GrowGeneration Corporation — Q3 2018 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2018; year-over-year comparisons are to the corresponding 2017 periods. The company operates hydroponic and specialty gardening retail stores, commercial sales and e-commerce. It reported 18 stores across seven states and one e-commerce site, and continued an acquisition-led expansion strategy.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $8.41 million | $4.03 million | $19.94 million | $10.72 million |
| Gross profit | $2.16 million | $1.12 million | $5.08 million | $2.95 million |
| Gross margin | 25.7% | 27.7% | 25.5% | 27.5% |
| Operating loss | $575,211 | $458,089 | $1.86 million | $1.08 million |
| Net loss | $784,573 | $460,887 | $2.67 million | $1.08 million |
| Adjusted EBITDA (non-GAAP) | Loss of $71,584 | Loss of $191,497 | Loss of $645,323 | Loss of $368,985 |
Revenue increased 109% in Q3 and 86% for the nine-month period, primarily reflecting acquired stores and the e-commerce business. Despite higher gross profit dollars, gross margin contracted as commercial sales carry lower margins and acquired inventory was initially recorded at fair value. Management said the acquired inventory write-up generally sells through in about three months, after which margins may improve. Operating expenses rose with the larger business, corporate staffing and acquisition-related costs.
Cash, liquidity and debt
- At September 30, cash was $14.33 million, versus $1.22 million at December 31, 2017. Working capital was approximately $23.1 million, compared with $5.6 million at year-end.
- Nine-month operating cash use was $1.87 million, versus $2.59 million in 2017. Investing cash use was $6.25 million, including approximately $5.76 million for business combinations. Financing provided $21.24 million.
- Financing included approximately $10 million from a May equity placement, $9 million gross proceeds from convertible notes, and proceeds from warrant and option exercises. The company said existing cash was sufficient for existing operations for the next 12 months, but additional financing would likely be needed to continue acquisitions and openings.
- Reported long-term convertible debt, net of discounts and issuance costs, was $2.34 million; other debt totaled approximately $1.05 million, including current maturities. Debt discount amortization was $858,624 for the nine months and materially increased reported losses.
- Shares outstanding were 27.44 million at September 30, compared with 16.85 million at December 31, 2017; 27.50 million were reported outstanding as of November 8, 2018.
Changes, outlook and risks
- Six 2018 acquisitions contributed $9.62 million of revenue from their respective acquisition dates through September 30. Preliminary purchase consideration was $11.92 million, including $5.75 million cash, $5.02 million in stock and $1.09 million seller financing; preliminary goodwill was $7.99 million.
- Same-store sales declined 4% in Q3 and 10% for the nine months. Management cited the Santa Rosa wildfires and ongoing sales weakness there, customer losses and market maturity in Colorado, and prior-period one-time commercial sales in Nevada.
- Management expected online and Amazon sales to contribute more in Q4 2018, continued to pursue acquisitions, and described plans for Canadian locations in early 2019. It stated a goal of 100% year-over-year growth. These are forward-looking statements, not quantified formal financial guidance.
- Management described Santa Rosa Hydro as capable of adding incremental sales, but gave differing projections in the MD&A: approximately $8 million in annual sales in the Q3 discussion and $2 million in the nine-month discussion. The filing also refers to approximately $25 million of revenue acquired in 2018 without clearly defining the measure or period.
- Key risks include slower issuance of California cultivation licenses, seasonal demand, declining same-store sales, lower commercial margins, acquisition integration and valuation, and dependence on future financing for expansion. The company reported no legal proceedings and no off-balance-sheet arrangements; no specific material contingency value is clearly provided in the supplied text.
Facts investors should verify
- Reconcile management’s Santa Rosa sales projections and the stated approximately $25 million of acquired revenue with the acquisition-level revenue reported in the financial statements.
- Track same-store sales, gross margin recovery after acquired inventory is sold through, and the profitability of acquired locations.
- Review acquisition assumptions, especially the preliminary $7.99 million goodwill balance, and whether acquired businesses meet expected performance.
- Assess dilution and the terms and potential conversion or warrant effects of the 2018 equity and convertible-debt financings.
- Monitor operating cash use and the company’s stated need for additional financing to pursue growth.