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, 2022 filed with the SEC on March 16, 2023. We caution readers regarding certain forward-looking statements, within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 in the following discussion and elsewhere in this report. 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 direct and indirect wholly-owned subsidiaries, collectively “GrowGeneration” or the “Company”) was incorporated in Colorado in 2014. GrowGeneration is the largest chain of hydroponic garden centers in the United States 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 an e-commerce platform, www.growgeneration.com, Mobile Media, a vertical racking and storage solutions business, Horticultural Rep Group, a horticultural products sales representative and distributor organization, and proprietary brands across multiple product categories, from lighting to nutrients and additives to environmental control systems. Our business is driven by a wide selection of products, facility design services, solutions driven staff and pick, pack and ship distribution and fulfillment capabilities. GrowGeneration carries and sells thousands of products, including nutrients, growing media, lighting, environmental control systems, vertical benching and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that are capable of growing and maximizing yield and quality of a wide range of plants. Our products include proprietary brands such as Charcoir, Drip Hydro, Power Si, MMI benching and racking, Ion lights, Durabreeze fans, and more. GrowGeneration also provides facility design services to commercial growers. As of March 31, 2023, we employed approximately 445 employees, a majority of them have been branded by us as “Grow Pros”, and our operations span over 952,000 square feet of retail and warehouse space. Markets and Business Segments GrowGeneration sells 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. Our target customer segments include the commercial growers in the plant-based medicine market, the craft grower and vertical and urban farmers who grow organic herbs, fruits and vegetables. Additionally, we sell products from our distribution and other segment to wholesalers, resellers, and retailers. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields and quality, regardless of the season or weather conditions. The Company has three primary reportable segments, including retail operations, e-commerce and all other. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The structure reflects the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. We recognize specifically identifiable operating costs such as cost of sales, distribution expenses, selling and general administrative expenses within each segment. Certain general and administrative expenses, such as administrative and management expenses, salaries and benefits, share based compensation, director fees, legal expenses, accounting and consulting expenses and technology costs, are not allocated to the specific segments and are reflected in the enterprise results. 20 Competitive Advantages The markets in which we sell our products are highly competitive. Our key competitors include many local and national vendors of gardening supplies, local product resellers of hydroponic and other specialty growing equipment, and online product resellers and large online marketplaces such as Amazon and eBay. Our industry is highly fragmented, with around 1,000 hydroponic retailers throughout the U.S. by management's estimates. Notwithstanding the foregoing, we are the largest chain of hydroponic garden centers in the U.S. by management's estimates, and our pricing, inventory and product availability and overall customer service provide us the ability to compete in our industry. In addition, as we continue to increase the scope of our operations, including both retail and distribution, we expect to continue to purchase inventory at lower volume prices, which we expect will enable us to price competitively and deliver the products that our customers are seeking. The Company competes by delivering a one-stop shopping experience that includes the widest selection of hydroponics products, end-to-end solutions for all types of cultivation environments, in-store sales and product support, direct manufacturer pricing and industry-leading expertise and customer service. Growth Strategy Core to our growth strategy is to expand the number of our retail garden centers in the U.S., especially in markets where we do not already have a physical presence, or where our existing physical presence is limited. During the first quarter of 2023, the Company acquired 1 new location in Michigan. Our plan is to continue to acquire, open and operate garden centers. GrowGeneration will also pursue growth through expansion of its commercial sales and distribution capabilities to sell more product to commercial cultivators for large grow operations and independent retail garden centers for resale, as well as by promoting and expanding its portfolio of proprietary brands to increase its market share, product offerings and profitability. R ESULTS OF OPERATIONS Comparison of the three months ended March 31, 2023 and 2022 Net sales for the three months ended March 31, 2023 was approximately $56.8 million, compared to $81.8 million for the three months ended March 31, 2022, a decrease of approximately $24.9 million or 31%. The decrease was primarily attributed to a decrease of approximately $21.8 million related to same store sales, which represented an approximate 36.6% decrease year over year. Overall sales in our retail segment declined from $64.3 million for the three months ended March 31, 2022, to $39.4 million for the same period in 2023. Distributed sales increased to $14.2 million for the three months ended March 31, 2023 compared to $12.2 million for the three months ended March 31, 2022. E-commerce sales decreased from $5.3 million for the three months ended March 31, 2022, to $3.3 million for the same period in 2023. Cost of Sales Cost of sales for the three months ended March 31, 2023 was approximately $40.5 million, compared to approximately $59.6 million for the three months ended March 31, 2022, a decrease of approximately $19.1 million or 32%. The decrease in cost of sales was primarily due to the 31% decrease in sales comparing the three months ended March 31, 2023 to the three months ended March 31, 2022. Gross Profit Gross profit was approximately $16.3 million for the three months ended March 31, 2023, compared to approximately $22.1 million for the three months ended March 31, 2022, a decrease of approximately $5.9 million or 26%. The decrease in gross profit is primarily related to the 31% decrease in net sales comparing the three months ended March 31, 2023 to the three months ended March 31, 2022. Gross profit as a percentage of net sales was 28.7% for the three months ended March 31, 2023, compared to 27.1% for the three months ended March 31, 2022. Gross profit in our retail segment declined from $15.5 million for the three months ended March 31, 2022, to $10.7 million for the same period in 2023. Gross profit from distributed sales decreased to $4.7 million for the three months ended March 31, 2023 compared to $4.9 million for the three months ended March 31, 2022. Gross profit from our e-commerce segment was $0.9 million for the three months ended March 31, 2023 compared to $1.7 million for the three months ended March 31, 2022. 21 Operating Expenses Operating expenses are comprised of store operations, selling, general, and administrative, and depreciation and amortization. Operating costs were approximately $24.1 million for the three months ended March 31, 2023 and approximately $29.4 million for the three months ended March 31, 2022, an decrease of approximately $5.3 million or 18%. The decrease in operating expenses is primarily attributable to payroll reductions and cost controls over a broad range of categories. Store operating costs were approximately $13.0 million for the three months ended March 31, 2023, compared to $14.5 million for the three months ended March 31, 2022, an decrease of $1.6 million or 11%. The decrease in store operating costs was directly attributable to payroll reductions and expense savings recognized from store consolidations. Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately $11.1 million for the three months ended March 31, 2023, compared to $14.8 million for the three months ended March 31, 2022, an decrease of $3.7 million or 25%. Selling, general, and administrative costs were approximately $6.8 million for the three months ended March 31, 2023, compared to approximately $9.6 million for the three months ended March 31, 2022. Salaries expense decreased to $3.5 million for the three months ended March 31, 2023, from $5.2 million for the same period in 2022. General administrative expenses decreased to $3.2 million for the three months ended March 31, 2023, from $3.6 million for the same period in 2022. Other Income/Expense Total other income was approximately $1.6 million for the three months ended March 31, 2023, compared to expense of $0.4 million for the three months ended March 31, 2022. This increase is primarily attributable to interest income driven from capital investments. Segment Operating Income Operating loss in our retail segment dropped from $7.2 million to an operating loss of $7.1 million. The operating loss for our e-commerce segment declined from $0.4 million for the three months ended March 31, 2022 to a loss of $0.5 million for the same period in 2023. Operating income in the distribution and other segment other decreased to a loss of $0.2 million in the three months ended March 31, 2023 compared to income of $0.4 million in the three months ended March 31, 2022. Income Taxes Income tax benefit was $0.0 million for the three months ended March 31, 2023, compared to income tax expense of $1.6 million for the three months ended March 31, 2022. Effective tax rate is impacted by differences in timing of expenses for share-based compensation, depreciation, amortization and the impact of 162(m) on deductible wages. As such, the Company’s taxable income varies from reported income in a material way. The Company has evaluated positive and negative evidence and has concluded that its deferred tax assets are not expected to be realizable and has recorded a valuation allowance in the current period. Net Income Net loss for the three months ended March 31, 2023 was approximately $6.1 million, compared to net income of approximately $5.2 million for the three months ended March 31, 2022, a decrease of approximately $1.0 million. Operating Activities Net cash provided by operating activities for three months ended March 31, 2023 was approximately $3.5 million compared to $2.2 million used for the three months ended March 31, 2022. The Company continued to decrease inventory and improve on receivable collection partially offset by reductions to customer deposits and payroll and payroll tax liabilities. Net cash provided by investing activities was approximately $19.3 million for the three months ended March 31, 2023, compared to cash used of approximately $9.5 million for the three months ended March 31, 2022. Investing activities in 2023 were primarily attributable to the maturity of marketable securities of $33.5 million partially offset by vehicle and store equipment purchases of $3.5 million. Investing activities for the three months ended March 31, 2022 were primarily related to maturities of marketable securities of $20.8 million, partially offset by store acquisitions of $6.8 million and the purchase of vehicles and store equipment to support new store operations of $4.5 million. 22 Net cash used in financing activities for the three months ended March 31, 2023 was approximately $0.1 million and was primarily attributable to common stock withheld for employee payroll taxes. Net cash used by financing activities for three months ended March 31, 2022 was $1.4 million and was primarily attributable to stock withheld to cover payroll taxes. 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. 23 Set forth below is a reconciliation of Adjusted EBITDA to net income (loss): Three Months Ended March 31, 2023 2022 (000) (000) Net income (loss) $ (6,134) $ (5,177) Income taxes — (1,636) Interest income (428) (2) Interest expense 2 3 Depreciation, and amortization 3,932 4,506 EBITDA $ (2,628) $ (2,306) Impairment loss — — Share based compensation (option compensation, warrant compensation, stock issued for services) 567 1,583 Restructuring charges 278 — Fixed asset disposal (19) (72) Adjusted EBITDA $ (1,802) $ (795) Adjusted EBITDA per share, basic $ (0.03) $ (0.01) Adjusted EBITDA per share, diluted $ (0.03) $ (0.01) Liquidity and Capital Resources As of March 31, 2023, we had working capital of approximately $130.7 million, compared to working capital of approximately $134.9 million as of December 31, 2022, a decrease of approximately $4.2 million. The decrease in working capital from December 31, 2022 to March 31, 2023 was due primarily to a decrease in Accounts Receivable, net, Inventory, and Income taxes receivable partially offset by an increase in current liabilities. At March 31, 2023, we had cash and cash equivalents of approximately $62.7 million. Currently, we have no extraordinary 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 and building our store and brand portfolio through organic growth and acquisitions. 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 through equity offerings and/or debt financings 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 critical accounting policies, judgements, and estimates, please refer to Item 7 of our Form 10-K for the year ended December 31, 2022. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a summary of the Company’s quantitative and qualitative disclosures about market risk, please refer to Item 7A of our Form 10-K for the year ended December 31, 2022. 24