GrowGeneration Corp. (OTCQX:GRWG) Q3 2018 Earnings Conference Call November 9, 2018 4:00 PM ET
Michael Salaman - President and Co-Founder
Darren Lampert - CEO and Co-Founder
Monty Lamirato - CFO
Good afternoon. My name is Leone, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrowGeneration Corp. Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks [Technical Difficulty].
Right now, I'd like to turn the conference over to your host, Mr. Michael Salaman, President. Please go ahead, Mr. 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 the GrowGeneration Corp. third quarter 2018 earnings conference call. After our remarks, we will answer a few questions that have been submitted via our email.
I'm going to read our forward-looking statements. This earnings call may include predictions, estimates or other information that might be considered forward-looking within the meaning of applicable securities 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 cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this call.
Please keep in mind that we are not obligating ourselves to revise or publicly release results of any revisions to these forward-looking statements in light of the new information of 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 contemplated in any forward-looking statements made by us herein are often discussed in filings we make with the United States Securities and Exchange Commission available at www.sec.gov and on our website at www.growgeneration.com.
This week's voting reinforced our country's support for legalized cannabis. With recreational legalization passing in Michigan and medical passing in Missouri and Utah, the U.S. legal landscape now stands at 10 recreational legal states and 33 medical legal states. GrowGen's market advantage is that we can open or acquire a new store location in less than 90 days. Our strategy is to anticipate this law is changing and be first to market like we executed in Las Vegas and Oklahoma this year, opening locations the same week legalization passed.
With three active stores today in Michigan, GrowGen is well positioned to serve the thousands of new license holders who will be granted a cultivation license. Michigan's cultivation rules allowed for micro-cultivation licensing as well as home-growing where households can grow up to 14 plants. Missouri and Utah as medical legal states have set the framework in place to begin issuing licenses for both dispensing and cultivation. Missouri were allowed for up to 24 dispensaries per congressional district, issuing around a 192 licenses. Both Utah and Missouri will allow for home-growing.
What this all means for GrowGeneration is continued and future growth in states that are legalizing cannabis. We continue to monitor and set in place our plan and strategies to open or acquire a new store location in these legal states today and in the future as our country and the will of the people seek national legalization.
I will now turn the call over to our CEO and Co-Founder, Darren Lampert who will present our third quarter results. Darren?
Thank you, Michael. Good afternoon, and welcome to our third quarter 2018 earnings call. I'd like to start by apologizing for the timing of this call. We know it's Friday afternoon and certainly it wasn't our desire to have the call on a Friday afternoon. Next week is MJ Biz; majority of our staff will be out there presenting GrowGeneration and meeting with customers for the 2019 season.
We'd like to begin our call by thanking our shareholders, management and employees for their continued support and belief in the mission Michael and I set forth almost five years ago to build the largest national chain of hydroponic stores in the U.S. Today GrowGeneration owns and operates a chain of 18 retail hydroponic gardening stores with 5 stores located in the State of Colorado, 6 stores in the State of California, 3 stores in the State of Michigan, 1 store in the State of Nevada, 1 store in the State of Washington, 1 store in the State of Oklahoma, and 1 store in the State of Rhode Island and an online e-commerce store HeavyGardens.com.
Today our 18 facilities operate in seven states around the USA. In 2018, we acquired $25 million of store revenue and we continue to achieve our growth goals 100% year-over-year. We continue to project similar growth rates in 2019. For the markets that have been soft for this company, Colorado, Northern California, Las Vegas and Washington in 2018, we firmly believe these markets will begin to show growth again in 2019 as more consolidation occurs in both the cultivation arena and hydroponic equipment sales space.
Our operations today span over 100,000 square feet of retail and warehouse space. We employed today 75 agronomists and horticulturists that we have brand and growth for us. In addition to our store operations, GrowGeneration also operates five divisions. These wholly-owned divisions are GrowGeneration Canada, GrowGeneration Commercial, GrowGeneration Hemp, GrowGeneration Distribution and our newly purchased e-commerce superstore, HeavyGardens.com.
GrowGeneration Commercial is operated as a standalone entity to sell directly into the commercial markets. These sales calls include new build-outs, large capital projects and the management of multiple cultivation facilities by the multi-state operators.
HeavyGardens.com powered by GrowGeneration is the company's recent acquisition of an 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 having our customers ordering online and picking up at one of our store locations. We were executing a digital marketing campaign to further grow our brand presence.
GrowGeneration Canada was formed to mirror our U.S. operations with strategies to acquire hydroponic operations in Canada. We plan to have three locations in Canada, one in British Colombia, one in Quebec and one in Ontario operating in 2019.
GrowGeneration Hemp Corp. is developing a supply chain to [ph] outfit all the nation's hemp farms with equipment and supplies. Today there is over 26,000 acres of active hemp farming. As more of these hemp farms become operational and the demand for CBD isolate biomass source, the increase in hemp farming will be a high growth sales channel for the company.
Lastly, GrowGeneration Distribution Corp is sourcing and developing new and innovative agricultural products as well as developing private label and exclusive products to drive margins and introduce the commercial growers to the latest and new technologies to increase yields and the quality of their plants.
Third quarter 2018 was another great quarter of growth for GrowGeneration with revenues growing over 100% quarter-over-quarter. Our management team's focus on profitability was clearly demonstrated with our operating cost being reduced by 16% in the quarter. We have invested in building strong and scalable supply chain infrastructure to scale the business into 2019 and 2020.
Our balance sheet with assets totaling $36 million, $14 million in cash, well positions the company to continue to execute its acquisition plan and begin the process to uplift the company to a larger exchange. As reported, we are forecasting a revenue run-rate of approximately $42 million coming out of 2018 and $10 million for the fourth quarter of 2018.
Our third quarter 2018 financial highlights. Revenue of $8.4 million, up a 109% compared to revenue of $4 million for the third quarter of 2017. Store operating cost as a percentage of revenue have declined 16% from 19.9% for the third quarter 2017 to 16.8% for the third quarter of 2018. Year-to-date revenue of $20 million, up 86% compared to year-to-date revenue of $10.7 million for 2017. Year-to-date store operating cost as a percentage of revenue have declined from 19.6% for the nine months ended September 30, 2017 to 17.3% for the nine months ended September 30, 2018.
Adjusted EBITDA loss of $71,000 for the third quarter of 2018 compared to an EBITDA loss of $191,000 for the third quarter of 2017. The company has $14.3 million in cash and cash equivalents at September 30, 2017, 2017 -- 2018, I'm sorry.
As of September 30, 2018, the company had total assets of $36.2 million compared to total assets of $9.2 million at December 31, 2017. As of September 30, 2018, the company had working capital of $23.1 million compared to working capital of $5.6 million at December 31, 2017.
The company raised approximately $12.5 million in equity capital through the issuance of common stock and the exercise of warrants and $9 million in convertible debt financing for the nine months period ended September 30, 2018. The company acquired Santa Rosa Hydro on July 12. The company acquired HeavyGardens on September 14. The company opened GrowGeneration Oklahoma, October 1. The company formed GrowGeneration Canada Corp. The company formed GrowGeneration Hemp Corp. As everyone can see, it was a pretty active third quarter and an extremely active 2018 to-date.
I now would like to turn the conference call over to our CFO, Monty Lamirato who will go over our financial results for the third quarter. Thank you.
Thanks Darren. Third quarter financial results; net revenue for the three months ended September 30, 2018 increased by approximately $4.4 million or a 109% to approximately $8.4 million compared to the $4 million for the three months ended September 30, 2017. The increase in revenues in 2018 was primarily due to the addition of eight new stores opened or acquired after September 30, 2017 and the new e-commerce site acquired in mid-September of 2018. The eight new stores and the e-commerce site contributed $4.9 million in revenue for the quarter ended September 30, 2018.
The company continues to focus on the seven markets and the new e-commerce site noted below and as further discussed below and the growth opportunities that exist in each market. We are also focusing on new store acquisitions, proprietary products and now developing our online in Amazon sales, which we expect to contribute more to sales in the fourth quarter of 2018.
Sales in the company's products -- sales of the company's products in the Colorado market declined slightly 1% by $17,249 comparing the quarter ended September 30, 2018 to September 30, 2017 is primarily due to the consolidation of stores 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 new stores through acquisitions, offset by decline in revenues in our Santa Rosa store of approximately $281,000. The California market experienced slower growth and 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 had sales increased by 148% or $200,000 comparing the quarter ended September 30 to the quarter ended September 30, 2017. We attribute this gain in the Southern California through the issuances of license in the Riverside County. With the recent acquisition of Santa Rosa Hydro in July of 2018, one of the country's largest hydroponic stores, the company projects to add an incremental $8 million in sales in the Santa Rosa market.
The recognition of revenue in the Rhode Island and Michigan markets are the results of 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 grow -- will be growth markets in the fourth quarter of 2018 and beyond.
Although revenues in the Nevada market had a slight decline only 22,000 comparing the quarter ended September 30, 2018 to the quarter ended September 2017. The decline in revenue was largely attributable to one-time sales to a commercial customer during the quarter ended September 30, 2017 related to this customer's initial build out of their commercial grow facility.
Sales in the Washington market had a slight decrease in revenues of approximately $14,000 comparing the quarter ended September 30, 2018 to the quarter ended September 30, 2017.
The company had the same 9 stores opened the entire three months ended September 30, 2018 and 2017; 5 in Colorado, 2 in California, 1 in Nevada and 1 in Washington. These same store sales generated $3.3 million in sales for the three months December 31, 2018 compared to $3.4 million in sales for the same period ended September 30, 2017, a slight decrease of 4%.
With regards to the 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 1% primarily due to the loss of customers where 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 stores that were closed and consolidated into another store location.
Revenue in the California market declined $81,000 or 10%, primarily due to the remnants of the large fires in the Santa Rosa area in 2017, which closed our store for 17 days in October due to mandatory evacuations. 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. The Washington market has a slight decline of revenues as previously noted of $14,000 or 6%. With regard to the Nevada market, the decline of revenue of $22,000 or 4% once again was attributable to one-time sales to commercial customers with regard to their initial build-out.
Let's talk a little bit about cost of goods sold. Cost of goods sold for the three months ended September 30, 2018 increased approximately $3.3 million or a 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 2017. The increase in cost of goods sold is directly attributable to the increase in the number of stores and the revenue as discussed previously.
Gross profit was approximately $2.2 million for the three months ended September 30, 2018 compared to $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 gross profit percentage is due to one, the increase in sales to commercial customers that have lower margins than retail customers. And two, the higher cost of inventory for acquired companies.
As we acquire companies, the cost of their inventory recorded at fair market value has had initial higher cost than pre-acquisition inventory values. As the purchased inventories being sold since it had a higher cost basis, margins are lower. Once the acquired inventory is sold through which takes approximately three months, the cost basis of the inventory replaced is at a lower cost basis, which will be realized in future periods as higher gross margins.
Commercial customers make up a majority of our revenue 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 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%.
Once again, the increase in store operating costs was directly attributable to the 109% increase in sales from the addition of the eight new locations that were acquired in 2018 that were not opened for any portion of the three months ended September 30, 2017 and our new e-commerce site that was acquired in mid-September 2018. Our Colorado store opened in Q4 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 percentage of revenue are affected in certain markets by seasonality. The second and third quarters are generally higher revenue months to peak outgrowing, outdoor growing seasons during these months. Store operating costs were positively impacted by the acquisitions of new stores in 2018, which have a lower percentage of operating costs of revenue due to their larger size and higher volume. The net impact as noted above -- as previously noted, 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 comprised of general and administrative costs, share-based compensation, depreciation and amortization and corporate salaries 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 primarily due 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 acquisition and those functions are absorbed into our existing centralized purchasing accounting and finance department, thus delivering additional 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 promotion, travel and 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 the majority of the increase related to advertising, promotion, travel, entertainment and legal fees. In the third quarter of 2018, we incurred legal fees and audit fees related two acquisitions. These types of costs were not incurred during the quarter ended September 30, 2017.
General and administrative costs as a percentage of revenues 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, primarily consisting of depreciation, amortization 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.
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 is primarily due to one, the increase in the amortization of debt discount, share-based compensation and depreciation of $451,813, all of which are non-cash expenses. And two, the increase in other corporate overhead of $323,831. These costs are offset by approximately $427,000 increase in net margin contribution in 2018 after deducting store operating costs.
Adjusted EBITDA for the quarter-ended September 30, 2018 was a negative $71,584 compared to adjusted EBITDA of $191,497 for the quarter ended September 30, 2017.
As previously noted by Darren, as of September 30, we had total assets of $36 million compared to $9 million as of December 31, 2017. Working capital, we had approximately $23,100 at September 30, 2018 compared to working capital of $5.6 million at December 31, 2017, an increase of approximately $17.5 million. The increase in working capital from December 31, 2017 to June 30, 2018 was due primarily due to the receipt of proceeds from an equity private placement offering of $10 million, convertible debt offering of $9 million and the proceeds from the exercise of warrants and options of $2.5 million.
At September 30, 2018, as previously mentioned by Darren, we had cash and cash equivalents of $14.3 million. The date of this filing we believe that the existing cash and cash equivalents are sufficient to fund existing operations for the next 12 months.
Thank you, Monty. I certainly got the easier part of that presentation. In conclusion, GrowGeneration's business model is working. Just like other industries, consolidation occurs when hypo growth in industry happens. This is exactly what is happening in the hydroponic equipment space, stores are consolidating or closing and the amount of cultivation for CBD and cannabis is exploding.
GrowGen has perfected the acquisition and new store opening model, reaching a tipping point of scale and nationalization. In 2019, we see continued triple digit sales growth, margins expanding through strategies where it's sitting in place today and profitability. Our future is bright and we look forward to sharing our successes with our shareholders, our management team and partners.
Now we will answer a few questions.
A - Michael Salaman
Thank you, Darren. A couple of questions that have been submitted via our email. First question. Discuss the new corporations have reformed this year, their relevancy and impact on the overall business. I'll take that one.
Basically the divisions that we created this year were created for the sole purpose of driving growth and leveraging the infrastructure that we built in the seven states and the 19 locations.
Looking at each division individually, we have a commercial division with very sophisticated and talented outside sales people that are calling on the large commercial customers to gain the build-outs. And as these new states have legalized, there is a tremendous windfall that the company sees in terms of obtaining and winning that business. Our e-commerce site was bought for a strategic reason to not only drive incremental revenue, but also to be a marketing platform at the local store level to create an omni-channel approach so our customers can touch us online and offline.
The hemp business, we certainly understand what's happening there. With the upcoming, we believe and I believe everyone, the consensus is that the Farm Act will pass in the near future. It's going to provide just the farmers they cash crop that we think is going to expand the active right now of 26,000 acres, dramatically increasing the amount of activity in terms of cultivation.
Our distribution business has been set to develop both internally as well as looking into the markets to identify the newest and latest technologies in agricultural products that will make an impact for the cultivators in terms of increasing yields and lowering the cost for production.
And lastly, our GrowGeneration Canada Corp, which we formed as a Canadian operation, which is a wholly-owned division of GrowGeneration was formed to mirror exactly the approach, the acquisition approach as Canada has as we all know recently nationalized. We see tremendous growth in that market. And as reported recently in the news, there is actually a supply shortage up there.
So, certainly our position in supplying growers' equipment and mirroring the operations and the strategies that we perfected in the U.S. will be very valuable as we look at acquisition and opportunities in the Canadian market.
Second question. Discuss your guidance for the rest of 2018 and your guidance going forward into 2019? Darren, you want to take that?
Sure. I'll do it. 2018 has been a tremendous growth year for the company as we continue to execute our national expansion plans. The acquisitions that were made in 2018 closed at various times in the year. And in 2019, we will have the benefit of a full year of revenue under the GrowGen umbrella from these acquisitions.
Combining these acquisitions along with our 2019 pipeline of acquisitions, should provide 100% plus year-over-year growth we have seen in 2018. This coupled with our online strategy and new commercial business that we are winning, will make 2019 a transformational and profitable year for GrowGeneration.
Perfect. Last question and we're hearing this from many different investors and certainly shareholders. They want to understand the company's strategy relative to as its build, its business and scaled its business, what is the company's strategy to uplist the company to a larger stock market exchange from the current OTCQX. You want to take that?
Yes. We are currently working on an application to uplift. We intend to file the application within the next 90 days. We at GrowGeneration are very cognizant of the limitation on trading of a [ph] golden board stock and have made an uplist to a national exchange a financial priority for 2019.
That concludes our third quarter conference call. We truly appreciate the support and interest from both our shareholders our management and the investment community. Thank you very much. And everyone have a great afternoon.
Ladies and gentlemen this concludes your conference call today. We thank you for listening. And have a great weekend.