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 believes it is the largest
chain of hydroponic garden centers in North America by revenue and number of stores. We also believe we are 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 twenty eight (28) retail hydroponic/gardening stores, with five (5)
located in the state of Colorado, five (5) in the state of California, four (4) in the state of Michigan, two (2) in the state
of Nevada, one (1) in the state of Washington, one (1) in the state of Oregon, four (4) in the State of Oklahoma, one (1) in the
state of Rhode Island, three (3) in Maine, (1) in Florida, one (1) distribution center in California and an online e-commerce store,
growgeneration.com. In addition, we operate a warehouse out of Sacramento, CA.
Market
Our
stores 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 were well over $8 billion in 2019, 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 300,000 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. In the second quarter of 2020, our revenue was $43.5 million, which increased 123% from the same period of the
prior year. For the six months ended June 30, 2020, our revenue was $76 million, which increased 135% compared to the same period
2019. There was a 49% increase in our same store sales comparing the quarter ended June 30, 2020 to the quarter ended June 30,
2019. The Company performed well in all markets, most notably sales in the Oklahoma market up 348%, Michigan market was up 322%,
Maine market up 146%, all attributable to gaining more commercial and walk in business in these growth markets. Income from store
operations was $7.6 million for the second quarter of 2020, compared to $3.1 million for the second quarter 2019, an increase of
146%. Net income from store operations was approximately $13 million for the six months ended June 30, 2020, compared to approximately
$4.9 million for the six months ended June 30, 2019.
Adjusted EBITDA was $4.6 million for the
second quarter of 2020 compared to $1.7 million the same period of 2019, an increase of 166%. There was a 50% increase in walk-in
transaction, averaging 10,000 per week from the end of the first quarter 2020 to the end of the second quarter 2020.
We
operate our business through the following sales channels:
|
●
|
Retail:
28 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 we intend to launch in September
2020.
|
|
●
|
Distribution:
The majority of our stores are also functioning as warehouse, distribution and fulfillment centers for directing products to our
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 10 states
where we are currently operating, we have identified Arizona, 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 Healthy 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. We have set a target to be at 50
stores and operate in 15 states by the end of 2021.
Commercial
Sales Division
In 2019, we created a commercial division
with 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 second quarter of 2020, our commercial division services over 700 commercial accounts, who
collectively contributed $9.2 million in revenue or approximately 21% of our sales. For the six-month period ended June 30,2020,
the commercial division generated $17.7 million compared to $6.3 million for the same period in 2019, a 181% 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 sales for the second quarter
of 2020 was approximately $2.6 million compared to $1.0 million for the same period in 2019, an increase of 149%. For the six months
ended June 30, 2020, our online sales were approximately $4.5 million compared to $1.7 million for the same period in 2019, an
increase of 163%. New visitors to our website are now approaching 100,000 per month. We are currently developing and rebranding
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 intend to launch 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.” 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 28 locations across 10 states. We are in the process of building several 20,000 square foot store operations that
will serve as fulfillment service centers, in addition to serving the local retail and commercial customers. These stores and 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 in the second quarter of 2020 for the line of
Sunleaves products is now approaching $100,000 per month. 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.
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 2019, 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.
Gross
Profit Margin
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 ended June 30, 2020 and 2019 includes stores
that operated for the entire quarter 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 June 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
June 30, 2020
|
|
|
Three Months
Ended
June 30, 2019
|
|
|
$
Variance
|
|
|
%
Variance
|
|
Net revenue
|
|
$
|
43,451,840
|
|
|
$
|
19,483,383
|
|
|
$
|
23,968,457
|
|
|
|
123
|
%
|
Cost of goods sold
|
|
|
31,866,503
|
|
|
|
13,663,173
|
|
|
|
18,203,330
|
|
|
|
133
|
%
|
Gross profit
|
|
|
11,585,337
|
|
|
|
5,820,210
|
|
|
|
5,765,127
|
|
|
|
99
|
%
|
Store operating costs
|
|
|
3,999,280
|
|
|
|
2,734,788
|
|
|
|
1,264,492
|
|
|
|
46
|
%
|
Income from store operation
|
|
|
7,586,057
|
|
|
|
3,085,422
|
|
|
|
4,500,635
|
|
|
|
146
|
%
|
Corporate operating expenses
|
|
|
4,776,408
|
|
|
|
1,911,711
|
|
|
|
2,864,697
|
|
|
|
150
|
%
|
Operating income
|
|
|
2,809,649
|
|
|
|
1,173,711
|
|
|
|
1,635,938
|
|
|
|
139
|
%
|
Other income (expense)
|
|
|
(79,707
|
)
|
|
|
(111,711
|
)
|
|
|
32,004
|
|
|
|
|
|
Net income, before taxes
|
|
$
|
2,729,943
|
|
|
$
|
1,062,000
|
|
|
$
|
1,667,942
|
|
|
|
157
|
%
|
Provision for income taxes
|
|
|
(156,000
|
)
|
|
|
-
|
|
|
|
(156,000
|
)
|
|
|
|
|
Net income
|
|
|
2,573,943
|
|
|
|
1,062,000
|
|
|
|
1,511,943
|
|
|
|
142
|
%
|
Net revenue for the three months ended
June 30, 2020 was approximately $43.5 million, compared to approximately $19.5 million for the three months ended June 30, 2019
an increase of approximately $24 million or 123%. The increase in revenues in 2020 was primarily due to 1) 6 new stores opened
or acquired at various times after June 30, 2019 that had revenues of $13.5 million for the quarter ended June 30, 2020 for which
there were no revenues for the quarter ended June 30, 2019, 2) 2 stores opened or acquired in May 2019, that had revenues of $2.25
million for the quarter ended June 30, 2020, compared to revenues of $1 million for the quarter ended June 30, 2019, 3) an increase
in same store sales of 49% comparing revenues for the quarter ended June 30, 2020 to the quarter ended June 30, 2019, and 4) an
increase in e-commerce revenues of $1.5 million or 149% comparing the quarter ended June 30, 2020 to the quarter ended June 30,
2019. As noted in the chart below, the 19 same stores contributed revenue of $25.1 million for the quarter ended June 30, 2020,
compared to revenues of $16.9 million for the quarter ended June 30, 2019, a 49% increase.
The
Company operated the same 19 stores for the entire three months ended June 30, 2020 and 2019: five (5) in Colorado, four (4) in
California, three (3) in Michigan, two (2) in Nevada, one (1) in Rhode Island, one (1) in Washington, one (1) in Maine and one
(2) in Oklahoma. As the chart shows below, these same stores generated approximately $25.1 million in revenues for the three months
ended June 30, 2020, compared to approximately $16.9 million in revenues for the three months ended June 30, 2019, an increase
of 49%, 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 June 30, 2020 to June 30, 2019 except for Washington and Nevada. Las Vegas, Nevada has
been impacted by COVID-19 and revenue increases in our Reno store were offset by revenue decreases in our Las Vegas store.
|
|
19 Same Stores All Markets
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
Variance
|
|
|
%
Variance
|
|
Colorado market
|
|
$
|
4,632,417
|
|
|
$
|
3,915,664
|
|
|
|
716,753
|
|
|
|
18
|
%
|
Rhode Island
|
|
|
3,281,117
|
|
|
|
2,056,590
|
|
|
|
1,224,527
|
|
|
|
60
|
%
|
Michigan
|
|
|
3,413,882
|
|
|
|
1,610,802
|
|
|
|
1,803,080
|
|
|
|
112
|
%
|
Oklahoma
|
|
|
5,151,142
|
|
|
|
2,506,769
|
|
|
|
2,644,373
|
|
|
|
105
|
%
|
California market
|
|
|
5,942,121
|
|
|
|
4,978,009
|
|
|
|
964,112
|
|
|
|
19
|
%
|
Washington market
|
|
|
300,533
|
|
|
|
350,244
|
|
|
|
(49,711
|
)
|
|
|
-14
|
%
|
Maine market
|
|
|
1,457,676
|
|
|
|
506,333
|
|
|
|
951,343
|
|
|
|
188
|
%
|
Nevada market
|
|
|
952,390
|
|
|
|
952,344
|
|
|
|
46
|
|
|
|
-
|
|
Net revenue, all markets
|
|
$
|
25,131,278
|
|
|
$
|
16,876,755
|
|
|
$
|
8,254,523
|
|
|
|
49
|
%
|
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 sales.
|
|
Sales by Market
|
|
|
|
|
|
|
Three Months Ended
June 30,
2020
|
|
|
Three Months Ended
June 30,
2019
|
|
|
Variance
|
|
|
%
Variance
|
|
Colorado
|
|
$
|
4,632,417
|
|
|
$
|
3,915,664
|
|
|
$
|
716,753
|
|
|
|
18
|
%
|
California
|
|
|
5,942,121
|
|
|
|
4,978,009
|
|
|
|
964,112
|
|
|
|
19
|
%
|
Rhode Island
|
|
|
3,281,117
|
|
|
|
2,056,590
|
|
|
|
1,224,527
|
|
|
|
60
|
%
|
Michigan
|
|
|
6,790,444
|
|
|
|
1,610,802
|
|
|
|
5,179,642
|
|
|
|
322
|
%
|
Nevada
|
|
|
952,390
|
|
|
|
952,344
|
|
|
|
46
|
|
|
|
0
|
%
|
Washington
|
|
|
300,533
|
|
|
|
350,244
|
|
|
|
(49,711
|
)
|
|
|
-14
|
%
|
Oregon
|
|
|
1,587,307
|
|
|
|
-
|
|
|
|
1,587,307
|
|
|
|
-
|
|
Oklahoma
|
|
|
11,239,366
|
|
|
|
2,506,769
|
|
|
|
8,732,597
|
|
|
|
348
|
%
|
Maine
|
|
|
3,709,126
|
|
|
|
1,509,285
|
|
|
|
2,199,841
|
|
|
|
146
|
%
|
Florida
|
|
|
2,443,082
|
|
|
|
-
|
|
|
|
2,443,082
|
|
|
|
-
|
|
E-commerce
|
|
|
2,576,293
|
|
|
|
1,036,334
|
|
|
|
1,539,959
|
|
|
|
149
|
%
|
Closed/consolidated locations
|
|
|
(2,356
|
)
|
|
|
567,342
|
|
|
|
(569,698
|
)
|
|
|
|
|
Total revenues
|
|
$
|
43,451,840
|
|
|
$
|
19,483,383
|
|
|
$
|
23,968,457
|
|
|
|
123
|
%
|
Revenues
in the Colorado market increased approximately $717,000 or 18% comparing the quarter ended June 30, 2020 to June 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 $1 million, or 19%. Same store revenues in the California market increased approximately
$1 million over the same quarter in 2019 and the Palm Springs acquisition in mid-February 2019 had revenues of approximately $1.4
million, a $464,000 increase or 50%.
Revenues
in the Rhode Island market increased approximately $1.2 million or 60% primarily from its increased focus on commercial and multi-state
commercial customers.
Revenues in the Michigan market increased
approximately $5.2 million or 322% due to 1) the acquisition of Grand Rapids in September 2019 that contributed $3.1 million in
revenue in the quarter ended June 30, 2020, 2) the acquisition of the Lansing store in mid-June 2020, that contributed revenues
of $227,000 for the quarter ended June 30, 2020, and 3) the increase in same store revenues which increased $1.8 million or 112%
primarily due to the increase in commercial accounts.
Revenues
in the Nevada market were flat. Las Vegas, Nevada has been impacted by COVID-19 and revenue increases in our Reno store were offset
by revenue decreases in our Las Vegas store.
Revenues
in the Washington market decrease 14% comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. Washington
currently is our smallest market.
Revenues
in Oregon were approximately $1.6 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 $8.7 million or 348% comparing the quarter
ended June 30, 2020 to the quarter ended June 30, 2019. Same stores revenues increased 105% comparing the quarter ended June 30,
2020 to the quarter ended June 30, 2019. The increase in revenues is primarily related to the addition of two new stores in November
2019 and one new store in March 2020.
Revenues in Maine have increased $2.2 million
or 146% comparing the quarter ended June 30, 2020 to the quarter ended June 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 $1.5 million
in the quarter ended June 30, 2020, compared to $506,000 for the quarter ended June 30, 2019. The two new stores acquired in May
2019, contributed $2.3 million in revenues for the quarter ended June 30, 2020, compared to revenues of $1 million for the quarter
ended June 30, 2019.
Florida
was a new market resulting from an acquisition in February 2020. Revenues in this market were $2.4 million for the quarter ended
June 30, 2020.
Cost
of Goods Sold
Cost
of goods sold for the three months ended June 30, 2020 was approximately $31.9 million compared to approximately $13.7 million
for the three months ended June 30, 2019 and increase of approximately $18.2 million or 133%. The increase in cost of goods sold
was primarily due to the 123% increase in sales comparing the three months ended June 30, 2020 to the three months ended June
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 June 30, 2020 compared to the quarter ended June 30, 2019, as discussed in detail above. The increase in cost of
goods sold as a percentage of revenues is due to increased commercial and e-commerce revenues as a percentage to total revenues.
Both commercial sales and e-commerce sales have lower margins than retail sales.
Gross profit was approximately $11.6 million
for the three months ended June 30, 2020, compared to approximately $5.8 million for the three months ended June 30, 2019, an increase
of approximately $5.8 million or 99%. The increase in cost of goods sold is primarily related to the 123% increase in revenues
comparing the quarter ended June 30, 2020 to the quarter ended June 30, 2019. Gross profit as a percentage of revenues was 26.7%
for the three months ended June 30, 2020, compared to 29.9% for the three months ended June 30, 2019. The decrease in the gross
profit margin percentage is due to 1) a greater percentage of our revenues for the quarter ended June 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 second quarter of 2019
accounted for 5% of our overall revenue and high margins, resulting in an 1.3 basis points increase in margin. Commercial and e-commerce
accounted for approximately 26% of overall sales for the quarter ended June 30, 2020, resulting in a margin reduction of approximately
0.8%.
Operating
Expenses
Operating expenses are comprised of store
operations, primarily payroll, rent and utilities, and corporate overhead. Operating costs were approximately $8.8 million for
the three months ended June 30, 2020 and approximately $4.6 million for the three months ended June 30, 2019, an increase of approximately
$4.1 million or 89%. Store operating costs were $4 million for the three months ended June 30, 2020 compared to $2.7 million for
the quarter ended June 30, 2019, an increase of 46%. The increase in store operating costs was directly attributable to 1) the
addition of six (6) new locations that were added after June 30, 2019, and 2) two (2) locations added at various times in the quarter
ended June 30, 2019 that were open for the entire quarter ended June 30, 2020. The addition of these 8 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 9.2% for the three months ended June 30, 2020, compared to 14% for the three months ended June 30, 2019, a 34% 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 49% increase in same store
sales.
Corporate overhead, comprised of general
and administrative costs, share based compensation, depreciation and amortization and corporate salaries, was approximately $4.8
million for the three months ended June 30, 2020, compared to approximately $1.9 million for the three months ended June 30, 2019.
Corporate overhead was 11% of revenue for the three months ended June 30, 2020 and 9.8% for the three months ended June 30, 2019.
The increase in corporate overhead as a percentage of revenues for the quarter ended June 30, 2020 was primarily due to the increase
in all components of corporate overhead as noted below. The increase in non-cash share based compensation from approximately $391,000
for the quarter ended June 30, 2019 to approximately $1.2 million for the quarter ended June 30, 2020, an increase of approximately
$796,000 was primarily the result of several new executive employment agreements which became effective January 1, 2020. The increase
in the non-cash share-based compensation in 2020 over 2019 was approximately 1.8% of revenues. The increase in salaries expense
from approximately $821,000 in the second quarter of 2019 to $2 million for the second quarter of 2020 was due primarily to the
increase in corporate staff to support expanding operations, including purchased store manager integrations, 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 4.5% for the three months ended June 30, 2020 compared to 4.2% for the three months ended June
30, 2019. General and administrative expenses comprised mainly of advertising and promotions, travel & entertainment, professional
fees insurance, and bad debt expense was approximately $1.2 million for the three months ended June 30, 2020 and approximately
$549,000 for the three months ended June 30, 2019, with a majority of the increase related to advertising and promotion, professional
and legal fees, insurance and bad debt reserve expense of $180,000. General and administrative costs as a percentage of revenue
were 2.6% for the three months ended June 30, 2020, and 2.8% for the three months ended June 30, 2019. As noted earlier, corporate
overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation, was approximately
$1.6 million for the three months ended June 30, 2020, compared to approximately $542,000 for the three months ended June 30, 2019.
Net
Income
Net income for the three months ended June
30, 2020 was approximately $2.6 million, compared to net income of approximately $1.1 million for the three months ended June 30,
2019, a positive change of nearly $1.5 million. The increase in net income for the quarter ended June 30, 2020 was primarily due
to the 123% increase in revenues while store operating costs increased only 46%. Net income from store operations which was approximately
$7.6 million for the quarter ended June 30, 2020, compared to approximately $3.1 million for the quarter ended June 30, 2019, an
increase of 146%. The increase in income from store operations were offset by increased corporate overhead which was approximately
$4.8 million for the quarter ended June 30, 2020, compared to approximately $1.9 million for the quarter ended June 30, 2019, an
increase of $2.9 million of which non-cash share based compensation and depreciation was approximately $1.1 million of that increase.
Increases in G&A and salaries in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 accounted for
the remaining increase.
Comparison
of the six months ended June 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.
|
|
Six Months
Ended
June 30,
2020
|
|
|
Six Months
Ended
June 30,
2019
|
|
|
$
Variance
|
|
|
%
Variance
|
|
Net revenue
|
|
$
|
76,433,345
|
|
|
$
|
32,570,605
|
|
|
$
|
43,862,740
|
|
|
|
135
|
%
|
Cost of goods sold
|
|
|
55,901,760
|
|
|
|
23,063,764
|
|
|
|
32,837,996
|
|
|
|
142
|
%
|
Gross profit
|
|
|
20,531,585
|
|
|
|
9,506,841
|
|
|
|
11,024,744
|
|
|
|
116
|
%
|
Store operating costs
|
|
|
7,516,329
|
|
|
|
4,616,326
|
|
|
|
2,900,003
|
|
|
|
63
|
%
|
Income from store operations
|
|
|
13,015,256
|
|
|
|
4,890,515
|
|
|
|
8,124,741
|
|
|
|
166
|
%
|
Corporate operating expenses
|
|
|
12,322,590
|
|
|
|
3,366,794
|
|
|
|
8,955,796
|
|
|
|
266
|
%
|
Operating income
|
|
|
692,666
|
|
|
|
1,523,721
|
|
|
|
(831,055
|
)
|
|
|
-55
|
%
|
Other income (expense)
|
|
|
(56,241
|
)
|
|
|
(232,300
|
)
|
|
|
176,058
|
|
|
|
|
|
Net income, before taxes
|
|
$
|
636,425
|
|
|
$
|
1,291,421
|
|
|
$
|
(654,996
|
)
|
|
|
|
|
Provision for income taxes
|
|
|
(156,000
|
)
|
|
|
-
|
|
|
|
(156,000
|
)
|
|
|
|
|
Net income
|
|
$
|
480,425
|
|
|
$
|
1,291,421
|
|
|
$
|
(810,996
|
)
|
|
|
-63
|
%
|
Net
revenue for the six months ended June 30, 2020 was approximately $76 million, compared to approximately $33 million for the six
months ended June 30, 2019 an increase approximately $44 million or 135%. The increase in revenues in 2020 was primarily due to
1) 6 new stores opened or acquired after June 30, 2019 which had revenues of $20 million for the six months ended June 30, 2020
for which there were no revenues for the six months ended June 30, 2019, 2) 7 stores opened or acquired in early 2019, that had
revenues of $19 million for the six months ended June 30, 2020 compared to revenues of $7.7 million for the six months ended June
30, 2019, 3) an increase in same store sales of 48% comparing revenues for the six months ended June 30, 2020 to the six months
ended June 30, 2019 and 4) an increase in e-commerce sales of $2.8 million or 163% comparing the six months ended June 30, 2020
to the six months ended June 30, 2019. As noted in the chart below, the 14 same stores contributed revenue of $32.7 million for
the six months ended June 30, 2020 compared to revenues of $22.1 million for the six months ended June 30, 2019, a 48% increase.
The Company operated the same 14 stores
for the entire six months ended June 30, 2020 and 2019: four (4) in Colorado, six (3) in California, three (3) 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
$32.7 million in revenues for the six months ended June 30, 2020, compared to approximately $22.1 million in revenues for the six
months ended June 30, 2019, an increase of 48%, 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 June 30, 2020 to June 30, 2019.
|
|
14 Same Stores All Markets
|
|
|
|
|
|
|
Six Months
Ended
|
|
|
Six Months
Ended
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
Variance
|
|
|
%
Variance
|
|
Colorado market
|
|
$
|
6,258,352
|
|
|
$
|
4,464,378
|
|
|
|
1,793,974
|
|
|
|
40
|
%
|
Rhode Island
|
|
|
7,062,487
|
|
|
|
3,554,572
|
|
|
|
3,507,915
|
|
|
|
99
|
%
|
Michigan
|
|
|
6,458,619
|
|
|
|
3,153,654
|
|
|
|
3,304,965
|
|
|
|
105
|
%
|
Oklahoma
|
|
|
3,398,593
|
|
|
|
2,895,652
|
|
|
|
502,941
|
|
|
|
17
|
%
|
California market
|
|
|
7,824,274
|
|
|
|
6,444,762
|
|
|
|
1,379,512
|
|
|
|
21
|
%
|
Washington market
|
|
|
665,980
|
|
|
|
677,540
|
|
|
|
(11,560
|
)
|
|
|
-2
|
%
|
Nevada market
|
|
|
983,330
|
|
|
|
939,304
|
|
|
|
44,026
|
|
|
|
5
|
%
|
Net revenue, all markets
|
|
$
|
32,651,635
|
|
|
$
|
22,129,862
|
|
|
$
|
10,521,773
|
|
|
|
48
|
%
|
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
|
|
|
|
|
|
|
Six Months Ended
June 30,
2020
|
|
|
Six Months Ended
June 30,
2019
|
|
|
Variance
|
|
|
%
Variance
|
|
Colorado
|
|
$
|
8,760,926
|
|
|
$
|
7,245,611
|
|
|
$
|
1,515,315
|
|
|
|
21
|
%
|
California
|
|
|
10,224,433
|
|
|
|
7,771,180
|
|
|
|
2,453,253
|
|
|
|
32
|
%
|
Rhode Island
|
|
|
7,062,487
|
|
|
|
3,554,572
|
|
|
|
3,507,915
|
|
|
|
99
|
%
|
Michigan
|
|
|
12,587,025
|
|
|
|
3,153,654
|
|
|
|
9,433,371
|
|
|
|
299
|
%
|
Nevada
|
|
|
2,145,645
|
|
|
|
1,819,934
|
|
|
|
325,711
|
|
|
|
18
|
%
|
Washington
|
|
|
665,980
|
|
|
|
677,540
|
|
|
|
(11,560
|
)
|
|
|
-2
|
%
|
Oregon
|
|
|
3,243,158
|
|
|
|
-
|
|
|
|
3,243,158
|
|
|
|
-
|
|
Oklahoma
|
|
|
17,532,932
|
|
|
|
4,059,518
|
|
|
|
13,473,414
|
|
|
|
332
|
%
|
Maine
|
|
|
6,689,664
|
|
|
|
1,563,350
|
|
|
|
5,126,314
|
|
|
|
328
|
%
|
Florida
|
|
|
3,002,421
|
|
|
|
-
|
|
|
|
3,002,421
|
|
|
|
-
|
|
E-commerce
|
|
|
4,521,032
|
|
|
|
1,717,632
|
|
|
|
2,803,400
|
|
|
|
163
|
%
|
Closed/consolidated locations
|
|
|
(2,358
|
)
|
|
|
1,007,614
|
|
|
|
(1,009,972
|
)
|
|
|
|
|
Total revenues
|
|
$
|
76,433,345
|
|
|
$
|
32,570,605
|
|
|
$
|
41,059,740
|
|
|
|
135
|
%
|
Revenues in the Colorado market increased
approximately $1.5 million or 21% comparing the six months ended June 30, 2020 to June 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 $1.8 million.
Revenues
in the California market increased approximately $2.5 million, or 32%. Same store revenues in the California market increased
approximately $1.4 million or 21% over the same six months in 2019 and the Palm Springs acquisition in mid-February 2019 had revenues
of approximately $2.4 million for 2020 compared to $1.3 million for 2019.
Revenues
in the Rhode Island market increased approximately $3.5 million or 99% primarily from its increased focus on commercial and multi-state
commercial customers.
Revenues in the Michigan market increased
approximately $9.4 million or 299% due to 1) an acquisition in September 2019 that contributed $5.9 million in revenue in the six
months ended June 30, 2020, 2) an acquisition in mid-June 2020 that contributed $227,000 in revenues in the six months ended June
30, 2020, and 3) the increase in same store revenues which increased $3.3 million or 105% primarily due to the increase in commercial
accounts.
Revenues in the Nevada market increased
18% due to 1) the acquisition of our Reno store in February 2019 which had revenues of $1.2 million in the six months ended June
30, 2020 compared to revenues of 881,000 for the six months ended June 30, 2019, and 2) a 5% increase in same store revenues in
the Las Vegas store.
Revenues
in the Washington market decreased by 2% comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. Washington
currently is our smallest market.
Revenues
in Oregon were approximately $3.2 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 $13.5 million or 332% comparing the six months
ended June 30, 2020 to the six months ended June 30, 2019. Same stores revenues increased 17% in Oklahoma City, the first store
opened in October 2018.
Revenues in Maine have increased $5.1 million
or 328% comparing the six months ended June 30, 2020 to the six months ended June 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 $2.2
million in the six months ended June 30, 2020, compared to $560,000 for the six months ended June 30, 2019. The two new stores
acquired in May 2019, contributed $4.5 million in revenues for the six months ended June 30, 2020, compared to $1 million for the
six months ended June 30, 2019.
Florida
was a new market resulting from an acquisition in February 2020. Revenues in this market were $3 million for the six months ended
June 30, 2020.
Cost
of Goods Sold
Cost of goods sold for the six months ended
June 30, 2020 was approximately $56 million compared to approximately $23 million for the six months ended June 30, 2019 an increase
of approximately $33 million or 142%. The increase in cost of goods sold was primarily due to the 135% increase in revenues comparing
the six months ended June 30, 2020 to the six months ended June 30, 2019. The increase in cost of goods sold is directly attributable
to the increase in the number of stores open during the six months ended June 30, 2020 compared to the six months ended June 30,
2019, as discussed in detail above.
Gross profit was approximately $20.5 million
for the six months ended June 30, 2020, compared to approximately $9.5 million for the six months ended June 30, 2019, an increase
of approximately $11 million or 116%. The increase in cost of goods sold is primarily related to the 135% increase in revenues
comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. Gross profit as a percentage of revenues was
26.8% for the six months ended June 30, 2020, compared to 29.2% for the six months ended June 30, 2019. The decrease in the gross
profit margin percentage is due to 1) a greater percentage of our sale for the six months ended June 30, 2020 in commercial and
e-commerce revenues with lower margins, and 2) in the first quarter of 1 2019 we acquired a significant amount of inventory from
a vendor at a substantial discount, sales of this product during the six 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%
of overall revenues for the six months ended June 30, 2020.
Operating
Expenses
Operating
expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs
were approximately $19.8 million for the six months ended June 30, 2020 and approximately $8 million for the six months ended
June 30, 2019, an increase of approximately $11.9 million or 149%. The increase in store operating costs was directly attributable
to 1) the addition of six (6) new locations that were added after June 30, 2019, and 2) six (6) locations added at various times
in the six months ended June 30, 2019 that were open for the entire six months ended June 30, 2020. The addition of these 12 new
stores, 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 9.8% for the six months ended June 30, 2020, compared to 14.2% for the six months
ended June 30, 2019, a 31% reduction. Store operating costs were positively impacted by the opening of new and acquired stores
throughout 2019 and acquisitions in February and June of 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 48% comparing the six months ended June 30,
2020 to the six months ended June 30, 2019, which also contributed 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 $12.3 million for the six months ended June 30, 2020, compared to approximately $3.4 million for the
six months ended June 30, 2019. Corporate overhead was 16.1% of revenue for the six months ended June 30, 2020 and 10.3% for the
six months ended June 30, 2019. The increase in corporate overhead as a percentage of revenues for the six months ended June 30,
2020 was primarily due to the increase in non-cash share base compensation from approximately $522,000 for the six months ended
June 30, 2019 to approximately $5.3 million for the six months ended June 30, 2020, an increase of $4.8 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 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 six 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 six months of 2020 than they will be in the periods subsequent to June 30, 2020. The increase
in salaries expense from 2019 to 2020 was due primarily to the increase in corporate staff to support expanding operations, including
purchased store manager 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 4.9% for the six months
ended June 30, 2020 compared to 4.4% for the six months ended June 30, 2019. General and administrative expenses comprised mainly
of advertising and promotions, travel & entertainment, professional fees and insurance, was approximately $2.4 million for
the six months ended June 30, 2020 and approximately $1.1 million for the six months ended June 30, 2019, with a majority of the
increase related to advertising and promotion, travel and entertainment and legal fees. General and administrative costs as a
percentage of revenue were 3.2% for the six months ended June 30, 2020, and 3.5% for the six months ended June 30, 2019. As noted
earlier, corporate overhead, which includes non-cash expenses consisting primarily of depreciation and share based compensation,
was approximately $6.2 million for the six months ended June 30, 2020, compared to approximately $813,000 for the six months ended
June 30, 2019, an increase of $5.3 million.
Net
Income
Net income for the six months ended June
30, 2020 was approximately $480,000, compared to net income of approximately $1.3 million for the six months ended June 30, 2019,
a change of approximately $(811,000). Net income from store operations which was approximately $13 million for the six months ended
June 30, 2020, compared to approximately $4.9 million for the six months ended June 30, 2019.
The net income for the six months ended
June 30, 2020 was primarily due to the 1) a 135% increase in revenues, 2) a 166% in income from store operations, offset by 3)
an increase in share-based compensation from approximately $522,000 in 2019 to $5.3 million for the six months ended June 30, 2020,
and 4) income tax expense of $156,000. The total of non-cash expense, share-based compensation and depreciation was $6.1 million
for the six months ended June 30, 2020 compared to $813,000 for the six months ended June 30, 2019.
Operating
Activities
Net cash provided by operating activities
for six months ended June 30, 2020 was approximately $6.1 million compared to net cash used by operating activities of approximately
$860,000 for six months ended June 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
$6.3 million and approximately $1.1 million for the six months ended June 30, 2020 and 2019, respectively, so non-cash adjustments
had a far greater positive impact on net cash provided by operating activities for the six months ended June 30, 2020 than the
same period in 2019. The net cash provided by operating activities, $6.1 million, for the six months ended June 30, 2020 compared
to the net cash used in operating activities, $(860,000) for six months ended June 30, 2019, a positive difference of $7 million,
was primarily related to1) the net income of approximately $636,000 for the six months ended June 30, 2020, 2) net increases in
inventory and prepaids of approximately $8.8 million offset by 3) positive non-cash adjustments of approximately $6.3 million and
4) increases in accounts payable, customer deposits and other current liabilities of approximately $7.5 million.
Net cash used in operating activities for
the six months ended June 30, 2019 was approximately $860,000. This amount was primarily related to 1) net income of approximately
$1.3 million, 2) positive non-cash adjustments of approximately $1.1 million, 3) increase in accounts payable and other current
liabilities of approximately $1.5 million offset by 4) increases of inventory of approximately $3 million, accounts receivable
of approximately $558,000 and prepaids of approximately $1.1 million.
Net cash used in investing activities was
approximately $5 million for the six months ended June 30, 2020 and approximately $8.8 million for the six months ended June 30,
2019. Investing activities in 2020 were primarily attributable to a store acquisition ($3 million) and vehicles, store equipment
purchases ($1.3 million) and intangible assets $(.7 million). Investing activities in for the six months ended June 30, 2019 were
primarily related to store acquisitions for which we paid approximately $7.6 million and the purchase of vehicles and store equipment
to support new store operations of approximately $1.1 million.
Net cash provided
by financing activities for the six months ended June 30, 2020 was approximately $745,000 and was primarily attributable to proceeds
from the exercise of warrants of approximately $792,000, offset by debt principal payments of approximately $47,000. Net cash
used in financing activities for six months ended June 30, 2019 was $12.9 million and was primarily from proceeds from the sale
of common stock and exercise of warrants of $13.1 million, offset by debt principal payments of approximately $229,000.
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
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Net income
|
|
$
|
2,573,943
|
|
|
$
|
1,062,000
|
|
Income taxes
|
|
|
156,000
|
|
|
|
-
|
|
Interest
|
|
|
13,240
|
|
|
|
3,161
|
|
Depreciation and Amortization
|
|
|
467,677
|
|
|
|
150,842
|
|
EBITDA
|
|
|
3,210,860
|
|
|
|
1,216,003
|
|
Share based compensation (option compensation, warrant compensation, stock issued for services)
|
|
|
1,186,905
|
|
|
|
390,898
|
|
Bad debt reserve allowance
|
|
|
194,680
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
117,150
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
4,592,445
|
|
|
$
|
1,724,051
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA per share, basic
|
|
$
|
.12
|
|
|
$
|
.06
|
|
Adjusted EBITDA per share, diluted
|
|
$
|
.11
|
|
|
$
|
.05
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Net income
|
|
$
|
480,425
|
|
|
$
|
1,291,421
|
|
Income taxes
|
|
|
156,000
|
|
|
|
-
|
|
Interest
|
|
|
20,421
|
|
|
|
8,690
|
|
Depreciation and Amortization
|
|
|
826,820
|
|
|
|
291,132
|
|
EBITDA
|
|
|
1,483,666
|
|
|
|
1,591,243
|
|
Share based compensation (option compensation, warrant compensation, stock issued for services)
|
|
|
5,301,972
|
|
|
|
522,243
|
|
Bad debt reserve allowance
|
|
|
194,680
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
242,096
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
6,980,318
|
|
|
$
|
2,355,582
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA per share, basic
|
|
$
|
.18
|
|
|
$
|
.08
|
|
Adjusted EBITDA per share, diluted
|
|
$
|
.17
|
|
|
$
|
.08
|
|
LIQUIDITY
AND CAPITAL RESOURCES
As of June 30, 2020, we had working capital
of approximately $35.2 million, compared to working capital of approximately $30.6 million as of December 31, 2019, an increase
of approximately $4.6 million. The increase in working capital from December 31, 2019 to June 30, 2020 was due primarily to 1)
proceeds from the exercise of warrants totaling approximately $792,000 during the six months ended June 30, 2020 and 2) the increase
in net cash provided by operations. At June 30, 2020, we had cash and cash equivalents of approximately $14.8 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 $465,420 and $291,372 has been reserved as of June 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 June 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 June 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.