Please stand by. Good day everyone and welcome to GrowGeneration First Quarter 2022 Earnings Call. At this time, I'd to turn the call over to Clay Crumbliss. Please go ahead sir.

Thank you and welcome everyone to the GrowGeneration first quarter 2022 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. You should have access to the company's first quarter earnings press release issued after the market close today. This information is available on the Investor Relations section of GrowGeneration's website at 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 provides reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following prepared remarks, we will take questions from research analysts. We ask that you limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue and we'll take them as time allows. Now, I will turn the call over to our Co-Founder and CEO, Darren Lampert. Darren?

Thank you, Clay and good afternoon everyone. Thank you for joining us today to discuss our first quarter 2022 financial results and full year guidance. I will begin with a brief discussion of our challenging start to the year, which has been slower than we hope; followed by a summary of what we're currently seeing in the U.S. cannabis market. And I'll finish by reiterating our confidence in the longer term strategic vision for GrowGeneration, highlighting some positive developments in the quarter against that strategy. I will then turn the call over to our CFO, Jeff Lasher, who will take you through the details for our first quarter results and our updated full year 2022 guidance. I'd like to start by thanking each one of our employees across our corporate center and 63 retail locations through a continued support of GrowGen and your dedication to our vision and strategic plan. While 2022 is off to a slower start than any of us would prefer, we remain confident in the longer term opportunity that exists within the hydroponic industry. We entered the quarter with excess inventory, and we didn't anticipate that demand for hydroponics would remain as slow as it has for as long as it has. As a result, we saw fewer vendor rebates and more obsolescence in the first quarter, which consequently had a negative impact on our gross profit from a lower sales base than we originally planned. As I can tell you firsthand, this isn't the first time the industry has experienced a downturn. And as it did last time, we expect this one to will pass in the near future. In the meantime, I want to reassure you GrowGen is on solid financial footing to weather this trough in the cannabis cycle. And we are focused…

Thank you, Darren. I will address our first quarter financial results and then I will discuss our updated full year 2022 guidance today. For the first quarter, GrowGeneration generated revenue of $81.8 million versus $90 million in the first quarter of 2021, representing a decline of approximately 9% or $8.2 million. The decrease in revenue was primarily attributed to a $25.1 million decrease in same-store sales revenue in stores, and a $1 million decline in e-commerce revenue for web stores opened in both periods. This was partially offset by $11.3 million of incremental revenue from non-com stores and stores opened or acquired last year. Sales in non-retail businesses, including the acquisition and integration of HRG and MMI, increased from $2.8 million in the same period 2021 to $12.2 million in the first quarter of 2022. Our same-store sales for the first quarter was $47.7 million compared to prior year sales of $74 million, representing a 35% decline against a comparable year ago quarter. Gross profit margin was 27.1% for the first quarter, down approximately 110 basis points from the prior year, but up from Q4. The year-over-year margin decrease in the first quarter was related to unrecaptured freight expense, diluted impact of pass-through freight charges to customers at cost, inventory write-downs and discounting activities. Gross profit dollar generation in the first quarter decreased 12.8% from the prior year, including the impact of additions of acquisitions and retail stores, e-commerce and our non-retail segment. Total operating expenses in retail stores and our e-commerce segment sequentially declined from the fourth quarter of 2021. However, the addition of HRG and MMI for the quarter resulted in an overall increase in operating expenses, which totaled $14.5 million compared to $8.2 million in the first quarter of 2021. On a year-over-year basis, we added 37…

Thank you, Jeff. Briefly, before we open lines for questions, I want to reiterate that we are not satisfied with our results in the first quarter. We acted quickly in January with cost reductions to prepare to weather the industry downturn. GrowGen is on solid financial footing with a strong balance sheet, a healthy liquidity position and solid underlying cash generation. We are confident that when the cannabis cycle turns and the excess supply in the marketplace eventually normalizes, which we firmly believe it will, GrowGen will be well-positioned to recover quickly and fully. Our strategic acquisition of HRG accelerates our expansion of our proprietary and distributed brands outside of our retail locations into 750 independent locations. We are very satisfied with our results of both Charcoir and Power Si and are very excited to beginning -- to begin selling Drip Hydro, nutrient and additives. The addition of MMI strengthens our position to gain indoor vertical cultivation projects with our leading benching and racking systems, controlled environment, agriculture and sustainable ag are only in the development stage, and we believe more local communities will invest in sustainable indoor vertical farms to local production of leafy greens, tomatoes, fruits, and other food products. We've taken the actions needed to reduce our expenses and drive cash generation, while focused on our growth plan. Thank you for your time today and thank you for your interest in GrowGeneration. We'll now take your question. Operator?

Thank you. [Operator Instructions] And our first question will come from Brian Nagel with Oppenheimer.

Hi, good afternoon.

Hey, Brian.

Good afternoon.

So, the first question I want to ask, I think, I guess, is Darren, more geared for you. Just from a bigger picture perspective -- and going back to the comment -- the opening comments you made in your prepared remarks, I guess, understand better what's -- from an industry perspective, what's happening here, because if you look at it -- we started talking about these headwinds oversupply, in some cases, slower licensing, basically midway through last year. I think now we'd say they, they persist -- these headwinds have persisted, if not intensified longer and further than most us thought. I mean, what's actually happening now. And if I heard you correctly, it sound like the oversupply now it's not just a West Coast or California issue, it's into some of these other markets as well. So, I guess, maybe what's happening? Is there -- is it a purely supply issue? Are you starting to see a demand? Is there a demand issue as well? And would it make sense -- could a supply issue actually persist more than one year, or does that -- is there like a self-correcting mechanism within there?

I can start Brian. To start with, there's some certain amount of licensing in every state that GrowGen does business in. So, it was always our thesis from the start that, we were going to move from state to state. And as states became more mature, you would see a slowdown in CapEx buildouts. And that's what we've seen. And what you've seen in California, Oklahoma, Michigan, we're starting to spread into other states is the states are fully built out. And what you see every three to five years is, is refresh cycles with new lights and new control systems and new products coming to market. We were always of the opinion that when you came out of this green wave, after the 2020 election with the democratic sweep, we wrote the opinion as was everyone else that new states would come to market quicker that you'd see legalization moving much quicker, but really what you've seen is the opposite. What you've seen is more red tape, more roadblocks from our government. And what you've seen is a tremendous amount of money coming into the industry in the same states. And you saw buildouts in California, Michigan and Oklahoma, took off in that 2020 to 2021 area. You saw also a tremendous upgrade cycle from any energy inefficient lighting to LED lighting. So, we're seeing right now really is -- you're seeing the illegal markets in California are persisting. But you're also seeing states that are fully built out with excess product. And you've also seen Wall Street step back and stop fueling the building in certain of these states. And you've seen an oversupply in dropping of pricing on the cannabis side of it. So, you're seeing the perfect storm in a lot of ways. And certainly, not…

That's really helpful, Darren. And then, I guess my follow-up, more for Jeff is, you talked about you just kind -- Darren used to allude to it as well, just kind of maintaining the finances here through this difficult period. But what are the other -- what are the levers, could you pull to the extent that results track weak, or maybe even weaker? What levers could you pull or would you pull here just to help stabilize the financial side?

Yeah. So, I think, there's a few things that we still are incorporating into our guidance, and continue to work on and through the course of the year. The number one for us is cash from operations, focusing on the balance sheet strength, focusing on inventory turns and improving our overall situation. And you can see that in our inventory numbers, as we come out with the inventory numbers throughout the county year, we are focused on improving that position. We've improved it so far, this calendar year, not withstanding the investment that we made in HRG, and the ability for us to convert that to a more -- additional brands offering for them for the distribution business. We've come down fairly substantially in inventory from 12/31 to today on the legacy business when you take out MMI and HRG, and we continue to look at our turns. We continue to look at our expense structure to find opportunities, both within the labor efficiencies at the store level and at the management level and at the administrative level, but also looking for efficiencies within outside services and marketing costs, things like that. We believe that the technology investments that we've made over the course of the last year, that will lead up to the launch of our new ERP system here in a couple of months, will substantially improve our distribution efficiencies, and allow us to better understand the physicals of the business and drive for better results. So, all of those things -- we continue to make sure that the business is maturing rapidly in order to be positioned for the -- position ourselves for the customers, and be in position to grow profitably in the future.

Okay. Thanks a lot. Appreciate it.

Thanks Brian.

And our next question will come from Aaron Grey with Alliance Global Partners. Mr. Grey. your line is open for a question. Please go ahead.

Hi. Apologize, I was on mute. Hi. Thanks for the question. So, first question for me. I appreciate the call on the brighter dynamics. One of the other things you guys mentioned was, lower demand from your larger customers, just as we think about these Northeast states kind of coming online, and some of the license structures are going to be a little bit different than, Michigan, California or Oklahoma. I think there's going to be a little bit more of a reliance on some of the larger players out there. So, can you talk about some of the initiatives you have with those players, because I think you're going to have more of reliance to capture some of the growth there? Yes. There'll be able to license. I believe, the New Jersey, New York and Virginias of the world, but less so than those other three markets from now see the downturn in which drove a lot of your growth last year. So, just your initiatives with some of those larger customers and how those have kind of evolved. Thank you.

Yeah. Aaron, we have a very talented commercial team at GrowGen, that does represent many of the large cultivators around the country. They're in constant contact with them. We are rolling out new products constantly. We have an eye on 630 light right now that we believe is best to breed. We have a benching company doing vertical racking right now. So, we are, certainly, looking right now to be a one stop shop for most of these larger cultivators around the country. But we do service most of them. And we have the best solution, best service, best supply in the country. And we also have dedicated reps that spend time in the cultivation centers around the country and they do work with hand in hand with a lot of the large cultivators that do have licensing in these new states.

Okay. Great. Thank you. And appreciate that. And then, also going back to the initial question asked, so just taking a look at that three to five-year reset cycle, and if you think that holds for some of those markets like California, Michigan, as well as Oklahoma, just given -- it makes up such a large set of your revenue base, would these other states coming online, given the license structure that you're currently seeing, even if everything did go well from regulatory perspective, do you think that would be enough to kind of offset the three to five-year reset cycle in these other three markets, as these are going through the buildout cycles? That'd be it. Thank you.

One of the things, Aaron, about 65% of our sales right now are on the consumable side of it, about 35% of the non-consumable side of it. And the consumable side of it is, is products that individuals need on a daily, weekly basis. So from that side of it, we feel pretty comfortable. On the reset refresh cycles, what you're usually seeing is new products coming to market or energy efficient products, whether on the lighting side of it, the dehumidification side of it, or the control system side of it. So, it's -- right now, it's in that wait and see category. And what you're really seeing is, we're over a year, probably a year and a half into that right now. So, we certainly believe that there'll be new products rolling out, and more money coming back into the markets. We do believe there'll be enough to offset it. Non-consumable products are our lowest margin products that we do sell. While our consumable products are at a higher margin base for us. So, we do believe we're well positioned to recapture the growth as the industry comes back and continues its growth. And we do believe that we will capture large shares of new states coming on board. And as we said earlier, we're building right now in Mississippi, signing leases right now in Virginia, New Jersey and Missouri. And we do believe that you will see growth coming. What you're also seeing from GrowGen right now is private label products. We have over 400 private label SKUs, that we are selling. We're in the midst of launching Drip Hydro into the markets in the middle of -- middle or late May that we believe is going to be an extremely successful nutrient lines, line -- the early feedback has been phenomenal on the product. And we look forward to talking to Wall Street about it on our next earnings call.

All right. Great. Thanks for the comment. I'll go ahead and jump back into the queue.

Our next question will come from Andrew Carter with Stifel.

Yeah. Thanks. Good evening. So, back -- for the back nine, this is implying a $14 million to $74 million absolute increase. So, first off, a couple things just so we can get all our models squared away. Could we get the same-store base for each of the next three quarters? So, we understand that component. But second, how much M&A is in the numbers in the final nine and then also how much is going -- what's the new store branch relocation revenue. Thanks.

So, Andrew -- yeah, Andrew. So, to break down your question and in order to be clear, there -- the M&A that we've already done this calendar year, the acquisition of HRG, which is a distribution business, as well as the acquisition at the end of calendar year 2021, which is the business that we acquired in New York, the MMI business that makes benches, those businesses are incorporated into our guidance for 2022. We are not assuming any additional acquisitions in 2021 -- I'm sorry -- 2022. The acquisitions -- at this point, we believe, we -- at this point, don't have any targets that make sense to us, and we are always on the lookout for additional opportunities for us to expand our network. However, we don't have any targets inside at this point in time.

Yeah. But when…

You look at the -- no, go ahead, Andrew.

I was going to say, what I'm asking is you have a plan for the year and there's going to be incremental M&A from either the wrap -- or MMI, HRG. How much is that embedded in the final nine months? That's what I'm asking, plus the new store openings.

Yeah. So, as we disclose at the end of the calendar year, the MMI business is -- total revenue for MMI is in the low double-digit millions. And same with HRG after the conversion of that business to distributor. The business that we have for new stores, we anticipate with our reduction in new store openings and really refocusing our attention on virgin markets for us. We anticipate that 10 to 15 retail stores will add round about $5 million to $10 million, call $10 million plus or minus revenue for the calendar year, depending on the openings, but that's the way we look at it today.

Okay. Thank you. Second question I would ask is, I mean, this is the second delayed filing you've had here and I know there's been a lot of guidance revisions. You're not alone. But I guess I would ask is, is there like an issue with the systems or something another round that you need to go, or something like another row of investment, anything you can help us out with. Thanks.

So, we've already been making those investments, Andrew, and I appreciate your patience on that. We have matured as a business and we're -- we've added complexity to the business, which obviously adds time and effort and detail to the close process. I can tell you that, moving from to a large accelerated filer at the end of the calendar year, accelerated the calendar for us, fairly substantially at the end of the year, and then, a marginal impact on the quarters, we don't anticipate any further delays in filing status in the future quarters. This quarter, we just needed that extra couple days to finish up some things that we're working on in conjunction with the 2022, and the complex business combinations that we've done over the past year and a half. But we don't anticipate any further delays in future quarters, most notably with the launch of NetSuite . In the summer, we anticipate that that will dramatically improve our ability to turn over the results and get out even earlier than what we're getting out today.

Thanks. I'll pass it on.

[Operator Instructions] We now take a question from Scott Fortune with ROTH Capital.

Yeah. Good afternoon. We'll put a little focus back on California, as it related as you saw the downturn kind of in Colorado, about four years back, but kind of how you look that from a standpoint? Obviously, there's no signals from California that is, is correcting here, but remind us, how much of the sales come from California. And the –return you said was 55%, which is great, but can you put that in perspective of kind of -- are you seeing customers going out a business? Are we losing -- cultivators obviously with the tough environment in California or -- and then just kind of put that in perspective from the downturn in Colorado, you saw and you shrunk store base, do you think your store base is fine there, or maybe some more right sizing or shrink the store base in California? How do you look at those 23 California stores in this current environment?

Yeah. Scott, I'll start. There are 23 California stores are pretty spread out between Northern California and Southern California. We have certain concentration in certain areas that -- consolidation may come into play in 2023. Most of our stores in California are still profitable. And we always take -- we take a hard look from on a quarter by quarter basis. We have cut costs tremendously in the California markets. Summer season is -- summer planting is coming, so the spring season is coming and I think we'll take a harder look after we see what happens in the spring. A lot of our stores out in California -- the Northern California areas are very springtime sensor through outdoor growing. So, we still haven't gotten a tremendous handle on the outdoor season in California. So, we're still looking. Our California business is in the low-20s right now, percentage of our business. The other larger part we spoke about was the Oklahoma and Michigan markets. But right now, I think it's just too early to really discuss consolidation of some of our stores out in California.

Got it. And then maybe just to provide a little color on the private label side. I know some initiatives you're still looking at potential, the nutrient side and there, but are you seeing customers trade down in price and that kind of benefiting your private label side? How are you seeing the customers kind of -- with the inflation environment and challenges affecting them? How are you seeing the trade down or anything like that from that side of things? And obviously M&A, it has to be a great opportunity, but any opportunities for M&A on the private label side still?

I think, right now, our are private label brands are growing. A lot of them have come from in-house as we spoke earlier in the midst of launching Drip Hydro, which is a product that comes from GrowGen. Our Power Si and Charcoir products, the two brands we bought last year, which are both performing well. MMI, we purchased this year. One of the interesting purchases this year for GrowGen was HRG. HRG was the distribution company that we're selling Power Si, Charcoir for GrowGen into 750 hydroponic locations around the country. So, we will be using HRG to distribute products -- private label GrowGen products into other stores around the country. We believe best pricing and best of breed products. That'll be happening later in the second quarter. So, we'll certainly get a better handle for that going into a third quarter call. And also Drip Hydro, we will be distributing into other stores, starting in the third quarter.

That's good. Any customers -- are they trading down or how you seeing the customer react with kind of the inflation pressures going on right now?

Our pricing on some of our private label products, our Charcoir product is probably -- is a premium product. And so, is our Power Si products. So really -- a lot of GrowGen products are premium products right now. Our Ion Lighting is priced very competitively in the market. And Ion had a tremendous 2021, and it's off to a decent 2022. But pricing on the lighting side has come down from vendors, from distributors and from stores. So, you've seen $1,100 lights that are trading at $800 right now. So you have seen pricing come down with the competitive side of the market in stores around the country.

Okay. I'll jump back in the queue. I really appreciate the color. Thanks Darren.

Our next question will come from Glenn Mattson with Ladenburg Thalmann.

Hi. Yeah. Thanks for taking the question. So, I'm just thinking about inventory and the chance for any potential obsolesce and how comfortable you are with the inventory on the balance sheet. Can you go into that at all?

We review our obsolescence position every quarter, and we're comfortable with the reserves that we have in place on the lower of cost of market analysis that we do on a regular basis. We do have programs in place to address product, that is starting to slow down. And we have specific programs from a marketing and promotional perspective to make sure that we continue to move the product, and no concerns on that front.

And is there a target number you want to get to by the end of the year in terms of days of inventory or an absolute dollar number in terms of working down that number over the course of the year?

Yeah. I'm hesitant to put our neck out there on a specific target of inventory numbers. I can say that internally we're focused on continuing to drive down our inventory levels and get back to a turnover that was similar to what we've seen in the past, which is four turns a year for our inventory. So, we're focused on improving our turns, but at the same time, making sure that we have product available for our customers, and that we have the selection and the service for the customers to make sure that we're competitive in the marketplace. So, it's a balance between those two issues and we want to make sure we're taking care of the customers on a long-term basis. We have the financial capabilities of being there for our customers and we don't want to change that.

Right. Darren, one -- someone else asked already about, you mentioned a lower demand from your large commercial accounts. When I think about the Northeast states, many of the guys who are biggest there at least early on are not necessarily people who are extremely big in markets like California or Oklahoma or anything like that. So, when you think about that -- this part of the country kind of turning the corner and lifting the cannabis market a little bit, how can you be -- can you give investors some level of confidence that you'll participate proportionally?

Yeah. I think the easy answer to that Glenn is, we've always participated probably -- we've always got our fair share plus in every state that we've been in. We're well known around the country for having the best service solutions, supply and best products. So -- and the best commercial team out there. So, I see no reason why our dominance in other states won't continue back East. We have a very strong presence right now in Maine and in Rhode Island, and also in Massachusetts. So, I see no reason why that doesn't continue straight up into New York, New Jersey and up the Coast.

All right. Som I guess, what I'm getting at -- I'll just -- let me sum it up with this one, but if you're comfortable the inventory level, which is by far your biggest balance sheet asset as far as a cash asset. And then, your CapEx has been reduced somewhat here. So, you're going to end the year theoretically with reasonable amount of cash as you work off some of that inventory. And I believe you said cash off operations would be better than EBITDA.

That's correct.

So, you're going to end the year with the decent -- still a significant level of cash. And I rarely ask this question, because I realize it's a question more for the Board, but just generally, Darren, I guess what your thoughts are about -- with the stock down where it is, potentially making a move in towards investing in the company and showing faith in that ability to bounce back with the market and do some sort of share buyback or something like that? That's it for me. Thanks.

Yeah. I think it's a question for the Board. Everyone has their personal opinions on it. I'd rather not discuss it right now. But certainly a question for the Board and like anything else, Board at GrowGen will always -- will look -- we'll look at where the stock is right now and make a rational decision on it. But there are plenty of people that view stock buybacks into weakness, not always the best of use of cash, it sometimes, especially in unsure markets. So, like anything else, Glenn, it'll be a question for the Board and we shall see.

[Operator Instructions] We will now hear from Ryan Meyers with Lake Street Capital Markets.

Yes. Hi, guys. Thanks for taking my question. Just one for me. So, of the 10 to 15 stores that you guys look to open, how many of these do you already have specific geographies identified?

Right now, we have -- we've opened a store in Ardmore, Oklahoma. We've also done reloads in Auburn and Redding. We have a signed lease in Mississippi. The store will be operational in June. It's being built as we speak. We have lease signings coming up in Virginia, Missouri, and New Jersey. So, we have specific areas, and we have leases and premises that we are signing on. And we are constantly looking around the country right now. So, the answer right now, we have three that we've done. Mississippi will be our fourth. We have three and three lease signings coming up, which bring you up to seven.

Great. Thanks guys.

And it appears there are no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

I'd like to thank you everyone on the call today. Thank you for -- thank you to our shareholders, to each one of our employees. We appreciate everything you do for GrowGen every day. And we look forward to sharing hopefully some better news on our second quarter call coming up in August. Thank you.

And that does conclude today's conference. Ones again, thanks everyone for joining us. You may now disconnect.