Good morning, everyone. Thank you for being here. Welcome to GrowGeneration Corp's conference call for the third quarter of 2021. During this presentation, everyone will be in listen-only mode. After the presentation, we will open the floor for analyst questions. If you have a question, please follow the operator's instructions. If you need to withdraw your question, please follow the operator's instructions. This conference is being recorded today, November 11, 2021, and the earnings press release was issued this morning. I will now hand the call over to John Evans from Investor Relations.

Good morning. I would like to welcome everyone to GrowGeneration’s third quarter 2021 earnings conference call. With us this morning is Darren Lampert, our Co-Founder, Chairman and CEO, Michael Salaman, Co-Founder and President, and Jeff Lasher, our CFO. After management remarks, there will be an analyst Q&A session. As always, we expect to make forward-looking statements this morning, but we want to caution you that our actual results could differ materially from what we say here. Such statements can be identified by terms such as believe, expect, intend, and may. You should not place undue reliance on forward-looking statements. Actual results may differ materially from those forward-looking statements. And we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued this morning, as well as risks and uncertainties included in the section under the caption, Risk Factors and management's discussion and analysis of financial position and results of operations in our annual report on Form 10-K, filed with the SEC and any subsequent Form 10-Q and Form 8-K filed with the SEC following prepared remarks today, we will open the call for questions. I'd also remind everyone that today's call is being recorded and an archived version of our call will be available on our website later today. I will now turn the call over to our CEO, Darren Lampert.

Thank you, John. Good morning. Before we begin with my prepared remarks, I would like to thank each and every one of our employees and customers for their continued hard work, dedication, and loyalty. Our best-in-class staff is now over 740 with over 500 of our teammates as experienced grow pros. We have created the largest sales team of hydroponic product specialists in the country. We had a strong record third quarter, with revenue of $116 million in the quarter, a 111% increase year-over-year, with a 15.7% increase in same-store sales. The Company earned $0.07 per share on GAAP Net Income of $4 million, which is burdened by amortization and income taxes, adjusted EBITDA grew 63% to $10.8 million for the third quarter 2021 or $0.18 per share versus $6.6 million for the third quarter 2020 or $0.13 per share. Inventory increased to $113 million and we ended the quarter with cash and marketable securities on hand of $93 million. Like all commodity products in emerging industries, we see from time to time an imbalance in supply and demand. We've experienced these imbalances before in California, Colorado, and Oregon, and now, once again, these states, California and the West, are dealing with oversupply positions that have created downward pressure on the cost per pound of flower. This is a short-term issue as growers will either sell through their inventory or have to dispose of it, as the flower has a freshness and effective expiration date. Supply chain headwinds had an impact on shipping container costs and securing some products. The GrowGen’s purchasing team has gotten ahead of the inventory. So, we're in a very strong inventory position heading into Q1 2022. Despite supply chain and construction delays, we opened two new superstores in LA at service logistic hubs for the important Southern California market. We're building for the future and have 37 states of growth in front of us. However, customers in a few key states, including California, Colorado, and Oregon, are taking a wait-and-see approach on building and outfitting cultivation facilities as the market sells through excess cannabis inventory. In addition, there has been a slowness to build the new markets in legalized states as cultivators wait for the rollout of rules and regulations, which are behind schedule. We believe the majority of these issues will be rectified by the second half of 2022. Accordingly, we are adjusting our annual revenue outlook to $435 million to $440 million and adjusted EBITDA guidance for the year of $41 million to $43 million. Evidenced that our GrowPro strategy is working is the explosive success we're having selling our lineup of private and proprietary brands, Power Si, Char Coir, Ion LEDs, DuraBreeze fans, all saw market acceptance and growth in 2021. Power Si is now in over 500 independent hydroponic locations across the U.S. and sells now in Canada, UK, and Europe. Our ability to distribute our proprietary brands beyond our retail footprint is a future driver for our Company. What excites us as the leader in the hydroponic and indoor gardening space is the future we see over the next several years. This week, Congresswoman Nancy Mace announced a Republican-backed proposal to legalize cannabis nationally, treating cannabis as an agricultural product, regulated like alcohol. States are allowing home-growing as previously announced in New Mexico, Virginia, Connecticut, with strong support for proposals in New York and Florida. At present, we operate stores in 13 of the 18 states that have adult use laws and we plan on expanding our states to 18 in 2022. Throughout 2021, we've been building for the future and we are in this for the long term. No Company is better positioned to take advantage of federal legalization of cannabis than Grow Generation. We see a tremendous opportunity in the vertical farming agricultural market as more and more states face the challenges of climate, drought, and water shortages with outdoor growing. GrowGen has built Garden Centers for a new generation that are growing for their own personal consumption, food production, and plant medicine. This demographic group is seeking the latest technologies to grow indoors and are energy and conservation conscious, choosing hydroponics as a better way to grow. In order to position the Company for 2022 and beyond, we have made several strategic decisions. Most importantly, we've organized the management team to focus the enterprise around key deliverables. Over the past several months, we have brought on key leaders, including Paul Rutenis, to take over as Chief Merchant and lead the private label and proprietary brand growth; Dennis Sheldon to run technology and supply chain; Becky Gephardt to run eCommerce and marketing. These individuals bring exceptional talent, expertise, and experience. They are leading the organization into 2022 and beyond. This shift allows our Chief Operating Officer to focus exclusively on new store development, retail store acquisitions, and execution of retail operations to drive that segment of our business to higher cash generation in order to fund growth initiatives. All four of these leaders will report to my co-founder, Michael Salaman. In addition, we've established an industrial sales organization to exclusively work with large cultivation operations, that will be serviced outside of our retail store system. This industrial sales team will also report to Michael. As we focus on long-term growth plans, we've established efforts across the portfolio of the business. The following five customer-focused initiatives will be key to EBITDA generation, efforts to improve results. First, we're focusing our energies for 2022 on new Greenfield locations across new states and new store Greenfield growth. There are still acquisition targets that will be added over the next couple of years but in emerging states, we believe Greenfield strategy will produce higher returns on investments. Second, we're investing in Company-wide technology to drive operational excellence in our retail stores. Our present ERP system is limiting our ability to scale and keep up with our growth. Our third initiative is related as we plan on establishing a network of distribution centers in key locations to serve our retail stores. At present, most of our product is shipped directly to stores and our proprietary brand fulfillment is handled by third-party logistic providers. We'll be using best-in-class technology to drive order management and warehouse management systems integrated with new POS and ERP systems, launching before summer of 2022. Our fourth initiative is driving sales of proprietary brands and private label sales in our retail stores. This includes investments in resources to provide customer service, product development, and distribution excellence. Over the long term, this will provide a platform for penetration and our goal in 2023 is to have 25% of sales coming from private label and proprietary brands. Finally, we plan on integrating our three main eCommerce web stores into one common back-end platform that will serve our customers better with improved product selection, common pricing, product availability, and the resources to assist customers with solutions to their problems. All of these initiatives will require a team-oriented approach and we believe the management team in place now is better suited than any other team in the industry to drive profitability growth over the next decade. I will now turn the call over to Jeff Lasher, our CFO, who will give a little color to our initiatives, some insights into Q3 results, and our views of what 2022 looks like.

Thank you, Darren. Let me start by building on what Darren laid out for future initiatives then I will address Q3 results and what our business looks like in 2022. Our investment focus in 2022 will shift towards Greenfield locations. We were very pleased with the customer reactions to our new locations in California, and believe we can modify the size of these locations while keeping the selection and service. Our 15 to 20 new locations will range from 5,000 to 15,000 square feet of retail selling space, along with outdoor facilities to serve book sales. Like capital investment will be $1 million to $2 million per location, including inventory. These locations will be in emerging states, such as New Jersey, New York, New England, Pennsylvania, and Illinois. Over time, this will reduce our reliance on California, which presently represents 26% of sales, and mature markets, including Colorado, Washington, and Oregon, which represent 13% of sales. The investment of $15 million to $30 million in 2022 will be combined with an investment in technology to improve operational metrics in the stores. Our revenue has grown 153% over the same period in 2020, and our store operating expenses have grown 185%. To drive profitable growth in 2022, we recognize the need to invest in the efficiency of store operations. The key initiative of technology in 2022 has been an organizational effort that spans across functions. We will be moving to a new solution powered by Oracle and Manhattan Associates to replace our existing systems. We will have a retail technology stack in line with best-in-class retailers of similar size with Oracle NetSuite, ERP, coupled with point-of-sale order management and warehouse management systems integrated by Manhattan Associates. We have partnered with the best providers in retail to use technology as a customer-centric competitive advantage. This will result in additional operating costs over the next 180 days as we prepare for an early second quarter launch and add to our fixed asset base by about $5 million. But we believe the project will produce substantial ROI. The new smaller retail locations will be serviced by a network of distribution centers that will feed the retail stores with inventory and be less than a day away from sites they serve. This will allow us to consolidate inventory improve procurement cost of goods and be more customer-focused in stores. Our existing locations in Sacramento, Long Beach, and Tulsa will be the foundational pillars of this new strategy. In 2022, we will bring on online additional facilities to serve the Midwest and East Coast locations. At present, Michigan represents 15% of sales, and New England has over 10% of sales for the Company, but neither served with a distribution center. Alongside the retail store plans, we have established a strategic plan to grow private label offerings and proprietary brands. At present, we have two proprietary brands, Power Si and Char Coir, along with our exclusive private label brands sold only in GrowGeneration locations that represent about 9% of our sales in the third quarter. Our plan is to be 25% of sales by 2023. This will produce a meaningful impact on gross margins. We see our ability to connect with customers with best-in-class products, including quality GrowGen exclusive offerings, as the best win-win for customers and the Company. We intend to increase turnover through product rationalization and utilizing the distribution center strategy, which allows us to right-size inventory. This will result in better operational results, increased gross margin, and increased inventory turnover, thereby driving materially better cash from operations as early as Spring 2022. However, this strategy in 2021 has resulted in an investment in the long lead time supply chain. Our inventory at the end of Q3 was $113 million and has grown $59 million this year. Of that growth, $13 million was acquired in acquisitions, and $13 million was associated with growing the offerings of private label. Additionally, we have used our capital capabilities to secure production of product overseas through prepaid inventory purchase commitments with long lead times in advance of Spring 2022 needs. Our final initiative is associated with e-commerce. At present, the Company has a variety of back-end processing software. Our core system is run on Adobe's Magento platform. And we will be migrating all of the sites to that engine over the next few quarters. We do not expect any material impact from this change for our customers, but it will lower the cost of operation and drive profitability in this area. Turning attention to the quarter, revenue for the quarter was $116 million compared to $55 million for the last year, an increase of 111% or $61 million. The increase in revenues is primarily attributable to a $29 million increase in revenue related to stores acquired since first quarter 2021, a $6.6 million increase in e-commerce revenue as that channel grew from $3.9 million to $10.5 million, and $8 million or 15.7% from 25 comparable stores operated for the full quarter in both 2020 and 2021. Sales from stores that opened last year in the second quarter increased from $51.2 million to $59.2 million. Our same-store sales comp base for the third quarter was over $55 million. In the fourth quarter, we will have multiple anniversaries of several acquisitions that will increase that base of stores throughout 2022. However, our location in the Miami area has relocated and will drop out of the comp base. Gross profit margin was 29.4% for the quarter, up 290 basis points from the prior year. Driving this margin expansion was an increase in revenues from both private-label products and distributed products, which were 9% of revenues for the quarter compared to less than 1% of revenues for the same period last year. Gross profit dollar generation was up 134% from the prior year, from both increased revenue and margin expansion. Total operating expenses in stores grew from $5 million in the prior year to $14.8 million in Q3 of 2021. Included in that spend is pre-opening spending for all of our new large format locations in Southern California and Oklahoma, as well as pre-opening relocation expenses for Miami and Arizona. This represented a one-time expense of about $1 million that will not reoccur as we move to smaller locations in future years. We expect the investment into new stores and relocations for 2021 will pay dividends in the future. In addition, we have modified labor hours in the fourth quarter in line with revenue. On a year-over-year basis, we added 37 locations; the quarter-over-quarter increase in store operations expense was $2.2 million and was primarily explained by these investments in pre-opening costs, labor initiatives, and additional locations owned for the full quarter. Selling general and administrative costs increased from $4 million to $11 million in Q3, 2021. More than explained by support costs for the enterprise, including the costs associated with establishing the infrastructure necessary to continue to profitably grow this business in future periods. Included in this quarter, SG&A was an expense associated with the HGS acquisition. We expect another $500,000 in expenses associated with that termination in the fourth quarter. Of the $11 million of SG&A, $2.1 million was associated with stock-based compensation. Amortization of intangibles was $2.5 million in the third quarter. We expect $2.7 million of amortization in Q4, along with $1 million of depreciation in part from new store openings that have added to our depreciable base. It is important to remember that as we grow in size and scope, depreciation and amortization expense will continue, and we forecast that amortization will be $11 million in 2022 associated with acquisitions over the last couple of years. The Company had an interest income of $450,000 associated with notes receivables that were settled in Q4, and investment activity in marketable securities in the quarter. Income tax expense was $1.1 million in Q3. For the fourth quarter and in early 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, increases in non-cash provisions, and share-based compensation. This has an impact on growth. As we shift to new store development in lieu of acquisitions to grow the store count, we will benefit from bonus depreciation of asset additions for tax purposes in late 2022. Net income for the quarter was $4 million compared to $3.3 million for the same period in 2020. Net income was $0.07 per share. Adjusted EBITDA, which excludes the expenses associated with interest, taxes, depreciation, amortization, and share-based compensation, was $10.8 million for the quarter, compared to $6.6 million in 2020. As discussed earlier, we had expenses associated with new store additions, relocations, expansions, and other expenses in excess of $1.5 million for the quarter. The Company ended the quarter with $63 million in cash and $29 million of marketable securities that are mature and available for sale if needed. Total liquidity is $93 million at the end of September. Net cash used in acquisitions and other investments totaled $24 million for the third quarter of 2021. As discussed, we estimate that revenue for the full year will be $435 to $440 million. Based on recent trends in our 62 Garden Centers and two proprietary brands, we estimate EBITDA adjusted for share-based compensation within those operations will be between $41 and $43 million, included in an expectation is the burden of termination expenses associated with the HGS acquisition of about $500,000. As we look out to 2022 for early planning efforts, if we had owned all 62 locations, our e-commerce businesses, and Char Coir for the full year of 2022, that combination of business would have generated about $475 million in total revenue. Included in that annual figure is $35 million in combined e-commerce sales that are accelerating rapidly and should generate growth of 20% to 30% in 2022. Our proprietary brands of Power Si and Char Coir, which we sell outside of our retail locations, make up about $20 million of total revenue and should see growth next year in the teens. We will add 15 to 20 new stores in the later portion of 2022. That should generate incremental sales of $1 to $2 million per location in 2022. In total, we expect our overall growth rate in 2022 will be in the high teens or better. Just as importantly, we believe that our additional investments in technology, distribution capabilities, and private-label sales will increase gross margins that will more than offset adjusted EBITDA margin impact of added SG&A and store operations expense. I will now turn the call back to Darren.

Thank you, Jeff. Our third quarter record results were achieved only through the relentless efforts of the best team of professionals in our industry. The strength of our supply chain and our commitment to provide the best-of-breed and latest innovative products to our customers. GrowGen has a tremendous team of essential employees who've made a commitment to our Company and customers that could not be any prouder. I'm inspired by their efforts and dedication as they have worked tirelessly to service our customers and communities. Our future success revolves around execution efforts in new stores, technology, distribution centers, product offerings, and eCommerce 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. Ladies and gentlemen, as a reminder to ask a question. The first question today comes from Brian Nagel of Oppenheimer.

Hi, Good morning.

Good morning, Brian.

My first question is just with regard to guidance, and maybe Darren, you spoke about this in your opening comments, but maybe just drill down a little bit more so we can understand better what really changed from the expectations that were revised and laid out, I guess it was on October 13th, with the HGS announcement and then today's announcement, both from a revenue and from an EBITDA perspective? Thank you.

Yeah, Brian, I'll start and then I'm going to turn it over to Jeff. As you know, GrowGen had an exceptionally strong second quarter which was fueled by the demand for what we saw was outdoor growing. During the last year, our store concentration in California and Colorado markets have increased 26% in California, 13% in Colorado, Oregon, and Washington. We're now seeing the impact of that oversupply position on cannabis that we believe will be exaggerated in the fourth quarter. We see the oversupply correcting itself in the second half. But during oversupplied positions, cultivators slowed down their purchasing of hydroponic equipment. In addition, we have seen a slowness in new states for rollout rules and regulations to enact adult use and to issue cultivation licenses in new markets. But on the flip side, we saw many positives in the third quarter; revenue was up 111% at $116 million, same-store sales were up 15.7%, gross profit margins, 290 basis points to 29.4%, and we successfully launched two flagship stores in LA in Long Beach. So, there were many positives in the quarter. But as you've seen from even the Scott's conference call with Hawthorne, business has slowed going into the fourth quarter. We've looked back, and our second quarter, the strength was incredible, and it was a lot of the outdoor growing that is now coming back to bite us a notch. But business remains strong. The industry remains strong. You're seeing a tremendous move towards legalization. But I'm going to turn it over to Jeff right now and he'll go over some of the numbers with you.

Hey Brian, thanks for the question. When we consider the fourth quarter and our full-year forecast, we have integrated recent market trends into our guidance for the fourth quarter and 2022. This also reflects our decisions to invest in the long-term health of the business, including bringing on the right management team, personnel, and systems for 2022, as well as the necessary resources for new store openings later in 2022. Additionally, some recent store expenses have impacted our EBITDA guidance. These expenses were associated with larger stores in the Southern California market and will not be repeated with smaller format stores, as mentioned earlier.

That's very helpful. As a follow-up, Darren, regarding the oversupply issues you've mentioned in the states, you indicated that you see them as short-term trends. Are you currently observing anything that suggests these pressures are easing, or are you relying more on historical patterns to predict that they will ease?

Yeah, we're looking more at the history back in 2018. As of now, we have not seen the slowdowns abate and the 26% in California. One of the positives is that we just opened 2 superstores in the LA markets that are performing well. So, we are optimistic. And it's happened before out west. And it will continue to happen Brian, but as we spread this business out into 50 states, you'll see less seasonality out West, but right now we are concentrated. And what you're seeing right now is in the fourth quarter of last year, we purchased 9 outdoor – 9 Garden Centers out in California and Oregon. And we're starting to see some of the pushback in the third and fourth quarters. The California markets, Northern California markets are extremely seasonal. We see that from the stores that we own. And now looking back into that second quarter, when we start seeing the strength in the second quarter, caught us by surprise and it's coming to bite us right now. So, the one thing you are seeing from GrowGen, we're way above estimates for the year, both on a same-store sales rate and also our revenue guidance rate, but you're seeing a little lumpiness. And the lumpiness, as we get bigger, will continue to grow, and we go into states it will smooth out.

That's helpful. I will turn the call over to the next person. Thank you.

Thank you, Brian.

And the next question comes from Eric Des Lauriers of Craig-Hallum Capital Group.

Thanks for taking my questions. Jeff, you called out the percent mix of California and other states which I really appreciate, very helpful. Just wanted to check on what period those sales mix percentages were from, was that Q3 or more of a year-to-date figure? Just looking for some clarity there. Thanks.

Those are year-to-date numbers as we look at them, and we try to get some guidance around the states without going into details by state. When we look at the state of California, it is, as Darren just mentioned, an increased percentage. But as we build our new stores in 2022 in the Mid-Atlantic states of New Jersey, Pennsylvania, New York, New England, as well as some Midwest states such as Illinois, we will reduce our reliance on California and be more diversified in the portfolio.

Yeah. Certainly, makes sense to me. I think prudent strategy there. Next question for me, just on the ERP system. How long of a process do you guys expect that to take? And what kind of an increase in SG&A might we see as you guys implement that process? Thanks.

So, the process will take this quarter and next quarter with some learning curve issues in the second quarter. As far as the expenses that go into that, we will absorb those into SG&A. We have already absorbed some expenses associated with standing up that system, both from an SG&A and from a capital spending perspective into intangibles as well as some prepaid for licenses. The moving parts there are in the low double-digit millions. They will be absorbed by the Company. We don't issue adjusted EBITDA by excluding things like that, we just absorbed those into our expense structure. But we're looking forward to going live in the second quarter of 2022 with both NetSuite and Manhattan Associates offerings. The projects are going very well and we anticipate that it will help us with our internal controls around financial reporting, as well as improve our operational excellence initiatives in the stores.

Great. We'll look forward to some of those improvements. Thanks.

Thank you, Eric.

Our next question comes from Andrew Carter of Stifel.

Thanks. Good morning. So, you're laying out a pro forma of $475 million and saying at least high teens growth for next year. What I want to understand is the M&A scenario. It looks like it's about 8 points additional you'll get next year from what's not this year. So just wanted to get an understanding of your sensitivity in meeting the underlying sales growth targets there in terms of opening stores? I know you've said 15 to 20, but could you give us an effective number of stores that are in your base plan at this point? Thanks.

So, let me break down the 2022 communication that we gave in the script again for everybody. We said that in 2021 we'll do about $435 million to $440 million of total revenue on a GAAP basis. The $475 million is a pro forma or run rate number of what our revenue would have been had we owned all of those profit centers for the full year of 2022. Included in that $475 million is $35 million of e-commerce and $20 million of proprietary brands, leaving $420 million for all of the store operations, the commercial business, as well as the rest of the organization. We anticipate e-commerce growing 20% to 30%, proprietary brands growing in the high teens. And overall, we anticipate growth in that 10% to 20% without acquisitions. As a blended number, when you incorporate in 15 to 20 stores that will open in the back half of the year, primarily Q3 and Q4, those 15 to 20 stores, we have not signed leases, but we have identified markets that we are interested in going to. And as we said, those are the big Mid-Atlantic states of Pennsylvania, New York, New Jersey, as well as increasing our position in Massachusetts and entering into the Midwest states such as Illinois. So, we're excited about where 2022 can take us overall as an organization, and we're excited about the opportunity to grow revenue in the back half of the year with Greenfield locations. We'll generate a lot of cash next year; we'll use that cash to invest in new stores. We're not at this time talking about acquisitions for 2022.

Yeah, I get it. But my question was, how many effective new stores are in there next year? You're saying 15 to 20 today in the stores this year, yet forward, they got pushed out, maybe it's different next year or whatever. But that's what I'm asking about. What's built into the plan, effective number of stores? Thanks.

15 to 20, opening in the back half of the year. We anticipate those stores would generate $1 million to $2 million per store in calendar year 2022 on a GAAP basis.

Okay, thanks. Second one to me is the inventory position. You're at a 103 days, I appreciate the call outs that were in the script and I will look at that again, but just wondering, as you assess the overall inventory, do you see any risks? This is a long shelf-life product, but can you give us a sense of, are there any products that are deflationary right now? Or do you have some risks, and also how this longer inventory position could potentially support new stores next year? Thanks.

To our inventory, as we discussed in the script, we've added inventory for acquisitions of around about $13 million since the beginning of this calendar year. We've added $13 million associated with inventory for our private labels products and we've added some prepaid assets to drive our label production which has a long lead time and long supply chain. That's the usage of cash for this calendar year. The products that we do have in our inventory, we actually look at it as a positive because it positions us to service our customers with a selection of products that are available to them even notwithstanding the supply chain challenges that the U.S. is facing. We have the product available for our customers and a lot of that product was purchased before price increases from our vendors. We're able to capture both the investment returns as well as produce a better scenario for our customers.

I'll pass it on.

And the next question comes from Mark Smith of Lake Street Capital Markets.

Hey guys. I just want to dig into the e-com business just a little bit. If you can discuss kind of the Agra on business and how that's trending and we see e-com kind of come down a little bit sequentially. Is that just a reflection of what's going on in the industry or just give us a feeling for how you feel about that e-com business.

Yes. Mark, this is Michael. Right now, it's actually trending up. I mean, we did $10.5 million versus $3.9 million for the quarter, trending to $35 million for the year. And really the initiative is to integrate our GrowGeneration.com portal with the Agra on business so that the two websites are really now integrated. So, we see tremendous efficiencies in pricing consistencies as well as improving delivery and logistics. And we see growth continuing in that 20% to 30% range we've previously discussed. So, we actually see a tremendous upside in our e-commerce business creating these efficiencies.

And then just big picture, if you guys can just walk us through quickly, strong goals for private label and exclusive products. Just walk us through briefly if you can, the margin impact of hitting those private label goals in 2023.

So, just like other retailers, our private label opportunity exists in the gross margin benefit that we get from selling products that we sourced, and we bring into the stores directly. Clearly, other retailers see a margin improvement of 10% to 20% on a percentage of revenue basis. We're looking at similar numbers for our private label enterprise that we're building and we're focused on for the future. We are investing in SG&A because it does take people, processes, and systems in order to drive the right allocation and the right inventory levels for private label. But net – net, that EBITDA margin flow-through was very strong from bringing in private label and proprietary brands.

Excellent. Thank you.

So, we can go to Aaron Grey of Allianz Global Partners.

Good morning, and thank you for the questions. I wanted to revisit California for a moment. Dan, I believe you mentioned that there might be some easing of pricing pressure there. However, we have heard from two MSOs that pricing pressure could persist for the next 12 to 18 months in the state. I’m interested to hear your thoughts on this, as it could impact your guidance in the short term. Looking more toward the long term, how do you see your position relative to competitors, especially with some consolidation happening, similar to what we observed a couple of years ago in Colorado? Given the ongoing challenges in supply and demand dynamics in California, how would you assess your competitive stance? Thank you.

Hey, Aaron. That's always a positive. Like anything else, we're in a better position than any of our competitors to continue to build out California and the rest of the country. However, we expect our concentration in California to decrease over the years as we expand nationally. So, we anticipate California's share will likely drop from 26% to hopefully under 20% next year. Looking back to 2018, we see that oversupply in California lasted a little over 6 months, possibly up to a year. There isn't a clear timeline for the current oversupply situation, but typically during such times, we observe that some growers reduce their operations or hold back on expansion; not everyone is building right now. But on the other side of it, you're seeing a tremendous push towards legalization as you saw from Nancy Mace the other day. Even though we don't believe it's imminent, we're certainly hoping for the interim elections in 2022 that we will see some sort of push both from the Democrats and the Republicans and hopefully some middle ground towards it. California is the largest market in the country, and things usually do normalize out in California. We will continue to build the business out in LA and the California markets, but we are concentrating right now coming back east, which we believe will be a tremendously strong market next year. We're seeing a push towards home-grow rules in certain states and also home-grow rules adopted in Connecticut, Virginia, and New Mexico, and also social equity rules. We believe next year will be a really bullish year for GrowGen as we rollout our ERP system and we continue to expand throughout the country.

Okay, thanks for that color. That's helpful, and then just on your private label initiative aimed at about 20% by 2023. I was just curious in terms of the mix, in terms of opportunity for brick-and-mortar and then eCommerce, do you feel there's more opportunity for you to increase that mix of private label on the eCommerce side or versus brick-and-mortar and just curious in terms of give some detail on your current mix today. private label between the 2 channels. Thank you.

Yeah, I'll start and then I'll kick it over to Michael to talk about the vision for the product line. I think some interesting facts started to come together in the third quarter where we are seeing a propensity of customers to come over to the eCommerce site as a percentage of our traffic, as well as an increased penetration of our credit cards in our stores, which does have a short-term impact on SG&A but long-term improves our control systems by using credit cards in the store. We're seeing this trend towards utilizing payment solutions, as well as migrating to the web. As we go through and mature as a business and as the industry overall. So, looking forward to that, and I'll take it over to Michael to talk about the mix of products by channel in the future.

We're certainly moving our private label initiative from the brick-and-mortar online to see more margin expansion and also more awareness. Our online business generates over 2.5 million unique visitors, and that number is increasing. So, we're seeing tremendous adoption of our private-label brands and we also see growth of our private label and proprietary brands both internally within the GrowGen stores, as well as outside as a growth initiative. As we mentioned, Power Si, for example, is in over 500 locations across the U.S. as well as in 3 international markets. So, our initiative is working, and our GrowPros have demonstrated an ability to present to our customers, and it's working.

The last thing I would add to Michael's comments is that we are also building out the distribution center on the backside of this. When we look at the business going forward, utilizing the investments that we're making right now into systems investments in 2022 into distribution center capabilities, we'll be able to service our customers through a network of regional distribution centers to service those customers with lower shipping costs for us as an entity. So, looking forward to that, coming online throughout 2022.

Great, thanks for the call, and I will jump back into the queue.

Thank you, Aaron.

Our next question comes from Mike Grondahl of Northland Securities.

Thanks guys. You guys have done a bunch of acquisitions. Switching to the more Greenfield new build strategy, I understand. How do we think about the potential for acquisitions going forward? Is it really low? Is it still just a small part of the strategy, and where is that pipeline? I guess just a little bit more color there would be helpful.

I believe acquisitions will play a vital role in our growth strategy. We will keep seeking opportunistic acquisitions both in the coming year and beyond. Currently, we don't have any updates for Wall Street, but I do anticipate that you will see some acquisitions from GrowGen next year, including new stores in new states.

Next year, we will be assisting in the development of Greenfield stores in Missouri, New Jersey, New York, Virginia, Connecticut, and Illinois, and hopefully Mississippi as well. We have an ambitious building strategy, and you will notice opportunistic acquisitions throughout the year that will enhance our revenue and EBITDA guidance.

And the only thing I would also add to Darren is on the capital allocation decision-making process here in the Company where we're spreading our capital allocation decisions across systems investments, as well as Greenfield. That doesn't mean that we're not going to do opportunistic acquisitions. We have plenty of capital and dry powder to do acquisitions as they present themselves to us in 2022 and incorporate those into our business.

Got it. And then just a quick one on the private label, 25% in 2023 goal, you talked a little bit about the margin benefit and the channels. But if there's just, I'll say two things that get you from 8.7% to 25%. What are those two actions you're taking to drive that?

I think the number one is to broaden our portfolio of brands, getting a higher penetration of offerings across the portfolio of products that we offer. The second really is to increase the training in the stores and getting our GrowPros throughout our network to understand the benefits of our private label and communicate those benefits to our customers. And the third is to have available products for customers throughout our network and through our distribution centers where we can really service the customers with private label very efficiently and very quickly for their needs.

Michael, this year's growth in private label has seen an increase from about $2.5 million in sales in 2020. We were initially forecasting close to 10% growth this year based on a run rate of about $320 million. When we analyze the numbers, we are currently surpassing that 10% on the $320 million revenue we initially projected. Typically, the first growth phase is the most challenging, yet we've managed to elevate our $2.5 million sales in private label to nearly $35 million this year. So, we're going in the right direction. And this is during extremely hard times with supply chains getting containers in from China and India. So, we've had some very long lead times on products that are still coming in that we're starting to get a better cadence on the ordering, and really the timeframes of getting these products in from China. So, as you're seeing throughout the year, our private label brands have been increasing quarter-over-quarter, and we see that continuing through next year in 2023 and into the future.

Great, thanks for the color.

We can now go to Scott Fortune of Roth Capital Partners.

Good morning, and thank you for the questions. See if to follow up on that one last thing on the private label side, you mentioned mix. Are there categories that you are putting priorities on like the nutrient side or the equipment side? Can you provide a little more color on the category focus to ramp up your private label flight, and then follow-on question after that?

Yeah. Scott, I mean, it's really across the board. Nutrients, additives, lighting, the high-velocity products that our customers are demanding, and we're investing in research development and bringing the best products at the best price. And then our ability to educate, this is a knowledge base sales process with our GrowPros, that gives us an advantage. We have the ability to not only develop product, and we see the trends in the market because of our number of stores and we're servicing hundreds of thousands of customers. We're hearing what those customers want, what the growers want, so we're able to take that data and convert it into a product development strategy, which is really working. So, it's really a broad-based approach from the private label side in terms of product.

I appreciate that. Darren, you talked about home growth and the do-it-yourself hobbyist as new states are added. We believe this could resemble the craft beer industry, where hobbyists are entering this space. You didn't mention the commercial side, which has been growing. It seems that online sales and private label could significantly enhance revenues in that area or for do-it-yourself hobbies. Can you share what percentage comes from that, the demographics involved, and your online strategies aimed at targeting higher-margin products?

Yes. The home-grow rules are very much in alignment with GrowGen’s due to social equity rules that you're starting to see rolled out. The more growers, really, the better the business for GrowGen. So, what excites us in addition to the home-grow rules is also vertical gardening. GrowGen is starting to make a push into the vertical and urban gardening markets also. When you come to our stores, we can teach you to grow a plant, whether it's a cannabis plant, whether it's fruits, vegetables, or lettuce. Even though 90% of our business right now is in the cannabis industry, we see a tremendous opportunity on the vertical gardening side of it, the home-grown side of it. Right now, you're looking at revenues of about $35 million online.

So, approximately 8% of our revenue is generated from our online business. However, we anticipate significant growth in the future as home-grow regulations evolve and more individuals develop robust online platforms. We expect to see growth coming from our physical stores as well. When we compare margins between our larger customers, the MSOs, and our smaller home growers, we find that we earn more from the home growers. They tend to spend more time in our stores and require more guidance from our GrowPros. The stores play a crucial role in this process, as they are a key asset for GrowGen, and we will continue to expand to over 100 locations in 2023. The learning experience for individual or new growers who visit our stores is invaluable, as they can learn how to cultivate both cannabis and other associated plants. We believe that with the introduction of home-grow regulations, people will increasingly cultivate plants in their backyards.

Okay. That's it for me. Thanks for the color, Darren. Appreciate it.

Thanks, Scott.

Thanks, Scott.

We can go to Glenn Mattson of Ladenburg Thalmann.

Hi, thanks for the question. I'm interested in how you're approaching the newer markets on the East Coast and in the Mid-Atlantic, and even a bit in the Midwest. Is there anything different about the competitive landscape in places like New Jersey and some markets in New York, considering these are new territories? It seems there's not much existing competition. However, in states like Illinois and Pennsylvania, the market is more established. I'm curious if you've noticed anything different compared to past experiences. Additionally, regarding your relationships with MSOs, many of them are setting up stores and cultivation operations in these states. Do you think that gives you an early advantage as they expand into the Northeast, especially compared to other competitors? Thanks.

Yeah. Glenn, we currently transact business in most states where the MSOs are located in the large single-state operators, so it certainly does give us an advantage. When you look at the competitive landscape in these states, Pennsylvania, whether it's New York, New Jersey, there is very little competition in those states. And what GrowGen will be doing, as we stated earlier, we'll be opening smaller stores with distribution centers, which will bring down the cost of opening these stores and really bring up the profitability. There is very little competition back on the East coast and certainly in the Mid-Atlantic states that we will be going into. We look at quicker ramps in these states, especially the states with home grow rules.

Great, thanks and one last one if I could squeeze in just, I'd maybe mentioned I missed but can you talk about any issues in the next say 6 months, with supply chain if there's any new issues or if you see that kind of subsiding over time? And with that maybe a little bit on commodity cost pressure in your ability to pass that on. Thanks.

As far as the supply chain and commodity cost increases, there's nothing really new to report there. We're still dealing with the same issues as the rest of the country on both sides of that. We do think that our investments in inventory will help mitigate some of their reliance on just-in-time delivery of products, as well as mitigate some of the impact of price increases for the short term for us as a Company.

Ladies and gentlemen, that concludes the question-and-answer session. I would now like to turn the call back to Darren Lampert for any additional or closing remarks.

I'd like to start by thanking each and every one of our veterans and our military for everything they do every day to keep our country safe. But also, thank you to each and every one of our employees and shareholders. I wish everyone a happy and healthy holiday season. We look forward to sharing our successes with you within the next few months, and we thank everyone for your continued support. Thank you.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.