GrowGeneration Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; interim financial statements are unaudited. GrowGeneration operated 21 hydroponic and gardening stores across eight states, along with its HeavyGardens e-commerce business.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $13.09 million | $4.38 million |
| Gross profit / margin | $3.69 million / 28.2% | $1.19 million / 27.1% |
| Operating income (loss) | $349,511 | ($659,964) |
| Net income (loss) | $229,421; $0.01 per share | ($953,430); ($0.05) per share |
| Adjusted EBITDA | $615,509 | ($366,945) |
| Net cash used in operating activities | $2.46 million | $1.78 million |
| Net cash used in investing activities | $5.52 million | $661,023 |
Revenue rose 199% year over year, primarily reflecting stores acquired or opened since early 2018 and the e-commerce acquisition. The company reported 42% growth in sales from seven stores open throughout both comparable quarters. Gross margin improved by 1.1 percentage points; management attributed the increase to improved vendor pricing. Operating expenses increased 80%, slower than revenue growth, and operating expenses as a share of revenue declined.
Cash, liquidity, debt, and capital
- Cash was $6.56 million at March 31, down from $14.64 million at December 31, 2018. Working capital was approximately $17.4 million, versus $21.6 million at year-end.
- Operating cash use included a $4.05 million inventory increase and higher receivables and prepaids, partly offset by increases in payables and other liabilities. Investing cash use primarily reflected about $5.0 million paid for three acquisitions.
- Long-term debt was $712,879, including $436,813 current maturities. Convertible debt had $3.075 million principal outstanding and a $2.169 million net carrying amount. Operating lease liabilities totaled $4.66 million, including $1.21 million current.
- Shares outstanding were 28,844,552 at March 31. Diluted weighted-average shares were 34,263,302; options, warrants, and convertible-debt warrants represented potential dilution.
Material changes, outlook, and risks
- Q1 acquisitions were Chlorophyll, Reno Hydroponics, and Palm Springs Hydroponics, for total stated consideration of approximately $5.98 million, funded with cash and stock. Preliminary purchase accounting included $3.67 million of goodwill. Acquired businesses contributed $5.17 million of revenue and $784,100 of earnings from their respective acquisition dates through quarter-end.
- The company adopted lease accounting standard ASC 842 in Q1, recording a $3.2 million increase in lease assets and liabilities on January 1, 2019. The March 31 balance sheet reports $4.63 million of operating lease assets and $4.66 million of related liabilities.
- Management said available cash was sufficient for existing operations for the next 12 months, but anticipated needing additional financing to continue acquiring and opening stores. The company cited ongoing growth plans in stores, e-commerce, commercial sales, hemp-related supply, and Canadian operations; these are forward-looking plans, not guaranteed results.
- Management cited inventory purchases at reduced prices as one driver of the quarter’s inventory build. The business also depends on market growth and the regulatory environment affecting cultivation customers. Management warned actual results could differ materially from forward-looking statements.
- No legal proceedings, defaults upon senior securities, or off-balance-sheet arrangements considered reasonably likely to have a material effect were reported. Management concluded disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- How much of revenue and earnings growth is sustainable same-store or organic growth versus acquisitions and new locations.
- Whether the inventory build converts to sales and cash, and how working capital and cash needs evolve.
- Acquisition integration, final purchase-price allocations, and the recoverability of acquisition-related goodwill.
- Future financing needs and potential dilution from convertible debt, warrants, options, and stock-based consideration.
- Lease obligations and the effect of regulatory or market changes on customer demand and expansion plans.