GrowGeneration Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results. GrowGeneration sells hydroponic and gardening supplies through retail stores, commercial sales, e-commerce and distribution. It operated 31 centers at quarter-end.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $55.0 million | $21.8 million | $131.4 million | $54.3 million |
| Gross profit | $14.6 million | $6.5 million | $35.1 million | $16.0 million |
| Gross margin | 26.5% | 29.9% | 26.7% | 29.5% |
| Operating income | $5.1 million | $1.1 million | $5.8 million | $2.7 million |
| Net income | $3.3 million | $1.0 million | $3.8 million | $2.3 million |
| Diluted EPS | $0.06 | $0.03 | $0.09 | $0.07 |
| Adjusted EBITDA, non-GAAP | $6.6 million | $2.0 million | $13.4 million | $4.3 million |
Q3 revenue rose 153%; management reported same-store sales growth of 73%. Nine-month revenue rose 141.8%, with same-store sales up 59%. Management attributed growth to organic sales, new and acquired locations, and e-commerce. Q3 commercial and e-commerce sales were a larger share of revenue and carried lower margins; management also cited the prior-year benefit of discounted inventory as factors in the gross-margin decline. Store operating costs fell as a share of sales, while corporate overhead increased, including higher share-based compensation and staffing costs.
Cash flow and balance sheet: Nine-month operating cash flow was $3.7 million, versus cash used of $2.3 million in 2019; investing cash outflow was $6.9 million and financing inflow was $45.6 million. Cash at September 30 was $55.3 million, and working capital was approximately $83 million. Current and long-term debt totaled approximately $277,000; operating lease liabilities totaled $8.3 million. The company reported no off-balance-sheet arrangements. Net proceeds of $44.6 million from a July public offering were a principal source of financing. Shares outstanding increased to 48.4 million at quarter-end from 36.9 million at year-end 2019.
Changes, outlook and risks
- Three acquisitions closed during the first nine months of 2020 for total consideration of approximately $5.8 million, including cash and shares. Management said these businesses contributed $9.1 million of revenue and $1.4 million of net income from acquisition dates through September 30.
- After quarter-end, the company acquired Hydroponics Depot and Big Green Tomato, and signed an agreement to acquire The GrowBiz for approximately $32 million, including cash and stock. Management targeted 50 stores in 15 states by the end of 2021; this is a goal, not a financial forecast.
- Management said the company remained open as an essential supplier during COVID-19. It reported minor vendor shipment delays, some reduced store hours and approximately $187,000 in COVID-related payroll and safety costs. Management said it had not experienced other adverse effects, while noting that the pandemic’s full impact was unknown.
- Management expects continued growth through acquisitions, store openings, e-commerce and private-label products, and said additional financing may be needed. No specific revenue, earnings or cash-flow guidance was provided.
- The company recorded income tax expense of $1.8 million in Q3 and $2.0 million for the nine-month period, reporting that prior net operating loss carryforwards had been used. Nine-month share-based compensation expense was $6.3 million, up from $1.1 million.
- Management concluded disclosure controls were not effective because of a material weakness in accounting for and valuing equity instruments in share-based compensation. Remediation steps were implemented, but management said effectiveness had not yet been established through sufficient testing. Management nevertheless said the reported financial statements were fairly stated in all material respects and could be relied upon.
- The filing reported no legal proceedings. It cautioned that forward-looking statements are subject to uncertainties; detailed risk-factor disclosure was not required because the company was a smaller reporting company.
Important facts for investors to verify
- How much reported growth reflects same-store demand versus acquisitions, new stores and changes in the store base.
- Whether gross margins stabilize as commercial and e-commerce mix changes, and whether private-label sales improve margins as management expects.
- Cash conversion and working-capital needs, particularly inventory growth, alongside planned acquisitions and lease commitments.
- The cost, financing and integration risks of announced and completed acquisitions, and progress toward the 2021 store target.
- Share dilution and equity-compensation expense: quarter-end shares were 48.4 million, with 2.1 million options and 2.4 million warrants outstanding.
- Remediation and testing of the material weakness in share-based compensation accounting, and the ongoing impact of COVID-19 and supply-chain disruptions.