GrowGeneration Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; dollar figures below are in millions unless otherwise noted. GrowGeneration operates hydroponic garden centers, e-commerce, and distribution/proprietary-brand businesses. It reported 63 stores across 13 states.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $81.8 | $90.0 |
| Gross profit / gross margin | $22.1 / 27.1% | $25.4 / 28.2% |
| Operating income (loss) | ($7.2) | $7.7 |
| Net income (loss) | ($5.2); ($0.09) per diluted share | $6.1; $0.10 per diluted share |
| Adjusted EBITDA | ($0.7) | $11.1 |
| Cash from (used in) operations | ($2.2) | $0.7 |
Cash and cash equivalents were $47.3 million and marketable securities were $19.0 million at quarter-end. Working capital was $157.9 million, down from $169.8 million at December 31, 2021. Total debt was approximately $0.1 million; operating lease liabilities totaled $47.6 million ($7.7 million current). Inventory was $105.9 million. The company reported no off-balance-sheet arrangements.
Changes and operating drivers
- Sales declined 9% year over year. Retail revenue fell to $64.3 million from $81.2 million; e-commerce fell to $5.3 million from $6.0 million. Distribution and other revenue rose to $12.2 million from $2.8 million, partly offsetting declines elsewhere.
- Management attributed the revenue decline primarily to lower same-store sales, which it said decreased approximately $26.2 million, partly offset by distribution growth. Gross profit fell 13% and gross margin contracted 1.1 percentage points.
- Operating expenses increased 66% to $29.4 million, reflecting added locations, higher store and corporate costs, and higher depreciation and amortization. Retail reported a $7.2 million operating loss; e-commerce a $0.4 million loss; distribution and other $0.4 million of operating income.
- Operating cash use was $2.2 million versus $0.7 million provided a year earlier. Investing provided $9.5 million, primarily due to $20.8 million of marketable-security maturities, partly offset by $6.8 million of acquisition spending and $4.5 million of property and equipment purchases.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said it expects to open many new stores in 2022 and may need additional financing to fund acquisitions and openings; it believes some growth can be funded from operating cash flow.
- The February 2022 acquisition of Horticultural Rep Group (HRG) had approximately $13.4 million of consideration, including cash, common stock, and an indemnity stock holdback. HRG contributed $3.4 million in revenue from its acquisition date through quarter-end. Purchase-price allocations remained preliminary.
- Management cited COVID-related supply-chain delays, higher operating and shipping costs, and uncertainty about future disruption. It also noted that interim results may not indicate full-year results.
- Disclosure controls were deemed ineffective at March 31, 2022 due to previously identified material weaknesses involving accounting resources and complex transactions, segregation of duties, IT controls, and physical inventory counts. Remediation was ongoing and had not been confirmed complete.
- The company recorded an immaterial prior-period correction to lease right-of-use assets and liabilities, each understated by $1.3 million at December 31, 2021. It also identified a prior segment-reporting omission and began reporting three segments prospectively.
- Management reported no pending or threatened litigation believed likely to have a material adverse effect; Part II lists no legal proceedings.
Important facts for investors to verify
- Whether retail sales and gross margins stabilize, and whether distribution growth can offset continued retail and e-commerce weakness.
- Whether expanded store operations and corporate costs generate improved profitability and operating cash flow.
- Acquisition performance, final HRG valuation, and the cash or equity required for planned expansion.
- Progress and testing of remediation measures for internal-control material weaknesses.
- Liquidity needs, including the distinction between minimal funded debt and substantial operating lease commitments.