GrowGeneration Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing describes a retailer and operator of hydroponic and specialty gardening stores, with locations in Colorado and California, pursuing growth through new stores and acquisitions. Statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.907 million | $813,408 | $3.449 million | $1.409 million |
| Gross profit | $569,905 | $262,061 | $1.062 million | $470,335 |
| Gross margin | 29.9% | 32.2% | 30.8% | 33.4% |
| Operating expenses | $713,586 | $228,892 | $1.284 million | $435,630 |
| Net income (loss) | $(143,681) | $30,577 | $(222,527) | $23,485 |
| Operating cash flow | $(439,097) | $(304,638) | $(743,248) | $(352,312) |
At June 30, cash was $450,828; current assets were $2.756 million and current liabilities were $646,788, implying working capital of approximately $2.109 million. Inventory was $2.150 million. Total assets were $3.474 million and stockholders’ equity was $2.774 million. Long-term debt, including current maturities, was $75,942; the balance sheet also reports $72,041 in short-term borrowings. Six-month investing cash outflow was $196,640, while financing provided $691,299, including $623,500 from common-stock issuance. The filing separately states cash of approximately $300,000 “as at the date of this filing.”
Changes, outlook, and notable matters
- Revenue rose 134% in Q2 and 145% for the six-month period, which management attributed to acquired and newly opened stores and growth at existing stores. Gross margin declined versus the prior-year periods.
- The company moved from prior-period profits to losses as operating expenses rose substantially. Management cited payroll, professional fees, broker commissions, travel, new-store costs, and stock-based compensation. Six-month noncash general and administrative expenses were reported as $244,044.
- Management aims to expand through new locations, acquisitions, business-to-business sales, and e-commerce, but says continued expansion depends on obtaining additional capital. No quantified earnings or revenue guidance is provided.
- At June 30, the company reported 10 stores. Subsequent events included a new Canon City lease and a Fairplay lease, with operations planned to start August 1, 2016. Future minimum operating lease payments were reported as $722,366 in the lease note; the MD&A contractual-obligations table instead lists $772,366.
- Outstanding equity-linked securities included 3,548,515 warrants and 1,872,000 options, generally exercisable at $0.70 and $0.62, respectively. These may create dilution. Management reported no off-balance-sheet arrangements or current legal proceedings, and said disclosure controls were effective.
- The filing cautions that interim results are not necessarily indicative of full-year results. It identifies potential goodwill impairment factors including continued operating losses or negative operating cash flows. The company was evaluating the impact of a forthcoming revenue-recognition standard.
Important facts to verify
- Resolve apparent filing inconsistencies: the balance-sheet date is rendered “June 30, 2013” despite the report being for June 30, 2016; the six-month cash-flow statement shows net loss of $222,525 versus $222,527 in the income statement; and lease commitments differ between the note and MD&A.
- Confirm cash available after June 30: the balance sheet reports $450,828, while the filing gives approximately $300,000 at filing date.
- Assess cash burn, inventory investment, financing needs, and the cost and execution of planned store expansion.
- Verify store count and opening status, including the Fairplay location, and evaluate lease commitments and dilution from outstanding warrants and options.