GrowGeneration Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. The company operates retail hydroponic and specialty gardening stores and reported 18 stores across six states. Comparisons below are with the corresponding 2017 periods unless noted.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $7.15 million, up 74% | $11.53 million, up 72% |
| Gross profit / gross margin | $1.73 million / 24.2% (28.0% in 2017) | $2.92 million / 25.3% (27.3% in 2017) |
| Operating loss | $622,000 | $1.28 million |
| Net loss | $930,000, or $0.04 per share | $1.88 million, or $0.09 per share |
| Adjusted EBITDA, non-GAAP | Loss of $206,000 (income of $7,000 in 2017) | Loss of $562,000 (loss of $177,000 in 2017) |
For the six months, operating cash flow was negative $3.52 million, investing cash flow was negative $1.08 million, and financing cash flow was positive $20.82 million. Cash at June 30 was $17.43 million, versus $1.22 million at December 31, 2017. Working capital was approximately $24.5 million, versus $5.6 million at year-end.
At June 30, total liabilities were $7.42 million, including $4.52 million of convertible debt net of discounts and issuance costs, and $610,000 of other long-term debt including current maturities. The convertible notes had $7.575 million principal, 0.1% stated interest and a January 2021 maturity; holders could convert at $3 per share. The company recorded $622,000 of debt-discount amortization in the first half, a noncash expense.
Changes and drivers
- Revenue growth largely reflected store expansion: 11 newer stores contributed $4.2 million in Q2 and $6.1 million in the first half. Four acquisitions were completed in 2018. Same-store revenue declined 20.8% in Q2 and 9.7% in the first half.
- Gross margins fell as commercial customers generally carried lower margins and acquired inventory initially had a higher fair-value cost basis. Management said the acquired inventory typically takes about three months to sell through.
- Operating expenses rose with the larger store base, corporate staffing, acquisition integration, and acquisition-related legal and audit work. Operating losses widened; first-half net loss also reflected higher share-based compensation and debt-discount amortization.
- Financing included a $10 million May 2018 equity private placement and a $9 million January convertible-note offering. Equity issuance, warrant exercises and acquisition-related stock contributed to dilution; 23.96 million shares were outstanding at June 30 and 25.74 million at August 14, 2018.
Outlook, risks and notable items
- Management stated that cash on hand was expected to fund existing operations for the next 12 months, but anticipated needing additional financing to continue opening and acquiring stores.
- Management expected online and Amazon sales to contribute beginning in Q3 2018 and viewed Rhode Island and Michigan as potential growth markets. It projected the subsequent Santa Rosa Hydro acquisition could add approximately $2 million in Santa Rosa-market sales; this is a projection, not a reported result.
- Management cited slower California license issuance following regulatory changes, wildfire-related disruption and unrecovered Santa Rosa sales, and a mature, consolidating Colorado market. Seasonality also affects store costs and revenue.
- On July 13, 2018, after quarter-end, the company acquired Santa Rosa Hydro assets for approximately $6.6 million, including cash, restricted shares and a promissory note, and entered a five-year lease.
- The company reported no legal proceedings or off-balance-sheet arrangements, and management concluded disclosure controls were effective as of June 30, 2018. Interim results were stated not to necessarily indicate full-year results.
Investor verification priorities
- Assess whether store additions can offset declining same-store sales and whether new acquisitions deliver the projected revenue and cost synergies.
- Track gross-margin recovery after acquired inventory turns over, alongside the mix of commercial versus retail sales.
- Review cash use, inventory growth, and the need and terms of future financing; assess dilution and potential conversion of notes and warrants.
- Verify the Santa Rosa acquisition’s final purchase accounting, integration costs, lease obligations, and realized sales contribution.
- Reconcile reported market and same-store figures against the filing’s tables and narrative; some table variance signs appear inconsistent with the stated declines.