Business Context and Reporting Period
GrowGeneration Corp. filed this Form 10-K for the fiscal year ended December 31, 2022. The company sells hydroponic and organic gardening products through retail stores, e-commerce, and distribution businesses, serving commercial and other growers. It reported 60 retail locations across 16 states in its business overview; a financial-statement note says 59 locations.
Financial Results and Liquidity
Amounts below are in millions of dollars except per-share data and percentages. Fiscal 2022 compared with fiscal 2021:
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $278.2 | $422.5 |
| Gross profit / margin | $70.3 / 25.3% | $118.2 / 28.0% |
| Operating expenses | $238.1 | $103.2 |
| Operating income (loss) | $(167.9) | $15.0 |
| Net income (loss) | $(163.7), or $(2.69) per diluted share | $12.8, or $0.21 per diluted share |
| Adjusted EBITDA, non-GAAP | $(16.7) | $34.2 |
| Cash from operating activities | $11.9 | $5.2 |
Cash and cash equivalents were $40.1 million and marketable securities were $31.9 million at year-end. Working capital was $134.9 million, down from $169.8 million. Interest-bearing debt was less than $0.1 million; operating lease liabilities totaled $48.8 million. Cash used in investing activities was $11.6 million, including acquisitions and capital expenditures, partly offset by marketable-security maturities. Cash used in financing activities was $1.7 million.
Material Changes Versus the Prior Year
- Sales fell 34.2%; management attributed the decline primarily to a downturn in cannabis cultivation and reduced grower spending on supplies and equipment. Same-store sales declined 51.6%, or about $178 million.
- Retail sales fell to $205.5 million from $369.2 million, and e-commerce sales fell to $15.1 million from $36.2 million. Distribution and other sales rose to $57.6 million from $17.1 million, driven principally by acquisitions, including HRG and MMI.
- Gross margin contracted 2.7 percentage points, which management attributed mainly to higher freight costs and increased retail discounting.
- The company recorded $127.8 million of impairment expense after weaker performance and a decline in market capitalization triggered impairment testing. This included $116.7 million of goodwill impairment and $11.2 million of intangible-asset impairment.
- Retail operating results included the impairment charge; e-commerce and distribution and other also reported operating losses for 2022.
- The company acquired or opened five locations and expanded into four states, while closing eight underperforming stores. It said further consolidation could occur in 2023.
Outlook, Risks, and Unusual Items
The filing provides no quantified revenue, earnings, or margin guidance. Management plans to pursue growth through commercial sales, distribution, proprietary brands, and selective store expansion, while considering additional store consolidation amid difficult market conditions. Management said it believed existing working capital was adequate to support current and future operations.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving the control environment, risk assessment, information and communication, monitoring, process controls, IT controls, inventory counts, valuations, and segregation of duties. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Remediation remained in progress.
- Legal contingency: GrowGeneration is in arbitration with Total Grow over an acquisition-related note and option. The company disputes the claims and counterclaims for repayment of a $1.5 million loan; it has recorded a $1.3 million reserve against the note.
- Business risks: Demand is exposed to cannabis-industry conditions and changing laws, as well as competition, inflation, freight and supply constraints, customer credit risk, and the possibility of further asset impairments. Federal cannabis prohibition also creates banking and customer-collection risks.
- Other items: The company recorded immaterial prior-period adjustments to lease balances and disclosed that its 2021 segment presentation had omitted a separate distribution and other segment; it concluded the omission was not material to prior statements.
Investor Facts to Verify
- Whether sales and same-store trends stabilize, and whether discounting and freight costs continue to pressure margins.
- The assumptions behind the 2022 impairment tests and the potential for further impairments.
- Progress and independent evidence of remediation of the material weaknesses in financial reporting controls.
- Collections and ultimate resolution of the Total Grow arbitration and reserved note receivable.
- Cash conversion, inventory levels, lease commitments, and the reported retail-location count.