GrowGeneration Corp. — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2021, compared with the same periods in 2020. GrowGeneration operates hydroponic and gardening retail stores, e-commerce and distribution businesses, and proprietary brands. At quarter-end it reported 61 stores in 12 states, approximately 748 employees, and more than 950,000 square feet of retail and warehouse space.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $116.0 | $55.0 | $331.9 | $131.4 |
| Gross profit | $34.1 | $14.6 | $95.2 | $35.1 |
| Gross margin | 29.4% | 26.5% | 28.7% | 26.7% |
| Operating income | $4.7 | $5.1 | $22.0 | $5.8 |
| Net income | $4.0 | $3.3 | $16.9 | $3.8 |
| Diluted EPS | $0.07 | $0.06 | $0.28 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $10.8 | $6.6 | $36.3 | $13.4 |
Q3 revenue increased 111%; management cited 15.7% same-store sales growth and growth in distribution and e-commerce. Nine-month revenue rose 153%, including reported same-store growth of 38.6%. Management attributed improved gross margins partly to greater contributions from private-label and distributed products. Operating expenses rose faster than quarterly revenue: Q3 operating income declined despite higher sales and gross profit. The filing attributes expense growth to store expansion, staffing and corporate support, pre-opening costs, and acquisition-related amortization.
Cash flow and liquidity: Operating cash flow was $1.9 million for the first nine months, versus $3.7 million in 2020. Investing cash outflow was $114.8 million, including $71.8 million of acquisition cash consideration, $10.8 million of property and equipment purchases, and net purchases of marketable securities. Financing cash outflow was $1.9 million. Cash and cash equivalents were $63.0 million at September 30, down from $177.9 million at year-end; marketable securities were $30.0 million. Working capital was $179.2 million, compared with $222.9 million at year-end. Inventory increased to $113.3 million from $54.0 million.
Debt and obligations: Reported long-term debt was $0.2 million, including current maturities. Operating lease liabilities totaled $37.6 million ($6.2 million current). The company said it may need additional equity or debt financing to support further acquisitions and store openings.
Material changes and notable items
- Acquisition-led expansion materially increased assets: goodwill rose to $123.9 million from $63.0 million at year-end, and net intangible assets to $49.4 million from $21.5 million. The company reported $108.1 million total consideration for 2021 acquisitions through September, funded with $71.8 million cash and $36.3 million stock.
- Management said inventory and prepayments increased partly to support the larger store base, private-label offerings, and advance overseas product commitments for spring 2022.
- Weighted-average shares increased year over year, reflecting equity issuance and acquisition consideration; 59.8 million shares were outstanding as of November 5, 2021.
- On October 12, 2021, the company reported acquiring All Seasons Gardening for $1.0 million and mutually terminating agreements to buy HGS Hydro assets, reimbursing a $0.3 million transaction fee.
- The company reported $457,800 in legal-service payments during the first nine months to a firm employing an immediate family member of an officer; no balance was due at quarter-end.
Outlook, risks and controls
The filing provides no specific revenue, earnings, or other numerical guidance. Management described continued geographic expansion through acquisitions and new stores and said it had an active acquisition pipeline. It also noted possible future financing needs.
COVID-19 had caused temporary supply-chain delays and higher shipping costs; management reported minimal business interruption to date but said effects could not be predicted. The filing identifies risks from supply availability and costs, customer credit and collections, and the pandemic’s potential effects on operations, staffing, and demand.
Management concluded internal control over financial reporting was not effective at September 30, 2021 because of material weaknesses, including insufficient accounting resources, inadequate segregation of duties over bank accounts, and ineffective IT general controls over user access. Remediation was ongoing and not complete. The filing reports no legal proceedings.
Important facts for investors to verify
- Whether same-store sales growth, acquisition contributions, and e-commerce expansion are sustainable and comparable across periods.
- Whether operating expenses can be controlled as the enlarged store base scales, given Q3 operating income declined year over year.
- Inventory quality and turnover, prepaid inventory commitments, and the ability to obtain products amid supply-chain disruptions.
- Acquisition integration, purchase-price valuations, and the recoverability of substantial goodwill and intangible assets.
- Progress in remediating material weaknesses and whether controls operate effectively over a sufficient testing period.
- Future liquidity and potential equity or debt financing needs, including dilution and lease commitments.