QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-207889
GROWGENERATION CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado
46-5008129
(State of other jurisdiction of incorporation)
(IRS Employer ID No.)
5619 DTC Parkway, Suite 900
Greenwood Village, Colorado80111
(Address of principal executive offices)
(800) 935-8420
(Issuer’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
GRWG
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 12, 2021 there were 59,607,234 shares of the registrant’s common stock issued and outstanding.
Operating lease liability, net of current maturities
27,427
9,479
Long-term debt, net of current portion
106
158
Total liabilities
88,994
37,737
Stockholders’ Equity:
Common stock
60
57
Additional paid-in capital
353,575
319,582
Retained earnings (deficit)
10,218
(2,642)
Total stockholders’ equity
363,853
316,997
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
452,847
$
354,734
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
1
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2021
2020
2021
2020
Sales
$
125,885
$
43,451
$
215,907
$
76,433
Cost of sales
90,172
31,866
154,817
55,902
Gross profit
35,713
11,585
61,090
20,531
Operating expenses:
Store operations
12,624
3,877
20,806
7,516
Selling, general, and administrative
10,563
4,431
17,968
11,496
Depreciation and amortization
2,917
468
4,971
827
Total operating expenses
26,104
8,776
43,745
19,839
Income from operations
9,609
2,809
17,345
692
Other income (expense):
Other expense
(8)
(66)
(46)
(61)
Interest income
36
—
40
25
Interest expense
(4)
(13)
(6)
(20)
Total non-operating income (expense), net
24
(79)
(12)
(56)
Net income before taxes
9,633
2,730
17,333
636
Provision for income taxes
(2,920)
(156)
(4,473)
(156)
Net income
$
6,713
$
2,574
$
12,860
$
480
Net income per share, basic
$
0.11
$
0.07
$
0.22
$
0.01
Net income per share, diluted
$
0.11
$
0.06
$
0.22
$
0.01
Weighted average shares outstanding, basic
59,061
38,617
58,588
38,224
Weighted average shares outstanding, diluted
60,223
41,016
59,794
40,241
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(in thousands)
(Unaudited)
Common Stock
Additional Paid-In Capital
Retained Earnings (Deficit)
Total Stockholders’ Equity
Shares
Amount
Balances, December 31, 2020
57,151
$
57
$
319,582
$
(2,642)
$
316,997
Common stock issued upon warrant exercise
40
—
111
—
111
Common stock issued upon cashless warrant exercise
535
1
(1)
—
—
Common stock issued upon exercise of options
1
—
2
—
2
Common stock issued upon cashless exercise of options
5
—
—
—
—
Common stock issued in connection with business combinations
548
—
29,249
—
29,249
Common stock issued for share based compensation
300
—
—
—
—
Common stock redeemed in litigation settlement
(90)
—
—
—
—
Common stock redemption
(96)
—
(3,954)
—
(3,954)
Share based compensation
—
—
1,187
—
1,187
Net income
—
—
—
6,147
6,147
Balances, March 31, 2021
58,394
$
58
$
346,176
$
3,505
$
349,739
Common stock issued upon warrant exercise
216
—
224
—
224
Common stock issued upon cashless warrant exercise
119
—
—
—
—
Common stock issued upon exercise of options
460
1
1,729
—
1,730
Common stock issued upon cashless exercise of options
272
—
—
—
—
Common stock issued in connection with business combinations
101
1
3,938
—
3,939
Share based compensation
—
—
1,508
—
1,508
Net income
—
—
—
6,713
6,713
Balances, June 30, 2021
59,562
$
60
$
353,575
$
10,218
$
363,853
3
Common Stock
Additional Paid-In Capital
Retained Earnings (Deficit)
Total Stockholders’ Equity
Shares
Amount
Balances, December 31, 2019
36,876
$
37
$
60,742
$
(7,970)
$
52,809
Common stock issued upon warrant exercise
191
—
510
—
510
Common stock issued upon cashless warrant exercise
19
—
—
—
—
Common stock issued upon cashless exercise of options
280
—
—
—
—
Common stock issued in connection with business combinations
250
—
1,102
—
1,102
Common stock issued for assets
24
—
101
—
101
Common stock issued for services
50
—
—
—
—
Common stock issued for share based compensation
519
1
1,760
—
1,761
Share based compensation
—
—
2,209
—
2,209
Net loss
—
—
—
(2,094)
(2,094)
Balances, March 31, 2020
38,209
$
38
$
66,424
$
(10,064)
$
56,398
Common stock issued upon warrant exercise
81
—
282
—
282
Common stock issued upon cashless warrant exercise
78
—
—
—
—
Common stock issued upon cashless exercise of options
30
—
—
—
—
Common stock issued in connection with business combinations
108
—
705
—
705
Common stock issued for assets
10
—
67
—
67
Common stock issued for services
325
—
717
—
717
Common stock issued for share based compensation
5
—
25
—
25
Share based compensation
—
—
1,162
—
1,162
Net income
—
—
—
2,574
2,574
Balances, June 30, 2020
38,846
$
38
$
69,382
$
(7,490)
$
61,930
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
GROWGENERATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended June 30,
2021
2020
Cash flows from operating activities:
Net income
$
12,860
$
480
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
4,971
827
Stock-based compensation expense
3,241
5,302
Bad debt expense, net of recoveries
313
195
Deferred taxes
947
—
Changes in operating assets and liabilities:
Accounts and notes receivable
(2,883)
652
Inventory
(32,763)
(6,154)
Prepaid expenses and other assets
(14,487)
(2,550)
Accounts payable and accrued liabilities
23,280
6,608
Operating leases
838
157
Payroll and payroll tax liabilities
1,757
272
Income taxes payable
1,846
156
Customer deposits
1,469
(169)
Sales tax payable
885
345
Net cash provided by operating activities
2,274
6,121
Cash flows from investing activities:
Assets acquired in business combinations
(48,045)
(3,032)
Purchase of marketable securities
(57,357)
—
Purchase of property and equipment
(4,428)
(1,280)
Purchase of intangibles
(1,262)
(709)
Net cash used in investing activities
(111,092)
(5,021)
Cash flows from financing activities:
Principal payments on long term debt
(52)
(47)
Common stock redeemed
(3,954)
—
Proceeds from the sale of common stock and exercise of warrants, net of expenses
2,067
792
Net cash provided by (used in) financing activities
(1,939)
745
Net change
(110,757)
1,845
Cash at the beginning of period
177,912
12,979
Cash at the end of period
$
67,155
$
14,824
Supplemental disclosures of non-cash activities:
Cash paid for interest
$
6
$
20
Common stock issued for accrued payroll
$
—
$
718
Common stock issued for business combination
$
33,187
$
1,808
Assets acquired by issuance of common stock
$
—
$
168
Right to use assets acquired under new operating leases
$
19,573
$
1,095
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
1.GENERAL
GrowGeneration Corp (the “Company”, "we", or "our") 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, ventilation systems and accessories for hydroponic gardening. Currently, the Company owns and operates a chain of fifty-eight (58) retail hydroponic/gardening stores across 12 states, an online e-commerce platform, and proprietary businesses that market grow solutions through our platforms and other wholesale customers. The Company’s plan is to continue to acquire, open and operate hydroponic/gardening stores and related businesses throughout the United States.
Basis of Presentation
The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.
All amounts included in the accompanying footnotes to the consolidated financial statements, except per share data, is in thousands (000).
Risk and Uncertainties
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations. As a result, if the pandemic persists or worsens, our accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time). The Company has experienced minimal business interruption as a result of the COVID-19 pandemic. We have been deemed an “essential” business by state and local authorities in the areas in which we operate and as such have not been subject to business closures. The COVID-19 pandemic to date has resulted in temporary supply chain delays of our inventory. As events surrounding the COVID-19 pandemic can change rapidly we cannot predict how it may disrupt our operations or the full extent of the disruption.
New Accounting Policies Adopted During the Six Months Ended June 30, 2021
Securities
The Company classifies its commercial paper and debt securities as marketable securities. Marketable securities with available fair market values are stated at fair market values. Unrealized gains and unrealized losses on these marketable securities are reported, net of applicable income taxes, in other comprehensive income. Realized gains or losses on sale of marketable securities are computed using primarily the moving average cost and reported in net income. For the six months ended June 30, 2021, there were no significant unrealized gains or losses recorded.
6
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
2.FAIR VALUE MEASUREMENTS
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable, available for sales securities, accounts payable and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the outstanding balance and are reviewed for impairment at least annually. The fair value of impaired notes receivable is determined based on estimated future payments discounted back to present value using the notes effective interest rate.
Level
June 30, 2021
December 31, 2020
Cash equivalents
2
$
67,155
$
177,912
Marketable securities
2
$
57,357
$
—
Notes receivable
2
$
5,906
$
2,937
Notes receivable impaired
3
$
—
$
875
Accounts receivable
2
$
4,377
$
3,901
7
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
3.RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification ("ASC") are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.
As an emerging growth company, the Company is permitted to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. The Company has chosen to take advantage of the extended transition period for complying with new or revised accounting standards.
Refer to Note 3 to the Consolidated Financial Statements reported in Form 10-K for the year ended December 31, 2020 for recently issued accounting pronouncements that are pending adoption.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this new guidance, effective January 1, 2020, did not have a material impact on our Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The standard was effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those periods. There was no material impact on our consolidated financial statements and related disclosures as a result of adopting this standard.
4.REVENUE RECOGNITION
The following table disaggregates revenue by source:
Three Months Ended June 30, 2021
Three Months Ended June 30, 2020
Six Months Ended June 30, 2021
Six Months Ended June 30, 2020
Sales at company owned stores
$
108,911
$
40,128
$
190,138
$
71,912
Distribution
4,988
—
7,823
—
E-commerce sales
11,986
3,323
17,946
4,521
Total Revenues
$
125,885
$
43,451
$
215,907
$
76,433
8
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
4.REVENUE RECOGNITION, continued
The opening and closing balances of the Company’s customer trade receivables and customer deposit liability are as follows:
Receivables
Customer Deposit Liability
Opening balance, January 1, 2021
$
7,713
$
5,155
Closing balance, June 30, 2021
10,283
6,793
Increase (decrease)
$
2,570
$
1,638
Opening balance, January 1, 2020
$
4,455
$
2,504
Closing balance, June 30, 2020
3,609
2,335
Increase (decrease)
$
(846)
$
(169)
Of the total amount of customer deposit liability as of January 1, 2021, $2,873 was reported as revenue during the six months ended June 30, 2021. Of the total amount of customer deposit liability as of January 1, 2020, $1,599 was reported as revenue during the six months ended June 30, 2020.
The Company also has customer trade receivables under longer term financing arrangements at interest rates ranging from 9% to 12% with repayment terms ranging for 12 to 18 months. Long term trade receivables as of June 30, 2021 and December 31, 2020 are as follows:
June 30, 2021
December 31, 2020
Note receivable
$
6,172
$
4,104
Allowance for losses
(266)
(292)
Notes receivable, net
$
5,906
3,812
The following table summarizes changes in notes receivable balances that have been deemed impaired.
June 30, 2021
December 31, 2020
Note receivable
$
266
$
1,166
Allowance for losses
(266)
(292)
Notes receivable, net
$
—
874
9
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
5.INVESTMENTS
Marketable securities have maturities of less than one year as of June 30, 2021. There were no significant realized or unrealized gains or losses for the six months ended June 30, 2021.
The components of investments, available for sales securities, as of June 30, 2021 were as follows:
Fair Value Level
Adjusted Cost Basis
Unrealized Gain (Loss)
Recorded Basis
Commercial paper
Level 2
$
9,994
$
—
$
9,994
Corporate notes and bonds
Level 2
47,363
—
47,363
Marketable securities
$
57,357
$
—
$
57,357
6.NOTES RECEIVABLE
Notes receivable include customer trade receivables under long term financing arrangements and other note receivables not associated with customer transactions.
June 30, 2021
December 31, 2020
Trade receivables under longer term financing arrangements
$
5,906
$
3,812
Note receivable, non-customer related
—
—
Subtotal
5,906
3,812
Less, current portion
(4,535)
(2,612)
Notes receivable, noncurrent
$
1,371
1,200
7.PROPERTY AND EQUIPMENT
June 30, 2021
December 31, 2020
Vehicles
$
2,256
$
1,342
Building
1,107
477
Leasehold improvements
3,381
1,988
Furniture, fixtures and equipment
8,223
5,739
Total property and equipment, gross
14,967
9,546
Accumulated depreciation and amortization
(4,512)
(3,071)
Property and equipment, net
$
10,455
$
6,475
Depreciation expense for the three and six months ended June 30, 2021 was $782 thousand and $1.4 million, respectively. Depreciation expense for the three and six months ended June 30, 2020 was $374 thousand and $705 thousand, respectively.
10
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
8.GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill are as follows:
June 30, 2021
December 31, 2020
Balance, beginning of period
$
62,951
$
17,799
Goodwill additions and measurement period adjustments
45,789
45,152
Balance, end of period
$
108,740
$
62,951
Intangible assets consist of the following:
June 30, 2021
December 31, 2020
Gross Carrying Amount
Accumulated Amortization
Gross Carrying Amount
Accumulated Amortization
Tradenames
$
24,184
$
(2,298)
$
13,923
$
(398)
Patents, trademarks
100
(35)
100
(9)
Customer relationships
18,372
(1,260)
6,297
(138)
Non-competes
1,115
(118)
796
(22)
Intellectual property
2,065
(138)
—
—
Capitalized software
2,762
(470)
1,163
(222)
$
48,598
$
(4,319)
$
22,279
$
(789)
Amortization expense for the six months ended June 30, 2021 and 2020 was $2,135 and $3,530, respectively.
Future amortization expense is as follows:
2021, remainder
$
4,714
2022
9,525
2023
9,164
2024
8,817
2025
8,283
Thereafter
3,776
Total
$
44,279
11
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
9.LONG-TERM DEBT
June 30, 2021
December 31, 2020
Long term debt is as follows:
Wells Fargo Equipment Finance, interest at 3.5% per annum, payable in monthly installments of $518.96 beginning April 2016 through March 2021, secured by warehouse equipment with a book value of $25
$
—
$
1
Notes payable issued in connection with seller financing of assets acquired, interest at 8.125%, payable in 60 installments of $8,440.00, Due August 2023
189
240
$
189
$
241
Less Current Maturities
(83)
(83)
Total Long-Term Debt
$
106
$
158
Interest expense for the three months ended June 30, 2021 and 2020 was $4 thousand and $13 thousand, respectively.
Interest expense for the six months ended June 30, 2021 and 2020 was $6 thousand and $20 thousand, respectively.
10.LEASES
We determine if a contract contains a lease at inception. Our material operating leases consist of retail and warehouse locations as well as office space. Our leases generally have remaining terms of 1-5 years, most of which include options to extend the leases for additional 3 to 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods.
June 30, 2021
December 31, 2020
Right to use assets, operating lease assets
$
31,661
$
12,088
Current lease liability
$
5,464
$
3,001
Non-current lease liability
27,427
9,479
$
32,891
$
12,480
June 30, 2021
June 30, 2020
Weighted average remaining lease term
7.17 years
3.44 years
Weighted average discount rate
6.0
%
7.6
%
Six Months Ended June 30,
2021
2020
Operating lease costs
$
3,548
$
1,714
Short-term lease costs
1,109
31
Total operating lease costs
$
4,657
$
1,745
12
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
10.LEASES, continued
The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2021:
2021 (remainder of the year)
$
3,769
2022
6,720
2023
6,021
2024
4,884
2025
4,246
Thereafter
15,170
Total lease payments
40,810
Less: Imputed interest
(7,919)
Lease Liability at June 30, 2021
$
32,891
11.SHARE BASED PAYMENTS
The Company maintains long-term incentive plans for employee, non-employee members of our Board of Directors and consultants. The plans allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards).
The Company accounts for share-based payments through the measurement and recognition of compensation expense for share-based payment awards made to employees and directors of the Company, including stock options and restricted shares. The Company also issues share based payments in the form of common stock warrants to non-employees.
The following table presents share-based payment expense for the six months ended June 30, 2021 and 2020.
Six months ended June 30,
2021
2020
Restricted stock
$
1,935
$
3,316
Stock options
559
1,986
Warrants
747
—
Total
$
3,241
$
5,302
As of June 30, 2021, the Company had approximately $10.4 million of unamortized share-based compensation for option awards and restricted stock awards, which is expected to be recognized over a weighted average period of approximately 3.3 years. As of June 30, 2021, the Company also had approximately $3.3 million of unamortized share-based compensation for common stock warrants issued to consultants, which is expected to be recognized over a weighted average period of 2.5 years.
Restricted Stock
The Company issues shares of restricted stock to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest on the second or third anniversary of the date of grant, subject to the employee’s continuing employment as of that date.
13
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
11.SHARE BASED PAYMENTS AND STOCK OPTIONS, continued
Restricted stock activity for the six months ended June 30, 2021 is presented in the following table:
Shares
Weighted Average Grant Date Fair Value
Nonvested, December 31, 2020
630
$
4.15
Granted
201
$
45.56
Vested
(291)
$
4.39
Forfeited
(9)
$
18.54
Nonvested, June 30, 2021
531
$
20.40
The table below summarizes all option activity under all plans during the six months ended June 30, 2021:
Options
Shares
Weight - Average Exercise Price
Weighted - Average Remaining Contractual Term
Weighted - Average Grant Date Fair Value
Outstanding at December 31, 2020
1,803
$
3.92
3.47
$
2.38
Granted
—
—
—
Exercised
(753)
3.05
1.65
Forfeited or expired
(50)
4.16
—
2.28
Outstanding at June 30, 2021
1,000
$
4.56
3.31
$
2.46
Options vested at June 30, 2021
774
$
4.29
2.80
$
3.31
A summary of the status of the Company’s outstanding stock purchase warrants for the six months ended June 30, 2021 is as follows:
Warrants
Weighted Average Exercise Price
Outstanding at December 31, 2020
1,393
$
7.49
Issued
—
Exercised
(968)
$
2.84
Forfeited
—
Outstanding at June 30, 2021
425
$
17.25
14
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
12.EARNINGS PER SHARE
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation for the three and six months ended June 30, 2021 and 2020.
Three Months Ended
June 30, 2021
June 30, 2020
Net income
$
6,713
$
2,574
Weighted average shares outstanding, basic
59,061
38,617
Effect of dilution
1,162
2,399
Adjusted weighted average shares outstanding, dilutive
60,223
41,016
Basic earnings per shares
$
0.11
$
0.07
Dilutive earnings per share
$
0.11
$
0.06
Six Months Ended
June 30, 2021
June 30, 2020
Net income
$
12,860
$
480
Weighted average shares outstanding, basic
58,588
38,224
Effect of dilution
1,206
2,017
Adjusted weighted average shares outstanding, dilutive
59,794
40,241
Basic earnings per shares
$
0.22
$
0.01
Dilutive earnings per share
$
0.22
$
0.01
13.ACQUISITIONS
Our acquisition strategy is to acquire (i) well established profitable hydroponic garden centers in markets where the Company does not have a market presence or in markets where it is increasing its market presence; and (ii) proprietary brands and private label brands. The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date. For all acquisitions, the preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. The Company has made adjustments to the preliminary valuations of the acquisition based on valuation analysis prepared by independent third-party valuation consultants. All acquisition costs are expensed as incurred and recorded in general and administrative expenses in the consolidated statements of operations.
Acquisitions during the six months ended June 30, 2021.
On January 25, 2021, the Company purchased the assets of Indoor Garden & Lighting, Inc, a two-store chain of hydroponic and equipment and indoor gardening supply stores serving the Seattle and Tacoma, Washington area. The total consideration for the purchase of Garden & Lighting was approximately $1.7 million, including $1.2 million in cash and common stock valued at approximately $0.5 million. Acquired goodwill of approximately $0.8 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
On February 1, 2021, the Company purchased the assets of J.A.R.B., Inc d/b/a Grow Depot Maine, a two-store chain in Auburn and Augusta, Maine. The total consideration for the purchase of Grow Depot Maine was approximately $2.1 million, including $1.7 million in cash and common stock valued at approximately $0.4 million. Acquired goodwill of approximately $1.3 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
15
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
13.ACQUISITIONS, continued
On February 15, 2021, the Company purchased the assets of Grow Warehouse LLC, a four-store chain of hydroponic and organic garden stores in Colorado (3) and Oklahoma (1). The total consideration for the purchase of Grow Warehouse LLC was approximately $17.8 million, including $8.1 million in cash and common stock valued at approximately $9.7 million. Acquired goodwill of approximately $11.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
On February 22, 2021, the Company purchased the assets of San Diego Hydroponics & Organics, a four-store chain of hydroponic and organic garden stores in San Diego, CA. The total consideration for the purchase of San Diego Hydroponics was approximately $9.3 million, including $4.8 million in cash and common stock valued at approximately $4.5 million. Acquired goodwill of approximately $5.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
On March 12, 2021, the Company purchased the assets of Charcoir Corporation, who sells an RHP-certified growing medium made from the highest-grade coconut fiber. The total consideration for the purchase of Charcoir was approximately $16.4 million, including $9.9 million in cash and common stock valued at approximately $6.5 million. Acquired goodwill of approximately $6.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established distribution market for the Company of a proprietary brand.
On March 15, 2021, the Company purchased the assets of 55 Hydroponics, a hydroponic and organic superstore located in Santa Ana, CA. The total consideration for the purchase of 55 Hydroponics was approximately $6.5 million, including $5.4 million in cash and common stock valued at approximately $1.1 million. Acquired goodwill of approximately $3.9 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
On March 15, 2021, the Company purchased the assets of Aquarius, a hydroponic and organic garden store in Springfield, MA. The total consideration for the purchase of Aquarius was approximately $3.6 million, including $2.4 million in cash and common stock valued at approximately $1.2 million. Acquired goodwill of approximately $1.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company.
On March 19, 2021, the Company purchased the assets of Agron, LLC, an online seller of growing equipment. The total consideration for the purchase of Agron was approximately $11.3 million, including $6 million in cash and common stock valued at approximately $5.3 million. Acquired goodwill of approximately $8.7 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established e-commerce market for the Company targeting the commercial customer.
On April 19, 2021, the Company purchased the assets of Grow Depot LLC ("Down River Hydro"), a hydroponic and indoor gardening supply store in Brownstown, MI. The total consideration for the purchase of Down River Hydro was approximately $4.4 million, including approximately $3.2 million in cash and common stock valued at approximately $1.2 million. Acquired goodwill of approximately $2.1 million represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.
On May 24, 2021, the Company purchased the assets of The Harvest company ("Harvest"), a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity County. The total consideration for the purchase if Harvest was approximately $8.3 million, including approximately $5.6 million in cash and common stock valued at approximately $2.8 million. Acquired goodwill of approximately $4.6 million represents the value expected to rise from organic growth and an opportunity to expand into a well established market for the Company.
16
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
13.ACQUISITIONS, continued
The table below represents the allocation of the purchase price to the acquired net assets during the six months ended June 30, 2021.
Agron
Aquarius
55 Hydro
Charcoir
San Diego Hydro
Inventory
$
—
$
957
$
780
$
839
$
1,400
Prepaids and other current assets
29
12
29
534
36
Furniture and equipment
46
63
50
—
315
Liabilities
—
—
—
—
—
Operating lease right to use asset
87
—
853
—
970
Operating lease liability
(87)
—
(853)
—
(970)
Customer relationships
832
339
809
5,712
605
Trade name
1,530
485
870
1,099
1,192
Non-compete
139
—
26
—
6
Intellectual property
—
—
—
2,065
—
Goodwill
8,673
1,702
3,915
6,119
5,728
Total
$
11,249
$
3,558
$
6,479
$
16,368
$
9,282
Grow Warehouse
Grow Depot Maine
Indoor Garden
Down River Hydro
Harvest
Total
Inventory
$
2,448
$
326
$
372
$
824
$
1,204
$
9,150
Prepaids and other current assets
30
3
—
3
7
683
Furniture and equipment
250
25
94
50
100
993
Liabilities
(169)
—
—
—
—
(169)
Operating lease right to use asset
94
91
129
—
—
2,224
Operating lease liability
(94)
(91)
(129)
—
—
(2,224)
Customer relationships
1,256
549
210
634
1,016
11,962
Trade name
2,748
344
353
698
1,392
10,711
Non-compete
94
36
2
16
—
319
Intellectual property
—
—
—
—
—
2,065
Goodwill
11,122
866
661
2,126
4,606
45,518
Total
17,779
2,149
1,692
$
4,351
$
8,325
$
81,232
The table below represents the consideration paid for the net assets acquired in business combinations.
Agron
Aquarius
55 Hydro
Charcoir
San Diego Hydro
Cash
$
5,973
$
2,331
$
5,347
$
9,902
$
4,751
Common stock
5,276
1,227
1,132
6,466
4,531
Total
$
11,249
$
3,558
$
6,479
$
16,368
$
9,282
Grow Warehouse
Grow Depot Maine
Indoor Garden
Down River Hydro
Harvest
Total
Cash
$
8,100
$
1,738
$
1,165
$
3,177
$
5,561
$
48,045
Common stock
9,679
411
527
1,174
2,764
33,187
Total
$
17,779
$
2,149
$
1,692
$
4,351
$
8,325
$
81,232
17
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement for the period ended June 30, 2021.
Agron
Aquarius
55 Hydro
Charcoir
San Diego Hydro
Acquisition date
3/19/2021
3/15/2021
3/15/2021
3/12/2021
2/22/2021
Revenue
$
6,105
$
2,684
$
2,222
$
1,880
$
3,446
Net Income
$
324
$
365
$
314
$
518
$
547
Grow Warehouse
Grow Depot Maine
Indoor Garden
Down River Hydro
Harvest
Total
Acquisition date
2/15/2021
2/1/2021
1/25/2021
4/19/2021
5/24/21
Revenue
$
6,753
$
2,779
$
2,308
$
1,200
$
1,489
$
5,986
Net Income
$
1,297
$
555
$
433
$
176
$
268
$
905
18
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
13.ACQUISITIONS, continued
The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the quarter ended June 30, 2021 and 2020.
Three Months Ended
Six Months Ended
June 30, 2021 (Unaudited)
June 30, 2021 (Unaudited)
Revenue
$
130,504
$
229,599
Net income
$
12,446
$
19,849
Three Months Ended
Six Months Ended
June 30, 2020 (Unaudited)
June 30, 2020 (Unaudited)
Revenue
$
40,501
$
90,126
Net income
$
1,849
$
2,352
Acquisitions during the six months ended June 30, 2020.
On February 26, 2020 we acquired certain assets of Health & Harvest LLC in a transaction valued at approximately $2.85 million. Acquired goodwill of approximately $1.1 million represented the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company’s existing working capital.
On June 16, 2020 we acquired certain assets of H2O Hydroponics, LLC in a transaction valued at approximately $2.0 million. Acquired goodwill of approximately $1.0 million represents the value expected to rise from organic growth and an opportunity to expand into a well-established market for the Company. Cash consideration was funded from the Company's existing working capital.
The table below represents the allocation of the purchase price to the acquired net assets during the six months ended June 30, 2020.
H2O Hydroponics LLC
Health & Harvest LLC
Total
Inventory
$
498
$
1,054
$
1,552
Prepaids and other current assets
4
—
4
Furniture and equipment
50
51
101
Right to use asset
902
192
1,094
Lease liability
(902)
(192)
(1,094)
Customer relationships
150
255
405
Trade name
234
357
591
Non-compete
43
6
49
Goodwill
1,008
1,130
2,138
Total
$
1,987
$
2,853
$
4,840
The table below represents the consideration paid for the net assets acquired in business combinations.
19
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
H2O Hydroponics LLC
Health & Harvest LLC
Total
Cash
$
1,282
$
1,750
$
3,032
Common stock
705
1,103
1,808
Total
$
1,987
$
2,853
$
4,840
The following table discloses the date of the acquisitions noted above and the revenue and earnings included in the consolidated income statement from the date of acquisition to the period ended June 30, 2020.
H2O Hydroponics LLC
Health & Harvest LLC
Total
Acquisition date
6/26/20
2/26/2020
Revenue
$
227
$
2,300
$
2,527
Earnings
$
28
$
462
$
490
The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire period for the six months ended June 30, 2020 and 2019.
Pro forma consolidated income statement:
Three Months Ended
Six Months Ended
June 30, 2019
June 30, 2019
Revenue
$
21,759
$
37,122
Earnings
$
1,149
$
1,465
14.RELATED PARTIES
The Company has engaged with a firm that employs an immediate family member of an officer of the Company as partner. The firm provides certain legal services. Amounts paid for to that firm in total was approximately $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2021, there was no outstanding balance due.
15.SUBSEQUENT EVENTS
The Company has evaluated events and transaction occurring subsequent to June 30, 2021 up to the date of this filing of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.
For all acquisitions subsequent to the end of the quarter, the Company’s initial accounting for the business combination has not been completed because the valuations have not yet been received from the Company’s independent valuation firm.
On July 1, 2021, the Company purchased the assets of Aqua Serene, an indoor/outdoor garden center with stores in Eugene and Ashland, Oregon. The total consideration for the purchase was $10.0 million, including approximately $7.7 million in cash and 46,554 shares of common stock valued at approximately $2.3 million.
On July 3, 2021, the Company purchased the assets of Mendocino Greenhouse & Garden Supply, Inc, a Northern California-based hydroponic garden center located in Mendocino, California. The total consideration for the purchase was approximately $4.0 million.
20
GrowGeneration Corporation and Subsidiaries
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 2021
On July 27, 2021, the Company entered into a series of asset purchase agreements (the “Purchase Agreements”) through its wholly-owned subsidiary, GrowGeneration Michigan Corp., to purchase the assets from subsidiaries of HGS Hydro (“HGS Hydro”) with six stores across the State of Michigan and a seventh store to open in the fall of 2021. This acquisition is expected to close before the end of 2021 fiscal year-end. As consideration for the assets, the Company agreed to pay HGS Hydro an aggregate purchase price of approximately $72.2 million which includes $55.2 million in cash and approximately $17.0 million in shares of the Company's restricted common stock.
21
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.
RESULTS 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.
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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
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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.
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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.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Management maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In making this assessment, management used the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on evaluation under these criteria, management determined, based upon the existence of the material weaknesses described below, that we did not maintain effective internal control over financial reporting as of June 30, 2021.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
The Company did not design and implement effective control activities based on the criteria established in the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
The following were contributing factors to the material weaknesses in control activities:
• Insufficient resources within the accounting and financial reporting department to review the accounting implications of complex transactions..
•Inadequate segregation of duties within the bank accounts.
•Ineffective information technology general controls (ITGCs) in the areas of user access over certain information technology (IT) systems that support the Company’s financial reporting processes.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the implementation of remediation plans for the deficiency to address the material weakness identified.
Remediation Plan and Status
Our remediation efforts are ongoing and we will continue our initiatives to implement and document policies, procedures, and internal controls. Remediation efforts will include but are not limited to new hires in critical positions to improve segregation of duties, supervision and oversight, as well as implementation of technologies to improve effective controls.
Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
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While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.
Inherent Limitations on Effectiveness of Controls
Management, including our CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The COVID-19 coronavirus pandemic could have a material negative effect on our results of operations, cash flows, financial position, and business operations.
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations.
We are unable to predict the impact that COVID-19 will have on our results of operations, cash flows, financial position, and business operations due to numerous uncertainties. These uncertainties include, but are not limited to: the severity of the virus; the duration of the pandemic; governmental actions which include restrictions on our operations up to and including potential closure of our stores and distribution centers; the duration and degree of quarantine or shelter-in-place measures, including additional measures that may still occur; impacts on our supply chain which include suppliers of our products and our transportation vendors; the health of our workforce and our ability to maintain staffing needs to operate our business; how macroeconomic factors evolve including unemployment rates and recessionary pressures; the impact of the crisis on consumer shopping patterns, both during and after the crisis; volatility in the economy as well as the credit and financial markets during and after the pandemic; the incremental costs of doing business during the crisis as well as on a long-term basis; potential increases in insurance premiums, medical claims costs, and workers’ compensation claim costs; unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; potential delays in growth initiatives including the timing of new store openings; potential adverse effects on our internal control environment and information security as a result of changes to a remote work environment; and the long-term impact of the crisis on our business.
In addition, we cannot predict the impact that the pandemic will have on our manufacturers and suppliers of our products and other business partners such as service vendors; however, any material effect on these parties could adversely impact our results of operations and our ability to operate our business effectively.
The COVID-19 coronavirus pandemic could have a material negative effect on our supply chain.
Circumstances surrounding and related to the COVID-19 pandemic have created unprecedented impacts on the global supply chain. Our business relies on an efficient and effective supply chain, including the manufacture and transportation of our products as well as the effective functioning of our distribution centers. Impacts related to the COVID-19 pandemic are placing strain on the domestic and international supply chain that could negatively affect the flow or availability of our products and result in higher out-of-stock inventory positions due to difficulties in timely obtaining product from the manufacturers and suppliers of our products as well as transportation of those products to our distribution centers and stores. Further, we may have to source products from different manufacturers or geographic locations which could result in, among other things, higher product costs, increased transportation costs, delays in receiving products or lower quality of the products.
Any of these circumstances could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation.
Actions taken to protect the health and safety of our team members and customers during the COVID-19 coronavirus pandemic have increased our operating costs and may not be sufficient to protect against operational or reputational harm to our business.
In response to the COVID-19 pandemic, we have taken a number of actions across our business to help protect our team members, customers, and others in the communities we serve. These measures include personal protective equipment for our team members, a requirement to wear masks in our facilities, increased staffing in order to provide contact-free curbside pickup from stores, expansion of our capabilities to support delivery to customer homes, increased cleaning and sanitizing measures, and monitoring for “social distancing” directives, as well as additional cleaning materials in our facilities. Additionally, we have provided appreciation bonuses as well as permanent increases in compensation and benefits for our team members in our stores and distribution centers to further support them during and after the COVID-19 pandemic. Actions such as these have
29
resulted in significant incremental costs and we expect that we will continue to incur these costs for the foreseeable future, which in turn will have an adverse impact on our results of operations.
The health and safety of our team members and customers are of primary concern to our management team. However, due to the unpredictable nature of this virus and the consequences of our actions, we may see unexpected outcomes notwithstanding our added safety measures. For instance, if we do not respond appropriately to the pandemic, or if our customers do not participate in “social distancing” and other safety measures, the well-being of our team members and customers could be jeopardized. Furthermore, any failure to appropriately respond, or the perception of an inadequate response, could cause reputational harm to our brand and subject us to claims and litigation from team members, customers and service providers.
Additionally, an outbreak of confirmed cases of COVID-19 in our stores or distribution centers could result in temporary or sustained workforce shortages or facility closures which would negatively impact our underlying business and results of operations.
There may be limitations on the effectiveness of our internal controls. Failure of our internal control over financial reporting could harm our business and financial results.
Proper systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.
Moreover, we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially adversely impact us.
In connection with the evaluation of our internal control over financial reporting as of December 31, 2020 that was undertaken by management, management identified the following material weaknesses in our control activities: i) insufficient resources within the accounting and financial reporting department to review the accounting for warrant compensation accounting, share-based compensation accounting, and accounting for rebates; ii) inadequate segregation of duties within the bank accounts; and ineffective information technology general controls (ITGCs) in the areas of user access over certain information technology (IT) systems that support the Company’s financial reporting processes. Based upon the existence of such material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020.
We have adopted a remediation plan and are in the process of implementing such plan. Remediation efforts will include but are not limited to new hires in critical positions to improve segregation of duties, supervision and oversight, as well as implementation of technologies to improve effective controls. Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.
30
If we are unable to assert that our internal control over financial reporting is effective, or, if applicable, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Common Stock to decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 19, 2021, the Company purchased the assets of Grow Depot LLC ("Down River Hydro"), a hydroponic and indoor gardening supply store in Brownstown, MI. As part of the consideration for the asset purchase, the Company issued 25,895 shares of common stock valued at approximately $1.2 million.
On May 24, 2021, the Company purchased the assets of The Harvest company, a northern California-based hydroponic supply center and cultivation design innovator with stores in Redding and Trinity County. As part of the consideration for the asset purchase, the Company issued 74,989 shares of common stock valued at approximately $2.8 million.
The above issuances were made by the Company pursuant to registration exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are included and filed with this report.
Exhibit
Exhibit Description
3.1
Certificate of Incorporation of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed on November 9, 2015)
3.2
Bylaws of GrowGeneration Corp. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 as filed on November 9, 2015)
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on August 12, 2021.
GrowGeneration Corporation
By:
/s/ Darren Lampert
Darren Lampert, Chief Executive Officer (Principal Executive Officer)
By:
/s/ Jeff Lasher
Jeff Lasher, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer)