GrowGeneration Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. GrowGeneration operates hydroponic and gardening retail stores and an e-commerce business; it reported 23 stores across nine states.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $19.48m | $7.15m | $32.57m | $11.53m |
| Gross profit / margin | $5.82m / 29.9% | $1.73m / 24.2% | $9.51m / 29.2% | $2.92m / 25.3% |
| Operating income (loss) | $1.17m | $(0.62)m | $1.52m | $(1.28)m |
| Net income (loss) | $1.06m | $(0.93)m | $1.29m | $(1.88)m |
| Operating cash flow | Not stated for quarter | $(0.86)m | $(3.52)m |
Q2 revenue rose 172% year over year; six-month revenue increased 182%. Same-store sales rose 23% for Q2 across nine comparable stores and 33% for the six-month period across six comparable stores. Growth primarily reflected stores acquired or opened since the comparable periods and the acquired e-commerce business. Gross margin improvement was attributed to better vendor pricing from increased purchasing and discounted inventory from a bulk purchase. Operating expenses increased in dollars with expansion, but declined as a share of revenue: store costs were 14.0% versus 16.1% in Q2 and 14.2% versus 17.6% for six months; corporate overhead was 9.8% versus 16.8% and 10.3% versus 18.8%, respectively.
Six-month Adjusted EBITDA, a non-GAAP measure, was $2.44m versus a loss of $0.56m; Q2 Adjusted EBITDA was $1.78m versus a loss of $0.21m. The filing cautions that this measure is not a substitute for GAAP results.
Cash, liquidity and capital
- Cash was $17.86m at June 30, 2019, up from $14.64m at year-end 2018. Working capital was approximately $29.6m, versus $21.6m.
- Six-month operating cash use was $0.86m despite reported net income, with cash absorbed by working-capital changes, including inventory and prepaid expenses.
- Investing cash use was $8.80m, including $7.63m cash paid for 2019 acquisitions and approximately $1.05m for equipment. Financing provided $12.88m, largely from stock and warrant proceeds.
- At June 30, current and long-term debt totaled approximately $0.58m, and net convertible debt was $2.10m. Operating lease liabilities were $5.54m, including $1.55m current. The company adopted ASC 842 in 2019, recognizing lease assets and liabilities.
- A June private placement raised approximately $12.78m gross from 4.12m units priced at $3.10 each; each unit included one share and a three-year warrant to buy one-half share at $3.50. Shares outstanding were 34.83m at June 30 and 35.53m as of August 7.
Outlook, commentary and notable items
Management said existing cash was sufficient to fund current operations for the next 12 months, but anticipated needing additional financing to pursue acquisitions and store openings. The company described a goal of 100% year-over-year revenue growth and said six additional acquired stores were projected to contribute $20m in annual revenue; these are management statements, not formal financial guidance. It also highlighted commercial sales, e-commerce, hemp-related demand, private-label products and further acquisitions as growth opportunities.
Expansion included four acquisitions during the six-month period detailed in the acquisition note, two store openings, and two warehouse facilities opened April 1. Acquisitions contributed $6.71m of revenue from their respective acquisition dates through June 30; purchase-price allocations were preliminary and included $5.97m goodwill. Management identified regulatory changes as affecting California grower licensing in 2018 and described future results as subject to uncertainties. Execution of acquisitions, store integration, continued financing needs, and demand or regulatory developments in target markets are important considerations. Management reported disclosure controls were effective and no material legal proceedings or off-balance-sheet arrangements.
Data note: The statement of operations heading in the supplied filing text says “Six Months Ended September 30” in one location, while the filing title, cash-flow statement, MD&A and other references identify the period as June 30. The figures above use June 30 as the comparable reporting period.
Important facts for investors to verify
- Reconcile reported growth and same-store comparisons with the contribution and timing of acquisitions, openings and store closures.
- Assess whether improved margins persist after the benefit of discounted bulk-purchase inventory and favorable vendor pricing.
- Monitor operating cash conversion and inventory, prepaid expenses and payables as the store base expands.
- Review dilution from the private placement, warrants, options and potential convertible-debt conversions, and the company’s future capital requirements.
- Confirm the reported period heading and review final acquisition valuations, including goodwill, as purchase accounting is finalized.