Grove Collaborative Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Grove sells household, personal care, beauty and other sustainability-oriented products through its direct-to-consumer (DTC) platform and retail partners. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $66.1 million | $79.3 million | $137.7 million | $169.8 million |
| Gross profit / margin | $34.3 million / 52% | $39.0 million / 49% | $71.6 million / 52% | $81.7 million / 48% |
| Operating loss | $9.6 million | $42.8 million | $23.2 million | $90.0 million |
| Net loss | $10.9 million | $35.3 million | $23.9 million | $82.7 million |
| Adjusted EBITDA loss | $2.6 million | $21.1 million | $9.5 million | $60.7 million |
| Adjusted EBITDA margin | (3.9)% | (26.6)% | (6.9)% | (35.8)% |
- Q2 revenue fell 17% year over year; first-half revenue fell 19%. Management attributed the declines mainly to fewer DTC orders and active customers following reduced advertising, partly offset by higher revenue per DTC order.
- Gross margin improved 280 basis points in Q2 and 390 basis points for the first half. The company cited pricing and revenue-management actions, including a supply-chain fee, and a lower share of lower-margin first orders; lower Grove Brands mix and inventory-related factors partly offset improvement.
- Q2 advertising expense fell 74% to $4.7 million. Selling, general and administrative expense decreased 39% to $35.2 million, reflecting lower fulfillment costs, stock-based compensation and other cost reductions. These savings reduced losses but coincided with lower sales.
- Cash from operations was negative $5.6 million in the first half, versus negative $66.1 million in the prior-year period. Investing cash outflow was $1.5 million; financing provided $0.9 million. Cash, cash equivalents and restricted cash declined $6.3 million.
- At June 30, cash and cash equivalents were $81.1 million, with $8.7 million restricted; working capital was $86.9 million. Total debt, net of debt issuance costs, was $69.9 million. The Structural Debt Facility had $72.0 million principal outstanding and a stated effective interest rate of 20.85%; the Siena revolver had $7.5 million outstanding and $9.3 million additional borrowing capacity.
- Total liabilities were $136.7 million and stockholders’ equity was $21.1 million. Accumulated deficit was $601.8 million.
Changes, outlook and key risks
- Compared with 2022, Grove substantially reduced advertising and operating costs, improving operating and adjusted EBITDA losses. Revenue and DTC orders nevertheless contracted; management expected the DTC order decline to continue through 2023 if advertising remained at then-current levels. No specific full-year revenue or earnings guidance was provided.
- Management said available resources were expected to fund operations for at least one year from the report’s issuance, while also stating that additional capital would be needed over the longer term before positive operating cash flow. The company reported compliance with debt covenants at June 30, including the Structural facility’s minimum unrestricted-cash requirement of $57 million and revenue targets.
- The Structural facility is secured by company assets, bears high interest, and includes a lender subjective-acceleration provision and potential additional fees. Siena’s facility also has covenants and a subjective-acceleration provision. Management considered exercise of those acceleration clauses remote.
- The company’s $100 million Standby Equity Purchase Agreement (SEPA) is subject to conditions and a 6,511,532-share exchange cap absent stockholder approval or other permitted conditions. Only 147,965 shares had been sold by June 30; management estimated that, at the 2023 average trading price, approximately $13.6 million could be raised, net of issuance costs, subject to market and other factors. Equity issuance may dilute shareholders, and further financing may not be available on acceptable terms.
- After quarter-end, on August 11, 2023, Grove received $10 million gross proceeds for Series A convertible preferred stock, convertible at $2.11 per share and redeemable for cash after seven years, and issued two warrants to the investor. The company said it was still assessing the accounting impact. On August 1, it also issued 714,285 shares to HGI to settle the additional-shares obligation.
- California authorities and the FTC were investigating the company’s automatic-renewal, billing, subscription and related practices. Grove said it had certified compliance with the initial FTC demand and was working with investigators; no legal proceeding had commenced as of the filing. The company had not established reserves for these matters.
- The NYSE delisted the public warrants on June 12, 2023 because of their low trading price; warrant valuations consequently moved to Level 3 and rely on model assumptions. Grove also completed a one-for-five reverse stock split in June. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower advertising spend and cost cuts can stabilize DTC customers and orders, and whether revenue can recover without eroding margins.
- Cash runway under continued operating losses, the $57 million minimum-cash covenant, debt service costs and the availability and conditions of remaining Siena and SEPA capacity.
- The terms, dilution and accounting treatment of the August preferred-stock financing and warrants, as well as the effect of the HGI share issuance.
- Developments and potential financial or operational consequences from the California and FTC investigations.
- Assumptions used to value Level 3 warrant and derivative liabilities, and the consequences of the warrant delisting and reverse split.