GrowGeneration Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. The company operated hydroponic and specialty gardening supply stores, with a business serving home and commercial growers, including cannabis cultivators. It reported 12 stores at the time of filing, primarily in Colorado.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $7.98 million | $3.46 million |
| Gross profit | $2.20 million | $1.10 million |
| Gross margin | 27.6% | 31.9% |
| Operating loss | $426,000 | $515,000 |
| Net loss | $431,000 | $529,000 |
| Net loss per share | $0.05 | $0.08 |
| Cash from operating activities | $(1.47) million | $(1.14) million |
- Revenue grew 131%, attributed to sales from new and acquired stores and growth at existing locations. Gross profit doubled, but gross margin fell about 4.3 percentage points as cost of sales grew faster than revenue.
- General and administrative expense increased to approximately $2.63 million, driven mainly by payroll, rent, professional fees, commissions, travel, and noncash expenses. The operating and net losses narrowed year over year.
- Operating cash use increased, with inventory up $1.26 million and receivables up $395,000. Investing activities used $332,000; financing activities provided $1.71 million, primarily from equity issuance and borrowings.
- At year-end, cash was $607,000, working capital approximately $2.76 million, and total current assets $3.61 million against current liabilities of $843,000. Inventory was $2.57 million and accounts receivable $391,000.
- Debt included $107,880 of short-term borrowings and $65,169 of long-term debt, including current maturities. Shareholders’ equity was $3.56 million. The company reported no off-balance-sheet arrangements.
- Rent expense was $306,000; future minimum operating-lease payments disclosed at year-end totaled approximately $2.18 million.
Material developments and outlook
- The company expanded its store base during 2016 and consolidated its Fairplay store into Conifer at year-end. Management’s strategy was to grow through new stores, acquisitions, existing-store sales, commercial-grower relationships, e-commerce, and private-label products.
- Management expected continued growth, especially through store openings and acquisitions, but provided no quantified revenue, profit, or cash-flow guidance. It stated that additional financing would be needed to continue expansion.
- After year-end, the company disclosed new leases and a Santa Rosa asset acquisition, and a March 2017 private placement that raised $1.65 million gross. These are subsequent events, not FY2016 operating results.
- Management cited high demand for growing supplies and potential purchasing discounts as volume increases. These expectations depend on market conditions and successful execution; the filing emphasizes that actual results may differ materially.
- Key risks include the unsettled federal-state legal conflict over cannabis, dependence on cannabis-related customer demand, strong competition and potential margin pressure, limited operating history, need for external capital, management succession, and execution of expansion plans. The company noted it had no product-liability insurance and limited insurance coverage.
- At December 31, 2016, management concluded disclosure controls were effective. The filing did not include management’s internal-control assessment or auditor attestation under the new-public-company transition relief. The independent auditor gave an unqualified opinion on the financial statements, but did not opine on internal-control effectiveness.
Important facts for investors to verify
- Reconcile store counts and timing: the filing describes 12 stores, while also noting Fairplay ceased operations at year-end and describing additional 2017 openings, moves, and consolidation.
- Check the same-store sales disclosures: the narrative gives FY2015 comparable-store revenue of $2,917,188, while a nearby table lists $2,197,188; the table’s stated variance also does not reconcile clearly.
- Confirm the share count: the cover reports 12,546,406 shares outstanding as of March 31, 2017, while another section reports 12,561,406 for that date.
- Assess working-capital quality and cash needs, particularly the large inventory balance, rising receivables and bad-debt allowance, operating cash burn, and reliance on financing to fund growth.
- Review dilution potential from outstanding options and warrants and the company’s limited OTCQB trading market. The filing reports inconsistent warrant totals at different dates, so reconcile the amounts against the underlying disclosures.