GrowGeneration Corp. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial amounts below are in U.S. dollars; statements are in thousands unless otherwise noted. The interim financial statements are unaudited.
Business context and reporting period
GrowGeneration operates hydroponic and gardening retail stores, e-commerce and distribution businesses, and proprietary brands. At quarter-end, it reported 58 stores across 12 states, approximately 671 employees, and more than 875,000 square feet of retail and warehouse space. Growth is driven by acquisitions, new stores, commercial sales, e-commerce, and proprietary products.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $125.9 million | $43.5 million | $215.9 million | $76.4 million |
| Gross profit | $35.7 million | $11.6 million | $61.1 million | $20.5 million |
| Gross margin | 28.4% | 26.7% | 28.3% | 26.9% |
| Operating income | $9.6 million | $2.8 million | $17.3 million | $0.7 million |
| Net income | $6.7 million | $2.6 million | $12.9 million | $0.5 million |
| Diluted EPS | $0.11 | $0.06 | $0.22 | $0.01 |
Q2 adjusted EBITDA, a non-GAAP measure, was $14.5 million versus $4.4 million; first-half adjusted EBITDA was $25.6 million versus $6.8 million. The company cautions that adjusted EBITDA is supplemental and is not a substitute for GAAP results.
Cash flow and liquidity: First-half operating cash flow was $2.3 million, down from $6.1 million. Investing cash use was $111.1 million, including $48.0 million for acquisitions and $57.4 million for marketable securities; financing cash use was $1.9 million. Cash and cash equivalents were $67.2 million and marketable securities were $57.4 million at June 30. Working capital was $195.9 million, compared with $222.9 million at December 31, 2020.
Debt and leases: Long-term debt was $189,000, including current maturities, versus $241,000 at year-end. Operating lease liabilities totaled $32.9 million, up from $12.5 million, reflecting store and facility expansion. Inventory was $95.9 million versus $54.0 million at year-end.
Material changes versus the prior comparable period
- Revenue increased 190% in Q2 and 182% in the first half. Management attributed approximately $45.4 million of Q2 growth and $73.4 million of first-half growth to acquisitions; it attributed $23.3 million and $37.8 million, respectively, to same-store sales growth.
- Gross margin improved year over year, which management attributed mainly to greater revenue contribution from private-label and distributed products.
- Operating expenses rose 197% in Q2 and 121% in the first half, reflecting the larger store base, higher staffing and corporate support costs, and increased depreciation and amortization.
- The company completed ten acquisitions in the first half for total consideration of approximately $81.2 million, comprising $48.0 million cash and $33.2 million stock. Acquisitions contributed to higher goodwill and intangible assets.
- Cash declined from $177.9 million at year-end to $67.2 million, principally amid acquisition spending and investment in marketable securities. The share count also increased; weighted-average basic shares for the first half were 58.6 million versus 38.2 million in 2020.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said it plans to continue expanding through acquisitions and new stores and may need additional equity or debt financing to support that strategy.
- Subsequent to quarter-end, the company acquired two businesses for stated consideration of $10.0 million and approximately $4.0 million. It also signed agreements to acquire seven HGS Hydro stores for approximately $72.2 million, including $55.2 million cash and $17.0 million in restricted shares; the transaction was expected to close by year-end 2021.
- Management reported that COVID-19 had caused temporary supply-chain delays but minimal business interruption to date. Risks include further supply disruption, increased costs, store or distribution-center closures, staffing constraints, and changes in customer demand.
- Management concluded that internal control over financial reporting was not effective as of June 30, 2021 because of material weaknesses involving control activities, insufficient accounting resources, inadequate segregation of duties over bank accounts, and IT access controls. Remediation was ongoing and incomplete.
- The company reported no legal proceedings. It disclosed payments of approximately $0.2 million in Q2 and $0.4 million in the first half to a law firm employing an officer’s immediate family member as a partner; no amount was outstanding at quarter-end.
Important facts for investors to verify
- How much future growth comes from comparable-store performance and product mix versus acquired businesses, and whether acquisition returns justify purchase prices and goodwill.
- Whether margin gains persist as the company scales, and how inventory growth, supply availability, and operating costs affect cash conversion.
- Cash needs and financing plans for announced acquisitions and planned expansion, including the HGS Hydro transaction’s closing and final terms.
- Progress in remediating the disclosed material weaknesses and whether controls operate effectively over a sufficient testing period.
- Potential effects of COVID-19 and supply-chain disruptions on product availability, costs, staffing, and store operations.