Grove Collaborative Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Grove is a digital-first sustainable consumer-products company selling Grove-owned and third-party brands through its direct-to-consumer (DTC) platform and retail partners. The June 2022 business combination was accounted for as a reverse recapitalization; historical results reflect Legacy Grove.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $77.7 million | $95.2 million | $247.5 million | $296.4 million |
| Gross profit / margin | $38.2 million / 49% | $48.0 million / 50% | $119.9 million / 48% | $149.2 million / 50% |
| Operating loss | $22.6 million | $36.2 million | $112.6 million | $98.4 million |
| Net income (loss) | $7.7 million | $(37.5) million | $(75.0) million | $(103.9) million |
| Adjusted EBITDA | $(9.6) million | $(31.2) million | $(70.3) million | $(83.6) million |
| Adjusted EBITDA margin | (12.4)% | (32.8)% | (28.4)% | (28.2)% |
Q3 reported net income was driven by a $28.8 million fair-value gain on the Earn-Out liability, alongside gains on warrant and Additional Shares liabilities; it did not indicate operating profitability. Adjusted EBITDA is a non-GAAP measure and remained negative.
- Cash and liquidity: Cash and cash equivalents were $103.8 million at September 30, 2022, versus $78.4 million at December 31, 2021. Working capital was $73.7 million. Cash equivalents included $102.1 million in money market funds.
- Cash flow: Nine-month operating cash use was $89.5 million, compared with $88.8 million in 2021; investing cash use was $3.6 million. Financing provided $118.5 million, principally from the business combination and related financing. Ending cash was $103.8 million.
- Debt: Total debt was $66.2 million, including $60.0 million under the SVB/Hercules facility. The company reported effective rates of 15.78%–18.83% on that facility. Principal repayments began in November 2022; management expected approximately $4.0 million of repayments in Q4 2022 and quarterly payments of $6.0 million in 2023.
- Balance sheet: Total assets were $203.2 million and total liabilities were $178.2 million. Accumulated deficit was $565.2 million. The company had $17.9 million of merchandise purchase commitments, mostly due within one year.
Changes versus comparable periods
- Revenue fell 18% in Q3 and 17% for the nine months. Grove Brands revenue declined 20% in Q3 and 17% year to date; third-party product revenue declined 16% and 17%, respectively.
- Management attributed the revenue decline primarily to fewer DTC orders and lower active customers, reflecting softer retention as pandemic-era buying patterns faded and reduced advertising. DTC orders fell to 1.242 million in Q3 from 1.672 million; active customers were 1.460 million versus 1.707 million. DTC revenue per order increased to $61 from $56, supported by price increases.
- Gross margin declined 1 percentage point in Q3 and 2 points year to date, due to higher product and inbound freight costs, increased retail mix and inventory reserves, partly offset by pricing initiatives.
- Advertising expense fell 73% in Q3 and 34% year to date as the company prioritized cash and customer-acquisition-cost management. SG&A was nearly flat in Q3 but increased 10% year to date, including higher stock-based compensation. Interest expense more than doubled year to date, reflecting debt and higher prime rates.
- Operating losses persisted. Year-to-date net loss narrowed versus 2021, but this comparison includes substantial non-cash fair-value gains on derivative liabilities and higher stock-based compensation.
Outlook, risks and unusual items
- Management said available resources were expected to fund obligations for at least one year after the filing, and the business combination had alleviated substantial doubt about going concern for that period. It also expects continuing operating losses and negative operating cash flow and says additional capital will be needed over the longer term; future financing may not be available on acceptable terms.
- Management expected DTC order and active-customer softness to continue at least into 2023. It cited consumer behavior normalization, inflation and discretionary-spending risk, marketing effectiveness, competition, supply-chain and freight costs, and the execution and margin effects of retail expansion.
- The July 2022 standby equity purchase agreement with Yorkville allows up to $100 million of share purchases over 36 months, subject to conditions. Only about $0.1 million had been raised under it by September 30; share sales may dilute existing holders and depend on market prices.
- In November 2022, the company disclosed a $2.5 million share subscription at $1.26 per share with potential additional-share protections if specified VWAP tests are below $1.26. It also issued a consulting warrant for up to 4.525 million shares at $1.26; 40% vested immediately, with the remainder subject to revenue or change-of-control conditions. These post-quarter arrangements may create dilution; the company said it was assessing accounting for certain obligations.
- Santa Clara County prosecutors and the FTC were investigating the company’s automatic-renewal and billing practices; no proceeding had commenced as of the filing. Ordinary-course legal matters were not expected by management to have a material effect.
- The company reported that a previously identified material weakness in financial-statement tie-out controls had been remediated as of September 30, 2022; disclosure controls were assessed as effective. It also reported reorganizations reducing corporate headcount by approximately 30%, with $3.0 million of charges for the first nine months.
- Grove’s public goal is to become 100% plastic-free by 2025. Failure to meet that goal or sustain plastic neutrality could harm its brand and business.
Most important facts for investors to verify
- Whether declining DTC customers and orders stabilize, and whether price increases can offset volume weakness without further damaging retention.
- Cash burn, debt repayment capacity and covenant compliance, including the effect of high borrowing costs and future capital needs.
- How much funding the Yorkville facility actually provides, and the resulting share issuance, pricing and dilution; also verify the accounting and dilution implications of the November HCI subscription and warrants.
- Whether operating performance improves independently of non-cash fair-value gains, and how stock-based compensation affects reported results and share count.
- Developments in the automatic-renewal investigations and any related regulatory, litigation or compliance costs.