GrowGeneration(GRWG) - 2021 Q4 - Annual Report

Part I Business GrowGeneration Corp. is North America's largest hydroponic garden center chain, operating 63 stores and focusing on acquisitions and proprietary brands for growth - As of year-end 2021, the Company operates 63 specialty retail hydroponic and organic gardening stores across 13 states, making it the largest chain of its kind in North America[17] - The company's growth strategy focuses on acquiring and opening new hydroponic stores across North America, acquiring 23 new locations in 2021[18][24] - The business is structured into three units: Retail (62 stores), E-Commerce (GrowGeneration.com), and Proprietary Brands (e.g., Power Si, CharCoir, Ion Lighting)[25] - A key supplier accounted for 28% of all purchases in 2021, a decrease from 41% in 2020 and 51% in 2019 (two suppliers)[40] - The company executed a significant number of acquisitions in 2021, 2020, and 2019, using cash and common stock to expand its market footprint and add proprietary brands[42][58][66] Risk Factors The company faces significant risks including material weaknesses in internal controls, acquisition integration challenges, and reliance on the legally complex cannabis industry - The company and its independent auditor identified material weaknesses in internal control over financial reporting for fiscal year ended December 31, 2021, potentially leading to a loss of investor confidence[92][93][94] - Acquisitions, a core strategy, present risks including integration difficulties, diversion of management attention, and unforeseen liabilities[85][89] - The business is indirectly subject to risks from the cannabis industry, which remains illegal under U.S. federal law, creating challenges in banking and insurance[134][135][137] - The company faces potential product liability lawsuits and does not maintain product liability insurance, which could result in substantial liabilities[111] - Operations are vulnerable to IT system failures and cyber-attacks, potentially leading to loss of confidential information and material adverse effects[115][116] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[149] Properties The company leases approximately 900,000 square feet of facilities, including corporate offices, warehouses, and retail stores across 13 states Leased Property Overview as of December 31, 2021 | State | Number of Locations | | :--- | :--- | | California | 26 | | Colorado | 11 | | Michigan | 7 | | Maine | 5 | | Oklahoma | 5 | | Oregon | 4 | | Washington | 3 | | Nevada | 2 | | Florida | 2 | | Arizona | 1 | | Rhode Island | 1 | | New Mexico | 1 | | Massachusetts | 1 | - The company leases approximately 900,000 square feet in total, comprising 7,000 sq. ft. for corporate offices, 100,000 sq. ft. for warehouses, and 800,000 sq. ft. for store space[150] Legal Proceedings The company is involved in routine legal matters, notably a lawsuit with TGC Systems, LLC regarding a failed acquisition, for which no loss accrual has been recorded - The Company is a defendant in a lawsuit with TGC Systems, LLC ("Total Grow") related to a failed acquisition, believing claims are without merit and seeking to recover a $1.5 million loan[153] - No accruals have been recorded for the Total Grow lawsuit as management believes a loss is not probable or material[153][154] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[156] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "GRWG", has never paid dividends, and has issued unregistered securities for compensation and acquisitions - The company's common stock trades on the Nasdaq Capital Market under the symbol "GRWG"[159] - The company has never paid cash dividends and does not expect to in the foreseeable future, retaining funds for operations and growth[162] - The company has issued unregistered securities in connection with its 2014 and 2018 Equity Compensation Plans and for various asset purchase acquisitions[164][167] Selected Financial Data This item is reserved with no information provided - This item is reserved[168] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2021, net revenue surged 118.5% to $422.5 million, driven by acquisitions and same-store sales, though operating expenses outpaced revenue growth, leading to a Q4 net loss Full Year Financial Performance (2019-2021, in millions) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Sales | $422.5 | $193.4 | $79.7 | | Gross Profit | $118.2 | $51.0 | $22.0 | | Gross Margin | 28.0% | 26.4% | 27.6% | | Net Income | $12.8 | $5.3 | $1.3 | | Adjusted EBITDA | $34.5 | $18.9 | $5.3 | Q4 Financial Performance (2020 vs 2021, in millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Sales | $90.6 | $61.9 | | Same-Store Sales Growth | -12.3% | 58.0% | | Net Income (Loss) | ($4.1) | $1.5 | | Adjusted EBITDA (Loss) | ($1.9) | $5.5 | - The 118.5% revenue growth in 2021 was driven by a $40.1 million (24.4%) increase in same-store sales, $17.1 million from distributed products, and $36.2 million in e-commerce sales[177][178] - Working capital decreased by $53.1 million, from $222.9 million at year-end 2020 to $169.8 million at year-end 2021, primarily due to $80.8 million in cash used for acquisitions[203] - Net cash from operating activities was $5.2 million in 2021, a shift from $213 thousand used in 2020; cash used in investing activities increased significantly to $139.3 million, driven by $80.8 million in acquisitions and $75.0 million in marketable securities purchases[207][209] Quantitative and Qualitative Disclosures About Market Risk The company reports minimal market risk exposure, with immaterial interest rate risk and strategies to mitigate inflation's impact on costs - The company has minimal exposure to interest rate risk, with less than $0.1 million of interest-bearing debt outstanding as of December 31, 2021[219][220] - Inflation is identified as a risk affecting cost of sales and operating costs, with mitigation strategies including cost reduction and passing costs to customers[221] Financial Statements and Supplementary Data This section presents audited financial statements, noting the auditor's adverse opinion on internal controls due to material weaknesses, while total assets grew to $459.3 million and total liabilities increased to $88.0 million - Plante & Moran, PLLC issued an ADVERSE opinion on the Company's internal control over financial reporting as of December 31, 2021, due to identified material weaknesses[228][237] - Identified material weaknesses include accounting for complex transactions, segregation of duties, inadequate IT general controls, and inadequate controls over physical inventory counts[238] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $459,338 | $354,734 | | Cash and cash equivalents | $41,372 | $177,912 | | Inventory | $105,571 | $54,024 | | Goodwill | $125,401 | $62,951 | | Total Liabilities | $88,047 | $37,737 | | Total Stockholders' Equity | $371,291 | $316,997 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Sales | $422,489 | $193,365 | $79,734 | | Gross Profit | $118,241 | $51,048 | $22,005 | | Income from Operations | $15,002 | $8,437 | $1,583 | | Net Income | $12,786 | $5,328 | $1,322 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company refers to a Form 8-K filed on March 27, 2020, regarding a change in accountants, with no disagreements noted in this report - The company directs readers to a Form 8-K filed on March 27, 2020, concerning a change in accountants[411] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2021, due to material weaknesses in internal control, with ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in internal control[413][416] - Identified material weaknesses include insufficient resources for complex accounting, inadequate segregation of duties, deficient IT general controls, and poor controls over physical inventory counts[418] - Remediation efforts in 2021 included hiring additional accounting resources, implementing new controls, and redesigning inventory procedures, with remediation ongoing[420][421] - Management's assessment of internal controls excluded recent 2021 acquisitions (Charcoir, Agron, MMI), which collectively accounted for 10% of total assets and 5% of total revenues[415] Other Information The company reports no other information under this item - None[426] Part III Directors, Executive Officers and Corporate Governance This section provides information on the company's executive officers and six directors, with detailed governance information incorporated by reference from the 2022 Proxy Statement - The company's key executive officers are Darren Lampert (CEO), Michael Salaman (President), and Jeff Lasher (CFO)[430][431][432] - The Board of Directors includes Darren Lampert, Michael Salaman, Eula Adams, Stephen Aiello, Paul Ciasullo, and Sean Stiefel[430] - Detailed corporate governance information, including director qualifications and committees, is incorporated by reference from the 2022 Definitive Proxy Statement[428] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's 2022 Definitive Proxy Statement - All information required by Item 402 of Regulation S-K is incorporated by reference from the 2022 Definitive Proxy Statement[439] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership is incorporated by reference from the company's 2022 Definitive Proxy Statement - All information required by Item 201(d) and Item 403 of Regulation S-K is incorporated by reference from the 2022 Definitive Proxy Statement[440] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's 2022 Definitive Proxy Statement - All information required by Items 404 and 407(a) of Regulation S-K is incorporated by reference from the 2022 Definitive Proxy Statement[441] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's 2022 Definitive Proxy Statement - All information required by Item 9(e) of Schedule 14A is incorporated by reference from the 2022 Definitive Proxy Statement[442] Part IV Exhibits, Financial Statement Schedules This section lists exhibits filed as part of the Form 10-K report, including corporate governance documents, material contracts, and required certifications - The report includes a list of exhibits such as corporate governance documents, material agreements, and required certifications[446][447]