GrowGeneration Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Financial statement amounts below are in millions of dollars unless otherwise noted. The interim financial statements are unaudited.
Business context
GrowGeneration operates hydroponic and gardening retail stores, distribution and e-commerce businesses, and proprietary brands. At quarter-end, it reported 53 stores across 12 states, approximately 590 employees, and more than 865,000 square feet of retail and warehouse space. Growth strategy centers on acquisitions and new stores.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $90.0 | $33.0; up 172.9% |
| Gross profit / margin | $25.4 / 28.2% | $8.9 / 27.1% |
| Operating income (loss) | $7.7 | $(2.1) |
| Net income (loss) | $6.1 | $(2.1) |
| Diluted earnings per share | $0.10 | $(0.06) |
| Adjusted EBITDA (non-GAAP) | $11.1 | $2.4 |
| Operating cash flow | $0.7 | $0.8 |
| Cash and cash equivalents | $92.0 | $177.9 at Dec. 31, 2020 |
| Marketable securities | $41.1 | None reported at Dec. 31, 2020 |
| Working capital | $194 | $223 at Dec. 31, 2020 |
Revenue growth included $41.4 million from acquisitions and $14.5 million from same-store sales, according to management. Company-owned store sales were $82.8 million, distribution revenue $2.8 million, and e-commerce sales $4.4 million. Management attributed gross-margin improvement mainly to a higher contribution from private-label and distributed products.
Operating expenses were $17.6 million, up 60%, including $8.2 million of store operating costs and $7.4 million of selling, general and administrative expense. Depreciation and amortization was $2.1 million. Income tax expense was $1.6 million; the prior-year quarter reported none.
Cash used in investing activities was $82.8 million, primarily $39.3 million for acquisitions and $41.1 million for marketable securities. Financing activities used $3.9 million, mainly for common-stock redemptions. Cash declined by $85.9 million during the quarter. Long-term debt was $0.2 million; operating lease liabilities totaled $14.7 million, including $3.9 million current.
Material changes and notable transactions
- The company completed eight acquisitions during the quarter, for total consideration of $68.6 million: $39.3 million cash and $29.2 million in stock. The transactions added 14 locations and businesses in retail, distribution, and e-commerce.
- Acquisitions contributed $6.0 million of reported revenue and $0.9 million of net income from their respective acquisition dates through March 31. Pro forma results assuming the acquisitions were included for the full quarter were revenue of $99.1 million and net income of $7.4 million.
- Acquisition accounting remained preliminary. The company said four of eight purchase-price valuations were completed and the remaining four were expected by June 30, 2021; changes in estimates could materially affect results or financial position.
- Goodwill increased from $63.0 million to $101.0 million, principally reflecting acquisitions. Intangible assets, net, increased from $21.5 million to $42.8 million.
- Inventory rose from $54.0 million to $77.9 million. Accounts payable increased from $14.6 million to $25.0 million.
Outlook, risks, and controls
The filing provides no quantified financial guidance. Management said it plans continued geographic expansion through acquisitions and store openings, may need additional equity or debt financing, and expects some expansion to be funded from operating cash flow. It reported no current demands or commitments expected to reduce working capital.
Management said COVID-19 had caused minimal business interruption to date, with temporary supply-chain delays, but warned that pandemic-related disruption could affect product availability, costs, staffing, store operations, and demand. The company also noted that its acquisition purchase-price estimates remain subject to change. No legal proceedings were reported.
Management concluded that disclosure controls and internal control over financial reporting were not effective as of March 31, 2021 because of material weaknesses. Cited issues included insufficient accounting resources, inadequate segregation of duties over bank accounts, and ineffective IT general controls. Remediation was ongoing and not complete.
Important facts for investors to verify
- Whether acquisition valuations and integration results ultimately support recorded goodwill and intangible assets, and whether acquired businesses deliver expected performance.
- Whether reported same-store growth and improved gross margin persist, including the contribution from private-label and distribution products.
- How inventory expansion, supplier delays, and working-capital needs affect operating cash generation and liquidity.
- Whether the company completes remediation of its material weaknesses and demonstrates effective controls over financial reporting.
- Whether future acquisition and store-opening plans require additional capital, and the resulting effect on cash, debt, leases, and share dilution.