GrowGeneration Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Comparisons are with the corresponding 2018 periods. The company operates hydroponic and gardening retail stores, commercial sales, and e-commerce. It reported 23 stores across eight states and the HeavyGardens online store.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $21.78 million | $8.41 million | $54.35 million | $19.94 million |
| Gross profit | $6.50 million | $2.16 million | $16.01 million | $5.08 million |
| Gross margin | 29.9% | 25.7% | 29.5% | 25.5% |
| Operating income (loss) | $1.13 million | $(0.58) million | $2.66 million | $(1.86) million |
| Net income (loss) | $1.05 million | $(0.78) million | $2.34 million | $(2.67) million |
| Basic EPS | $0.03 | $(0.03) | $0.07 | $(0.12) |
- Q3 revenue increased 159%; year-to-date revenue increased 173%. Management attributed growth to store openings and acquisitions, e-commerce, commercial sales, and higher same-store sales. Same-store sales rose 48% for Q3 across 13 comparable stores and 37% year to date across six comparable stores.
- Management attributed higher gross margins to improved vendor pricing from increased purchasing and sales of inventory obtained through a discounted bulk purchase.
- Operating expenses rose 96% in Q3 and 93% year to date, but declined as a share of revenue. Store operating costs were 12.6% of Q3 revenue versus 16.8% and 13.5% year to date versus 17.3%; corporate overhead was 12% versus 16% and 11% versus 17.4%, respectively.
- Adjusted EBITDA, a non-GAAP measure, was $2.05 million for Q3 and $4.48 million year to date, versus a loss of $72,000 and $645,000, respectively, in 2018. It excludes specified items and should not be viewed as a substitute for GAAP results.
Cash flow, liquidity and capital
- Cash was $15.98 million at September 30, 2019, compared with $14.64 million at December 31, 2018. Working capital was approximately $30.4 million, up from $21.6 million.
- For the first nine months, operating cash flow was negative $2.28 million (2018: negative $1.87 million). Inventory increased $7.33 million, receivables $1.31 million, and prepaid and other assets $2.21 million; payables and accrued liabilities provided a partial offset.
- Investing cash outflow was $10.18 million, including $8.53 million for business combinations and $1.54 million for equipment. Financing provided $13.80 million, mainly from $14.14 million of stock-sale and warrant-exercise proceeds. Management said existing cash was sufficient for operations for the next 12 months, while anticipating a need for future financing to support expansion.
- Convertible debt was fully converted to equity by September 30; none remained outstanding. Other long-term debt totaled $472,000, including $208,000 current maturities. Operating lease liabilities were $7.80 million, including $1.94 million current.
- Shares outstanding increased from 27.95 million at year-end 2018 to 36.65 million at September 30, 2019; 36.71 million were outstanding as of November 8. A June private placement raised approximately $12.78 million and included warrants.
Developments, outlook and items to monitor
- The company reported acquisitions during 2019 and $11.85 million of acquired-business revenue from their respective acquisition dates through September 30. The preliminary purchase-price allocation included $8.35 million of goodwill. Management said six additional stores acquired or opened during the first nine months were projected to contribute $27 million in annual revenue.
- Management stated a goal of 100% year-over-year revenue growth and expected two new locations to open in Q4 2019; the filing does not provide formal numeric quarterly or full-year earnings guidance. It also cited continued expansion through acquisitions, new stores, commercial sales, proprietary products and e-commerce.
- The filing identifies growth and integration execution, inventory and working-capital requirements, access to future financing, and regulatory changes affecting growers as considerations. Management cautioned that forward-looking statements depend on assumptions and actual results may differ. The company reported no off-balance-sheet arrangements or legal proceedings.
- The company adopted lease accounting standard ASC 842 in 2019, recording operating lease assets and liabilities; the reported adoption-date increase was $3.2 million. This affects balance-sheet comparability with 2018.
Important facts for investors to verify
- How much revenue and profit growth is organic versus attributable to acquisitions, new stores, and e-commerce; and whether same-store growth continues.
- Whether gross-margin improvement from purchasing terms and discounted bulk inventory is repeatable.
- Whether inventory investment converts into sales and operating cash flow, given year-to-date operating cash use despite reported net income.
- The annualized economics and integration progress of acquired businesses, including goodwill and the projected $27 million of additional annual revenue.
- Future financing needs, potential dilution from outstanding options and warrants, and the company’s ability to fund expansion while maintaining liquidity.