GrowGeneration Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing is an annual report, not a standalone fourth-quarter report. The company operates retail hydroponic and specialty gardening stores and sells growing supplies through stores and e-commerce. It had 13 stores at year-end; two additional store acquisitions closed in January 2018, bringing the reported post-acquisition total to 15.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $14.36 million | $7.98 million |
| Gross profit / margin | $3.27 million / 22.8% | $2.20 million / 27.6% |
| Operating loss | $2.85 million | $426,000 |
| Net loss | $2.54 million | $431,000 |
| Adjusted EBITDA (non-GAAP) | Loss of $1.10 million | Loss of $46,000 |
| Cash used in operating activities | $3.41 million | $1.42 million |
| Cash used in investing activities | $1.18 million | $264,000 |
| Cash provided by financing activities | $5.19 million | $1.59 million |
- Revenue rose 80%. The seven stores operating throughout both years grew sales 35%; new and recently opened stores also contributed materially.
- Gross margin fell about 4.8 percentage points. Management cited new-store discounting, a larger share of lower-margin commercial accounts, and inventory write-offs. The filing describes a roughly $463,000 fourth-quarter noncash inventory write-off, while its Adjusted EBITDA reconciliation lists $201,170 of inventory write-offs; investors should reconcile these figures.
- Operating expenses increased 133% to $6.12 million, including higher store costs, corporate staffing, professional fees, and share-based compensation. Share-based compensation was $1.08 million, versus $219,000 in 2016.
- Year-end cash was $1.22 million; working capital was approximately $5.6 million, versus $2.8 million a year earlier. Current assets were $7.17 million and current liabilities $1.59 million.
- Year-end debt was $124,244, including $41,707 current and $82,537 long-term. The filing reports $2.48 million of future minimum operating-lease payments.
- Inventory increased to $4.59 million from $2.57 million and was a significant use of operating cash. Net property and equipment was $1.26 million.
Changes, outlook, and notable items
- Growth strategy centers on opening or acquiring stores, growing same-store sales, serving commercial growers, and developing e-commerce, national sales, and private-label products. Management anticipated continued significant growth, but provided no quantified revenue, earnings, or cash-flow guidance.
- Management said year-end cash plus the January 2018 financing should fund existing operations for the next 12 months, while additional capital would likely be needed to continue store expansion and acquisitions.
- In January 2018, the company raised $9 million through unsecured convertible notes bearing 0.1% interest, due in three years, with holder conversion rights at $3 per share and warrants to buy 1.35 million shares in aggregate at $0.01 per share. The terms create potential dilution and a future repayment obligation if notes are not converted or extended.
- January 2018 acquisitions included a Rhode Island store for $1.8 million plus 300,000 shares, and a California store for $895,000 plus 100,000 shares.
- A California wildfire temporarily closed the Santa Rosa store. Management estimated approximately $120,000 of lost revenue during the closure and reported lower sales after reopening. The company recorded $322,058 in settlement gains, including insurance proceeds and a gain related to assigning acquisition rights.
- Key risks include federal cannabis-law and enforcement uncertainty, intense competition and potential margin pressure, reliance on suppliers (two accounted for 61% of purchases), execution and funding needs for expansion, and share dilution. The filing notes that the Attorney General rescinded prior federal enforcement guidance in January 2018.
- The company reported no material pending legal proceedings. The independent auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting. The auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile the approximately $463,000 inventory write-off described in MD&A with the $201,170 shown in the Adjusted EBITDA reconciliation, and assess whether further inventory charges are possible.
- Review the January 2018 note and warrant terms, including conversion, repayment, and potential dilution; confirm how the $9 million proceeds were used.
- Assess operating cash burn, inventory and receivables growth, and the company’s ability to fund expansion without repeated equity or debt financing.
- Track store-level profitability and whether new locations can improve gross margins after initial discounting and ramp-up costs.
- Monitor cannabis-related federal enforcement developments and customer demand, as well as supplier concentration and the impact of the Santa Rosa disruption.