GrowGeneration Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The interim consolidated financial statements are unaudited. GrowGeneration operates hydroponic and specialty-gardening retail stores and was pursuing growth through new locations, acquisitions, existing-store sales, and business-to-business e-commerce.
Financial results
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Revenue | $4.03 million | $2.17 million | $10.72 million | $5.62 million |
| Gross profit | $1.12 million | $609,000 | $2.95 million | $1.67 million |
| Gross margin | 27.7% | 28.1% | 27.4% | 29.7% |
| Operating loss | $458,000 | Operating income $12,000 | $1.08 million | $207,000 |
| Net income (loss) | $(461,000) | $11,000 | $(1.08) million | $(212,000) |
| Adjusted EBITDA (non-GAAP) | $(191,000) | $29,000 | $(369,000) | $14,000 |
- Quarterly revenue grew 86%; same-store sales at eight stores rose 31%. Nine-month revenue grew 91%; same-store sales at seven stores rose 43%.
- Quarterly and nine-month gross margins declined year over year. Management attributed the nine-month decline partly to introductory discounting at the Seattle store and a greater share of lower-margin commercial accounts.
- Operating expenses increased to $1.57 million for the quarter and $4.03 million for the nine months. Management cited store expansion and ramp-up costs, higher staffing and corporate support costs, advertising and professional fees, and increased stock-based compensation.
- Cash used in operating activities was $2.59 million for the nine months, versus $992,000 in 2016. Investing activities used $870,000, including equipment purchases and acquired intangibles.
- Financing activities provided $4.76 million, including approximately $3.29 million net from stock-and-warrant offerings and $1.50 million from warrant exercises. Cash at September 30 was $1.91 million, versus $607,000 at December 31, 2016.
Balance sheet and liquidity
- At September 30, cash was $1.91 million, inventory $5.02 million, total current assets $8.22 million, and total current liabilities $1.66 million. Management reported working capital of approximately $6.6 million.
- Total debt was approximately $144,000, including $54,000 current and $90,000 long-term. Certain equipment and vehicle loans carried rates as high as 10.9%.
- Management said existing cash was sufficient for existing operations for the next 12 months, but anticipated needing additional financing to continue opening and acquiring stores.
Changes, outlook, and notable items
- Revenue growth reflected both same-store gains and additional locations. The filing reports a 14-store network and notes that one Nevada store opened after September 30; store counts and comparable-store groupings vary by period.
- Management expected continued growth over the next several years, principally from existing and new stores. The filing gives no quantified revenue, earnings, or cash-flow guidance.
- On October 8, the Santa Rosa, California store was closed amid nearby wildfires and reopened October 26. The company said it was insured for contents damage and business interruption, but the longer-term sales impact was unknown while it assessed damage and customer effects.
- New three-year CEO and president employment agreements provide annual compensation of $175,000 each, with annual 10% increases and potential revenue-based bonuses; each was eligible for up to 300,000 options, with 30,750 granted as of September 22.
- The company reported effective disclosure controls, no legal proceedings, and no material off-balance-sheet arrangements. It said it would adopt revenue-recognition guidance in fiscal 2018.
Important facts for investors to verify
- Whether store expansion and commercial-account growth can sustain revenue gains while restoring gross margins and reducing operating losses.
- Cash burn, inventory growth, and funding needs relative to management’s 12-month liquidity assessment; expansion may require further financing.
- Potential dilution: 16.09 million shares were outstanding at September 30 and 16.44 million at November 8; the filing also lists 4.21 million warrants and 2.15 million options outstanding at September 30.
- The financial and operational impact of the Santa Rosa wildfire event, including the scope of damage, insurance recovery, and any lasting effect on sales.
- Store-count and comparable-store definitions, including the timing of openings and closures used in management’s growth comparisons.