GrowGeneration Corp. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; includes fourth-quarter results. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
GrowGeneration operates hydroponic and specialty gardening retail stores, e-commerce and distribution businesses, and proprietary brands. It sells products for a range of crops, including cannabis and hemp. The company reported 62 company-operated garden centers in its business-unit description and said it acquired 23 locations during 2021. Its strategy remains focused on store expansion, acquisitions, e-commerce and proprietary products.
Key financial metrics
| Metric | FY2021 | FY2020 | Q4 2021 | Q4 2020 |
|---|---|---|---|---|
| Revenue | $422.5 | $193.4 | $90.6 | $61.9 |
| Gross profit | $118.2 | $51.0 | $23.1 | $15.9 |
| Gross margin | 28.0% | 26.4% | 25.5% | 25.8% |
| Operating income (loss) | $15.0 | $8.4 | $(7.0) | $2.6 |
| Net income (loss) | $12.8 | $5.3 | $(4.1) | $1.5 |
| Adjusted EBITDA | $34.5 | $18.9 | $(1.9) | $5.5 |
FY2021 diluted earnings per share were $0.21, versus $0.11 in FY2020. Q4 2021 diluted loss per share was $0.07. The Q4 net loss included a $3.1 million income-tax benefit, reducing the loss from the $7.2 million pretax loss.
FY2021 revenue rose 118.5%. Sales at company-owned stores were $369.2 million, distribution revenue was $17.1 million and e-commerce revenue was $36.2 million. Full-year same-store sales increased 24.4%, while Q4 same-store sales at 26 comparable locations fell 12.3% year over year. Proprietary and private-label products represented 7.5% of Q4 revenue, versus 0.5% a year earlier.
Net cash from operating activities was $5.2 million, compared with cash used of $0.2 million in FY2020. Investing activities used $139.3 million, including $80.8 million for acquisitions, $75.0 million of marketable-security purchases and $18.7 million for property and equipment, partly offset by security maturities. Cash and cash equivalents were $41.4 million, and marketable securities were $39.8 million at year-end. Working capital was $169.8 million, down from $222.9 million.
Reported long-term debt was $0.2 million, including current maturities; the company separately disclosed less than $0.1 million of interest-bearing debt. Operating lease liabilities totaled $45.4 million. There were no cash dividends, and management said it expects to retain funds for operations and growth.
Material changes versus the prior comparable period
- FY2021 revenue more than doubled, with same-store growth, acquired businesses, distribution and e-commerce contributing. E-commerce revenue increased to $36.2 million from $10.6 million.
- Annual gross margin improved by 1.6 percentage points, which management attributed mainly to higher private-label and distributed-product sales. However, operating expenses increased 142.3%, faster than revenue growth of 118.5%.
- Q4 revenue increased 46%, but comparable-store sales declined and gross margin slipped 0.3 percentage points. Q4 shifted from net income and positive adjusted EBITDA to losses.
- Cash and working capital declined substantially, primarily reflecting acquisition spending, capital investment and purchases of marketable securities. The company completed 16 acquisitions in 2021; acquisition consideration was approximately $118.1 million, including $80.8 million cash and $37.3 million in stock.
- Goodwill rose to $125.4 million from $63.0 million, and net intangible assets rose to $48.4 million from $20.5 million, increasing the importance of acquisition valuations and future impairment assessments.
Outlook, management commentary, risks and unusual items
- Management expected to open many new stores in 2022 and intends to continue acquiring and opening locations. It gave no quantified revenue, earnings or cash-flow guidance in the provided filing text.
- Management cited private-label expansion as a potential margin and profitability benefit. It also noted seasonality, with historically higher sales in Q2 and Q3 and lower sales in Q1 and Q4.
- Major risks include changing cannabis laws and federal cannabis prohibition; supply-chain disruption, freight and inventory costs; competition and potential margin pressure; acquisition integration and goodwill/intangible valuation; customer credit and collection risk; and reliance on suppliers. One supplier accounted for 28% of purchases in 2021.
- The auditor issued an adverse opinion on internal control over financial reporting. Management and the auditor identified material weaknesses involving complex transaction accounting, segregation of duties, IT general controls and physical inventory counts. Remediation was underway but was not complete.
- The company reported a lawsuit involving Total Grow, which alleges breach of contract and related claims. GrowGeneration disputes the claims and is seeking repayment of a $1.5 million principal loan plus interest. No loss accrual was recorded because a loss was not considered probable; management did not expect a material effect, while acknowledging litigation outcomes remain uncertain.
- Other items to note: 2021 acquisition accounting remained provisional for MMI; the company acquired Horticultural Rep Group for $12.3 million on January 31, 2022; and it disclosed $0.8 million of 2021 legal fees paid to a firm employing an immediate family member of an officer.
Most important facts for investors to verify
- Whether the Q4 comparable-store sales decline continued and how much reported growth depends on acquisitions versus organic demand.
- Whether gross-margin gains from proprietary and distributed products persist, and whether operating costs can be contained.
- Cash conversion, inventory growth and the company’s capacity to fund further acquisitions without additional equity or debt financing.
- Progress in remediating the material weaknesses and whether controls operate effectively in subsequent reporting periods.
- Assumptions underlying acquisition valuations, goodwill and intangible assets, including MMI’s provisional allocation and potential impairment exposure.
- Developments in the Total Grow litigation, customer credit exposures, supplier concentration and cannabis-related legal and regulatory risks.