Grove Collaborative Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Grove sells sustainability-oriented household, personal care, beauty and other consumer products through its direct-to-consumer (DTC) platform and retail channel. Amounts below are in U.S. dollars.
Financial performance and key metrics
- Revenue: $71.6 million, down 21% from $90.5 million. Grove Brands revenue was $35.0 million, down 25%; third-party product revenue was $36.6 million, down 16%.
- Gross profit and margin: Gross profit was $37.3 million, down 13%; gross margin expanded to 52% from 47% (462 basis points). Management attributed the improvement to pricing and a supply-chain fee, fewer lower-margin first orders, and lower inventory reserves, partly offset by product costs and lower Grove Brands mix.
- Expenses and operating results: Advertising fell 74% to $8.7 million; product development fell 32% to $4.2 million; selling, general and administrative expense fell 25% to $38.0 million. Operating loss improved to $13.7 million from $47.3 million.
- Net loss: $13.1 million, versus $47.4 million; basic and diluted loss per share was $0.08 versus $5.05. The prior-period share count was substantially lower, so per-share comparisons are affected by the post-business-combination capital structure.
- Adjusted EBITDA: Loss of $6.9 million versus a loss of $39.7 million; adjusted EBITDA margin was negative 9.6% versus negative 43.8%. This is a non-GAAP measure and excludes specified items.
- Cash flow: Operating cash use was $6.7 million versus $29.5 million; investing cash use was $0.8 million versus $1.4 million; financing provided $2.0 million versus $26.9 million. Cash, cash equivalents and restricted cash declined $5.5 million during the quarter.
- Liquidity and debt at March 31: Cash and cash equivalents were $81.7 million, with restricted cash of $8.8 million; working capital was $94.2 million. Debt, net of debt issuance costs, was $69.4 million. The Structural Debt Facility had $72.0 million principal outstanding and a 20.34% effective interest rate; its stated rate is at least 15%. Siena Revolver borrowings were $7.5 million, with $10.2 million additional borrowing capacity available.
- Other balance-sheet items: Total assets were $165.6 million, total liabilities $137.9 million and stockholders’ equity $27.7 million. Accumulated deficit was $590.9 million.
- Operating indicators: DTC orders were 1.097 million versus 1.558 million; DTC active customers were 1.241 million versus 1.653 million. DTC net revenue per order rose to $62 from $55. Grove Brands were 49% of net revenue versus 52%.
Material changes and management commentary
- Management said lower advertising spending, introduced in the second half of 2022 to reduce customer acquisition costs and manage cash, drove fewer new customers and orders and contributed to the revenue decline. It expects the order trend to continue through 2023 if advertising remains at current levels.
- Higher order value reflected strategic price increases and the Supply Chain Fee. Fulfillment costs fell to $17.0 million from $24.4 million, primarily with lower order volumes and more efficient fulfillment.
- Interest expense rose 79% to $3.7 million, primarily due to higher rates on debt facilities. Management expects interest expense and cash interest payments to increase.
- Q1 included a $13.4 million reduction in previously accrued business-combination transaction costs: $9.6 million was credited to additional paid-in capital and $3.8 million recorded in other income. Fair-value movements in warrants and other derivative liabilities also affected reported results.
Outlook, risks and contingencies
- Management expects continued operating losses and negative operating cash flow until revenue can exceed operating expenses. It believes available cash and resources, including revolver availability, will fund operations for at least one year from the filing’s issuance date, but says longer-term funding will be needed and may not be available on acceptable terms.
- The Structural facility requires at least $57.0 million of unrestricted cash and compliance with trailing-four-quarter revenue targets. The company reported compliance with both Structural and Siena covenants at March 31, 2023. Both facilities contain subjective acceleration provisions tied to perceived material adverse changes; management considers exercise remote.
- The company may seek capital through its standby equity purchase agreement (SEPA), equity or debt offerings, or strategic arrangements. SEPA sales are subject to conditions and a 19.99% share cap absent specified exceptions or stockholder approval; management estimated that, at the 2023 average share price then in effect, approximately $14.0 million net might be raised. Equity financing could materially dilute shareholders.
- Merchandise purchase commitments were $15.3 million, predominantly due within one year. Letters of credit were $3.5 million. Management said it did not believe existing litigation or tax matters would have a material impact, but noted ongoing Santa Clara County and Federal Trade Commission investigations into automatic-renewal and billing practices; no proceeding had commenced as of the filing.
- An April 2023 amendment extended a Missouri warehouse lease through September 2028, with escalating undiscounted annual payments of up to $0.7 million; the company was assessing the accounting impact.
Most important facts for investors to verify
- Whether the sharp reduction in DTC customers and orders stabilizes, and whether pricing and fees can support order value without further weakening demand.
- Whether the company sustains gross-margin gains while rebuilding revenue and limiting customer acquisition costs.
- Cash runway and covenant headroom, especially the $57.0 million unrestricted-cash minimum and the Structural facility’s revenue tests; confirm actual revolver availability as borrowing-base conditions change.
- The cost and availability of future financing, SEPA share-cap limitations, and potential dilution from equity, warrants, earn-outs and stock-based awards.
- Developments in the automatic-renewal investigations, the warehouse lease modification, and other disclosed commitments or contingencies.