GrowGeneration Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. GrowGeneration sells hydroponic and gardening supplies through retail stores, commercial sales, e-commerce, and distribution. It reported 28 stores across 10 states, plus an online store and distribution operations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $43.45 million | $19.48 million | $76.43 million | $32.57 million |
| Gross profit | $11.59 million | $5.82 million | $20.53 million | $9.51 million |
| Gross margin | 26.7% | 29.9% | 26.8% | 29.2% |
| Operating income | $2.81 million | $1.17 million | $0.69 million | $1.52 million |
| Net income | $2.57 million | $1.06 million | $0.48 million | $1.29 million |
| Diluted EPS | $0.06 | $0.03 | $0.01 | $0.04 |
- Q2 revenue rose 123% year over year; management cited 49% same-store sales growth, acquisitions and new stores, and e-commerce growth. E-commerce revenue was $2.58 million, up 149%.
- Six-month revenue increased 135%, while same-store sales grew 48%. Commercial sales were $17.7 million for the half-year, up 181% year over year; management said they represented about 21% of Q2 sales.
- Gross margin declined as commercial and e-commerce sales—lower-margin channels—grew as a share of revenue, and because the prior-year comparison benefited from discounted inventory purchases.
- Q2 adjusted EBITDA, a non-GAAP measure, was $4.59 million versus $1.72 million. Six-month adjusted EBITDA was $6.98 million versus $2.36 million. These figures add back, among other items, share-based compensation.
Cash flow, liquidity, and capital
- Six-month operating cash flow was positive $6.12 million, versus negative $0.86 million a year earlier. Inventory and prepaid assets used cash; higher accounts payable and other liabilities, and non-cash compensation, supported operating cash flow.
- Investing cash outflow was $5.02 million, primarily for acquisitions, equipment, and intangible assets. Financing cash inflow was $0.75 million, mainly from warrant exercises.
- Cash was $14.82 million at June 30, 2020; working capital was approximately $35.2 million. Current assets were $54.03 million and current liabilities $18.80 million.
- Long-term debt, including current maturities, was approximately $0.31 million. Operating lease liabilities totaled $7.80 million, including $1.96 million current.
- On July 2, after quarter-end, the company sold 8.625 million shares at $5.60 per share, generating approximately $44.6 million of net proceeds. The filing reported 47,677,772 shares issued and outstanding as of August 12.
Changes, outlook, risks, and unusual items
- Q2 net income improved 142% year over year, but six-month net income fell 63%. Six-month operating income also declined despite higher sales, principally amid a large rise in corporate expenses.
- Six-month share-based compensation expense increased to $5.30 million from $0.52 million, primarily reflecting executive agreements and vesting awards. Management said much of the elevated vesting expense occurred in the first half; approximately $4.1 million of unrecognized compensation costs remained, expected to be recognized over two years.
- Management targeted 50 stores in 15 states by the end of 2021 and planned an omnichannel e-commerce launch in September 2020. It identified Arizona, Illinois, Pennsylvania, New York, New Jersey, and Missouri as potential new markets. These are plans, not reported results or formal financial guidance.
- Management described the company as an essential agricultural supplier during COVID-19; stores remained open, with some reduced hours or weekend closures and minor vendor shipment delays. It said curbside pickup was operating successfully, but the pandemic’s full impact was unknown and could materially affect estimates and results.
- Management reported no legal proceedings, off-balance-sheet arrangements with a reasonably likely material effect, or current demands or commitments expected to reduce working capital. It said future acquisitions and openings may require additional capital.
- Disclosure controls were deemed ineffective due to a material weakness in accounting for and valuing equity instruments in share-based compensation. Remediation steps were implemented, but the company said effectiveness had not yet been established through sufficient testing; management nevertheless stated the financial statements were fairly stated in all material respects.
- Acquisitions during the period included Health & Harvest and H2O Hydroponics, with approximately $4.84 million of total consideration, including cash and stock. The company also acquired Emerald City Garden for $1 million in August.
Important facts for investors to verify
- Whether same-store sales growth and recent revenue momentum persist, particularly in commercial and newer geographic markets.
- Whether gross margins stabilize as channel mix changes, and how much reported earnings depend on non-cash share-based compensation and adjusted EBITDA add-backs.
- Integration, performance, and final purchase accounting for acquisitions; the filing describes H2O’s acquisition as June 16 in one section and June 26 in another.
- Execution of the omnichannel launch and store expansion targets, and the associated capital and operating costs.
- Progress in remediating and testing controls over equity awards, and any resulting adjustments to share-based compensation accounting.
- Share dilution from the July offering and outstanding options and warrants; compare the filing’s stated August share count with the offering and subsequent equity activity.