GrowGeneration Corp.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Grow Generation Corp fourth quarter and four-year 2021 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for analyst questions. If you have a question, please press the star key followed by the digit 1 on your touchtone phone. If you'd like to withdraw your question from the queue, please press the star key followed by the digit 2. If you're using speaker equipment, please lift the handset before making your selection. This conference is being recorded today, March 1st, 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 Kambliss.

Please go ahead.

Thank you, and welcome to the Grow Generation 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 Grow Generation Corp. Everyone should have access to the company's fourth quarter earnings press release issued after the market closed today. This information is available on the investor relations section of Grow Generation'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 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 shut down their facilities or scale back on their production and expansion plans. Due to the results of these events, we've seen a slowdown in LED lighting and CapEx projects coming out of the third quarter 2021 into 2022. In addition, there's 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 saw a weakness in 2018, which corrected itself within six months. We continue to think federal legalization of cannabis is a likely eventuality. It's just a matter of when, in our view. When that time comes, GrowGen is well positioned to service and sell to the millions of new craft and commercial growers who enter the market. Despite the market segment headwinds, GrowGen had a record 2021 with revenue of $422 million versus $193 million in 2020. a 118% increase year-over-year, with a 24% increase in same-store sales. Gross profit margins were 28% in 2021 versus 26.4% for the prior year, an increase of 160 basis points. Full-year net income was $12.8 million, or 21 cents per share in 2021, versus $5.3 million, or 11 cents per share in the prior year, an increase of 140%. Adjusted EBITDA grew 83%, $34.5 million for the full year 2021 for $0.57 per share versus $18.9 million for $0.41 per share for the full year 2020. In total, 8% of 2021 revenue came from brands that we own, including private label sales in our retail stores, and proprietary brands sold to other retailers. With our recently announced acquisition of HRG, our products now have access to the HRG channel in over 750 hydroponic store locations in the United States and several distribution platforms across multiple countries around the world. ProGen is well positioned to take advantage of the growth in indoor vertical farming, driven by both new cannabis cultivation licenses and a growing trend in the agricultural markets as more and more states face the challenges of climate, drought, and water shortages experienced with outdoor growing. To execute and accelerate this strategy, we acquired Mobile Media, a 35-year-old company specializing in the manufacturing and selling of vertical benching and racking systems for both the retail and agricultural markets. Our initiatives in 2022 are geared towards positioning the company for success in 2023 and beyond. We're investing resources and attention to scale key areas of the business and infrastructure. Our five key initiatives include, first, building new greenfield locations across new states. We plan to open 15 to 20 new locations, building out network of retail stores to 80 locations across almost half of the country's states. Second, investing in company-wide technology to drive operational excellence to deliver our omnichannel strategy. Third, establishing a network of five distribution centers in key locations to serve our retail stores, e-commerce, and commercial customers. Fourth, driving sales of proprietary brands and private label revenue. This includes investments in resources provide customer service, product development, and distribution excellence. And fifth, combining e-commerce sites by integrating Agron with our growgeneration.com marketplace, creating one common back-end platform. The management team we've assembled over the past year is better suited than any other team in the industry to implement these initiatives and drive profitable growth over the next decade. With these initiatives as backdrop, we are providing the following full year 2022 guidance. Revenue to be in the range of $415 to $445 million and adjusted EBITDA to be in the range of $30 to $35 million. I will now turn the call over to Jeff Lasher, our CFO, who will give a little color to our initiatives, some insight into our four-quarter results and our views of what 2022 looks like.

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. Design 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 5 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 back-end 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 already made against the initiative includes the positioning of our existing locations in Sacramento, Long Beach, and Tulsa to improve operational metrics with the technology launched this summer and the relocation of our Miami facility to enable distribution capabilities including servicing the expanded southern markets. In the second half of 2022, we will be launching a new location in the Midwest to develop the last pillar of the distribution strategy for retail. This new location will be within one day service for the Midwest, Mid-Atlantic, and New England markets. With the addition of HRG, we have the need for additional distribution capabilities, and we will be focusing on integration of certain activities in coming quarters. The acquisition of HRG adds 70,000 square feet of distribution space for our proprietary brands and products that we distribute to third-party retailers. It also allows us to expand the markets for PowerSI, Charcor, and other private label products as those businesses are integrated into HRG. Historically, HRG has been a sales agent for companies and, to a lesser degree, also provided distribution capabilities. Our goal is to expand that distribution capability which will increase revenue and incremental EBITDA. We expect that HRG will produce a creative earnings in 2023 following the 2022 investments. The expansion efforts in HRG fit well with our fourth initiative of increasing mix of private label in our retail stores. For full year 2021, the mix of owned brands in our retail stores was 4%, and we plan on expanding by 50% in 2022. This does not include the revenue from owned brands sold to third-party locations that represented an additional 4% of revenue in 2021. Our final initiative is associated with e-commerce. We have recently combined all e-commerce activities onto one website and backend operation powered by one e-commerce platform. The result of this conversion is an elimination of duplicate cost and an unnecessary competition among divisions for the same customer. Turning now to our results for the fourth quarter. Revenue for the fourth quarter was $90.6 million compared to $61.9 million in the same period last year, an increase of 46% or $28.7 million. The increase in revenues is primarily attributable to a $32.5 million increase in revenue related to businesses acquired in the fourth quarter from 2020 and acquired during 2021. A $3.5 million increase in e-commerce revenue as that channel grew from $3.3 million to $6.9 million. Those increases were partially offset with $5.7 million degradation or 12.3% from 26 comparable stores operated for the full quarter in both 2020 and 2021. Our same store sales comp base for the fourth quarter was over $40 million. In the fourth quarter, we rolled over the anniversary of several acquisitions that will increase the comp base of stores throughout 2022. However, our new location in the Miami area has been relocated and will drop out of the comp base. Gross profit margin was 25.5% for the fourth quarter, down 30 basis points from prior year. Full year margin improved 160 basis points from 26.4% to 28%. But margin dropped in the fourth quarter from unrecaptured freight expense, dilutive impact of pass-through freight charge to customers at cost, and a higher volume of discounted capital products, including lighting and discounting activities. The opening of two new large locations in the competitive Southern California marketplace also presented a headwind to gross margins. Overall, our sales in Southern California were 10% of retail revenue, and total California exposure for 2021 was 30% of retail store sales. The California market continues to pressure revenue in margins into 2022, and we are planning for a reduction in comp sales in California retail store sales in 2022. But overall revenue from California is planned to increase from full year operation of 2021 new and acquired locations. Gross profit dollar generation in the fourth quarter was up 45% from the prior year from increased revenue and margin expansion. We are planning for an increase in full year margin for 2022, primarily attributable to increases in private label sales, pricing actions, and strategic moves away from low margin sales channels. Total operating expenses in stores grew from $6.2 million in the prior year to $14 million in the fourth quarter of 2021. We modified labor hours in the fourth quarter in line with revenue. On a year-over-year basis, we added 37 locations. Notably, the quarter-over-quarter expenses in store operations was down $750,000 and was primarily due to the drop in pre-opening cost and labor initiatives partially offset by additional locations operated in the quarter. Selling, general, and administrative costs increased from $6 million to $12 million in the fourth quarter of 2021, primarily from the increased support costs for the enterprise, including the cost associated with establishing the infrastructure necessary to continue to profitably control the enterprise and grow the business in future periods. Included in SG&A this quarter was a $500,000 expense associated with the termination of the HGS acquisition and $1 million of severance expenses and charges for organizational changes. Of the $12 million of SG&A in the quarter, $1.2 million of it was from stock-based compensation. Depreciation and amortization of intangibles was $4.1 million in the fourth quarter of 2021. The breakdown is $2.7 million of amortization and $1.4 million of depreciation in part from new store openings that have added to our depreciable asset base. It is important to remember that as we grow in size and scope, depreciation and amortization expenses will continue, and we forecast that amortization will be over $12 million in 2022 associated with the acquisition over the last couple years, including the 2022 acquisition of HRG. Income tax provision was a credit of $3 million in the fourth quarter following a net loss in the quarter last year. For 2022, we expect that our effective tax rate will be higher than statutory rates as a result of disallowed deductions in federal taxable income from intangible amortization and increases in non-cash provisions. This is an impact of growth. However, as we shift to new store development in lieu of acquisitions to grow the store count, we will benefit from bonus depreciation of assets additions for tax purposes in late 2022. Net loss for the fourth quarter was $4.1 million, or 7 cents per share. compared to net income of 1.5 million or 3 cents per share for the same period in 2020. Adjusted EBITDA, which excludes the expenses associated with interest, taxes, depreciation, amortization, and share-based compensation, was a loss of $1.9 million for the fourth quarter of 2021, compared to income of $5.5 million in the fourth quarter of 2020. As discussed earlier, we incurred charges associated with terminated acquisitions and separation expenses that totaled $1.5 million in the fourth quarter this year. Our adjusted EBITDA calculation includes the burden of these expenses. The company ended the quarter with $40 million of cash and $41 million of marketable securities that are mature and available for sale if needed. Total liquidity was $81 million at the end of December 2021. The company reduced inventory, reduced receivables, and managed other working capital needs in the fourth quarter, resulting in a generation of about $3 million of cash from operations, even with the previously mentioned adjusted EBITDA loss. Full-year cash from operations was over $5 million. In 2022, our business strategy and incentive programs will focus on generating cash from operations generally in line with adjusted EBITDA through inventory management and other balance sheet optimization efforts. Net cash used in acquisitions and property totals $100 million for 2021. We are planning for total capital investments and cash investments in new store, distribution capability, technology, and the recently completed HRG acquisition to total $30 million. As Darren discussed, we estimate that revenue for the full year 2022 will be $415 million to $445 million based on recent trends in our 63 garden centers and non-retail businesses. This includes the entire enterprise inclusive of HRG and MMI businesses. We estimate that full-year EBITDA adjusted for share-based compensation will be between $30 million and $35 million. Recent trends in retail and significant declines that we are seeing in capital investments of new grow operations continue to pressure revenue and profits in Q1. At present, for the first quarter of 2022, the company is projecting revenue of at least $80 million, including revenue from newly acquired enterprises. We expect adjusted EBITDA results in Q1 of 2022 will be similar to those seen in Q4 of 2021. We expect gross margins to sequentially improve in the first quarter and operating expenses to be just slightly up reflecting full quarter operating expenses for the new profit centers opened or acquired in the fourth quarter of 21 and in Q1 of this year. Retail sales performance on a year-over-year basis will be materially impacted from a slowdown in capital build and will continue to be hampered on a year-over-year basis for the first three quarters of 2022. Accordingly, revenue will be flat to down 10% in the first half with significant same-store sales declines offset by inorganic growth and investments into new retail stores. Second half, we are planning for reported revenue to be up 5% to 10%. As we look further out to 2022, our proprietary brands of PowerSI and Charcor will benefit from the industry focus on yielding quality and products but other areas including lighting control systems, HVAC, and benching products will be under pressure. As such, we have significantly constrained our inventory purchases as we focus on our own brands and decrease working capital needs. Our cash from operations in 2022 will benefit from the focus on inventory management, skew rationalization, and a decrease in other working capital accounts. We will add 15 to 20 new stores in the latter portion of 2022 that should generate, on average, incremental sales of $1 to $2 million per location in 2022 as they come online throughout the year. As mentioned, these locations will be in new states on the East Coast and the Midwest. Just as importantly, we believe that our additional investments in technology distribution capacity and private label sales will increase gross margin in future years. Total cash generated by the business will be about $25 to $30 million. This cash generation is in line with adjusted EBITDA expectations and represents the actualization of plans to manage balance sheet metrics including receivables and inventory. We maintain a strong cash position without the immediate need for external debt and do not foresee a need for debt or equity issuance. Total investment activity including acquisition of HRG is estimated to be about $30 million in total for 2022. with about two-thirds of that investment earmarked for new retail stores and the remainder for the HRG acquisition and technology investments. Shares outstanding will increase only slightly from our present level of 61 million shares, primarily reflecting share-based compensation in 2022 and shares issued for business combinations in the first quarter. We expect amortization expense to be about $12 million in 2022 and depreciation expense to increase from about $2 million a quarter in the first half to $2.5 million a quarter in the second half, with a total of $8 to $10 million for the year. Expense for share-based compensation will be largely in line with 2021. Our focus for 2022 is on execution to set our company for a strong future with new retail locations, improved technology, superior distribution capabilities, and a strong e-commerce platform to scale profitably. As you have likely seen by now, This afternoon, we filed the form 12B25 with the SEC as notification that we will not meet the March 1st, 2022 deadline to file our form 10-K. This is due to our new status as an accelerated filer this year, and as a result, our need for more time to complete the year-end reporting processes. At this time, as disclosed in the 12B25 filing, we do not anticipate any material modifications to the financial statements included in the earnings release today. I will now turn the call back to Darren.

Thank you, Jeff. As we continue to navigate through the headwinds of the hydroponic industry, we're starting to see signs that the market could rebound later in 2022. One such sign is that Mississippi, an open cultivation license market, could provide us with opportunities to outfit 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 their 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 locations 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.

If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. Again, if you're using a speakerphone, please do make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you'd like to ask a question. 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, you know, just to start, can you maybe just go through why building 15 to 20 stores, you know, given the market uncertainty or having those new stores coming in, given the market uncertainty, is the right decision versus, you know, 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, rolled up to the back half, conscious of your total company sales that you're expecting, but 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 to purchase best of breed stores in mature states where we'll be able to compete. States that have been either recreational or medically legal for some time with very 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. When we look towards the landscape within these new states coming on board, there are no stores that fit the GrowGen criteria. We've been quite successful in greenfielding stores in new states, 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 greenfielding new locations, building them to our criteria, which boots 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.

Yeah, Chris, you know, when we look at our guidance for the calendar year and what's incorporated into that guidance, you know, we see the market and what's incorporated in the guidance is that the 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 in some of our acquisitions and new stores, specifically in the California market. You know, in the back half of the year, we do expect some growth, and we do see some incremental growth in our proprietary brands that are focused on the consumable side of 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 a 35% drop in same-store sales 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 of months. Breaking down, you know, 21 to 22 revenue, though, the comp store revenue, you know, of about $350 million from stores and $36 million from e-commerce. We still expect total revenue in those retail business 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 a creative revenue, and we expect positive growth from our proprietary brands in 2022.

Thank you so much for that. If I could just, you know, have, you know, just one, you know, follow-up here. When you're looking at, you know, the market moving out 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 a relevant factor. Thanks so much.

Yeah, Chris, I think when you take a look at the 63 garden centers we have currently, you know, our garden centers are B2B and also B2C. So our garden centers are set up for both currently. and we will be building the garden centers 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're able to service growers of all types from the largest MSOs in the country to the single light growers to the single growers growing the plant outdoors.

Okay, thanks so much. Thank you. We'll now take our next question from Andrew Carter with Stifel.

Hey, thanks. Good afternoon or evening, whatever you are. What 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 the 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.

No, Andrew. Yeah, go. No, Andrew. We have until March 15th 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 it 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 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? Yeah.

Jeff, you want to take that?

Sure. Yeah, we, you know, 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, you know, 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 opened 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, you know, as we look out into the summertime, we've got, you know, locations in Virginia, Illinois, Missouri, Connecticut lined up and, you know, indications of interest to locations in specific cities. in those marketplaces. Further investigations are going on in 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. You know, as you know, 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 been able to get larger facilities. You know, 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 will launch in the second half. Andrew, just so you understand.

Andrew, just so you understand as a matter of size, we 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 Mangle with Oppenheimer.

Hi. Good evening, guys. So the first question I have, just with regard to the sector of macro pressures, and Darren, you spend a lot of time here talking about this, but 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 the open supply 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, which is always favorable. We saw similar issues back in 2018 that we're seeing right now out west. California is 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 in SoCal 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're quite confident with our locations in California. we're starting to move out of a seasonable slow time of year in California going into the springtime. So we're usually seeing a tremendous rebound in our California stores and our stores out west 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 rebound. My top one?

The second question I have, just with respect to the guidance. So if you look at the initial 2022 sales guidance, it kind of suggests, given what you reported for 2021, you're kind of toggling flat. I guess it's better than flat, but I'm kind of flattered. So the question I have is, we talk a lot about this, given the cadence of acquisitions made in 2021, the underlying revenue run rate. that you would be exiting 21 with would be higher than reported revenues. So as you look at that guidance, is this a function of now you take any consideration of these industry headwinds in forecasting, or are you actually starting to reevaluate the potential, the underlying potential, or even structural potential for some of these acquisitions that were made in 21?

So I'll unpack that for you, you know, as far as the guidance for 2022. And as I mentioned, with Chris's question earlier, you know, we are anticipating a same-store sales decline in Q1 and then, you know, full-year same-store sales decline, which obviously pressures the run rate because the run rate assumed, you know, 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.

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

Hi, good evening, and thank you for the questions. So first question for me, you know, going back to California, you know, 23 stores today, 30% of revenue. Then you talk back to 2018, you know, a little bit, and just thinking back to Colorado, right, you guys, you know, 2016 had 10 stores, and then you had some similar dynamics in terms of pricing pressure, you know, consolidation, you know, 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 didn't 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 you do see some consolidation, 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?

You know, Aaron, when I look at our California footprint, you know, it runs, you know, it goes from Northern California to Southern California. San Diego, L.A., you know, up towards Arden's County, when you go look down in Northern California, it runs right up the coast. So, you know, we go from Humboldt straight down into Santa Rosa. So we're pretty happy with the locations of our stores. You know, 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 at the market right now, it always gives me tremendous confidence. You're looking at a cannabis market right now that's anywhere from $20 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 that these growth rates in the plant-touching side of it is 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. We did it quite profitably. So, you know, we are quite comfortable where we are right now. You know, we've made it through some really difficult times. 2021, you know, 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 fan store sales go to 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 a slowdown, and we continue to see that slowdown. But our forecasts are based upon, you know, 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, Wes.

Thanks for that, Kyler. 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 any of that in the marketplace and what opportunity you might have there going forward in 2022. Thank you.

You know, we, we built private label from one and a half percent to 8% this year and forecasting going higher next year. We continue to bring it, 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. Charcoal and Power SI, we had a wonderful year. We're starting to see a tremendous pickup on our charcoal brands right now. And we are offering our customers, you know, best in breed products at better pricing. And we do believe that it is working and will continue to work within our stores.

All right, great. Thanks for calling.

I'll jump back into the queue.

Thank you.

We'll now take our next question from Glenn Madsen with Leidenberg Thalmann.

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

So I'll walk through some of the 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 – on the industry. So when you look at the, you know, just like you mentioned, we're anticipating adjusted EBITDA in that $30 to $35 million range for 2022. You know, 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, You know, both with the new stores that will be opening, the 15 to 20 stores that will consume around 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 around about that $30 million to consume the cash that we generate. And we'll be around about 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 projected right now. So the cash We'll be at a low point in March 31st, 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, 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 retail umbrella. You know, 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, you know, right now we think the better use of our capital as a company is to invest in new stores rather than to try to acquire locations in emerging states.

Is there an appetite for acquisitions on the private label side then, perhaps?

Glenn, I can get to that. If there's 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 side. So like anything else, if it's there, You know, we would certainly take a hard look at it, but right now there's nothing in the harbor.

Okay, great. Thanks. Thank you.

And once again, at Star 1, we'll take our next question from Eric DeNouris with Craig Hallam 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, you know, things like lighting and 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?

Yeah, I'll take a stab at that, and then Darren can 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 need to stand up a growth facility. The consumables market is also where we focused our proprietary brands which also helps us on the gross margin side. You know, we have a pretty good lineup of products from a proprietary brand 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 shortage of capital equipment that's being bought in the marketplace.

Eric, I think there's been no secret that, you know, we and The rest of the hydroponic industry has seen a slowdown in CapEx projects, which is really lighting and 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, that we do believe the CapEx projects will begin to gain momentum as we continue to develop commercial relationships in other markets. So we're quite confident that, you know, you will see a tremendous amount of building, you know, starting in the second half of this year, if not sooner. And we do believe that we'll get, you know, certainly our fair portion of these large build-outs. So, you know, we are pretty upbeat. But as, you know, until these deals start coming into house, you know, we are guarded until we start seeing them come into house.

Yeah, I think that definitely makes sense. And I appreciate that caller. 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, you know, 15 to 20 green fields 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, you know, with these build outs. And maybe, you know, help us sort of understand, like, you know, when we might be able to tell if that 15 to 20 is sort of increasingly likely or unlikely. You know, as we get, for example, if we get, you know, Q2 results in August and you guys have, you know, five stores open by then, does that give you enough time to open up, you know, the remaining 10 to 15 by the end of the year? Just any color on that sort of timing and how long it takes you in that outlook would be very helpful. Thank you.

Yeah, we've given a range of 15 to 20, and we are quite comfortable with, you know, with the lower end at 15. We are, you know, again, we are in an all-out blitz right now working with, you know, some large brokerage firms. We have LOIs in place. As I said earlier, we built over 250,000 square feet of space this year, of last year, and we do believe it's certainly, you know, within the realm. And we are in March, and we certainly understand where we are. you know, within the LOI process, the lease process. We've just finished up, you know, 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, you know, 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. We'll take our next question from Scott Fortune with Roth Capital Partners.

Yeah, good afternoon. A little focus back on the private liable 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 what the environment is kind of a little bit pushed out a little bit from your expectations from that standpoint?

As of now, Scott, we have not pushed out that expectation. We finished this year at about 8%. We just added MMI to our you know, 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 wide 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.

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

Yes.

So, yeah, 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 in 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, you know, approaching that 10% number for the non-retail space. And that's kind of how we see the legacy business growth rate for the county year. You know, 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, Carter. Thanks. Thank you. And that does conclude today's question and answer session. That also does conclude today's conference.

We do thank you all for your participation, and you may now disconnect.