GrowGeneration Corp. — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results for the three and nine months ended September 30, 2022. GrowGeneration operated 61 hydroponic and gardening stores across 15 states, alongside e-commerce and distribution businesses. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $70.9 | $116.0 | $223.7 | $331.9 |
| Gross profit / margin | $18.3 / 25.9% | $34.1 / 29.4% | $60.7 / 27.1% | $95.2 / 28.7% |
| Operating income (loss) | $(8.1) | $4.7 | $(152.1) | $22.0 |
| Net income (loss) | $(7.2) | $4.0 | $(148.8) | $16.9 |
| Adjusted EBITDA | $(2.6) | $10.8 | $(6.3) | $36.3 |
| Operating cash flow | Not separately stated | Not separately stated | $9.9 | $1.9 |
Sales trends. Q3 sales declined 39% year over year; management attributed the decrease primarily to a $55.4 million decline in same-store sales, down 58%. Nine-month sales fell 33%, with same-store sales down approximately 51.6%. Retail and e-commerce sales weakened substantially, while distribution sales increased, largely reflecting acquisitions.
Cash flow and liquidity. Cash and cash equivalents were $71.1 million at September 30, 2022, up from $41.4 million at year-end 2021; working capital was $145.8 million, down from $169.8 million. Nine-month investing cash flow was positive $21.4 million, mainly due to $39.8 million in marketable-security maturities, partly offset by $6.8 million for acquisitions and $11.6 million of property and equipment purchases. Financing cash outflow was $1.5 million.
Debt and obligations. Long-term debt was nearly zero: $0.1 million current and none reported long term. Operating lease liabilities totaled $46.6 million, including $8.0 million current. The filing says future financing through equity or debt may be needed to support acquisitions and store openings.
Material changes and unusual items
- The company recorded $127.8 million of impairment expense in the first nine months, including $116.7 million against goodwill and $11.2 million against intangible assets. The charge followed lower market capitalization, weaker financial performance, inflation, lower-than-expected sales, and higher operating expenses. Goodwill declined from $125.4 million at year-end 2021 to $15.8 million.
- Despite lower sales, Q3 operating expenses excluding impairment were lower year over year. For the nine-month period, operating expenses rose 191%, primarily due to the impairment charge and higher store costs after prior-year expansion.
- The February 2022 HRG acquisition had approximately $13.4 million total consideration, including cash, stock, and an indemnity holdback. HRG contributed $13.5 million in reported-period revenue and a $0.2 million net loss.
- Deferred tax assets were judged not expected to be realizable, and the company recorded a valuation allowance. Nine-month income tax benefit was $2.6 million.
- After quarter-end, the company reported a $32.0 million investment in short-term corporate bonds and Treasury bills, plus acquisitions of certain VW Ag Consulting assets for approximately $0.3 million in stock and St. Louis Hydro assets for approximately $0.4 million cash.
Outlook, risks, and controls
The filing provides no specific numerical revenue or earnings guidance. Management described continued plans to expand through stores, acquisitions, and distribution of proprietary products, while noting potential need for additional financing. It cited adverse equity-market conditions, industry deterioration, inflation, weaker-than-expected sales, operating-cost increases, and possible future impairment if forecasts or valuation assumptions worsen. COVID-related supply-chain delays and higher shipping and operating costs were also identified as risks.
Management concluded disclosure controls and procedures were not effective as of September 30, 2022 because material weaknesses remained in financial reporting controls. Identified issues included limited accounting resources for complex transactions, segregation-of-duties and IT-control deficiencies, inventory-count controls, valuation and forecasting controls, and distribution of accounting policies. Remediation was ongoing; management said the weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested.
Segment disclosure note: The segment table reports Q3 Distribution and other operating income of $18.4 million, while the MD&A narrative describes that segment as having an $18.4 million operating loss. The filing text is internally inconsistent on this point.
Important facts for investors to verify
- Reconcile the conflicting Q3 Distribution and other operating-income disclosure against the segment financial statements.
- Track whether same-store sales and e-commerce demand stabilize and whether gross margins recover.
- Review impairment assumptions and any additional write-downs, given the large charge and sensitivity to forecasts and valuation inputs.
- Assess remediation and testing of the disclosed material weaknesses, including valuation, inventory, IT, and accounting-policy controls.
- Consider liquidity alongside lease commitments and management’s statement that future equity or debt financing may be needed.