GrowGeneration Corp.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Good afternoon. My name Joana and I will be your conference operator today. At this time, I would like to welcome everyone to the GrowGeneration Corp. Second 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Michael Salaman, President of GrowGeneration Corp. You may begin your conference.

[Michael Salaman:]

Thank you. Good afternoon. My name is Michael Salaman, Co-Founder and President of GrowGeneration Corp. At this time, I would like to welcome everyone to our GrowGeneration Corp. second quarter 2018 earnings conference call. After our CEO and CFO’s remarks, we will make some comments and answer a few questions. Prior to me turning the call over to our CEO, I would like to read our forward-looking statements. This earnings call may include predictions, estimates and other information that might be considered forward-looking within the meaning of applicable security laws. While these forward-looking statements represent our current judgments, they are subject to risks and uncertainties that could cause actual results to differ materially. You are caution not to place undue reliance on these forward-looking statements, which reflect our opinions only as the date of this call. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. When used herein, words such as look forward, believe, continue, building, or variations of such words and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are often discussed in filings we make with the Security Commission and Exchange available at www.sec.gov and on our website at www.growgeneration.com. I’m proud to turn the call over to our CEO and Co-Founder, Darren Lampert, who will present our second quarter results.

[Darren Lampert:]

Good afternoon. Thank you, Michael, and welcome to our second quarter 2018 earnings call. We would like to begin our call by thanking our shareholders and management for their continued support and belief in the mission Michael and I set forth nearly four years ago to build the largest national chain of hydroponic stores in the U.S. I’m proud to say that I believe we will achieve that goal in 2019. Q2 was another great quarter of sales for GrowGeneration, clearly demonstrating the demand for our products and the scalability of our business model. As we continue our acquisition strategy, our management team is executing and implementing our plan, and I will further discuss this quarter’s significant event shortly. Our company continues to benefit from a strong balance sheet and cash position that affords us the ability to acquire the best of breed hydroponic operations across the U.S. The acquisition strategy is now not only delivering incremental revenue, but also operational cost savings. Our sales strategy is benefiting from our brand and operational presence in 18 locations across six states. GrowGeneration is now coast to coast. We’re not only generating sales from walk-ins, but also from our commercial direct sales team and the Internet site. Although some – although same-store sales were down for the quarter versus 2017, primarily due to store consolidations in Colorado, impact of the Santa Rosa fires and slow regulatory climate in California, particularly the July 1st day for all products to be tested before being sold and a one large – and a large one-time sales in Las Vegas. Our 2018 quarter-over-quarter sales in all markets were up 63%, with the Colorado market up 28% and the California market up 93%. Our company continues to attract capital raising $21 million in debt and equity financing for the six months ended June 30, 2018, strengthening our balance sheet to $17.4 million in cash and $24.5 million in working capital. We saw in this quarter the positive impact of our acquisition model with operating expenses going down 2%, or 13%. Our acquisition pipeline continues to be strong with a focus in California, New England and new emerging markets in the Mid-Atlantic and Midwest regions. GrowGen now is operating in six states, with 18 commercial and retail stores, with over 100,000 square feet of space, servicing hundreds of licensed growers coast to coast. The company has now set run rate to be in excess of $42 million heading into 2019 and over $10.5 million for the fourth quarter 2018. I’d like to spend a few minutes going over our second quarter 2018 financial highlights. Revenue of $7.15 million, up 74%, compared to revenue of $4.1 million for the second quarter of 2017. Store operating costs have declined 13% from 18.2% for the second quarter 2017 to 16.1% for the second quarter of 2018. Year-to-date revenue of $11.5 million, up 72%, compared to year-to-date revenue of $6.7 million for 2017. Year-to-date store operating costs have declined from 19.4% for the six months ended June 30, 2017 to 17.6% for the six months ended June 30, 2018. The company had $17.4 million in cash and cash equivalents at June 30, 2018. As of June 30, 2018, the company had working capital of $24.5 million, compared to working capital of $5.6 million at December 31, 2017. The company raised approximately $12 million in equity capital to the issuance of common stock and the exercise of warrants and $9 million in convertible debt financing, of which $1.4 million has been converted to equity for the six-month period ended June 30, 2018. On April 12, the company purchased a three-store chain in Livonia and Lansing, Michigan superior grower supply. Superior grower supply generates around $4 million in revenue in 2018, and we are estimating in excess of $5 million for the 12-month period through April 12, 2019. On June 12, we closed our Central Coast grower supply in Salinas, California. Central Coast generates approximately $2 million in revenue annually. On July 13, we closed on Santa Rosa hydroponics, the largest hydroponic operation in Northern California. Santa Rosa hydro generates approximately $8 million in revenue annually. We launched the Alliance Biologics product in Colorado. We set up a partnership with Amazon.com that is now generating sales. On financing. On May 9, 2018, the company completed a $10 million private placement of the company’s securities. The company raised a total of $10 million from three credit investors. The three strategic investors were Gotham Green Partners for $7.5 million, Merida Capital for $1.5 million and Navy Capital for $1 million. This capital is being deployed towards new acquisitions. Investments in plant, science and new products. The company entered into an exclusive product development research and distribution agreement to exclusively sell a complete line of specialty products and powder fertilizers that enhance point health in yields. The company began to sell the Alliance Biologics through its hydroponic stores starting in the second quarter of 2018 in Colorado. And the product recently got registration approval in Washington, Nevada, and Rhode Island. We’re pleased with the early results of the Alliance product line the company will begin to report the sales results quarter-over-quarter starting in Q3. The company is also actively seeking proprietary product to acquire and entered into exclusive agreements with the companies that have products that are margin attractive and appeal to the commercial and home growers. Our CFO Monty Lamirato who will go over financial results for the second quarter of 2018. Monty?

[Monty Lamirato:]

Thank you. Yes, thank you, Darren. Revenues for the three months ended June 13, 2018 increased approximately $3 million, or 74% to approximately $7.2 million, compared to $4.1 million for the three months ended June 30, 2017. The increase in revenues in 2018 was primarily due to addition of 10 new stores opened or acquired after June 30, 2017 and one new store acquired in May of 2017, that contributed only partially the sales for the quarter ended June 30, 2017. This revenue was offset by a decline in same-store sales as we will note below. The eight new stores contributed $4.2 million in revenue for the quarter ended June 30, 2018. The company had same seven stores opened for the entire three months ended June 30, 2018 and 2017. These same-stores generated $2.9 million in sales for the three months ended June 30, 2018, compared to $3.7 million in sales for the period ended June 30, 2017, a decrease of 20.8%. With regard to these same-store sales, our revenue in the Colorado market has declined comparing the three months ended June 30, 2018 to the three months ended June 30, 2017 by approximately $212,000 and 9% primarily due to a loss of customers when we consolidated two Pueblo locations in the first quarter of 2018. While there was a loss of some revenue from these 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 $249,000, or 36% primarily due to the large fires in the Santa Rosa area in October of 2017 which closed our store for 17 days due to mandatory evacuations. Further, the delayed implementation of the regulations, which effectively began July 1, 2018 created a climate of a wait-and-see approach by the cultivators. The Santa Rosa fires also impacted our commercial customer base and revenues in the Santa Rosa area have not returned to their pre-October 2017 revenue levels. With regard to the Nevada market, our store in Nevada had a one-time large sale of $288,000 in the second quarter of 2017 for our new customer build out for which there was no similar sale from a customer build out in the second quarter of 2018. Although Colorado was a more mature market, we continue to focus selling efforts and building growth in this market. Sales in our Denver store increased 42% comparing the quarter ended June 30, 2018 to the quarter ended March 31 2018. We noted that our Santa Rosa store decreased only 5% comparing the quarter ended June 30, 2018 to the quarter ended March 31, 2018 suggesting a stabilization in this market. Further with the recent acquisition of Santa Rosa Hydro, one of the country’s largest hydroponic stores, the company projects to add an incremental $2 million in sales in the Santa Rosa market. Revenue in the Nevada market has some slight growth, $32,000 or 77%, comparing the quarter ended June 30, 2018 to the quarter ended March 31 2018. The recognition of revenue in Rhode Island and Michigan markets are the result of new acquisitions in 2018 for which there was no comparable revenue in the same periods in 2017. The company is pursuing new store acquisitions in both of these markets and believes that these markets will grow – will be growth markets in the third and fourth quarter of 2018. The increase in our sales in the Washington market is due to a new store acquisition in May of 2017, for which we only recognized revenue for approximately 1.5 months in 2017 compared to a full quarter in 2018. In addition, revenues for the quarter ended June 30, 2018 were approximately $334,000, or 103% increase over the quarter ended March 31, 2018. Sales in all markets have trended up comparing Q1 2018 to Q2 2018. Now let’s talk a little bit about cost of goods sold and profit margins. Cost of goods sold for the quarter ended June 30, 2018 was $5.4 million, an increase of 83%, compared to cost of goods sold of $3 million for the quarter ended June 30, 2017. Gross profit was $1.7 million for the quarter ended June 30, 2018, compared to $1.15 million for the quarter ended June 30, 2017, an increase of 50%. The increase in cost of goods sold was directly attributable to the addition of 11 new stores and then 74% increase in revenues. Gross profit percentage was 24% for the quarter ended June 30, 2018, compared to 28% for the quarter ended June 30, 2017. The largest contributor to the decrease in gross profit percentage is the higher basis of inventory acquired in a business acquisition. Acquired inventory is recorded at fair market value, a basis higher than pre-acquisition basis. After we sell through that acquired inventory, which takes about three months, the replacement purchases are at or normal cost basis typically had a better margin due to our stronger purchasing power. Margins are also impacted by the increase in commercial customers, which we continue to target where those margins are lower than retail customers. While there was a decrease in the gross profit percentage, it was also a decrease in store operating costs from 18.2% for the quarter ended June 30, 2017 to 16.1%, or 13% decline for the quarter ended June 30, 2018. Store operating income was 9.8% of revenues for the quarter ended June 30, 2017, compared to 8.1% of revenues for the quarter ended June 30, 2018. I’ll talk a little bit about operating expenses. Operating expenses are comprised of store operations, primarily payroll, rent and utilities and corporate overhead, which is primarily comprised of payroll, share-based compensation, general and administrative expenses and depreciation and amortization. We previously discussed store operating costs we will focus on corporate overhead. Overall, corporate overhead was 17% of revenues for the quarter ended June 30, 2018, compared to 18% of revenues for the quarter ended June 30, 2017. Payroll and general and administrative costs are the two largest components of corporate overhead. Corporate payroll costs as a percentage of sales were 5.5% for the three months ended June 30, 2018, compared to 4.1% for the three months ended June 30, 2017. The increase in salary expense from 2017 to 2018, was due primarily to the increase in the corporate staff to support expanding operation, including purchasing store integrations, accounting and finance, information systems, purchasing and commercial sales staff, and online sales presence. It should be noted that when we consummated 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 department, thus, delivering cost savings. General and administrative expenses comprised mainly of advertising promotion, travel and entertainment, professional fees and insurance, were 5.6% of revenues for the three months ended June 30, 2018 and 2017. In the second quarter 2018, we incurred legal fees, audit fees related to the two acquisitions and we incurred costs related to our first annual shareholders meeting held in April 2018. These types of costs are not recurring on a quarterly basis. These types of costs were not incurred during the quarter ended June 30, 2017. Net income and net loss. The net loss for the three months ended June 30, 2018 was $929,959, compared to a net loss of $340,375 for the three months ended June 30, 2017. The increase in the net loss from 2017 to 2018, which was 589,000,584, was primarily due to one, increase in the amortization of debt discount of $304,842, which is a non-cash expense; and two, the increase in corporate overhead of 463,729. The increase in cost noted above were offset by the $180,000 increase in net margin contribution in 2018 after deducting store operating cost. Adjusted EBITDA for the three months ended June 30, 2018, which is the net loss less non-cash expenses, which totaled $712,889 and interest expense of $11,312 was a negative $205,758 for the quarter ended June 30, 2018. Adjusted EBITDA after the three months ended June 30, 2017, which is the net loss once again less these non-cash expenses, up $344,932 and interest expense of $2,610, resulting in an adjusted EBITDA of $7,167. The company had $17.4 million in cash and cash equivalents at December 31, 2018. The company also had $24.5 million of working capital compared to $5.6 million of working capital at December 31, 2017. The company’s significant improvement in the cash and working capital position, which has been previously mentioned, was the result of the company raising approximately $12 million in equity through the issuance of common stock and the exercise of warrants and $9 million in convertible debt financing that occurred during the six months ended June 30, 2018. Disbursements related to acquisitions during the same time period – during this same time period were approximately $3.5 million. The company is extremely well positioned with existing working capital to finance existing operations and to fund the future acquisition targets. I’ll turn it over – back over to Darren for some concluding remarks.

[Darren Lampert:]

Thank you, Monty. I’m much appreciated. GrowGeneration is well-positioned to take advantage of the fragmented hydroponic industry and fuel its sales growth through continuing its acquisition strategy. As we acquired new operation, we were able to eliminate costs and grow sales, creating a dynamic profit-driven business model. Our strong balance sheet is attracting the best of breed operations. We have built a seasoned professional commercial sales team to supplement our 75 grow professionals that manage our store operations. We have in place administrative staff that is seasoned to manage our inventory, our purchasing and sourcing and logistics that will allow us to manage similar growth we’ve achieved over the last several quarters. We are reviewing acquisitions in new technology and products that bring automation – that will lower the growers costs and deliver an overall better yielding in tasting product. We have a strong balance sheet of almost $17 million in cash and strong strategic partners in Gotham Green Partners, Merida Capital and NAVY Capital. The company has set its maybe revenue run rate guidance in excess of $42 million, coming out of 2018 and in excess of $10.5 million run rate for the fourth quarter. Our future is bright and we look forward to sharing our successes with our shareholders, our management team and partners. I’d like to turn the call over to Michael to go over a few questions and also we will give a few closing remarks.

[Michael Salaman:]

A couple of comments and some questions to – just to discuss as a follow-up to the earnings call. Question #1, the outlook of Colorado? I think, it’s important for the investment community to understand that quarter-over-quarter in Colorado, we’re up 28%. The high concentrated area of cultivators in Denver is up 42% quarter-over-quarter. So we’re seeing growth in our backyard in Colorado so we’re very bullish on where we see the future growth. And we’re seeing more consolidation, we’re adding new customers and we’ve done it also by lowering our operating expenses. So you’re seeing that trend and we see that trend continuing into Q3 and Q4. Question #2 California. We’re getting a lot of questions about our position in California, where is California going and, of course, it’s been certainly a regular – regulatory issue for a lot of companies in this space, but that’s behind us. I mean, July 1, which is the date in which all product needed to be tested is now behind us. So we’re starting to see more licenses coming online and we’re seeing more cultivators start to spend capital and start to build out. So as we’ve seen in our Santa Rosa market, it’s starting to stabilize. We made the acquisition of Santa Rosa Hydro, which is a regional play for the company. It’s not just Santa Rosa with 20,000 square feet and 3.5 acres of soil yard, we’re able to service a regional Northern California customer. So we see tremendous growth coming from that acquisition. In addition, our San Bernardino stores growing quarter-over-quarter Q1 to Q2 up 53% and Humboldt, which is traditionally up between Q1 was up 250%. So we see tremendous growth and also more acquisitions in the near future in the state of California. Darren will take. Do you want to talk again?

[Darren Lampert:]

Yes I also figured California markets. When looking at in 2017, now we had one store in California. We opened a store in San Bernardino towards the summer of 2017. On an interesting thing, you’re not seeing the San Bernardino store in our same-store sales, it hasn’t been opened a year. But that stores is turned profitable after a year. And the one thing about California and when you look at some of the comments coming out of some of the other companies in our space certainly, complaining about the regulatory climate in California and the slow uptick. What this has allowed us to do is, we’ve walked into California this year and we’ve made some tremendous purchases at very, very comforting prices to GrowGeneration. So we’re extremely bullish it on the uptake of the market. We spend a lot of time in California right now. We have salespeople on the floor in California. We’ll be in LA this week and again, we’re starting to see – we’re starting to bid out some very large transactions in California. We think, we bought in at the bottom of the California market and we’re extremely bullish on the California market. And we look forward to discussing our same-store sales in California in the future and certainly, the progress that we make in California going into 2019. Another question is, with the capital that we have on the balance sheet, how many more acquisitions can the company do? We’re Holding about $50 million in capital and the dynamic part of the business model is that we are able to purchase cost effective and we’ve demonstrated that over the last several years of rolling up the industry and we continue to attract quality companies that were able to strip out expenses, make it more profitable and grow their sales. So with the strong balance sheet, we’re attracting additional acquisition targets and there are several lined up for the next couple of quarters.

[Michael Salaman:]

Basically, our business model that we set forth a few years ago that still rings pretty true today. For every $1 million in capital, we put to work we usually purchase around $3 million of revenue. And we still – we’re still seeing that in the market right now. So if you equate the $15 million that’s sitting on our balance sheet right now, it’s our understanding and contention that we can probably buy in excess of $40 million of revenue going into 2019, coupled with the $42 million run rate we’ve just forecasted coming out of 2018. So you were extremely bullish on this year and certainly on 2019. On one of the report and thing that we saw our loss or adjusted loss for the second quarter was $200,000. We were supposed to close the transaction, Santa Rosa Hydro was supposed to close going into the second quarter was pushed out three months. Certainly, our due diligence process took longer than we expected. And if again, if we would have included Santa Rosa Hydro into our second quarter numbers and then it would have closed on time, you would have seen a profitable adjusted EBITDA for the second quarter. Certainly, we feel comfortable going into the third quarter with our numbers. And again, we look at – business is getting better by the day. Our staff is getting better by the day and our executive committee, and we’ve learned a lot over the four years and certainly, we’re going to put that to work in the next four years.

[Michael Salaman:]

Question #4. The last question is, when are you preparing to uplist the company? Darren, you want to take that?

[Darren Lampert:]

Yes, sure. The company is starting to work on an uplist. We feel comfortable telling the street that we will probably be filing wait fourth quarter in uplist application and we’ll certainly keep everyone updated on the progress of it. Well, we want to thank, everyone, for their time this afternoon and we appreciate everyone’s support, and thank you and enjoy the day. Thank you.

[Michael Salaman:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. We thank you for participating, and we ask that your please disconnect your lines.