GrowGeneration Corporation — Q3 2016 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2016. GrowGeneration operated 11 hydroponic and gardening retail stores—10 in Colorado and one in California—and said it was pursuing further store openings and acquisitions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2.169 million | $0.922 million | $5.618 million | $2.331 million |
| Gross profit | $0.609 million | $0.346 million | $1.670 million | $0.816 million |
| Gross margin | 28.1% | 37.5% | 29.7% | 35.0% |
| Operating income (loss) | $10,844 | ($145,411) | ($210,084) | ($110,704) per operations statement |
| Net income (loss) | $10,844 | ($145,411) | ($211,682) | ($121,924) per operations statement |
- Q3 revenue rose about 135%; management attributed growth to new and acquired stores and existing-store growth. Q3 returned to a small profit, while gross margin declined year over year.
- Nine-month revenue increased about 141%, but the net loss widened. Management attributed higher expenses to payroll, professional and broker fees, travel, new-store costs, and stock-based compensation.
- Cash flow: Nine-month operating cash use was $1.036 million, versus $0.539 million in 2015; investing cash use was $240,383. Financing provided $1.088 million, including $998,500 from common-stock issuance. Cash declined $187,943 to $511,474 at quarter-end. Management reported approximately $625,000 cash as of the filing date.
- Liquidity: Current assets were $3.280 million and current liabilities $823,567, implying working capital of approximately $2.456 million and a current ratio of about 4.0. Management separately stated working capital was approximately $3.219 million; this does not reconcile to the balance sheet.
- Debt: Short-term borrowings were $99,503; long-term debt, including current maturities, was $70,382. The filing lists $77,902 in total scheduled principal and interest payments. Operating lease commitments totaled $1.027 million.
- Total assets were $4.030 million, inventory $2.388 million, accounts receivable $365,023, and stockholders’ equity $3.160 million at September 30.
Changes, outlook, and risks
- Management said four new stores generated $1.466 million of nine-month 2016 revenue; its six existing stores generated $4.151 million, compared with $2.331 million from six stores in the prior-year period. Store expansion and acquisitions were central to reported growth.
- The company said growth depended on its ability to raise additional capital. Its stated strategy included opening stores in high-value markets, acquiring stores, developing business-to-business sales, and creating a branded e-commerce portal. No quantified financial guidance was provided.
- Working-capital use was substantial, particularly from inventory growth of $1.076 million and accounts-receivable growth of $331,157. The company also reported a $52,000 obsolete-inventory reserve.
- After quarter-end, the company raised $700,000 gross in a private placement on October 6, 2016, issuing 1,000,000 units, each consisting of a share and a five-year $0.70 warrant. It began trading on OTCQB under “GRWG” on October 19. Castle Rock store operations began October 1.
- As of September 30, 4,084,229 warrants and 1,872,000 options were outstanding, generally exercisable at $0.70 and an average $0.62, respectively; both were excluded from diluted EPS as antidilutive. CFO Irwin Lampert intended to retire from his positions on December 31, 2016; a replacement was being sought.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no current or threatened legal proceedings and no defaults on senior securities.
Important facts to verify
- Reconcile reported working capital of $3.219 million with balance-sheet working capital of approximately $2.456 million.
- Check the nine-month 2015 net-loss comparison: the statement of operations reports ($121,924), while MD&A elsewhere cites ($110,704), the operating loss before other items.
- Confirm common-share counts: the balance sheet reports 10,584,262 shares at September 30; a note says 10,548,262, while the filing reports 11,053,548 issued and outstanding as of November 14.
- Assess whether the expanded store base can improve gross margins and cover higher operating costs, lease commitments, and ongoing working-capital needs without further financing.