santa Rosa store was forced to close for 17 days due to wildfires in the Santa Rosa area. We estimate that the Company’s loss of revenue for that period
was approximately $120,000. In addition, revenue subsequent to when the store reopened on October 26, 2017, were lower than the months prior to the fire by approximately
$100,000 a month.
As noted above, the Company had the same 7 stores opened for the entire year ended December 31, 2017 and 2016. These same stores generated $8.6 million in sales for the
year ended December 31, 2017, compared to $6.4 million in sales for the same period ended December 31, 2016, an increase of 35%.
Net revenue
20
Year ended
December 31,
2017
7 Same Stores
Year ended
December 31,
2016
Variance
$
8,592,898
$
6,377,595 $
2,215,303
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2017 increased approximately $5.3 million, to $11.1 million, an increase of 92%, as compared to $5.8 million for the year
ended December 31, 2016. The increase in cost of goods sold was primarily due to the 80% increase in sales comparing the year ended December 31, 2016 to 2017.
Gross profit was $3.3 million for the year ended December 31, 2017, as compared to $2.2 million for the year ended December 31, 2016, an increase of approximately $1.1
million or 48%. Gross profit as a percentage of sales was 23% for the year ended December 31, 2017, compared to 28% for the year ended December 31, 2016. The decrease in
the gross profit percentage is partially due to the opening of a new stores in Las Vegas, NV on January 2017, San Bernardino, CA and Seattle, WA in mid-May 2017 and
Boulder, CO in September 2017 and the initial product discounting to attract new customers to that location, as well the increase in the number of commercial accounts which
have lower margins than the retail customer. The primary reason for the reduction in the gross margin % was a non-cash write of inventory of approximately $463,000 in the
fourth quarter of 2017 whose impact was to reduce the gross margin % by 3.4%. The inventory write-off consists of obsolete inventory as part of the purchase price of stores
acquired and believes that this write-off is one-time event.
Operating Expenses
Operating expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $3.0 million for the
year ended December 31, 2017 and approximately $1.5 for the year ended December 31, 2016, an increase of approximately $1.5 million or 96%. The increase in store
operating cost was due to addition of five locations that were not open in 2016. Store operating costs as a percentage of sales were 21% for the year ended December 31, 2017,
compared to 19% for the year ended December 31, 2016. A previously noted above, we opened five locations in 2017 that were not open at all in 2016 and as such, store
operating costs will be higher as the stores ramp up in sales which can take several months. Corporate overhead is comprised of, share based compensation, depreciation and
amortization, general and administrative costs and corporate salaries and related expenses and were approximately $3.2 for the year ended December 31, 2017, compared to
approximately $1.1 million for the year ended December 31, 2016. The increase in salaries and related expense from 2016 to 2017 was due to the increase in corporate staff,
primarily, accounting and finance, inventory management, sales and information technology, to support both current and future operations and to increase outside sales.
Corporate salaries as a percentage of sales were 6.3% for the year ended December 31, 2017 and 5.8% for the year ended December 31, 2016. The slight increase in this
percentage is because corporate staff costs do not rise directly commensurate with the increase in revenues. In addition, current corporate staff levels will not rise commensurate
with increase in revenues in the future and the percentage of salaries to sales will decline. General and administrative expenses, comprised mainly of advertising and promotions,
travel & entertainment, professional fees and insurance, were approximately $1 million for the year ended December 31, 2017, and approximately $386,000 for the year ended
December 31, 2016 with a majority of the increase in advertising and promotion and travel and entertainment. General and administrative costs as a percentage of revenue was
7.1% for the year ended December 31, 2017 compared to 4.8% for the year ended December 31, 2016.
The slight increase in the percentage comparing 2016 to 2017 was primarily due to an increase in advertising and promotion expenses from approximately $108,000 in 2016 to
approximately $265,000 for 2017, which was mainly due to new store promotional costs in 2017 and increase in professional fees from approximately $58,000 for the year
ended December 31, 2016 to approximately $630,000 for the year ended December 31, 2017. Professional fees for 2017 included $184,000 in noncash share-based
compensation. Corporate overhead includes non-cash expenses, consisting primarily of depreciation and share-based compensation, which was approximately $1.1 million for
the year ended December 31, 2017, compared to approximately $219,000 for the year ended December 31, 2016. Corporate overhead costs were 22% of revenue for the year
ended December 31, 2017, compare to 14% for the year ended December 31, 2016, due to the reason noted above.
21
Net Income (Loss)
The net loss for the year ended December 31, 2017 was approximately $2.5 million, compared to approximately $431,000 for the year ended December 31, 2016, an increase in
the net loss of $2.1 million. The increase in the net loss was primarily due to 1) an increase in non-cash shares-based compensation of approximately $636,000, 2) increases in
other operating costs such as general and administrative costs and salaries, 3) the opening of our operations in Denver and Boulder, CO, Las Vegas and Las Vegas North, NV,
and San Bernardino, CA, 4) costs related to the Seattle Hydro purchase and pre-opening store costs, and 5) a decrease in the gross profit percentage as noted above, offset
somewhat by the increase on gross profit.
Operating Activities
Net cash used in operating activities for the year ended December 31, 2017 was $3,406,175 compared to $1,419,210 for the year ended December 31, 2016. Cash provided by
operating activities is driven by our net loss and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include
depreciation, amortization of intangible assets, share based compensation expense and changes in valuation allowances. Non-cash adjustment totaled $1,353,141 and $307,821
for the year ended December 31, 2017 and 2016, respectively, so non-cash adjustments had a greater impact on net cash provided by operating activities for the year ended
December 31, 2017 than the same period in 2016. The net cash used in operating activities was primarily related to the increase in the net loss of approximately $2.1 million, an
increase in inventory of $2,084,551, an increase in accounts receivable of $312,333, an increase in prepaids, primarily vendor prepaids, of $551,718, offset by an increase in
accounts payable and other current liabilities of $731,868. The increase in inventory and a corresponding increase in trade payables was attributable to both and increase in
revenues and an increase in the number of operating stores between December 31, 2016 and December 31, 2017.
Net cash used in operating activities for the year ended December 31, 2016 was $1,419,210. This amount was primarily related to increases of inventory of $1,256,799, accounts
receivable of $395,208, partially offset by an increase in accounts payable and other current liabilities of $386,786. The increase in inventory and a corresponding increase in
trade payables was attributable to both an increase in revenues and an increase in the number of operating stores between December 31, 2015 and December 31, 2016.
Net cash used in investing activities was $1,179,008 for the year ended December 31, 2017 and $264,140 for the year ended December 31, 2016. The increase in 2017 was due
to acquired intangibles related to the Seattle Hydro purchase in May 2017 and the purchase of vehicles and store equipment to new support store operations. Between January 1,
2017 and December 31, 2017, the Company opened 5 new locations.
Net cash provided by financing activities for the year ended December 31, 2017 was approximately $5.2 million and represented proceeds from the sale of Common Stock, net
of offering costs, of $3.3 million and proceeds from the exercise of warrants of approximately $1.9 million. Net cash provided by financing activities for the year ended
December 31, 2016 was approximately $1.6 million and was primarily from proceeds from the sales of Common Stock and exercise of warrants.
22
Use of Non-GAAP Financial Information
The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful
supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures
for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be
different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net
income or net income per share prepared in accordance with generally accepted accounting principles.
Set forth below is a reconciliation of Adjusted EBITDA to net income (loss):
Net loss
Interest
Depreciation and Amortization
EBITDA
Inventory write-offs
Share based compensation (option comp, warrant comp, stock issued for services)
Adjusted EBITDA
23
Year ended
$
December 31,
2017
(2,542,582) $
15,339
151,561
(2,375,682)
201,170
1,077,932
December 31,
2016
(431,244)
5,251
52,962
(373,031)
108,124
219,333
$
(1,096,580) $
(45,575)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2017, we had working capital of approximately $5.6 million, compared to working capital of approximately $2.8 million as of December 31, 2016, an
increase of approximately $2.8 million. The increase in working capital from December 31, 2016 to December 31, 2017 was due primarily to the proceeds from the sale of
Common Stock and exercise of warrants. At December 31, 2017, we had cash and cash equivalents of approximately $1.2 million. We believe that existing cash and cash
equivalents along with additional financing we closed on in January 2018 are sufficient to fund existing operations for the next twelve months.
We anticipate that we will need additional financing in the future to continue to acquire and open new stores. To date we have financed our operations through the issuance of
the sale of Common Stock, warrants and convertible debentures.
Financing Activities
2017 Private Placements
On March 10, 2017, the Company closed a private placement of a total of 825,000 units of its securities to 4 accredited investors. Each unit consists of (i) one share of the
Company’s Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an exercise price of $2.75 per share. The Company raised an aggregate of
$1,650,000 gross proceeds in the offering.
On May 15, 2017, the Company closed a private placement of a total of 1,000,000 units of its securities through GVC Capital LLC (“GVC Capital”) as its placement agent.
Each unit consists of (i) one share of the Company’s Common Stock and (ii) one 5-year warrant to purchase one share of Common Stock at an exercise price of $2.75 per share.
The Company raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital a total compensation for its services of (i) for a price of $100
5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75 per share, (ii) a cash fee of $150,000, (iii) a non-
accountable expense allowance of $60,000, and (iv) a warrant exercise fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants (not
including the 250,000 warrants issued to Merida Capital Partners, LP) when they are exercised.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect
on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue
Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue
accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of
much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance was effective for annual reporting periods
beginning on or after December 15, 2016, and interim periods within those annual periods. On July 9, 2015, the FASB approved a one-year delay of the effective date. The
Company will now adopt the new provisions of this accounting standard at the beginning of fiscal year 2018.
24
In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at
the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on
inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. This update was adopted by the Company in the first
quarter of fiscal year 2017. There was no material impact on the Company's consolidated financial statements as a result of the adoption of this accounting standard.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance eliminates the requirement to separate deferred
income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those
annual periods. The adoption of this standard did not have a material impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities , which requires
that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value
option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income.
Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for the Company starting in the first quarter of
fiscal 2019. Early adoption is permitted for certain provisions. The Company is in the process of determining the effects the adoption will have on its consolidated financial
statements as well as whether to adopt certain provisions early.
In February 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the
requirement in current GAAP for an entity to use bright-line tests in determining lease classification. ASU 2016-02 is not effective for us until January 1, 2019, with early
adoption permitted. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock
Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial
statements. ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early
adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We adopted this guidance effective
January 2, 2017, and the adoption did not have a material effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate
the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the
excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting
periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are currently
evaluating the impact of the new guidance on our goodwill impairment testing process and consolidated financial statements.
On August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,” which better aligns risk management activities and financial reporting for hedging
relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments
expand and refine hedge accounting for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the effects of the
hedging instrument and the hedged item in the financial statements. The new standard will be effective for the Company as of January 1, 2019. Early adoption is permitted. We
do not believe the adoption of this new standard will have any impact on our consolidated financial statements and footnote disclosures.
Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its
financial condition, results of operations, cash flows or disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for Years Ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
GrowGeneration Corp.
1000 West Mississippi Ave
Denver, CO 80223
We have audited the accompanying consolidated balance sheets of GrowGeneration Corp. and Subsidiaries as of December 31, 2017 and 2016, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GrowGeneration Corp. and Subsidiaries as
of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in
the United States of America.
Certified Public Accountants
Philadelphia, Pennsylvania
March 27, 2018
Member of the American Institute of Certified Public Accountants,
Public Company Accounting Oversight Board, and Pennsylvania Institute of Certified Public Accountants
1608 Walnut Street, Suite 1703, Philadelphia, PA 19103 ● (215) 732-4580 ● Fax (215) 735-4584 ● www.cgcpc.com
F-2
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $97,829 and $47,829 at December 31, 2017 and 2016, respectively
Inventory
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Other accrued liabilities
Payroll and payroll tax liabilities
Customer deposits
Sales tax payable
Current portion of long term debt
Total current liabilities
Long term debt, net of current portion
Total liabilities
Commitments and contingencies
Stockholders’ Equity:
Common stock; $.001 par value; 100,000,000 shares authorized; 16,846,835 and 11,742,834 shares issued and outstanding as
December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2017
December 31,
2016
$
$
$
1,215,265 $
653,568
4,585,341
711,852
7,166,026
1,259,483
53,286
592,500
183,113
9,254,408 $
1,067,857 $
70,029
247,887
92,350
73,220
41,707
1,593,050
82,537
1,675,587
606,644
391,235
2,574,438
35,256
3,607,573
549,854
-
243,000
42,526
4,442,953
643,793
-
77,068
51,672
46,942
23,443
842,918
41,726
884,644
-
-
16,846
11,254,212
(3,692,237)
7,578,821
9,254,408 $
11,743
4,696,221
(1,149,655)
3,558,309
4,442,953
$
The accompanying notes are an integral part of these audited consolidated financial statements.
F-3
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales
Cost of sales
Gross profit
Operating expenses:
Store operations
General and administrative
Share based compensation
Depreciation and amortization
Salaries and related expenses
Total operating expenses
Net loss from operations
Other income (expense):
Gain on settlements
Other income
Other expense
Interest expense
Total non-operating income (expense), net
Net loss
Net loss per shares, basic and diluted
Weighted average shares outstanding, basic and diluted
For the Years Ended
December 31,
2017
2016
$
14,363,886 $
11,094,331
3,269,555
7,980,471
5,776,194
2,204,277
2,963,306
1,022,401
1,077,932
151,561
904,868
6,120,068
1,510,204
385,972
219,333
52,962
461,799
2,630,270
(2,850,513)
(425,993)
322,058
1,633
(421)
(15,339)
307,931
-
-
-
(5,251)
(5,251)
(2,542,582) $
(431,244)
(.18) $
(.05)
14,510,582
9,153,053
$
$
The accompanying notes are an integral part of these audited consolidated financial statements.
F-4
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2017 and 2016
Balances, December 31, 2015
8,967,834
$
8,968 $
2,862,816 $
(718,411) $
2,153,373
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
(Deficit)
Total
Stockholders’
Equity
Sale of Common stock and warrants, net of fees
1,890,714
1,891
996,606
Warrants issued for services
Stock option expense
Stock compensation expense
Common stock issued upon warrant exercise
Stock issued for services
Net loss
132,350
86,333
140
97,860
694
485,306
50
34,950
140,000
694,286
50,000
998,497
132,350
86,333
98,000
486,000
35,000
(431,244)
(431,244)
Balances, December 31, 2016
11,742,834
$
11,743 $
4,696,221 $
(1,149,655) $
3,558,309
Sale of Common stock and warrants, net of fees
1,825,000
1,825
3,289,740
-
3,291,565
Warrants issued for services
Stock option expense
263,986
188,666
Common stock issued upon warrant exercise
2,755,001
2,754
1,925,747
Common stock issued upon exercise of options
Stock issued for services
Net loss
Balances, December 31, 2017
50,000
474,000
50
29,950
474
859,902
16,846,835
$
16,846 $
11,254,212 $
(3,692,237) $
7,578,821
(2,542,582)
(2,542,582)
263,986
188,666
1,928,501
30,000
860,376
The accompanying notes are an integral part of theses audited consolidated financial statements.
F-5
GROWGENERATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization
Provision for doubtful accounts receivable
Inventory valuation reserve
Stock based compensation
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable
Inventory
Prepaid expenses and other assets
Increase (decrease) in:
Accounts payable and accrued liabilities
Customer deposits
Payroll and payroll tax liabilities
Sales taxes payable
Net Cash (Used In) Operating Activities
Cash Flows from Investing Activities:
Purchase of furniture and equipment
Purchase of goodwill and other intangibles
Net Cash (Used In) Investing Activities
Cash Flows from Financing Activities:
Principal payments on long term debt
Proceeds from the sales of common stock and exercise of warrants and options, net of expenses
Net Cash Provided by Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Supplemental Information:
Common stock and warrants issued for prepaid services
Acquisition of vehicles with debt financing
Insurance premium financing
Interest paid during the period
Taxes paid during the period
Years Ended December 31,
2016
2017
$
(2,542,582) $
(431,244)
151,561
50,000
73,648
1,077,932
(312,333)
(2,084,551)
(551,718)
494,093
40,678
170,819
26,278
(3,406,175)
52,962
41,526
(6,000)
219,333
(395,208)
(1,256,799)
(30,566)
295,532
33,262
33,143
24,849
(1,419,210)
(775,101)
(403,907)
(1,179,008)
(264,140)
-
(264,140)
(56,259)
5,250,063
5,193,804
(26,270)
1,616,847
1,590,577
608,621
(92,773)
606,644
699,417
$
1,215,265 $
606,644
416,886
84,968
30,366
15,339 $
- $
$
$
-
-
-
5,251
-
The accompanying notes are an integral part of these audited consolidated financial statements.
F-6
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
1. NATURE OF OPERATIONS
GrowGeneration Corp (the “Company”) was incorporated on March 6, 2014 in Colorado under the name of Easylife Corp and changed its name to GrowGeneration Corp. It
maintains its principal office in Denver, Colorado.
GrowGeneration Corp is engaged in the business of operating retail hydroponic stores through its wholly owned subsidiaries, GrowGeneration Pueblo Corp,
GrowGeneration California Corp, Grow Generation Nevada Corp, GrowGeneration Washington Corp, GrowGeneration Rhode Island Corp, GGen Distribution Corp and
GrowGeneration Management Corp. The company commenced operations with the purchase of 4 retail hydroponic stores in Pueblo and Canon City, Colorado on May 30,
2014. The Company, currently owns and operates a total of 15 stores (13 stores as of December 31, 2017) and is actively engaged in seeking to acquire additional
hydroponic retail stores.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The financial statements are prepared under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 105-10, Generally
Accepted Accounting Principles, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
The consolidated financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated in
consolidation.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported
consolidated net income (loss).
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles. These
estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.
Segment Reporting
Management makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis.
Accordingly, the various products sold are aggregated into one reportable operating segment as under guidance in the Financial Accounting Standards Board (the “FASB”)
Accounting Standards Codification (“ASC or codification”) Topic 280 for segment reporting.
Revenue Recognition
The Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives services. 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
Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete.
F-7
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 earned are initially recorded as a reduction in Merchandise Inventories and a subsequent reduction in Cost of Sales when the related product is sold.
Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company’s cash equivalents are
carried at fair market value and consist primarily of money market funds.
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect from balances outstanding at year-end. Based on the Company's assessment of the credit
history with customers having outstanding balances and current relationships with them. A reserve for uncollectable receivables is established when collection of amounts
due is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, client cash flow difficulties or ongoing service or billing disputes.
Credit is generally extended on a short-term basis thus receivables do not bear interest. At December 31, 2017 and 2016, the Company established an allowance for doubtful
accounts of $97,829 and $47,829, respectively.
Inventory
Inventory consists primarily of gardening supplies and materials and is recorded at the lower of cost (first-in, first-out method) or market. The company periodically reviews
the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to
cost of goods sold.
Property and Equipment
Property and equipment are carried at cost. Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the
improvement, whichever is shorter. Renewals and betterment that materially extend the life of the asset are capitalized. Expenditures for maintenance and repairs are
charged against operations. Depreciation of property and equipment is provided on the straight-line method for financial reporting purposes at rates based on the following
estimated useful lives:
Vehicle
Furniture and fixtures
Computers and equipment
Leasehold improvements
Estimated Lives
5 years
5-7 years
3-5 years
10 years
F-8
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
The fair value of certain of our financial instruments including cash and cash equivalents, accounts receivable, prepaid assets, employee advances, accounts payable,
customer deposits, payroll and payroll tax liabilities, sales tax payable and notes payable approximate their carrying amounts because of the short-term maturity of these
instruments.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred income taxes for differences
between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to depreciation of property and equipment,
reserve for obsolete inventory and bad debt. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be deductible or
taxable when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized.
The Company adopted the provisions of FASB ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement of
tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. The Company’s tax returns are
subject to tax examinations by U.S. federal and state authorities until respective statute of limitation. Currently, the 2016, 2015, and 2014 tax years are open and subject to
examination by taxing authorities. However, the Company is not currently under audit nor has the Company been contacted by any of the taxing authorities. The Company
does not have any accruals for uncertain tax positions as of December 31, 2016. It is not anticipated that unrecognized tax benefits would significantly increase or decrease
within 12 months of the reporting date.
Advertising
The Company expenses advertising and promotional costs when incurred. Advertising and promotional expenses for the years ended December 31, 2017 and 2016
amounted to $264,632 and $107,744, respectively.
Concentration of Risk
Financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not
collateralized. Our policy is to place our cash and cash equivalents with high quality financial institutions, in order to limit the amount of credit exposure. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000. At December 31, 2017 and 2016, the Company had $750,141 and $8,332,
respectively, in excess of the FDIC insurance limit. The Company generally does not require collateral from its customers, but its credit extension and collection policies
include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. The
Company maintains allowance for potential credit losses.
F-9
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets. The Company accounts for goodwill in accordance with the provisions of FASB
Accounting Standards Update (ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill. In accordance with FASB ASC Topic 350 for
Intangibles – Goodwill and Other, goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential
impairment, at the reporting unit level. The Company’s review for impairment includes an assessment of qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying value, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit
is less than its carrying value, including goodwill, the first step of the two-step quantitative goodwill impairment test is performed, which compares the fair value of the
reporting unit with its carrying amounts, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered
not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, additional procedures must be performed. That additional procedure compares the
implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of
goodwill exceeds its implied fair value. The carrying value of goodwill is tested for impairment annually or more frequently if circumstances indicate that impairment may
have occurred.
Earnings (Loss) Per Share
The Company computes net earnings (loss) per share under Accounting Standards Codification subtopic 260-10, “Earnings Per Share” (“ASC 260-10”). Basic earnings or
loss per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income (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 and share purchase warrants, which assumes that any proceeds received
from the exercise of in-the-money stock options and share purchase warrants, would be used to purchase common shares at the average market price for the period.
Stock Based Compensation
The Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). The Company estimates the
fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as an expense over the requisite service
period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method.
The Black-Scholes option pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the
calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-
free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected life of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based
compensation expense in future periods.
F-10
3.
RECENT ACCOUNTING PRONOUNCEMENTS
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
In May 2014, the FASB issued guidance creating the ASC Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue
Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue
accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of
much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance was effective for annual reporting
periods beginning on or after December 15, 2016, and interim periods within those annual periods. On July 9, 2015, the FASB approved a one-year delay of the effective
date. The Company will now adopt the new provisions of this accounting standard at the beginning of fiscal year 2018.
In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured
at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. This update was adopted by the
Company in the first quarter of fiscal year 2017. There was no material impact on the Company's consolidated financial statements as a result of the adoption of this
accounting standard.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance eliminates the requirement to separate
deferred income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim
periods within those annual periods. The adoption of this standard did not have a material impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities , which
requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when
the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive
income. Additionally, the ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for the Company starting in the
first quarter of fiscal 2019. Early adoption is permitted for certain provisions. The Company is in the process of determining the effects the adoption will have on its
consolidated financial statements as well as whether to adopt certain provisions early.
In February 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the
requirement in current GAAP for an entity to use bright-line tests in determining lease classification. ASU 2016-02 is not effective for us until January 1, 2019, with early
adoption permitted. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock
Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial
statements. ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period.
Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We adopted this guidance
effective January 2, 2017, and the adoption did not have a material effect on our consolidated financial statements.
F-11
3.
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to
calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge
based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for
reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are
currently evaluating the impact of the new guidance on our goodwill impairment testing process and consolidated financial statements.
On August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging,” which better aligns risk management activities and financial reporting for hedging
relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments
expand and refine hedge accounting for both nonfinancial and financial risk components and in some situations better align the recognition and presentation of the effects of
the hedging instrument and the hedged item in the financial statements. The new standard will be effective for the Company as of January 1, 2019. Early adoption is
permitted. We do not believe the adoption of this new standard will have any impact on our consolidated financial statements and footnote disclosures.
Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its
financial condition, results of operations, cash flows or disclosures.
4.
PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2017 and 2016 consists of the following:
Vehicle
Leasehold improvements
Furniture, fixtures and equipment
Accumulated depreciation
Property and equipment, net
Depreciation expense was $150,440 and $52,962 for the years ended December 31, 2017 and 2016, respectively.
F-12
$
December 31,
2017
2016
243,264 $
181,724
1,057,902
1,482,890
(223,407)
102,014
131,411
389.396
622,821
(72,967
$
1,259,483 $
549,854
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
5.
INCOME TAXES
The Company and subsidiaries file a consolidated federal income tax return. The Company’s consolidated provision for income taxes for the years ended December 31,
2017 and 2016 consists of the following:
Income Tax Expense (benefit)
Current federal tax expense
Federal
State
Deferred tax (benefit)
Federal
State
Total
Year Ended
December 31,
2017
Year Ended
December 31,
2016
$
$
$
-0- $
-0-
-0- $
-0-
-0- $
-0-
-0-
-0-
-0-
-0-
The consolidated provision for income taxes for the years ended December 31, 2017 and 2016 differs from that computed by applying federal statutory rates to income
before federal income tax expense, as indicated in the following analysis:
Expected federal tax provision (benefit) at 35% rate
Surtax exemption
Meals and entertainment
Valuation allowance
State income tax
Total income tax
Effective tax rate
F-13
Year Ended
December 31,
2017
Year Ended
December 31,
2016
$
$
(831,200) $
23,700
12,700
(43,300)
838,100
-
$
(150,900)
21,600
6,400
(20,000
142,900
-
0.0%
0.0%
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
5.
INCOME TAXES (Continued)
A summary of deferred tax assets and liabilities as of December 31, 2017 and 2016 is as follows:
Deferred tax assets:
Reserve for inventory obsolescence
Reserve for bad debt
Stock option compensation
Federal tax loss carryforward
State tax loss carryforward
Less valuation allowance
Total Deferred Tax Asset
Deferred tax liabilities:
Accumulated depreciation and amortization
Total deferred tax liabilities
NET DEFERRED TAX
Year Ended Year Ended
December 31,
2017
December 31,
2016
$
41,700 $
34,200
273,500
1,058,000
201,000
(1,398,400)
15,900
16,600
172,800
258,200
39,900
(398,700)
$
210,000 $
104,700
Year Ended Year Ended
December 31,
2017
December 31,
2016
$
$
(210,000)
$
(210,000)
(104,700)
(104,700)
-0- $
-0-
As of December 31, 2017, the Company had approximately $2.5 federal and state net operating loss carryforwards, which results in a Federal and State deferred tax asset of
approximately $1.3 million, expiring in 2034 through 2038.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A
significant piece of objective negative evidence evaluated was the cumulative loss incurred since inception. Such objective evidence limits the ability to consider other
subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2017, a valuation allowance of approximately $1.4 million has been recorded to record only the portion of the deferred
tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable
income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight
may be given to subjective evidence such as our projections for growth.
F-14
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
6.
LONG-TERM DEBT
Long-term debt is as follows:
Long term debt is as follows:
Chrysler Capital, interest ranging from 9.8% and 10.9% per annum, payable in monthly installments of $1,889.59 beginning May
2017 through June 2022, secured by vehicles with a book value of $128,800
$
79,479 $
-
Hitachi Capital, interest at 8.0% per annum, payable in monthly installments of $631.13 beginning September 2015 through August
2019, secured by delivery equipment with a book value of $24,910
11,781
18,133
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
18,641
24,559
December 31, December 31,
2017
2016
RMT Equipment, interest at 10.9% per annum, payable in monthly installments of $1,154.79 beginning June 2016 through October
2018, secured by delivery equipment with a book value of $31,130
Note payable insurance premium financing, interest at 4.74% per annum, payable in 10 installments of $3,441, due January 2018
Less Current Maturities
Total Long-Term Debt
Debt maturities as of December 31, 2017 are as follows:
2018
2019
2020
2020
2021
Interest expense for the years ended December 31, 2017 and 2016 was $15,339 and $5,251, respectively.
F-15
10,916
22,477
3,427
124,244 $
(41,707)
82,537 $
-
65,169
(23,443)
41,726
$
$
$
$
42,201
27,693
24,785
21,715
7,850
124,244
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
7.
SHARE BASED PAYMENTS AND STOCK OPTIONS
On March 6, 2014, the Company’s Board of Directors (the “Board”) approved the 2014 Equity Incentive Plan (“2014 Plan) pursuant to which the Company may grant
incentive, non-statutory options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock or cash awards to
employees, nonemployee members of our Board, consultants and other independent advisors who provide services to the Company. The maximum shares of common stock
which may be issued over the term of the plan shall not exceed 2,500,000 shares. Awards under this plan are made by the Board or a committee designated by the Board.
Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s common
stock which is required to be issued at a price not less than 110% of the fair market value on the day of the grant. Each option is exercisable at such time or times, during
such period and for such numbers of shares shall be determined by the plan administrator. However, no option shall have a term in excess of 5 years from the date of grant.
Total Shares available for issuance pursuant to the 2014 Plan
Options outstanding, December 31 2017
Total options exercised under 2014 Plan
Total shares issued pursuant to the 2014 Plan
Awards available for issuance under the 2014 Plan, December 31, 2017
Expected volatility
Expected dividends
Expected term
Risk-free rate
Options
Outstanding at January 1, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Vested and exercisable at December 31 2016
Outstanding at January 1, 2017
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2017
Vested and exercisable at December 31, 2017
F-16
2017
2,500,000
(2,083,500)
(50,000)
(331,500)
35,000
2017
2016
73.28% -96.92%
None
2.5 years
1.64%-1.70%
141.26%
None
3 years
2.0%
Weighted-
Average
Shares
Exercise Price
1,862,000 $
-
-
-
1,862,000
1,862,000 $
1,862,000 $
306,500 $
(50,000) $
(35,000) $
2,083,500 $
1,926,832 $
.60
-
-
-
.60
.60
.62
1.85
.60
.60
.78
.70
Weighted-
Average
Remaining
Contractual
Term
Weighted-
Average Grant
Date Fair Value
3 years
$
.07
2.26 years
2.26 years
1.74 years
1.59 years
$
$
$
$
$
$
.07
.07
.91
.07
.07
.20
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
7.
SHARE BASED PAYMENTS AND STOCK OPTIONS (Continued)
Share-based payment expense to officers, directors and employees and the years ended December 31, 2017 and 2016 was $730,464 and $184,333, respectively.
Expense related to issuance of shares, options and warrants to consultants for the years ended December 31, 2017 and 2016 was $347,468 and $35,000, respectively.
8.
STOCK PURCHASE WARRANTS
A summary of the status of the Company’s outstanding stock warrants as of December 31, 2017 is as follows:
Weighted
Average
Outstanding January 1, 2016
Granted/issued
Exercised
Forfeited
Outstanding December 31, 2016
Granted/issued
Exercised
Forfeited
Outstanding December 31, 2017
9.
STOCKHOLDERS’ EQUITY
Common Stock
Exercise Price
.70
.70
.70
-0-
.70
2.55
.70
2,607,801 $
2,635,000
(1,357,072)
-0-
3,885,729 $
2,475,000 $
(2,755,001) $
-
3,605,728 $
1.84
The Company’s current Certificate of Incorporation authorizes it to issue 100,000,000 shares of common stock, par value $0.001 per share.
As of December 31, 2017and 2016, there were 16,846,835 and 11,742,834 shares of common stock issued and outstanding, respectively.
During the year ended December 31, 2017, the Company sold 1,825,000 shares of common stock for net proceeds of $3,291,565.
During the year ended December 31, 2017, the Company issued 2,755,001 shares of common stock upon exercise of 2,755,001 warrants resulting in proceeds to the
Company of $1,928,502.
During the year ended December 31, 2017, the Company issued 50,000 shares of common stock upon exercise of 50,000 options resulting in proceeds of $30,000
During the year ended December 31, 2017, the Company issued 194,000 shares of common stock to employees valued at $433,379. The Company also issued 280,000
shares of common stock to consultants valued at $427,000.
F-17
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
10. EARNINGS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted net
loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding plus the number of
common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares. Potentially dilutive securities are excluded from the
calculation when their effect would be antidilutive. For all years presented in the consolidated financial statements, all potentially dilutive securities have been excluded
from the diluted share calculations as they were anti-dilutive as a result of the net losses incurred for the respective years. Accordingly, basic shares equal diluted shares for
all years presented.
Potentially dilutive securities were comprised of the following:
Warrants
Options
Total
11. LEASE COMMITMENTS
December 31,
2017
December 31,
2016
3,605,728
2,083,500
5,689,228
3,885,729
1,870,000
5,755,729
The Company leases its store facilities under operating leases ranging from $900 to $5,600 per month. The following is a schedule of future minimum rental payments
required under the terms of the operating leases as of December 31, 2017:
Year Ending December 31
2018
2019
2020
2021
Thereafter
Amount
710,485
673,449
541,580
448,886
100,920
2,475,320
$
$
Rent expense under all operating leases for the year ended December 31, 2017 and 2016 was $641,408 and $306.115, respectively.
12. VENDOR CONCENTRATIONS
As of December 31, 2017, two suppliers represent 61% of our purchases. Although the Company expects to maintain relationships with these vendors, the loss of either
supplier would not have a material adverse impact on our business, because both suppliers provide the same products.
F-18
13. ACQUISITIONS
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
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. Results of operations are included in the Company’s financial statements from the date of
acquisition. For the acquisitions noted below, the Company used the income approach to determine the fair value of the customer relationships, the relief from royalty
method to determine the fair value of trademarks and the comparison of economic income using the with/without approach to determine the fair value of non-compete
agreements. The Company used Level 3 inputs to determine the fair value of all these intangible assets.
On February 8, 2017, through its wholly-owned subsidiary, GrowGeneration California Corp. (“GrowGeneration California”), the Company purchased certain assets of
Sonoma Hydro, a retail hydroponic and garden supply business located in Santa Rosa, CA.
The assets purchased included inventories, fixed assets, tangible personal property, intangible personal property, receivables and a customer list. In addition to the cash
consideration for the purchase of such assets, GrowGeneration California also agreed to make certain cash payments and 25,000 shares of common stock of the Company to
the Seller contingent on the achievement of revenue goals by the Business in 2017, 2018 and 2019.
The total purchase price including contingent purchase obligation earned by the seller was $641,589. The purchase price was allocated as follows:
Inventory
Furniture and equipment
Goodwill
Total
14. GAIN ON SETTLEMENTS
$
$
272,089
50,000
319,500
641,589
For the year ended December 31, 2017, the Company recorded $322,058 in settlements which were comprised of two events.
In 2017, a fire in northern California resulted in our Santa Rosa store being closed for approximately 10 days. In addition to the loss of revenue, the contents of the store were
damaged due to smoke from the fire. The Company had insurance coverage for both the contents of the store and business interruption. The settlement with our insurance
carrier was $126,278.
In 2017, the Company entered into an asset purchase agreement to acquire the assets of an entity in California. One of the non-executing shareholders of the seller had
various objections to the acquisition and asserted certain rights, claims and demands. The Company became aware that a third party was also interested in acquiring the
target entity. The Company entered into an agreement to assign all its rights, title and interest in its asset purchase agreement to the third part in exchange for a payment of
$75,000 and inventory from the third party valued at approximately $140,000, resulting in a gain on the settlement of approximately $195,000 after deducting costs of
approximately $20,000.
F-19
15. SUBSEQUENT EVENTS
GROWGENERATION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
On January 12, 2018, the Company completed a private placement of a total of 36 units (the “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 under the Securities Act. Each Unit consists of
(i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii) a 3-year warrant entitling the holder to purchase 37,500 shares of the
Company’s common stock, at a price of $.01 per share or through cashless exercise. The Offering was originally effected on a 10 Units Minimum ($2,500,000)/30 Units
Maximum ($7,500,000) basis, with an oversubscription allowance for an additional 4 Units ($1,000,000). The Company subsequently increased the Offering Maximum to a
total of 36 Units or $9,000,000 based upon demand, inclusive of the oversubscription allowance and 4 Unit increase. The Company raised gross proceeds of $9,000,000
from 23 accredited investors in the private placement.
On December 22, 2017, the Company entered into an asset purchase agreement to purchase all of the assets of a retail hydroponic store, East Coast Hydroponic Warehouse,
located in Warwick, RI. The closing of the asset purchase took place on January 23, 2018.
The assets subject to the sale under the asset purchase agreement included inventories, fixed assets, tangible personal property, intangible personal property and contracts.
The Company paid the sellers a total of $1,800,000, of which $1.2 million was in cash and $600,000 in a note payable, and 300,000 shares of common stock of the
Company, valued at $552,000 as consideration for the assets.
On October 25, 2017, the Company entered into an asset purchase agreement through its wholly-owned subsidiary, GrowGeneration California Corp., to purchase all of the
assets of a retail hydroponic store, Humboldt Depot, located in Arcata, CA. The closing of the asset purchase took place on January 30, 2018.
The assets subject to the sale under the asset purchase agreement included inventories, fixed assets, tangible personal property, intangible personal property and contracts.
The Company paid the sellers $895,000 and 100,000 shares of common stock of the Company, valued at $184,000, as consideration for the assets purchased.
F-20
ITEM 9. CHANGES AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that
are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management
to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of
future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and
procedures were effective as of December 31, 2017 to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our
chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
As required by the SEC rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. Our 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 consolidated financial statements
in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated
financial statements.
In making the assessments on the effectiveness of our internal controls over financial reporting as of December 31, 2017, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessments and those
criteria, management determined that we maintained effective internal controls over financial reporting as of December 31, 2017.
This Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. As an emerging
growth company, management’s report is not subject to attestation by our registered public accounting firm.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
26
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
All directors of the Company hold office for one-year terms until the election and qualification of their successors. Officers are appointed by our Board and serve at the
discretion of the board, subject to applicable employment agreements. The following table sets forth information regarding our executive officers and the members of our
Board.
Name
Darren Lampert
Michael Salaman
Monty Lamirato
Joe Prinzivalli
Stephen Aiello
Peter Rosenberg
Sean Stiefel
Age
57
55
62
37
57
55
30
Position
Chief Executive Officer and Director
President and Director
Chief Financial Officer and Secretary
Chief Operating Officer
Director
Director
Director
Darren Lampert has been our Chief Executive Officer and a Director since our inception in 2014. Mr. Lampert began his career in 1986 as a founding member of the law firm
of Lampert and Lampert (1986-1999), where he concentrated on securities litigation, NASD (now FINRA) compliance and arbitration and corporate finance matters. Mr.
Lampert has represented clients in actions and investigations brought before government agencies and self-regulatory bodies. Mr. Lampert has spent the past 15 years working
as a portfolio manager and proprietary trader at Schonfeld Securities (1999-2005), Schottenfeld Group (2007) and Incremental Capital (2008-2010). From 2010 to 2014, Mr.
Lampert was a private investor. Mr. Lampert graduated in 1982 with a Bachelor of Science degree in business administration from Ithaca College. Mr. Lampert received a JD
from Bridgeport University School of Law in 1985. Mr. Lampert was admitted to practice law in New York in 1986 and is also admitted to practice before the United States
District Courts for the Southern and Eastern Districts of New York.
Michael Salaman has been our President and a Director since our inception. Mr. Salaman served as the Chairman of Skinny Nutritional Corp. since January 2002 and as Chief
Executive Officer and President of Skinny Nutritional Corp. since June 2010. He also served as Chief Executive Officer of Skinny Nutritional Corp. Skinny Nutritional Corp.
filed for Chapter 11 Bankruptcy protection in 2013 and the assets were sold to a private equity firm in March 2014. Mr. Salaman has over 20 years’ experience in the area of
start-ups, new product development, distribution and marketing. Mr. Salaman began his business career as Vice President of Business Development for National Media Corp.,
an infomercial marketing company in the United States from 1985-1993. From 1995-2001, Mr. Salaman started a Digital Media company called American Interactive Media,
Inc., a developer of Web TV set-top boxes and ISP services. In 2002, Mr. Salaman became the principal officer of that entity and directed its operations as a marketing and
distribution company and in 2005 focused its efforts in the enhanced water business. Mr. Salaman received a Bachelor of Business Administration degree in business from
Temple University in 1986.
27
Monty Lamirato joined the Company as Chief Financial Officer and Secretary in May 2017. From March 2009 to just prior to joining GrowGen, Mr. Lamirato worked as an
independent consultant providing chief financial officer and financial reporting consulting services to companies of various sizes in a variety of industries. In this capacity, he
prepared and reviewed SEC filings and GAAP-compliant financial statements, provided technical accounting assistance, designed and developed inventory and logistics systems
for inventory management, developed scalable accounting and reporting systems, internal accounting controls and annual budgets and evaluated short-term investment
alternatives for idle cash. From March 2013 until November 2016, Mr. Lamirato served as Chief Financial Officer of Strategic Environmental & Energy Resources, Inc., a
publicly traded holding company that provides a wide range of environmental, renewable fuels and industrial waste stream management services, where he was responsible for
all SEC filings, prepared all GAAP and SEC compliant financial statements and developed financial and operating metrics and other key performance indicators for evaluation
of business results by management. Mr. Lamirato has also served as Chief Financial Officer and Treasurer of ARC Group Worldwide, Inc. from June 2001 to March 2009, Vice
President of Finance at GS2.net, LLC from November 2000 to May 2001, and also Vice President of Finance for PlanetOutdoors.com, Inc. from June 1999 to October 2000. He
began his career as an audit staff member with Coopers & Lybrand in 1977, where he remained until he served as an Audit Manager and Audit Partner with Mitchell Finley and
Company, P.C. from 1986 to 1993. Mr. Lamirato received a Bachelor of Science, cum laude, from Regis College in Denver and is a Certified Public Accountant.
Joe Prinzivalli has been our Chief Operating Office since April 2017. Prior to joining the Company, Mr. Prinzivalli spent 6 years with a Colorado based hydroponic retail
company, Way to Grow. He identified the need for, and implemented, all distribution operations for Way to Grow. As Inventory Manager, from July 2014 to December 2016,
Mr. Prinzivalli was responsible for overseeing the movement and integrity of all Way To Grow physical inventories, managed analytical/reporting functions, and implemented
standard operating procedures across all company functions.
Steven Aiello has been a Director of the Company since May 2014. Mr. Aiello was a partner at Jones and Company from 2004-2008. From 2001-2003, he worked at 033 Asset
Management. From 1986-2001, he was a partner at Montgomery Securities. Mr. Aiello received a B.A. in Psychology from Ithaca College and an MBA from Fordham
University. Since 2010, Mr. Aiello has been a private investor and owner of real estate properties.
Peter Rosenberg has been a Director of the Company since July 2017. He has 28 years of experience in the financial services industry, specifically in leveraged finance,
capital markets, strategic advisory, private equity and asset management. Throughout his career, he has executed capital raising, mergers and acquisitions, and restructuring
transactions. Mr. Rosenberg was previously with Duff & Phelps as a Managing Director in the Consumer and Retail Merger and Acquisitions Group. Prior to Duff & Phelps,
Mr. Rosenberg was a Managing Director with Wells Fargo Securities, where he was responsible for sourcing and executing financing and mergers and acquisitions transactions
for independent and financial sponsor-backed middle market companies. Previously, Mr. Rosenberg established and managed the San Francisco office for Barrington
Associates, a boutique mergers and acquisitions advisory firm. At Barrington, he completed divestiture and recapitalization transactions in the consumer, retail, industrial and
business services sectors and was responsible for coverage of middle market private equity firms. Prior to Barrington, Mr. Rosenberg was a Director at Salomon Smith Barney,
focusing on corporate finance and mergers and acquisitions transactions for West Coast consumer product, specialty retail, financial services and industrial companies. Mr.
Rosenberg has also held positions at Richard C. Blum & Associates (now BLUM Capital) and Comann, Howard & Flamen. He graduated magna cum laude from the University
of Colorado with a B.S. degree in Business and Administration and was a member of the Beta Gamma Sigma academic honor society. Mr. Rosenberg holds Series 7, 24, and 63
securities industry registrations.
28
Sean Stiefel has been a Director of the Company since January 2018. Mr. Stiefel founded Navy Capital LLC in 2014, where he is currently a Portfolio Manager and is
responsible for all aspects of stock selection, investment due diligence and portfolio construction. Mr. Stiefel launched the Navy Capital Green Fund, LP in 2017 as a global
public equity focused cannabis dedicated fund. Navy Capital has been involved in cannabis related investing since early 2016. Prior to founding Navy Capital, Mr. Stiefel was a
research analyst and trader for Northwoods Capital Management Partners, a global equity fund with a fundamental value and special situations investment strategy. Mr. Stiefel
had previously served as an associate within an equity long/short fund at Millennium Partners, and he began his career as an equities trading analyst for Barclays Capital. He is
a graduate of the University of Southern California’s Marshall school of Business.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees other than Michael Salaman (see biographical
information of Michael Salaman above regarding the Chapter 11 Bankruptcy protection filed by Skinny Nutritional Corp. in 2013) has:
●
●
●
●
●
●
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a
general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority,
permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment,
banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not
including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation,
any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement
or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire
fraud or fraud in connection with any business entity; or
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)
(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons associated with a member.
29
Board Committees
The Company currently maintains a board of directors that is composed of a majority of “independent” directors.
The Company has an audit committee, which is comprised of Darren Lampert (Chairman), Steven Aiello and Peter Rosenberg. The Board has determined that Messrs. Aiello
and Rosenberg are independent directors.
The Company does not expect to appoint nominating committee and/or compensation committee, or to adopt charters relative to each such committees at this time.
Code of Business Conduct and Ethics
The Company has not adopted a Code of Business Conduct and Ethics. The Company has adopted an Insider Trading Policy which sets forth the procedure regarding trading by
insiders in securities of the Company.
Limitation of Directors Liability and Indemnification
The Colorado Business Corporations Act authorizes corporations to limit or eliminate, subject to certain conditions, the personal liability of directors to corporations and their
stockholders for monetary damages for breach of their fiduciary duties.
Bylaws of the Company provide that the Company will indemnify its directors and officers who, by reason of the fact that he or she is one of the Company’s officers or
directors, is involved in a legal proceeding of any nature.
The Company has purchased director and officer liability insurance to cover certain liabilities its directors and officers may incur in connection with their services to the
Company.
There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted. The Company
is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
Indemnification Agreements
The employment agreements the Company entered into with each of its current executive officers provides for indemnification to the fullest extent permitted by applicable law
for the executive officers against all debts, judgments, costs, charges or expenses whatsoever incurred or sustained by an executive officer in connection with any action, suit or
proceeding to which the executive officer may be made a party by reason of his being or having been an officer of the Company, or because of actions taken by the executive
officer which were believed by the executive officer to be in the best interests of the Company.
30
ITEM 11. EXECUTIVE COMPENSATION
The following table presents information regarding the total compensation awarded to, earned by, or paid to our chief executive officer and the three most highly-compensated
executive officers (other than the chief executive officer) who were serving as executive officers as of the Record Date for services rendered in all capacities to us for the years
ended December 31, 2017 and 2016.
Name and Principal Position
Darren Lampert
Chief Executive Officer
Michael Salaman
President and Secretary
Joe Prinzivalli (1)
Chief Operating Officer
Monty Lamirato (2)
Chief Financial Officer and
Secretary
Year
Salary
($)
Bonus
($)
Option Awards
($)(3)
2017
2016
2017
2016
2017
2016
164,600
120,000
164,600
120,000
75,900
-
31,900
-
31,900
-
10,000
-
233,800
-
233,800
-
-
-
2017
2016
93,800
-
-
-
156,200
-
Stock Based
Awards
($)(4)
All Other
Compensation
($)
Total
($)
-
-
-
-
303,000
-
276,000
-
-
-
-
-
-
-
-
-
429,700
120,000
429,700
120,000
388,900
-
526,000
-
(1)
(2)
(3)
(4)
As of April 10, 2017, Joe Prinzivalli started to provide his services to the Company as Chief Operating Officer.
As of May 15, 2017, Monty Lamirato started to provide his services to the Company as Chief Financial Officer and Secretary.
The amounts in the Option Awards column reflect the aggregated grant date fair value of awards granted during 2017 as computed in accordance with FASB ASC Topic
718.
The amounts in the Stock Based Awards column reflect the aggregated grant date fair value of awards granted during 2017 as computed in accordance with FASB ASC
Topic 718.
Employment and Consulting Agreements
On September 22, 2017, the Company entered into employment agreements with Darren Lampert, Chief Executive Officer, and Michael Salaman, President, who have each
agreed to devote their full time and attention to the Company’s business and each receive compensation of $175,000 per annum for their full-time employment. In addition,
commencing with the year ending December 31, 2017, each of Mr. Lampert and Mr. Salaman is eligible for a cash bonus payment equal to 0.5% multiplied by the difference
between revenue in each fiscal year less $7,980,471, and is granted up to 300,000 options to purchase shares of Common Stock of the Company, of which 30,750 have been
granted as of the date of their respective agreements.
On May 15, 2017, the Company entered into a three-year executive employment agreement with Monty Lamirato as Chief Financial Officer and Secretary, pursuant to which
the Company agreed to pay Mr. Lamirato a salary of $150,000 per annum for the first year, $162,500 for the second year and $175,000 for the third year. The Company also
agreed to issue to Mr. Lamirato 25,000 shares of Common Stock and 50,000 stock options as of July 10, 2017, May 15, 2018 and May 15, 2019, respectively.
31
In February 2015, the Company entered into a three-year executive employment agreement with Jason Dawson, our former Chief Operating Officer, pursuant to which the
Company paid Mr. Dawson compensation of $84,000 per annum, subject to a 10% increase each January 1 during the term of the agreement. Mr. Dawson was also entitled to
receive 100,000 common shares per year, on each of the anniversary dates of his employment agreement. Mr. Dawson’s employment with the Company as Chief Operating
Officer terminated as of April 10, 2017. On the Same day, the Company and Mr. Dawson entered into a consulting agreement, pursuant to which Mr. Dawson agreed to provide
consulting services to the Company as an independent contractor, up to 20 hours per week, for a period of six months. The Company also agreed to pay Mr. Dawson an hourly
fee of $60 and issue 50,000 shares of Common Stock to Mr. Dawson as of the date of the agreement.
On January 1, 2017, the Company entered into an employment agreement with Joe Prinzivalli, pursuant to which Mr. Prinzivalli agreed to provide his services to the Company
as Inventory Controller, and, as a part of the consideration for his services, among other compensations, the Company agreed to grant him 10,000 options upon signing of the
agreement. The 10,000 options were deemed issued as of July 10, 2017 when the Company filed a Registration Statement on Form S-8 registering the shares of Common Stock
issuable under its 2014 Plan. On April 10, 2017, the Company entered into a three-year executive employment agreement with Mr. Prinzivalli (which replaced the previous
agreement), pursuant to which Mr. Prinzivalli agreed to provide his services to the Company as Chief Operating Officer. The Company agreed to pay Mr. Prinzivalli a salary of
$100,000 per annum with a 10% annual raise and issue to Mr. Prinzivalli 50,000 shares of Common Stock as of the date of the agreement, 50,000 shares as of December 31,
2017 and 50,000 shares as of December 31, 2018.
Additionally, each member of Management may receive a year-end cash bonus and options as determined by the Board of Directors.
On January 30, 2018, the Company entered into a six-month Advisor Agreement with Brian Tantalo, pursuant to which the Company agreed to pay Mr. Tantalo $6,000 per
month and one-year warrants to purchase 250,000 shares of Common Stock at the price of $5.75 per share.
On November 7, 2017, the Company entered into a two-year Advisor Agreement with Kevin McGrath, pursuant to which the Company agreed to issue to Mr. McGrath 150,000
shares of Common Stock, with 50,000 shares vested as of the date of the agreement, 50,000 shares to vest as of November 7, 2018 and 50,000 shares to vest as of November 7,
2019.
On April 3, 2017, the Company entered into a three-year Consulting Agreement with Merida Capital Partners, LP, pursuant to which the Company agreed to pay Merida Capital
a cash fee of $60,000 per annum, payable quarterly, 80,000 shares of Common Stock, and five-year warrants to purchase 150,000 shares of Common Stock at the price of $2.75
per share.
32
Outstanding Equity Awards
The following table summarizes, for each of the named executive officers, the number of shares of Common Stock underlying outstanding stock options held as of December
31, 2017.
Name
Darren Lampert
Darren Lampert
Michael Salaman
Michael Salaman
Monty Lamirato 2
Joe Prinzivalli 3
Option Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Option
exercise
price ($)1
650,000
30,750
400,000
30,750
150,000
10,000
0
0
0
0
0
0
$.66/$.60
$1.80
$.66/$.60
$1.80
$1.90
$1.90
Option
expiration
date
March 16, 2019
as to 400,000
options and May 12,
2019 as to
250,000 options
September 21, 2022
March 6, 2019
September 21, 2022
May 15, 2022
January 1, 2022
1 The first $100,000 of options granted to each person may be deemed to be incentive stock options and are exercisable at a price of $.66 per share. The balance of the options
owned by such persons may be deemed to be non-qualified options and are exercisable at a price of $.60 per share.
2 Monty Lamirato started serving as the Company’s Chief Financial Officer and Secretary as of May 15, 2017. The vesting schedule of his 150,000 stock options is as follows:
50,000 stock options as of July 10, 2017, 50,000 stock options as of May 15, 2018 and 50,000 stock options as of May 15, 2019.
3 Joe Prinzivalli started serving as the Company’s Chief Operating Officer as of April 10, 2017. All 10,000 stock options granted to Mr. Prinzivalli vested as of July 10, 2017.
2014 Equity Compensation Plan
On March 6, 2014, the Board of the Company adopted an Equity Compensation Plan (the “2014 Plan”). The 2014 Plan was approved by the shareholders on March 6, 2014.
The general purpose of the 2014 Plan is to provide an incentive to our employees, directors, consultants and advisors by enabling them to share in the future growth of our
business. Our Board believes that the granting of stock options, restricted stock awards, unrestricted stock awards and similar kinds of equity-based compensation promotes
continuity of management and increases incentive and personal interest in the welfare of our Company by those who are primarily responsible for shaping and carrying out our
long range plans and securing our growth and financial success.
The Board believes that the 2014 Plan will advance our interests by enhancing our ability to (a) attract and retain employees, consultants, directors and advisors who are in a
position to make significant contributions to our success; (b) reward our employees, consultants, directors and advisors for these contributions; and (c) encourage employees,
consultants, directors and advisors to take into account our long-term interests through ownership of our shares.
33
Description of the 2014 Equity Incentive Plan
The following description of the principal terms of the 2014 Plan is a summary and is qualified in its entirety by the full text of the 2014 Plan, which was attached as Exhibit
10.5 to the Registration Statement on Form S-1 filed with the SEC on November 9, 2015.
Administration. The 2014 Plan will be administered by our Board. Our Board may grant options to purchase shares of our Common Stock, stock appreciation rights, restricted
stock units, restricted or unrestricted shares of our 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 2014 Plan and amend or modify outstanding options, grants and awards. The Board may delegate authority to the chief executive officer and/or other
executive officers to grant options and other awards to employees (other than themselves), subject to applicable law and the 2014 Plan. No options, stock purchase rights or
awards may be made under the Plan on or after the ten year anniversary of the adoption of the 2014 Plan by our Board, but the 2014 Plan will continue thereafter while
previously granted options, stock appreciation rights or awards remain subject to the 2014 Plan.
Eligibility. Persons eligible to receive options, stock appreciation rights or other awards under the 2014 Plan are those employees, consultants, advisors and directors of our
Company and our subsidiaries who, in the opinion of the Board, are in a position to contribute to our success.
Shares Subject to the 2014 Plan. The aggregate number of shares of Common Stock available for issuance in connection with options and awards granted under the 2014 Plan
is 2,500,000, subject to customary adjustments for stock splits, stock dividends or similar transactions. Incentive Stock Options may be granted under the 2014 Plan with respect
to all of those shares. If any option or stock appreciation right granted under the 2014 Plan terminates without having been exercised in full or if any award is forfeited, or if
shares of Common Stock are withheld to cover withholding taxes on options or other awards, the number of shares of Common Stock as to which such option or award was
forfeited, or which were withheld, will be available for future grants under the 2014 Plan. No employee, consultant, advisor or director may receive options or stock
appreciation rights relating to more than 1,000,000 shares of our Common Stock in the aggregate in any calendar year.
Terms and Conditions of Options. Options granted under the 2014 Plan may be either “incentive stock options” that are intended to meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the “Code”) or “nonstatutory stock options” that do not meet the requirements of Section 422 of the Code. The Board will
determine the exercise price of options granted under the 204 Plan. The exercise price of stock options may not be less than the fair market value, on the date of grant, per share
of our Common Stock issuable upon exercise of the option (or 110% of fair market value in the case of incentive options granted to a ten-percent stockholder).
If on the date of grant the Common Stock is listed on a stock exchange or is quoted on the automated quotation system of Nasdaq, the fair market value shall generally be the
closing sale price on the last trading day before the date of grant. If no such prices are available, the fair market value shall be determined in good faith by the Board based on the
reasonable application of a reasonable valuation method.
No option may be exercisable for more than ten years (five years in the case of an incentive stock option granted to a ten-percent stockholder) from the date of grant. Options
granted under the 2014 Plan will be exercisable at such time or times as the Board prescribes at the time of grant. No employee may receive incentive stock options that first
become exercisable in any calendar year in an amount exceeding $100,000. The Board may, in its discretion, permit a holder of an option to exercise the option before it has
otherwise become exercisable, in which case the shares of our Common Stock issued to the recipient will continue to be subject to the vesting requirements that applied to the
option before exercise.
34
Generally, the option price may be paid (a) in cash or by certified bank check, (b) through delivery of shares of our Common Stock having a fair market value equal to the
purchase price, or (c) a combination of these methods. The Board is also authorized to establish a cashless exercise program and to permit the exercise price (or tax withholding
obligations) to be satisfied by reducing from the shares otherwise issuable upon exercise a number of shares having a fair market value equal to the exercise price.
No option may be transferred other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an option may be exercised only by the recipient.
However, the Board may permit the holder of an option, stock appreciation right or other award to transfer the option, right or other award to immediate family members or a
family trust for estate planning purposes. The Board will determine the extent to which a holder of a stock option may exercise the option following termination of service with
us.
Stock Appreciation Rights. The Board may grant stock appreciation rights independent of or in connection with an option. The Board will determine the other terms applicable
to stock appreciation rights. The exercise price per share of a stock appreciation right will be determined by the Board, but will not be less than 100% of the fair market value of
a share of our Common Stock on the date of grant, as determined by the Board. The maximum term of any SAR granted under the 2014 Plan is ten years from the date of grant.
Generally, each SAR stock appreciation right will entitle a participant upon exercise to an amount equal to:
●
●
the excess of the fair market value on the exercise date of one share of our Common Stock over the exercise price, multiplied by
the number of shares of Common Stock covered by the stock appreciation right.
Payment may be made in shares of our Common Stock, in cash, or partly in Common Stock and partly in cash, all as determined by the Board.
Restricted Stock and Restricted Stock Units. The Board may award restricted Common Stock and/or restricted stock units under the 2014 Plan. Restricted stock awards consist
of shares of stock that are transferred to a participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. Restricted stock units confer the
right to receive shares of our Common Stock, cash, or a combination of shares and cash, at a future date upon or following the attainment of certain conditions specified by the
Board. The Board will determine the restrictions and conditions applicable to each award of restricted stock or restricted stock units, which may include performance-based
conditions. Dividends with respect to restricted stock may be paid to the holder of the shares as and when dividends are paid to stockholders or at the time that the restricted
stock vests, as determined by the Board. Dividend equivalent amounts may be paid with respect to restricted stock units either when cash dividends are paid to stockholders or
when the units vest. Unless the Board determines otherwise, holders of restricted stock will have the right to vote the shares.
Performance Shares and Performance Units. The Board may award performance shares and/or performance units under the 2014 Plan. Performance shares and performance
units are awards, denominated in either shares or U.S. dollars, which are earned during a specified performance period subject to the attainment of performance criteria, as
established by the Board. The Board will determine the restrictions and conditions applicable to each award of performance shares and performance units.
35
Effect of Certain Corporate Transactions. The Board may, at the time of the grant of an award, provide for the effect of a change in control (as defined in the 2014 Plan) on any
award, including (i) accelerating or extending the time periods for exercising, vesting in, or realizing gain from any award, (ii) eliminating or modifying the performance or
other conditions of an award, or (iii) providing for the cash settlement of an award for an equivalent cash value, as determined by the Board. The Board may, in its discretion
and without the need for the consent of any recipient of an award, also take one or more of the following actions contingent upon the occurrence of a change in control: (a)
cause any or all outstanding options and stock appreciation rights to become immediately exercisable, in whole or in part; (b) cause any other awards to become non-forfeitable,
in whole or in part; (c) cancel any option or stock appreciation right in exchange for a substitute option; (d) cancel any award of restricted stock, restricted stock units,
performance shares or performance units in exchange for a similar award of the capital stock of any successor corporation; (e) redeem any restricted stock, restricted stock unit,
performance share or performance unit for cash and/or other substitute consideration with a value equal to the fair market value of an unrestricted share of our Common Stock
on the date of the change in control; (f) cancel any option or stock appreciation right in exchange for cash and/or other substitute consideration based on the value of our
Common Stock on the date of the change in control, and cancel any option or stock appreciation right without any payment if its exercise price exceeds the value of our
Common Stock on the date of the change in control; or (g) make such other modifications, adjustments or amendments to outstanding awards as the Board deems necessary or
appropriate.
Amendment, Termination. The Board may amend the terms of awards in any manner not inconsistent with the 2014 Plan, provided that no amendment shall adversely affect the
rights of a participant with respect to an outstanding award without the participant’s consent. In addition, our board of directors may at any time amend, suspend, or terminate
the 2014 Plan, provided that (i) no such amendment, suspension or termination shall materially and adversely affect the rights of any participant under any outstanding award
without the consent of such participant and (ii) to the extent necessary to comply with any applicable law or stock exchange rule, the 2014 Plan requires us to obtain stockholder
consent. Stockholder approval is required for any plan amendment that increases the number of shares of Common Stock available for issuance under the 2014 Plan or changes
the persons or classes of persons eligible to receive awards.
Tax Withholding
As and when appropriate, the Company has the right to require each optionee purchasing shares of Common Stock and each grantee receiving an award of shares of Common
Stock under the 2014 Plan to pay any federal, state or local taxes required by law to be withheld.
Option Grants and Stock Awards
The grant of options and other awards under the 2014 Plan is discretionary, and the Company cannot determine now the specific number or type of options or awards to be
granted in the future to any particular person or group.
2018 Equity Compensation Plan
On January 7, 2018, the Board adopted the 2018 Equity Compensation Plan (the “2018 Plan”). The Company plans to obtain shareholder approval on the 2018 Plan in its
upcoming annual shareholders’ meeting for the year ended December 31, 2017.
The general purpose of the 2018 Plan is to provide an incentive to the Company’s employees, directors, consultants and advisors by enabling them to share in the future growth
of the Company’s business. The Board believes that the granting of stock options, restricted stock awards, unrestricted stock awards and similar kinds of equity-based
compensation promotes continuity of management and increases incentive and personal interest in the welfare of the Company by those who are primarily responsible for
shaping and carrying out its long range plans and securing its growth and financial success.
36
The Board believes that the 2018 Plan will advance the Company’s interests by enhancing its ability to (a) attract and retain employees, consultants, directors and advisors who
are in a position to make significant contributions to the Company’s success; (b) reward the Company’s employees, consultants, directors and advisors for these contributions;
and (c) encourage employees, consultants, directors and advisors to take into account the Company’s long-term interests through ownership of its shares.
Description of the 2018 Equity Incentive Plan
The following description of the principal terms of the 2018 Plan is a summary and is qualified in its entirety by the full text of the 2018 Plan, which is filed as an exhibit to this
report.
Administration. The 2018 Plan will be administered by our Board. Our Board may grant options to purchase shares of our Common Stock, stock appreciation rights, restricted
stock units, restricted or unrestricted shares of our 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. The Board may delegate authority to the chief executive officer and/or other
executive officers to grant options and other awards to employees (other than themselves), subject to applicable law and the 2018 Plan. No options, stock purchase rights or
awards may be made under the Plan on or after the ten year anniversary of the adoption of the 2018 Plan by our Board, but the 2018 Plan will continue thereafter while
previously granted options, stock appreciation rights or awards remain subject to the 2018 Plan.
Eligibility. Persons eligible to receive options, stock appreciation rights or other awards under the 2018 Plan are those employees, consultants, advisors and directors of our
Company and our subsidiaries who, in the opinion of the Board, are in a position to contribute to our success.
Shares Subject to the 2018 Plan. The aggregate number of shares of Common Stock available for issuance in connection with options and awards granted under the 2018 Plan
is 2,500,000, subject to customary adjustments for stock splits, stock dividends or similar transactions. Incentive Stock Options may be granted under the 2018 Plan with respect
to all of those shares. If any option or stock appreciation right granted under the 2018 Plan terminates without having been exercised in full or if any award is forfeited, or if
shares of Common Stock are withheld to cover withholding taxes on options or other awards, the number of shares of Common Stock as to which such option or award was
forfeited, or which were withheld, will be available for future grants under the 2018 Plan. No employee, consultant, advisor or director may receive options or stock
appreciation rights relating to more than 1,000,000 shares of our Common Stock in the aggregate in any calendar year.
Terms and Conditions of Options. Options granted under the 2018 Plan may be either “incentive stock options” that are intended to meet the requirements of Section 422 of the
Code or “nonstatutory stock options” that do not meet the requirements of Section 422 of the Code. The Board will determine the exercise price of options granted under the
204 Plan. The exercise price of stock options may not be less than the fair market value, on the date of grant, per share of our Common Stock issuable upon exercise of the
option (or 110% of fair market value in the case of incentive options granted to a ten-percent stockholder).
If on the date of grant the Common Stock is listed on a stock exchange or is quoted on the automated quotation system of Nasdaq, the fair market value shall generally be the
closing sale price on the last trading day before the date of grant. If no such prices are available, the fair market value shall be determined in good faith by the Board based on the
reasonable application of a reasonable valuation method.
No option may be exercisable for more than ten years (five years in the case of an incentive stock option granted to a ten-percent stockholder) from the date of grant. Options
granted under the 2018 Plan will be exercisable at such time or times as the Board prescribes at the time of grant. No employee may receive incentive stock options that first
become exercisable in any calendar year in an amount exceeding $100,000. The Board may, in its discretion, permit a holder of an option to exercise the option before it has
otherwise become exercisable, in which case the shares of our Common Stock issued to the recipient will continue to be subject to the vesting requirements that applied to the
option before exercise.
37
Generally, the option price may be paid (a) in cash or by certified bank check, (b) through delivery of shares of our Common Stock having a fair market value equal to the
purchase price, or (c) a combination of these methods. The Board is also authorized to establish a cashless exercise program and to permit the exercise price (or tax withholding
obligations) to be satisfied by reducing from the shares otherwise issuable upon exercise a number of shares having a fair market value equal to the exercise price.
No option may be transferred other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an option may be exercised only by the recipient.
However, the Board may permit the holder of an option, stock appreciation right or other award to transfer the option, right or other award to immediate family members or a
family trust for estate planning purposes. The Board will determine the extent to which a holder of a stock option may exercise the option following termination of service with
us.
Stock Appreciation Rights. The Board may grant stock appreciation rights independent of or in connection with an option. The Board will determine the other terms applicable
to stock appreciation rights. The exercise price per share of a stock appreciation right will be determined by the Board, but will not be less than 100% of the fair market value of
a share of our Common Stock on the date of grant, as determined by the Board. The maximum term of any SAR granted under the 2018 Plan is ten years from the date of grant.
Generally, each SAR stock appreciation right will entitle a participant upon exercise to an amount equal to:
●
●
the excess of the fair market value on the exercise date of one share of our Common Stock over the exercise price, multiplied by
the number of shares of Common Stock covered by the stock appreciation right.
Payment may be made in shares of our Common Stock, in cash, or partly in Common Stock and partly in cash, all as determined by the Board.
Restricted Stock and Restricted Stock Units. The Board may award restricted Common Stock and/or restricted stock units under the 2018 Plan. Restricted stock awards consist
of shares of stock that are transferred to a participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. Restricted stock units confer the
right to receive shares of our Common Stock, cash, or a combination of shares and cash, at a future date upon or following the attainment of certain conditions specified by the
Board. The Board will determine the restrictions and conditions applicable to each award of restricted stock or restricted stock units, which may include performance-based
conditions. Dividends with respect to restricted stock may be paid to the holder of the shares as and when dividends are paid to stockholders or at the time that the restricted
stock vests, as determined by the Board. Dividend equivalent amounts may be paid with respect to restricted stock units either when cash dividends are paid to stockholders or
when the units vest. Unless the Board determines otherwise, holders of restricted stock will have the right to vote the shares.
Performance Shares and Performance Units. The Board may award performance shares and/or performance units under the 2018 Plan. Performance shares and performance
units are awards, denominated in either shares or U.S. dollars, which are earned during a specified performance period subject to the attainment of performance criteria, as
established by the Board. The Board will determine the restrictions and conditions applicable to each award of performance shares and performance units.
38
Effect of Certain Corporate Transactions. The Board may, at the time of the grant of an award, provide for the effect of a change in control (as defined in the 2018 Plan) on any
award, including (i) accelerating or extending the time periods for exercising, vesting in, or realizing gain from any award, (ii) eliminating or modifying the performance or
other conditions of an award, or (iii) providing for the cash settlement of an award for an equivalent cash value, as determined by the Board. The Board may, in its discretion
and without the need for the consent of any recipient of an award, also take one or more of the following actions contingent upon the occurrence of a change in control: (a)
cause any or all outstanding options and stock appreciation rights to become immediately exercisable, in whole or in part; (b) cause any other awards to become non-forfeitable,
in whole or in part; (c) cancel any option or stock appreciation right in exchange for a substitute option; (d) cancel any award of restricted stock, restricted stock units,
performance shares or performance units in exchange for a similar award of the capital stock of any successor corporation; (e) redeem any restricted stock, restricted stock unit,
performance share or performance unit for cash and/or other substitute consideration with a value equal to the fair market value of an unrestricted share of our Common Stock
on the date of the change in control; (f) cancel any option or stock appreciation right in exchange for cash and/or other substitute consideration based on the value of our
Common Stock its exercise price exceeds the value of our Common Stock on the date of the change in control; or (g) make such other modifications, adjustments or
amendments to outstanding awards as the Board deems necessary or appropriate.
Amendment, Termination. The Board may amend the terms of awards in any manner not inconsistent with the 2018 Plan, provided that no amendment shall adversely affect the
rights of a participant with respect to an outstanding award without the participant’s consent. In addition, our board of directors may at any time amend, suspend, or terminate
the 2018 Plan, provided that (i) no such amendment, suspension or termination shall materially and adversely affect the rights of any participant under any outstanding award
without the consent of such participant and (ii) to the extent necessary to comply with any applicable law or stock exchange rule, the 2018 Plan requires us to obtain stockholder
consent. Stockholder approval is required for any plan amendment that increases the number of shares of Common Stock available for issuance under the 2018 Plan or changes
the persons or classes of persons eligible to receive awards.
Tax Withholding
As and when appropriate, the Company has the right to require each optionee purchasing shares of Common Stock and each grantee receiving an award of shares of Common
Stock under the 2018 Plan to pay any federal, state or local taxes required by law to be withheld.
Option Grants and Stock Awards
The grant of options and other awards under the 2018 Plan is discretionary, and the Company cannot determine now the specific number or type of options or awards to be
granted in the future to any particular person or group.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares of Common Stock beneficially owned as of March 27, 2018 by:
●
●
●
●
each of our stockholders who is known by us to beneficially own 5% or more of our Common Stock;
each of our executive officers;
each of our directors; and
all of our directors and current executive officers as a group.
Beneficial ownership is determined based on the rules and regulations of the SEC. A person has beneficial ownership of shares if such individual has the power to vote and/or
dispose of shares. This power may be sole or shared and direct or indirect. Applicable percentage ownership in the following table is based on the total of 19,332,120 shares of
Common Stock outstanding as of March 27, 2018. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of
Common Stock that are subject to options or warrants held by that person and exercisable as of, or within 60 days of, March 27, 2018. These shares, however, are not counted as
outstanding for the purposes of computing the percentage ownership of any other person(s). Except as may be indicated in the footnotes to this table and pursuant to applicable
community property laws, each person named in the table has sole voting and dispositive power with respect to the shares of Common Stock set forth opposite that person’s
name. Unless indicated below, the address of each individual listed below is c/o GrowGeneration Corp., 1000 West Mississippi Avenue, Denver, CO 80223.
Name of Beneficial Owner
Michael Salaman, President and Director
Darren Lampert, Chief Executive Officer and Director
Joe Prinzivalli, Chief Operating Officer
Stephen Aiello, Director
Monty Lamirato, Chief Financial Officer and Secretary
Peter Rosenberg, Director
Sean Stiefel, Director
All Officers and Directors (7 Persons)
Number of
Shares
Beneficially
Owned
Percentage of
Shares
Beneficially
Owned
2,130,7501
2,130,7502
112,5003
314,5834
130,0005
16,6666
16,6667
4,851,915
10.78%
10.65%
*
1.62%
*
*
*
23.44%
* Less than 1%
1 Includes i) 1,700,000 shares of Common Stock; and ii) 430,750 vested options issued under the 2014 Plan.
2 Includes i) 1,450,000 shares of Common Stock; and ii) 680,750 vested options issued under the 2014 Plan.
3 Includes i) 102,500 shares of Common Stock; and ii) 10,000 vested options issued under the 2014 Plan.
4 Includes i) 50,000 shares of Common Stock owned directly by Mr. Aiello; ii) 150,000 shares of Common Stock owned by Aiello Family Trust; iii) 58,333 vested options
issued under the 2014 Plan; iv) 56,250 shares of Common Stock underlying warrants purchased in a private placement of the Company at $0.01 per share. Mr. Aiello also owns
8,333 options exercisable commencing September 22, 2018 and 8,334 options exercisable commencing September 22, 2019.
5 Includes i) 30,000 shares of Common Stock issued to Mr. Lamirato; and ii) 50,000 stock options and 50,000 stock options (out of a total of 150,000 stock options) vested as
of July 10, 2017 and May 15, 2018, respectively. Mr. Lamirato also owns 50,000 options exercisable commencing May 15, 2019.
6 Includes 16,666 vested options issued under the 2014 Plan. Mr. Rosenberg also owns 16,667 options exercisable commencing September 22, 2018 and 16,667 options
exercisable commencing September 22, 2019.
7 Includes 16,666 vested options issued under the 2014 Plan. Mr. Stiefel also owns 16,667 options exercisable commencing January 4, 2019 and 16,667 options exercisable
commencing January 4, 2020.
40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Unless described below, since March 5, 2014 (inception), there are no transactions or series of similar transactions to which the Company was a party or will be a party, in
which:
●
●
the amounts involved exceeded or will exceed $120,000; and
any of the Company’s directors, executive officers or holders of more than 5% of its capital stock, or any member of the immediate family of the foregoing persons, had
or will have a direct or indirect material interest.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Connolly Grady & Cha served as our independent registered public accounting firm for 2017 and 2016. The following table shows the fees that were billed for the audit and
other services provided by this firm for 2017 and 2016.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
2017
2016
45,000 $
-0- $
-0- $
7,500 $
52,500 $
35,000
-0-
-0-
5,000
40,000
$
$
$
$
$
Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services
that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on
audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the
performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include
consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.
Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for
the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees — This category consists of fees for other miscellaneous items.
Our Board has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the Board approves the
engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated
member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to
2017 were pre-approved by the entire Board.
41
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
10.3
10.4
10.5
10.6
Certificate of Incorporation of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed on November
9, 2015)
Bylaws of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 as filed on November 9, 2015)
Form of Investor Warrant (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 as filed on November 9, 2015)
Form of Placement Agent Warrant issued to Cavu Securities LLC (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 as filed
on November 9, 2015)
Form of Warrant for private placement in March 2017 (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K as filed on March 16, 2017)
Form of Investor Warrant for second 2017 private placement (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K as filed on May 19,
2017)
Form of Placement Agent Warrant ($2.00 Per Share) for second 2017 private placement (Incorporated by reference to Exhibit 99.3 to the Current Report on
Form 8-K as filed on May 19, 2017)
Form of Placement Agent Warrant ($2.75 Per Share) for second 2017 private placement (Incorporated by reference to Exhibit 99.4 to the Current Report on
Form 8-K as filed on May 19, 2017)
Form of .1% Unsecured Convertible Promissory Note for private placement in January 2018 (Incorporated by reference to Exhibit 99.3 to the Current Report on
Form 8-K as filed on January 12, 2018)
Form of Warrant for private placement in January 2018 (Incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K as filed on January 12,
2018)
GrowGeneration Corp. 2014 Equity Incentive Plan (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 as filed on November
9, 2015)
Form of GrowGeneration Corp. Stock Option Agreement in connection with the 2014 Equity Incentive Plan (Incorporated by reference to Exhibit 10.6 to
the Registration Statement on Form S-1 as filed on November 9, 2015)
GrowGeneration Corp. 2018 Equity Incentive Plan (Filed herewith)
Form of GrowGeneration Corp. Stock Option Agreement in connection with the 2018 Equity Incentive Plan (Filed herewith)
Placement Agency Agreement, dated March 12, 2015, between of GrowGeneration Corp. and Cavu Securities LLC. (Incorporated by reference to Exhibit 10.1
to the Registration Statement on Form S-1 as filed on November 9, 2015)
Form of Subscription Agreement for 2014 private placement (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 as filed on
November 9, 2015)
42
10.7
10.8
10.9
10.10
10.11
10.12
10.13
Form of Subscription Agreement for first 2015 private placement (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 as filed
on November 9, 2015)
Form of Subscription Agreement for second 2015 private placement (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 as
filed on November 9, 2015)
Form of Subscription Agreement for 2016 private placement (Incorporated by reference to Exhibit 10.28 to the Amendment No. 1 to Registration Statement on
Form S-1 as filed on May 11, 2016)
Form of Securities Purchase Agreement for first 2017 private placement (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed
on March 16, 2017)
Form of Subscription Agreement for second 2017 private placement (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on
May 19, 2017)
Form of Securities Purchase Agreement for 2018 private placement (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on
January 12, 2018)
Form of Supplement to Securities Purchase Agreement for 2018 private placement (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K
as filed on January 12, 2018)
10.14
Employment Agreement, dated September 22, 2017, between of GrowGeneration Corp. and Darren Lampert (Incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q as filed on November 8, 2017)
10.15
Employment Agreement, dated September 22, 2017, between of GrowGeneration Corp. and Michael Salaman (Incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q as filed on November 8, 2017)
10.16
Employment Agreement, dated April 10, 2017, between of GrowGeneration Corp. and Joe Prinzivalli (Incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K as filed on April 14, 2017)
10.17
Employment Agreement, dated May 15, 2017, between of GrowGeneration Corp. and Monty Lamirato (Incorporated by reference to Exhibit 99.5 to the Current
Report on Form 8-K as filed on May 19, 2017)
10.18
10.19
10.20
10.21
Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 as filed on November 9, 2015)
Consulting Agreement with Merida Capital Partners, LP, dated April 3, 2017 (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as
filed on April 5, 2017)
Separation and Release Agreement with Jason Dawson, dated April 10, 2017 (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K as
filed on April 14, 2017)
Consulting Agreement with Jason Dawson, dated April 10, 2017 (Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K as filed on April
14, 2017)
10.22
Asset Purchase Agreement dated April 14, 2014 between GrowGeneration Pueblo Corp. and Southern Colorado Garden Supply Corp. (d/b/a Pueblo
Hydroponics) (Incorporated by reference to Exhibit 10.11 to the Amendment No. 2 to Registration Statement on Form S-1 as filed on June 15, 2016)
10.23
Inventory Purchase Agreement dated May 10, 2015 between Grow Generation Pueblo Corp. and Happy Grow Lucky, LLC (Incorporated by reference to
Exhibit 10.12 to the Amendment No. 1 to Registration Statement on Form S-1 as filed on May 11, 2016)
43
10.24
10.25
10.26
10.27
10.28
Inventory Purchase Agreement dated April 10, 2015 between Grow Generation Pueblo Corp. and Green Growers Corp. (Incorporated by reference to Exhibit
10.13 to the Amendment No. 1 to Registration Statement on Form S-1 as filed on May 11, 2016)
Inventory Purchase Agreement dated October 28, 2015 between GrowGeneration California Corp. and Sweet Leaf Hydroponics, Inc. dba Mad Max
Hydroponics (Incorporated by reference to Exhibit 10.14 to the Amendment No. 1 to Registration Statement on Form S-1 as filed on May 11, 2016)
Inventory Purchase Agreement dated November 28, 2015 between Grow Generation Pueblo Corp. and Greenhouse Tech Inc. (Incorporated by reference to
Exhibit 10.27 to the Amendment No. 1 to Registration Statement on Form S-1 as filed on May 11, 2016)
Asset Purchase Agreement, dated February 1, 2017, by and among GrowGeneration Corp., GrowGeneration California Corp., and Morgan Pagenkopf
(Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on February 14, 2017)
Agreement to Purchase and Sell Assets, dated March 6, 2017, by and among GrowGeneration Corp., Seattle’s Hydro Spot LLC and David G. Iacovelli
(Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K as filed on May 22, 2017)
10.29
Consulting Agreement dated April 10, 2015 by and between GrowGeneration Corp. and Duane Nunez (Incorporated by reference to Exhibit 10.23 to
the Registration Statement on Form S-1 as filed on November 9, 2015)
10.30
Consulting Agreement dated May 10, 2015 by and between Grow Generation Pueblo Corp. and Lindsay Schmitt and Cody Schmitt (Incorporated by reference
to Exhibit 10.24 to the Registration Statement on Form S-1 as filed on November 9, 2015)
10.31
Consulting Agreement dated October 28, 2105 by and between GrowGeneration California Corp. and Troy Sowers (Incorporated by reference to Exhibit 10.25
to the Registration Statement on Form S-1 as filed on November 9, 2015)
21.1
List of Subsidiaries of GrowGeneration Corp. (Filed herewith)
101.INS
XBRL Instance Document (Filed herewith.)
101.SCH
XBRL Taxonomy Extension Schema Document (Filed herewith.)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (Filed herewith.)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (Filed herewith.)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (Filed herewith.)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Definition (Filed herewith.)
31.1
31.2
32.1
32.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (Filed herewith.)
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer (Filed herewith.)
Section 1350 Certification of Principal Executive Officer (Filed herewith.)
Section 1350 Certification of Principal Financial and Accounting Officer (Filed herewith.)
44
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 27,
2018
SIGNATURES
GROWGENERATION CORP.
By:
By:
/s/ Darren Lampert
Name: Darren Lampert
Title: Chief Executive Officer
(Principal Executive Officer)
/s/ Monty Lamirato
Name: Monty Lamirato
Title: Chief Financial Officer
(Principal Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors GrowGeneration Corp., a Colorado corporation (the “Registrant”), do
hereby constitute and appoint Darren Lampert and Monty Lamirato, and each of them, as his or her true and lawful attorney-in-fact and agents, with full power of substitution
and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Person
Capacity
/s/ Darren Lampert
Darren Lampert
/s/ Monty Lamirato
Monty Lamirato
/s/ Michael Salaman
Michael Salaman
/s/ Stephen Aiello
Stephen Aiello
/s/ Peter Rosenberg
Peter Rosenberg
/s/ Sean Stiefel
Sean Stiefel
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
President and Director
Director
Director
Director
45
Date
March 27, 2018
March 27, 2018
March 27, 2018
March 27, 2018
March 27, 2018
March 27, 2018
Exhibit 10.3
GROWGENERATION CORP.
2018 EQUITY INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Plan are:
●
●
●
to attract and retain the best available personnel for positions of substantial responsibility,
to provide incentives to individuals who perform services for the Company, and
to promote the success of the Company’s business.
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance
Units, Performance Shares and other stock or cash awards as the Administrator may determine.
2. Definitions. As used herein, the following definitions will apply:
(a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 hereof.
(b) “Affiliate” means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common
control with the Company.
(c) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. federal and state corporate laws, U.S. federal and state
securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction
where Awards are, or will be, granted under the Plan.
(d) “Award” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance
Units, Performance Shares and other stock or cash awards as the Administrator may determine.
(e) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award
Agreement is subject to the terms and conditions of the Plan.
(f) “Board” means the Board of Directors of the Company.
(g) “Change in Control” means the occurrence of any of the following events:
(i)
A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires
ownership of stock in the Company that, together with the stock already held by such Person, constitutes more than 50% of the total voting power of the
stock of the Company; provided, however, that for purposes of this subsection (i), the acquisition of additional stock by any Person who is considered to
own more than 50% of the total voting power of the stock of the Company before the acquisition will not be considered a Change in Control; or
(ii) A change in the effective control of the Company, which occurs on the date that a majority of the members of the Board are replaced during any twelve
(12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the
appointment or election. For purposes of this subsection (ii), if any Person is considered to effectively control the Company, the acquisition of additional
control of the Company by the same Person will not be considered a Change in Control; or
(iii) A change in the ownership of a substantial portion of the Company’s assets, which occurs on the date that any Person acquires (or has acquired during the
twelve (12) month period ending on the date of the most recent acquisition by such Person) assets from the Company that have a total gross fair market
value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or
acquisitions; provided, however, that for purposes of this subsection (iii), the following will not constitute a change in the ownership of a substantial
portion of the Company’s assets or a Change in Control: (A) a transfer to an entity that is controlled by the Company’s stockholders immediately after the
transfer, or (B) a transfer of assets by the Company to: (1) a stockholder of the Company (immediately before the asset transfer) in exchange for or with
respect to the Company’s stock, (2) an entity, 50% or more of the total value or voting power of which is owned, directly or indirectly, by the Company,
(3) a Person that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Company, or (4) an entity,
at least 50% of the total equity or voting power of which is owned, directly or indirectly, by a Person described in subsection (iii)(B)(3) above. For
purposes of this subsection (iii), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of,
determined without regard to any liabilities associated with such assets.
Notwithstanding the foregoing, as to any Award under the Plan that consists of deferred compensation subject to Section 409A of the Code, the definition of “Change in
Control” shall be deemed modified to the extent necessary to comply with Section 409A of the Code.
For purposes of this Section 2(g), persons will be considered to be acting as a group if they are owners of a corporation or other entity that enters into a merger, consolidation,
purchase or acquisition of stock, or similar business transaction with the Company.
(h) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended
section of the Code.
(i) “Committee” means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board in accordance with Section 4 hereof.
(j) “Common Stock” means the common stock, $.001 par value per share, of the Company.
(k) “Company” means GrowGeneration, Corp., a Colorado corporation, or any successor thereto.
(l) “Consultant” means any person, including an advisor, engaged by the Company or a Parent, Subsidiary or Affiliate to render services to the Company or a
Subsidiary.
(m) “Determination Date” means the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as “performance-based
compensation” under Section 162(m) of the Code.
(n) “Director” means a member of the Board.
(o) “Disability” means permanent and total disability as defined in Section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock
Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted
by the Administrator from time to time.
(p) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent, Subsidiary or Affiliate of the Company. Neither service
as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.
(q) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(r) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have
lower exercise prices and different terms), Awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any outstanding Awards to a financial
institution or other person or entity selected by the Administrator, and/or (iii) the exercise price of an outstanding Award is reduced. The Administrator will determine the terms
and conditions of any Exchange Program in its sole discretion.
2
(s) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq
Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock
(or if no closing sales price was reported on that date, as applicable, on the last trading date such closing sales price was reported) as quoted on such exchange or system on the
day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a
Share will be the mean between the high bid and low asked prices for the Common Stock on the day of determination (or, if no bids and asks were reported on that date, as
applicable, on the last trading date such bids and asks were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, or if such Common Stock is not regularly quoted or does not have sufficient
trades or bid prices which would accurately reflect the actual Fair Market Value of the Common Stock, the Fair Market Value will be determined in good faith by the
Administrator upon the advice of a qualified valuation expert.
(t) “Fiscal Year” means the fiscal year of the Company.
(u) “Incentive Stock Option” means an Option that by its terms qualifies and is otherwise intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code and the regulations promulgated thereunder.
(v) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
(w) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.
(x) “Option” means a stock option granted pursuant to Section 6 hereof.
(y) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
(z) “Participant” means the holder of an outstanding Award.
(aa) “Performance Goals” will have the meaning set forth in Section 11 hereof.
(bb) “Performance Period” means any Fiscal Year of the Company or such other period as determined by the Administrator in its sole discretion.
(cc) “Performance Share” means an Award denominated in Shares which may be earned in whole or in part upon attainment of Performance Goals or other vesting
criteria as the Administrator may determine pursuant to Section 10 hereof.
(dd) “Performance Unit” means an Award which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the
Administrator may determine and which may be settled for cash, Shares or other securities or a combination of the foregoing pursuant to Section 10 hereof.
3
(ee) “Period of Restriction” means the period during which transfers of Shares of Restricted Stock are subject to restrictions and, therefore, the Shares are subject to a
substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as
determined by the Administrator.
(ff) “Plan” means this 2018 Equity Incentive Plan.
(gg) “Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under Section 8 hereof, or issued pursuant to the early exercise of an Option.
(hh) “Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 9 hereof.
Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.
(ii) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.
(jj) “Section 16(b)” means Section 16(b) of the Exchange Act.
(kk) “Service Provider” means an Employee, Director, or Consultant.
(ll) “Share” means a share of the Common Stock, as adjusted in accordance with Section 15 hereof.
(mm) “Stock Appreciation Right” means an Award, granted alone or in connection with an Option, that pursuant to Section 7 is designated as a Stock Appreciation
Right.
(nn) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 15 hereof, the maximum aggregate number of Shares and options that may be awarded and sold under the Plan is 2,500,000
Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.
(b) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an Exchange Program, or, with
respect to Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units, is forfeited to or repurchased by the Company, the unpurchased Shares (or for
Awards other than Options and Stock Appreciation Rights, the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under
the Plan (unless the Plan has terminated). Upon exercise of a Stock Appreciation Right settled in Shares, the gross number of Shares covered by the portion of the Award so
exercised will cease to be available under the Plan. Shares that have actually been issued under the Plan under any Award will not be returned to the Plan and will not become
available for future distribution under the Plan; provided, however, that if unvested Shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance
Units are repurchased by the Company or are forfeited to the Company, such Shares will become available for future grant under the Plan. Shares used to pay the tax and/or
exercise price of an Award will become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash
payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the foregoing provisions of this Section 3(b), subject to
adjustment provided in Section 14 hereof, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share
number stated in Section 3(a) above, plus, to the extent allowable under Section 422 of the Code, any Shares that become available for issuance under the Plan under this
Section 3(b).
(c) Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the
requirements of the Plan.
4
(d) Limitation on Number of Shares Subject to Awards. Notwithstanding any provision in the Plan to the contrary, the maximum aggregate number of Shares with
respect to one or more Awards that may be granted to any one person during any calendar year (measured from the date of any grant) shall be 1,000,000 and the maximum
aggregate amount of cash that may be paid in cash during any calendar year (measured from the date of any payment) with respect to one or more Awards payable in cash shall
be $600,000.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.
(ii)
Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based
compensation” within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two (2) or more “outside directors”
within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be
structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which committee will be
constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such
Committee, the Administrator will have the authority, in its discretion:
(i)
to determine the Fair Market Value;
(ii)
to select the Service Providers to whom Awards may be granted hereunder;
(iii)
to determine the number of Shares to be covered by each Award granted hereunder;
(iv)
to approve forms of Award Agreements for use under the Plan;
(v)
to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder;
(vi)
t o institute an Exchange Program and to determine the terms and conditions, not inconsistent with the terms of the Plan, for (1) the surrender or
cancellation of outstanding Awards in exchange for Awards of the same type, Awards of a different type, and/or cash, (2) the transfer of outstanding
Awards to a financial institution or other person or entity, or (3) the reduction of the exercise price of outstanding Awards;
(vii)
to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose
of satisfying applicable foreign laws or for qualifying for favorable tax treatment under applicable foreign laws;
(ix)
to modify or amend each Award (subject to Section 20(c) hereof), including but not limited to the discretionary authority to extend the post-termination
exercisability period of Awards;
(x)
to allow Participants to satisfy withholding tax obligations in a manner described in Section 16 hereof;
(xi)
t o authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the
Administrator;
(xii)
to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an
Award pursuant to such procedures as the Administrator may determine; and
(xiii) to make all other determinations deemed necessary or advisable for administering the Plan.
5
(c) Effect of Administrator’s Decision . The Administrator’s decisions, determinations, and interpretations will be final and binding on all Participants and any other
holders of Awards.
5. Eligibility. Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares, and such other cash or
stock awards as the Administrator determines may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.
6. Stock Options.
(a) Limitations.
(i)
Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000 (U.S.), such
Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options will be taken into account in the order
in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted.
(ii)
The Administrator will have complete discretion to determine the number of Shares subject to an Option granted to any Participant.
(b) Term of Option. The Administrator will determine the term of each Option in its sole discretion; provided, however, that the term will be no more than ten (10)
years from the date of grant thereof. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns
stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option
will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.
(c) Option Exercise Price and Consideration.
(i)
Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator, but
will be no less than 100% of the Fair Market Value per Share on the date of grant. In addition, in the case of an Incentive Stock Option granted to an
Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than 10% of the voting power of all classes of stock of
the Company or any Parent or Subsidiary, the per Share exercise price will be no less than 110% of the Fair Market Value per Share on the date of grant.
Notwithstanding the foregoing provisions of this Section 6(c), Options may be granted with a per Share exercise price of less than 100% of the Fair
Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.
(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and
will determine any conditions that must be satisfied before the Option may be exercised.
(iii) Form of Consideration. The Administrator will determine the acceptable form(s) of consideration for exercising an Option, including the method of
payment, to the extent permitted by Applicable Laws. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of
consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) promissory note, to the extent permitted by
Applicable Laws, (4) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which such Option will be exercised and provided further that accepting such Shares will not result in any adverse accounting
consequences to the Company, as the Administrator determines in its sole discretion; (5) consideration received by the Company under cashless exercise
program (whether through a broker or otherwise) implemented by the Company in connection with the Plan; (6) by net exercise, (7) such other
consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws, or (8) any combination of the foregoing
methods of payment. In making its determination as to the type of consideration to accept, the Administrator will consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
6
(d) Exercise of Option.
(i)
Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times
and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a
Share.
An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Administrator specifies from time to time)
from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with any
applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by
the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the
Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with
respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares
promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares
are issued, except as provided in Section 15 hereof.
(ii)
Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s termination as the
result of the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award
Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set
forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months
following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not
exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to
the Plan.
(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her
Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the
Option will remain exercisable for six (6) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date
of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan.
If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered
by such Option will revert to the Plan.
(iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Award
Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of
such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to
Participant’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be
exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will
or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable
for six (6) months following Participant’s death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his
or her entire Option, the Shares covered by the unvested portion of the Option will continue to vest in accordance with the Award Agreement. If the
Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
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7. Stock Appreciation Rights.
(a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to Service Providers at any time
and from time to time as will be determined by the Administrator, in its sole discretion.
(b) Number of Shares. The Administrator will have complete discretion to determine the number of Stock Appreciation Rights granted to any Participant.
(c) Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of
Stock Appreciation Rights granted under the Plan; provided, however, that the exercise price will be not less than 100% of the Fair Market Value of a Share on the date of
grant.
(d) Stock Appreciation Rights Agreement . Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the
term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire upon the date determined by the Administrator, in its sole
discretion, and set forth in the Award Agreement; provided, however, that the term will be no more than ten (10) years from the date of grant thereof. Notwithstanding the
foregoing, the rules of Section 6(d) above also will apply to Stock Appreciation Rights.
(f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive payment from the Company in
an amount determined by multiplying:
(i)
The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times
(ii)
The number of Shares with respect to which the Stock Appreciation Right is exercised.
At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
8. Restricted Stock.
(a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted
Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine.
(b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of
Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, the Company as
escrow agent will hold Shares of Restricted Stock until the restrictions on such Shares have lapsed.
(c) Transferability. Except as provided in this Section 8, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated until the end of the applicable Period of Restriction.
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(d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or
appropriate.
(e) Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will
be released from escrow as soon as practicable after the last day of the Period of Restriction. The Administrator, in its discretion, may accelerate the time at which any
restrictions will lapse or be removed.
(f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect
to those Shares, unless the Administrator determines otherwise.
(g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends
and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares
will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.
(h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the
Company and again will become available for grant under the Plan.
(i) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under Section 162(m) of the
Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the Administrator on or
before the Determination Date. In granting Restricted Stock which is intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures
determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance
Goals).
9. Restricted Stock Units.
(a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. Each Restricted Stock Unit grant will be
evidenced by an Award Agreement that will specify such other terms and conditions as the Administrator, in its sole discretion, will determine, including all terms, conditions,
and restrictions related to the grant, the number of Restricted Stock Units and the form of payout, which, subject to Section 9(d) hereof, may be left to the discretion of the
Administrator.
(b) Vesting Criteria and Other Terms . The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will
determine the number of Restricted Stock Units that will be paid out to the Participant. After the grant of Restricted Stock Units, the Administrator, in its sole discretion, may
reduce or waive any restrictions for such Restricted Stock Units. Each Award of Restricted Stock Units will be evidenced by an Award Agreement that will specify the vesting
criteria, and such other terms and conditions as the Administrator, in its sole discretion will determine. The Administrator, in its discretion, may accelerate the time at which any
restrictions will lapse or be removed.
(c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as specified in the Award
Agreement.
(d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) set forth in the Award Agreement.
The Administrator, in its sole discretion, may pay earned Restricted Stock Units in cash, Shares, or a combination thereof. Shares represented by Restricted Stock Units that are
fully paid in cash again will be available for grant under the Plan.
(e) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.
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(f) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock Units as “performance-based compensation” under Section 162(m)
of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the
Administrator on or before the Determination Date. In granting Restricted Stock Units which are intended to qualify under Section 162(m) of the Code, the Administrator will
follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in
determining the Performance Goals).
10. Performance Units and Performance Shares.
(a) Grant of Performance Units/Shares. Performance Units and Performance Shares may be granted to Service Providers at any time and from time to time, as will be
determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining the number of Performance Units/Shares granted to each
Participant.
(b) Value of Performance Units/Shares. Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each
Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.
(c) Performance Objectives and Other Terms. The Administrator will set performance objectives or other vesting provisions. The Administrator may set vesting criteria
based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis determined by the
Administrator in its discretion. Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and such other
terms and conditions as the Administrator, in its sole discretion, will determine.
(d) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a
payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the
corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion,
may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.
(e) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration
of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an
aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.
(f) Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to
the Company, and again will be available for grant under the Plan.
( g ) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance Units/Shares as “performance-based compensation” under
Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by
the Administrator on or before the Determination Date. In granting Performance Units/Shares which are intended to qualify under Section 162(m) of the Code, the
Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the
Code (e.g., in determining the Performance Goals).
11. Performance-Based Compensation Under Code Section 162(m).
(a) General. If the Administrator, in its discretion, decides to grant an Award intended to qualify as “performance-based compensation” under Code Section 162(m),
the provisions of this Section 11 will control over any contrary provision in the Plan; provided, however, that the Administrator may in its discretion grant Awards that are not
intended to qualify as “performance-based compensation” under Section 162(m) of the Code to such Participants that are based on Performance Goals or other specific criteria
or goals but that do not satisfy the requirements of this Section 11.
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(b) Performance Goals. The granting and/or vesting of Awards of Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units and other
incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Code Section 162(m) and
may provide for a targeted level or levels of achievement (“Performance Goals”) including (i) earnings per Share, (ii) operating cash flow, (iii) operating income, (iv) profit
after-tax, (v) profit before-tax, (vi) return on assets, (vii) return on equity, (viii) return on sales, (ix) revenue, and (x) total shareholder return. Any Performance Goals may be
used to measure the performance of the Company as a whole or a business unit of the Company and may be measured relative to a peer group or index. The Performance Goals
may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Administrator will determine whether any significant element(s) will
be included in or excluded from the calculation of any Performance Goal with respect to any Participant.
(c) Procedures. To the extent necessary to comply with the performance-based compensation provisions of Code Section 162(m), with respect to any Award granted
subject to Performance Goals, within the first twenty-five percent (25%) of the Performance Period, but in no event more than ninety (90) days following the commencement of
any Performance Period (or such other time as may be required or permitted by Code Section 162(m)), the Administrator will, in writing, (i) designate one or more Participants
to whom an Award will be made, (ii) select the Performance Goals applicable to the Performance Period, (iii) establish the Performance Goals, and amounts of such Awards, as
applicable, which may be earned for such Performance Period, and (iv) specify the relationship between Performance Goals and the amounts of such Awards, as applicable, to
be earned by each Participant for such Performance Period. Following the completion of each Performance Period, the Administrator will certify in writing whether the
applicable Performance Goals have been achieved for such Performance Period. In determining the amounts earned by a Participant, the Administrator will have the right to
reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Administrator may deem relevant to
the assessment of individual or corporate performance for the Performance Period. A Participant will be eligible to receive payment pursuant to an Award for a Performance
Period only if the Performance Goals for such period are achieved.
(d) Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Participant and is intended to constitute qualified
performance based compensation under Code Section 162(m) will be subject to any additional limitations set forth in the Code (including any amendment to Section 162(m)) or
any regulations and ruling issued thereunder that are requirements for qualification as qualified performance-based compensation as described in Section 162(m) of the Code,
and the Plan will be deemed amended to the extent necessary to conform to such requirements.
12. Compliance with Code Section 409A. Awards will be designed and operated in such a manner that they are either exempt from the application of, or comply with, the
requirements of Code Section 409A, except as otherwise determined in the sole discretion of the Administrator. The Plan and each Award Agreement under the Plan is intended
to meet the requirements of Code Section 409A and will be construed and interpreted in accordance with such intent, except as otherwise determined in the sole discretion of the
Administrator. To the extent that an Award or payment, or the settlement or deferral thereof, is subject to Code Section 409A the Award will be granted, paid, settled or
deferred in a manner that will meet the requirements of Code Section 409A, such that the grant, payment, settlement or deferral will not be subject to the additional tax or
interest applicable under Code Section 409A.
13. Leaves of Absence. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence. A Service
Provider will not cease to be an Employee in the case of (i) any leave of absence approved by the Company, or (ii) transfers between locations of the Company or between the
Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such
leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six (6) months and one
day following the commencement of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for
tax purposes as a Nonstatutory Stock Option.
14. Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in
any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator
makes an Award transferable, such Award may only be transferred (i) by will, (ii) by the laws of descent and distribution, (iii) to a revocable trust, or (iii) as permitted by Rule
701 of the Securities Act of 1933, as amended.
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15. Adjustments; Dissolution or Liquidation; Merger or Change in Control.
(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other
change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential
benefits intended to be made available under the Plan, will adjust the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of
Shares covered by each outstanding Award, and the numerical Share limits set forth in Sections 3, 6, 7, 8, 9 and 10 hereof.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as
practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the
consummation of such proposed action.
(c) Change in Control. In the event of a merger of the Company with or into another corporation or other entity or a Change in Control, each outstanding Award will be
treated as the Administrator determines (subject to the provisions of the proceeding paragraph) without a Participant’s consent, including, without limitation, that (i) Awards will
be assumed, or substantially equivalent Awards will be substituted, by the acquiring or succeeding corporation (the “ Successor Corporation”) (or an affiliate thereof) with
appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a Participant, that the Participant’s Awards will terminate upon or
immediately prior to the consummation of such merger or Change in Control; (iii) outstanding Awards will vest and become exercisable, realizable, or payable, or restrictions
applicable to an Award will lapse, in whole or in part prior to or upon consummation of such merger or Change in Control, and, to the extent the Administrator determines,
terminate upon or immediately prior to the effectiveness of such merger or Change in Control; (iv) (A) the termination of an Award in exchange for an amount of cash and/or
property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights as of the date of the occurrence of
the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the Administrator determines in good faith that no amount would have been
attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment), or (B) the
replacement of such Award with other rights or property selected by the Administrator in its sole discretion; or (v) any combination of the foregoing. In taking any of the actions
permitted under this subsection (c), the Administrator will not be obligated to treat all Awards, all Awards held by a Participant, or all Awards of the same type, similarly.
In the event that the Successor Corporation does not assume or substitute for the Award, the Participant will fully vest in and have the right to exercise all of his or her
outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock
will lapse, and, with respect to Restricted Stock Units, Performance Shares and Performance Units, all Performance Goals or other vesting criteria will be deemed achieved at
target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted for in the event of a Change in Control,
the Administrator will notify the Participant in writing or electronically that the Option or Stock Appreciation Right will be fully vested and exercisable for a period of time
determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
For the purposes of this subsection (c), an Award will be considered assumed if, following the Change in Control, the Award confers the right to purchase or receive,
for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) or, in the case of a Stock
Appreciation Right upon the exercise of which the Administrator determines to pay cash or a Performance Share or Performance Unit which the Administrator can determine to
pay in cash, the fair market value of the consideration received in the merger or Change in Control by holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however,
that if such consideration received in the Change in Control is not solely common stock of the Successor Corporation, the Administrator may, with the consent of the Successor
Corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Performance Share or Performance
Unit, for each Share subject to such Award (or in the case of Performance Units, the number of implied shares determined by dividing the value of the Performance Units by the
per share consideration received by holders of Common Stock in the Change in Control), to be solely common stock of the Successor Corporation equal in fair market value to
the per share consideration received by holders of Common Stock in the Change in Control.
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Notwithstanding anything in this Section 15(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more Performance Goals will
not be considered assumed if the Company or its successor modifies any of such Performance Goals without the Participant’s consent; provided, however, a modification to
such Performance Goals only to reflect the Successor Corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award
assumption. In the case of an Award providing for the payment of deferred compensation subject to Section 409A of the Code, any payment of such deferred compensation by
reason of a Change in Control shall be made only if the Change in Control is one described in subsection (a)(2)(A)(v) of Section 409A and the guidance thereunder and shall be
paid consistent with the requirements of Section 409A. If any deferred compensation that would otherwise be payable by reason of a Change in Control cannot be paid by
reason of the immediately preceding sentence, it shall be paid as soon as practicable thereafter consistent with the requirements of Section 409A, as determined by the
Administrator.
16. Tax Withholding.
(a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the Participant’s FICA
obligation) required to be withheld with respect to such Award (or exercise thereof).
(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant
to satisfy such tax withholding obligation, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Company withhold otherwise deliverable cash or
Shares having a Fair Market Value equal to the minimum amount required to be withheld, (iii) delivering to the Company already-owned Shares having a Fair Market Value
equal to the amount required to be withheld, or (iv) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may
determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. The amount of the withholding requirement will be deemed
to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal,
state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair
Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
17. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a
Service Provider with the Company, nor will they interfere in any way with the Participant’s right or the Company’s right to terminate such relationship at any time, with or
without cause, to the extent permitted by Applicable Laws.
18. Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other
later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.
19. Term of Plan. Subject to Section 23 hereof, the Plan will become effective upon its adoption by the Board. It will continue in effect for a term of ten (10) years unless
terminated earlier under Section 20 hereof.
20. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable
Laws.
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(c) Effect of Amendment or Termination. No amendment, alteration, suspension, or termination of the Plan will impair the rights of any Participant, unless mutually
agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan
will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
21. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares
will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at
the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
(c) Restrictive Legends. All Award Agreements and all securities of the Company issued pursuant thereto shall bear such legends regarding restrictions on transfer and
such other legends as the appropriate officer of the Corporation shall determine to be necessary or advisable to comply with applicable securities and other laws.
22. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the
Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority will not have been obtained.
23. Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted by the Board.
Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws. In the event that stockholder approval is not obtained within
twelve (12) months after the date the Plan is adopted by the Board, the Plan and all Awards granted hereunder shall be void ab initio and of no effect. Notwithstanding any other
provisions of the Plan, no Awards shall be exercisable until the date of such stockholder approval.
23. Notification of Election Under Section 83(b) of the Code. If any Service Provider shall, in connection with the acquisition of Shares under the Plan, make the election
permitted under Section 83(b) of the Code, such Service Provider shall notify the Company of such election within ten (10) days of filing notice of the election with the Internal
Revenue Service and provide the Company with a copy thereof, in addition to any filing and a notification required pursuant to regulations issued under the authority of Section
83(b) of the Code. A Service Provider shall not be permitted to make a Section 83(b) election with respect to an Award of a Restricted Stock Unit.
24. Notification Upon Disqualifying Disposition Under Section 421(b) of the Code. Each Service Provider shall notify the Company of any disposition of Shares issued
pursuant to the exercise of an Incentive Stock Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), within ten
(10) days of such disposition.
25. Choice of Law. The Plan and all rules and determinations made and taken pursuant hereto will be governed by the laws of the State of Colorado, to the extent not preempted
by federal law, and construed accordingly.
** Adopted by the Board as of January 7, 2018. **
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GROWGENERATION, CORP.
2018 EQUITY INCENTIVE PLAN
STOCK OPTION AWARD AGREEMENT
Exhibit 10.4
Unless otherwise defined herein, the terms defined in the GrowGeneration, Corp. 2018 Equity Incentive Plan (the “Plan”) will have the same defined meanings in this
Stock Option Award Agreement (the “Award Agreement”).
I. NOTICE OF STOCK OPTION GRANT
Participant Name: __________________________________
Address: __________________________________________
You have been granted an Option to purchase Common Stock of GrowGeneration, Corp. (the “Company”), subject to the terms and conditions of the Plan and this
Award Agreement, as follows:
Grant Number
Date of Grant
____________________________________________
____________________________________________
Vesting Commencement Date
____________________________________________
Exercise Price per Share
____________________________________________
Total Number of Shares Granted
____________________________________________
Total Exercise Price
Type of Option:
____________________________________________
[ ] _____________ Incentive Stock Option
[ ] _____________ Nonstatutory Stock Option
Term/Expiration Date:
____________________________________________
Vesting Schedule:
Subject to any acceleration provisions contained in the Plan or set forth herein, this Option shall vest and may be exercised, as follows:
a.
b.
c.
_____________ options shall be immediately exerciseable
_____________ options shall become exerciseable commencing _____________
_____________ options shall become exerciseable commencing _____________
Termination Period:
This Option will be exercisable for three months after Participant ceases to be a Service Provider, unless such termination is due to Participant’s death or Disability, in
which case this Option will be exercisable for six months after Participant ceases to be Service Provider. Notwithstanding the foregoing, in no event may this Option be
exercised after the Term/Expiration Date as provided above and may be subject to earlier termination as provided in Section 15 of the Plan.
By Participant’s signature and the signature of the Company’s representative below, Participant and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Award Agreement, including the Terms and Conditions of Stock Option Grant, attached hereto as Exhibit A, all of which are
made a part of this document. Participant has reviewed the Plan and this Award Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Award Agreement and fully understands all provisions of the Plan and Award Agreement. Participant hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Administrator upon any questions relating to the Plan and Award Agreement. Participant further agrees to notify the Company upon any
change in the residence address indicated below.
PARTICIPANT:
Signature
Print Name
Residence Address:
GROWGENERATION, CORP.
By
Title
2
EXHIBIT A
TERMS AND CONDITIONS OF STOCK OPTION GRANT
1. Grant of Option. The Company hereby grants to the Participant named in the Notice of Stock Option Grant (“Notice of Grant”) attached as Part I of this Award
Agreement (the “Participant”) an option (the “Option”) to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per Share set forth in the
Notice of Grant (the “Exercise Price”), subject to all of the terms and conditions in this Award Agreement and the Plan, which is incorporated herein by reference. Subject to
Section 20 of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Award Agreement, the terms and conditions of
the Plan will prevail.
If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an ISO under Section 422 of the Internal
Revenue Code of 1986, as amended (the “Code”). However, if this Option is intended to be an ISO, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it will
be treated as a Nonstatutory Stock Option (“NSO”). Further, if for any reason this Option (or portion thereof) will not qualify as an ISO, then, to the extent of such
nonqualification, such Option (or portion thereof) shall be regarded as a NSO granted under the Plan. In no event will the Administrator, the Company or any Parent or
Subsidiary or any of their respective employees or directors have any liability to Participant (or any other person) due to the failure of the Option to qualify for any reason as an
ISO.
2. Vesting Schedule. Except as provided in Section 3, the Option awarded by this Award Agreement will vest in accordance with the vesting provisions set forth in the
Notice of Grant. Shares scheduled to vest on a certain date or upon the occurrence of a certain condition will not vest in Participant in accordance with any of the provisions of
this Award Agreement, unless Participant will have been continuously a Service Provider from the Date of Grant until the date such vesting occurs.
3. Administrator Discretion. The Administrator, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, of the unvested
Option at any time, subject to the terms of the Plan. If so accelerated, such Option will be considered as having vested as of the date specified by the Administrator.
4. Exercise of Option.
accordance with the Plan and the terms of this Award Agreement.
(a) Right to Exercise. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in
(b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit B (the “Exercise Notice”) or in a manner
and pursuant to such procedures as the Administrator may determine, which will state the election to exercise the Option, the number of Shares in respect of which the Option is
being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The
Exercise Notice will be completed by Participant and delivered to the Company. The Exercise Notice will be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares together with any applicable tax withholding. This Option will be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice
accompanied by such aggregate Exercise Price.
5. Method of Payment. Payment of the aggregate Exercise Price will be by any of the following, or a combination thereof, at the election of Participant.
(a) cash;
(b) check;
(c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or
that accepting such Shares, in the sole discretion of the Administrator, will not result in any adverse accounting consequences to the Company.
(d) surrender of other Shares which have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares, provided
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6. Tax Obligations.
(a) Withholding Taxes. Notwithstanding any contrary provision of this Award Agreement, no certificate representing the Shares will be issued to Participant,
unless and until satisfactory arrangements (as determined by the Administrator) will have been made by Participant with respect to the payment of income, employment and
other taxes which the Company determines must be withheld with respect to such Shares. To the extent determined appropriate by the Company in its discretion, it will have the
right (but not the obligation) to satisfy any tax withholding obligations by reducing the number of Shares otherwise deliverable to Participant. If Participant fails to make
satisfactory arrangements for the payment of any required tax withholding obligations hereunder at the time of the Option exercise, Participant acknowledges and agrees that the
Company may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.
(b) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Participant herein is an ISO, and if Participant sells or otherwise disposes of
any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two (2) years after the Date of Grant, or (ii) the date one (1) year after the date of exercise,
Participant will immediately notify the Company in writing of such disposition. Participant agrees that Participant may be subject to income tax withholding by the Company on
the compensation income recognized by Participant.
(c) Code Section 409A. Under Code Section 409A, an option that vests after December 31, 2004 (or that vested on or prior to such date but which was
materially modified after October 3, 2004) that was granted with a per share exercise price that is determined by the Internal Revenue Service (the “IRS”) to be less than the
Fair Market Value of a Share on the date of grant (a “ Discount Option”) may be considered “deferred compensation.” A Discount Option may result in (i) income recognition
by Participant prior to the exercise of the option, (ii) an additional twenty percent (20%) federal income tax, and (iii) potential penalty and interest charges. The Discount Option
may also result in additional state income, penalty and interest charges to the Participant. Participant acknowledges that the Company cannot and has not guaranteed that the
IRS will agree that the per Share exercise price of this Option equals or exceeds the Fair Market Value of a Share on the Date of Grant in a later examination. Participant agrees
that if the IRS determines that the Option was granted with a per Share exercise price that was less than the Fair Market Value of a Share on the date of grant, Participant will be
solely responsible for Participant’s costs related to such a determination.
7. Rights as Stockholder. Neither Participant nor any person claiming under or through Participant will have any of the rights or privileges of a stockholder of the
Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued, recorded on the records of the Company or
its transfer agents or registrars, and delivered to Participant. After such issuance, recordation and delivery, Participant will have all the rights of a stockholder of the Company
with respect to voting such Shares and receipt of dividends and distributions on such Shares.
8. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING
SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (OR THE PARENT OR SUBSIDIARY
EMPLOYING OR RETAINING PARTICIPANT) AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES
HEREUNDER. PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AWARD AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND WILL NOT INTERFERE IN ANY WAY WITH
PARTICIPANT’S RIGHT OR THE RIGHT OF THE COMPANY (OR THE PARENT OR SUBSIDIARY EMPLOYING OR RETAINING PARTICIPANT) TO
TERMINATE PARTICIPANT’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
9. Address for Notices. Any notice to be given to the Company under the terms of this Award Agreement will be addressed to the Company, in care of its Chief
Financial Officer at GrowGeneration, Corp, or at such other address as the Company may hereafter designate in writing.
10. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be
exercised during the lifetime of Participant only by Participant.
4
11. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding upon and inure to the
benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.
12. Additional Conditions to Issuance of Stock. If at any time the Company will determine, in its discretion, that the listing, registration or qualification of the Shares
upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority is necessary or desirable as a condition to
the issuance of Shares to Participant (or his or her estate), such issuance will not occur unless and until such listing, registration, qualification, consent or approval will have
been effected or obtained free of any conditions not acceptable to the Company. The Company will make all reasonable efforts to meet the requirements of any such state or
federal law or securities exchange and to obtain any such consent or approval of any such governmental authority. Assuming such compliance, for income tax purposes the
Exercised Shares will be considered transferred to Participant on the date the Option is exercised with respect to such Exercised Shares.
13. Plan Governs. This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Award
Agreement and one or more provisions of the Plan, the provisions of the Plan will govern. Capitalized terms used and not defined in this Award Agreement will have the
meaning set forth in the Plan.
14. Administrator Authority . The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not
any Shares subject to the Option have vested). All actions taken and all interpretations and determinations made by the Administrator in good faith will be final and binding
upon Participant, the Company and all other interested persons. No member of the Administrator will be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or this Award Agreement.
15. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to Options awarded under the Plan or future options that
may be awarded under the Plan by electronic means or request Participant’s consent to participate in the Plan by electronic means. Participant hereby consents to receive such
documents by electronic delivery and agrees to participate in the Plan through any on-line or electronic system established and maintained by the Company or another third party
designated by the Company.
16. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Award Agreement.
17. Agreement Severable. In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will be severable from, and
such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.
18. Modifications to the Agreement. This Award Agreement constitutes the entire understanding of the parties on the subjects covered. Participant expressly warrants
that he or she is not accepting this Award Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this
Award Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary
in the Plan or this Award Agreement, the Company reserves the right to revise this Award Agreement as it deems necessary or advisable, in its sole discretion and without the
consent of Participant, to comply with Code Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Code Section 409A in connection
to this Option.
19. Amendment, Suspension or Termination of the Plan. By accepting this Award, Participant expressly warrants that he or she has received an Option under the Plan,
and has received, read and understood a description of the Plan. Participant understands that the Plan is discretionary in nature and may be amended, suspended or terminated
by the Company at any time.
20. Governing Law. This Award Agreement will be governed by the laws of the State of Colorado, without giving effect to the conflict of law principles thereof. For
purposes of litigating any dispute that arises under this Option or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Colorado,
and agree that such litigation will be conducted in the courts of Colorado, or the federal courts for the United States for Colorado, and no other courts, where this Option is made
and/or to be performed.
[Remainder of Page Intentionally Left Blank]
5
EXHIBIT B
GROWGENERATION, CORP.
2018 EQUITY INCENTIVE PLAN
EXERCISE NOTICE
Attention: GrowGeneration, Corp.
1 . Exercise of Option. Effective as of today, ________________, _____, the undersigned (“Purchaser”) hereby elects to purchase ______________ shares (the
“Shares”) of the Common Stock of GrowGeneration, Corp. (the “Company”) under and pursuant to the 2018 Equity Incentive Plan (the “Plan”) and the Stock Option Award
Agreement dated ________ (the “Award Agreement”). The purchase price for the Shares will be $_____________, as required by the Award Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price of the Shares and any required tax withholding to be paid in connection
with the exercise of the Option.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Award Agreement and agrees to abide by
and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company)
of the Shares, no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares subject to the Option, notwithstanding the exercise of
the Option. The Shares so acquired will be issued to Purchaser as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for
which the record date is prior to the date of issuance, except as provided in Section 15 of the Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that
Purchaser is not relying on the Company for any tax advice.
6. Entire Agreement; Governing Law. The Plan and Award Agreement are incorporated herein by reference. This Exercise Notice, the Plan and the Award Agreement
constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and
Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of the State of Colorado.
6
Submitted by:
PURCHASER:
Signature
Print Name
Residence Address:
Date Received
Accepted by:
GROWGENERATION, CORP.
By:
Name:
Title:
******* FOLLOWING PORTION TO BE COMPLETED BY THE COMPANY *******
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Subsidiary
GrowGeneration Pueblo Corp. (1)
GrowGeneration California Corp. (1)
Grow Generation Nevada Corp. (1)
GrowGeneration Washington Corp. (1)
GrowGeneration Rhode Island Corp. (1)
GGen Distribution Corp. (1)
GrowGeneration Management Corp. (1)
GrowGeneration Michigan Corp. (1)
(1) 100% owned by GrowGeneration, Corp.
SUBSIDIARIES OF GROWGENERATION, CORP.
Exhibit 21.1
Jurisdiction of Incorporation
Colorado
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Exhibit 31.1
I, Darren Lampert, the Principal Executive Officer of GrowGeneration Corp. (the “Company”), certify that:
1. I have reviewed this Form 10-K of the Company;
OFFICER'S CERTIFICATE PURSUANT TO SECTION 302
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting; and
5. The Company’s other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Company's auditors and
the audit committee of the Company's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
Company's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Dated: March 27, 2018
By:
/s/ Darren Lampert
Darren Lampert
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Monty Lamirato, the Principal Financial Officer of GrowGeneration Corp. (the “Company”), certify that:
1. I have reviewed this Form 10-K of the Company;
OFFICER'S CERTIFICATE PURSUANT TO SECTION 302
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting; and
5. The Company’s other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Company's auditors and
the audit committee of the Company's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
Company's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Dated: March 27, 2018
By:
/s/ Monty Lamirato
Monty Lamirato
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of GrowGeneration Corp. (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Darren Lampert, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the undersigned and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
Dated: March 27, 2018
By:
/s/ Darren Lampert
Darren Lampert
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of GrowGeneration Corp. (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Monty Lamirato, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the undersigned and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
Dated: March 27, 2018
By:
/s/ Monty Lamirato
Monty Lamirato
Chief Financial Officer
(Principal Financial Officer)