GrowGeneration Corp. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; quarterly results are not clearly provided in the filing text. The audited consolidated statements received an unqualified opinion.
Business context
GrowGeneration operates hydroponic and specialty gardening retail stores, a commercial sales operation and the GrowGen.Pro e-commerce business. Growth strategy centers on acquisitions, new locations, commercial customers, online sales and private-label products. As of March 2020, the company reported 27 stores across 10 states, a California distribution center and an e-commerce store.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $79.7 million | $29.0 million |
| Gross profit / margin | $22.6 million / 28.3% | $6.4 million / 22.2% |
| Operating expenses | $20.4 million | $10.7 million |
| Operating income (loss) | $2.1 million | $(4.3) million |
| Net income (loss) | $1.9 million; $0.06 basic EPS | $(5.1) million; $(0.22) basic EPS |
| Adjusted EBITDA (non-GAAP) | $6.64 million; $0.20 basic per share | $(0.82) million; $(0.04) basic per share |
| Net cash used in operating activities | $(3.34) million | $(1.54) million |
| Net cash used in investing activities | $(11.81) million | $(6.37) million |
| Net cash provided by financing activities | $13.49 million | $21.33 million |
Cash was $13.0 million at year-end, down from $14.6 million. Working capital was approximately $30.6 million, versus $21.6 million. Total liabilities were $18.1 million, including $352,000 of long-term debt (including current maturities) and $7.64 million of operating lease liabilities. Convertible debt was fully converted or otherwise no longer outstanding at year-end. Management said cash on hand was sufficient for existing operations for the next 12 months, while additional financing may be needed to fund further acquisitions and openings.
Changes and management commentary
- Revenue increased 175% year over year, driven substantially by acquisitions, new stores and a fuller-year contribution from locations added in 2018. Management reported same-store sales growth of approximately 36%; its detailed comparison of six stores shows 36.4% growth.
- Gross margin rose 6.1 percentage points. Management attributed the improvement to greater purchasing scale and discounted bulk inventory purchases; it also reported inventory valuation adjustments of $809,000 in 2019 versus $870,000 in 2018.
- Store operating costs fell to 12.7% of revenue from 18.0%. Corporate overhead was approximately 13% of revenue, down from 18.9%, though absolute overhead increased with expansion.
- Operating cash use increased despite the return to net income, largely reflecting higher inventory, receivables and other current assets. Investing cash use increased with acquisitions and store equipment spending.
- The company raised approximately $12.8 million in a 2019 private placement and reported $13.95 million of net cash proceeds from stock sales and exercises of warrants and options. Year-end shares outstanding were 36.9 million; 38.1 million were outstanding as of March 26, 2020.
Outlook, risks and unusual items
No specific revenue, earnings or margin guidance is provided. Management anticipated continuing expansion and described plans to develop omnichannel sales, increase commercial business and broaden private-label offerings, which it expected could support margins. The company completed implementation of an ERP platform. Subsequent to year-end, it acquired Healthy Harvest assets for $1.75 million and 250,000 shares; the filing also describes the GrowWorld acquisition completed in December 2019.
- COVID-19: The filing warns that the pandemic could disrupt store traffic, staffing, supply chains and customer spending; the ultimate effect was uncertain.
- Industry and regulatory exposure: Demand is linked in part to cannabis and hemp markets, which face changing and inconsistent laws, enforcement and customer perceptions.
- Competition and execution: The company faces established retailers, online marketplaces and potential direct sales by manufacturers. Rapid expansion and acquisitions create integration, staffing and operating demands.
- Supplier concentration: Two suppliers accounted for 51% of purchases in 2019, compared with 56% in 2018.
- Equity dilution: Outstanding options and warrants may dilute shareholders; the company also reported increasing shares outstanding during the year.
- Product liability: The company stated it did not maintain product liability insurance.
- Accounting and cash-flow considerations: Operating cash flow was negative, inventory increased materially, and the company maintained a full valuation allowance against deferred tax assets. Adoption of lease accounting added operating lease assets and liabilities to the balance sheet.
Important facts for investors to verify
- Reconcile reported revenue: the audited statement reports $79,733,568, while the MD&A market-revenue table totals $79,773,568, a $40,000 difference.
- Review the quality and sustainability of growth, including acquisition contributions, same-store sales, commercial revenue and e-commerce performance.
- Assess inventory growth, receivables collection and the drivers of negative operating cash flow against management’s 12-month liquidity statement.
- Confirm the fully diluted share count and potential dilution from outstanding options, warrants, equity awards and the February 2020 acquisition consideration.
- Evaluate acquisition purchase-price allocations and goodwill, which increased to $17.8 million from $8.8 million.
- Monitor COVID-19 effects, regulatory developments, supplier concentration and the company’s financing needs for planned expansion.