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, 2021filed with the SECon March 10, 2022. 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.
GrowGeneration Corp.(together with all of its direct and indirect wholly owned subsidiaries, collectively "GrowGeneration" or the "Company") was incorporated in Coloradoin 2014 and is the largest chain of hydroponic garden centers in North Americaand is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, environmental control systems and accessories for hydroponic gardening. GrowGenerationalso 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 Power Si, CharCoir, and several other proprietary private-label brands across multiple product categories from LED lighting to nutrients and additives and environmental control systems for indoor cultivation.
GrowGenerationsells 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 employed approximately 660 employees as of March 31, 2022, a majority of them we have branded as "Grow Pros." Currently, our operations span over 1,022,000 square feet of retail and warehouse space. 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. Competitive Advantages
As the largest chain of hydroponic garden centers by revenue and number of
•We offer a one-stop shopping experience to all types of growers by providing "selection, service, and solutions"; •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; 20 -------------------------------------------------------------------------------- •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; and •We have a professional team for mergers and acquisitions, and to acquire and open new locations and successfully add them to our company portfolio.
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. In addition to the 13 states in which we are currently operating, we have identified new market opportunities in states that include Connecticut, Ohio, Illinois, Pennsylvania, New York, New Jersey, Mississippi, Missouriand Virginia. The Company acquired 23 new locations in 2021 and expects to open many new stores in 2022. Secondary to this growth strategy is the expansion of distribution and sales capabilities for products that the company owns, distributes, or represents to independent retail garden centers for resale.
RESULTS OF OPERATIONS
Comparison of the three months ended
Net revenue for the three months ended
March 31, 2022was approximately $81.8 million, compared to $90.0 millionfor the three months ended March 31, 2021, a decrease of approximately $8.3 millionor 9%. The decrease was attributed to a decrease of approximately $26.2 millionrelated to same store sales, which represented 35.5% of the decrease year over year. Overall sales in our retail segment declined from $81.2 millionto $64.3 million. Distributed sales were $12.2 million. E-commerce sales decreased from $6.0 millionto $5.3 million.
Cost of Goods Sold
Cost of goods sold for the three months ended
March 31, 2022was approximately $59.6 million, compared to approximately $64.6 millionfor the three months ended March 31, 2021, a decrease of approximately $5.0 millionor 8%. The decrease in cost of goods sold was primarily due to the 9% decrease in sales comparing the three months ended March 31, 2022to the three months ended March 31, 2021. Gross profit was approximately $22.1 millionfor the three months ended March 31, 2022, compared to approximately $25.4 millionfor the three months ended March 31, 2021, a decrease of approximately $3.2 millionor 13%. The decrease in gross profit is primarily related to the 9% decrease in revenues comparing the three months ended March 31, 2022to the three months ended March 31, 2021. Gross profit as a percentage of revenues was 27.1% for the three months ended March 31, 2022, compared to 28.2% for the three months ended March 31, 2021. Gross profit in our retail segment declined from $21.9 millionto $15.5 million. Gross profit from distributed sales was $4.9 millionand was $1.7 millionfrom e-commerce sales for the three months ended March 31, 2022.
Operating expenses are comprised of store operations, selling, general, and
administrative, and depreciation and amortization. Operating costs were
Store operating costs were approximately
Total corporate overhead, which is comprised of Selling, general, and administrative expense and Depreciation and amortization expense, was approximately
$14.8 millionfor the three months ended March 31, 2022, compared to $9.5 millionfor the three months ended March 31, 2021, an increase of $5.4 millionor 57%. Selling, general, and administrative costs were approximately $10.3 millionfor the three months ended March 31, 2022, compared to approximately $7.4 millionfor the three months ended March 31, 2021. Salaries expense increased to $5.2 millionfrom $4.0 millionprimarily due to an increase in corporate staff. General administrative expenses increased to $3.6 millionfrom $2.1 millionto support expanding operations. 21 --------------------------------------------------------------------------------
Total other income was approximately
$0.4 millionfor the three months ended March 31, 2022, compared to expense of $36.0 thousandfor the three months ended March 31, 2021. This increase is primarily attributable to a gain recorded related to an earnout revaluation adjustment related to The Harvest Companyacquisition.
Segment Operating Income
Operating income in our retail segment dropped from
$6.3 millionto an operating loss of $7.2 millionas a result of lower sales volume, lower gross margins and higher expenses at existing stores combined with operating losses at nine stores not in operation in the same period in 2021, including acquired and new retail locations. Operating income in our e-commerce segment declined from $0.4 millionto a loss of $0.4 millionas a result of lower revenue and higher operating expenses as well as integration costs of Agron.IO that was consolidated with our core e-commerce webstore in the period. Operating income in all other decreased to $0.4 millionin the three months ended March 31, 2022compared to $1.0 millionin the three months ended March 31, 2021. Increase in the operating income of the other segment was primarily attributable to the addition of HRG and MMI. Income Taxes Income tax benefit was $1.6 millionfor the three months ended March 31, 2022, compared to income tax expense of $1.6 millionfor the three months ended March 31, 2021. 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.
Net loss for the three months ended
Net cash used by operating activities for three months ended
March 31, 2022was approximately $2.2 millioncompared to $0.7 millionprovided for the three months ended March 31, 2021. The Company reduced prepaid inventory by $9.1 millionin the quarter as well as retail store inventory by $3.8 million, which was more that offset by payments for accounts payable and deferred compensation, including annual cash bonuses. Net cash provided by investing activities was approximately $9.5 millionfor the three months ended March 31, 2022compared to cash used of approximately $82.7 millionfor the three months ended March 31, 2021. Investing activities in 2022 were primarily attributable to acquisitions of $6.8 millionand vehicles and store equipment purchases of $4.5 millionpartially offset by the maturity of marketable securities of $20.8 million. Investing activities for the three months ended March 31, 2021were primarily related to store acquisitions of $39.3 million, purchase of marketable securities of $41.1 million, the purchase of vehicles and store equipment to support new store operations of $1.7 million, and intangible assets of $0.7 million.
Net cash used in financing activities for the three months ended
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 March 31, 2022 2021 (000) (000) Net income
$ (5,177) $ 6,147Income taxes (1,636) 1,553 Interest 3 2 Depreciation and Amortization 4,506 2,054 EBITDA $ (2,304) $ 9,756Share based compensation (option compensation, warrant compensation, stock issued for services) 1,583 1,327 Adjusted EBITDA (721) $ 11,083Adjusted EBITDA per share, basic $ (0.01) $ 0.19Adjusted EBITDA per share, diluted $
LIQUIDITY AND CAPITAL RESOURCES
March 31, 2022, we had working capital of approximately $157.9 million, compared to working capital of approximately $169.8 millionas of December 31, 2021, a decrease of approximately $11.9 million. The decrease in working capital from December 31, 2021to March 31, 2022was due primarily to a decrease in marketable securities, inventory and prepaid inventory partially offset by decreases in current liabilities. At March 31, 2022, we had cash and cash equivalents of approximately $47.3 millionand available for sale debt securities of $19.0 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 Statesand building our brand portfolio 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
Note 1 - Operations and Summary of Significant Accounting Policies to the consolidated financial statements included in Part II. Item 8 of our Form 10-K for the year ended
December 31, 2021describes the significant accounting policies used in preparation of these consolidated financial statements. We believe the following critical accounting policy and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change. In each of these areas, management makes estimates based on historical results, current trends and future projections. Therefore, these are considered to be our critical accounting policies and estimates. We account for transactions that represent business combinations under the acquisition method of accounting, which requires us to allocate the total consideration paid for each acquisition to the assets we acquire and liabilities we assume based on their fair values as of the date of acquisition, including identifiable intangible assets. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. We may refine our estimates and make adjustments to the assets acquired and liabilities assumed over a measurement period, not to exceed one year. The Company has financial liabilities resulting from our business combinations, including contingent consideration arrangements. We estimate the fair value of these financial liabilities using Level 3 inputs that require the use of numerous assumptions, which may change based on the occurrence of future events and lead to increased or decreased operating income in future periods. Estimating the fair value at an acquisition date and in subsequent periods involves significant judgments, including projecting the future financial performance of the acquired businesses. The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions. 23 --------------------------------------------------------------------------------
Changes in the fair value of these financial liabilities are recorded in the Consolidated Statements of Operations within other income (expense).
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.
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