GrowGeneration Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. GrowGeneration operated 27 retail hydroponic/gardening stores across 10 states, plus an e-commerce business and distribution operations.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $33.0 million | $13.1 million; up 152% |
| Gross profit / margin | $8.9 million / 27.1% | $3.7 million / 28.2% |
| Operating income (loss) | $(2.1) million | $0.35 million |
| Net income (loss) | $(2.1) million; $(0.055) per share | $0.23 million; $0.01 per share |
| Adjusted EBITDA, non-GAAP | $2.71 million | $0.62 million |
| Operating cash flow | $0.75 million provided | $2.46 million used |
| Cash | $11.44 million at March 31 | $12.98 million at December 31, 2019 |
| Working capital | Approximately $31.7 million | Approximately $30.6 million at December 31, 2019 |
| Debt, excluding leases | $0.31 million total | Includes $0.08 million current and $0.23 million long-term |
| Operating lease liabilities | $7.38 million | $7.64 million at December 31, 2019 |
Gross margin declined 1.1 percentage points, which management attributed primarily to a larger mix of commercial and e-commerce sales, which carry lower margins. The company reported that commercial and e-commerce sales represented about 32% of revenue.
Changes and drivers versus the prior-year quarter
- Revenue growth reflected store openings and acquisitions, stronger comparable-store sales, and online growth. Same-store sales at 14 stores rose 58% to $15.2 million; e-commerce sales grew 185% to $1.94 million.
- Management attributed the comparable-store gains principally to increased commercial customers. Revenue growth also included contributions from stores acquired or opened after Q1 2019, so reported growth was not solely organic.
- Operating expenses rose 232% to $11.06 million. Share-based compensation increased to $4.12 million from $0.08 million, largely due to executive awards and vesting; management identified this as the primary reason for the quarterly net loss.
- Inventory increased to $28.67 million from $22.66 million at year-end. Operating cash flow benefited from non-cash adjustments and higher payables and customer deposits, despite cash investment in inventory and prepaid expenses.
- On February 26, 2020, the company acquired Health & Harvest LLC for approximately $2.85 million, consisting of $1.75 million cash and $1.10 million in stock. The acquisition contributed $0.56 million of revenue and $0.11 million of earnings from closing through quarter-end.
Outlook, risks, and unusual items
- Management said existing cash was sufficient for operations over the next 12 months, while noting that additional financing may be needed to fund future acquisitions and store openings. No numerical revenue or earnings guidance was provided.
- GrowGeneration described itself as an essential supplier and said it remained open during COVID-19. It reported reduced store hours and some weekend closures, minor vendor shipment delays, and successful curbside and will-call service. Management said the pandemic’s full impact was unknown and could not be reasonably estimated; it had not experienced other adverse effects as of the filing discussion.
- The company committed to donate up to $500,000 of free product to affected local communities.
- Management estimated share-based compensation for the remainder of 2020 at approximately $2.4 million, substantially less per quarter than the Q1 charge, based on awards then outstanding. The company stated that, under a hypothetical level-vesting treatment for certain new awards, Q1 expense would have been about $2.43 million lower and Q1 net income about $0.33 million; this was an illustrative scenario, not reported GAAP results.
- Management concluded disclosure controls were ineffective due to a material weakness in accounting for and valuing equity instruments recorded as share-based compensation. Remediation changes were implemented, but management said sufficient testing was still needed and did not assure the weakness was fully remediated. Management nevertheless stated the financial statements were fairly stated in all material respects.
- The filing reported no legal proceedings and no off-balance-sheet arrangements considered reasonably likely to have a material effect. Management cautioned that forward-looking statements were subject to uncertainties.
Key facts for investors to verify
- How much of the 152% revenue increase reflects acquired/opened locations versus sustainable comparable-store and commercial-customer growth.
- Whether lower-margin commercial and e-commerce mix continues to pressure gross margin.
- The timing and cash-flow implications of inventory growth, customer deposits, and accounts payable.
- Actual future share-based compensation expense and dilution; 38,209,300 shares were outstanding at March 31, and 38,533,974 at May 13, 2020.
- Whether the material weakness in equity-award accounting is fully remediated and supported by effective testing.
- The effects of COVID-19 on operating hours, vendor supply, customer demand, and the company’s stated liquidity outlook.
- The assumptions underlying non-GAAP Adjusted EBITDA, which excludes share-based compensation and other items, and its reconciliation to GAAP net loss.