ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere
in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 27,
2018. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion
and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the SEC.
Forward looking statements are statements not based on historical information and which relate to future operations, strategies,
financial results or other developments. Forward looking statements, particularly those identified with the words, “anticipates,”
“believes,” “expects,” “plans,” “intends,” “objectives,” and similar
expressions, are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any
obligation to update forward looking statements, except as required by law.
OVERVIEW
GrowGeneration’s mission is to become
one of the largest retail hydroponic and organic specialty gardening retail outlets in the industry. Today, GrowGeneration owns
and operates a chain of eighteen (18) retail hydroponic/gardening stores, with five (5) located in the state of Colorado, six (6)
in the state of California, three (3) in the state of Michigan, one (1) in the state of Nevada, one (1) in the state of Washington,
one (1) in the State of Oklahoma and one (1) in the state of Rhode Island, and an online e-commerce store, HeavyGardens. Our plan
is to open and operate hydroponic/gardening stores throughout the United States.
Today, our 18 facilities operate in 7 states,
each state considered an operating region. In 2018, we acquired approximately $25 million in revenue from the six acquisitions
completed so far this year. We continue to achieve our yearly growth goals of 100% year over year growth. Our operations span over
100,000 sq. ft of retail and warehouse space. We employ today approximately 75 agronomist and horticulturist that we have branded
“Grow Pros”. In addition to our store operations, GrowGeneration also operates 5 divisions. These wholly-owned divisions
are, GrowGeneration Canada, GrowGeneration Commercial, GrowGeneration Hemp, GrowGeneration Distribution and our newly purchased
e-commerce super-store HeavyGardens.com. GrowGeneration Commercial is operated as a stand-alone entity to sell directly into the
commercial markets. These sales calls include new build-outs, large capital projects and multi-state operators. Commercial customers
set up accounts and can order directly online and receive their commercial pricing. HeavyGardens.com is the Company’s recent
acquisition of an e-commerce online superstore that today generates around $300,000 a month in sales and, has over 60,000 unique
visitors. The Company is implementing an omni- channel approach of ordering online and picking up at one of our store locations.
We have allocated marketing dollars to a digital marketing campaign to further grow our online brand presence. GrowGeneration Canada
was formed to mirror our US operations and strategies to acquire hydro operations in Canada. We plan to have 3 locations, in British
Columbia, Quebec and Ontario, operating in the early part of 2019. GrowGeneration Hemp is developing a supply chain to outfit hemp
farms, currently over 26,000 acres, with equipment and supplies. As more of these hemp farms become operational and the demand
for CBD Isolate and Biomass soars, the increase in hemp farming will be a high growth channel for the Company. Lastly, GrowGen
Distribution is sourcing and developing new and innovative agricultural products, private label and exclusive products to drive
margins and introduce the commercial growers to the latest in new technologies to increase yields and the quality of their plants.
Our stores sell thousands of products,
such as organic nutrients and soils, advanced lighting technology, state of the art hydroponic and aquaponic equipment, and other
products needed to grow indoors and outdoors. Our strategy is to target two distinct groups of customers; namely (i) commercial
growers, and (ii) smaller growers who require a local store to fulfill their daily and weekly growing needs. Our supply-chain includes
over 10,000 sku’s, across 12 product departments. We can deliver directly to the grower’s facility, and they can pick
up the products at one of our stores or, order online and pick up at one of our stores.
GrowGeneration serves a new, yet sophisticated
community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines. Unlike
the traditional agricultural industry, these cultivators use innovative indoor and outdoor growing techniques to produce specialty
crops in highly controlled environments. This enables them to produce crops at higher yields without having to compromise quality,
regardless of the season or weather and drought conditions.
Our target market segments include the
commercial growers in the cannabis market (dispensaries, cultivators and caregivers), the home cannabis grower and to businesses
and individuals who grow organically grown herbs and leafy green vegetables. The landscape for hydroponic retail stores is very
fragmented, with smaller single stores which we consider very ripe for our roll up strategy. Further, the products we sell are
in demand due to the ever-increasing legalization and the number of licensed cultivation facilities in both the US and Canada.
Total sales for the hydroponic equipment business are well over $4 billion.
Sales at our stores have grown since we
commenced our business in May 2014, when we acquired the assets of Southern Colorado Garden Supply Corp. (d/b/a Pueblo Hydroponics),
which owned and operated four retail stores. Our growth has been fueled by the purchase of additional retail stores, frequent and
higher dollar transactions from commercial growers, individual home growers and gardeners who grow their own organic foods. We
expect to continue to experience significant growth over the next few years, primarily from existing and new stores that we open
or acquire. Our growth is likely to come from four distinct channels: establishing new stores in high-value markets, internal growth
at existing stores, acquiring existing stores with strong customer bases and strong operating histories and the creation of a business
to business e-commerce portal at www.GrowGeneration.com.
RESULTS
OF OPERATIONS
Comparison
of the three months ended September 30, 2018 to September 30, 2017
The
following table presents certain consolidated statement of operations information and presentation of that data as a $ change
from year-to-year.
|
|
Three Months Ended
September 30,
2018
|
|
|
Three Months Ended
September 30,
2017
|
|
|
$
Variance
|
|
Net revenue
|
|
$
|
8,406,255
|
|
|
$
|
4,028,170
|
|
|
$
|
4,378,085
|
|
Cost of goods sold
|
|
|
6,249,129
|
|
|
|
2,912,328
|
|
|
|
3,336,801
|
|
Gross profit
|
|
|
2,157,126
|
|
|
|
1,115,842
|
|
|
|
1,041,284
|
|
Operating expenses
|
|
|
2,732,337
|
|
|
|
1,573,931
|
|
|
|
1,158,406
|
|
Operating income (loss)
|
|
|
(575,211
|
)
|
|
|
(458,089
|
)
|
|
|
(117,122
|
)
|
Other income (expense)
|
|
|
(209,362
|
)
|
|
|
(2,798
|
)
|
|
|
(206,564
|
)
|
Net income (loss)
|
|
$
|
(784,573
|
)
|
|
$
|
(460,887
|
)
|
|
$
|
(323,686
|
)
|
Revenue
Net
revenue for the three months ended September 30, 2018 increased approximately $4.4 million, or 109%, to approximately $8.4 million,
compared to approximately $4.0 million for the three months ended September 30, 2017. The increase in revenues in 2018 was primarily
due to the addition of 8 new stores opened or acquired after September 30, 2017, and the new e-commerce site acquired in mid-September
2018, offset by the decline in same store sales as further discussed below. The 8 new stores and the new e-commerce web site contributed
$4.9 million in revenue for the quarter ended September 30, 2018. The chart below shows sales by market for the three months ended
September 30, 2018 and 2017. The Company also consolidated some stores in 2018 and 2017 in Colorado that had revenues of $123,563
for the three months ended September 30, 2018 and $631,097 for the three months ended September 30, 2017.
The
Company continues to focus on the six markets and the new e-commerce site noted below and the growth opportunities that exist
in each market. We are also focusing on new store acquisitions, proprietary products and on developing our online and Amazon sales
which we expect to contribute more to sales in the fourth quarter of 2018.
|
|
Sales by Market
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Variance
|
|
Colorado market
|
|
$
|
1,816,620
|
|
|
$
|
1,833,869
|
|
|
$
|
(17,249
|
)
|
California market
|
|
|
3,416,915
|
|
|
|
815,270
|
|
|
|
2,601,645
|
|
Rhode Island market
|
|
|
1,114,306
|
|
|
|
-
|
|
|
|
1,114,306
|
|
Michigan market
|
|
|
1,101,356
|
|
|
|
-
|
|
|
|
1,101,356
|
|
Nevada market
|
|
|
491,294
|
|
|
|
513,513
|
|
|
|
(22,219
|
)
|
Washington market
|
|
|
219,434
|
|
|
|
233,382
|
|
|
|
(13,948
|
)
|
Closed/consolidated locations
|
|
|
121,536
|
|
|
|
632,136
|
|
|
|
(510,600
|
)
|
E-commerce site
|
|
|
124,794
|
|
|
|
-
|
|
|
|
124,794
|
|
Total revenues
|
|
$
|
8,406,255
|
|
|
$
|
4,028,170
|
|
|
$
|
4,378,085
|
|
Sales of the Company’s products in
the Colorado market declined $17,249 or less that 1% comparing the quarter ended September 30, 2018 to September 30, 2017 and is
primarily due to store consolidations and the Company’s focus on operating larger, more profitable stores. Sales of the Company’s
products in the California market have seen growth of approximately $2.6 million from the addition of four (4) new stores through
acquisitions, offset by a decline in revenues in our Santa Rosa store of approximately $281,000. The California market experienced
slower growth in the prior and current quarters as a result of a change in the regulatory environment and the implementation of
new rules and regulations which have slowed the issuance of new licenses. However, the Company is positioned to grow as new licenses
are issued. Sales in our Santa Rosa store decreased $281,000 or 40% comparing the quarter ended September 30, 2018 to the quarter
ended September 30, 2017. Our San Bernardino store increased by 148%, or $200,000, comparing the quarter ended September 30, 2018
to the quarter ended September 30, 2017. We attribute this gain to the Southern California issuances of licenses in the Riverside
County. With the recent acquisition of Santa Rosa Hydro in July 2018, one of the country’s largest hydroponic stores, the
Company projects to add an incremental $8.0 million in annual sales in the Santa Rosa market.
The recognition of revenue in the Rhode
Island and Michigan markets are the result of these new acquisitions in 2018 for which there was no comparable revenue in 2017.
The Company is pursuing new store acquisitions in both of these markets and believes that these markets will be growth markets
in the fourth quarter of 2018.
Although revenues in the Nevada market
had a slight decline of $22,000, comparing the quarter ended September 30, 2018 to the quarter ended September 30, 2017, the decline
in revenue was attributable to large one-time sales to a commercial customer during the quarter ended September 30, 2017, related
to this customer’s initial buildout of their commercial grow facility.
Sales in the Washington market had a slight
decrease in revenue of $14,000 comparing the quarter ended September 30, 2018 to the quarter ended September 30, 2017.
The Company had the same 9 stores opened for the entire three months ended September 30, 2018 and 2017,
five (5) in Colorado, two (2) in California,
one (1)
in Nevada, and one (1) in Washington. These same stores generated $3.3 million in sales for the three months ended September 30,
2018, compared to $3.4 million in sales for the same period ended September 30, 2017, a decrease of 4%. With regard to same store
sales, our revenue in the Colorado market has declined comparing the three months ended September 30, 2018 to the three months
ended September 30, 2017 by approximately $17,000 or approximately 1%, primarily due to the loss of customers when we consolidated
locations in the first quarter of 2018. While there was a loss of some revenue from customers where stores were consolidated, all
operating costs were eliminated from the store that was closed and consolidated into another store location. Revenue in the California
market declined by approximately $81,000 or 10%, primarily due to the large fires in the Santa Rosa area in October 2017 which
closed our store for 17 days due to mandatory evacuations. The Santa Rosa fires also impacted our commercial customer base and
revenues in the Santa Rosa area which have not returned to their pre-October 2017 revenue levels. The Washington market has a slight
decline of revenues of approximately $14,000 of 6%. With regard to the Nevada market, the decline in revenue of $22,000 or 4% was
attributable to large one-time sales to a commercial customer during the quarter ended September 30, 2017 related to this customer’s
initial buildout of their commercial grow facility. In the Colorado market, we are not seeing additional commercial grows as this
market has matured and is going through a consolidation.
|
|
9 Same Stores All Markets
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Variance
|
|
Colorado market
|
|
$
|
1,816,620
|
|
|
$
|
1,833,869
|
|
|
$
|
(17,249
|
)
|
California market
|
|
|
734,299
|
|
|
|
815,270
|
|
|
|
(80,971
|
)
|
Washington market
|
|
|
219,434
|
|
|
|
233,382
|
|
|
|
(13,948
|
)
|
Nevada market
|
|
|
491,294
|
|
|
|
513,513
|
|
|
|
(22,219
|
)
|
Net revenue, all markets
|
|
$
|
3,261,647
|
|
|
$
|
3,396,034
|
|
|
$
|
(134,387
|
)
|
Cost
of Goods Sold
Cost
of goods sold for the three months ended September 30, 2018 increased approximately $3.3 million, or 115%, to approximately $6.2
million, as compared to approximately $2.9 million for the three months ended September 30, 2017. The increase in cost of goods
sold was primarily due to the 109% increase in sales comparing the three months ended September 30, 2018 to the three months ended
September 30, 2017. The increase in cost of goods sold is directly attributable to the increase in the number of stores as discussed
above.
Gross profit was approximately $2.2 million
for the three months ended September 30, 2018, compared to approximately $1.1 million for the three months ended September 30,
2017, an increase of approximately $1.1 million or 100%. Gross profit as a percentage of sales was 25.7% for the three months ended
September 30, 2018, compared to 27.7% for the three months ended September 30, 2017. The decrease in the gross profit margin percentage
is due to 1) the increase in sales to commercial customers that have lower margins than retail customers and 2) the higher cost
of inventory for acquired companies. As we acquire companies, the cost of their inventory, recorded at fair market value, has an
initial higher cost than pre-acquisition inventory values. As the purchased inventory is being sold, since it has a higher cost
basis, margins are lower. Once the acquired inventory is sold through, which takes approximately three months, the cost basis of
inventory replaced is at a lower cost basis, which will be realized in future periods as higher gross margins. Commercial customers
make up the majority of our revenues and we continue to target large commercial customers. The Company continues to focus on higher
margin items and proprietary additives and other consumables that provide higher margin opportunities for us.
Operating
Expenses
Operating expenses are comprised of store
operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs were approximately $1.4 million
for the three months ended September 30, 2018 and approximately $801,000 for the three months ended September 30, 2017, an increase
of approximately $614,000 or 77%. The increase in store operating costs was directly attributable to the 109% increase in sales
from the addition of eight (8) new locations that were acquired in 2018 and that were not open for any portion of the three months
ended September 30, 2017 and our new e-commerce site that was acquired mid-September 2018. A Colorado store opened in the fourth
quarter of 2017 was closed on September 30, 2018 and those commercial customers will be serviced out of our Denver store. Store
operating costs as a percentage of sales were 16.8% for the three months ended September 30, 2018, compared to 19.9% for the three
months ended September 30, 2017. Operating costs, as a percentage of revenue, are affected in certain markets by seasonality. The
second and third quarters are generally higher revenue months due to peak outdoor growing season during those months. Store operating
costs were positively impacted by the acquisitions of new stores in 2018 which have a lower percentage of operating costs to revenues
due to their larger size and higher volume. The net impact, as noted above, was lower store operating costs as a percentage of
revenues. Corporate overhead was 15.7% of revenue for the three months ended September 30, 2018 and 19.2% for the three months
ended September 30, 2017. Corporate overhead is comprised of general and administrative costs, share based compensation, depreciation
and amortization and corporate salaries and was approximately $1.3 million for the three months ended September 30, 2018, compared
to approximately $773,000 for the three months ended September 30, 2017. The increase in salaries expense from 2017 to 2018 was
due primarily to the increase in corporate staff to support expanding operations, including purchased store integrations, accounting
and finance, information systems, purchasing and commercial sales staff, and online sales presence. It should be noted that when
we consummate a new acquisition, purchasing and back office accounting functions are stripped from the new acquisitions and those
functions are absorbed into our existing centralized purchasing and accounting and finance departments, thus delivering cost savings.
Corporate salaries and related payroll costs as a percentage of sales were 5.5% for the three months ended September 30, 2018 compared
to 6.7% for the three months ended September 30, 2017. General and administrative expenses comprised mainly of advertising and
promotions, travel & entertainment, professional fees and insurance, were approximately $375,000 for the three months ended
September 30, 2018 and approximately $238,000 for the three months ended September 30, 2017, with a majority of the increase related
to advertising and promotion, travel and entertainment and legal fees. In the third quarter 2018, we incurred legal and audit fees
related to two acquisitions. These types of costs were not incurred during the quarter ended September 30, 2017. General and administrative
costs as a percentage of revenue were 4.5% for the three months ended September 30, 2018, and 5.9% for the three months ended September
30, 2017. As noted earlier, corporate overhead includes non-cash expenses, consisting primarily of depreciation and share based
compensation, which was approximately $481,000 for the three months ended September 30, 2018, compared to approximately $266,000
for the three months ended September 30, 2017.
Net
Loss
The
net loss for the three months ended September 30, 2018 was $784,573, compared to a net loss of $460,887 for the three months ended
September 30, 2017. The increase in the net loss from 2017 to 2018 of $323,686 was primarily due to (1) an increase in amortization
of debt discount, share based compensation and depreciation of $451,813, all non-cash expenses, and (2) increases in other corporate
overhead of $328,831 offset by the approximately $427,000 increase in net margin contribution in 2018 after deducting store operating
costs.
Comparison
of the nine months ended September 30, 2018 to September 30, 2017
The
following table presents certain consolidated statement of operations information and presentation of that data as a $ change
from year-to-year.
|
|
Nine months Ended
September 30,
2018
|
|
|
Nine months Ended
September 30,
2017
|
|
|
$
Variance
|
|
Net revenue
|
|
$
|
19,939,572
|
|
|
$
|
10,722,738
|
|
|
$
|
9,216,834
|
|
Cost of goods sold
|
|
|
14,863,600
|
|
|
|
7,775,718
|
|
|
|
7,087,882
|
|
Gross profit
|
|
|
5,075,972
|
|
|
|
2,947,020
|
|
|
|
2,128,952
|
|
Operating expenses
|
|
|
6,933,124
|
|
|
|
4,025,494
|
|
|
|
2,907,630
|
|
Operating income (loss)
|
|
|
(1,857,152
|
)
|
|
|
(1,078,474
|
)
|
|
|
(778,678
|
)
|
Other income (expense)
|
|
|
(811,846
|
)
|
|
|
(6,119
|
)
|
|
|
(805,727
|
)
|
Net income (loss)
|
|
$
|
(2,668,998
|
)
|
|
$
|
(1,084,593
|
)
|
|
$
|
(1,584,405
|
)
|
Revenue
Net
revenue for the nine months ended September 30, 2018 increased approximately $9.2 million, or 86%, to approximately $19.9 million,
compared to approximately $10.7 million for the nine months ended September 30, 2017. The increase in revenue was due to the addition
of eight (8) new stores acquired after December 31, 2017 and a new e-commerce site acquired in mid-September 2018. The chart below
shows sales by market for the nine months ended September 30, 2018 and 2017. The Company also had consolidated some stores in
2017 and 2018 that had sales of $691,641 for the nine months ended September 30, 2018 and $665,700 for the nine months ended September
30, 2017.
While
the Company continues to focus on the 7 markets noted below and the growth opportunities that exist in each market, we also are
focusing on new store acquisitions, proprietary products, and developing our online and Amazon sales, which we expect to contribute
to sales in the fourth quarter of 2018.
|
|
Sales by Market
|
|
|
|
Nine months Ended
|
|
|
Nine months Ended
|
|
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Variance
|
|
Colorado market
|
|
$
|
5,385,585
|
|
|
$
|
4,560,209
|
|
|
$
|
825,376
|
|
California market
|
|
|
6,358,549
|
|
|
|
1,843,672
|
|
|
|
4,514,877
|
|
Rhode Island market
|
|
|
3,450,640
|
|
|
|
-
|
|
|
|
3,450,640
|
|
Michigan market
|
|
|
1,926,370
|
|
|
|
-
|
|
|
|
1,926,370
|
|
Nevada market
|
|
|
1,287,101
|
|
|
|
1,318,909
|
|
|
|
(31,808
|
)
|
Washington market
|
|
|
718,149
|
|
|
|
334,248
|
|
|
|
383,901
|
|
E-commerce market
|
|
|
121,537
|
|
|
|
-
|
|
|
|
121,537
|
|
Consolidated/closed location
|
|
|
691,641
|
|
|
|
2,665,700
|
|
|
|
(1,974,059
|
)
|
Total revenues
|
|
$
|
19,939,572
|
|
|
$
|
10,722,738
|
|
|
$
|
9,216,834
|
|
Overall
sales in the Colorado market increased approximately $825,400 or 18%, as noted above, comparing the nine months ended September
30, 2018 to the nine months ended September 30, 2017, with a majority of that increase attributable to the opening of our new
Denver Mississippi store location in April 2017. We continue to focus selling efforts in building growth in this market.
Our
sales in the California market have seen growth of approximately $4.5 million primarily from the addition of 5 new stores
through acquisitions offset by a decline in revenues of approximately $404,000 or 24% resulting from the Santa Rosa wildfires
in October 2017, as discussed further below in the same store sales analysis, comparing the nine months ended September 30,
2018 to the nine months ended September 30, 2017. The California market experienced slower grow in the current and prior
quarter as a result of a change in the regulatory environment, and the implementation of new rules and regulations which have
slowed the issuance of new licenses. However, the Company is positioned to grow as new licenses are issued. With the recent
acquisition of Santa Rosa Hydro in July 2018, one of the country’s largest hydroponic store, the Company projects to
add an incremental $2.0 million in sales in the Santa Rosa market.
Revenues
in the Rhode Island and Michigan markets are the result of these new acquisitions in 2018 for which there was no comparable revenue
in 2017. The Company is pursuing new store acquisitions in both of these markets and believes that these markets will be growth
markets in the fourth quarter of 2018.
Our
revenue in the Nevada market decreased slightly by approximately $32,000 comparing the nine months ended September 30, 2018 to
nine months ended September 30, 2017, despite the fact that a large one-time $288,000 sale to a commercial customer during the
nine months ended September 30, 2017 related to this customer’s initial buildout of its commercial grow facility for which
there was no comparable one-time sale for the nine months ended September 30, 2018.
The increase in the Washington market is
due to the new store acquisition in May 2017, for which there was only revenue for approximately four and a half months in 2017
compared to a full nine months for 2018.
The Company had the same six (6) stores
opened for the entire nine months ended September 30, 2018 and 2017. These same stores generated $6.3 million in sales for the
nine months ended September 30, 2018, compared to $7.0 million in sales for the same period ended September 30, 2017, a decrease
of 10%. With regard to same store sales, total revenues in our Colorado declined approximately $258,000 or 10% comparing the nine
months ended September 30, 2018 to the nine months ended September 30, 2017. Colorado is a very mature and competitive market with
no real growth and the revenue loss is due to customer loss mostly from growers that have closed their operations. Our revenue
in the California market has declined by approximately $404,000 or 24% primarily due to the effects of the large fires in the Santa
Rosa area in October 2017 which impacted our commercial customer base. Revenues in the Santa Rosa market have not recovered from
the pre-fire sale levels. Revenues in the Nevada market was relatively flat with a slight 2% decline, but revenue from the nine
months ended September 30, 2017 includes one-time sales of approximately $288,000 to a customer that was doing an initial build
out of a grow facility for which there was no comparable one-time sale in 2018.
|
|
6 Same Stores All Markets
|
|
|
|
Nine months Ended
September 30,
|
|
|
Nine months Ended
September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
Colorado market
|
|
$
|
3,686,281
|
|
|
$
|
3,944,433
|
|
|
$
|
(258,152
|
)
|
California market
|
|
|
1,304,032
|
|
|
|
1,708,195
|
|
|
|
(404,163
|
)
|
Nevada market
|
|
|
1,287,101
|
|
|
|
1,318,909
|
|
|
|
(31,808
|
)
|
Net revenue
|
|
$
|
6,277,414
|
|
|
$
|
6,971,537
|
|
|
$
|
(694,123
|
)
|
Cost
of Goods Sold
Cost
of goods sold for the nine months ended September 30, 2018 increased approximately $7.1 million, or 91%, to approximately $14.9
million, as compared to $7.8 million for the nine months ended September 30, 2017. The increase in cost of goods sold was due
to the 86% increase in sales comparing the nine months ended September 30, 2018 to the same period in 2017. The increase in cost
of goods sold is directly attributable to the increase in the number of stores as noted above.
Gross
profit was approximately $5.1 million for the nine months ended September 30, 2018, compared to approximately $2.9 million for
the nine months ended September 30, 2017, an increase of approximately $2.2 million or 72%. Gross profit as a percentage of sales
was 25.5% for the nine months ended September 30, 2018, compared to 27.5% for the nine months ended September 30, 2017. The slight
decrease in the gross profit percentage is due to 1) the increase in sales to commercial customers that have lower margins than
retail customers and 2) the higher cost of inventory for acquired companies. As we acquire companies, the cost of their inventory,
recorded at fair market value, has an initial higher cost than pre-acquisition inventory. As those items are being sold, since
they have a higher cost basis, margins are lower. Once the acquired inventory is sold through, which normally takes approximately
three months, the cost basis of inventory replaced is at our normal cost basis (which is lower than our acquired inventory cost
basis), which will be realized in future periods gross margin. Commercial customers make up the majority of our revenues and we
continue to target large commercial customers. The Company continues to focus on higher margin items and proprietary additives
and other consumables that provide higher margin opportunities for us.
Operating
Expenses
Operating
expenses are comprised of store operations, primarily payroll, rent and utilities, and corporate overhead. Store operating costs
were approximately $3.5 million for the nine months ended September 30, 2018 compared to approximately $2.1 million for the nine
months ended September 30, 2017, an increase of approximately $1.4 million or 65%. The increase in store operating costs was directly
attributable to the 86% increase in sales from the addition of eight (8) locations and the one e-commerce site, acquired in September
2018, that were not open for any portion of the nine months ended September 30, 2017, and three stores that were opened at various
times in 2017. Store operating costs as a percentage of sales were 17.3% for the nine months ended September 30, 2018, compared
to 19.6% for the nine months ended September 30, 2017. Operating costs, as a percentage of revenue, are affected by seasonality.
The second quarter and third quarters are generally higher revenue months due to peak outdoor growing season during those months.
Store operating costs were positively impacted by the acquisitions of new stores in 2018 which have a lower percentage of operating
costs to revenues due to their larger size and higher volume. The net impact, as noted above, was lower store operating costs
as a percentage of revenues. Corporate overhead was 17.4% of revenue for the nine months ended September 30, 2018 and 18% for
the nine months ended September 30, 2017. Corporate overhead is comprised of general and administrative costs, share based compensation,
depreciation and amortization and corporate salaries and was approximately $3.5 million for the nine months ended September 30,
2018, compared to approximately $1.9 million for the nine months ended September 30, 2017. The increase in salaries expense from
2017 to 2018 was due primarily to the increase in corporate staff to support expanding operations including, purchased store integration,
accounting and finance, information systems, purchasing and commercial sales staff, and online sales presence. It should be noted
that when we consummate a new acquisition, the purchasing and back office accounting functions are stripped from the new acquisitions
and those functions are absorbed into our existing centralized purchasing and accounting and finance departments thus delivering
cost savings. Corporate salaries as a percentage of sales were 6% for the nine months ended September 30, 2018 compared to 5.4%
for the nine months ended September 30, 2017. General & administrative expenses comprised mainly of advertising and promotions,
travel & entertainment, professional fees, insurance and legal fees, were approximately $1.1 million for the nine months ended
September 30, 2018 and approximately $645,000 for the nine months ended September 30, 2017, with a majority of the increase related
to advertising and promotion, travel and entertainment and legal fees. For the nine months ended September 30, 2018 we incurred
legal and audit fees related to four acquisitions and costs related to our first annual shareholders meeting. These costs were
not incurred for the nine months ended September 30, 2017. General and administrative costs as a percentage of revenue were 5.7%
for the nine months ended September 30, 2018, compared to 6.0% for the nine months ended September 30, 2017.
As
noted earlier, corporate overhead includes non-cash expenses, consisting primarily of depreciation and share based compensation,
which was approximately $1.2 million for the nine months ended September 30, 2018, compared to approximately $708,000 for the
nine months ended September 30, 2017. The increase in share-based compensation from $654,000 in 2017 to $920,000 in 2018 is due
to an increase in 1) non-cash compensation to consultants, 2) stock issued to employees, and 3) the fair market value of options
issued to employees.
Net
Income (Loss)
The
net loss for the nine months ended September 30, 2018 was approximately $2.7 million, compared to a net loss of
approximately $1.1 million for the nine months ended September 30, 2017. The increase in the net loss from 2017 to 2018 of
approximately $1.6 million was primarily due to 1) increases in non-cash expenses, share based compensation, depreciation and
amortization and amortization of debt discount which accounted of approximately $1.3 million of the increase and 2) an
increase of approximately $1.1 million in general and administrative and payroll costs. The increase in costs noted above
were offset by approximately $770,000 increase in net margin contribution in 2018 after deducting store operating costs.
Amortization of debt discount did not exist in 2017.
Operating
Activities
Net
cash used in operating activities for the nine months ended September 30, 2018 was approximately $1.9 million compared to approximately
$2.6 million for nine months ended September 30, 2017. Cash provided by operating activities is driven by our net loss and adjusted
by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation,
amortization of intangible assets, share based compensation expense and amortization of debt discount. Non-cash adjustment totaled
approximately $2 million and $708,400 for the nine months ended September 30, 2018 and 2017, respectively, so non-cash adjustments
had a greater positive impact on net cash provided by operating activities for the nine months ended September 30, 2018 than the
same period in 2017. The increase in the net cash used in operating activities was related to the increase in the net loss of
approximately $1.6 million comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2018, an
increase in inventory of approximately $1.2 million, an increase in accounts receivable of approximately $356,000, offset by an
increase in accounts payable and other current liabilities of approximately $457,000. The increase in accounts payable and other
accrued expenses was attributable to the increase in the number of operating stores in 2018.
Net
cash used in operating activities for the nine months ended September 30, 2017 was approximately $2.6 million. This amount was
primarily related to increases of inventory of approximately $2.4 million, accounts receivable of $293,000, offset by an increase
in accounts payable and other current liabilities of $787,000. The increase in inventory and a corresponding increase in trade
payables was attributable to both an increase in revenues and an increase in the number of operating stores between December 31,
2016 and September 30, 2017.
Net
cash used in investing activities was approximately $6.3 million for the nine months ended September 30, 2018 and approximately
$870,000 for the nine months ended September 30, 2017. Investing activities in 2018 were primarily attributable to six acquisitions
in 2018 in which the we paid approximately $5.8 million in cash. Other investing activities in 2018 were the purchase of vehicles
and store equipment totaling approximately $455,000. Investing activities in 2017 related the purchase of vehicles and store equipment
to support new store operations. Between January 1, 2017 and September 30, 2017, the Company opened 4 new locations.
Net cash provided
by financing activities for the nine months ended September 30, 2018 was approximately $21.2 million and represented approximately
$10.0 million from the proceeds of a private placement of our Common Stock which closed in May 2018, $9 million in proceeds from
a convertible debt offering which closed in January 2018, and proceeds from the exercise of warrants and options of approximately
$2.5 million. Net cash provided by financing activities for the nine months ended September 30, 2017 was $4.8 million and was primarily
from proceeds from the sales of Common Stock, net of offering costs, of $3.2 million, and proceeds from the exercise of warrants
of $1.6 million.
Use
of Non-GAAP Financial Information
The
Company believes that the presentation of results excluding certain items in “Adjusted EBITDA,” such as non-cash equity
compensation charges, provides meaningful supplemental information to both management and investors, facilitating the evaluation
of performance across reporting periods. The Company uses these non-GAAP measures for internal planning and reporting purposes.
These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be
different from non-GAAP measures used by other companies. The presentation of this additional information is not meant to be considered
in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting
principles.
Set
forth below is a reconciliation of Adjusted EBITDA to net income (loss):
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Net income (loss)
|
|
$
|
(784,573
|
)
|
|
$
|
(460,887
|
)
|
Interest
|
|
|
(4,795
|
)
|
|
|
3,419
|
|
Depreciation and Amortization
|
|
|
114,159
|
|
|
|
22,987
|
|
EBITDA
|
|
|
(675,209
|
)
|
|
|
(434,481
|
)
|
Share based compensation (option compensation, warrant compensation, stock issued for services)
|
|
|
367,098
|
|
|
|
242,984
|
|
Amortization of debt discount
|
|
|
236,527
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(71,584
|
)
|
|
$
|
(191,497
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Net income (loss)
|
|
$
|
(2,668,998
|
)
|
|
$
|
(1,084,593
|
)
|
Interest
|
|
|
14,535
|
|
|
|
7,181
|
|
Depreciation and Amortization
|
|
|
230,070
|
|
|
|
63,035
|
|
EBITDA
|
|
|
(2,424,393
|
)
|
|
|
(1,014,377
|
)
|
Share based compensation (option compensation, warrant compensation, stock issued for services)
|
|
|
920,446
|
|
|
|
645,392
|
|
Amortization of debt discount
|
|
|
858,624
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(645,323
|
)
|
|
$
|
(368,985
|
)
|
LIQUIDITY
AND CAPITAL RESOURCES
As of September 30, 2018, we had working
capital of approximately $23.1 million, compared to working capital of approximately $5.6 million as of December 31, 2017, an increase
of approximately $17.5 million. The increase in working capital from December 31, 2017 to September 30, 2018 was due primarily
to the receipt of proceeds from an equity private placement offering of $10 million, a convertible debt offering of $9 million
and proceeds from the exercise of warrants and options of $2.5 million. At September 30, 2018, we had cash and cash equivalents
of approximately $14.3 million. As of the date of this filing, we believe that existing cash and cash equivalents are sufficient
to fund existing operations for the next twelve months.
We
anticipate that we will need additional financing in the future to continue to acquire and open new stores. To date we have financed
our operations through the issuance and sale of Common Stock, convertible notes and warrants.
Financing
Activities
2017
Private Placements
On
March 10, 2017, the Company closed a private placement of a total of 825,000 units of its securities to 4 accredited investors.
Each unit consisted of (i) one share of the Company’s Common Stock and (ii) one 5-year warrant to purchase one share of
Common Stock at an exercise price of $2.75 per share. The Company raised an aggregate of $1,650,000 gross proceeds in the offering.
On
May 15, 2017, the Company closed a private placement of a total of 1,000,000 units of its securities through GVC Capital LLC (“GVC
Capital”) as its placement agent. Each unit consisted of (i) one share of the Company’s Common Stock and (ii) one
5-year warrant to purchase one share of Common Stock at an exercise price of $2.75 per share. The Company raised an aggregate
of $2,000,000 gross proceeds in the offering. The Company paid GVC Capital total compensation for its services as follows: (i)
it issued GVC 5-year warrants to purchase 75,000 shares at $2.00 per share and 5-year warrants to purchase 75,000 shares at $2.75
per share (for which GVC paid $100), (ii) it paid GVC a cash fee of $150,000, (iii) it paid GVC a non-accountable expense allowance
of $60,000, and (iv) it agreed to pay GVC a warrant exercise fee equal to 3% of all sums received by the Company from the exercise
of 750,000 warrants (excluding the 250,000 warrants issued to Merida Capital Partners, LP) when they are exercised.
2018
Private Placement
On
January 17, 2018, the Company completed a private placement of a total of 36 units of its securities at the price of $250,000
per unit. Each unit consisted of (i) a .1% unsecured convertible promissory note in the principal amount of $250,000, and (ii)
a 3-year warrant entitling the holder to purchase 37,500 shares of Common Stock, at a price of $.01 per share or through cashless
exercise. The Company raised gross proceeds of $9,000,000 from 23 accredited investors in the offering.
On
May 9, 2018, the Company completed a private placement of a total of 33.33 units of the Company’s securities at the price
of $300,000 per unit pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act. Each unit consists of (i) 100,000 shares of Common Stock and (ii) 50,000 3-year warrants, each entitling the holder to purchase
one share of Common Stock, at a price of $.35 per share or through cashless exercise. The Company raised a total of $10,000,000
from three accredited investors.
C
ritical
Accounting Policies, Judgments and Estimates
Use
of Estimates
The
preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United
States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include
the carrying amount of intangible assets; valuation allowances and reserves for receivables, inventory and deferred income taxes;
revenue recognition related to contracts accounted for under the percentage of completion method; share-based compensation; and
loss contingencies, including those related to litigation. Actual results could differ from those estimates.
Accounts
Receivable and Concentration of Credit Risk
Accounts
receivable are recorded at the invoiced amounts less an allowance for doubtful accounts and do not bear interest. The allowance
for doubtful accounts is based on our estimate of the amount of probable credit losses in our accounts receivable. We determine
the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment.
Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance
when we determine that the potential for recovery is remote. An allowance for doubtful accounts of approximately $97,829 has been
reserved as of September 30, 2018 and December 31, 2017.
We
are exposed to credit risk in the normal course of business, primarily related to accounts receivable. We are affected by general
economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition
of its customers and maintains an allowance for doubtful accounts. As of September 30, 2018, and December 31, 2017, we do not
believe that we have significant credit risk.
Fair
Value of Financial Instruments
The
carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which
approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third
parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based
on our current financial condition and liquidity. We believe the amounts due to related parties also approximate their fair value,
as their carried interest rates are consistent with those of our notes payable with third parties.
Long-lived
Assets
We
evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted
future cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the
difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning
the amount and timing of estimated future cash flows. No impairment was determined as of September 30, 2018 and December 31, 2017.
Revenue
Recognition
Revenue
on product sales is recognized upon delivery or shipment. Customer deposits and lay away sales are not reported as revenue until
final payment is received and the merchandise has been delivery.
Stock-based
Compensation
We
account for stock-based awards at fair value on the date of grant and recognize compensation over the service period that they
are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing
model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration
estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately
vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted
for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.