GrowGeneration Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company operates retail hydroponic garden centers, e-commerce, distribution and proprietary-brand businesses; it reported 59 retail locations in 16 states.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $56.8 million | $81.8 million |
| Gross profit / margin | $16.3 million / 28.7% | $22.1 million / 27.1% |
| Operating loss | $7.8 million | $7.2 million |
| Net loss | $6.1 million | $5.2 million |
| Adjusted EBITDA loss | $1.8 million | $0.8 million |
| Operating cash flow | $3.5 million provided | $2.2 million used |
- Revenue fell 31%, primarily due to a 36.6% decline in same-store sales (about $21.8 million). Retail sales decreased to $39.4 million from $64.3 million; e-commerce decreased to $3.3 million from $5.3 million. Distribution and other sales rose to $14.2 million from $12.2 million, including $7.7 million of commercial fixture sales.
- Gross margin improved by 1.6 percentage points despite lower gross profit. Operating expenses declined 18% to $24.1 million, reflecting payroll reductions, cost controls and store consolidations.
- Cash and cash equivalents were $62.7 million at March 31, versus $40.1 million at year-end; marketable securities were $9.1 million. Working capital was $130.7 million, down from $134.9 million.
- Investing activities provided $19.3 million, mainly from $33.5 million of marketable-security maturities, partly offset by $3.5 million of capital expenditures. Financing activities used $0.1 million.
- Current and long-term debt totaled approximately $34,000; operating lease liabilities were $46.1 million. The filing says the company may need equity or debt financing in the future to fund store openings and acquisitions.
Changes, outlook and other material matters
- Management attributed the sales decline mainly to weaker same-store demand. It cited lower payroll and other expense levels as drivers of reduced operating costs. Retail and e-commerce segment operating losses were $7.1 million and $0.5 million; distribution and other reported a $0.2 million operating loss.
- No specific financial guidance or quantified outlook is provided. The company plans to pursue growth through retail locations, commercial sales, distribution and proprietary brands; it acquired one Michigan location during the quarter. Management says acquisitions and openings may require additional financing.
- The income-tax rate was 0% versus 24.02% in Q1 2022. The company recorded a valuation allowance because it concluded deferred tax assets were not expected to be realizable.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to continuing material weaknesses, including deficiencies in the control environment, risk assessment, information and communication, monitoring, process controls and IT controls. Remediation was ongoing and not yet complete.
- In the Total Grow dispute, the company is defending claims in arbitration and counterclaiming for repayment of a $1.5 million loan; it has reserved the full principal amount. Management says ordinary-course claims are not expected to have a material adverse effect, while noting outcomes cannot be assured.
- The company reported no goodwill or intangible-asset impairment in Q1 2023. It had recorded $116.7 million of goodwill impairment in 2022 amid weaker performance and adverse market conditions.
- Comparative-period note: The statements report a Q1 2022 net loss of $5.2 million, but the MD&A describes Q1 2022 net income of approximately $5.2 million. The financial statements show a loss; investors should verify this apparent inconsistency.
Important facts for investors to verify
- Whether sales and same-store trends stabilize, especially in retail, and whether improved gross margin can be sustained.
- Cash generation, working-capital changes and any need for additional financing; also consider lease obligations alongside the low reported debt balance.
- Progress and testing of internal-control remediation, given the disclosed material weaknesses and ineffective controls.
- Developments in the Total Grow arbitration and the recoverability of the reserved loan.
- The Q1 2022 net-income/net-loss inconsistency in the MD&A versus the statements of operations.