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, 2019 filed with the SEC on March 27,
2020. 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 is the largest chain of
hydroponic garden centers in North America by revenue and number of stores. We are the 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 thirty one (31) retail hydroponic/gardening centers, with six (6) in the state of California,
six (6) in the state of Michigan, five (5) located in the state of Colorado, four (4) in the State of Oklahoma, three (3) in Maine,
two (2) in the state of Nevada, one (1) in the state of Washington, one (1) in the state of Oregon, one (1) in the state of Rhode
Island, (1) in the state of Florida, one (1) distribution center in the state of California and an online e-commerce store, GrowGeneration.com.
Our plan is to continue to acquire, open and operate hydroponic/gardening centers and related businesses throughout the United
States and Canada.
Market
Our
garden centers sell thousands of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation
systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products, that serve multi-purposes
and are designed and intended for growing a wide range of plants. Hydroponics is a specialized method of growing plants using
mineral nutrient solutions in a water solvent, as opposed to soil. This method is typically used inside greenhouses to give growers
the ability to better regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. Hydroponic
growers benefit from these techniques by producing crops faster and with higher crop yields per acre as compared to traditional
soil-based growers. Indoor growing techniques and hydroponic products are being utilized in new and emerging industries or segments,
including the growing of cannabis and hemp. In addition, vertical farms producing organic fruits and vegetables are also beginning
to utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities including drought, other
severe weather conditions and insect pests.
GrowGeneration
serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens
and plant-based medicines. Unlike the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing
techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields without
having to compromise quality, regardless of the season or weather and drought conditions.
Our
target market segments include the commercial growers in the plant-based medicine market, the home grower and businesses and individuals
who grow organically grown herbs and leafy green vegetables. The landscape for hydroponic retail stores is very fragmented, with
numerous single stores which we consider very ripe for our roll up strategy. Further, the products we sell are in demand due to
the ever-increasing legalization of plant-based medicines, primarily cannabis and hemp, and the number of licensed cultivation
facilities in both the US and Canada. Total sales for the hydroponic equipment industry, projected to surpass $16 billion by 2025.
Our
retail operations are driven by our high-quality products, value-add knowledgeable staff and fast distribution capabilities. We
employ horticulturists that we have branded as “Grow Pros”. Our operations span over 400,000 square feet of retail
and warehouse space. During COVID-19, we have been deemed an “essential” supplier to the agricultural industry and,
as such, we remained open and continued our operations. For the quarter ended September 30, 2020, our revenue was $55 million,
which increased 153% from the same period of the prior year. For the nine months ended September 30, 2020, our revenues were $131.4
million, which increased 141.8% compared to the same period 2019. There was a 73% increase in our same store sales comparing the
quarter ended September 30, 2020 to the quarter ended September 30, 2019. The Company performed well in all markets, most notably
sales in the Oklahoma market up 288%, Michigan market was up 271%, Maine market up 82%, all attributable to gaining more commercial
and walk in business in these growth markets. Income from store operations was $9.6 million for the third quarter of 2020, compared
to $3.8 million for the third quarter 2019, an increase of 155%. Net income from store operations was approximately $22.6 million
for the nine months ended September 30, 2020, compared to approximately $8.6 million for the nine months ended September 30, 2019.
Adjusted
EBITDA was $6.6 million for the third quarter of 2020 compared to $2 million the same period of 2019, an increase of 230%. The
Company is averaging 12,000 walk-in transaction per week.
We
operate our business through the following sales channels:
|
●
|
Retail:
31 retail and commercial hydroponic/gardening centers focused on serving growers and cultivators.
|
|
●
|
Commercial:
Sales to commercial customers, including expert growers and cultivators, and provide them with advice from sales representatives
with the requisite expertise (whom we brand as “GrowPros”) to serve their specific needs.
|
|
●
|
E-Commerce:
Our existing e-commerce operation, growgeneration.com (previously HeavyGarden.com and GrowGen.pro), is currently being developed
and rebranded into an omni-channel sales approach to enable e-commerce at all of our locations, which ws launched in September
2020.
|
|
●
|
Distribution:
Some of our stores function as warehouse, distribution and fulfillment centers for directing products to other store locations
and to the retail, wholesale and mass hydroponic markets.
|
Growth
Strategy - Store Acquisitions and New Store Openings
Our growth strategy is to expand the
number of our retail and commercial operations throughout the United States. The hydroponic retail landscape is fragmented,
which we believe has allowed us to acquire the “best of breed” locations in the United States. In addition, we
have a two-year roadmap to open a number of new locations in markets that we believe are underserved throughout the country.
In addition to the 11 states where we are currently operating, we have identified Ohio, Illinois, Pennsylvania, New York, New
Jersey and Missouri as new markets where we plan to open a new operation. In the first quarter of 2020, we opened a second
hydroponic/gardening center in Tulsa, Oklahoma, a 40,000 square feet store operation and fulfillment center, and acquired
Health & Harvest located outside of Miami, FL. On June 16, 2020, we acquired the assets of H2O Hydroponics LLC, a
hydroponic garden center in Lansing, MI. In connection with this acquisition, we have consolidated and relocated our
current West Lansing location into a newly built 14,000 square foot hydroponic garden center. On August 10, 2020,
we purchased the assets of Emerald City Garden located in Concord, CA for $1 million, following which acquisition we opened a
new store in the state of California. On October 12, 2020, the Company purchased the assets of Hydroponics Depot, located in
Phoenix, AZ, which represents the Company’s 11th state. On October 20, 2020, we purchased the assets of The
Big Green Tomato, a two-store chain in Michigan.
The
Company now owns and operates 6 locations in the state of Michigan. On October 29, 2020, the Company entered into an asset purchase
agreement to buy The GrowBiz, the 3rd largest chain of Hydroponic garden centers in the US. The GrowBiz operates five
garden centers, four in CA and one in Oregon. We have set a target to be at 50 stores and operate in 15 states by the end of 2021.
Commercial
Sales Division
Our
commercial division is a dedicated sales and support team to sell and service large commercial customers, who are primarily licensed
growers of medicinal and non-medicinal cannabis. As of the third quarter of 2020, our commercial division services over 1,000
commercial accounts, who collectively contributed $13.2 million in revenue or approximately 24% of our total Q3 2020 revenues.
For the nine-month period ended September 30,2020, the commercial division generated revenues of $32.7 million compared to $10.9
million for the same period in 2019, a 200% increase. We have identified over 14,000 licensed hemp and cannabis growers in the
United States and believe there is significant room for us to expand our base of commercial customers.
E-Commerce
Strategy
Our
online revenues for the third quarter of 2020 was approximately $2.9 million compared to $1.4 million for the same period in 2019,
an increase of 112%. For the nine months ended September 30, 2020, our online revenues were approximately $7.4 million compared
to $3.1 million for the same period in 2019, an increase of 140%. New visitors to our website are over 100,000 per month. We rebranded
our existing e-commerce operation, HeavyGarden.com and GrowGen.Pro, as growgeneration.com, which will be an omni-channel sales
approach to enable e-commerce at all of our locations, providing our customers convenient ways to shop when and how they feel
comfortable. We launched this strategy in September 2020. This omni-channel approach will provide 24/7 availability of products
and allow our customers to “Buy Online and Pick Up In Store is currently being tested in several garden centers.”
Customers will be able to shop online in all product departments and access descriptions, reviews and pictures of our products.
Our customers can order online and they can choose to either have their products delivered directly to their growing facility
(usually within 48 hours) or they can pick up the products at one of our stores (usually within 24 hours). We believe that this
omni-channel initiative will result in a more seamless, convenient shopping experience for our customers and will drive financial
results.
Distribution
Channel
We
have built a supply chain that currently spans through 31 locations across 10 states. We are in the process of building several
operations that will serve as fulfillment service centers, in addition to serving the local retail and commercial customers. These
garden/fulfillment centers will ship directly to a farm or home as well as to any commercial hydroponic store (including ours
and others) in the United States. We have a fleet of trucks that allow us to deliver within the proximity of any of these locations.
Products
and Private Label Strategy
We
sell a variety of products, including nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems,
and accessories for hydroponic gardening, as well as other indoor and outdoor growing products. Our supply chain includes several
thousand stock keeping units (“SKUs”) across 12 product departments. Many of our products are consumables leading
to repeat orders by our customers. Consumable products are mainly nutrients and additives that feed the plants on a recurring
basis. Our strategy is to supply products to two groups of customers: commercial growers and smaller growers that require a local
center to fulfill their daily and weekly growing needs.
We
are also actively developing a line of private label products that we intend to sell through our garden centers under brands we
own or control. Our strategy is to deliver high-quality products at a lower cost, and higher margin to us. To further our private
label strategy, we acquired various trademarks in March 2019 to aid in branding our ‘in house’ products to our customers.
We introduced our first private labeled products under the Sunleaves brand in first quarter of 2020. Sales of our various private
label products are over $1,000,000. This initial offering encompassed a broad variety of products ranging from trellis netting
to plastic pots and organic nutrients. We intend to introduce additional private label products during 2020 and 2021. We believe
that expanding our private label offerings will have a positive impact on our margins and profitability in the near term. We use
various trademarks, trade names and service marks in our business, including Blueprint
Controllers, Carbide, DuraBreeze, Elemental Solutions, GrowGeneration, GrowXcess, GuardenWare, Harvester’s Edge, HeavyGardens,
Ion, MixSure+, OptiLUME, Power Matrix, Smart Support, Sunleaves, Sunspot, The Fountain for Automation, VitaPlant, and Where
The Pros Go To Grow. For convenience, we may not include the SM, ® or ™ symbols, but such
omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by
law. Any other trademarks, trade names or service marks referred to in this filing are the property of their respective owners.
As we continue to monitor the COVID-19
situation, we are considered an “essential” supplier to the agricultural industry, suppling the nutrients and nourishment
required to feed their plants. The Company has been opened during this difficult time. We have plans and procedures in place to
ensure our customers and employees stay safe during this time of uncertainty. As a result of COVID-19 we reduced some hours of
operations at the store level and some stores were closed on the weekends, starting in the later part of the first quarter of 2020.
There have been some minor delays in vendor shipments as their warehouses and supply chain were affected by staffing shortages.
The Company successfully implemented a will call and curb side pick-up process that is working well. All of us at GrowGeneration
remain committed to the safety and well-being of our customers and employees. To do our part, GrowGeneration has committed to donate
up to $500,000 of free product to local communities that have been severely affected. To date, COVID-19 related costs are $158,000
for payroll related and $29,000 for store masks, gloves, cleaning supplies and sneeze guards.
As
the largest chain of stand-alone 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”;
|
|
●
|
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.
|
The
Company has recently announced its partnership with Whole Cities Foundation. Founded by Whole Foods Market in 2014, the independent,
nonprofit organization is based in Austin, Texas, and has partnered with more than 190 community organizations in 100 cities across
the U.S. to build thriving local food systems and improve health. The first project, with Whole Cities, through its Fresh, Healthy
Food Access Grant program, has been with Newark Science & Sustainability and Greater Newark Conservancy over the past 4 years.
Both organizations had identified hydroponic growing as a goal for their community plans. Each group will benefit from an
equipment grant. These first two opportunities are part of a pilot that we expect will yield learnings over the course of the
next year. GrowGeneration will provide equipment and expertise and partner with Whole Cities to evaluate community impact.
As
we have built a national chain of hydroponic garden centers, it has always been our mission to give back to the local communities.
In our day to day operations, we see the results growing hydroponically. We could not be prouder to partner with Whole Cities
to donate hydroponic equipment and supplies to their local communities to help them with their gardens and increase the quality
of their food production. Our staff of over 250 dedicated team members, the majority have tremendous knowledge on how to grow
hydroponically, are energized to lend a hand and their personal time to support Whole Cities. It is rewarding to watch a community,
come together, parents and children, and produce the largest tomatoes and produce in their community!
How
We Evaluate Our Operations
Sales
We
earn our sales primarily from the sale of hydroponic garden products, including nutrients, growing media, advanced indoor and
greenhouse lighting, ventilation systems, and accessories for hydroponic gardening, as well as other indoor and outdoor growing
products. Revenue on product sales is recognized upon delivery or shipment. Customer deposits and lay away sales are not reported
as revenue until final payment is received and the merchandise has been delivery.
Our
sales depend on the type of products we sell and the mix between consumables and non-consumables. Due to their nature, purchases
of consumables results in repeat orders as customers seek to replenish their supplies. In 2020, approximately 60% of our sales
were consumables. Generally, in markets where legalization of plant-based medicines is recent and licensors are ramping up their
grow operations, there are more purchases of non-consumables for build-outs compared to purchases of consumables. In more mature
markets, there are generally more purchases of consumables than non-consumables. Our sales are also impacted by our customer mix
of commercial and non-commercial customers, as larger commercial customers may receive volume discounts. More than a majority
of our sales is derived from our commercial customers.
Gross
Profit
We
calculate gross profit as sales less cost of goods sold. Cost of goods sold consists of cost of product sold and freight. Gross
profit excludes depreciation and amortization, which is presented separately in our consolidated statements of operations.
Our
overall gross profit margin varies with our product mix, in particular the percentage of sales of consumable products versus non-consumables,
such as in connection with build-outs, during a particular quarter. In addition, our customer mix impacts gross profit margin
due to larger commercial customers receiving discounts.
Operating
Expenses
Operating
expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Corporate overhead
is comprised of share-based compensation, depreciation and amortization, general and administrative costs and corporate salaries
and related expenses. General and administrative expenses (“G&A”) consist mainly of advertising and promotions,
travel & entertainment, professional fees and insurance. G&A as a percentage of sales does not increase commensurate with
an increase in sales. Our largest expenses are payroll and rent and these are largely fixed and not variable. Our advertising
and marketing expenses are controllable and variable depending on the particular market.
Same-Store
Sales
We
assess the organic growth of our sales on a same-store basis. We believe that our assessment on a same-store basis represents
an important indicator of comparative financial results and provides relevant information to assess our performance. New and acquired
stores become eligible for inclusion in the comparable store base if the store has been under our ownership for the entire period
in the same-store base periods for which we are including the store. For example, our same store sales for the three months and
nine months ended September 30, 2020 and 2019 includes stores that operated for the entire quarter and year to date in both 2020
and 2019. We do not include any stores that were closed or consolidated during a particular period.
Adjusted
EBITDA
We
define Adjusted EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, further adjusted
for other items such as non-cash equity compensation charges. See “Use of Non-GAAP Financial Measure” for more information
and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented
in accordance with GAAP.
RESULTS
OF OPERATIONS
Comparison
of the three months ended September 30, 2020 and 2019
The
following table presents certain consolidated statement of operations information and presentation of that data as a dollar and
percentage change from year-to-year.
|
|
Three Months
Ended
September 30, 2020
|
|
|
Three Months
Ended
September 30, 2019
|
|
|
$
Variance
|
|
%
Variance
|
|
Net
revenue
|
|
$
|
55,007,475
|
|
|
$
|
21,778,487
|
|
|
$
|
33,228,988
|
|
|
153
|
%
|
Cost
of goods sold
|
|
|
40,436,707
|
|
|
|
15,276,906
|
|
|
|
25,159,801
|
|
|
164
|
%
|
Gross
profit
|
|
|
14,570,768
|
|
|
|
6,501,581
|
|
|
|
8,069,187
|
|
|
124
|
%
|
Store
operating costs
|
|
|
4,972,058
|
|
|
|
2,744,199
|
|
|
|
2,227,859
|
|
|
81
|
%
|
Income
from store operation
|
|
|
9,598,710
|
|
|
|
3,757,382
|
|
|
|
5,841,328
|
|
|
156
|
%
|
Corporate
operating expenses
|
|
|
4,498,934
|
|
|
|
2,625,541
|
|
|
|
1,873,393
|
|
|
71
|
%
|
Operating
income
|
|
|
5,099,776
|
|
|
|
1,131,841
|
|
|
|
3,967,935
|
|
|
351
|
%
|
Other
income (expense)
|
|
|
13,358
|
|
|
|
(82,142
|
)
|
|
|
95,500
|
|
|
|
|
Net
income, before taxes
|
|
|
5,113,134
|
|
|
|
1,049,699
|
|
|
|
4,063,435
|
|
|
387
|
%
|
Provision
for income taxes
|
|
|
(1,775,801
|
)
|
|
|
-
|
|
|
|
(1,175,801
|
)
|
|
|
|
Net
income
|
|
$
|
3,337,333
|
|
|
$
|
1,049,699
|
|
|
$
|
2,287,634
|
|
|
217.9
|
%
|
Net
revenue for the three months ended September 30, 2020 was approximately $55 million, compared to approximately $21.8 million for
the three months ended September 30, 2019 an increase of approximately $33.2 million or 153%. The increase in revenues in 2020
was primarily due to 1) an increase in same store sales of $14.1 million or 73%, 2) 6 new stores opened or acquired at various
times after September 30, 2019 that had revenues of $15.8 million for the quarter ended September 30, 2020 for which there were
no revenues for the quarter ended September 30, 2019, 3) 1 store acquired in September 2019, that had revenues of $2.9 million
for the quarter ended September 30, 2020, compared to revenues of $646,000 for the quarter ended September 30, 2019 and 4) an
increase in e-commerce revenues of $1.5 million or 112% comparing the quarter ended September 30, 2020 to the quarter ended September
30, 2019. As noted in the chart below, the 20 same stores contributed revenue of $33.4 million for the quarter ended September
30, 2020, compared to revenues of $19.2 million for the quarter ended September 30, 2019, a 73% increase.
The
Company operated the same 20 stores for the entire three months ended September 30, 2020 and 2019: five (5) in Colorado, four
(4) in California, two (2) in Michigan, two (2) in Nevada, one (1) in Rhode Island, one (1) in Washington, three (3) in Maine
and one (2) in Oklahoma. As the chart shows below, these same stores generated approximately $33.4 million in revenues for the
three months ended September 30, 2020, compared to approximately $19.2 million in revenues for the three months ended September
30, 2019, an increase of 73%, primarily due to an increase in the number of commercial customers in those markets. Same store
sales increased in all of the markets as noted below comparing September 30, 2020 to September 30, 2019.
|
|
20
Same Stores All Markets
|
|
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
Variance
|
|
%
Variance
|
|
Colorado
market
|
|
$
|
5,683,073
|
|
|
$
|
4,155,798
|
|
|
|
1,527,275
|
|
|
37
|
%
|
Rhode
Island
|
|
|
6,936,543
|
|
|
|
2,177,808
|
|
|
|
4,758,735
|
|
|
219
|
%
|
Michigan
|
|
|
2,968,690
|
|
|
|
1,172,653
|
|
|
|
1,796,037
|
|
|
153
|
%
|
Oklahoma
|
|
|
5,081,746
|
|
|
|
3,361,443
|
|
|
|
1,720,303
|
|
|
51
|
%
|
California
market
|
|
|
6,557,500
|
|
|
|
4,457,195
|
|
|
|
2,100,305
|
|
|
47
|
%
|
Washington
market
|
|
|
404,161
|
|
|
|
310,699
|
|
|
|
93,462
|
|
|
30
|
%
|
Maine
market
|
|
|
4,451,835
|
|
|
|
2,446,502
|
|
|
|
2,005,333
|
|
|
82
|
%
|
Nevada
market
|
|
|
1,298,607
|
|
|
|
1,159,576
|
|
|
|
139,031
|
|
|
12
|
%
|
Net
revenue, all markets
|
|
$
|
33,382,154
|
|
|
$
|
19,241,674
|
|
|
$
|
14,140,480
|
|
|
73
|
%
|
The
Company currently continues to focus on ten (10) markets and e-commerce noted below and the growth opportunities that exist in
each market. We continue to focus on new store acquisitions and openings, proprietary products and the continued development of
our online omni-channel and Amazon revenues. In October 2020, the Company purchased the assets of Hydroponics Depot, located in
Phoenix, AZ, which represents the Company’s 11th state.
|
|
Sales
by Market
|
|
|
|
|
|
Three
Months Ended
September 30,
2020
|
|
|
Three
Months Ended
September 30,
2019
|
|
|
Variance
|
|
%
Variance
|
|
Colorado
|
|
$
|
5,683,073
|
|
|
$
|
4,155,798
|
|
|
$
|
1,527,275
|
|
|
36.8
|
%
|
California
|
|
|
7,029,475
|
|
|
|
4,457,195
|
|
|
|
2,572,280
|
|
|
57.7
|
%
|
Rhode
Island
|
|
|
6,936,543
|
|
|
|
2,177,808
|
|
|
|
4,758,735
|
|
|
218.5
|
%
|
Michigan
|
|
|
8,396,886
|
|
|
|
2,259,114
|
|
|
|
6,137,772
|
|
|
271.7
|
%
|
Nevada
|
|
|
1,298,607
|
|
|
|
1,159,576
|
|
|
|
139,031
|
|
|
12
|
%
|
Washington
|
|
|
404,161
|
|
|
|
310,699
|
|
|
|
93,462
|
|
|
30.1
|
%
|
Oregon
|
|
|
1,937,185
|
|
|
|
0
|
|
|
|
1,937,185
|
|
|
-
|
|
Oklahoma
|
|
|
13,057,210
|
|
|
|
3,361,443
|
|
|
|
9,695,767
|
|
|
288.4
|
%
|
Maine
|
|
|
4,451,835
|
|
|
|
2,446,502
|
|
|
|
2,005,333
|
|
|
82
|
%
|
Florida
|
|
|
2,885,003
|
|
|
|
0
|
|
|
|
2,885,003
|
|
|
-
|
|
E-commerce
|
|
|
2,927,740
|
|
|
|
1,381,677
|
|
|
|
1,546,063
|
|
|
111.9
|
%
|
Closed/consolidated
locations
|
|
|
(243
|
)
|
|
|
68,676
|
|
|
|
(68,919
|
)
|
|
-
|
|
Total
revenues
|
|
$
|
55,007,475
|
|
|
$
|
21,778,488
|
|
|
$
|
33,228,987
|
|
|
152.6
|
%
|
Revenues
in the Colorado market increased approximately $1.5 million or 36.8% comparing the quarter ended September 30, 2020 to September
30, 2019. The increase in sales in the Colorado market is due to 1) the Company’s continued focus on increasing commercial
sales, and 2) the acquisition of a new store in mid-January 2019.
Revenues in the California market increased
approximately $2.6 million, or 57.7%. Same store revenues in the California market increased approximately $2.1 million over the
same quarter in 2019 and the Concord, CA acquisition in mid-August 2020 had revenues of approximately $472,000 for the quarter
ended September 30, 2020.
Revenues
in the Rhode Island market increased approximately $4.8 million or 218.5% primarily from its increased focus on commercial and
multi-state commercial customers.
Revenues
in the Michigan market increased approximately $6.1 million or 271.7% due to 1) the increase in same store revenues which increased
$1.8 million or 153% primarily due to the increase in commercial accounts, 2) the acquisition of Grand Rapids in September 2019
that contributed $2.9 million in revenue in the quarter ended September 30, 2020 compared to $646,000 for the quarter ended September
30, 2019, 3) the acquisition of the West Lansing store in mid-June 2020 that was consolidated with our existing West Lansing store,
that had revenues of $2.6 million for the quarter ended September 30, 2020 compared to $440,000 for the quarter ended September
30, 2019.
Revenues
in the Nevada market were up 12%. The Las Vegas, Nevada store has been impacted by COVID-19 and their revenues were flat quarter
to quarter but same store sales revenue in our Reno store were up 25%.
Revenues
in the Washington market increased 30% comparing the quarter ended September 30, 2020 to the quarter ended September 30, 2019.
Revenues
in Oregon were approximately $1.9 million and represents a new market from an acquisition in mid-December 2019.
Currently we have 4 stores in the Oklahoma
market. Revenues in the Oklahoma market increased $9.7 million or 288% comparing the quarter ended September 30, 2020 to the quarter
ended September 30, 2019. Same stores revenues increased 1.7 million or 51% comparing the quarter ended September 30, 2020 to
the quarter ended September 30, 2019. The increase in revenues is also related to the addition of two new stores, one in November
2019 and one in March 2020 which contributed revenues of $8 million.
Revenues
in Maine have increased $2 million or 82% comparing the quarter ended September 30, 2020 to the quarter ended September 30, 2019.
The increase in revenues in primarily due to the increase in commercial customers.
Florida
was a new market resulting from an acquisition in February 2020. Revenues in this market were $2.9 million for the quarter ended
September 30, 2020.
Cost
of Goods Sold
Cost
of goods sold for the three months ended September 30, 2020 was approximately $40.4 million compared to approximately $15.3 million
for the three months ended September 30, 2019 an increase of approximately $25.2 million or 164%. The increase in cost of goods
sold was primarily due to the 153% increase in sales comparing the three months ended September 30, 2020 to the three months ended
September 30, 2019. The increase in cost of goods sold is directly attributable to the increase in the number of stores open during
the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019, and an increase in same store sales as
discussed in more detail above.
Gross
profit was approximately $14.6 million for the three months ended September 30, 2020, compared to approximately $6.5 million for
the three months ended September 30, 2019, an increase of approximately $8.1 million or 124%. The increase in gross profit is
primarily related to the 153% increase in revenues comparing the quarter ended September 30, 2020 to the quarter ended September
30, 2019. Gross profit as a percentage of revenues was 26.5% for the three months ended September 30, 2020, compared to 29.9%
for the three months ended September 30, 2019. The decrease in the gross profit margin percentage is due to 1) a greater percentage
of our revenues for the quarter ended September 30, 2020 in commercial and e-commerce revenues as a percentage of overall revenues
that have lower margins and 2) in the first quarter of 2019 we acquired a significant amount of inventory from a vendor at a substantial
discount, sales of this product in the third quarter of 2019 accounted for 5% of our overall revenue with higher margins. Commercial
and e-commerce accounted for approximately 29.3% of overall sales for the quarter ended September 30, 2020 compared to 27.3% for
the quarter ended September 30, 2019, resulting in a margin reduction of approximately 1.3 basis points. The Company has
maintained a consistent margin for all of 2020.
Operating
Expenses
Operating
expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Operating costs were
approximately $9.5 million for the three months ended September 30, 2020 and approximately $5.4 million for the three months ended
September 30, 2019, an increase of approximately $4.1 million or 76%. Store operating costs were $5 million for the three months
ended September 30, 2020 compared to $2.7 million for the quarter ended September 30, 2019, an increase of 81%. The increase in
store operating costs was directly attributable to 1) the 153% increase in revenues, 2) the addition of five (5) new locations
that were added after September 30, 2019, and 3) two (2) locations added at various times in the quarter ended September 30, 2019
that were open for the entire quarter ended September 30, 2020. The addition of these 7 stores, discussed above, and a new warehouse
facility were the primary reasons for the increase in store operating costs. Store operating costs as a percentage of sales were
9% for the three months ended September 30, 2020, compared to 12.6% for the three months ended September 30, 2019, a 28% reduction.
Store operating costs were positively impacted by 1) the opening of new and acquired stores throughout 2019 and 2020 which have
lower percentage of operating costs to revenues due to their larger size and higher volume, and 2) a 73% increase in same store
sales.
Corporate
overhead, comprised of general and administrative costs, share based compensation, depreciation and amortization and corporate
salaries, was approximately $4.5 million for the three months ended September 30, 2020, compared to approximately $2.6 million
for the three months ended September 30, 2019. Corporate overhead was 8.2% of revenue for the three months ended September 30,
2020 and 12.1% for the three months ended September 30, 2019. The decrease in corporate overhead as a percentage of revenues for
the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019 was primarily due to the leverage we are
achieving through the increase in revenues not only from same store sales but through revenues from acquired and opened stores.
Share based compensation for the three months ended September 30, 2020 was $1 million compared to $553,000 for the three months
ended September 30, 2019. The increase in the amount of share-based compensation is primarily due to new executive compensation
agreements effective January 1, 2020. Share based compensation as a % of revenues decreased from 2.5% for the three months ended
September 30, 2019 to 1.9% for the three months ended September 30, 2020. The increase in salaries expense from approximately
$1 million in the three months ended September 30, 2019 to $2.2 million for the three months ended September 30, 2020 was due
primarily to the increase in corporate staff to support expanding operations, including purchased store integrations, new store
openings, accounting and finance, information systems, purchasing and commercial sales staff. It should be noted that when we
consummate a new acquisition, purchasing and back office accounting functions are stripped from the new acquisitions and those
functions are absorbed into our existing centralized purchasing and accounting and finance departments, thus delivering cost savings.
Corporate salaries and related payroll costs as a percentage of sales were 4% for the three months ended September 30, 2020 compared
to 4.7% for the three months ended September 30, 2019. General and administrative expenses comprised mainly of advertising and
promotions, travel & entertainment, professional fees, insurance, and bad debt expense was approximately $858,000 for the
three months ended September 30, 2020 and approximately $804,000 for the three months ended September 30, 2019, with a majority
of the increase related to advertising and promotion, professional and legal fees and insurance. General and administrative costs
as a percentage of revenue were 1.6% for the three months ended September 30, 2020, and 3.7% for the three months ended September
30, 2019. As noted earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share
based compensation, was approximately $1.5 million for the three months ended September 30, 2020, compared to approximately $801,000
for the three months ended September 30, 2019.
Net
Income
Net income for the three months ended
September 30, 2020 was approximately $3.3 million, compared to net income of approximately $1 million for the three months
ended September 30, 2019, a positive change of approximately $2.3 million. The increase in net income for the quarter ended
September 30, 2020 was primarily due to the 153% increase in revenues while store operating costs increased only 81%. Net
income from store operations which was approximately $9.6 million for the quarter ended September 30, 2020, compared to
approximately $3.8 million for the quarter ended September 30, 2019, an increase of $5.8 million or 155%. The increase in
income from store operations were offset by increased corporate overhead, which was approximately $4.5 million for the
quarter ended September 30, 2020, compared to approximately $2.6 million for the quarter ended September 30, 2019, an
increase of $1.9 million. In addition, the Company reported a provision for income taxes of approximately $1.8 million for
which there was no provision in the comparable period last year. In prior years, the Company was able to offset taxable
income with net operating loss carryforwards. Those carryforwards were fully utilized this year, as such we commenced
recorded a provision for income taxes. Of the total corporate overhead of $4.5 million, non-cash share-based compensation and
depreciation was approximately $1.5 million. Increases in G&A and salaries in the quarter ended September 30, 2020
compared to the quarter ended September 30, 2019 accounted for the remaining increase.
Comparison
of the nine months ended September 30, 2020 and 2019
The
following table presents certain consolidated statement of operations information and presentation of that data as a dollar and
percentage change from year-to-year.
|
|
Nine Months
Ended
September 30,
2020
|
|
|
Nine Months
Ended
September 30,
2019
|
|
|
$
Variance
|
|
|
%
Variance
|
|
Net revenue
|
|
$
|
131,440,820
|
|
|
|
54,349,092
|
|
|
$
|
77,091,728
|
|
|
|
141.8
|
%
|
Cost of goods sold
|
|
|
96,338,467
|
|
|
|
38,340,670
|
|
|
|
57,997,797
|
|
|
|
151.3
|
%
|
Gross profit
|
|
|
35,102,353
|
|
|
|
16,008,422
|
|
|
|
19,093,931
|
|
|
|
119.3
|
%
|
Store operating costs
|
|
|
12,523,594
|
|
|
|
7,360,525
|
|
|
|
5,163,069
|
|
|
|
70.1
|
%
|
Income from store operations
|
|
|
22,578,759
|
|
|
|
8,647,897
|
|
|
|
13,930,862
|
|
|
|
161.1
|
%
|
Corporate operating expenses
|
|
|
16,783,616
|
|
|
|
5,992,335
|
|
|
|
10,791,281
|
|
|
|
180.1
|
%
|
Operating income
|
|
|
5,795,143
|
|
|
|
2,655,562
|
|
|
|
3,139,581
|
|
|
|
118.2
|
%
|
Other income (expense)
|
|
|
(22,272
|
)
|
|
|
(314,442
|
)
|
|
|
292,170
|
|
|
|
|
|
Net income, before taxes
|
|
$
|
5,772,871
|
|
|
|
2,341,120
|
|
|
|
3,431,751
|
|
|
|
146.6
|
%
|
Provision for income taxes
|
|
|
(1,995,113
|
)
|
|
|
-
|
|
|
|
(1,995,113
|
)
|
|
|
|
|
Net income
|
|
$
|
3,817,758
|
|
|
$
|
2,341,120
|
|
|
$
|
1,476,638
|
|
|
|
63.1
|
%
|
Net
revenue for the nine months ended September 30, 2020 was approximately $131 million, compared to approximately $54 million for
the nine months ended September 30, 2019 an increase approximately $77 million or 142%. The increase in revenues in 2020 was primarily
due to 1) 5 new stores opened or acquired after September 30, 2019 which had revenues of $27 million for the nine months ended
September 30, 2020 for which there were no revenues for the nine months ended September 30, 2019, 2) 8 stores opened or acquired
in early 2019, that had revenues of $38.7 million for the nine months ended September 30, 2020 compared to revenues of $15.7 million
for the nine months ended September 30, 2019, 3) an acquired store June 2020 that was consolidated with an existing store, that
on a combined basis had revenues of $5.5 million for the nine months ended September 30, 2020 compared to $1.5 million for the
nine months ended September 30, 2019, 4) increase in same store sales of 59% comparing revenues for the nine months ended September
30, 2020 to the nine months ended September 30, 2019 and 5) an increase in e-commerce sales of $4.3 million or 140% comparing
the nine months ended September 30, 2020 to the nine months ended September 30, 2019. As noted in the chart below, the 13 same
stores contributed revenue of $52.4 million for the nine months ended September 30, 2020 compared to revenues of $33 million for
the nine months ended September 30, 2019, a 59% increase.
The
Company operated the same 13 stores for the entire nine months ended September 30, 2020 and 2019: four (4) in Colorado, six (3)
in California, two (2) in Michigan, one (1) in Nevada, one (1) in Rhode Island, one (1) in Washington and one (1) in Oklahoma.
These same stores generated approximately $52.4 million in revenues for the nine months ended September 30, 2020, compared to
approximately $33 million in revenues for the nine months ended September 30, 2019, an increase of 59%, primarily due to an increase
in the number of commercial customers in those markets. Same store sales increased in all of the markets, except for Washington,
as noted below comparing September 30, 2020 to September 30, 2019.
|
|
13
Same Stores All Markets
|
|
|
|
|
|
Nine
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
Variance
|
|
%
Variance
|
|
Colorado
|
|
$
|
10,560,433
|
|
|
$
|
6,897,311
|
|
|
$
|
3,663,122
|
|
|
53
|
%
|
Rhode
Island
|
|
|
13,999,030
|
|
|
|
5,735,736
|
|
|
|
8,263,294
|
|
|
144
|
%
|
Michigan
|
|
|
6,701,100
|
|
|
|
3,300,886
|
|
|
|
3,400,214
|
|
|
103
|
%
|
Oklahoma
|
|
|
5,544,250
|
|
|
|
4,630,998
|
|
|
|
913,252
|
|
|
20
|
%
|
California
|
|
|
12,912,045
|
|
|
|
9,909,840
|
|
|
|
3,002,205
|
|
|
30
|
%
|
Washington
|
|
|
1,070,141
|
|
|
|
988,239
|
|
|
|
81,902
|
|
|
8
|
%
|
Nevada
|
|
|
1,600,894
|
|
|
|
1,552,035
|
|
|
|
48,859
|
|
|
3
|
%
|
Net
revenue
|
|
$
|
52,387,893
|
|
|
$
|
33,015,045
|
|
|
$
|
19,372,848
|
|
|
59
|
%
|
The
Company currently continues to focus on ten (10) markets and the new e-commerce site noted below and the growth opportunities
that exist in each market. We continue to focus on new store acquisitions and openings, proprietary products and the continued
development of our online omni-channel and Amazon revenues.
|
|
Sales
by Market
|
|
|
|
|
|
Nine
Months Ended
September 30,
2020
|
|
|
Nine
Months Ended
September 30,
2019
|
|
|
Variance
|
|
%
Variance
|
|
Colorado
|
|
$
|
14,441,674
|
|
|
$
|
11,392,368
|
|
|
3,049,306
|
|
26.8
|
%
|
California
|
|
|
17,253,908
|
|
|
|
12,228,377
|
|
|
|
5,025,531
|
|
|
41.1
|
%
|
Rhode
Island
|
|
|
13,999,030
|
|
|
|
5,735,736
|
|
|
|
8,263,294
|
|
|
144.1
|
%
|
Michigan
|
|
|
20,983,911
|
|
|
|
5,414,648
|
|
|
|
15,569,263
|
|
|
287.5
|
%
|
Nevada
|
|
|
3,444,252
|
|
|
|
2,979,641
|
|
|
|
464,611
|
|
|
15.6
|
%
|
Washington
|
|
|
1,070,141
|
|
|
|
988,239
|
|
|
|
81,902
|
|
|
8.3
|
%
|
Oregon
|
|
|
5,180,343
|
|
|
|
-
|
|
|
|
5,180,343
|
|
|
-
|
|
Oklahoma
|
|
|
30,590,141
|
|
|
|
7,420,962
|
|
|
|
23,169,179
|
|
|
312.2
|
%
|
Maine
|
|
|
11,141,499
|
|
|
|
4,010,103
|
|
|
|
7,131,396
|
|
|
177.8
|
%
|
Florida
|
|
|
5,887,424
|
|
|
|
-
|
|
|
|
5,887,424
|
|
|
-
|
|
E-commerce
|
|
|
7,448,772
|
|
|
|
3,099,310
|
|
|
|
4,349,462
|
|
|
140.3
|
%
|
Closed/consolidated
locations
|
|
|
(275
|
)
|
|
|
1,079,708
|
|
|
|
(1,079,983
|
)
|
|
-
|
|
Total
revenues
|
|
$
|
131,440,820
|
|
|
$
|
54,349,092
|
|
|
$
|
77,091,728
|
|
|
141.8
|
%
|
Revenues
in the Colorado market increased approximately $3 million or 26.8% comparing the nine months ended September 30, 2020 to September
30, 2019. The increase in revenues in the Colorado market is due to 1) the Company’s continued focus on increasing commercial
revenues, and 2) the acquisition of a new store in mid-January 2019. Same store revenues in Colorado increased approximately $3.7
million or 53%.
Revenues
in the California market increased approximately $5 million, or 41%. Same store revenues in the California market increased approximately
$3 million or 30% over the same nine months in 2019 and the Palm Springs acquisition in mid-February 2019 had revenues of approximately
$3.9 million for 2020 compared to $2.3 million for 2019.
Revenues
in the Rhode Island market increased approximately $8.3 million or 144% primarily from its increased focus on commercial and multi-state
commercial customers.
Revenues
in the Michigan market increased approximately $15.6 million or 288% due to 1) an acquisition in September 2019 that contributed
$8.8 million in revenue in the nine months ended September 30, 2020 compared to $646,000 for the nine months ended September 30,
2019, 2) an acquisition in mid-June 2020 that consolidated with an existing store that combined had revenues of $5.5 million for
the nine months ended September 30, 2020 compared to $1.5 million for the nine months ended September 30, 2019, and 3) the increase
in same store revenues which increased $3.4 million or 103% primarily due to the increase in commercial accounts.
Revenues
in the Nevada market increased $465,000 or 15.6% due to 1) the acquisition of our Reno store in February 2019 which had revenues
of $1.8 million in the nine months ended September 30, 2020 compared to revenues of $1.4 million for the nine months ended September
30, 2019, and 2) a 3% increase in same store revenues in the Las Vegas store.
Revenues
in the Washington market increased by 8% comparing the nine months ended September 30, 2020 to the nine months ended September
30, 2019. Washington currently is our smallest market.
Revenues
in Oregon were approximately $5.2 million and represents a new market from an acquisition in mid-December 2019.
Currently
we have 4 stores in the Oklahoma market. Revenues in the Oklahoma market increased $23.2 million or 312% comparing the nine months
ended September 30, 2020 to the nine months ended September 30, 2019. Same stores revenues increased 20% in Oklahoma City, the
first store opened in October 2018. Revenue growth in 2020 was greatly enhanced by the addition of two new stores in Oklahoma
that opened in mid-November 2019 and March 2020, that combined had revenues of $15.9 million for the nine months ended September
30, 2020 and no revenues for the nine months ended September 30, 2019.
Revenues
in Maine have increased $7.1 million or 178% comparing the nine months ended September 30, 2020 to the nine months ended September
30, 2019. The increase was primarily due to a new store opened January 31, 2019 and two new stores acquired in May 2019. The new
store opened in early 2019 had revenues of $4.1 million in the nine months ended September 30, 2020, compared to $1.1 million
for the nine months ended September 30, 2019. The two new stores acquired in May 2019, contributed $7.1 million in revenues for
the nine months ended September 30, 2020, compared to $2.9 million for the nine months ended September 30, 2019.
Florida
was a new market resulting from an acquisition in February 2020. Revenues in this market were $5.9 million for the nine months
ended September 30, 2020.
Cost
of Goods Sold
Cost
of goods sold for the nine months ended September 30, 2020 was approximately $96.3 million compared to approximately $38.3 million
for the nine months ended September 30, 2019 an increase of approximately $58 million or 151%. The increase in cost of goods sold
was primarily due to the 142% increase in revenues comparing the nine months ended September 30, 2020 to the nine months ended
September 30, 2019. The increase in cost of goods sold is directly attributable to the increase in the number of stores open during
the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, as discussed in detail above.
Gross
profit was approximately $35.1 million for the nine months ended September 30, 2020, compared to approximately $16 million for
the nine months ended September 30, 2019, an increase of approximately $19.1 million or 119%. The increase in cost of goods sold
is primarily related to the 141.8% increase in revenues comparing the nine months ended September 30, 2020 to the nine months
ended September 30, 2019. Gross profit as a percentage of revenues was 26.7% for the nine months ended September 30, 2020, compared
to 29.5% for the nine months ended September 30, 2019. The decrease in the gross profit margin percentage is due to 1) a greater
percentage of our sale for the nine months ended September 30, 2020 in commercial and e-commerce revenues with lower margins compare
to the nine months ended September 30, 2019 (30.6% vs 25.7%, respectively), and 2) in the first quarter of 2019 we acquired a
significant amount of inventory from a vendor at a substantial discount, sales of this product during the nine months ended 2019
accounted for 4% of our overall revenue and high margins, resulting in an 1.1 basis points increase in margin. Commercial and
e-commerce accounted for approximately 30.6% of overall revenues for the nine months ended September 30, 2020 compared to 25.7%
for the nine months ended September 30, 2019.
Operating
Expenses
Operating
expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs
were approximately $12.5 million for the nine months ended September 30, 2020 and approximately $7.4 million for the nine months
ended September 30, 2019, an increase of approximately $5.2 million or 70%. The increase in store operating costs was directly
attributable to 1) the addition of five (5) new locations that were added after September 30, 2019, and 2) eight (8) locations
added at various times during the nine months ended September 30, 2019 that were open for the entire nine months ended September
30, 2020. The addition of these 13 stores, as discussed above, and the new warehouse facility were the primary reasons for the
increase in store operating costs. Store operating costs as a percentage of revenues were 9.5% for the nine months ended September
30, 2020, compared to 13.5% for the nine months ended September 30, 2019, a 30% reduction. Store operating costs were positively
impacted by the opening of new and acquired stores throughout 2019 and acquisitions in 2020 which have lower percentage of operating
costs to revenues due to their larger size and higher volume. As noted above, same store revenues increased 59% comparing the
nine months ended September 30, 2020 to the nine months ended September 30, 2019, which also contributed significantly to lowering
of the store operating costs as a percentage of revenues.
Corporate overhead, comprised of general
and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $16.8
million for the nine months ended September 30, 2020, compared to approximately $6 million for the nine months ended September
30, 2019. Corporate overhead was 12.8% of revenue for the nine months ended September 30, 2020 and 11% for the nine months ended
September 30, 2019. The increase in corporate overhead as a percentage of revenues for the nine months ended September 30, 2020
was primarily due to the increase in non-cash share base compensation from approximately $1.1 million for the nine months ended
September 30, 2019 to approximately $6.3 million for the nine months ended September 30, 2020, an increase of $5.2 million. The
increase in non-cash share-based compensation was primarily the result of several new executive employment agreements which became
effective January 1, 2020 which resulted in the vesting of common stock and common stock options at the start of the first quarter,
as well as options issued in 2018 and 2019 for options vesting in 2020. The shares based awards associated with the new executive
employment agreements resulted in approximately one-third of the award being recognized as an expense in the first three months
of 2020, due to vesting, and the remaining two-thirds on the share-based awards are being recognized over a 24 month period commencing
January 2020 and ending December 2021, based on shared based award vesting in future periods. The vesting of these shares and options
was significantly higher in the first nine months of 2020 than they will be in the periods subsequent to September 30, 2020. The
increase in salaries expense from 2019 to 2020, which increased from $2.5 million for the nine months ended September 30, 2019
to $5.9 million for the nine months ended September 30, 2020 was due primarily to the increase in corporate staff to support expanding
store operations, including purchased store integrations, accounting and finance, information systems, purchasing and commercial
revenues staff. It should be noted that when we consummate a new acquisition, purchasing and back office accounting functions are
stripped from the new acquisitions and those functions are absorbed into our existing centralized purchasing and accounting and
finance departments, thus delivering cost savings. Corporate salaries and related payroll costs as a percentage of revenues were
4.5% for the nine months ended September 30, 2020 and the nine months ended September 30, 2019.
General and administrative expenses comprised
mainly of advertising and promotions, travel & entertainment, professional fees and insurance, was approximately $3.2 million
for the nine months ended September 30, 2020 and approximately $1.9 million for the nine months ended September 30, 2019, with
a majority of the increase related to advertising and marketing, insurance, consulting and legal fees. General and administrative
costs as a percentage of revenue were 2.5% for the nine months ended September 30, 2020, and 3.5% for the nine months ended September
30, 2019. As noted earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share
based compensation, was approximately $7.6 million for the nine months ended September 30, 2020, compared to approximately $1.6
million for the nine months ended September 30, 2019, an increase of $6 million, primarily due to share-based compensation as previously
discussed. Corporate overhead, excluding non-cash share-based compensation and depreciation, was $9.2 million for the nine months
ended September 30, 2020 or 7% of revenues, compared to $4.4 for the nine months ended September 30, 2019, or 8.1% of revenues.
Net
Income
Net income for the nine months ended September
30, 2020 was approximately $3.8 million, compared to net income of approximately $2.3 million for the nine months ended September
30, 2019, a positive change of approximately $1.5 million.
The net income for the nine months ended
September 30, 2020 was primarily due to the 1) a 141.8% increase in revenues, 2) a 161% increase in income from store operations
from $8.6 million for the nine months ended September 30, 2019 to $22.6 million for the nine months ended September 30, 2020, offset
by 3) a $5.2 million increase in share-based compensation from approximately $1.1 million in 2019 to $6.3 million for the nine
months ended September 30, 2020, and 4) income tax expense of $2 million for 2020 compared to $0 for 2019. In prior years, the
Company was able to offset taxable income with net operating loss carryforwards. Those carryforwards were fully utilized this year,
as such we commenced recorded a provision for income taxes. The total of non-cash expense, share-based compensation and depreciation
was $7.6 million for the nine months ended September 30, 2020 compared to $1.6 million for the nine months ended September 30,
2019.
Operating
Activities
Net cash provided by operating
activities for nine months ended September 30, 2020 was approximately $3.7 million compared to net cash used by operating
activities of approximately $(2.3) million for nine months ended September 30, 2019. Cash used in operating activities is
driven by our net income and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash
adjustments primarily include depreciation, amortization of intangible assets, share based compensation expense and
amortization of debt discount. Non-cash adjustments totaled approximately $7.7 million and approximately $2 million for the
nine months ended September 30, 2020 and 2019, respectively, so non-cash adjustments had a far greater positive impact on net
cash provided by operating activities for the nine months ended September 30, 2020 than the same period in 2019. The net cash
provided by operating activities, $3.7 million, for the nine months ended September 30, 2020 compared to the net cash used in
operating activities, $(2.3) million for nine months ended September 30, 2019, a positive difference of $6 million, was
primarily related to 1) the net income of approximately $3.8 million for the nine months ended September 30, 2020, 2) net
increases in inventory and prepaids of approximately $(16.5) million, which had a negative impact, offset by 3) positive
non-cash adjustments of approximately $7.7 million and 4) increases in accounts payable, customer deposits, income taxes and
other current liabilities of approximately $9.6 million.
Net cash used in operating activities for
the nine months ended September 30, 2019 was approximately $(2.3) million. This amount was primarily related to 1) net income of
approximately $2.3 million, 2) positive non-cash adjustments of approximately $2 million, 3) increase in accounts payable and other
current liabilities of approximately $4.3 million offset by 4) increases of inventory of approximately $7.3 million, accounts receivable
of approximately $1.3 million and prepaids of approximately $2.2 million.
Net
cash used in investing activities was approximately $6.9 million for the nine months ended September 30, 2020 and approximately
$10.2 million for the nine months ended September 30, 2019. Investing activities in 2020 were primarily attributable to a store
acquisition ($4 million), vehicles and store equipment purchases ($2.1 million) and intangible assets $(.8 million). Investing
activities in for the nine months ended September 30, 2019 were primarily related to store acquisitions approximately $(8.5) million,
the purchase of vehicles and store equipment to support new store operations of approximately $(1.5) million.
Net cash provided
by financing activities for the nine months ended September 30, 2020 was approximately $45.6 and was primarily attributable to
proceeds from the sale of common stock in a public offering, $44.6 million, exercise of warrants of approximately $1.1 million,
offset by debt principal payments of approximately $74,000. Net cash provided by financing activities for nine months ended September
30, 2019 was $13.8 million and was primarily from proceeds from the sale of common stock and exercise of warrants of $14.1 million,
offset by debt principal payments of approximately $340,000.
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
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Net income
|
|
$
|
3,337,333
|
|
|
$
|
1,049,699
|
|
Income taxes
|
|
|
1,775,801
|
|
|
|
-
|
|
Interest
|
|
|
142
|
|
|
|
27,067
|
|
Depreciation and Amortization
|
|
|
443,578
|
|
|
|
247,715
|
|
EBITDA
|
|
|
5,556,854
|
|
|
|
1,324,481
|
|
Share based compensation (option compensation, warrant compensation, stock issued for services)
|
|
|
1,022,137
|
|
|
|
553,492
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
114,210
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
6,578,991
|
|
|
$
|
1,992,183
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA per share, basic
|
|
$
|
.14
|
|
|
$
|
.06
|
|
Adjusted EBITDA per share, diluted
|
|
$
|
.13
|
|
|
$
|
.05
|
|
|
|
Nine
Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Net
income
|
|
$
|
3,817,758
|
|
|
$
|
2,341,120
|
|
Income
taxes
|
|
|
1,955113
|
|
|
|
-
|
|
Interest
|
|
|
19,728
|
|
|
|
35,757
|
|
Depreciation
and Amortization
|
|
|
1,270,398
|
|
|
|
538,847
|
|
EBITDA
|
|
|
7,062,997
|
|
|
|
2,915,724
|
|
Share
based compensation (option compensation, warrant compensation, stock issued for services)
|
|
|
6,324,109
|
|
|
|
1,075,735
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
356,306
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
13,387,106
|
|
|
$
|
4,347,765
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA per share, basic
|
|
$
|
.32
|
|
|
$
|
.14
|
|
Adjusted
EBITDA per share, diluted
|
|
$
|
.30
|
|
|
$
|
.13
|
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of September 30, 2020, we had working capital of approximately $83 million, compared to working capital of approximately $30.6
million as of December 31, 2019, an increase of approximately $52.4 million. The increase in working capital from December 31,
2019 to September 30, 2020 was due primarily to 1) proceeds from the a public offering of common stock resulting in net proceeds
of $44.6 million, 2) exercise of warrants totaling approximately $1.1 million during the nine months ended September 30, 2020
and 3) the increase in net cash provided by operations. At September 30, 2020, we had cash and cash equivalents of approximately
$55.3 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.
Financing
Activities
2020
Public Offering
On
July 2, 2020 the Company consummated an underwritten public offering of 8,625,000 shares of its common stock (the “Shares”),
which included the exercise in full of the underwriters’ option to purchase an additional
1,125,000 shares of common stock to cover over-allotments. The Shares were sold at a public offering price of $5.60 per
share, generating gross proceeds of $48.3 million, before deducting the underwriting discounts
and commissions and other offering expenses. Net proceeds from the sales of common stock, net of all offering costs and
expenses was approximately $44.6 million.
2019
Private Placement
On
June 26, 2019, the Company completed a private placement of a total of 4,123,257 units of the Company’s securities at the
price of $3.10 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act. Each unit consisted of (i) one share of common stock and (ii) one 3-year warrant, each entitling the holder to purchase one
half share of common stock, at a price of $3.50 per share. The Company raised a total of $12,782,099 from 19 accredited investors.
2018
Private Placement
On
January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000
per unit. Each unit consists of (i) a .1% unsecured convertible promissory note of the principal amount of $250,000, and (ii)
a 3-year warrant entitling the holder to purchase 37,500 shares of common stock, at a price of $.01 per share or through cashless
exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering.
On
May 9, 2018, the Company completed a private placement of a total of 33.33 units of its securities at a price of $300,000 per
unit to 3 accredited investors. Each unit consists of (i) 100,000 share of the Company’s common stock and (ii) 50,000 3-year
warrant to purchase one share of common stock at an exercise price of $.35 per share. The Company raised an aggregate of $10,000,000
gross proceeds in the offering.
2017
Private Placements
On
March 10, 2017, the Company completed a private placement of a total of 825,000 units of its securities to 4 accredited investors.
Each unit consists of (i) one share of the Company’s common stock and (ii) one 5-year warrant to purchase one share of common
stock at an exercise price of $2.75 per share. The Company raised an aggregate of $1,650,000 gross proceeds in the offering.
On
May 16, 2017, the Company completed a private placement of a total of 1,000,000 units of its securities to 27 accredited investors
through GVC Capital LLC (“GVC Capital”) as its placement agent. Each unit consists of (i) one share of the Company’s
common stock and (ii) one 5-year warrant to purchase one share of common stock at an exercise price of $2.75 per share. The Company
raised an aggregate of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital total compensation for its services,
(i) for a price of $100, 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares
at $2.75 per share, (ii) a cash fee of $150,000, (iii) a non-accountable expense allowance of $60,000, and (iv) a warrant exercise
fee equal to 3% of all sums received by the Company from the exercise of 750,000 warrants (not including 250,000 warrants issued
to one investor) when they are exercised.
Critical
Accounting Policies, Judgments and Estimates
Use
of Estimates
The
preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United
States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include
the carrying amount of intangible assets; valuation allowances and reserves for receivables, inventory and deferred income taxes;
share-based compensation; and loss contingencies, including those related to litigation. Actual results could differ from those
estimates.
Accounts
Receivable and Concentration of Credit Risk
Accounts
receivable are recorded at the invoiced amounts less an allowance for doubtful accounts and do not bear interest. The allowance
for doubtful accounts is based on our estimate of the amount of probable credit losses in our accounts receivable. We determine
the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment.
Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance
when we determine that the potential for recovery is remote. An allowance for doubtful accounts of approximately $364,262 and
$291,372 has been reserved as of September 30, 2020 and December 31, 2019, respectively.
We
are exposed to credit risk in the normal course of business, primarily related to accounts receivable. We are affected by general
economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition
of its customers and maintains an allowance for doubtful accounts. As of September 30, 2020, and December 31, 2019, we do not
believe that we have significant credit risk.
Fair
Value of Financial Instruments
The
carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which
approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third
parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based
on our current financial condition and liquidity.
Long-lived
Assets
We
evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted
future cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the
difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning
the amount and timing of estimated future cash flows. No impairment was determined as of September 30, 2020 and December 31, 2019.
Revenue
Recognition
Revenue
on product revenues is recognized upon delivery or shipment. Customer deposits and lay away revenues are not reported as revenue
until final payment is received and the merchandise has been delivery.
Stock-based
Compensation
We
account for stock-based awards at fair value on the date of grant and recognize compensation over the service period that they
are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing
model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration
estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately
vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted
for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.
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.