GrowGeneration Corp. — Q2 2022 Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. GrowGeneration operated 64 stores across 14 states, alongside e-commerce and distribution businesses.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $71.1 million | $125.9 million | $152.9 million | $215.9 million |
| Gross profit | $20.2 million | $35.7 million | $42.4 million | $61.1 million |
| Gross margin | 28.5% | 28.4% | 27.7% | 28.3% |
| Operating income (loss) | $(136.8) million | $9.6 million | $(144.0) million | $17.3 million |
| Net income (loss) | $(136.4) million | $6.7 million | $(141.6) million | $12.9 million |
| Adjusted EBITDA | $(2.9) million | $14.5 million | $(3.7) million | $25.6 million |
Q2 sales fell 44%; six-month sales fell 29%. Management attributed the declines principally to lower same-store sales: down 56.9% in Q2 and approximately 48% for the six-month period. Retail and e-commerce sales declined, while distribution and other sales rose to $12.0 million in Q2 from $5.0 million and to $24.2 million for six months from $7.8 million.
Cash flow and liquidity: Six-month operating cash flow was $1.6 million, versus $2.3 million in 2021. Investing activities provided $14.2 million, principally from $29.8 million of marketable-security maturities, offset by acquisitions and capital spending. Financing activities used $1.5 million. At June 30, cash and equivalents were $55.6 million and marketable securities were $10.0 million; working capital was approximately $150.0 million, down from $169.8 million at year-end 2021.
Debt and balance sheet: Total debt was approximately $0.1 million; operating lease liabilities were $49.3 million. Total assets were $317.7 million, down from $459.3 million at December 31, 2021, mainly reflecting impairment and lower goodwill and intangible assets. Stockholders’ equity was $236.7 million.
Material changes and unusual items
- The company recorded a $127.8 million noncash impairment charge in Q2: $116.7 million against goodwill and $11.2 million against finite-lived intangible assets. Goodwill declined from $125.4 million at year-end to $15.8 million at June 30. Management cited lower-than-expected sales, rising operating expenses, inflation, adverse equity-market conditions, and the company’s market capitalization falling below net assets.
- Excluding the impairment, adjusted EBITDA was still negative: $(2.9) million for Q2 and $(3.7) million for the first half, compared with positive results in 2021.
- Q2 store operating costs increased 9%; six-month store operating costs increased 36%, reflecting added locations. E-commerce results also included Agron integration costs.
- The company recorded a valuation allowance because management concluded deferred tax assets were not expected to be realizable; the six-month effective tax rate was 1.34%.
- In February 2022, GrowGeneration acquired Horticultural Rep Group for approximately $13.4 million in cash, stock, and holdback consideration. It contributed $8.1 million of revenue and $0.1 million of net income through June 30.
Outlook, risks, and controls
The filing provides no specific numerical earnings or revenue guidance. Management said it expected to open additional stores in 2022 and continued to pursue geographic expansion, acquisitions, and distribution of proprietary products. It cautioned that future acquisitions and openings may require additional financing, including equity or debt financing.
Risks highlighted include continued pressure on sales and profitability, inflation and operating costs, supply-chain delays and shipping costs, and potential further asset impairments if results or valuation assumptions worsen. Management’s impairment assessments rely on forecasts and other significant Level 3 assumptions. The company reported that disclosure controls were not effective at June 30, 2022, citing continuing material weaknesses in accounting resources, segregation of duties, IT controls, inventory-count controls, and valuation review. Remediation was ongoing. The filing reported no litigation believed likely to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether same-store sales and gross margins stabilize, and whether distribution growth can offset retail and e-commerce declines.
- Whether operating costs and integration expenses improve enough to restore positive adjusted EBITDA and operating cash flow.
- The assumptions underlying the $127.8 million impairment and the possibility of further impairments.
- Progress in remediating material weaknesses and whether controls are subsequently tested and found effective.
- Whether planned store expansion and acquisitions require additional capital and on what terms.