Grove Collaborative Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial amounts below are in U.S. dollars; “million” figures are rounded. Grove sells sustainability-focused household, personal care, beauty and other products through its direct-to-consumer (DTC) platform and retail partners. The June 16, 2022 business combination made Grove public and is accounted for as a reverse recapitalization, with Legacy Grove as the accounting predecessor.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $79.3 million | $99.0 million | $169.8 million | $201.2 million |
| Gross profit / margin | $39.0 million / 49% | $49.1 million / 50% | $81.7 million / 48% | $101.3 million / 50% |
| Operating loss | $(42.8) million | $(26.1) million | $(90.0) million | $(62.3) million |
| Net loss | $(35.3) million | $(28.5) million | $(82.7) million | $(66.4) million |
| Adjusted EBITDA (non-GAAP) | $(21.1) million | $(21.0) million | $(60.7) million | $(52.4) million |
| Adjusted EBITDA margin (non-GAAP) | (26.6)% | (21.2)% | (35.8)% | (26.0)% |
- Revenue fell 20% in Q2 and 16% in the first half. Grove Brands revenue declined 19% and 15%, respectively; third-party product revenue declined 20% and 17%.
- Management attributed the revenue contraction mainly to fewer DTC orders and active customers, reflecting weaker retention as pandemic-era shopping patterns receded and reduced advertising spend. DTC orders were 1.315 million in Q2 versus 1.694 million; active customers were 1.564 million versus 1.733 million. DTC revenue per order rose to $58 from $56.
- Gross margin declined 40 basis points in Q2 and 219 basis points for the first half, primarily due to increased discounts and inbound freight costs.
- Operating expenses included substantial stock-based compensation: $20.1 million in Q2 and $24.5 million for the first half, largely reflecting accelerated recognition after the business combination satisfied liquidity-event vesting conditions. Q2 SG&A rose 23% to $57.9 million.
- Net loss includes noncash fair-value movements on transaction-related liabilities. In Q2, the $17.3 million gain on the Earn-Out liability partly offset losses on the Additional Shares liability and other expenses; these items can fluctuate with the share price and valuation assumptions.
Cash, liquidity and debt
- Cash and cash equivalents were $132.4 million at June 30, 2022, compared with $78.4 million at December 31, 2021. Current assets were $193.4 million and current liabilities $98.5 million; reported working capital was $94.9 million.
- For the six months, operating cash flow was negative $66.1 million, investing cash flow was negative $2.6 million, and financing cash flow was positive $122.8 million. Financing included $97.1 million of business-combination proceeds and $27.5 million from the Backstop Tranche 1 issuance, partly offset by transaction costs and debt repayments.
- Total debt was $66.4 million: $22.7 million current and $43.7 million noncurrent. The $60 million SVB/Hercules term facility carried effective rates of 14.26%–17.31%; its final payment was amended from 6.75% to 8.75% of advances. The SVB revolver had $5.9 million outstanding at a 5.00% effective rate. Grove reported covenant compliance at quarter-end.
- Management said available resources were expected to fund obligations for at least one year after the financial statements’ issuance, and that the business combination alleviated substantial doubt about going concern for that period. It also said additional capital would be needed over the longer term before achieving positive operating cash flow.
Business developments, outlook and risks
- The company completed its business combination on June 16 and began NYSE trading as GROV on June 17. It reported $80.0 million of net cash proceeds from the combination, after transaction costs.
- Management expects DTC order weakness to continue at least into 2023. It plans to expand retail distribution, including announced partnerships with Kohl’s, Meijer and Giant Eagle, while maintaining DTC as a product-innovation and customer-feedback channel. Retail growth may pressure gross margin, partly offset by lower fulfillment costs per unit.
- No specific numerical revenue or earnings guidance is provided in the filing. Management expects continued operating losses and negative operating cash flows while investing in growth, and anticipates lower advertising costs than in 2021 while seeking operating efficiencies.
- A March 2022 reorganization reduced corporate headcount by approximately 17% and resulted in $1.6 million of first-half charges.
- On July 18, 2022, Grove entered a standby equity purchase agreement allowing it, subject to conditions, to sell up to $100 million of Class A shares through July 2025. As of August 11, the conditions permitting sales had not been met. Use could dilute existing shareholders.
- Risks highlighted include post-pandemic demand and retention, inflation and freight costs, reliance on a limited supplier base, retail execution and competition, ongoing losses and financing needs, potential share dilution, and the possibility of further share-price-driven derivative-liability volatility.
- The Santa Clara County District Attorney’s Consumer Protection Division and the Federal Trade Commission were investigating Grove’s automatic-renewal and billing practices; the filing stated that no proceeding had commenced as of its date. Grove said it did not believe other known legal claims or proceedings would have a material adverse effect.
Important facts for investors to verify
- Whether subsequent quarters confirm management’s expectation that DTC order weakness will persist into 2023, and whether retail expansion offsets DTC declines.
- Cash burn, debt-service requirements and covenant headroom, including the term loan’s scheduled principal repayments beginning November 2022 and its high effective interest rates.
- Whether the Yorkville equity facility’s conditions are satisfied, how much is drawn, and the resulting dilution and pricing terms.
- The scale and timing of stock-based compensation, future fair-value changes in the $76.7 million of derivative liabilities, and any issuance of Additional Shares under the backstop arrangement.
- Developments in the automatic-renewal and billing investigations, and any resulting claims, compliance costs or changes to membership practices.