GrowGeneration Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 29, 2021. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the SEC. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives,” and similar expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements, except as required by law. OVERVIEW GrowGeneration Corp. (together with all of its wholly-owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014 and is the largest chain of hydroponic garden centers in North America and is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems and accessories for hydroponic gardening. GrowGeneration also owns and operates e-commerce platforms, www.growgeneration.com and www.agron.io, Canopy Crop Management Corp, CharCoir Inc, and several proprietary private-label brands across multiple product categories from LED lighting to nutrients and additives and environmental control systems for indoor cultivation. Markets GrowGeneration sell thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems, vertical benching and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are designed and intended for growing a wide range of plants. In addition, vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other severe weather conditions and insect pests. Our retail operations are driven by a wide selection of all hydroponic products, service and solutions driven staff and pick, pack and ship distribution and fulfillment capabilities. We employ approximately 671 employees, a majority of them we have branded as “Grow Pros.” Currently, our operations span over 875,000 square feet of retail and warehouse space. We operate our business through the following business units: • Retail : 58 operating hydroponic/gardening centers focused on serving growers and cultivators. • Commercial : Sales to commercial customers, including large multi-state operators and cultivators. • E-Commerce/Omni-channel : Our e-commerce operation, includes GrowGeneration.com and Agron.io, a business-to-business (B2B) online portal for commercial growers. GrowGeneration.com is currently adding “Buy online/Pick up in store” same day pick up service. • Proprietary Brands and Private Label : GrowGeneration sells a variety of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems, vertical benching, environmental control systems and accessories for hydroponic gardening. Competitive Advantages As the largest chain of hydroponic garden centers by revenue and number of stores in the United States based on management’s estimates, we believe that we have the following core competitive advantages over our competitors: • We offer a one-stop shopping experience to all types of growers by providing “selection, service, and solutions”; 22 • We provide end-to-end solutions for our commercial customers from capex built-out to consumables to nourish their plants; • We have a knowledge-based sales team, all with horticultural experience; • We offer the options to transact online, in store, or buy online and pick up; • We consider ourselves to be a leader of the products we offer, from launching new technologies to the development of our private label products; • We have a professional team for mergers and acquisitions to acquire and open new locations and successfully add them to our company portfolio; and • We offer a program of issuing credit to licensed commercial customers based on a credit evaluation process. Growth Strategy - Store Acquisitions and New Store Openings Core to our growth strategy is to expand the number of our retail garden centers throughout North America. The hydroponic retail landscape is fragmented, which allows us to acquire the “best of breed” hydroponic operations. In addition to the 12 states we are currently operating in, we have identified new market opportunities in states that include Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi and Missouri. In 2020, we opened a second hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and completed eight (8) acquisitions, adding 14 new locations. The Company acquired 17 new locations in the first half of 2021, three additional locations in July 2021 and has an active target pipeline of acquisitions which are planned to close in 2021. R ESULTS OF OPERATIONS Comparison of the three months ended June 30, 2021 and 2020. Net revenue for the three months ended June 30, 2021 was approximately $125.9 million, compared to $43.5 million for the three months ended June 30, 2020 an increase of approximately $82.4 million or 190%. This increase included approximately $45.4 million of additional revenue related to 2020 and 2021 acquisitions and $23.3 million of revenue from same store sales. Cost of Goods Sold Cost of goods sold for the three months ended June 30, 2021 was approximately $90.2 million, compared to approximately $31.9 million for the three months ended June 30, 2020, an increase of approximately $58.3 million or 183%. The increase in cost of goods sold was primarily due to the 190% increase in sales comparing the three months ended June 30, 2021 to the three months ended June 30, 2020. Gross profit was approximately $35.7 million for the three months ended June 30, 2021, compared to approximately $11.6 million for the three months ended June 30, 2020, an increase of approximately $24.1 million or 208%. The increase in gross profit is primarily related to the 190% increase in revenues comparing the quarter ended June 30, 2021 to the quarter ended June 30, 2020. Gross profit as a percentage of revenues was 28.4% for the three months ended June 30, 2021, compared to 26.7% for the three months ended June 30, 2020. The increase in the gross profit margin percentage is primarily due to higher increases in revenues from both private label products and distributed products which were 7.1% of revenues for the quarter ended June 30, 2021 and less than 1% of revenues for the quarter ended June 30, 2020. Operating Expenses Operating expenses are comprised of store operations, selling, general, and administrative and depreciation and amortization. Operating costs were approximately $26.1 million for the three months ended June 30, 2021 and approximately $8.8 million for the three months ended June 30, 2020, an increase of approximately $17.3 million or 197%. Store operating costs were approximately $12.6 million for the three months ended June 30, 2021, compared to $3.9 million for the quarter ended June 30, 2020, an increase of $8.7 million or 226%. The increase in store operating costs was directly attributable to the 190% increase in revenues, the addition of twenty-nine (29) locations that were added after June 30, 2020, and one (1) locations added during the quarter ended June 30, 2020 that were open for the entire quarter ended June 30, 2021. 23 Total corporate overhead was approximately $13.5 million for the three months ended June 30, 2021, compared to $4.9 million for the quarter ended June 30, 2020, an increase of $8.6 million or 175%. Selling, general, and administrative costs were approximately $10.6 million for the three months ended June 30, 2021, compared to approximately $4.4 million for the three months ended June 30, 2020. Salaries expense increase to $5.6 million from $2.0 million primarily due to an increase in corporate staff and general and administrative expenses increased to $3.0 million from $1.3 million to support expanding operations. Share-based compensation increased to $1.9 million from $1.2 million primarily due to expanding corporate staff to support the increased operations. Net Income Net income for the three months ended June 30, 2021 was approximately $6.7 million, compared to net income of approximately $2.6 million for the three months ended June 30, 2020, a increase of approximately $4.1 million. Comparison of the six months ended June 30, 2021 and 2020. Net revenue for the six months ended June 30, 2021 was approximately $215.9 million, compared to $76.4 million for the six months ended June 30, 2020 an increase of approximately $139.5 million or 182%. This increase included $73.4 million of additional revenue from 2020 and 2021 acquisitions and $37.8 million of additional revenue from same store sales performance. Cost of Goods Sold Cost of goods sold for the six months ended June 30, 2021 was approximately $154.8 million, compared to approximately $55.9 million for the six months ended June 30, 2020, an increase of approximately $98.9 million or 177%. The increase in cost of goods sold was primarily due to the 182% increase in sales comparing the six months ended June 30, 2021 to the six months ended June 30, 2020. Gross profit was approximately $61.1 million for the six months ended June 30, 2021, compared to approximately $20.5 million for the six months ended June 30, 2020, an increase of approximately $40.6 million or 198%. The increase in gross profit is primarily related to the 182% increase in revenues comparing the six months ended June 30, 2021 to the six months ended June 30, 2020. Gross profit as a percentage of revenues was 28.3% for the six months ended June 30, 2021, compared to 26.9% for the six months ended June 30, 2020. The increase in the gross profit margin percentage is primarily due to higher increases in revenues from both private label products and distributed products which were 6.8% of revenues for the quarter ended June 30, 2021 and less than 1% of revenues for the quarter ended June 30, 2020. Operating Expenses Operating expenses are comprised of store operations, selling, general, and administrative and depreciation and amortization. Operating costs were approximately $43.7 million for the six months ended June 30, 2021 and approximately $19.8 million for the six months ended June 30, 2020, an increase of approximately $23.9 million or 121%. Store operating costs were approximately $20.8 million for the six months ended June 30, 2021, compared to $7.5 million for the six months ended June 30, 2020, an increase of $13.3 million or 177%. The increase in store operating costs was directly attributable to the 182% increase in revenues, the addition of twenty-nine (29) locations that were added after June 30, 2020, and two (2) locations added during the six months ended June 30, 2020 that were open for the entire quarter ended June 30, 2021. Total corporate overhead was approximately $22.9 million for the six months ended June 30, 2021, compared to $12.3 million for the quarter ended June 30, 2020, an increase of $10.6 million or 86%. Selling, general, and administrative costs were approximately $18.0 million for the six months ended June 30, 2021, compared to approximately $11.5 million for the six months ended June 30, 2020. Salaries expense increased to $9.6 million from $3.8 million primarily due to an increase in corporate staff and general and administrative expenses increased to $5.1 million from $2.4 million to support expanding operations. These increases were partially offset by a decrease in share-based compensation to $3.2 million from $5.3 million primarily due to new executive compensation agreements effective January 1, 2020 that had front loaded vesting provisions for shares and options that vested January 1, 2020 for which the remaining vesting was over a two-year period. 24 Net Income Net income for the six months ended June 30, 2021 was approximately $12.9 million, compared to a net income of approximately $0.5 million for the six months ended June 30, 2020, a increase of approximately $12.4 million. Operating Activities Net cash provided by operating activities for six months ended June 30, 2021 was approximately $2.3 million compared to $6.1 million for the six months ended June 30, 2020. Net cash used in investing activities was approximately $111.1 million for the six months ended June 30, 2021 and approximately $5.0 million for the six months ended June 30, 2020. Investing activities in 2021 were primarily attributable to acquisitions of $48.0 million , purchase of marketable securities of $57.4 million, vehicles and store equipment purchases $4.4 million and intangible asset purchases of $1.3 million. Investing activities for the six months ended June 30, 2020 were primarily related to store acquisitions of $3.0 million, the purchase of vehicles and store equipment to support new store operations of $1.3 million and intangible assets of $0.7 million. Net cash used in financing activities for the six months ended June 30, 2021 was approximately $1.9 million and was primarily attributable to stock redemptions partially offset by the proceeds from the sales of common stock and exercise of warrants. Net cash provided by financing activities for six months ended June 30, 2020 was $0.7 million and was primarily from proceeds from the sale of common stock and exercise of warrants. Use of Non-GAAP Financial Information The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles. Set forth below is a reconciliation of Adjusted EBITDA to net income (loss): Three Months Ended June 30, 2021 2020 (000) (000) Net income $ 6,713 $ 2,574 Income taxes 2,920 156 Interest expense 4 13 Depreciation and Amortization 2,917 468 EBITDA $ 12,554 $ 3,211 Share based compensation (option compensation, warrant compensation, stock issued for services) 1,914 1,187 Adjusted EBITDA $ 14,468 $ 4,398 Adjusted EBITDA per share, basic $ 0.24 $ 0.11 Adjusted EBITDA per share, diluted $ 0.24 $ 0.11 25 The Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles. Set forth below is a reconciliation of Adjusted EBITDA to net income (loss): Six Months Ended June 30, 2021 2020 (000) (000) Net income $ 12,860 $ 480 Income taxes 4,473 156 Interest 6 20 Depreciation and Amortization 4,971 827 EBITDA $ 22,310 $ 1,483 Share based compensation (option compensation, warrant compensation, stock issued for services) 3,241 5,302 Adjusted EBITDA 25,551 $ 6,785 Adjusted EBITDA per share, basic $ 0.44 $ 0.18 Adjusted EBITDA per share, diluted $ 0.43 $ 0.17 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2021, we had working capital of approximately $195.9 million, compared to working capital of approximately $222.9 million as of December 31, 2020, a decrease of approximately $27.0 million.. The decrease in working capital from December 31, 2020 to June 30, 2021 was due primarily to ten (10) business acquisition completed during the six months ended June 30, 2021 for which the cash consideration was approximately $48.0 million. This decrease in working capital related to business acquisitions was partially offset by an increase in inventory associated with more locations and our ability to leverage greater bulk purchasing due to our growth. At June 30, 2021, we had cash and cash equivalents of approximately $67.2 million and available for sale debt securities of $57.4 million. Currently, we have no demands, commitments or uncertainties that would reduce our current working capital. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth and acquisitions. Based on our strategy we may need to raise additional capital in the future through equity offerings and/or debt financings. We believe that some of our store acquisitions and new store openings can come from cash flow from operations. We anticipate that we may need additional financing in the future to continue to acquire and open new stores and related businesses. To date we have financed our operations through the issuance and sale of common stock, convertible notes and warrants. Critical Accounting Policies, Judgements and Estimates For a summary of the Company’s significant accounting policies, please refer to Note 2 to our Consolidated Financial Statements filed on our Form 10-K for the year ended December 31, 2020. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.