GrowGeneration Corp (GRWG) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the GrowGeneration Corp. 2021 Second Quarter Conference Call. (Operator Instructions) This conference is being recorded today, August 12, 2021, and the earnings press release accompanying this conference call was issued this morning.

On our call today is Darren Lampert, our CEO and Co-Founder; Michael Salaman, President and Co-Founder; Jeff Lasher, our CFO; and Tony Sullivan, our COO; and Grow Generation's Head of Investor Relations, John Evans.

I would now like to turn the call over to John Evans.

Good morning. I would like to welcome everyone to the GrowGeneration second quarter 2021 earnings conference call. After management remarks, there will be a 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 the terms such as believe, expect, intend and may. You should not place undue reliance on forward-looking statements.

Actual results may differ materially from these 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 today, as well as, risks and uncertainties included in the section under the caption risk factors and management's discussion and analysis of financial condition and results of operations in our annual report on Form 10-K filed with the SEC and any subsequent Form 10-Qs and Form 8-Ks filed with the SEC.

Following prepared remarks today, we will open the call for questions. I'd also like to remind everyone that today's call is being recorded, and an archived version of our call will be available on our website later today.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 President and Co-Founder, Michael Salaman.

Thank you, John, and good morning. Our second quarter record results exemplify our continued focus on the execution of our business plan, and we are very proud of the results our team achieved. For the year, we have closed 12 transactions and have added a total of 20 new locations to our portfolio of garden centers that now totals 58. Our company continues to attract the best-of-breed and largest chains of hydroponic operators as evident with our recent signing of HGS Hydro, the country's third largest chain of hydroponic stores with 7 locations across the state of Michigan.

In the quarter, we hired Paul Rutenis as Chief Merchant Officer; and Dennis Sheldon, Senior VP of Global Supply Chain and systems, who, along with Jeff Lasher, our Chief Financial Officer; and Tony Sullivan, our Chief Operating Officer, had tremendous experiences at the C-Suite level, to lead our team and execute our plan. Our strategy set forth several quarters ago have begun to pay dividends with better margins achieved from a wider product mix of private-label and proprietary products.

As we navigate through construction delays, our new store openings planned for Q3 will be Q4 events. In 2021, 4 states pass legalization, New Mexico, Virginia, Connecticut and New York. Additionally, New York is expected to have licensing starting in 2022. Today, we operate 12 of the 18 states that have adult-use laws with a goal to expand our operations to 14 states by the end of the year.

I will now turn the call over to Darren, who will present our second quarter 2021 results. Darren?

Thank you, Michael. Good morning, and welcome to our second quarter 2021 earnings conference call. Before I begin with my prepared remarks, I'd like to thank each and every one of our staff and customers for their continued hard work, dedication and loyalty. Our best-in-class staff is now over 600, with over 500 of our teammates experienced Grow Pros. We have created the largest sales team of hydroponic product specialists in the country.

The company generated revenues of $126 million in the quarter, a 190% increase year-over-year with a 60% increase in same store sales. The company reported second quarter 2021 GAAP pre-tax net income of approximately $9.6 million compared to pre-tax net income of $2.7 million in the same period last year. Earnings per share, inclusive of tax expense, was $0.11 compared to $0.06 in the same period last year.

Adjusted EBITDA grew 230% to $14.5 million for second quarter 2021 compared to $4.4 million in the same period last year or $0.24 per share. As we continue to expand our operations and serve more customers, we are raising our fiscal year 2021 revenue guidance to $455 million to $475 million and maintaining adjusted EBITDA guidance for 2021 of $54 million to $58 million. The company continues to balance store acquisitions with the delays and timing of commercial build-outs and new store openings.

It should be noted that in Q2, we experienced a higher sales mix of seasonal outdoor products based upon recent acquisitions of West Coast Garden Centers. We operate 58 locations across 12 states today with the addition of HGS, who have added 27 new locations this year. When these transactions close, the company will have 68 garden centers across the country. We strive to finish the year with over 70 locations and over 100 locations by 2023.

In addition, these new locations will enable us to optimize our supply chain for both private-label and distributed products to ensure that we have the right product when and where the customers need them, either to the store or directly to their grow operation. We have over 100,000 walk in customers per month to our hydroponic garden centers. Our e-commerce channel grew from $3.3 million to $12 million in the quarter.

Transactions were up 55% over same period last year, and we attracted approximately 1 million unique visitors to growgeneration.com. We continue to see strong growth coming from our e-commerce website. We continue to focus on margin expansion strategies that include furthering the deployment of more private-label products, acquisitions of proprietary products and driving more efficiencies at the purchasing level as we continue to scale and grow top line revenue.

Our private-label and proprietary brand sales were over $8.9 million in the second quarter of 2021 compared to $408,000 same period last year. In the first half of the year, our sales of private-label are up from $557,000 in 2020 to $14.8 million in 2021. Our steadfast focus on rapid strategic growth in key markets, both organically and through acquisitions, has resulted in a record revenue and EBITDA.

With the anticipated addition of HGS, we will operate 1 million square feet of retail and warehouse space. GrowGen is a tremendous team of essential employees who've made a commitment to our company and customers, I cannot be any prouder. I'm inspired by their efforts and dedication that they have worked tirelessly to serve our customers and communities.

I will now turn the call over to Tony Sullivan, our Chief Operating Officer, will brief everyone on our key operating initiatives, executed in second quarter of 2021 and then turn the call over to our CFO, Jeff Lasher, who'll provide more financial detail on our second quarter 2021 year results. Tony?

Thank you, Darren. We had another successful quarter with record financial results, and we're very proud of our team's continued growth, execution and performance in the second quarter. In 2021, our company purchased a total of 20 locations, and we have integrated the acquisitions of 2 leading proprietary product companies, Canopy Crop Management acquired in December of 2020 and Char Coir acquired in March of 2021. Both companies support our important private-label strategies moving forward.

Also, we have now integrated Agron.io, our B2B online sales platform for our commercial customers. We have developed a documented and consistent team approach to acquisitions and integration of the companies we are purchasing. Our proven process allows us to close multiple transactions in any given month and book the revenue on the day of closing. Our proven GrowGen model ensures we leverage our scale and size to increase sales, improve customer service and efficiencies throughout the process.

Most importantly, we plan and spend the necessary time to onboard, teach and train our newest GrowGen family members. We have developed a real estate and 2-year growth strategy that is targeting the best greenfield opportunities throughout the U.S. We are building a DC hub, multichannel fulfilment and spoke model to better serve the rapid growth we are experiencing in our industry.

Today, we operate distribution and fulfilment out of our 60,000 square foot location in Sacramento, California and 40,000 square foot in Tulsa, Oklahoma. Earlier this year, we announced the additional 122,000 square feet in Southern California that will serve as distribution and fulfilment locations for the company. We are in the process of building additional locations that will serve as fulfillment service centers that include 25,000 square feet in Phoenix, Arizona and 58,000 square feet in Medley, Florida. We expect these locations to be fully operational and contributing by Q4.

Turning our attention to the omni-channel and our new capabilities in e-commerce, we have invested significantly in our new website launching BOPUS, improving design, navigation, speed and functionality. At growgeneration.com we are currently testing buy online, pick up in-store, pick pack and ship and curbside pickup solutions. As a multichannel retailer, nothing is more important than understanding your customer shopping needs. We have just completed a detailed brand tracker and customer segmentation analysis that will enable us to better identify, serve and target customers where they consume information. We will be optimizing through mobile and digital solutions to drive additional traffic to all segments of our business.

I will now turn it over to Jeff, our CFO, to review the financial highlights. Jeff?

Thank you, Tony. As Darren previously discussed, revenue for the quarter was $125.9 million compared to $43.5 million last year, an increase of $82.4 million or 190%. The increase in revenues is primarily attributable to a $45.4 million increase in revenue related to stores acquired since first quarter of last year, an increase of $23.3 million from same-store sales and an $8.7 million increase in e-commerce revenue as that channel grew from $3.3 million to $12 million.

Sales from stores opened last year in the second quarter increased from $38.9 million to $62.2 million. Our same-store sales comp based for the third quarter is over $50 million and grows to $55 million in the fourth quarter as we anniversary acquisitions and stronger 2020 sales. Gross profit margin was 28.4% for the quarter, up 170 basis points from prior year. Driving this margin expansion was an increase in revenues from both private-label products and distributed products, which were 6.75% of revenues for the quarter compared to less than 1% of revenues for the same period last year. Gross profit dollar generation was up 208% from prior year from increased revenue and margin expansion.

Total operating expenses grew in line with revenue from $8.8 million to $26.1 million. Store operating cost totaled $12.6 million for the quarter compared to $3.9 million for last year. That was driven by the 190% increase in revenues and the addition of 29 locations acquired or opened after second quarter 2020, and one location that was acquired during Q2 2020 that had full quarter expenses in 2021.

In addition, the company has 6 locations under development that did not produce revenue in the quarter. These locations include 3 greenfield locations that will open in 2021, two relocations scheduled for Q4 2021 and one location that is under development. We did leverage selling, general and administrative costs as those expenses increased from $4.4 million to $10.6 million, a 141% increase or $6.2 million, more than explained by support costs for the enterprise that includes the costs associated with the stash in the infrastructure necessary to continue to profitably grow the business in future periods.

Amortization of intangibles increased from $93,000 in second quarter 2020 to $2.1 million in the second quarter of 2021. We expect amortization expense to continue as a result of intangibles acquired from acquisitions. Income tax expense increased year-over-year from $156,000 in the second quarter of 2020 to $2.9 million in the same period 2021. Effective tax rate was 30% in the quarter as a result of disallowed deductions in federal taxable income from intangible amortization and share-based compensation.

Net income for the quarter was $6.7 million compared to $2.6 million for the same period in 2020. Net income per share was $0.11. Adjusted EBITDA, which excludes the expenses associated with interest, taxes, depreciation, amortization and share-based compensation, was $14.5 million for the quarter compared to $4.4 million in 2020. The company ended the quarter with $67.2 million of cash and $57.4 million of marketable securities that are mature and available for sale, if needed. Total liquidity is $124.5 million at the end of June.

The closing of HGS Hydro will result in a cash payment of approximately $55 million based on present inventory levels at that company. Excluding the commitment the company has made to acquire HGS Hydro, the company retains $70 million of net dry powder for acquisitions or working capital needs. Net cash used in acquisitions and other investments totaled $48 million for the first 6 months of 2021.

In addition, the company has issued 100,000 shares in conjunction with acquisition activity to-date, and we'll issue approximately 400,000 shares in connection with the HGS Hydro acquisition. As Darren discussed, we estimate that revenue for the year will be between 455 and $475 million based on the 68 garden centers and the 2 proprietary brands that we operate now or will operate for the balance of the year.

We estimate that EBITDA adjusted for share-based compensation with those operations will be between 54 and $58 million. In total, we expect the revenue in the second half of 2021 to be between 234 and $254 million compared to prior year of $117 million, of which $102 million is in the same-store sales base for the second half of 2021. Comp base in the first half of 2020 was $66 million.

To add one more bit of clarity, included in this guidance is an assumption that we will close the acquisition of and begin to operate HGS Hydro in the fourth quarter. We had a busy quarter of business expansion announcements, including the acquisition of Downriver Hydroponics, a Michigan-based garden center and The Harvest Company, a Northern California-based garden center with stores in the Emerald Triangle region of California.

The second half of 2021 has already resulted in 3 acquisition announcements that are included in our guidance. This includes the acquisition of HGS Hydro in Michigan, Aqua Serene in Oregon and Mendocino Garden supply in California. These acquisitions will result in 10 new GrowGeneration locations.

Now I'd like to turn the call back to Darren for concluding remarks before Q&A.

Thank you, Jeff. The GrowGen team delivered another record second quarter. The entire enterprise generated more revenue in the first half of 2021 and all of 2020. For adjusted EBITDA in the first half of 2021 is more than all previous TReDS combined. Our ability to attract and purchase the best-of-breed and largest hydroponic operators in the country was again evident with our signing of HGS Hydro, the country's third largest hydroponic chain. The strategies implemented several quarters ago are now positively impacting margins. We increased our inventory positions across all key product categories to get ahead of price increases as well as expanded more private-label purchases.

Our private-label and proprietary products continue to grow. The company continues to focus on building out a world-class supply chain with omni-channel functionality that will allow the company to continue to deliver just-in-time inventory for all types of growers and cultivators. Guidance for the balance of the year will be set after the company closes the HGS Hydro transaction.

Our leadership position is driven through our corporate mission statement to be the largest chain of hydroponic garden centers in North America. As we look into future years, we think there are still tremendous opportunities to add to our network through acquisitions of independent retailers and open greenfield locations in markets that are expanding customer demand. We look forward to continuing to provide guidance as need be, and we're excited to share our successes with our shareholders, our management team and partners.

Now we would like to turn the call over to the operator to take a few questions.

Your first question comes from Brian Nagel from Oppenheimer.

Congratulation on a really nice quarter, very nice first half of the year. So my first question, I guess, this is for Darren and Jeff or whoever, really. Just with respect to guidance, if you look at the trends you reported here in Q2 and your articulation of this trend, and the business is clearly strong, if not getting stronger. You've made a number of significant acquisitions. Why not lift sales guidance more given the trends, given even what I perceived to be the other beat to expectations in Q2? And then the same kind of question for EBITDA. Why don't you reiterate the previous guidance for EBITDA here?

So I'll go first, and then Darren will give some color. When you look at the same-store sales for the first half of the year, we were up 60% in Q2, and the team really delivered a very strong quarter in the last 90 days. In the first quarter, we were up 52% on a same-store sales base. The comp base in that first half was $66 million from 2020. So when we look at the second half comp base in 2021, we had same-store sales in that comp base of $100 million because of the expansion of sales last year in 2020 after the pandemic influence first and second quarter. We feel pretty strongly about the business overall, and we're still in the same range of full year expectations that we discussed earlier in the year of same-store sales increase of about 25% overall when you blend all 4 quarters together. But it's important to remember that the comp base in the second half does materially impact the same-store sales basis as we're comping against more strength in the second half of 2020, which we're proud of, by the way. Darren?

Brian, also, we're seeing certainly a tremendous slowness to market with new states coming on. The East Coast right now, when you look at New Jersey, you look at New York, and you look at some of the other states coming on board, we've seen very slow movement in-licensing. And also -- we've seen slowness in building. We had 4 operations that we thought would be operational early third quarter, even late second quarter. But we've seen there really because of building supply issues, it's taking us longer to build stores. So certainly, some of the larger stores that we have coming to market, we don't expect to come online to the fourth quarter. So we're being extremely conservative with guidance right now to Wall Street. We operate in 12 states. We have 38 states to go. This business has grown from $30 million back in 2018, approaching $500 million in 2021 and that's with 12 states. We still believe that we have tremendous work to do in the 12 states that we're in, we have tremendous growth left ahead in these 12 states. But even more exciting is the 38 states coming to market, where you'll see same-store sales comping for many years.

We've been comping off of tremendous same-store sales growth over the last 3 years. 2018, you saw, again, a $30 million business. And you saw a 37% same-store sales growth, followed by 63% sales growth. And you're seeing us comping almost in the mid-50s this year. That's in mature states where we have stores that have been in business for over 10 years. So like anything else, we guided Wall Street earlier this year to same-store sales growth, really high teens to 20, and we are beating those numbers. But there is no secret that in states that we've been in that are maturing, that same-store sales growth can't continue with this incredibly rapid pace. So we're taking a conservative look into the business throughout the remainder of the year with supply chain issues, with container costs going up. And one of the more impressive parts, what you're seeing is an incredibly quick adoption of our private label brands, which is certainly balancing our EBITDA numbers and really balancing our margins, which are almost two points higher than last year. So I couldn't be any prouder of what the team has done in the first half of this year. I certainly expect a very strong second half of this year. But right now, with COVID and with supply chain issues, we are taking a very conservative approach to guidance right now.

What about the e-commerce sales? It seems like you've seen some pretty rapid growth in e-commerce sales. So the question I have is, as I understand it, e-commerce has, for the most part, been kind of a clearance mechanism for you when you buy stores or inventory, you're not going to be carrying, you can go through e-commerce. Is the strategy change in there to be more of a true sales channel?

I'm going to pass it over to Tony.

So if you look at our e-commerce business, it may have started out, Brian, as a little bit of a clearance, but it is definitely becoming twofold. Twofold, we have a retail channel that is performing greatly, as you know, we've just recently acquired Agron.io, which gives us additional sales capability within the B2B and the commercial side of the business. And combined, we are seeing significant growth on both.

Your next question comes from Andrew Carter from Stifel.

What I wanted to ask was, you mentioned a lot of the stores that weren't open according to the plan. So I guess my first question is, what are the costs kind of burdening this quarter? And since they're not opening to the fourth quarter, how would you expect that to expand? And within that, what's kind of the delta in kind of your expectations in contributions from those stores versus now a drag for the third quarter and not operational into the fourth quarter?

So I'll start off with the cost side, and then I'll turn it over to Tony to discuss kind of what we expect out of the new store openings. But in the cost side, as we talked about, the units that we plan on opening in the second half, the 2 in L.A., the 1 in Oklahoma, and we have a unit down in Mississippi. We also have some relocation of existing operations. And there is a burden on the business, SG&A and other components of store operating costs while we're opening those locations. We are excited about those locations in coming online in the second half of this year. We continue to build those locations. We hit some constraints like everybody else, but we do anticipate that those locations will be up and generating revenue in the second half of this year. The overall cost burden in the first half was less than $1 million, but it will mitigate itself in the second half as we continue to work toward opening those locations.

And just to add to that, guys, as you guys know and everybody else is reporting, there are supply chain logistic disruptions. There are lingering COVID effects going on, as you guys know, cities are trying to get back up and running. They're slow to get permits, they're slow to get licensing and those impacts are impacting us as well. But as Jeff said, our planned stores, whether they were new stores, relocated or expanded stores that were planned for late Q2 or into Q3 will be Q4 events.

I mean, I was asking for the cost for the third quarter as well. But I guess the second question I would ask is, and you mentioned the same-store sales base for next year. Are you seeing any -- number one, what's the variance in the store performance? And then in that $100 million same-store sales base you're talking about, I know you mentioned slower builds. Could you give a mix of how much of that's durables versus consumables? Because if it's slower builds, then I wouldn't expect your durables performance to be kind of under pressure in the second half of the year?

So you're referring to our product mix in the second half. Our forecast for the second half has about the same level of durables and consumables. As you know, about 60% of our sales comes from the consumables side. And we still see a strong pipeline of commercial activity in the back half of the year. So we're up against more difficult comps as we've talked about, where the first half to second half in 2020 grew by 50%. But we're still excited about the growth of the business in the second half of 2021.

Andrew, we've also seen -- we're certainly having issues on the building side, getting up some of our new operations up and running. But we're seeing the same from some of our customers. So what you're starting to see is pushback in building. It's not pushback in building, but it's push back in completing building. So in a growth facility, usually equipment that we sell is last in, especially on the lighting side. So you're seeing a little slowing in benching coming in and certain products to get some of these facilities done. So we're seeing a little pushback right now, it's not slowing, it's getting pushed back. So we'll see facilities that we thought would be done in the third quarter, will be done in the fourth quarter. Not withstanding that, we saw an extremely powerful June coming out on the building side of it, which was probably our strongest month that we've ever seen at GrowGen. So it's not that we're seeing a slowing, we're certainly seeing some pushback, longer length time to get some of these facilities built. We are seeing absolutely no slowdown on our consumable products.

Your next question comes from Eric Des Lauriers from Craig-Hallum Capital Group.

Congrats on another strong quarter from you guys here. So e-commerce certainly picking up, especially with this Agron acquisition. Wondering if you can help us understand how that's impacting the business from a margin perspective. It's great to see those -- that line item expanding here with private-label. But just wondering if you can help us understand how we should think of e-commerce from a margin perspective?

This is Michael. The Agron acquisition was done strategically to add a business-to-business marketplace. And what we're very proud of and excited about with the Agron acquisition is that it's demonstrating a higher dollar per transaction versus our growgeneration.com website, which is attracting more of a craft consumer. So when you look at a blended strategy between growgeneration.com and Agron.io we're really attracting the widest and broadest reach of growers in the marketplace.

Great. And then just, I guess, any comment there on the margin dynamics of Agron or just the e-commerce business overall?

Margins are coming in right in line, Eric. So it's coming in, in the mid-20s. So we're very, very satisfied with the performance of both websites. And they're very, very much in alliance with the budget and the plan that we've set forth for both of those assets which the company has operated, both channels.

Yes, Eric, just to be more specific, our e-commerce is running usually about 4% to 5% lower than our margin that you're seeing in the overall business.

Yes. I think that's to be expected, but helpful color, I appreciate that. And then I guess just last from me, on the M&A outlook here. So presumably, plenty of more hydroponic stores, I guess, both from an acquisition and organic expansion perspective, especially with more states legalizing here. But maybe as we kind of look beyond new stores, whether it's something like Agron or e-commerce or maybe other verticals even. Anything else sort of in the pipeline that we should be expecting, looking out for? Or should it be sort of more of the same continued store acquisitions here? I'm just kind of wondering how you're thinking about your M&A pipeline as the business is evolving and as you guys continue to kind of pull away with market share on the retail level here?

Yes, Eric, as we always said, we target best-of-breed talent, operator zone and dominate the markets we operate in. We stay very disciplined on our due diligence and modeling. To-date, we haven't seen any material change in acquisition multiples, you'll see more of the same from GrowGen, again, going forward right through 2022 and 2023. Our pipeline remains large and continues to grow. And like anything else, I think you've seen multi different purchases from GrowGen this year from the product side, from the e-commerce side, from the store side, and also GrowGen opening new stores. So really, there's certainly four buckets that you will see GrowGen continuing and if we find niche products that we believe will fit GrowGen's proprietary brand products, we certainly are out there bidding on them. And certainly, on each and every store and the pipeline as large as you're seeing from the recent announcement of the HGS transaction, and we're going to continue to do what we're doing. And once again, we're in 12 states, there's 38 to go and almost $0.5 million in business and growing in these 12 states. So we couldn't be any more excited about the future of GrowGen, what we've built in the past 3 years and really the future of this industry. This is the early stages of many decades growth. This industry right now is a $20 billion industry compared to the Wine & Spirits industry, we're seeing almost a $1 trillion industry. Forecast for this industry are going to $100 billion by the end of the decade. So you're going to see a lot of building, a lot of new plants in the ground. You'll see a lot of opportunities for GrowGen on a go-forward basis.

Your next question comes from Mark Smith from Lake Street Capital.

First, I just wanted to ask a clarifying question. What is your guidance assume for end in-store count during the end of the year? And does your guidance, revenue guidance, in particular, include HGS Hydro?

So I'll walk you guys through that. So as we said on the script today, we have 58 stores in the business today. All 58 of those are assumed in the revenue guidance. We have 6 stores that we will acquire from HGS Hydro, and we will have a seventh HGS Hydro location up and running, right about the same time that we take over the business in Q4. And those 7 stores are assumed in our guidance as well. So the guidance is the book of business that we own or have committed the company to acquire for the balance of 2021.

But the guidance does not include any additional acquisitions? And what about the kind of greenfield stores expected to open later this year?

It includes the greenfield stores, the 2 in Southern California and the 1 in Oklahoma are included similar to what we had in the first quarter and acquisitions that we have not committed the business for are not included, and we would do an update if there was a material change to the business' guidance.

Excellent. Second for me. Private-label sales certainly coming along. Can you talk about the difference in private-label sales at comp stores versus kind of new stores, the comp stores trending above this kind of 7% system just might average?

We're seeing consistent private-label sales across the board. As you guys can see, we are ending the quarter up around 7%, it's a significant increase over last year. And as we shared with you in first quarter, this was the beginning of building out our entire private label franchise brand collection. We're looking at every department, every area of opportunity. And right now, we're seeing pretty consistent across the board selling, both at our acquired stores as well as our current comp-based stores.

And then the last one for me is just looking at operating expenses, maybe up a little bit here this quarter, what are you guys seeing from a labor inflation standpoint? And then I know you've called out supply chain, other inflationary headwinds that you guys are seeing that maybe we should be keeping our eye on?

Yes. Let me walk you through a couple of the headlines just to reiterate some things that we'd said on the script. So the amortization expense, which is included in our total operating expense that you're looking at there. Our amort expense was significantly higher than prior years, as we talked about in the script, where we went from less than a couple of hundred thousand of amort expense in 2020 to $2.5 million in 2021. We had a total depreciation and amortization of $2.9 million in Q2 of 2021, and that compares to $2.1 million in the first quarter. So that was a significant increase in our amort expense that's backed out for adjusted EBITDA, but I did want to clarify that, that rolls through the net income line. And as we do acquisitions and add intangibles to the business, which gets expensed over time, we do see that number continuing to increase as we increase the size of the business through acquisitions.

As far as our labor cost, if you look at store operations as a percentage growth relative to our revenue, we're in line with that, and we're pretty excited about our maintenance of cost controls in the stores. We have paid our employees a fair wage for quite some time, we continue to review those wages, we continue to look for opportunities to reward our employees. We consider ourselves a good steward of their career progress, and we continue to look for opportunities to improve their career prospects with us and continue to profit from our growth. We're very excited with our employees, and we not only try to treat them well, but we also value those employees and our associates throughout our 58 stores we have today. And as we acquire the HGS stores into the family, we're excited to welcome them into the family as well.

Yes. Mark, what you've also seen is we've built the C-Suite out as we certainly have told Wall Street, we have brought a world-class team into GrowGen. So certainly, in the last quarter or two, you've seen an increase certainly on the C-Suite side of GrowGen, our C-suite is built out right now, and we couldn't be any prouder of the team on a go-forward basis.

Yes. I mean, it sounds like you guys this year and recently, 've been building a base for continued future growth as we look at kind of the BCs, building out the C-Suite? Is that kind of a fair way to look at some of the expenses this year?

100%.

Yes, absolutely. But again, there is leverage there. I mean, last year, if you look at our SG&A as a percentage of revenue was 10.2% in the second quarter, this year, it was 8.4% in the second quarter. So we are leveraging our SG&A as we grow our business. But there is infrastructure needs of the business, and we continue to look for opportunities to fill in the holes in the business that were created because of our exceptional growth that we've had year-over-year. We've done more revenue in the first half than we did in all of 2020. And that means that we need to bring on both executives as well as associates within the office staff and look for ways to service the business better through people, processes and technology and invest it back into the infrastructure of the business to build the business for the future and continue to grow this business in '22 and '23.

Our next question comes from Mike Grondahl from Northland Securities.

This is Owen on for Mike. I just have a couple of quick questions. How is the expansion of the commercial customer base going? And are there any material updates from the previous quarter?

Commercial continues to be a focus for the company. We continue to acquire new commercial customers. I mean our commercial division expands quarter-over-quarter. We're adding more MSOs quarter-over-quarter, we're adding single state operators. And I think what we're most proud of is the service. So not only are we acquiring, we're retaining customers and providing end-to-end solutions for these commercial customers that are demanding, and we're able to customize and provide them a personalized, high-touch solution for all their product needs. So the commercial division is certainly a huge growth engine and a major sales channel for the company.

Got it. And then are there any other improvements to the customer experience? I think you guys mentioned curbside pickup and other improvements on the e-commerce channel, anything else to call out here?

Yes. As you guys know, we updated each of you on it, both in the first quarter and now in the second quarter, we have launched our BOPUS, buy online pickup in store. And as you guys know, we're building and have built a multichannel approach to our business. So we want to be able to get that product to the customer any way they need it, whether it is buy online, pickup in store, curbside, pick, pack and ship, last mile, we are working through all of those efficiencies and solutions. And as we also noted, who is going to take that technology even further. So we're really excited about the new initiatives and where we're headed.

Your next question comes from Aaron Grey from Alliance Global.

Congrats on the quarter. So just quickly, I just want to know maybe if you can provide some color on maybe some geographic performance during the quarter and also how that's baked into your outlook for the back half of the year, certainly appreciate the (inaudible), I would like some conservatism there, but obviously going against a different comp base. So I just wanted to know maybe if you could kind of talk about some geographies to where you might believe you're going to get backed up for a comp based? Any kind of color there would be helpful.

Yes. When we look at the geographic performance of the business, it is not terribly different across the country. We're still seeing growth in Michigan, obviously, because of our investment in HGS. We're very bullish on the state of Michigan. And we continue to see growth in other markets that are less mature than California and Colorado and Oregon and Washington, such as Oklahoma and Massachusetts in the Northeast corridor. So we're excited about those opportunities. And as we look at the pipeline for acquisitions going into 2022, we are focused on building out a network in the Northeast to build on our geographic presence on the West side of the U.S..

Great. That's helpful there. And then just want to dive back into the private-label initiative, at 7%, say, less than 1% last year. I just want to know in terms of with COVID kind of being able to talk to more people in the stores. Any color in terms of you can give to how much of a lift you might have seen as store starts to open back up and it was kind of talks to customers coming in and how that's helped with your private-label initiative, more of a granule and how you think that will continue to improve as people continue to come to the stores and you can have more of that educated assisted sale?

So I'll take that as a 2-part question. From the COVID side, as you guys know, we have reported to you multiple quarters that we ran an essential business, and we're an essential supplier. And because of our 5 phase program, Phase 1, 2, 3, 4, 5, we really had the additional protocols, we stayed one step ahead of COVID and did not see as much impact because of our essential supplier position. From a private-label standpoint, as you know, we've ramped this up from first quarter to second quarter. And as we've shared with you guys, we have delivered around approximately 7% of our total revenue. As we've been able to get this product into stores, it has been selling exceptionally. And as you can see, and as we've reported over the same 6 months last year, we went from up almost 2,548%. So we're pretty excited and bullish on our private label. And as this continues to come into the back half, we expect equally of strong sales.

Aaron, the only thing I would add to that is that the acceptance at the store level, at the customer level has been certainly on plan, and we're seeing that the company strategy of bringing these private-label products to our customers at a great price as well as a high-quality product is certainly not only helping us on the margin side, but it's offering GrowGeneration back product, and we're seeing tremendous acceptance from the customers and that relationship between our Grow Pro and our customers in delivering private-label products is working out extremely well for the company.

Your next question comes from Scott Fortune from ROTH Capital.

A lot of them have been answered. But real quick, just as a reminder, bringing the timing of new greenfield builds? And how quickly you ramp to get that fully optimized at the store level with company margins and a strong customer base, just kind of step us through the timing of that fall optimization for these new builds as we look out into 2022 here?

Yes. So if you take the new process, we anticipate 60 days as we move into the project and have it up and running. We run big grand openings, as you guys know, COVID has impacted us a little bit on our ability to do grand openings. But the exciting thing about new builds as you step through, we've got a pipeline of talent ready to go. We've got a proven process that takes us from 60 days out to the grand opening. And then we have a process of training implementation and getting it up and running with the customer the next 60 days. So we've seen a ramp. And we saw it with Tulsa 2, and we'll walk you guys through it. We've walked you through it before. But we saw a ramp in the first 30 days, where it did significant volume, but by the next 30 days, it was up and running doing $1 million a month. So we expect that it takes 60 days to lead in and 60 days to get to the level we expect out the backside.

Your next question comes from Glenn Mattson, Ladenburg.

Q3, is there increased exposure to outdoors, is there any thoughts about seasonality? Is there any possibility that top line would be down sequentially? Or is it -- is that not really a factor?

Again, second quarter, as everyone knows, is outdoor season out West. We recently purchased GrowBiz, which is a Northern California centric business and a few other shops in Washington and Oregon. So we certainly saw a very strong outdoor season this year in both parts of -- in California and also Washington and Oregon. And it's onetime planting. So we certainly don't see that outdoor continuing into the third and fourth quarter.

Next, on the -- some of the throttle back in the growth rate, it sounds like you're talking about some disruption in the process of putting on new facilities for some of your customers. So I'm just trying to get a sense of the balance between the temporary factor that that's involved and whether or not you see like a snapback at some point next year? Or how much of it is kind of like the law of large numbers or just the ability to comp against some of that stuff, like just the give and take between those 2 forces, some color there would be great?

As we said previously, the new store openings, which were scheduled for third quarter are going to be pushed out to the fourth quarter. And I can tell you that our acquisitions are certainly in line and are as strong as they ever have been in terms of the pipeline.

And I guess, lastly, on the cash balance post the HGS acquisition. Is that -- clearly, it's enough to fund the business and continue to grow, but is that a number you're comfortable with in terms of your ability to expand over the next 2 years? Or do you have to increase that cash position to complete all the acquisition plans you expect over a multiyear period?

So I'll take that, and then I'll turn it over to Darren for some comments about it. The company ended the last quarter, the second quarter was $67 million of cash and $57 million of marketable securities. When you add those two together, we're sitting at $125 million of total liquidity. Those marketable securities are mature and available for us to use if necessary. So it's a total of $125 million of liquidity. We expect a cash outlay for HGS Hydro in the neighborhood of $55 million based on the present inventory levels. Excluding that commitment, we still have $70 million of liquidity to go after additional acquisitions. And we continue to generate cash over the next six quarters to help fund the business as we keep our options open for additional acquisitions over the next 1.5 years. We have that opportunity. If there's a need for capital, we'll reassess and have a conversation about that internally and then communicate that externally.

I think that answers it, Jeff.

There are no further questions at this time. I'll turn it back to Darren for closing remarks.

Thank you. I'd like to start by thanking our 600-plus employees with a tremendous job that they have done during very difficult times in our country. Our employees have worked tirelessly to serve our customers and giving back to our communities that we service. I'd like to thank each and every one of our shareholders for having faith in this company. The canopy's industry is not a short-term phenomenon, and we believe there is many decades of hyper growth ahead. GrowGen currently operates in 12 states with incredible potential ahead. Even more exciting is GrowGen is another 38 states to build-out. We have scaled this business from $30 million in sales in 2018 to revise guidance for 2021 of $455 million to $475 million. I remain as confident as ever in our business model. As for the future, the staff we are building, the executive team, and I couldn't be prouder to be the CEO, Co-Founder of GrowGen. Everyone stays safe, and we look forward to updating everyone in November with our third quarter numbers. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.