GrowGeneration Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; interim financial statements are unaudited. GrowGeneration operates hydroponic and specialty gardening retail stores and reported 16 stores across six states. Comparisons below are with Q1 2017 unless otherwise noted.
Key financial results
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $4.38 million | $2.58 million; up 70% |
| Gross profit / margin | $1.19 million / 27.2% | $0.68 million / 26.3% |
| Operating expenses | $1.85 million | $0.96 million |
| Operating loss | $660,000 | $282,000 loss |
| Net loss | $953,000; loss per share $0.05 | $283,000; loss per share $0.02 |
| Adjusted EBITDA | $(367,000) | $(185,000) |
| Cash from operations | $(1.78) million | $(957,000) |
| Cash from investing | $(661,000) | $(380,000) |
| Cash from financing | $9.99 million | $2.05 million |
At March 31, cash was $8.76 million, working capital was approximately $14.3 million, and total assets were $21.0 million. Total liabilities were $7.19 million, including $4.36 million of convertible debt net of discounts and issuance costs and $635,000 of other long-term debt, including its current portion. Management said existing cash was sufficient for existing operations for the next 12 months, but expected to need additional financing to fund further store acquisitions and openings.
Material changes and management commentary
- Revenue growth reflected same-store sales growth of 3.4% at nine comparable stores, four stores added in 2017, and two stores acquired in January 2018. The two acquired stores contributed about $1.26 million in Q1 sales; the four 2017 additions contributed about $563,000.
- Management said Colorado revenue declined as the market matured and underwent consolidation, while Nevada and California revenue increased. Gross margin improved modestly, which management attributed to better vendor pricing and increased purchasing power.
- Operating expenses rose 92%, faster than revenue, amid additional locations, higher corporate staffing and costs, and increased share-based compensation. Store operating costs declined to 20.4% of sales from 21.0%; corporate overhead increased to 21.8% from 16.3%.
- Net loss widened by $670,000. Management attributed about $456,000 of the increase to higher noncash expenses, primarily share-based compensation and amortization of debt discount; higher corporate overhead accounted for the remainder.
- Operating cash use increased, with inventory growth of $2.13 million—primarily related to January acquisitions—partly offset by higher payables and other current liabilities. Financing inflows included approximately $9 million from a January convertible-debt offering and about $1.2 million from stock and warrant exercises.
Outlook, financing, and other notable items
- Management expects growth over the next several years, emphasizing existing-store growth, new stores, acquisitions, and a business-to-business e-commerce portal. It cautioned that results may be affected by seasonality; Q1 and Q4 are generally lower-revenue periods.
- The January offering raised $9 million gross through 0.1% unsecured convertible notes due January 2021, convertible at $3 per share, and warrants exercisable at $0.01. The filing recorded a $4.24 million warrant-related debt discount; $317,255 was amortized in Q1. The notes and warrants may create substantial potential share dilution.
- After quarter-end, the company agreed to acquire substantially all assets of Superior Growers Supply for approximately $818,000 plus 75,000 shares. On May 9, it raised $10 million in a private placement of common stock and warrants.
- Acquisition purchase-price allocations were preliminary and included $2.01 million of goodwill. Management reported no impairment of long-lived assets, no off-balance-sheet arrangements, and no legal proceedings. Disclosure controls were assessed as effective at March 31, 2018.
Important facts for investors to verify
- Whether same-store growth and acquired-store contribution persist, particularly given management’s comments about Colorado market maturity and seasonality.
- Cash use, inventory levels, and the company’s ability to fund planned expansion without further financing or material dilution.
- The conversion and warrant terms, debt-discount accounting, and fully diluted share count. The filing reports 19,294,270 shares on the balance sheet but 19,284,270 in a note at March 31, 2018; it reports 23,152,603 shares outstanding as of May 15.
- Final acquisition valuations and related goodwill, as the purchase-price allocations were preliminary. The filing’s supplemental cash-flow disclosure and acquisition discussion also report differing approximate values for stock issued in connection with acquisitions.