GrowGeneration Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 15, 2017. Financial statements are unaudited. GrowGeneration operates retail hydroponic and specialty gardening stores and reported one operating segment. It had 12 stores at quarter-end and planned further expansion.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2.584 million | $1.542 million | Up 68% |
| Gross profit / margin | $681 thousand / 26% | $492 thousand / 32% | Margin down 6 percentage points |
| Operating expenses | $963 thousand | $570 thousand | Up $393 thousand |
| Operating loss | $282 thousand | $78 thousand | Loss increased $204 thousand |
| Net loss | $283 thousand | $79 thousand | Loss increased $204 thousand |
| Basic and diluted loss per share | $0.02 | $0.01 | — |
| Operating cash flow | $(978) thousand | $(304) thousand | Cash use increased |
Management attributed revenue growth to same-store growth and added stores: six comparable stores increased sales 18% to $1.480 million, while new-store sales contributed $1.053 million. Gross margin declined partly because new stores used introductory discounts and commercial accounts increased. Higher store count, payroll, professional fees, travel, acquisition costs, and fundraising-related expenses contributed to expense growth and the larger net loss.
Cash, liquidity, debt, and capital
- Cash was $1.324 million at March 31, versus $607 thousand at December 31, 2016. Management reported approximately $2.9 million of cash as of the filing date.
- Working capital was approximately $4.2 million, up approximately $1.4 million from year-end; current assets were $5.381 million and current liabilities $1.151 million.
- Operating cash use reflected a $943 thousand inventory increase and $116 thousand increase in receivables, partly offset by higher payables and other current liabilities. Investing cash use was $380 thousand, including $256 thousand for intangibles and $124 thousand for equipment.
- Financing provided $2.075 million, primarily from common-stock and warrant sales. The company reported $131 thousand of short-term borrowings and $59 thousand of long-term debt at quarter-end.
- The company stated it expects to need additional financing to continue acquisitions and store openings. Store operating leases require approximately $2.076 million in future minimum payments as of March 31, 2017.
Material developments, outlook, and risks
- In February, the company acquired a Santa Rosa, California retail business for $572 thousand, allocated to inventory ($272 thousand), fixed assets ($50 thousand), and goodwill ($250 thousand). Additional payments and 25,000 shares may be due if specified revenue goals are achieved.
- Management’s strategy is to expand through new stores, existing-store growth, acquisitions, and a business-to-business e-commerce portal. It expected significant growth over the next few years, but provided no quantified guidance.
- After quarter-end, the company announced a San Bernardino store expected to begin operations in late May 2017, new executive and consulting arrangements, and a private placement that raised $1.95 million gross. These transactions involve additional cash costs and/or potential share dilution.
- Q1’s March private placement raised $1.65 million gross through 825,000 units, each consisting of a share and a five-year warrant exercisable at $2.75. At March 31, 3.992 million warrants and 1.872 million options were outstanding; both were excluded from diluted loss per share as anti-dilutive.
- Management cautioned that interim results may not indicate full-year performance and that actual results may differ from forward-looking statements. The filing reported no current or threatened legal proceedings and no off-balance-sheet arrangements it considered reasonably likely to have a material effect. The company noted it was not required to provide a risk-factor discussion as a smaller reporting company.
Important facts for investors to verify
- Whether new and acquired stores can sustain revenue growth while recovering the six-point gross-margin decline and covering higher operating costs.
- Cash burn, inventory levels, receivable collection, and the company’s need for additional financing to fund expansion.
- Lease obligations, acquisition earn-outs, and the expected costs and returns of planned store openings.
- Potential dilution from outstanding warrants and options, the subsequent private placement, and stock-based compensation or equity commitments.
- The filing has an apparent date-label inconsistency in its earnings-per-share note; investors should confirm the comparative-period labels against the underlying financial statements.