GrowGeneration Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. GrowGeneration operated 13 hydroponic and gardening retail stores across Colorado, California, Washington and Nevada.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $4.11 million | $1.91 million | $6.69 million | $3.45 million |
| Gross profit | $1.15 million | $570,000 | $1.83 million | $1.06 million |
| Gross margin | 28% | 30% | 27% | 31% |
| Operating loss | $338,000 | $143,000 | $620,000 | $221,000 |
| Net loss | $340,000 | $144,000 | $624,000 | $223,000 |
| Adjusted EBITDA | $7,000 | $(33,000) | $(177,000) | $(16,000) |
Q2 revenue increased 116% year over year; six-month revenue increased 94%. Same-store sales across seven stores rose 54% in Q2 and 42% for the six-month period. Revenue growth also reflected newly added locations. Gross margins declined as Seattle launched with introductory discounts and commercial accounts, which management says typically carry lower margins, grew.
Operating expenses increased with store expansion and higher share-based compensation. Share-based compensation was $325,000 for Q2 and $402,000 for the first half. Net losses widened year over year; management attributed the increase to compensation expense, new-store and pre-opening costs, Seattle acquisition-related costs, and lower gross margins.
Cash, liquidity and debt
- Cash was $2.16 million at June 30, 2017, versus $607,000 at December 31, 2016. Working capital was approximately $5.9 million, up from $2.8 million.
- Operating cash use was $1.57 million for the first half, compared with $727,000 a year earlier. Inventory growth of $1.86 million and prepaid expenses and other assets of $267,000 were significant uses of cash; higher payables partly offset these outflows.
- Investing cash use was $659,000, primarily for equipment, vehicles and acquired intangibles. Financing provided $3.78 million, chiefly from stock and warrant transactions.
- Total debt was $164,000, including $63,000 current and $101,000 long-term, compared with $65,000 at year-end. Certain equipment and vehicle loans carry interest rates up to 10.9%.
Management stated existing cash was expected to fund current operations for the next 12 months, but anticipated needing additional financing to continue opening and acquiring stores.
Business developments, outlook and risks
- The company acquired hydroponic and garden-supply businesses in Santa Rosa, California, for $572,000 and Seattle, Washington, for $123,000. The Seattle acquisition was completed in May.
- Management’s growth strategy includes opening stores, growing existing locations, acquiring stores and developing a business-to-business e-commerce portal. It expected continued growth over the next few years, but provided no quantified financial guidance.
- Key business considerations include execution and funding of expansion, store start-up costs, inventory and working-capital needs, lower margins from commercial sales and introductory discounting, and reliance on equity financing. Forward-looking statements are subject to uncertainties; the filing says actual results may differ materially.
- The company reported no current or threatened legal proceedings, no material off-balance-sheet arrangements, and no impairment of long-lived assets. Management concluded disclosure controls were effective as of June 30, 2017.
Important facts for investors to verify
- Share-count disclosures differ: the balance sheet reports 14,591,406 shares outstanding at June 30, while the cover page and equity note report 14,511,406. Confirm the correct period-end count and reconcile subsequent outstanding shares.
- Review the financing terms, warrant overhang and potential dilution: the filing reports 5,392,157 warrants and 2,022,000 options outstanding at June 30, and significant equity issuance during the first half.
- Track whether expansion converts revenue growth into positive operating cash flow and sustainable margins, given first-half operating cash use and lower gross margins.
- Assess the assumptions behind management’s 12-month liquidity statement and its expected need for further capital to fund acquisitions and store openings.