Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to GrowGeneration Corp Fourth Quarter and Full Year 2021 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for analyst questions. [Operator instructions] This conference is being recorded today, March 1, 2022, and the earnings press release accompanying this conference call was issued after market close today. I will now turn the conference over to Clay Crumbliss. Please go ahead.

Thank you and welcome to the GrowGeneration's fourth quarter and full year 2021 earnings results conference call. Today's call is being recorded. With us today are Mr. Darren Lampert, Co-Founder and Chief Executive Officer; and Jeff Lasher, Chief Financial Officer of GrowGeneration Corp. Everyone should have access to the company's fourth quarter earnings press release issued after the market close today. This information is available on the Investor Relations section of GrowGeneration's website, ir.growgeneration.com. Certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking state statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filing as well as the earnings press release providing reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. And now, I will turn the call over to Darren Lampert, Co-Founder and CEO. Darren?

Thank you, Clay. Good afternoon. I'd like to start by thanking each one of our employees and customers for their continued support and dedication to the GrowGen vision and plan. We had an outstanding 2021 as a company. We added 24 new locations and now have 63 locations across 13 states, which includes our latest store in Ardmore, Oklahoma. I would like to begin with sharing some of my views of the hydroponic industry prior to discussing 2021 fourth quarter and full year results. 2021 started off with tremendous strength with the expectation of federal cannabis legalization after the democratic sweep in the November elections. In addition, five new states unanimously voted to pass new cannabis laws and the term green sweep began circulating around the country. As 2021 unfolded federal legalization became less clear and cannabis legalization became a bargaining tool that pushed investors and the commercial industry to the sidelines on further investments. Additionally, during the third quarter of 2021, we saw a supply/demand imbalance in California and other Western states with a tremendous oversupply of outdoor cannabis, which was produced during the summer months. The oversupply put pressure on cannabis pricing and caused many cultivators to either shutdown their facilities or scale back on their production and expansion plans. As a result of these events, we have seen a slowdown in LED lighting and CapEx projects coming out of the third quarter 2021 into 2022. In addition, there has been a slowness to build in new legalized states as cultivators wait for the rollout of rules and regulations, which are behind schedule. We are hopeful that some of these issues will start to stabilize by the second half of 2022, but we are planning for a challenging sales environment in 2022. It should be noted that industry…

Thank you, Darren. Let me start by building on what Darren discussed regarding our initiatives. Then I will address our fourth quarter results and what our business will look like in 2022. As previously discussed, we have five strategic initiatives in 2022 and have already made progress against each of them. Our first initiative in 2022 is our investment in greenfield locations, we have signed seven indications of interest and are on track to open 15 to 20 new stores in 2022. The signed locations include a recently opened store in Ardmore, Oklahoma, a location in Jackson, Mississippi, and five other locations. These new store locations will range from five to 15,000 square feet of retail space, along with outdoor facilities to serve bulk sales. The capital investment will be about $2 million per location, including inventory needs. These locations will be in emerging states, such as New Jersey, New York, Virginia, and Illinois. Second, our investment in new store locations in 2022 will be combined with an investment in technology to improve the operational metrics in the stores. Our new integrated system is being tested and final development activities are in place to support a launch this spring. Our retail technology stack will now be in line with best-in-class retailers with improved backend processes, coupled with point of sale, order management, and warehouse management systems integrated by Manhattan Associates. The benefits will include better customer service, better internal controls and labor efficiencies. Third, retail locations will be fed with inventory from a network of distribution centers less than a day away from the sites they serve. And these centers will also provide the vast majority of e-commerce customers with a shorter delivery window. This will allow us to consolidate inventory, improve procurement cost and be more customer focused. Progress…

Thank you, Jeff. As we continue to navigate through the headwinds of the hydroponic industry, we are starting to see signs that the market could rebound later in 2022, once such sign is that Mississippi, an open cultivation license market to provide us with opportunities to hundreds of new license holders in the second half of the year. As such, GrowGen plans to have its Jackson location operational in Q2. We are also seeing increased momentum in New York, New Jersey, Virginia and Illinois for adult use licensing and finalization of the respective rules and regulations. We will be focusing much of our new store growth in those markets. Our strategic acquisition of HRG accelerates our expansion of proprietary distributed brands outside of our own retail location into over 750 independent locations. Mobile Media strengthens our position to gain more indoor vertical cultivation projects with their leading benching and racking systems. Our future success revolves around execution efforts in new stores, technology, distribution centers, product offering, enhancing the e-commerce user experience. We believe we have the best team in the industry to deliver that execution. I will now turn over the call for questions.

Thank you. [Operator Instructions] And we’ll take our first question from Chris Carey with Wells Fargo Securities. Please go ahead.

Hi everyone.

Good afternoon, Chris.

Hi, Chris.

Thank you for the question. So, just to start can you maybe just go through why building 15 to 20 stores, given the market uncertainty or having those new stores coming in, given the market uncertainty is the right decision versus maybe just hunkering down and letting the market stabilize? And then, connected to that, just on the guidance and the cadence that you’re implying for the year, can you maybe just review your expectations for same-store sales in the first half relative to the back half conscious of your total company sales that you’re expecting with the same-store sales would also be helpful.

Chris, that’s a handful. I’m going to start it off and I’ll send it over to Jeff. Our decision to greenfield new stores and new locations is based upon licensing. Our original plan, as you probably know was the green – was to purchase best of breed stores in mature states where we were able to compete, states that have been either recreation or medically legal for some time with every favorable growing loss. What we’re starting to see right now is a push towards legalization back east with pretty broad licensing. So we’re seeing a push in New York, New Jersey, Virginia, Missouri. And when we look towards the landscape within these new states coming on board, there are no stores that fit the GrowGen’s criteria. We’ve been quite successful in greenfielding stores in new state as we’ve done in Oklahoma, we’ve recently done in California, we did in Brewer, Maine and we’ve done in Colorado. So when we look at the return on invested capital, we’re starting to see a push towards greenfield in new locations, building them to our criteria, which meets our future growth with our distribution centers opening around the country, our stores will be a little smaller and we’ll be able to service customers with solutions to grow within all these new emerging states around the country. I’m going to send the rest of this question over to Jeff.

Yes. Chris, when we look at our guidance for the calendar year and what’s incorporated into that guidance, we see the market – and what’s incorporated in the guidance is that due to the decrease in our commercial CapEx sales to customers that are operating Grow facilities, the difficult same-store sales comps from last year that we’re not going to comp in 2022 and lower than originally projected sales and some of our acquisitions and new stores specifically in the California market. In the back half of the year, we do expect some growth and we do see some incremental growth in our proprietary brands that that are focused on the consumable side of the business and add tremendous value to grow operations customers. Full year comps, we’re projecting to be down about 5% to 10% on a same-store sales basis with significant degradation in Q1. Right now we’re forecasting about 35% drop in same-store sales for the fourth – for the first quarter based on the start of the year. Our most difficult period of comps was in the first quarter, specifically in the first couple months. Breaking down 2021 to 2022 revenue though, the comp store revenue of about $350 million from stores and $36 million from e-commerce, we still expect total revenue in those retail businesses to be down about 5% to 10% as I mentioned. But we’ll see incremental revenue from investment activities, including the new garden centers that Darren talked about and the proprietary brands that will generate accretive revenue and we expect positive growth from our proprietary brands in 2022.

Thank you so much for that. If I could just have just one follow-up here. When you’re looking at the market moving out to east, can you maybe just touch on how your business model might evolve from maybe more of a retail driven consumer out west versus maybe more of a B2B type consumer out east or whether that’s relevant factor? Thanks so much.

Yes. Chris, I think when you take a look at the 63 garden centers, we have currently, our garden centers are our B2B and also B2C. So our garden centers are set up for both currently and we will be building the garden center similarly. So if you went down to Oklahoma and saw the four centers that we built, and also if you see the 120,000 square feet we just put online in Southern California, the stores are set up for both. They’re B2B and B2C. And again, they at – they’re able to service growers of all types from the largest MSOs in the country to the single light growers, to the single grower growing the plant outdoors.

Okay. Thanks so much.

Thank you. We’ll now take our next question from Andrew Carter with Stifel.

Thanks. Good afternoon or evening, whatever time – whatever you are. I wanted to ask is first off, just kind of a housekeeping question. You’ve delayed the 10-K filing. Are there any kind of potential restrictions around ability to issue equity or anything like that? If you don’t meet a certain deadline, I think is it the end of this month? Just a real quick one on that.

Andrew – no, Andrew, we have until March 15 on the extension and we don’t see it. At this point, we don’t anticipate any problems meeting that deadline.

Okay, great. Second question, I guess, I would ask and kind of gets into Chris’s question, I guess, with the 15 to 20 stores, you’re planning this year and that could be anywhere from $15 million to $40 million in the revenue guide. I mean, how much flexibility is that? And how much of that is tied in to kind of the new state openings? I know that last year it was slower to get, I mean, Ardmore is going in, in January. I think there were four next year. How can you get those out faster next year? And are you watching anything to just not open ahead of the markets?

Yes. Jeff, you want to take that?

Sure. Yes. We – as we look out into this calendar year, we have plans already in the course of events to start the process of building locations in and around markets that are emerging. So, when we look out right now, like you mentioned Ardmore, Oklahoma opened in January. We have a relocation in Auburn, Maine that’s taking place in February or did take place in February. We have Jackson, Mississippi that we’ll open in the first half of 2022. We’re going to relocate our Redding location. So those four are pretty much locked in and happening as we speak. And then, as we look out into the summertime, we’ve got locations in Virginia, Illinois, Missouri, Connecticut lined up and indications of interest to locations in specific cities in those marketplaces. Further investigations are going on and other markets specifically in New York, which will be later in the calendar year. And then we also have additional opportunities that are presenting themselves in New Jersey. So, we’re actively looking for smaller footprint locations in that 8,000 to 15,000 square feet of retail selling space. They’ll have some soil yards in the back. They’ll be serviced from a distribution on more of a two step basis, which will be more efficient for us and will allow us to operate those additional locations with lower inventory. So the models will look a little bit different on the East Coast as we get over there. As you know that the cost of real estate on the East Coast is more than what we see in Oklahoma and Southern Colorado and places that we’ve historically been and we’ve been able to get larger facilities. Here on the East Coast, we’ll have more reasonably sized locations and they’ll be serviced within a one day service range from our distribution center that we’re building that we’ll launch in the second half.

Andrew, just so you understand, as a matter of size. We’ve built over 250,000 square feet of space last year and we expect to do the same this year. Just more locations, smaller space, but pretty much in course with what we built last year in 2021.

That’s helpful. I’ll pass it on.

Thank you. We’ll take our next question from Brian Nagel with Oppenheimer.

Good evening, guys. So the first question I have just with regard to the sector, the sector of macro pressures. And Darren, you spent a lot of time here talking about this. So I heard you say at the end of your prepared comments, you talked about maybe some of the improvements you’re seeing in the legalization front, in the Eastern part of the United States. Is there anything – as you look to the West Coast and these oversupply issues, are you starting to see any signals there that those issues are beginning to correct?

The one thing that we have seen recently, we have certainly seen stabilization of cannabis pricing out west. We've also seen an increase in pricing recently, so – which is always a – which is always favorable. We saw similar issues back in 2018 that we're seeing right now out west. California is the largest, the largest market in the country, probably the largest in the world. And we have tremendous confidence in the California market. We have recently built greenfield at two large locations in California that are up and running and ramping nicely. So we're quite confident in our California locations, both So-Cal and also in North Cal. And we believe that everything goes through California and the California markets, , as you've seen before, will rebound. And we are quite confident with our locations in California. We're starting to go out of the – we're starting to move out of a seasonable slow time of year-end California going into the spring time. So we're usually seeing a tremendous rebound in our California stores and our stores out west coming green are going into March and April. So, we'll know a lot more on our first quarter call, which is in the beginning of May really how March and April shaped up in California to see if there is a revamp.

That's helpful. And the second question I have just with respect to the guidance. And so if you look at with the initial 2022 sales guidance, you kind of suggest, I mean, given what you reported for 2021, you're kind of toggling flat. I mean, I guess, it's better than flat, but kind of flattish. So the question I have is we talked a lot about just given the cadence of acquisitions made in 2021 that the underlying revenue run rate that you would be exiting 2021 whether it would be higher than reported revenues. So as you look at that guidance, is this a function of now you take into consideration these industry headwinds and forecasting? Or are you actually starting to reevaluate the potential, the underlying potential, maybe even structural potential for some of these acquisitions that were made in 2021?

So I'll unpack that for you as far as the guidance for 2022, and as I mentioned with Chris' question earlier, we are anticipating a same-store sales decline in Q1 and then full year same-store sales decline, which obviously pressures the run rate because the run rate assumed a comparable performance on a year-over-year basis. Some of the acquisitions that we bought on the west coast earlier in 2021 are also disappointing in their sales volume going into 2022, so our vision of those units are challenged. This is still a relatively immature marketplace with a lot of uncertainties in the actual in state run rates for these locations. And we do anticipate a longer term recovery, as Darren was talking about, but just for projection purposes in 2022 that feed into our inventory demand structure we are taking a conservative position, so that we make sure that we are generating cash for the organization and maintaining a strong balance sheet throughout 2022.

Okay. Thank you very much.

Thank you. We'll now take our next question from Aaron Grey with Alliance Global Partners.

Hi, good evening, and thank you for the questions. So, first question for me, going back to California 30 – 23 stores today, 30% of revenue, Darren, you talk back to 2018 a little bit. And just thinking back to Colorado, right, you guys – 2016 had 10 stores, and then you had some similar dynamics in terms of pricing pressure consolidation there, and then you cut down your stores to five by the end of 2018. So just with the 23 stores in California today, I know you said you're happy with the footprint now, but if you then start to see that rebound in March or April that you mentioned, at what point do you think that maybe if this cultivation doesn't come back or do you see some consolidation so there might not be the need for that many stores in the state that you kind of look back and see what type of footprint you might need there.

Aaron, when I look at our California footprint, it runs North – it goes from Northern California to Southern California. San Diego, LA up towards Orange County, when you go look down in Northern California, it runs right up the coast. So, we go from Humboldt, straight down into Santa Rosa. So we're pretty happy with the locations of our stores. Is there a possibility that we can close a store or two? There is always that possibility, but the majority of our stores are making money and functioning well. When you look out at the market right now, it always gives me tremendous confidence. If you're looking at a cannabis market right now, that's anywhere from $20 billion to $25 billion, and you're still seeing forecasts even today of $100 billion by 2030. So you're looking at compounded annual growth rates of 20% straight out through this decade. And most people will tell you that if the underlying crop is going to grow at that rate, that the hydroponic industry will grow with it. And we are the leader in the industry. So we have tremendous confidence if these growth rates in the plant touching side of it, it's going to continue to grow, we'll grow with it. We were a $30 million company coming out of 2018. We did $422 million in revenue three years later, and we did it quite profitably. So, we are quite comfortable where we are right now. We've made it through some really difficult times, 2021. We grew over 100% during extremely difficult times with supply chain. We built our private label brands from 1.5% up to 8%. We've doubled revenue in our stores. We had same-store sales growth of 24% coming off 63% the year before and 37% the year before. So it was a little lumpy of the year and we have seen the slowdown and we continue to see that slowdown, but our forecasts are based upon – we haven't seen a turn yet. Our forecasts are based that a turn isn't coming. And we do believe the turn comes in the second half, but as of now we're extremely guarded and we'll continue to be until we get confirmation of that turnout west.

Thanks for that color. Second question for me on private label initiative, just given the pricing pressure that you're seeing overall in the market. I want to know if that might offer some opportunity for you guys, especially as some of your buyers get more price conscious and you guys offer that lower price private label offering. So just want to know if you're seeing of that in the marketplace and what opportunity you might have there going forward in 2022. Thank you.

We built private label from 1.5% to 8% this year and forecasting going higher next year. We continue to bring out best of breed products into the market. We just added MMI to the suite on the benching side of it. Our lighting is selling well. Charcoir and Power Si, we had a wonderful year. We're starting to see a tremendous pickup on our truckload brands right now. And we are offering our customers best of breed products with better pricing. And we do believe that it is working and will continue to work within our stores.

All right. Great. Thanks for color. I'll jump back into the queue.

Thank you. We will now take our next question from Glenn Mattson with Ladenburg Thalmann.

Hi. I guess you talked about adjusted EBITDA about in line with operating cash flow for the year and then CapEx maybe resulting in some sort of free cash flow that's about breakeven plus or minus, I think maybe correct me if I'm wrong there, but just with that outlook and with the uncertainty in general and the backdrop, just curious about how you feel with the cash position as it relates to your appetite for acquisitions and what level of cash do you think the company needs to maintain just on the balance sheet as a core position?

Sure. I'll walk through some of the – yes, ins and outs there on that, just to make sure we have clarity and then I'll have Darren give you some color on the industry. So when you look at the – just like you mentioned, we're anticipating adjusted EBITDA in that $30 million or $35 million range for 2022. We anticipate that our cash from operations on our cash flow statement will be about the same as our generated EBITDA as we manage our working capital and our balance sheet requirements to run the stores. We'll then take that cash and reinvest it back into the company both with the new stores that we'll be opening the 15 to 20 stores that will consume round about $20 million, and then we'll have about $10 million associated with acquisitions and technology expenditures. So the total investments into the business will be roundabout that $30 million to consume the cash that we generate. And we'll be roundabout the same cash position according to our plans at the end of the year if things go the way we project them to go. I would mention that on a quarterly basis, there's going to be some ups and downs however. For example, we acquired HRG this quarter and the cash necessary for that business will burden this quarter plus the revenue in this quarter will be the smallest revenue for the four quarters as we project it right now. So the cash will be at a low point in March 31. And then we'll build back up in the three quarters that we have left of the calendar year. As far as spending on acquisitions, what we've said on the call is as well as our prior call, we are focused on new stores, new greenfield locations to be the source of growth from a square feet under our we retail umbrella. That said, if there was a great acquisition, we would certainly entertain it, but we would want to have a positive return on invested capital right away. And right now, we think the better use of our capital as a company is to invest in new stores rather than to a try to acquire locations in emerging states.

Is there some – is there an appetite for acquisitions on the private label side than that perhaps?

I can get to that. If there is something out there that jumps at us that we believe will be a tremendous investment for our shareholders, we're open to it, but as of now, there's nothing on our plate when it comes to the product site. So like anything else, if it's there, we would certainly take a hard look at it. But right now, there's nothing in the hard book.

Okay, great. Thanks.

Thank you. [Operator Instructions] We'll take our next question from Eric Des Lauriers with Craig-Hallum Capital Group.

Great. Thanks for taking my question. So you guys have been kind of highlighting the difference in your sort of durable goods versus consumable goods. I guess, things like lighting in HVAC versus nutrients, et cetera. Could you just give us a sense of the overall difference in margin profile for those two product categories here?

Yes. I'll take a stab at that. And then Darren could talk about the trends that we're seeing in the marketplace around our durables versus consumables. But I think when we look at our gross margins for consumables, they are in general, higher than our margins for the durables specifically associated with lighting and other capital needs for operations that you need to stand up and grow facility. The consumables market is also where we focused our proprietary brands which also helps us on the gross margin side. We have a pretty good lineup of products from a proprietary brands perspective, as well as the distribution brands that we represent. So we're pretty excited about where that's going and the opportunity that we have on the consumable side to make up some of the ground from the capital – the shortage of capital equipment that's being bought in the marketplace.

Eric, I think there's been no secret that we and the rest of the hydroponic industry has seen us slow down in CapEx projects which is really lighting and then HVAC and benching and similar products. But we are quite confident with some of these emerging markets coming on board, New Mexico, Missouri, New Jersey, Mississippi, New York. And we do believe the CapEx projects will be begin to gain momentum as we continue to develop commercial relationships in other markets. So we're quite confident that you will see a tremendous amount of building, starting in the second half of this year, if not sooner. And we do believe that we'll get certainly our fair portion of these large build outs. So we are pretty upbeat, but as you know, until these deals start coming into the house, we are guarded until we start seeing them come into house.

Yes. I think that definitely makes sense and appreciate that color. Also appreciate all the guidance that you guys have given from a modeling perspective. If I could just kind of drill into your unit expansion, 15 to 20 greenfields this year, kind of just feels a bit aggressive to me. So maybe you could just sort of help me understand a bit more about the timeline associated with these build-outs and maybe help us sort of understand like when we might be able to tell if that 15 to 20 is sort of increasingly likely or unlikely as we get, for example, if we get Q2 results in August and you guys have five stores open by then. Does that give you enough time to open up the remaining 10 to 15 by the end of the year, just any color on that sort of timing, how long it takes you in that outlook would be very helpful. Thank you.

Yes, Eric, we've given a range of 15 to 20 and we are quite comfortable with the low end at 15, again, we are in an all out splits right now, working with some large brokerage firms. We have LOIs in place. As I said earlier, we built over 250,000 square feet space of last year. And we do believe it's certainly within the realm. And we are in March. We certainly understand where we are, within the LOI process, the lease process we've just finished up. We just finished opening Ardmore, which is a 25,000 square foot store in Ardmore, Oklahoma. We're just in the midst of finishing a couple new larger locations we're moving. We just moved into a larger location in Auburn, Maine, just, we're doing one in Redding right now. And then it's full steam ahead on new locations around the country. But as of now, we're quite comfortable with that number.

Okay. Thank you.

Thank you. I'll take our next question from Scott Fortune with ROTH Capital Partners.

Yes, good afternoon. Have a little focus back on the private label side, the initiatives going on there. I know you've had a goal to get up to 20% of revenues. Where do you see that private label mix opportunity at the storefront or online channel and are there certain categories that you're looking to get into and is that 20% mix kind of with environment is kind of a little bit – pushed out a little bit from your expectations from that standpoint?

Yes, as of now, Scott, we have not pushed out that expectation. We finished this year at about 8%. We just added MMI to our arsenal which is a benching company. We are launching a nutrient brand called drip hydro which will be launching sometime in the first quarter, if not early second quarter. So we think we're pretty much on target. We feel very comfortable with the success of our online products and really the progress that we've made. If you look this year, if you look into 2021, we built our private label from 1.5% in 2020 to 8% of sales. And we do believe in 2023, we will hit those numbers. And it will be a wider array you will see in the soil industry, in the nutrient industry, we're in the benching industry and also the lighting industry. So our private label brands span pretty much the entire gamut of the hydroponic field.

Got it. Thanks for that color. And then real quickly, just kind of on guidance a little bit, you mentioned growing e-com around on 20%, 30% where are you guys kind of initiative and the growth expectations for the e-com side with kind same-store sales kind of being a little more obviously muted for 2022 here. And where are those initiatives on the e-com side, as you brought those platforms together here?

So yes, I'm sorry. I don't recall mentioning the e-commerce growth rate. We actually anticipate a reasonable growth of e-commerce this calendar year. And we certainly look forward to that being an avenue of really strong growth once we see federal legalization around the space and our customers start to use more traditional payment methodologies. And we are anticipating that coming along in the future. And that's why we've put investments into e-commerce. This year with the lack of that federal legalization, we are planning for an increase in e-commerce, but a more reasonable growth rate on a year-over-year basis and that kind of mid single-digits number. We anticipate on the proprietary brands that we'll see about a little bit better than that mid single-digits number, approaching that 10% number for the non-retail space. And that's kind of how we see the legacy business growth rate for the calendar year. Overall, the growth in 2023 as we position ourselves with the new stores and we position ourselves with the HRG business and really invest into that business, we see the future in 2023 very strong – to be a very strong year for us.

I appreciate that color. Thanks.

Thank you. That does conclude today's question-and-answer session. It also does conclude today's conference. We do thank you all for your participation and you may now disconnect.