GrowGeneration Corp. (GRWG) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to GrowGeneration Corp 2018 fiscal year end earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, April 1, 2019. I would now like to turn the conference over to Michael Salaman. Please go ahead.

Good afternoon and welcome. My name is Michael Salaman, Co-Founder and President of GrowGeneration Corp. At this time, I would like to welcome everyone to the GrowGeneration Corp. 2018 yearend earnings conference call. After our CEO and CFO’s remarks, there will be a question-and-answer session. Now, I will do the forward-looking statements. This earnings call may include predictions, estimates or other information that might be considered forward-looking within the meaning of applicable securities laws. While these forward-looking statements represent our current judgments, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this earnings call. Please keep in mind that we are not obligating ourselves to revise or publicly release results of any of the revisions to these forward-looking statements in light of the new information or future events. When used herein, words such as look forward, believe, continue, building, or variations of such words and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are often discussed in our filings we make with the United States Securities and Exchange Commission available at sec.gov and on our website, growgeneration.com. The U.S. cannabis legal landscape now stands at 10 recreational legal states and 33 medical states. GrowGeneration is a agricultural driven company that is leading the convergence of big ag and cannabis and hemp cultivation. Our continued market advantage and growth is fueled by our ability to open or acquire a new store location in less than 90 days. With our national supply chain now in place, we can serve and service any multistate operator or local grower with a one stop shopping solution for all their cultivation products. What this all means for GrowGeneration is continued and future growth. We continue to monitor and set in place a plan and strategies to open or acquire new locations, develop new emerging vertical markets like hemp farming and invest in new products. I will now turn the call over to our CEO and Co-Founder, Darren Lampert, who will present our 2018 fiscal year end results. Darren?

Good afternoon and welcome to our 2018 earnings call. We'd like to begin our call by thanking our shareholders, management and employees for their continued support and belief in the mission, Michael and I set forth five years ago to build the largest national chain of hydroponic stores in the US. 2018 was a transformational year for the company. We've built out our just-in-time supply chain, completing the outfitting of our management team, inclusive of purchasing, accounting, technology and commercial sales. Today, GrowGeneration is a leading marketer and distributor of nutrients, [indiscernible], advanced indoor and greenhouse lighting and ventilation systems and accessories for hydroponic gardening. Our guidance for 2019 is 52 million to 58 million in revenue, and $0.12 to $0.16 in adjusted EBITDA. Today, GrowGeneration owns and operates a chain of 21 hydroponic gardening stores with 6 in California, 5 in Colorado, 3 in Michigan, 2 in Oklahoma, 1 in Nevada, Rhode Island, Washington and Maine and our online e-commerce store, heavygardens.com. In 2018, we acquired 8 new locations and opened 1 new store in Oklahoma City, adding 25 million in revenue and we continue to achieve our growth goals of 100% year-over-year. It should be noted that we currently expect our 2018 transactions to add over 30 million in revenue for 2019. We have six locations that qualify for same store sales, which were down 5% for the year, but up 12% for the fourth quarter. The same store sales for the first quarter of ‘19 are trending up between 30% and 40%. Our operations today span over 200,000 square feet of retail showroom and warehouse space. We employ today 140 employees, of which 100 are agronomists and horticulturists. In addition to our store operations, GrowGeneration also operates five divisions. These wholly owned divisions are GrowGeneration Canada, GrowGeneration commercial management, GrowGeneration Hemp Corp, GrowGeneration Distribution, and our newly purchased e-commerce superstore, heavygardens.com. GrowGen commercial is operated as a standalone entity to sell directly into the commercial markets. These sales calls include new build outs, large capital projects and the supply side management of the large multi-state operators. Our commercial management team closed over $2 million in commercial capital projects in the first quarter, and we are projecting over $10 million in new capital projects for the year. Heavygardens.com, powered by GrowGeneration is the company's online superstore that today generates around $300,000 a month in sales and has over 60,000 unique visitors. GrowGeneration Canada was formed to mirror our US operation with strategies to acquire hydroponic operations in Canada. We plan to have an operation in Canada in 2019. GrowGeneration Hemp Corp is developing a supply chain to outfit all the nation’s hemp farms with equipment and supplies. Today, there's over 75,000 acres, up from 25,000 in 2018 of active hemp farming. As more of these hemp farms become operational, and the demand for CBD isolate biomass soars, the increase in hemp farming will be a high growth sales channel for the company. Lastly, GrowGeneration distribution Corp is sourcing and developing new and innovative agricultural products as well as developing private label and exclusive products to drive margins and introduce the commercial growers to the latest and new technologies to increase yields and the quality of their plants. With our purchase of product trademarks from a large hydroponic distributor, we have a portfolio of house brands that are now selling through over store locations that will have a positive impact on our margins and profitability. I'd like to go over a few of our 2018 and year-to-date 2019 financial highlights. Revenue of 29 million, up 14.6 million or 102% over 2017 revenues of 14.4 million; acquired eight stores, heavygardens.com and opened our Oklahoma City location; store operating costs as a percentage of revenue have declined 13% from 20.6% for 2017 to 18% for 2018; gross margin percentage, exclusive of inventory valuation adjustments, was 25.2% for 2018 compared to 24.2% for 2017. We see this trend continuing into 2019. Corporate overhead salaries and general and administrative declined from 13.4% of revenue for 2017 to 11.2% of revenue for 2018, the company of 14.6 million in cash and cash equivalents at December 31, 2018. As of December 31 2018, the company had working capital of 21.6 million compared to working capital of 5.6 million at December 31, 2017. The company raised approximately 12.9 million in equity capital through the issuance of common stock and the exercise of warrants and 9 million in convertible debt financing for the year ended December 31, 2018. As of today, we have 3 million in convertible debt on our balance sheet. We implemented an ERP system, with successful deployment in Colorado, Oklahoma and Maine to date; the build out of a national management team to secure large capital commercial projects. Some of our 2019 highlights to date, we acquired certain assets and IP from the third largest hydroponic distributor; we acquired three stores located in Denver, Palm Springs and Reno; we opened two new stores in Brewer, Maine and Tulsa. Same store sales and margins remained strong and are increasing. Our CFO, Monty Lamirato, will now go over our financial results for 2018 in a little more detail.

Great, thanks, Darren. Net revenue for the year ended December 31, 2018 were approximately 29 million, compared to approximately 14.4 million for the year ended December 31, 2017, an increase of 14.6 million, or 102%. As previously noted in Darren's highlights, the increase in revenues is due to the addition of eight new retail stores and one e-commerce site during 2018, for which there were no sales for these retail stores or e-commerce site for the year ended December 31, 17. There were also three stores opened during various times during 2017 that were open for all of 2018, also contributing to the increase in the revenues. Sales in the eight new stores, the e-commerce site and the three stores opened in 2017 were approximately 19.8 million for the year ended December 31 2018, compared to approximately 2.1 million for the year ended December 31, 2017. The increase in cost of goods sold is primarily due to the increase, the 102% increase in revenue, comparing to year ended December 31, ’17 to December 31, 2018. Gross profit was approximately 6.4 million for the year ended December 31, 2018 as compared to 3.3 million for the year ended December 31, 2017, an increase of approximately 3.1 million or 97%. Gross profit, as a percentage of sales, was 22.2% for the year ended December 31, ‘18, compared to 22.8% for the year ended December 31, ‘17. The slight decrease in the gross profit percentage was due to the increase in non-cash inventory valuation adjustment of approximately 108,000 in 2018 compared to 201,000 for the year ended December 31, ‘17 Gross profit percentage, net of the inventory valuation adjustments, was 25.2% for 2018 and 24.2% for 2017. Store operating costs, as a percentage of revenues, were 18% for the year ended December 31 2018, compared to 20.6% for the year ended December 31, 2017, a 15% improvement. Non-cash corporate overhead, consisting of salaries and administrative expenses, declined from 13.4% of revenues for 2017 to 11.2% of revenues for 2018. While the company continues to focus on seven markets and the growth opportunities that exist in each market, we're also focusing on new store acquisitions, proprietary products and developing our online sales with heavygardens.com and Amazon sales. The seven markets that the company currently operates in are the Colorado market, the California market, Rhode Island, Michigan, Nevada, Washington, and Oklahoma. In all of these locations, 2018 revenues far exceeded 2017 revenues, primarily due to the acquisition of new stores within those markets. But in the case of Colorado, for example, revenues for the year ended December 31, ‘18, exceeded December 31, 2017, primarily contributing -- contributions were by organic growth. As of December 31, 2018, we had working capital of approximately 21.6 million, compared to working capital of approximately 5.6 million at the end of December 31, 2017, an increase of 15.6 million. The increase in working capital from December 31, ’17 to December 31 ’18 was primarily due to the proceeds from the sale of common stock proceeds from convertible debt offering, an exercise of warrants totaling approximately 21.8 million. At December 31, 2018, we had cash and cash equivalents of approximately 14.6 million and believe that existing cash and cash equivalents are sufficient to fund existing operations for the next 12 months. I will now hand this over back to Darren for some conclusions.

Thank you, Monty. GrowGeneration has built a national supply chain to service every commercial grower in the US. 21 locations across 8 states allow us to have a personal one-on-one relationship with our customers. Our competitive advantage is our ability to consolidate and deliver complex purchasing solutions for our customers. The company has laid the foundation to scale our business well above 100 million profitably. The company continues the process of up-listing to a larger exchange. We foresee symbol of growth and margin expansion in 2019. Our guidance for 2019 is 52 million to 58 million in revenue, and $0.12 to $0.16 in adjusted EBITDA. Our future is bright, and we look forward to sharing our successes with our shareholders, our management team, and partners. I will now turn the call over for Michael to go over a few questions.

There was a couple of email questions that came in. We will answer those questions and then we'll open for questions whoever wants to ask a question that's on the conference call. The first question came in from Lawrence Fleming and he asked, how is the bureaucracy of California, that has slowed, Grow license application approval, affecting your California store revenue and profitability and do you have confidence that the approval process will improve? And if so, when? California, the California cannabis market has re-entered a growth mode, as a result of a record number of temporary license issued in Q4 2018, which will become permanent over time. Last year, there was about 9500 temporary licenses issued with about 7000 remaining active. There were more than twice as many licenses issued in Q4 than the other three quarters in 2018 combined. The issuance of cultivation licenses is a leading indicator of hydroponic supply, revenue growth, and the number of licenses is growing rapidly. As a result, we believe GrowGeneration will anticipate record revenues and its projected record revenues for the California operations in 2019 and beyond. The second question that came in was related to the Nasdaq filing. And I know Darren mentioned the fact that we have re-filed, but we'll just address it, again, you mentioned in the last quarterly call that we applied for the exchange and that we anticipate a first quarter calendar year 2019. I mean, we have re-filed, we believe we qualify, and we're in a process of communicating with Nasdaq on a regular basis. And we do believe that there will be a positive result, but we're at the mercy of Nasdaq. And, we are certainly working towards an up-list but again, we've done everything that we can do. You want to add anything, Darren?

No. Once again, the application is current. We continue to answer Nasdaq questions. As everyone does know, Nasdaq has been quite reluctant to allow any groups that have anything to do with the cannabis industry to list on Nasdaq. Once again, we're a gardening store and we know every product we sell is sold through a lot of other organizations. And we feel confident as we continue in the process that hopefully results will be rewarding in the future.

We'll take questions. Moderator, if you want to open it up for a few questions.

[Operator Instructions] Your first question is from Aaron Grey from Alliance Global Partners.

Hey, guys, congrats on the quarter and the year.

Thanks, Aaron.

So just, quickly, as you look at some of the markets for, like a new market like Oklahoma, can you talk about how that market has kind of evolved? It's a new market and kind of what you're seeing from cultivators, as I imagine, there's more kind of initial purchases. So what do you expect to that market, kind of, as we look to 2019?

The nice part about Oklahoma and I guess the reason we moved into Oklahoma so quickly, was the amount of licenses given out and they were basically smaller licenses, cottage licenses, but there was over 2000 licenses and they certainly weren't expensive. So Oklahoma basically opened up the markets to small growers and large growers alike. So it's a perfect market for us to be in. We've opened two stores in Oklahoma, one in Oklahoma City, one in Tulsa. Both stores have gone profitable first month. We see tremendous growth in the Oklahoma markets, continuing to the next five years, as these build-outs continue.

Okay, great, thank you. And then can you talk more about what drove some of the softness in same store sales as well as the improvement you saw in the fourth quarter and I think you mentioned to date this year as well. And then how best to think about that same store sales kind of going forward, because I know it can be a little bit lumpy in terms of like the cadence of when they need to buy some purchases as a cultivator.

I think when looking at same store sales in new markets, you'll see a continuation, dependent upon the amount of new builds you do every year. So, a lot of these same store sales, we can have more customers, more transactions, but same store sales in a mature market, you will see go up, in a new market, you'll see trend up and you'll see after the cultivation, groups are built out, you will see a flat lining of same store sales, you will see continued business to keep the grows open, but you certainly will see a flattening. What we're seeing right now is a tremendous increase in certain areas that we were in where you saw the moderation, but you're seeing rebuild, you're seeing refresh cycles, you'll see our first quarter same store sales trending up tremendously, probably triple what you're seeing in the fourth quarter from us. But, albeit, that a lot of our same store sales you're seeing right now is a very small part of our business you're seeing, some of our legacy stores, so most of our same store sales, comparisons right now are against some of our smaller stores. This quarter, in the second quarter, you'll see the opening up of our Rhode Island store and also our [indiscernible] store. Coming into the third quarter, you'll see our Michigan stores come online. And in the fourth quarter, you'll see our Santa Rosa stores. So you'll see new stores, keep coming online into our same store sales. But right now, we're seeing a resurgence in the California markets and the Colorado markets and I think you'll be very impressed when you see our first quarter same store sales comparisons.

Your next question is from Roger [indiscernible].

Just a couple of questions. In the press release, you guys mentioned, you guys are expecting to have about 10 million in new capital projects revenue this year, backing out the 2 million that you guys did in first quarter. Can you talk a little bit how -- about how are we going to see it in terms of how's it going to be distributed throughout the year, is it going to be first quarter heavy or first half heavy or anything like that?

Yeah. Roger, I'll take that. I mean, basically, it really is -- it's based on the issuance of licenses and the timing that those licenses get issued and every market is slightly different. But GrowGen is in a great position to take advantage of these capital projects whenever they come on. We have an outside sales team. We're well positioned in the emerging markets. Michigan, we talked about Oklahoma. These are the markets that just came on, that are issuing licenses and are in a position where the growers are doing their initial capital buildouts, and we're seeing it in California now, the resurgence of California, they've issued more licenses in the last quarter than they did all of last year. And GrowGen has built a supply chain that allows us to reach really every commercial grower in a just-in-time manner. We have the infrastructure, we have the management team, we have the inventory to fulfill a large multi state operator. And again, we're getting a lot more of that business. These multi-state operators are growing exponentially. They're in multiple locations. They're looking for a one stop shopping solution. They want one bill at the end of the month. And they want to know that there's a credible, reliable company that will be able to support them today and in the future, and they're coming to GrowGen for those solutions. So I think it's actually going to be spread out throughout the year. And I think, you'll see a 10 million year end capital project, projected number I think, that's a fair number. And, we'll start reporting that on a quarter-to-quarter basis.

Roger, I think also one of the interesting parts, this is Darren, again, our management team has taken about a year to build and it's built now and with some very talented individuals, so we're starting to see a tremendous pickup in our commercial business and our buildout business. So, right now from my looking out right now, we did 2 million in the first quarter. I see that number increasing throughout the year, certainly increasing, probably increasing in the next 10 years. So, we certainly don't see a slowdown in this industry, in this part of our business. We see it increasing, we're continuing to hire new individuals, new commercial sales people. So we're extremely high on this part of our business and very excited about it. We’ve built out a world class commercial team and they continue to win projects and continue to certainly supplement the store and the online business that we have today.

Great, great. Also, can you just share a little bit about your private label business, for example, the margin profiles? I would imagine it’s higher than your regular products, but just trying to get a little bit of color on that?

Yeah, it's two-fold. One was the acquisition of the intellectual property that we just recently purchased from a large wholesale distributor in the hydroponic space. There was 18 trademarks that we acquired. We're in the process of developing and vetting them out and putting together a supply chain solution against most of those trademarks and bringing them to all of the locations and all of our commercial customers. And that will have a positive immediate impact on margins. The inventory that we purchased through that transaction is also now being funneled through our store locations. And we're seeing a positive impact on margins. So in addition to those private label products, we're also developing our product internally. As we mentioned, we are an agricultural driven company. And we see and we're on the, we believe the cutting edge and the leading edge of what's happening with the convergence between big agricultural processes and the cannabis, and hemp cultivator and we see that apex coming together, and we're developing products and solutions that are being brought into GrowGen that will be under our own brand that we will bring out to our customer base. That will also have a positive impact on our margins. So it's really a development effort internally, combined with the acquisition that we just made. And it's part of our margin expansion strategy, as we build out our national distribution, we're starting to now take advantage of that with our own products and bringing them into the marketplace. So you're certainly going to see, as Darren reported, a margin tickling up quarter-over-quarter.

Thank you. Your next question is from Robert [indiscernible] who is a private investor.

Congratulations, great revenue growth. One of the questions I had was, can you extrapolate a little bit on the infrastructure that you've put in place and developed to support, I think, you said over 100 million. And can you discuss, how large can you get before you're going to need additional investment?

I'll answer that Robert, again, it's an excellent question. If you took a look at our org chart right now, it's certainly -- it doesn't look like the dealer chart from a year ago, we’ve built out a world class accounting team, purchasing team. We've hired and we've hired an IT department, we've hired individuals and started an IT department. We have a product development department in GrowGen now. So, as we continue to grow, you'll certainly see some additions, but certainly not at the upper level. Our upper level management is well built out right now anywhere from our CEO down. We have VPs in different regions at GrowGen right now. We have a management team and certainly Vice Presidents that are running all divisions of GrowGen right now. So, what you'll see as we continue to grow and scale above 100 million, you will see certain additions, but they will not be at the expense and caliber of what's working at GrowGen right now.

The other nice part about the company from investment capital is all being used for acquisition growth. The company is now running profitably, we put out guidance, earnings per share on an adjusted basis. And the company, when it does go back into the capital markets, the capital is being utilized for growth, it’s being utilized for strategic acquisitions, to further expand the company's market share, whether it's opening up or acquiring a new location in a market that’s just legalized or acquiring a company that will strengthen our ability to deliver cost effective solutions into the commercial markets. We're looking at a variety of those kinds of opportunities. So, we think we're in a very strong position to scale this business at the similar rates that we've been demonstrating for the last several years.

Thank you. There are no more questions at this time. Please proceed.

Well, with that, we want to thank everyone for their afternoon, taking the time, their support. As Darren said in the opening, we really appreciate our shareholders, our management, all of our investors that have been following the company. We're excited to report our first quarter in May and we look forward to talking to everyone at that point.

And just as an aside, on May 16, we will be having our shareholders meeting, we will also be having a get together for our shareholders after our shareholders meeting. So certainly, we look forward to meeting all our shareholders and for everyone to attend. We will be sending out further information, as it gets closer. Thank you. Have a good day and certainly we look forward to sharing our first quarter results in another month with everybody. Thank you.

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.