GrowGeneration Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018, compared with FY2017. This is an annual report, not a standalone 2018 Q4 report; the filing does not provide a clear Q4-only set of financial results.
Business context
GrowGeneration operates retail hydroponic and garden-supply centers and an e-commerce business, selling nutrients, growing media, lighting, ventilation, irrigation and related products. Demand is tied in part to indoor cultivation, including cannabis, as well as other specialty crops. The filing reports 18 centers across seven states at year-end; elsewhere it describes a 21-store footprint during 2018 or as of the filing date, so the precise store-count timing should be verified.
Expansion relied on acquisitions, new stores and online sales. The company acquired several businesses in 2018, including stores in Michigan and California and the Heavy Gardens e-commerce operation. It also reported additional acquisitions, openings and store consolidations in early 2019.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $29.0 million | $14.4 million |
| Gross profit | $6.4 million; 22.2% margin | $3.3 million; 22.8% margin |
| Operating expenses | $10.7 million | $6.1 million |
| Loss from operations | $(4.3) million | $(2.9) million |
| Net loss | $(5.1) million; $(0.22) per share | $(2.5) million; $(0.18) per share |
| Adjusted EBITDA, non-GAAP | $(0.8) million | $(1.1) million |
| Net cash used in operating activities | $(1.5) million | $(3.4) million |
| Net cash used in investing activities | $(6.4) million | $(1.2) million |
| Net cash provided by financing activities | $21.3 million | $5.2 million |
Sales increased 102%, primarily reflecting new stores and acquisitions. The six stores open throughout both comparison years generated $8.4 million in 2018 sales, down 5.4% from 2017. Gross margin declined 0.6 percentage points; management attributed this mainly to inventory valuation adjustments, which reduced margin by approximately three percentage points in both years. Operating expenses rose 75%, less than sales growth, but the company remained loss-making.
Cash and cash equivalents were $14.6 million at year-end, versus $1.2 million a year earlier. Working capital was approximately $21.6 million, compared with $5.6 million. Total assets were $35.9 million and total liabilities were $5.8 million. The balance sheet included $2.0 million of convertible debt, net of discount and issuance costs, and $812,000 of other debt, including $437,000 current. The convertible notes had $3.075 million of remaining principal, mature in January 2021 and are convertible at $3 per share; the filing says management expects cash on hand to fund existing operations for 12 months but anticipates needing further financing for expansion.
Changes, outlook and risks
- Funding and dilution: The company raised approximately $19 million in 2018 through equity, warrant exercises and convertible debt. It converted approximately $5.9 million of convertible debt and accrued interest into shares during the year. Outstanding options, warrants and remaining convertible debt could dilute shareholders; repayment at maturity is also a risk.
- Acquisition and operating execution: Expansion increased goodwill to $8.8 million from $0.6 million. Integrating acquired businesses, opening stores, scaling e-commerce and implementing an ERP system create execution and control demands.
- Management outlook: Management cited market growth, volume purchasing discounts and private-label products as potential drivers of sales and margins. It expected private-label offerings to benefit margins and profitability, but provided no quantified formal guidance. California license issuance and regulatory changes had slowed market growth; management anticipated growth as licenses are issued.
- Industry and concentration risks: Cannabis remains illegal under federal law despite state programs, and changes in enforcement or state laws could reduce customer investment. Two suppliers accounted for 56% of purchases in 2018. Competition is intense, and the filing says the company does not maintain product-liability insurance.
- Unusual items: FY2018 included $870,000 of inventory valuation adjustments and $990,000 of non-cash debt-discount amortization. The 2017 comparison included $322,000 of settlement gains. Adjusted EBITDA is a non-GAAP measure; FY2018 was $(824,000), versus $(1.097) million in 2017.
- Audit and controls: The independent auditor issued an unqualified opinion on the financial statements. Management said disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile the filing’s store counts and confirm the operating footprint at December 31, 2018 versus the filing date.
- Review same-store sales trends, acquisition contributions and post-acquisition performance, including the assumptions supporting acquired goodwill.
- Confirm convertible-note principal, maturity and conversion terms, and the potential dilution from outstanding warrants and options.
- Assess whether operating cash use, inventory valuation reserves and planned expansion are consistent with management’s 12-month liquidity assessment.
- Track California licensing and cannabis-related legal or enforcement developments, supplier concentration, and progress on private-label and e-commerce initiatives.