FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
of ☐ ☒ As of “Hydrofarm” and other trade names and trademarks of ours appearing in this Annual Report on Form 10-K are our property. This Annual Report on Form 10-K contains trade names and trademarks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies. The following graphic illustrates a representative set of our market-leading products across key CEA product categories: Our Industry Is Large 2026 come. This significant growth in the U.S. cannabis market is expected due to (i) state initiatives for new adult-use and/or medical-use programs in additional U.S. states, (ii) expanded access for patients or consumers in existing state medical or adult-use cannabis programs, and (iii) increased consumption driven by greater product diversity and choice, reduced stigma, and real and perceived health benefits in states with existing adult-use or Industry publications project that the global vertical farming market will reach approximately $6 billion in 2023, up from $3 billion in 2019 and representing a 24% CAGR from 2019 to 2023. The Broad Portfolio with Innovative Proprietary Offerings and Recurring Consumables Sales North America include liquid nutrient blending and bottling, soil blending and bagging, dry fertilizer blending and bagging, worm casting production, perlite production, peat harvesting, metal fabrication, LED surface mounting and light fixture assembly. Our Growth and Productivity Strategies Innovative Growers Equipment. Acquiring Value-Enhancing Businesses Government Regulation medical-use. relationships. •certain provisions in the JPMorgan Credit Facility our corporate charter documents and in our current loan agreement and credit facility and under Delaware law could make an acquisition of our company more difficult and may prevent attempts by our stockholders to replace or remove current management or to obtain a favorable judicial forum for disputes with directors, officers or employees; Corporate Information We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference. Investors should not rely on any such information in deciding whether to purchase our common stock. Failure to properly register and maintain these registrations for these products could result in significant penalties, additional costs, product stop-sales or recalls. vaccination programs. Our international operations make us susceptible to the costs and risks associated with operating internationally. As a privately held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a public reporting company. As a public company, we are required to file with the SEC annual and quarterly information and other reports pursuant to the Exchange Act. We are also required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations. Our marketing activities may not be successful. Our acquisition strategy may also result in exposure to certain technology risks during integration of systems of acquired companies to our existing platform. For example on January 31, 2022, certain of our computer systems related to the “Aurora” acquisition that had not yet been integrated into our main systems were the victim of a cybersecurity attack. We have experienced delays in relocating certain of our facilities as a result of issues impacting the availability of transportation and the provision of other services necessary to open the new location. In order to An “ownership change” (generally defined as greater than 50-percentage-point cumulative changes in the equity ownership of certain stockholders over a rolling three-year period) under Section 382 of the Code may limit our ability to utilize fully our pre-change NOL carryforwards to reduce our taxable income in periods following the ownership change. In general, an ownership change would limit our ability to utilize NOL carryforwards to an amount equal to the aggregate value of our equity at the time of the ownership change multiplied by a specified tax-exempt interest rate, subject to increase by certain built-in gains. Similar provisions of state tax law may also apply to our state NOL carryforwards. Following the end of 2021, LIBOR ceased being a widely used benchmark interest rate. Risks Relating to Third Parties If our suppliers that currently, or will in the future, sell directly to the retail market in which we conduct our current or future business, enhance these efforts and cease or decrease their sales through us, our ability to sell certain products could be harmed. affected. Supply and demand and prevailing prices for cannabis may also adversely impact our business. medical-use. In addition, third parties with whom we may do business could perceive that they are exposed to reputational risk as a result of our retailers’ and resellers’ involvement with cannabis businesses. Failure to establish or maintain business relationships due to reputational risk arising in connection with the nature of our business could have a material adverse effect on our business, financial condition and results of operations. Compliance with applicable state laws regarding cannabis activities does not protect from federal prosecution or other enforcement action, such as seizure or forfeiture remedies, nor does it provide any defense to such prosecution or action. In the Risks Relating to Our Intellectual Property From time to time, we may need to rely on licenses to proprietary technologies, which may be difficult or expensive to obtain or we may lose certain licenses which may be difficult to replace, harming our competitive position. We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. We cannot assure you that the interests of our former directors and affiliated persons will coincide with the interests of the investors. So long as our former directors and affiliated persons collectively controls a significant portion of our common stock, these individuals and/or entities controlled by them, will continue to collectively be able to strongly influence or effectively control our decisions. Therefore, you should not invest in reliance on your ability to have any control over our company. See Our Certificate of Incorporation and our Bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. Our security holders may be diluted by future issuances of securities by us. this Annual Report on Form 10-K. relevant. We continue to monitor the COVID-19 pandemic and will adjust our mitigation strategies as necessary to address changing health, operational or financial risks that may arise. The extent to which the COVID-19 pandemic will ultimately impact our business, results of operations, financial condition and cash flows depends on future developments that are highly uncertain, rapidly evolving and difficult to predict at this time. Results of Operations Data Year to year change As more fully discussed in Note Non-GAAP Financial Measures working capital assets. consolidated balance sheet were not impaired. impaired. rates that are based on London interbank offered rate (“LIBOR”) or an alternate base rate. If these rates were to increase above their respective floors, 1% for LIBOR or 2% for an alternate base rate, by 100 basis points, our interest expense on the variable-rate debt would increase by an average of $1.2 million annually. We do not currently hedge our interest rate risks, but may determine to do so in the future. See reporting. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 1, 2022 Reporting INCOME (LOSS) Reverse stock split offering expenses. Use of estimates information The business is organized as information Accounts receivable, which are unsecured except those that are backed by personal guarantees, expose the Company to credit risks such as collectability and business risks such as customer concentrations. Exposure to losses on receivables is principally dependent on each customer’s financial condition. Credit risk is mitigated by investigating the credit worthiness of most customers prior to establishing relationships with them and performing periodic review of the credit activities of those customers. Receivables arising from sales are not collateralized; however, credit risk is somewhat mitigated as a result of the large diverse customer base. No customer accounted for more than 10% of revenues in 2021, 2020, per share amounts) matters The effect of currency translation adjustments on cash, cash equivalents and restricted cash is presented separately in the consolidated statements of cash flows. for doubtful accounts. The Company maintains an allowance for excess and obsolete inventory. The estimate for excess and obsolete inventory is based upon assumptions about future demand and market conditions. per share amounts) Deferred offering costs For 2021, the fair value of the underlying common stock for RSUs is the closing date price of the Company's common stock at the grant-date. Market-based awards 2021 restricted stock units (“RSUs”). Basic and diluted net 2019: The aggregate future minimum lease payments under long-term $610. The BofA Credit Facility The Encina Credit Facility was secured by working capital assets and a second lien on non-working capital assets. $318. The balance of the Encina Credit Facility was $0 as of December 31, 2020, which The Encina Obligors were in compliance with all debt covenants as of December 31, early termination fees totaling $680 were recognized as a loss on debt extinguishment in the consolidated statements of operations for the year ended December 31, 2021. Debt convertible into preferred stock , are as follows: outstanding warrants: Plan. Of the total shares available for grant under the 2020 Plan, 2,118,067 shares remain available as of December 31, 2021. Upon vesting, the RSUs convert into shares of the Company’s common stock. The award granted to 2021. For the year ended December 31, 2021, there were no performance awards with market-based conditions granted. 2021: following: $1,000 and $3,000 at December 31, 2021 and 2020, respectively. The Company recognizes interest and penalties relating to unrecognized tax benefits as part of its income tax expense. The Company’s major filing jurisdictions are the United States and Canada. Due to the Company’s net operating loss carryforwards, the Company’s income tax returns remain subject to examination by federal, foreign and most state taxing authorities for all tax years. and Certain Facilities a LLC that is the lessor. For the year ended December 31, 2021, rent expense for the 2 leases totaled $149. Accounts 2019 Other than disclosed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the * plan or arrangement. Chief Executive Officer and Chairman of the Board /s/ B. John Lindeman Chief Financial Officer /s/ Patrick Chung /s/ Renah Persofsky /s/ Richard D. Moss /s/ Melisa DenisDelaware 81-4895761 (State or other jurisdiction
incorporation or organization)290 Canal RoadFairless Hills, Pennsylvania(Address of principal executive offices)81-4895761(I.R.S. Employer
Identification No.)19030(Zip Code)Registrant’s telephone number, including area code (707) 765-9990Exchange Act:Title of each class Trading Symbol(s)SymbolName of each exchange on which registered Common Stock, $0.0001 par value per share HYFMHYFM The Nasdaq Stock Market LLC ☐☒ No ☒registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐registrantRegistrant was required to submit such files). Yes ☒ No ☐company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☐☒ Accelerated filer ☐ Non-accelerated filer ☒☐ Smaller reporting company ☐ Emerging growth company ☒☐ ☐.: Yes ☐ No ☒December 31, 2020,June 30, 2021, as reported by The Nasdaq Global Select Market on such date was approximately $1.4$2.4 billion. The registrant has elected to use December 31, 2020 as the calculation date, which was the last trading date of the registrant’s most recently completed fiscal year, because on June 30, 2020 (the last business day of the registrant’s second fiscal quarter), the registrant was a privately-held company. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.March 16, 2021,February 15, 2022, the registrant had 33,853,41144,712,413 shares of common stock, $0.0001 par value per share, outstanding.20212022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2020.PagePART I Page PART II PART IIIPART III PART IV iabout us and our industry that involve substantial risks and uncertainties.within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regardingconcerning our future results of operations or financial condition, business strategy and plans, future operating results and financial position, as well as our objectives of managementand expectations for our future operations, are forward-looking statements.because they contain wordsby such terminology as “anticipate,” “believe,” “contemplate,“may,” “will,” “potentially,” “estimate,” “continue,” “could,” “estimate,” “expect,“anticipate,” “intend,” “may,“could,” “would,” “project,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will”“expect” and similar expressions that convey uncertainty of future events or “would” or the negative ofoutcomes, although not all forward-looking statements contain these words or other similar terms or expressions. These forward-lookingwords. Forward-looking statements include, but are not limited to, statements concerning the following:about:U.S.United States and Canada;pandemic,outbreak, on our business, results of operations and financial condition;U.S.,United States and such lawsCanada;regulationsacceptance of cannabis use;Canada;the price of various crops and other factors affecting growers;• in “Risk Factors.”You should not rely on forward-looking statements as predictions of future events. The outcome of the events described in “Risk Factors.”islargely on our current expectations and described future events and trends that we believe may affect our business, financial condition, results of operations, prospects, and financial needs. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to a number of risks, uncertainties and other factorsassumptions described underin the header “Risk Factors”section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. NewBecause forward-looking statements are inherently subject to risks and uncertainties, emerge from time to time, and it issome of which cannot be predicted or quantified, you should not possible for us to predict all risks and uncertainties that could have an impactrely on thethese forward-looking statements contained herein.as predictions of future events. The results, events and circumstances reflected in theour forward-looking statements may not be achieved or occur and actual results events or circumstances could differ materially from those describedprojected in the forward-looking statements.The We disclaim any intention or obligation to publicly update or revise any forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made, and we undertake no obligation to update them to reflect events or circumstances after the date of this Annual Report on Form 10-Kfor any reason or to reflect new informationconform such statements to actual results or the occurrence of unanticipated events,revised expectations, except as required by law.Unless the context otherwise indicates, references in this Annual Report on Form 10-K to the terms “Hydrofarm”, “the Company,” “we,” “our” and “us” refer to Hydrofarm Holdings Group, Inc. and its subsidiaries.We may announce material businessfinancial information“us” refer to our investors using our investor relations website (www.investors.hydrofarm.com/investor-relations). We therefore encourage investorsHydrofarm Holdings Group, Inc. and others interested in Hydrofarm to review the information that we make available on our website, in addition to following our filings with the Securities and Exchange Commission, or the SEC, webcasts, press releases and conference calls.2 Item 1.BUSINESSOverviewdistributormanufacturer and manufacturerdistributor of controlled environment agriculture (“CEA”, principally hydroponics) equipment and supplies, including a broad portfolio of our own innovative portfolio ofand proprietary branded products. We primarily serve the U.S. and Canadian markets, and believe we are one of the leading competitors by market share in these markets in an otherwise highly fragmented industry. For over 40 years, we have helped growers make growing easier and more productive. Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency and speed in their grow projects.For the 2021 fiscal year, we had net sales of $479.4 million. From 2005 through 2021, we generated a net sales compound annual growth rate (“CAGR”) of approximately 19%.eCommercee-commerce marketplace. Over 80%A substantial majority of our net sales are into theto specialty hydroponic retailers, through which growers are able to enjoy specialized merchandise assortments and knowledgeable staff. We also distribute our products across the U.S.United States and Canada to a diversified range of retailers of commercial and home gardening equipment and supplies that include garden centers, hardware stores, eCommercee-commerce retailers, commercial greenhouse builders, and commercial resellers.U.S.United States and Canada.that are supported by 24 patents and 60 registered trademarks. Our product offerings spanspanning lighting solutions, growing media (i.e., premium soils and soil alternatives), nutrients, equipment and supplies and includes more than 6,000 stock-keeping-units (“SKUs”) sold under leading proprietary, exclusive/preferred brands or non-exclusive/distributed brands. Some of our most well-known proprietary brands include Phantom, andPhotoBio, Active Aqua, as well as in-licensed brands such as FoxFarmActive Air, HEAVY 16, House & Garden, Mad Farmer, Roots Organics, Soul, Procision, Grotek, Gaia Green, and Grodan.Innovative Growers Equipment. We estimate that approximatelyin excess of two-thirds of our net sales relate to recurring consumable products, including growing media, nutrients and supplies that require regular replenishment. The remaining portion of our sales relate to durable products such as hydroponic lighting and equipment. The majority of products we offer are produced by us or are supplied to us under exclusive/preferred brand relationships providing for attractive margins and a significant competitive advantage as we offer retailers and resellers a breadth of products that cannot be purchased elsewhere.3 
U.S.United States and Canada. We believe that our six U.S.-based distribution centers can reach approximately 90% of the U.S. population within 24 to 48 hours and that our two Canadian distribution centers can provide timely coverage to the full Canadian market.U.S.,United States, we currently operate distribution centers in Petaluma,Fairfield, California; Santa Fe Springs,Fontana, California; Gresham, Oregon; Denver, Colorado; Fairless Hills, Pennsylvania; and New Hudson, Michigan. In Canada, we currently have distribution centers in Langley, British Columbia and Cambridge, Ontario.Outside of North America, we operate a distribution center in Zaragoza, Spain, and we have an office for product quality assurance and supply chain management in Shenzhen, China. We partner with a network of third-party logistics companies that facilitate expeditious delivery to our customers across the globe. The majority of customer orders are received through our business-to-business e-commerce platform. Through our differentiated Distributor Managed Inventory (“DMI”) Program, we partner with our network of retailers and resellers to create customized, JIT supply chain solutions for large commercial end users.Overpast fifteen years,United States in Paramount, California; Arcata, California; Eugene, Oregon; Goshen, New York; and Sycamore, Illinois. In Canada, our manufacturing facilities are in Langley, British Columbia and Edmonton, Alberta.
17% CAGR.19% CAGR*. This historical growth is largely due to the growth in CEA growing across several end-markets, including cannabis, and our ability to continuously develop, manufacture and distribute innovative branded products on timely basis.
isremains poised to grow significantly.grow. Expanding populations, limited natural resources and a focus on the environment and the security of our agricultural systems have illuminated the benefits of CEA compared to traditional outdoor agriculture. We believe the adoption of CEA will continue to accelerate, particularly in the commercial agriculture industry, where CEA can be deployed to achieve growsresults that are simultaneously more efficient for the planet and profitable for growers. Furthermore, certain of our end-markets are experiencing significant growth, including cannabis. The global cannabis industry is a rapidly developing business opportunity for us, particularly as the legal market in the U.S.United States continues to expand.4 And Rapidlyand Growing 
USDAU.S. Department of Agriculture and National Gardening Survey, the agriculture, food, and related industries sector produced more than $1 trillion worth of goods in the U.S.United States alone in 2017, and U.S. households spent a record of approximately $48 billion at retail stores on gardening and growing supplies and equipment.$65$75 billion in 2019,2020, and is expected to grow at a CAGR of 16%19% from 20192020 to 2023.20251. The rapid growth of CEA crop output will subsequently drive growth in the wholesale CEA equipment and supplies industry. According to industry publications, the global wholesale CEA equipment and supplies industry totaled approximately $8$9.5 billion in 20192020 and is expected to grow at a CAGR of 12.8%11% from 20192020 to 2025.Significant Growth in the Cannabis Industry
participants incannabis growers or to retailers that sell only to the cannabis industry directly.in the United States. The North American cannabis industry is massive and growing, rapidly, driven largely by state-level legalization efforts in the U.S.United States and federal-level legalization in Canada. The currentAlthough there has been what management believes is a short-term agricultural oversupply that has recently put downward pressure on cannabis growing activity, management believes that the state-level legalization efforts in the United States and expected growth inincreasing popular support (and related positive impacts, as further detailed below) will continue to increase the size of the cannabis market has and will continuein North America for years to have a very significant, positive impact on our business.Importantly, though Canada and several U.S. states have taken significant steps towards cannabis legalization, we believe the North American legal cannabis market is still in the nascent stages of realizing its growth potential. As of the date of this Annual Report on Form 10-K, only 15 U.S. states and the District of Columbia had legalized cannabis for adult-use. The aggregate population of those states is only around one third of the total U.S. population. Furthermore, in U.S. states that have passed cannabis laws, many such laws remain restrictive to consumer access. As an example, we believe significant suppressed demand would be unlocked in Texas, should the state adopt a medical cannabis law that more closely resembles that of their neighboring state, Oklahoma, where we have seen significant growth since cannabis was legalized for medical use in 2018. In Canada, the governments of every province and territory have enacted laws allowing for the distribution and sale of cannabis for adult-use purposes; however, the market remains in early stages of market development.$31.1$47.5 billion by 2024,2026, up from approximately $12.2$18.0 billion in 2019,2020, representing a 21%an 18% CAGR. In Canada, the cannabis market is projected to reach approximately $6.2$6.7 billion by 2024, up from approximately $1.7$2.6 billion in 2019,2020, representing a 30%17% CAGR.
5 medical usemedical-use programs.U.S.United States is gaining momentum. According to a November 2019 poll by Pew Research Center, public support for the legalization of cannabis in the United States increased from approximately 41% in 2010 to approximately 67% in 2019. According to a 2019 poll by Quinnipiac University, 93% of Americans support patient access to medical-use cannabis if recommended by a doctor. Furthermore, due to the recent socio-economic changes across the U.S.United States since early 2020, many state government budgets are increasingly under pressure to identify additional revenue sources, such as the potential revenue streams from the taxation and job creation that state legalized adult-use cannabis may offer. Accordingly, a number of states are at various stages of considering implementing laws permitting cannabis use or further liberalizing their existing laws permitting such use. Our sales per capita in U.S. states with legalized adult-use programs are on average several multiples higher than our sales per capita in states without adult-usemedical usemedical-use programs. Several key developments have contributed to an increase in cannabis product availability and breadth, including the proliferation of CBDcannabidiol (CBD) and other cannabis-infused products, including edibles, oils, tinctures, and topical treatments. We believe that the historical stigmatization of cannabis use has diminished significantly, driven by a more supportive legislative environment, a rise in progressive sociopolitical views and greater consumer awareness of the potential health benefits of cannabis consumption. According to industry publications, real and perceived health benefits extend into areas including cancer treatment, pain management, the treatment of neurological and mental conditions, and sleep management. According to industry publications, the use of cannabis in the United States by adults aged 65+ has increased sharply in recent years from 0.4% in 2006 and 2.9% in 2015 to 4.2% in 2018 (JAMA Internal Medicine).harvestsharvest with outdoor cultivation;U.S.United States and its legalization in Canada also comes with a corresponding increase in regulatory oversight and statutory requirements for growers and their products. These regulations enhance product safety and transparency to consumers but usually necessitate the use of CEA in cannabis cultivation in order to meet mandated THCtetrahydrocannabinol (THC) content or impurity tolerances.6 Strong Demand for Hemp for CBD ProductionHemp cultivation in North America has grown significantly since the passage of the U.S. Farm Bill in December 2018. Consumers are increasingly using hemp-derived products such as CBD for their therapeutic benefits. According to industry publications, the U.S. hemp-derived CBD market is expected to grow from $1.2 billion in 2019 to $6.9 billion in 2025, representing a six-year CAGR of 33.8%. We have experienced strong demand for our products from growers that solely harvest hemp and from cannabis growers who are adding hemp to their offerings. We are very well positioned to continue to capitalize on the growth of industrial hemp cultivation in North America especially as cultivation is increasingly done indoors. Both our current product portfolio and our pipeline of new products tailored to the needs of hemp cultivators will help us serve this burgeoning market.when compared on select key ESG performance criteria:More efficient land usage. CEA allows for greater crop production per square foot, reducing the amount of land needed to grow crops. Certain types of vertical farming are 20 times more productive than traditional farming per acre.More efficient fresh water usage. CEA allows for the management and recycling of water inside of a closed-loop system and therefore generally require less water than traditional outdoor agriculture. In certain instances, CEA can grow plants with up to 98% less water than soil based agriculture.Decreased use of fertilizer and pesticides. As CEA takes place in a controlled, often indoor environments, the need for pesticides application is reduced, allowing growers to apply less pesticide with more precise application compared to traditional outdoor agriculture.Reduced carbon emissions. CEA, especially vertical farming, allows large farming operations to be located significantly closer to end-users, thereby reducing the transportation distance of ready-to-use crops.Reduced food waste. Similar to the above, since CEA allows for food production significantly closer to end-user, there is less time between production and consumption and therefore reduced product spoilage, damage and waste.Chemical runoff prevention. Due to closed-loop nature of CEA systems, CEA significantly decreases the risk of chemical runoff, which is generally more difficult to control in traditional outdoor agriculture.Supports organic farming. CEA is well suited for organic farming, the produce of which has been in increasing demand by consumers.7 COVID-19COVID-19coronavirus (“COVID-19”) pandemic has caused significant shifts in consumer sentiment and behavior thereby altering the dynamics of the CEA industry. WhileVaccines for COVID-19 continue to be administered in the rolloutUnited States and other countries around the world, but the extent and rate of vaccine adoption, the long-term efficacy of these vaccines and other factors remain uncertain. Authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs. The impact of COVID-19 and its variants has begun, the timing of vaccinations, herd immunity,been and the lifting of shelter in place and similar restrictions and movement restrictions is unknown. Its effect on the cannabis industry may also driveremains unpredictable. Management believes that COVID-19 has driven a greater volume of sales by our customers increasingin select time periods, thus creating demand for our CEA equipmentsupplies and supplies.equipment. We believe that these changes, as outlined below, will benefit our industry in the long-term:followingduring the COVID-19 outbreak washas been driven by first-time users. We expect this to be a tailwind for the consumer gardening and growing market going forward as a portion of these consumers opt to work-from-homework from home more.medicinalmedical or adult-use cannabis. use occasion opportunities for cannabis use. The COVID-19 pandemic is expected to foster a long-term increase in at-home activity. This lifestyle shift may foster growth in the cannabis market by increasing potential occasions for cannabis use as cannabis is often consumed at home.demandschallenges in 2020 and 2021, we believe this precedent will benefit the CEA industry in the long term.long-term.distributormanufacturer and manufacturerdistributor of CEA equipment and supplies in the U.S.United States and Canada and one of the two major consolidators in the CEA industry. The broader market is comprised of a fragmented group of smaller competitors. We serve several attractive end-markets, including hemp and indirectly the cannabis industry. Favorable trends in CEA, including increased adoption of vertical farming methods to increase yields, are projected to drive a 24% CAGR for the vertical farming market through 2023 according to industry publications. Similarly, growers’ increasing preference to reduce water and energy usage, limit pesticide use and risk of environmental runoff, and reduce labor costs coupled with growing consumer demand for fruits and vegetables are expected to drive significant growth in CEA methods. Furthermore, CEA allows farms to be located closer to their consumers, greatly reducing the costs and waste (namely CO2carbon dioxide and spoiled food) related to transportation resulting in an overall smaller carbon footprint. However, we will likely see the most significant growth in cannabis. Increased support for cannabis legalization at the federal level in the U.S.,United States, an increase in U.S. states’ implementation of adult-use and medical cannabis programs continued growth in the Canadian cannabis market following the implementation of the Cannabis Act in 2018, and consumer and commercial awareness of the benefits associated with hemp-derived products will serve as significantly favorable tailwinds thatincreasing popular support will drive continuedfuture growth.New, Advance PierreAdvancePierre Foods and President of Pinnacle Foods, in addition to holding executive roles at Campbell Soup Company, Nabisco and Procter & Gamble. Terence Fitch, President, possesses significant relevant business experience including more than 20 years of management experience with the Coca-Cola Company and Coke Enterprises, where he was responsible for manufacturing, supply chain, and sales and marketing for the multi-billion-dollar Refreshment Direct and Independent Bottlers business units. For the past six years, Terence has been working on building, managing and designing large CEA operations in Colorado and Arkansas. B. John Lindeman, Chief Financial Officer, brings us more than 25 years of finance and leadership experience. Most recently he served as Chief Financial Officer and Corporate Secretary at Calavo Growers, Inc. (Nasdaq-GS: CVGW), a fresh food company, where he was responsible for the finance, accounting, IT and human resource functions. Prior to joining Calavo, he held various leadership positions within the finance and investment banking industries at Janney Montgomery Scott, Stifel Nicolaus, Legg Mason and PricewaterhouseCoopers LLP.8 26over 40 internally developed or acquired proprietary brands across approximately 900 SKUs with 24 patents and 60 registered trademarksthousands of stock keeping units ("SKUs") as well as over 4035 exclusive/preferred brands across approximately 900 SKUs. We maintain inventory across over 6,000 SKUs, and approximately 60%brands. Approximately 72% of our sales relate to proprietary and exclusive/preferred brands. Our proprietary and exclusive/preferred brands include lighting, equipment, grow media, nutrients and supplements. Our proprietary products command a significant gross margin premium relative to general distributed brands. Our revenue mix continues to shift towards proprietary brands as we continue to innovate, improving overall margins. Further, our revenue stream is highly consistent as, in our estimation, we believe that approximately two-thirds of our net sales are generated from the sale of recurring consumable products including growing media, nutrients and supplies.top 20 customers buy over 3,000 SKUsmanufacturing capabilities across seven locations in the aggregate.900,000one million square feet of distribution space across six distribution centers in the U.S.United States and two distribution centers in Canada. Following our 2021 acquisitions, we also maintain five manufacturing facilities in the United States and two manufacturing facilities in Canada. Furthermore, we have cultivated over the last 40 years long-term relationships with a network of approximately 400 suppliers, giving us access to a best-in-class products portfolio and allowing us to provide a full range of CEA solutions to our customers. We source individual components from our diverse supplier base to assemble our products, including utilizing a dedicated on-the-ground purchasing team in China to maintain and develop relationships with suppliers. To maintain competitive pricing, we implement cost sharing with certain of our suppliers. One supplier accounted for 10% of purchases in 2021, and another supplier accounted for 10% of purchases in 2019. No single supplier makes upaccounted for more than 10% of our total purchases in 2020.eCommercee-commerce retailers, commercial greenhouse builders, and commercial resellers. We serve over 2,000 business-to-business customers across multiple channels in North America, providing customers with the capability to purchase their entire product range from us. Our commercial sales and DMI programs further enhance our customer capabilities, offering consultation, technical expertise, facilitated order fulfillment and JIT delivery of consumables. Our unique distribution capabilities allow us to provide JIT delivery across North America, utilizing six strategically located distribution centers in the U.S.United States and our two distribution centers in Canada. OurWe believe that our distribution footprint in the U.S.United States can reach approximately 90% of the population in 24 to 48 hours and our two distribution centers in British ColombiaColumbia and Ontario can provide timely coverage to the fullyfull Canadian market. We maintain coverage of industry trends and consumer preferences via thirteena robust, seasoned sales managersorganization located regionally across North America complemented by teams made up of specialized product category experts. Given our ability to provide a comprehensive product offering and excellent customer service, we maintain over seven-year relationships with the majority of our largest customers.GSD”IPO”), which in December 2020, we believe were two of the leading CEAhave consummated five acquisitions, including HEAVY 16, House & Garden, Aurora, Greenstar, and lawnInnovative Growers Equipment (as described and garden distributors in Canada at the time of the acquisitions. Those acquisitions, combined with our existing infrastructure and experience, have enabled us to become one of the leading CEA equipment distributors in Canada. Additionally, we maintain relationships throughout our markets to identify specific product categories of interest for M&A activity.each defined below). Our robust understanding of commercial growers’ needs coupled with our experienced M&A team has preparedenabled us to make additional acquisitions in the hydroponics industry, which will help usbuild a robust pipeline of potential acquisition targets and to continue to grow our market share.convince targets that we should be their partner of choice. We view M&A as a significant driver of potential growth as the hydroponics industry is fragmented and primed for consolidation.9 brands.brands and acquisitions. Our proprietary brands command a meaningful gross margin premium to our distributed products. Our core competency in new product innovation is in lighting, consumable and equipment categories, and we are enhancing research and development in our other product categories to expand our brand portfolio’s value and further enhance our margins. We have launched several new product lines over the past year,last two years, including PhotoBio LED lighting equipment and Phantom Core HID lighting equipment. As evidenced by its strong sales velocity, the PhotoBio LED lighting line has whatThrough recent acquisitions, we believe is a higher performance level at a lower cost than current leading LED products. We also maintain a pipeline of next generationhave expanded our proprietary productsbrands to include HEAVY 16, House & Garden, Mad Farmer, Roots Organics, Soul, Procision, Grotek, Gaia Green, and occasionally make investments in suppliers to create strategic relationships around the development of specific products and enhanced distribution agreements.relationships. Although select key suppliers experienced significant volume demands for the year 2020, our exclusive/preferred brand relationships with leading brandsthat continue to drive sales and margin improvement. We believe we are a highly attractive distribution partner due to our scale and independence in growing media and nutrient categories. We have established sixteen new exclusive/preferred distribution relationships over the past two years including with established equipment and nutrient suppliers.10 Expand our Operating Marginsaan additional means of funding growth. Our initiatives include the following:Enhance Our Brand Mix. We will continue to increasehave increased the percentage of proprietary and exclusive/preferred brands and products manufactured internally in our product portfolio. Our innovative proprietary and exclusive/preferred brands offer us a significant margin benefit compared to distributed brands.Drive Supply Chain Efficiencies. We are implementing multiple supply chain efficiency initiatives, including the review of our carrier sourcing relationships and intra-warehouse shipments for optimization opportunities, reducing the active SKU count by eliminating non-core SKUs, and the deployment enhanced inventory planning tools. Additionally, we continually review our distribution network for optimization opportunities. Service levels are improving as the global supply chain continues to stabilize.Optimize the Customer Investment Program. We have segmented our client accounts to improve our discounting decisions in order to maximize net sales as a percent of gross sales.Leveraging G&A. Additional areas of cost savings will come from more efficiently leveraging corporate overhead as our business continues to grow and scale.that will acceleratewith the goal of accelerating sales and EBITDA growth, increaseincreasing competitive strength and market share and expandexpanding our proprietary brand portfolio.continually seek acquisition targets that can accelerate our growth and generate significant cash flows over time. We are evaluating numerous opportunities for suchAs more fully described in “Recent Acquisitions”, we consummated five acquisitions in fiscal 2021.near term. Althoughacquisitions made in 2021, we anticipate that our acquisition activities will proceed at a slower pace, particularly during the most advancedfirst half of 2022. Nonetheless, we expect to continue to evaluate opportunities in ourand maintain a pipeline would not individually or in the aggregate constitute “significant” acquisitions as defined by the SEC’s Regulation S-X, any of these acquisitions could have a material effect on our results of operations and financial condition.The status of opportunities in our pipeline varies from early evaluation through preliminary discussions and varying levels of due diligence and negotiation of potential transaction terms.targets. We are not party to any definitive agreements in respect of such acquisition targets as of the date of this Annual Report on Form 10-K and the timing and our desire to consummate any such acquisition depends, among other things, on the results of our continuing due diligence, which may However, negotiations and diligence relating to one or more of these potential acquisitions could advance rapidly in the near future, and, accordingly, it is also possible that we could enter into and close under agreements to acquire one or more businesses consistent with our acquisition strategy described above, shortly after the date of this Annual Report on Form 10-K.Our more advanced negotiations contemplate a purchase price consisting of both cash and our common stock or of cash only. We would be able to consummate the most advanced of our potential acquisitions from available cash and our credit line. “Risk Factors RelatingNote 3 - Business Combinations under Innovative Growers Equipment, Inc. Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. – Acquisitions,strategic alliancescountries around the world, but the extent and investmentsrate of vaccine adoption, the long-term efficacy of these vaccines and other factors remain uncertain. Authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs. The global pandemic and actions taken to contain COVID-19 have adversely affected the global economy and financial markets.operating difficulties, dilution,the re-closure of factories in China and/or in North America. Quarantine orders and travel restrictions within the United States and other harmful consequences thatcountries may also adversely impact our supply chains, the manufacturing of our own products and our ability to obtain necessary materials. We are experiencing some extended lead times in our supply chain, as well as increased shipping costs and believe the COVID-19 pandemic is a contributing factor to those extended lead times and increased costs. Although we have not, to date, experienced any material interruptions in our ability to fill our customers' orders or manufacture our own products, we may in the future be unable to obtain adequate inventory to fill purchase orders or manufacture our own products, which could adversely affect our business, and results of operations” and financial condition. Furthermore, potential suppliers or sources of materials may pass the increase in sourcing costs due to the COVID-19 pandemic to us through price increases, thereby impacting our potential future profit margins. We continue to monitor the COVID-19 pandemic and will adjust our mitigation strategies as necessary to address changing health, operational or financial risks that may arise.information.11 U.S.,United States, products containing pesticides generally must be registered with the Environmental Protection Agency (the “EPA”), and similar state agencies before they can be sold or applied. The failure by one of our partners to obtain, or the cancellation of any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our businesses, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected. The pesticides we use are either granted a license by the EPA or exempt from such a license and may be evaluated by the EPA as part of its ongoing exposure risk assessment. The EPA may decide that a pesticide we distribute will be limited or will not be re-registered for use in the U.S.United States. We cannot predict the outcome or the severity of the effect on our business of any future evaluations, if any, conducted by the EPA.U.S.United States. The federal and state laws and regulations governing the growth and use of cannabis may be subject to change. New laws and regulations pertaining to the use or cultivation of cannabis and enforcement actions by state and federal authorities concerning the cultivation or use of cannabis could indirectly reduce demand for our products, and may impact our current and planned future operations.adult-use,adult use, other states have enacted legislation specifically permitting the cultivation and use of cannabis for medicinal purposes, and several states have enacted legislation permitting cannabis cultivation and use for both adult and medicinal purposes.12 medical use.adult-useadult use of cannabis are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion, and public opinion relating to cannabis will be favorable. The cannabis industry is an early-stage business that is constantly evolving with no guarantee of viability. The market for medical and adult-useadult use of cannabis is uncertain, and any adverse or negative publicity, scientific research, limiting regulations, medical opinion and public opinion (whether or not accurate or with merit) relating to the consumption of cannabis, whether in the U.S. or internationally, may have a material adverse effect on our operational results, consumer base, and financial results. Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult-use of cannabis where it is now legal, thereby limiting the potential customers and end-users of our products who are engaged in the cannabis industry (collectively “Cannabis Industry Participants”). is illegal under federal law.Cannabis is illegal under federal law. Federal law and enforcement may adversely affect the implementation of medical cannabis and/or adult-use cannabis laws, and may negatively impact our revenues and profits.Governmentgovernment lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal. It is also federally illegal to advertise the sale of cannabis or to sell paraphernalia designed or intended primarily for use with cannabis, unless the paraphernalia is authorized by federal, state, or local law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop.Cooperative and Gonzales v. Raich, 532 U.S. 483 (2001), that the federal government has the right to regulate and criminalize cannabis, even for medical purposes. The illegality of cannabis under federal law preempts state laws that legalize its use. Therefore, strict enforcement of federal law regarding cannabis would likely adversely affect our revenues and results of operations.businessbusinesses from a taxation standpoint in the future and no assurance can be given to what extent Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future.13 14 U.S..United States. In February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the Treasury Department issued a memorandum (the “FinCEN Memo”) providing guidance to banks seeking to provide services to cannabis businesses. The FinCEN Memo outlines circumstances under which banks may provide services to cannabis businesses without risking federal prosecution for violation of U.S. federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors relating to the prosecution of U.S. money laundering offenses predicated on cannabis violations of the CSA and outlines extensive due diligence and reporting requirements, which most banks have viewed as onerous.requirements. The FinCEN Memo currently remains in place, but it is unclear at this time whether the current administration will continue to follow the guidelines of the FinCEN Memo. Such requirements could negatively affect the ability of certain of the end users of our products to establish and maintain banking connections.industry.industry in countries where it is federally illegal. As a result, the Subsidiary Obligors do not sell our products directly to the cannabis industry, cannabis growers or cultivators, or to sellers or retailers that sell only to the cannabis industry. See “— Risks Relating to our Indebtedness”Indebtedness” for further detail.1615 issued U.S. design patents, three2 issued U.S. utility patents, five3 issued foreign patents and designs, 38112 registered U.S. trademarks, and 22 registered foreign trademarks that enable us to position ourselves and our products to a wide range of customers. Our 2420 issued patents cover grow lighting and hydroponic systems and components. These issued patents and our registered trademarks allow us to build out our proprietary brand products, which we believe are high quality products and generate higher sales margins than the distributed products that we sell. Our owned U.S. and foreign issued patents are expected to expire between 20212022 and 2034.15 Property”Property” for more information on the risks associated with intellectual and proprietary rights.February 28,December 31, 2021, we employ 327709 full-time employees and no11 part-time employees. We also employ 66106 temporary workers and 89 independent contractors. None of our employees are subject to collective bargaining agreements, and we have had no labor-related work stoppages. Our retention rate for our full-time employees is approximately five years, and we employ various initiatives to increase employee retention, including offering bonus programs and training opportunities. We strive to foster an innovative and team-oriented culture and view our human capital resources and initiatives as an ongoing priority.“Risk“Risk Factors,,” as well as elsewhere in this Annual Report on Form 10-K.recent Coronavirus outbreak,COVID-19 pandemic, on our business, results of operations and financial operations;•limitations and possible failures of our internal control systems;•we identified material weaknesses in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected; •acquisitions, other strategic alliances and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations;16 the success of our marketing activities; andrestrictions imposed by our JPMorgan Credit Facility on our ability to sell products directly to the cannabis industry.from time to time, which could be difficult or expensive to obtain; andvolatile;volatile.we are an emerging growth company and we cannot be certain if reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.17 290 Canal Road, Fairless Hills,1510 Main Street, Shoemakersville, Pennsylvania 1903019526 (the “Pennsylvania HQ”“HQ”) and our telephone number is (707) 765-9990. Our website address is www.hydrofarm.com. InformationThe information contained on, or that can be accessed through, our website is not, incorporated by reference into this Annual Report on Form 10-K, and you shouldshall not consider information on our websitebe deemed to be part of, this Annual Report on Form 10-K.www.sec.gov.www.sec.gov. The information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.18 Item 1A.RISK FACTORSand products and product innovations require substantial research, development and marketing expenditures, which we may be unable to recoup if such new products or innovations do not achieve market acceptance.19 U.S.United States and Canada, could adversely affect our business.U.S.United States and Canada, such as decreased consumer and business spending, high unemployment levels, reduced rates of home ownership and housing starts, high foreclosure rates and declining consumer and business confidence, pose challenges to our business and could result in declining revenues, profitability and cash flow. Although we continue to devote significant resources to support our brands, unfavorable economic and/or industry conditions may negatively affect consumer demand for our products. Our most price-sensitive customers may trade down to lower priced products during challenging economic times or if current economic conditions worsen, while other customers may reduce discretionary spending during periods of economic uncertainty, each of which could reduce sales volumes of our products in favor of our competitors’ products or result in a shift in our product mix from higher margin to lower margin products. WhileVaccines for COVID-19 continue to be administered in the rolloutUnited States and other countries around the world, but the extent and rate of vaccine adoption, the long-term efficacy of these vaccines has begun,and other factors remain uncertain. Authorities throughout the timingworld have implemented measures to contain orvaccinations, herd immunity,the virus, including physical distancing, travel bans and the liftingrestrictions, closure of shelter in placenon-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and similar restrictions and movement restrictions is unknown.futureongoing developments that cannot be accurately predicted at this time (e.g., the severity and transmission rate of the virus and new variants, the extent and effectiveness of containment and vaccination measures, and the impact of these and other factors on our employees, customers, vendors and partners, including their respective productivity).Furthermore, our limited operating history combined with the uncertainty created by the COVID-19 pandemic significantly increases the difficulty of forecasting operating results and of strategic planning. For example, weThe COVID-19 pandemic has resulted in global supply chain constraints and transportation disruptions that have recently incurred high operatingled to increased costs of goods and experienced unreliable results in connection with maritime transportation. higher freight/import costs. If we are unable to effectively predict and manage the impact of the COVID-19 pandemic on our business, our results of operations and financial condition may be negatively impacted.20 Our business has experienced an accelerated rate of growth which may be due in part to lifestyle changes in the wake of the COVID-19 pandemic; if so, our recent accelerated rate of growth may not be sustainable.Although we cannot precisely quantify in absolute or relative terms, our accelerated rate of growth in net sales for the year ended December 31, 2020 correlates with shelter-in-place orders issued in many locations in March 2020 in response to the COVID-19 pandemic. Our net sales for the year ended December 31, 2020 were approximately 46% higher as compared to the year ended December 31, 2019. A portion of our net sales during this period could be due to pull-through demand for our products due to higher consumption of CEA products from individuals spending more time at home due to shelter-in-place measures. Although uncertainty created by the COVID-19 pandemic remains, and various state budgets remain under economic pressure, creating a greater chance of further cannabis legalization, we cannot assure you that such growth will continue.freightfreight/import expenses;U.S.;United States;U.S.United States are subject to the risk of new and different legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations and potentially adverse tax consequences. The costs associated with operating our continuing international business could adversely affect our results of operations, financial condition and cash flows in the future.increaseincreases in our expenses than if we had remained privately-held. The cost of being a public company have and will divertdiverts resources that might otherwise have been used to develop our business, which could have a material adverse effect on our company.21 have and will devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will continue to incur as a public company or the specific timing of such costs.have and will, among other things:changesmatters require a significant commitment of additional resources and many of our competitors already comply with these obligations. We may not be successful in complying with these obligations and the significant commitment of resources required for complying with them could have a material adverse effect on our business, financial condition and results of operations. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our committees of our board of directors or as our executive officers.We may be required, pursuant to Section 404 to furnish a report by management on, among other things, the effectiveness our internal control over financial reporting for the fiscal year ending December 31, 2021. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Following the date2021 we arewere no longer an “emergingemerging growth company,” our independent registered public accounting firm will be and we are now required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC. We have recently commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 butof the Sarbanes-Oxley Act. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may, notin the future, be ableunable to complete our evaluation, testing and any required remediationcomply with these requirements in a timely fashion once initiated. Ouror cost-effective manner.will require that we incur substantial expenses and expend significant management efforts. We may need to hire additional accounting and financial staff, or leverage outside resources, with appropriate public company experience and technical accounting knowledge and compileof the system and process documentation necessary to performSarbanes-Oxley Act. However, in the evaluation needed to comply with Section 404.22 Duringfuture during the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to certify that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.initial public offering (“IPO”)IPO in December 2020, we were a private company with limited accounting and finance personnel, adequate review processes and other resources with which to address our internal controls and procedures.In connection with the audit of our financial statements for fiscal 2019, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted material weaknesses previously disclosed in our registration statement on Form S-1 which was declared effective on December 9, 2020.havewere not been remediated as of December 31, 2020: that (i) we did not maintain a sufficient complement of personnel with an appropriate degree of technical knowledge commensurate with our accounting and reporting requirements and (ii) our controls related to the preparation, review, and analysis of accounting information and financial statements were not adequately designed or appropriately implemented to identify material misstatements in our financial reporting on a timely basis for our U.S. entities and Eddi’s.Eddi’s Wholesale Garden Supplies, Ltd. These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.We have taken several actions towards remediating thesetaken steps to address theremediated previously identified material weaknesses, we are still in the process of completing the remediation and we cannot assure you that the steps we are takinghave taken will be sufficient to remediate our material weaknesses or prevent future material weaknesses or significant deficiencies from occurring.23 could entail material investments by us and beare material to our financial condition and results of operations. We expect to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks may include, but are not limited to:ourany inability to ship, sell or transport our products, governmental investigations and other matters may harm our reputation and acceptance of our products, which may materially and adversely affect our business operations, decrease sales and increase costs.24 successful.time-consumingtime-threetwo to tentwelve years, with options to renew for specified periods of time.We believe that our future leases will likely also be long-term and non-cancellable and have similar renewal options.If we close or stop fully utilizing a facility, we will most likely remain obligated to perform under the applicable lease, which would include, among other things, making the base rent payments and paying insurance, taxes and other expenses on the leased property for the remainder of the lease term. Our future minimum aggregate rental commitments for leases for our facilities and distribution centers, as of December 31, 2020, is approximately $22.1 million for leases classified as operating and $408,000 for leases classified as financing. Our inability to terminate a lease when we stop fully utilizing a facility or exit a market can have a significant adverse impact on our financial condition, operating results and cash flows.GAAP.accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We cannot assure, however, that our estimates, or the assumptions underlying them, will not change over time or otherwise prove inaccurate. Any potential litigation related to the estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could have a material adverse effect on our financial results, harm our business, and cause our share price to decline.25 increasemanage our sales and marketing infrastructure,future expected growth, we willmay need to continue to grow the size of our organization, and we may experience difficulties in managing this growth.As we continue to work to expand our business, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial and other resources. in the hydroponics industry effectively will depend, in part, on our ability to effectively manage any future growth.U.S.United States has imposed tariffs on certain imports from China, including on lighting and environmental control equipment manufactured in China. If the U.S. administration imposes additional tariffs, or if additional tariffs or trade restrictions are implemented by the U.S.United States or other countries the cost of our products manufactured in China and imported into the U.S.United States or other countries could increase, which in turn could adversely affect the demand for these products and have a material adverse effect on our business and results of operations. As of the date of this Annual Report on Form 10-K, tariffs have not adversely affected the purchase price of our products manufactured in China and imported into the U.S.U.S.United States federal jurisdiction and various local, state and foreign jurisdictions. Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets (such as net operating losses and tax credits) and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly related to our operations in the U.S.,United States, is dependent on our ability to generate future taxable income of the appropriate character in the relevant jurisdiction.2020,2021, we had U.S. federal net operating loss (“NOL”) carryforwards of approximately $62.5$74.9 million, the utilization of which may be limited annually due to certain change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).Our NOL carryforwards will begin to expire in 2037. Please referSee Note 13 - Income Taxes, in the notes to Note 12, Income Taxes, in ourthe consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a further discussion of the carryforward of our NOLs.As of December 31, 2020,2021, we maintained a valuation allowance of approximately $34.4$14.9 million on the majority of our net deferred tax assets.26 As a result of the IPO, the aggregate ownership change exceeded the 50% threshold. The annual limitation resulting from this ownership change is not expected to result in the expiration of the NOL carryforwards before utilization. In addition, future changes in our stock ownership, some of which may be beyond our control, could result in additional ownership changes under Section 382 of the Code.Credit Facility hascredit facilities have restrictions on our ability to sell our products directly to the cannabis industry.Wecredit agreement$50 million senior secured revolving loan facility with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent for the lenders, which was amended on March 29,October 25, 2021 to increase such revolving loan facility to $100 million (as amended, the “JPMorgan Revolving Loan Facility”). On October 25, 2021, we and the Subsidiary Obligors entered into a $125 million senior secured term loan facility with JPMorgan, as administrative agent for the lenders (the “JPMorgan CreditTerm Loan Facility”). The JPMorgan Credit Facility refinanced the Encina CreditRevolving Loan Facility and is an asset based loan that containsthe JPMorgan Term Loan Facility each contain customary covenants, restrictions and defaults. The JPMorgan CreditRevolving Loan Facility prohibits us and the Subsidiary Obligors from selling our products, inventory or services directly to cannabis growers or to retailers that sell only to the cannabis industry. As a result,The JPMorgan Term Loan Facility prohibits us and the Subsidiary Obligors do not sellfrom selling our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of cannabis industry.products other than in accordance with the applicable laws of such country. We are in compliance with the terms set forth byin the JPMorgan CreditRevolving Loan Facility and the JPMorgan Term Loan Facility and maintain policies and procedures that are designed to promote and achieve continued compliance with thesesuch requirements.compared to us if we are not able to sell our products to a certain customer, and may negatively impact our marketing efforts, sales and reputation in the market.Moreover, the breach of any breach of these compliance requirements couldmay result in the occurrence of an event of default under each of the JPMorgan CreditRevolving Loan Facility and the JPMorgan Term Loan Facility, which would entitle JPMorgan to accelerateterminate the payment ofcommitments thereunder and declare all obligationsloans then outstanding without any action by them or notice of any kind. to be due and payable.The foregoing events would have a material adverse effect on our business, results of operations and financial condition.27 theour and our Subsidiary Obligors’ assets are pledged to secure obligations under the Subsidiary Obligors outstanding indebtedness.TheJPMorgan credit facilities.theirour assets to JPMorgan, as security foradministrative agent on behalf of the Subsidiary Obligors’ obligations under JPMorgan Credit Facility. lenders party to such agreements.If we or the Subsidiary Obligors default on any of theirour obligations under thesesuch agreements, and JPMorgan will be entitled to exercise remedies available itto them resulting from such default, including increasing the applicable interest rate on all amounts outstanding, declaring all amounts due thereunder immediately due and payable, assuming possession of the secured assets, and exercising rights and remedies of a secured party under the Uniform Commercial Code, as applicable then in the U.S.,United States, or the Personal Property Security Act, as applicable then in Canada.Our ability to conduct our business may be materially harmed as a result of the exercise of any remedies, in the event that such remedies are exercisable, by JPMorgan.Subsidiary Obligors existing debt agreementsJPMorgan credit facilities contain, and our or our subsidiaries’ future debt agreementsfacilities may contain, restrictions that may limit our flexibility in operating our business.Subsidiary Obligors’ existing debt agreementsJPMorgan credit facilities contain, and any documents governing our or our subsidiaries’ future indebtedness may contain, numerous financial and operating covenants that limit the discretion of management with respect to certain business matters. Such restrictive covenants include restrictions on, among others, our or our subsidiaries’ ability to: (1) incur additional indebtedness; (2) create or suffer to exist any liens upon any of our or our subsidiaries’ property; (3) pay dividends and other distributions or enter into agreements restricting our subsidiaries’ ability to pay dividends; (4) make any restricted investment;investments; (5) make certain loans; make certain dispositions(6) dispose of assets; (6)(7) merge, amalgamate, combine or consolidate; (7)(8) engage in certain transactions with stockholders or affiliates; (8)(9) amend or otherwise alter the terms of our or our subsidiaries’ indebtedness; or (9)and (10) alter the business that we conduct. The Subsidiary Obligors’ existing debt agreementsJPMorgan credit facilities also require, and any documents governing our or our subsidiaries’ future indebtedness may require, us to meet certain financial ratios and tests. Noncompliance with the applicable financial ratios and tests are specified defaults under the JPMorgan CreditRevolving Loan Facility.Thetheirthe existing debt agreementsJPMorgan credit facilities is dependent on our future performance, which will be subject to many factors, some of which are beyond our control. The breach of any of these covenants or noncompliance with any of these financial ratios and tests could result in an event of default under the existing debt agreements, which, if not cured or waived, could result in acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may also contain cross-acceleration or cross-default provisions. Variable rate indebtedness subjects us and the Subsidiary Obligors to the risk of higher interest rates, which could cause our future debt service obligations to increase significantly.ishas historically been widely used as a reference for setting the interest rate on loans globally. The JPMorgan Credit Facility provides that loans denominated in US dollars bear interest at the Eurodollar Rate plus 1.95% and those denominated in Canadian dollars bear interest at the CDOR rate plus 1.95%. Both rates are ultimately based on LIBOR and there is a floor of 0.0% for each rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform or discontinuation.In particular, on July 27, 2017, the Chief Executive of the U.K.Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.Subsequently, the ICE Benchmark Administration announced its plan to extend the date most U.S. dollar LIBOR values would cease being computed to June 30, 2023.CreditRevolving Loan Facility and the JPMorgan Term Loan Facility each contains benchmark replacement terms pursuant to which the LIBOR-based rates will convert to Secured Overnight Funding Rate (SOFR) based rates or other alternative rates upon the occurrence of certain events. The floor of 0.0% or 1.0%, as applicable, would continue to apply to any alternative rate. SOFR (and other potential alternative rates) are overnight rates, while LIBOR has seven varying rates on terms of one day to one year. The JPMorgan CreditRevolving Loan Facility utilizes one-month, LIBOR.two-month, or three-month interest periods while the JPMorgan Term Loan Facility utilizes one-month, three-month or six-month interest periods. The agreement attempts to provide mechanisms whereby the tenor (one month)month, two months, three months or six months, as applicable) of the LIBOR based rates would remain the same even though SOFR is an overnight rate. In addition, LIBOR incorporates built in credit risk component because it is based on the aggregate cost of borrowing by a bank and SOFR does not have this component since it is based on overnight transactions in the Treasury repurchase market. Accordingly, there are inherent difficulties in matching these two rates and it is possible that the use of SOFR may result in a higher rate. In the event that one of the alternative rates are not available, the JPMorgan Credit Facility provides that the US loans would convert to the CB Floating Rate plus 1.95% and the Canadian loans would convert to the Canadian Prime Rate. CreditRevolving Loan Facility or JPMorgan Term Loan Facility, and even if an alternative interest rate is established, such alternate interest rate may be higher than a corresponding interest rate benchmarked to LIBOR, especially given uncertainty as to the effectiveness of alternative rate-setting methodologies prior to their utilization in practice. Uncertainty as to the nature of any potential modification to or discontinuation of LIBOR, the decline in usefulness of LIBOR as an interest rate reference prior to its discontinuation, the establishment of alternative interest rates or the implementation of any other potential changes may materially and adversely affect our interest expense.28 2020,2021, which impacted supplier performance. If we are unable to maintain supplier arrangements and relationships, if we are unable to contract with suppliers at the quantity and quality levels needed for our business, or if any of our key suppliers becomes insolvent or experience other financial distress, we could experience disruptions in production, which could have a material adverse effect on our financial condition, results of operations and cash flows.2020.2021. A significant interruption in the operation of our or our suppliers’ facilities, especially for those products manufactured at a limited number of facilities, such as fertilizer and liquid products, could significantly impact our capacity to sell products and service our customers in a timely manner, which could have a material adverse effect on our customer relationships, revenues, earnings and financial position.U.S. United States.The general availability and price of those components can be affected by numerous forces beyond our control, including political instability, trade restrictions and other government regulations, duties and tariffs, price controls, the availability of shipping and transportation services, changes in currency exchange rates and weather.29 U.S.United States and Canadaeffected.WeU.S.United States and its legalization in Canada has ultimately had a significant, positive impact on our industry. Accordingly, the risks referred to below, to the extent they relate to our customers could impact us indirectly. In addition, if our business is deemed to transact with companies in the United States involved in the cannabis business, these risks could apply directly to us. “Cannabis Industry Participants” means the potential customers and end-users of our products who are engaged in the cannabis industry.CSA,Controlled Substances Act, the U.S. Government lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.It is also federally illegal in the United States to advertise the sale of cannabis or to sell paraphernalia designed or intended primarily for use with cannabis, unless the paraphernalia is authorized by federal, state, or local law.The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop.Cooperative and Gonzales v. Raich, 532 U.S. 483 (2001), that the United States federal government has the right to regulate and criminalize cannabis, even for medical purposes.The illegality of cannabis under United States federal law preempts state laws that legalize its use.Therefore, strict enforcement of United States federal law regarding cannabis would likely adversely affect our revenues and results of operations.30 regulations. regulations. As a result, we are indirectly subject to a number of risks related to controlled substances.31 As a result, the Subsidiary Obligors do not sell our products directly to the cannabis industry.market. Newmarket.In the past, California regulations caused licensing shortages and future regulations may create other limitations that decrease the demand for our products. products. State level regulations adopted in the future may adversely impact our business.U.S.United States has grown over the past 20 years since the legalization of cannabis for medical uses in states such as California, Colorado, Michigan, Nevada, Oregon and Washington, with a large number of those growers depending on products similar to those we distribute. The U.S. cannabis market is still in its infancy and early adopter states such as California, Colorado and Washington represent a large portion of historical industry revenues. If the U.S. cannabis cultivation market does not grow as expected, our business, financial condition and results of operations could be adversely impacted.U.S.United States. As a result, the laws governing the cultivation and use of cannabis may be subject to change. change. Any new laws and regulations limiting the use or cultivation of cannabis and any enforcement actions by state and federal governments could indirectly reduce demand for our products, and may impact our current and planned future operations.32 TheFurthermore, the JPMorgan Credit Facility prohibitsrestricts our ability and the ability of the Subsidiary Obligors from selling our products to the cannabis industry. As a result, the Subsidiary Obligors do not sell our products directly to cannabis growers or to retailers that sell only to the cannabis industry.See “— Risks Relating to Our Indebtedness.”medical use.U.S.United States or internationally, may have a material adverse effect on our operational results, consumer base, and financial results. Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adultadult-use cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult-use of cannabis where it is now legal, thereby limiting the Cannabis Industry Participants.33 U.S.USA PATRIOT Act, other anti-money laundering laws, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S..United States. In February 2014, the Financial Crimes Enforcement Network of the Treasury Departmentrequirements, which most banks have viewed as onerous.requirements. On June 29, 2020, FinCEN issued additional guidance for financial institutions conducting due diligence and filing suspicious activity reports in connection with hemp-related business customers. While these guidelines clarify that financial institutions are not required to file suspicious activity reports solely based on a customer’s hemp-related business operations which must be operating lawfully underthat comply with applicable state law and regulations, these requirements can still present challenges for certain end users of our products to establishin establishing and maintainmaintaining banking connections,relationships, and restrictions on cannabis-related banking activities remain. In September 2019, the United States House of Representatives passed the SAFE Banking Act, which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, but the Senate has not taken up the SAFE Banking Act or other similar legislation.information. information. Our actual or perceived failure to comply with such obligations could harm our business.34 U.S.,United States, various federal and state regulators, including governmental agencies like the Consumer Financial Protection Bureau and the Federal Trade Commission, have adopted, or are considering adopting, laws and regulations concerning personal information and data security. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (“CCPA”), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. In addition, on November 3, 2020, California voters approved a new privacy law, the California Privacy Rights Act (“CPRA”). The CPRA comes into effect on January 1, 2023, and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain personal informationU.S.,United States, products containing pesticides generally must be registered with the Environmental Protection Agency (the “EPA”), and similar state agencies before they can be sold or applied. The failure by one of our partners to obtain or the cancellation of any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our businesses, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected. The pesticides we use are either granted a license by the EPA or exempt from such a license and may be evaluated by the EPA as part of its ongoing exposure risk assessment. The EPA may decide that a pesticide we distribute will be limited or will not be re-registered for use in the U.S.United States. We cannot predict the outcome or the severity of the effect on our business of any future evaluations, if any, conducted by the EPA.35 U.S.United States and other countries may have a significant impact on our ability to protect our technology and enforce our intellectual property and proprietary rights. There have been numerous changes to the patent laws and to the rules of the United States Patent and Trademark Office (the “USPTO”), which may have a significant impact on our ability to protect our technology and enforce our intellectual property and proprietary rights. For example, the Leahy-Smith America Invents Act, which was signed into law in 2011, includes a transition from a “first-to-invent” system to a “first-to-file” system, and changes the way issued patents can be challenged. Certain changes, such as the institution of inter partes review and post-grant and derivation proceedings, came into effect in 2012. Substantive changes to patent law associated with the Leahy-Smith America Invents Act may affect our ability to obtain patents, and, if obtained, to enforce or defend them in litigation or inter partes review, or post-grant or derivation proceedings, all of which could harm our business.U.S.United States or in every country in which such mark is used. Furthermore, because of the differences in foreign trademark, patent and other intellectual property or proprietary rights laws, we may not receive the same protection in other countries as we would in the U.S.United States with respect to the registered brand names and issued patents we hold. If we are unable to obtain, maintain, protect and enforce our intellectual property and proprietary rights, including our information and/or brand names, we could suffer a material adverse effect on our business, financial condition and results of operations.U.S.,United States, even if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date and the natural expiration of a design patent is generally 14 years after its issue date, unless the filing date occurred on or after May 13, 2015, in which case the natural expiration of a design patent is36 non- U.S.non-United States opposition proceedings. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. A successful claim of trademark, patent or other intellectual property or proprietary right infringement, misappropriation or other violation against us, or any other successful challenge to the use of our intellectual property and proprietary rights, could subject us to damages or prevent us from providing certain products or services, or using certain of our recognized brand names, which could have a material adverse effect on our business, financial condition and results of operations. As a result of any such infringement claims, or other intellectual property claims, regardless of merit, or to avoid potential claims, we may choose or be compelled to seek intellectual property licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees, royalties, minimum royalties and/or milestone payments and the rights granted to us could be nonexclusive, which would mean that our competitors may be able to obtain licenses to the same intellectual property. Ultimately, we could be prevented from commercializing a product and/or technology or be forced to cease some aspect of our business operations if, as a result of actual or threatened infringement or other intellectual property claims, we are unable to enter into licenses of the relevant intellectual property on acceptable terms. Further, if we attempt to modify a product and/or technology or to develop alternative methods or products in response to infringement or other intellectual property claims or to avoid potential claims, we could incur substantial costs, encounter delays in product introductions or interruptions in sales.37 38 39 our• stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter, except in certain circumstances;Indebtedness.”Indebtedness”. Moreover, certain provisions of our Certificate of Incorporation and Bylaws and provisions of Delaware General Corporation Law could delay or prevent a change of control or may impede the ability of the holders of our common stock to change our management.In particular, our Certificate of Incorporation and Bylaws, among other things will regulate how stockholders may present proposals or nominate directors for election at stockholders’ meetings and authorize our board of directors to issue preferred stock in one or more series, without stockholder approval.See “Description“Description of Capital Stock — Anti-Takeover Provisions.”As of March 16, 2021, collectively own 13,051,042 shares of our common stock, or approximately 39% of our outstanding shares of common stock. Accordingly, if these stockholders were to choose to act together, they could have a significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or all or a significant percentage of our assets.This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.40 “Principal“Principal Stockholders,,” “Certain“Certain Relationships and Related Party Transactions”Transactions” and “Description“Description of Capital Stock.”We, along with our directors and executive officers and holders of substantially all of our capital stock and securities convertible into our capital stock are subject to lock-up agreements or market stand-off provisions that expire in June 2021 and, accordingly, approximately 23,552,486 shares of our common stock will become eligible for sale upon such expiration. Such lock-up expirations could adversely affect the market for our common stock.We have also agreed to file a registration statement for the resale of certain shares of our common stock held by certain of our stockholders. All of our common stock sold pursuant to an offering covered by such registration statement will be freely transferable.may behas been volatile.may fluctuatehas fluctuated substantially depending ondue to a number of factors, many of which are beyond our control and may not be related to our operating performance.These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid.Factors that could cause fluctuations in the trading price of our common stock include the following:41 We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.As an emerging growth company, as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to obtain an assessment of the effectiveness of our internal controls over financial reporting from our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. To the extent we avail ourselves of these exemptions, our financial statements may not be comparable to companies that comply with such new or revised accounting standards. We cannot predict if investors will find our common stock less attractive because we will rely on these.42 or warrants or conversion of convertible securities may have a dilutive effect on your percentage ownership and may result in a dilution of your voting power and an increase in the number of shares of common stock eligible for future resale in the public market, which may negatively impact the trading price of our shares of common stock. or conversion of some or all of our outstanding options warrants, or convertible securities could result in significant dilution in the percentage ownership interest of existing investors and in the percentage ownership interest of our existing common stockholders and in a significant dilution of voting rights and earnings per share.As of March 16,December 31, 2021, we have outstanding warrants to purchase up to 3,569,833 sharesoptions, held primarily by current and former employees of our common stock at a weighted exercise price of $16.42 per share and we have outstanding optionsthe Company, for the issuance of up to 890,728720,549 shares of common stock at a weighted exercise price of $8.82$9.57 per share. The exercise of such existing outstanding stock options will further dilute our stockholders’ voting interests.To the extent options and/or warrants and/or conversion rights are exercised, additional shares of common stock will be issued, and such issuance will dilute stockholders.43 U.S.United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Some foreign companies, including some that may compete with us, may not be subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in countries in which we conduct our business. However, our employees or other agents may engage in conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.Item 1B.UNRESOLVED STAFF COMMENTSItem 2.PROPERTIES900,0001,000,000 square feet of distribution space under leases in strategic locations, including six distribution centers in the U.S.,United States and two distribution centers in CanadaCanada. Following our 2021 acquisitions, we also maintain five manufacturing facilities in the United States and one distribution centertwo manufacturing facilities in Spain.Canada. Our headquarters is located in Fairless Hills,Shoemakersville, Pennsylvania. See “Certain“Certain Relationships and Related Party Transactions.” Wetotal six facilitiesconnection with the sale of that building by our lessor. The other distribution center is located in Fontana, California which we relocated to from our Santa Fe Springs, California distribution facility. See Note 7 - Leases, in the U.S.notes to the consolidated financial statements elsewhere in this Annual Report on Form 10-K.two in the notes to the consolidated financial statements elsewhere in this Annual Report on Form 10-K.onecommencing June 1, 2023 . See Note 7 - Leases, in Spain, and onethe notes to the consolidated financial statements elsewhere in China.As a result of the planned sale of the building which we currently lease in Petaluma, California, we have temporarily relocated our executive offices to another one of our existing locations, specifically our 290 Canal Road, Fairless Hills, Pennsylvania 19030 distribution center. We also intend to relocate our existing distribution operations in Northern California from the existing Petaluma building to a larger distribution center in the surrounding area.44 Item 3.LEGAL PROCEEDINGSItem 4.MINE SAFETY DISCLOSURES45 Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarchFebruary 17, 2021,2022, there were approximately 12,19818,746 stockholders of record of our common stock.relevant.Stock Performance GraphThis performance graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The stock price performance shown on the graph is not necessarily indicative of future price performance.Comparison of Cumulative Total ReturnAmong Hydrofarm Holdings Group, Inc., S&P 500 Consumer Discretionary Sector and the Nasdaq Composite Index
The above graph measures the change in a $100 investment in our common stock from December 10, 2020 (the date our common stock commenced trading on The Nasdaq Global Select Market) through December 31, 2020. Our relative performance is then compared with the S&P 500 Consumer Discretionary Sector and the Nasdaq Composite Index. The graph uses the closing market price on December 10, 2020 of $51.99 per share as the initial value of our common stock. If we used the $20 per share price paid in our December 2020 initial public offering, the total return through December 31, 2020 would greatly exceed the amount shown in the graph above.On December 31, 2019, we entered into a securities purchase agreement with certain investors named therein, pursuant to which we issued and sold, in a private placement offering between December 2019 and February 2020, 7,725,045 shares of our Series A Convertible Preferred Stock, par value $0.0001 per share, at an offering price of $3.50. We received gross proceeds of approximately $27 million (which includes proceeds of approximately $8 million raised from the issuances of convertible unsecured subordinated promissory notes in September and October 2019, which converted into shares of our Series A Preferred Stock) in connection with our initial public offering, before deducting fees and related offering expenses.The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.Not applicable.46 Item 6.SELECTED FINANCIAL DATAItem 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS related notes contained elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements are only predictions, and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this Annual Report on Form 10-K, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in “Risk Factors” in this Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements.”and manufacturer of controlled environment agriculture (“CEA”, principally hydroponics)CEA equipment and supplies, including a broad portfolio of our own innovative portfolio of proprietary branded products. We primarily serve the U.S. and Canadian markets, and believe we are one of the leading competitors by market share in these markets in an otherwise highly fragmented industry. For over 40 years, we have helped growers make growing easier and more productive. Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency and speed in their grow projects.CO2,CO2, light intensity spectrum, nutrient concentration and pH. Through CEA, growers are able to be more efficient with physical space, water and resources, while enjoying year-round and more rapid grow cycles as well as more predictable and abundant grow yields, when compared to other traditional growing methods.eCommercee-commerce marketplace. Over 80%A substantial majority of our net sales are into theto specialty hydroponic retailers, through which growers are able to enjoy specialized merchandise assortments and knowledgeable staff. We also distribute our products across the U.S. and Canada to a diversified range of retailers of commercial and home gardening equipment and supplies that include garden centers, hardware stores, eCommercee-commerce retailers, commercial greenhouse builders, and commercial resellers.Initial Public OfferingDecember 14, 2020,November 1, 2021, we closed the acquisition of the IGE Entities. See Note 3 - Business Combinations under Innovative Growers Equipment, Inc. Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The IGE Entities are a manufacturer of horticulture benches, racking and LED lighting systems. The addition of the IGE Entities' commercial equipment product range complements our existing lineup of high performance, proprietary branded products.IPO,outstanding warrants (the "Investor Warrants") to purchase shares of our common stock that were issued in connection with a private placement of units. See Note 11 - Stockholders' Equity under Warrants - Redemption of investor warrants, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Prior to July 19, 2021, 3,367,647 Investor Warrants were exercised, generating approximately $56.8 million of gross proceeds to the Company. As a result, we redeemed 1,491 Investor Warrants for a redemption price of $0.00033712 per Investor Warrant. As of December 31, 2021, there were no Investor Warrants outstanding. We used the net proceeds from the redemption of the Investor Warrant for acquisitions, working capital and other general corporate purposes.9,966,6675,526,861 shares of our common stock, including the full exercise by the underwriters of their option to purchase 1,300,000720,894 additional shares of our common stock, at a public offering price of $20.00$59.00 per share, which resulted in net proceeds of $182.3approximately $309.8 million after deducting underwriting discounts and commissions and offering expenses. TheWe used the proceeds from the IPO werefollow-on offering for acquisitions, working capital and other general corporate purposes.(i)in all stages of plant growth, helping to repayincrease the amounts outstanding under the Term Loanyield and quality of crops.Agreement amongFacilitysubsidiary obligors, Brightwood Loan Services, LLCsubsidiaries entered into a Senior Secured Revolving Credit Facility (the “JPMorgan Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender, and the other lenders from time to time party thereto (as amended to date,thereto. The JPMorgan Credit Facility replaced the “Term Loan Agreement”) of $76.6 million (includes accrued interest and fees of $0.3 million), (ii) to paydown certain amountsSecurity Agreement with Encina Business Credit, LLC (the “Encina Credit Facility”). There was no outstanding indebtedness under the Encina Credit Facility when it was replaced. The JPMorgan Credit Facility, among other things, provides for an asset based senior revolving credit line (the “Senior Revolver”) with JPMorgan as the initial lender. The three-year Senior Revolver had a borrowing limit of $33.4$50 million. We had the right to increase the amount of the Senior Revolver in an amount up to $25 million (iii) to repay $3.3 millionby obtaining commitments from JPMorgan or from other lenders. Our and our subsidiaries’ obligations under the promissory noteJPMorgan Credit Facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of our and our subsidiaries’ respective personal property assets pursuant to the terms of a U.S. and a Canadian Pledge and Security Agreement, dated March 29, 2021, and the other security documents. On August 31, 2021, the JPMorgan Chase, N.A. throughCredit Facility was amended to increase the U.S. Small Business Administrative Paycheck Protection Program (the “PPP Loan”)borrowing limit to $100 million and on October 25, 2021 was further amended to permit the Term Loan and to conform changes to provisions of the Term Loan. The JPMorgan Credit Facility is more fully described in Note 10 - Debt under Revolving asset-backed credit facilities - JPMorgan Revolving Credit Facility in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.and (iv)in the notes to pay $2.6 millionthe consolidated financial statements included elsewhere in this Annual Report on Form 10-K.settlebe available upon expiration of the Series A Preferred Stock dividend. Our common stock began tradinglease for existing space, commencing January 1, 2023. See Note 7 - Leases, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Nasdaq Global Select Marketlease existing space, commencing June 1, 2023. See Note 7 - Leases, in the notes to the consolidated financial statements included elsewhere in this Annual Report on December 10, 2020.47 CoronavirusCOVID-19 on Our BusinessPublic health responsesVaccines for COVID-19 continue to be administered in the United States and other countries around the world, but the extent and rate of vaccine adoption, the long-term efficacy of these vaccines and other factors remain uncertain. Authorities throughout the world have included national pandemic preparednessimplemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and response plans, travel restrictions, closure of non-essential businesses, quarantines, curfews, event postponementswork-from-home directives, mask requirements, shelter-in-place orders and cancellations and closures of facilities including local schools and businesses. While the rollout of vaccines has begun, the timing of vaccinations, herd immunity, and the lifting of shelter in place and similar restrictions and movement restrictions is unknown.vaccination programs. The global pandemic and actions taken to contain COVID-19 have adversely affected the global economy and financial markets.In March 2020, the majority of the employees at our headquarters transitionedWe have historically and may continue to working remotely. For several weeks following the initial outbreak of COVID-19, we experienced a material impact to our supply chain that inhibited growth and results of operations. Andsource select products from time-to-time during the COVID-19 pandemic, we experienced delays in the receipt of goods from international and domestic suppliers as well as a general slowdown in freight processing times resulting in shipping delays and higher periodic freight costs.China. It is difficult to predict the extent to which COVID-19, including the emergence and spread of more transmissible variants, may continue to spread. As of the date of this Annual Report on Form 10-K, manufacturers in China and in North America are generally back in operation; however, new waves of the COVID-19 pandemic could result in the re-closure of factories in China and/or in North America. Quarantine orders and travel restrictions within the U.S.United States and other countries may also adversely impact our supply chains, the manufacturing of our own products and our ability to obtain necessary materials. Consequently,We are experiencing some extended lead times in our supply chain, as well as increased shipping costs and believe the COVID-19 pandemic is a contributing factor to those extended lead times and increased costs. Although we have not, to date, experienced any material interruptions in our ability to fill our customers' orders or manufacture our own products, we may in the future be unable to obtain adequate inventory to fill purchase orders or Although we cannot precisely quantify in absolute or relative terms, our accelerated rate of growth in net sales for the twelve months ended December 31, 2020 correlates with shelter-in-place orders issued in many locations in March 2020 in response to the COVID-19 pandemic. Our sales growth for the twelve months ended December 31, 2020 was approximately 46% higher than the same period in 2019. A portion of our net sales during this period could be due to pull-through demand for our products due to higher consumption of CEA products from individuals spending more time at home due to shelter-in-place measures. Although uncertainty created by the COVID-19 pandemic remains, and various state budgets remain under economic pressure creating a greater chance of further cannabis legalization, we cannot assure you that such a rate of growth will continue.2020,2021, our manufacturing and distribution operations wereare viewed as essential services and continuedcontinue to operate. Our key suppliers, retailers and resellers have been designated as essential services and remain open at this time; however, in certain places they are operating under reduced hours and capacity limitations. The majority of U.S. and Canadian cannabis businesses have been designated as essential by U.S. stateState and Canadian government authorities.U.S.,United States, possible negative supply chain impact from workforce disruption at international and domestic suppliers and domestic ports and the possible negative impact on transportation costs) have had on the overall business. And so, while we do not believe that we are experiencing net material adverse impacts at this time, given the global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the COVID-19 pandemic, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. While we believe that we are well positioned for the future as we navigate the crisis and prepare for an eventual return to a more normal operating environment, we continue to closely monitor the COVID-19 pandemic as we evolve our business continuity plans and response strategy.48 farmersgrowers but rather our customer base consists of specialty hydroponic retailers, garden centers, eCommerce and greenhouse suppliers.productionmanufacturing and warehouse personnel, facility costs for manufacturing operations and depreciation, depletion and amortization of manufacturing and warehouse improvements and equipment. We expect our cost of goods sold to increase in absolute dollars in conjunction with our growth.growth and as a result of higher freight and labor costs. However, we expect that, over time, cost of goods sold will decrease as a percentage of net revenue as a result of the scaling of our business including a higher proportion of the amount of proprietary and exclusive branded products that we sell.49 2019 and 20182019 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Years ended December 31, 2021 2020 Year to year change Net sales $ 479,420 100.0 % $ 342,205 100.0 % $ 137,215 40.1 % Cost of goods sold 377,934 78.8 % 278,572 81.4 % 99,362 35.7 % Gross profit 101,486 21.2 % 63,633 18.6 % 37,853 59.5 % Operating expenses: Selling, general and administrative 103,888 21.7 % 58,492 17.1 % 45,396 77.6 % Impairment, restructuring and other 297 0.1 % 860 0.3 % (563) -65.5 % (Loss) income from operations (2,699) -0.6 % 4,281 1.3 % (6,980) -163.0 % Interest expense (2,138) -0.4 % (10,141) -3.0 % 8,003 -78.9 % Loss on debt extinguishment (680) -0.1 % (907) -0.3 % 227 -25.0 % Other (expense) income, net (204) 0.0 % 70 0.0 % (274) -391.4 % Loss before tax (5,721) -1.2 % (6,697) -2.0 % 976 -14.6 % Income tax benefit (expense) 19,137 4.0 % (576) -0.2 % 19,713 -3,422.4 % Net income (loss) 13,416 2.8 % (7,273) -2.1 % 20,689 -284.5 % Cumulative dividends allocated to Series A Convertible Preferred Stock — 0.0 % (2,597) -0.8 % 2,597 -100.0 % Net income (loss) attributable to common stockholders $ 13,416 2.8 % $ (9,870) -2.9 % $ 23,286 -235.9 % 2020 2019 Net sales $ 342,205 100.0 % $ 235,111 100.0 % $ 107,094 45.6 % Cost of goods sold 278,572 81.4 % 208,025 88.5 % 70,547 33.9 % Gross profit 63,633 18.6 % 27,086 11.5 % 36,547 134.9 % Operating expenses: Selling, general and administrative 58,492 17.1 % 43,784 18.6 % 14,708 33.6 % Impairment, restructuring and other 860 0.3 % 10,035 4.3 % (9,175 ) -91.4 % Income (loss) from operations 4,281 1.3 % (26,733 ) -11.4 % 31,014 -116.0 % Interest expense (10,141 ) -3.0 % (13,467 ) -5.7 % 3,326 -24.7 % Loss on debt extinguishment (907 ) -0.3 % (679 ) -0.3 % (228 ) 33.6 % Other income, net 70 0.0 % 105 0.0 % (35 ) -33.3 % Net loss before tax (6,697 ) -2.0 % (40,774 ) -17.4 % 34,077 -83.6 % Income tax (expense) benefit (576 ) -0.2 % 691 0.3 % (1,267 ) -183.4 % Net loss (7,273 ) -2.1 % (40,083 ) -17.1 % 32,810 -81.9 % Cumulative dividends allocated to Series A �� convertible preferred stock (2,597 ) -0.8 % — 0.0 % (2,597 ) n/a Net loss attributable to Hydrofarm Holdings Group, Inc. $ (9,870 ) -2.9 % $ (40,083 ) -17.1 % $ 30,213 -75.4 % Years ended December 31, 2020 2019 Year to year change Net sales $ 342,205 100.0 % $ 235,111 100.0 % $ 107,094 45.6 % Cost of goods sold 278,572 81.4 % 208,025 88.5 % 70,547 33.9 % Gross profit 63,633 18.6 % 27,086 11.5 % 36,547 134.9 % Operating expenses: Selling, general and administrative 58,492 17.1 % 43,784 18.6 % 14,708 33.6 % Impairment, restructuring and other 860 0.3 % 10,035 4.3 % (9,175) -91.4 % Income (loss) from operations 4,281 1.3 % (26,733) -11.4 % 31,014 -116.0 % Interest expense (10,141) -3.0 % (13,467) -5.7 % 3,326 -24.7 % Loss on debt extinguishment (907) -0.3 % (679) -0.3 % (228) 33.6 % Other income, net 70 0.0 % 105 0.0 % (35) -33.3 % Net loss before tax (6,697) -2.0 % (40,774) -17.4 % 34,077 -83.6 % Income tax (expense) benefit (576) -0.2 % 691 0.3 % (1,267) -183.4 % Net loss (7,273) -2.1 % (40,083) -17.1 % 32,810 -81.9 % Cumulative dividends allocated to Series A Convertible Preferred Stock (2,597) -0.8 % — 0.0 % (2,597) n/a % Net loss attributable to Hydrofarm Holdings Group, Inc. $ (9,870) -2.9 % $ (40,083) -17.1 % $ 30,213 -75.4 % behave been related to pull-through demand for our products due to higher consumption of CEA products from individuals spending more time at home due to shelter-in-place measures. Although uncertainty created by the COVID-19 pandemic remains, and various state budgets remain under economic pressure, creating a greater chance of further cannabis legalization, we cannot assure you that such growth will continue.iswas primarily due to (i) a more favorable sales mix of proprietary and exclusive branded products, which typically carry a higher gross margin, (ii) lower freight cost, and (iii) inventory adjustments and write-downs that impacted the fourth quarter of 2019 primarily associated with our 2019 SKU rationalization. (“SG&A”) expenses for the year ended December 31, 2020 increased by $14.7 million or 33.6%, compared to the year ended December 31, 2019 due primarily to an increase of $8.7 million in stock-based compensation expense, of which $6.1 million was directly triggered by our IPO in December 2020 (more fully described below). SG&A expense excluding the portion of stock-based compensation expense triggered by the IPO decreased from 18.6% in 2019 to 15.3% in 2020 due to economies of scale as our net sales grew faster than our selling, general and administrative expenses.50 11, 12 - Stock-based compensation and 401K plan, in ourthe notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we granted restricted stock units (“RSUs”)RSUs to certain officers, former directors and their affiliates which have vesting conditions including a performance-based vesting requirement which was satisfied upon the consummation of our IPO. As a result, our IPO in December 2020 triggered a significant performance-based stock compensation charge of $6.1 million for previously unrecognized time-based vesting prior to the IPO.2020 from $5.4 million in 2019.2020. For the year ended December 31, 2019, we recognized expensesa $5.4 million expense related to the impairment of intangible assetassets for customer relationships; $2.0 million for restructuring costs;costs, and $1.5 million for other similar activities related to our capitalization.expenses. We also incurred $1.1 million for a registration statement which was delayed, and accordingly, the third-party costs were expensed. See Note 14, 15 - Impairment, restructuring and other, in ourthe notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.Loan Agreement,Loan"), from approximately 13% for the year ended December 31, 2019 to an effective interest rate of approximately 10.2% for the year ended December 31, 2020 due to a reduction of the Brightwood Term Loan Agreement interest rate margin which became effective on January 1, 2020 from LIBOR plus 10.0% to LIBOR plus 8.5% along with a reduction of average LIBOR from 2.5% to 1%. The decrease in interest costs was also slightly impacted by a decrease in the effective interest rate on our revolving credit facilities from approximately 9.9% for the year ended December 31, 2019 to approximately 9.3% for the year ended December 31, 2020. Agreement in connection with the IPO. Similar costs in 2019 resulted from the write-off of unamortized deferred financing costs when the BofA Credit Facility was refinanced with the Encina Credit Facility.Results of Operations– Comparison of Years Ended December 31, 2019 and 2018The following table sets forth our consolidated statements of operations for the years ended December 31, 2019 and 2018, including amounts and percentages of net sales for each year and the year-to-year change in dollars and percent (amounts in thousands): 2019 2018 Year to year change Net sales $ 235,111 100.0 % $ 211,813 100.0 % $ 23,298 11.0 % Cost of goods sold 208,025 88.5 % 187,743 88.6 % 20,282 10.8 % Gross profit 27,086 11.5 % 24,070 11.4 % 3,016 12.5 % Operating expenses: Selling, general and administrative 43,784 18.6 % 42,229 19.9 % 1,555 3.7 % Impairment, restructuring and other 10,035 4.3 % 7,169 3.4 % 2,866 40.0 % Loss from operations (26,733 ) -11.4 % (25,328 ) -11.9 % (1,405 ) 5.5 % Interest expense (13,467 ) -5.7 % (11,606 ) -5.5 % (1,861 ) 16.0 % Loss on debt extinguishment (679 ) -0.3 % — 0.0 % (679 ) — Other income, net 105 0.0 % 995 0.5 % (890 ) -89.4 % Loss before tax (40,774 ) -17.4 % (35,939 ) -16.9 % (4,835 ) 13.5 % Income tax benefit 691 0.3 % 397 0.2 % 294 74.2 % Net loss (40,083 ) -17.0 % (35,542 ) -16.8 % (4,541 ) 12.8 % Net loss attributable to non-controlling interest — (2,650 ) Net loss attributable to Hydrofarm Holdings Group, Inc $ (40,083 ) $ (32,892 ) Net salesNet sales for the year ended December 31, 2019 increased $23.3 million or 11.0% compared to the year ended December 31, 2018. The increase was primarily due to an increase in the volume sold during the period. For the year ended December 31, 2019, we realized an approximate 11.6% increase in volume offset by a 0.6% decrease in price. Our sales in certain non-U.S. markets were impacted by IT system challenges experienced during the integration of our Canadian businesses, an issue we do not expect to continue in 2020. The increase in U.S. volume sold was primarily related to (i) higher demand from the end-markets across numerous U.S. states, including but not limited to Oklahoma, Michigan and California and (ii) higher demand for our proprietary and preferred branded products which grew at a faster pace than our distributed brands for the year ended December 31, 2019.Gross profitGross profit for the year ended December 31, 2019 increased $3.0 million or 12.5% compared to the year ended December 31, 2018. The increase in gross profit was primarily related to (i) the 11.0% increase in net sales and (ii) a small increase in gross profit margin percentage (gross profit as a percent of net sales) associated with a more favorable mix of proprietary and exclusive branded products as compared to the prior year. This increase was partially offset by the year-over-year decrease in net sales (as noted above) and associated gross profit in non-U.S. markets.Selling, general and administrative expensesSelling, general and administrative expenses for the year ended December 31, 2019 increased $1.6 million or 3.7% compared to the year ended December 31, 2018. The increase was primarily due to (i) higher outside accounting and IT consultant expense of $2.0 million related to increased preparation for the IPO and (ii) higher bad debt expenses of $0.4 million primarily attributable to the challenges in the Canadian market in 2019 offset by lower facility expenses of $0.7 million due to adjusting our warehouse footprint.Impairment, restructuring and otherCertain expenses of $10.0 million for 2019 and $7.2 million for 2018 primarily related to recognition of impairment on intangible assets, several restructuring and recapitalization events, and fees for various statutory filings. The impairment in 2019 related to the impairment of our intangible asset for customer relationships; in 2018, the impairment was for goodwill. Restructuring and recapitalization events refer to our debt refinancing in 2019 and 2018; our Preferred Stock Offering in 2019; the recapitalization and reverse merger in 2018; and, other similar activities related to our capitalization. In 2019, we filed a registration statement which was delayed, and the third-party costs were expensed. See Note 14, Impairment, restructuring and other, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.Interest expenseInterest expense was $13.5 million for the year ended December 31, 2019 compared to $11.6 million for the year ended December 31, 2018, reflecting an increase of $1.9 million or 16.0%.The increase in interest expense was due in part to an increase in the effective interest rate on the Term Loan Agreement to 13.0% for the year ended December 31, 2019 from 12.1% for the year ended December 31, 2018. Additionally, interest payments for the years ended December 31, 2019 and 2018 of $7.1 million and $6.8 million, respectively, were deferred and added to principal which resulted in additional interest on the increase in the principal balance.Similarly, the effective interest rate on the revolving credit facilities increased to 9.8% for the year ended December 31, 2019 compared to 5.0% to 5.1% for the year ended December 31, 2018 as we transitioned from the BofA Credit Facility in July 2019 to the Encina Credit Facility.Income tax benefitIncome tax benefit was $0.7 million or 1.7% of loss before tax for the year ended December 31, 2019 compared to $0.4 million or 1.1% for the year ended December 31, 2018. The net income tax benefit is comprised of two amounts: a current tax expense of $27 thousand and $0.5 million for 2019 and 2018, respectively; and, a deferred income tax benefit of $0.7 million and $0.9 million for 2019 and 2018, respectively. The current portion of the provision (tax expense) generally reflects minimum U.S. state and Canadian provincial taxes which do not fluctuate with pre-tax income or loss. The deferred income tax benefit in each year was primarily generated from the tax consequence of the impairment write-offs; these income tax benefits are not expected to recur.Net loss attributable to non-controlling interestIn May 2017, Hydrofarm Investment Corp. (“HIC”), acquired, through its wholly-owned subsidiary, Hydrofarm Holdings, LLC, all of the capital stock of Hydrofarm, Inc., in a transaction referred to as the “Formation Transaction.” Concurrently with the acquisition by HIC, Hydrofarm, Inc. converted from an S-Corp to a limited liability company and was renamed Hydrofarm, LLC. At the time of the Formation Transaction in May 2017, an investor in Hydrofarm, LLC retained a 12.5% interest in Hydrofarm Holdings, LLC which was presented as a non-controlling interest and allocated a portion of our losses until it was exchanged for shares in our parent and reclassified to controlling interest. See Note 1, Description of the business, basis of presentation and significant accounting policies – Recapitalization and reverse merger in 2018, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.52 accounting principles in the United States of America (“U.S. (“GAAP” or “GAAP”). However, management believes that certain non-GAAP financial measures provide investors of our financial information with additional useful information in evaluating our performance and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income (loss) provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. These non-GAAP financial measures may be different than similarly titled measures used by other companies. the significant interest expense, or the amounts necessary to service interest or principal payments on our indebtedness;each of the years ended December 31, 2021, 2020 and 2019 (in thousands):Years ended December 31, 2021 2020 2019 Net income (loss) $ 13,416 $ (7,273) $ (40,083) Interest expense 2,138 10,141 13,467 Income tax (benefit) expense (19,137) 576 (691) Distribution center exit costs and other 2,641 — — Depreciation, depletion and amortization 14,934 6,779 6,995 Impairment, restructuring and other 297 860 10,035 Acquisition and integration expenses* 24,210 — — Other expense (income), net 204 (70) (105) Stock-based compensation** 5,750 9,156 208 Loss on debt extinguishment 680 907 679 Investor warrant solicitation fees 1,949 — — Adjusted EBITDA $ 47,082 $ 21,076 $ (9,495) Adjusted EBITDA as a percent of net sales 9.8 % 6.2 % (4.0) % 2018: Years ended December 31, 2020 2019 2018 (In thousands) Net loss $ (7,273 ) $ (40,083 ) $ (32,892 ) Interest expense 10,141 13,467 11,606 Income tax expense (benefit) 576 (691 ) (397 ) Depreciation and amortization 6,779 6,995 8,260 Impairment, restructuring and other 860 10,035 7,169 Other income, net (70 ) (105 ) (995 ) Stock-based compensation(1) 9,156 208 — Loss on debt extinguishment 907 679 — Adjusted EBITDA $ 21,076 $ (9,495 ) $ (7,249 ) Adjusted EBITDA as a percent of net sales 6.2 % -4.0 % -3.4 % (1) Includeslegal fees incurred for the amount ofcompleted Heavy 16, House and Garden, Aurora, Greenstar/Grotek and IGE acquisitions and certain potential acquisitions.share-basedstock-based compensation53 CASH FLOWS FROM OPERATING, INVESTING, AND FINANCING ACTIVITIESFlowsFlow from Operating, Investing, and Financing Activities —- Comparison of Years Ended December 31, 2021, 2020, and 2019 2020 2019 Net cash used in operating activities $ (44,825 ) $ (13,302 ) Net cash provided by (used in) investing activities 546 (3,818 ) Net cash provided by financing activities 88,145 19,900 Effect of exchange rate changes on cash, cash equivalents and restricted cash 232 2,154 Net increase in cash, cash equivalents and restricted cash 44,098 4,934 Cash, cash equivalents and restricted cash at beginning of year 32,857 27,923 Cash, cash equivalents and restricted cash at end of year $ 76,955 $ 32,857 Years ended December 31, 2021 2020 2019 Net cash used in operating activities $ (45,067) $ (44,825) $ (13,302) Net cash (used in) provided by investing activities (468,184) 546 (3,818) Net cash provided by financing activities 464,707 88,145 19,900 Effect of exchange rate changes on cash, cash equivalents and restricted cash (27) 232 2,154 Net (decrease) increase in cash, cash equivalents and restricted cash (48,571) 44,098 4,934 Cash, cash equivalents and restricted cash at beginning of year 76,955 32,857 27,923 Cash, cash equivalents and restricted cash at end of year $ 28,384 $ 76,955 $ 32,857 We have no material commitments for capital expenditures.$182.3$182.4 million in net proceeds. We used a portion of the proceeds to pay off ourthe Brightwood Term Loan, Agreement, to payoffpay off our PPP loan and to paydown the outstanding balance under the Encina Credit Facility.Facility. Other activity was a net of $1.2 million from transactions with our Series A preferred stock investors and payments of $1.0$0.7 million on finance leases. Our net cash provided by these activities was $88.1 million for the period which we will useused for our planned business growth and expansion.
JPMorgan Revolving Credit FacilityCash Flows from Operating, Investing, and Financing Activities — Comparison of Years Ended December 31, 2019 and 2018The following table summarizes our cash flows foryears ended 2019 and 2018 (amounts in thousands): 2019 2018 Net cash (used in) provided by operating activities $ (13,302 ) $ 4,437 Net cash used in investing activities (3,818 ) (3,312 ) Net cash provided by financing activities 19,900 25,516 Effect of exchange rate changes on cash, cash equivalents and restricted cash 2,154 (924 ) Net increase in cash, cash equivalents and restricted cash 4,934 25,717 Cash, cash equivalents and restricted cash at beginning of year 27,923 2,206 Cash, cash equivalents and restricted cash at end of year $ 32,857 $ 27,923 Operating ActivitiesNet cash used in operating activities was $13.3 million for the year ended December 31, 2019. This consisted of net loss of $40.1 million offset by $26.2 million in non-cash addbacks,JPMorgan Credit Facility, which were largely composed of depreciation and amortization, impairment charges, interest expense added to principal and non-cash operating lease expense, plus a $0.6 million increase in working capital. The small change in working capital primarily reflects a $2.1 million net decrease in accounts receivable and inventories as collections and net sales during 2019 were slowed due to the industry downturn, plus a $1.2 million increase in accounts payable and accrued expenses as we were able to align payment of our obligations with our cash flow.Net cash provided by operating activities was $4.4 million for the year ended December 31, 2018. The increase in cash used in operating activities for the year ended December 31, 2019 compared to the prior year was mostly due to the $22.0 million net drawdown of 2017 inventory (inventory purchased and carried in ending inventory at December 31, 2017 and sold in 2018) by the year ended December 31, 2018 as inventory overstock issues from the industry down-turn in late 2017 which continued into 2018 were addressed and rebalanced.Investing ActivitiesNet cash used in investing activities was $3.8 million for the year ended December 31, 2019 and $3.3 million for the year ended December 31, 2018. In 2019, the cash was primarily for a $3.1 million advance on an interest bearing note receivable to a third party secured by equipment; in 2018, cash was used for a similar advanceborrowing limit of $2 million to another third party.Financing ActivitiesNet cash provided by financing activities was $19.9 million for the year ended December 31, 2019 consisting primarily of proceeds from the Preferred Stock Offering, net of offering costs, of $21.7 million which includes proceeds from debt eventually converted into the preferred stock.$50 million. The offering improved our capital and liquidity. The other significant activity was replacement of the BofAJPMorgan Credit Facility withreplaced the Encina Credit Facility.Net cash provided The JPMorgan Credit Facility is due on March 29, 2024.financing activities was $25.5 million fora first priority lien (subject to certain permitted liens) in substantially all of our and our subsidiaries' respective personal property assets pursuant to the year endedterms of a U.S. and Canadian Pledge and Security Agreement dated March 29, 2021 and other security documents2018 primarily consisting2021. As of $52.6December 31, 2021, approximately $83.6 million less offering costswas available to borrow under the undrawn JPMorgan Credit Facility.$4.5our direct and indirect subsidiaries entered into the Term Loan (as defined below) with JPMorgan Chase Bank, N.A., as administrative agent for certain lenders, pursuant to which we borrowed a $125.0 million senior secured term loan. The Term Loan bears interest at LIBOR (with a 1.0% floor) plus 5.50%, or an alternative base rate (with a 2.0% floor), plus 4.50%, and is subject to a call premium of 2% in year one, 1% in year two, and 0% thereafter, and matures on October 25, 2028. We received net proceeds of $119.9 million from the Term Loan after deducting discounts and deferred financing costs.offering and concurrent offering of common stock to investors,non-working capital assets and a net of $4 million from a related party. The offering improved our capital and liquidity. Our sources of cash provided by financing activities were offset by a $27.4 million net paymentsecond lien on our revolving credit facility.SEASONALITYwhich corresponds with the moredue to robust sales in the warmer spring and summer months in North America (US(the United States and Canada are our primarily markets). This seasonal trend primarily relates to consumersthe garden center portion of our customer base and that certain of our customers may from time to time use some of our products (such as grow media and nutrient products utilizing natural sunlightnutrients) in their CEA or outdoor grow application.LIQUIDITY AND CAPITAL RESOURCESOur liquidityapplications.capital resources were significantly improved byUse of CashIPO in December 2020 which resulted in net proceeds of $182.3 million after deducting underwriting discountscash flows from operating activities and commissions and offering expenses. The proceeds from the IPO were used to repay $76.6 million (including accrued interest and fees of $0.3 million) outstanding under the Term Loan Agreement, $33.4 million outstanding under the EncinaJPMorgan Credit Facility and $3.3 millionTerm Loan will be sufficient to meet our capital expenditures, working capital needs and debt repayments for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under the PPP Loan, andour borrowing agreements in amounts sufficient to pay $2.6 million to settle the Series A Preferred Stock dividend.55 Asindebtedness or fund other working capital needs. Actual results of December 31, 2020, we had a cash balance of $75.2 million and restricted cash of $1.8 million; $1.0 million of interest-bearing liabilities; $15.0 million of inventory purchase commitment obligations,operations will depend on numerous factors, many of which $3.0 million is dueare beyond our control as further discussed in 2021; and $22.1 million of lease obligations associated with our right-of-use assets of which $4.4 million is due in 2021.CRITICAL ACCOUNTING POLICIES AND ESTIMATESIn preparing our consolidated financial statements in conformity with GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances, historical experience, and business valuations. Actual amounts could differ from those estimated at the time the Consolidated Financial Statements are prepared.Our significant accounting policies are described in Note 1, Description of the business, basis of presentation and significant accounting policies, to our consolidated financial statements Some of those significantdifficult, subjective, or complexestimates and judgments or estimates. Anin determining the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. A discussion of our principal accounting estimatepolicies that required the application of significant judgments as of December 31, 2021 follows.considered to be critical if it meets bothmeasured at fair value, which is calculated as the sum of the following criteria: (i)acquisition date fair value of assets transferred, liabilities incurred to the estimate requires assumptions about matters thatformer owners of the acquiree and the equity interest issued in exchange for control of the acquiree. Acquisition related costs are highly uncertain atexpensed as incurred.time the accounting estimateconsideration transferred in a business combination includes a contingent consideration arrangement, which is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to periodwhere we may have the obligation to transfer additional assets or equity interest to the former owners if specified future events or conditions are met, the contingent consideration is measured at its acquisition date fair value and is included as part of the consideration transferred in a material impact onbusiness combination. Contingent consideration is classified as a liability when the presentationobligation requires settlement in cash or other assets and is classified as equity when the obligation requires settlement in our own equity instruments. Changes in fair value of our financial condition, changes in financial condition, or results of operations. Our critical accounting estimates includecontingent consideration that qualify as measurement period adjustments are adjusted retrospectively with a corresponding adjustment to goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the following:Revenue recognition, volume rebates and provision for doubtful accountsAll of our revenue is derivedmeasurement period, which cannot exceed one year from the sale of inventory and we recognize revenue as control of promised goods or services is transferred to customers. Arrangements have a single performance obligation and revenue is reported net of variable consideration which includes applicable volume rebates, cash discounts and sales returns and allowances. Variable consideration is estimated and recorded at the time of sale. The recognition of variable consideration requires the use of estimates. While we believe these estimates to be reasonable based on the then currentacquisition date, about facts and circumstances there can be no assurance that actual amounts realized willexisted at the acquisition date. All other subsequent changes in fair value of contingent consideration classified as a liability are included in net income in the period and changes in fair value of contingent consideration classified as equity are not differ materially from estimated amounts recorded.Provisions for uncollectible receivables due from customers are established based on management’s judgmentrecognized.toof the ultimate collectabilityacquisition date and we may extend our review and evaluation of these balancespre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess these contingencies as part of acquisition accounting.the receivable. The allowance is based on a combination of factors including the age of the account, the credit worthiness of the customer, payment terms, the customer’s historical payment historyacquired businesses and general economic conditions.InventoriesInventories are primarily comprised of finished goods and are recorded at the lower of cost or net realizable value determined by the first-in, first-out method of accounting. Net realizable value represents the estimated selling priceother indefinite-lived intangible assets. We evaluate these assets for inventoriesimpairment annually in the ordinary course of business, less all estimated costs of completionfourth quarter and costs necessaryon an interim basis if the facts and circumstances lead us to make the sale. The determination of net realizable value requires significant judgment, including consideration of factors such as shrinkage, the aging ofbelieve that more-likely-than-not there has been an impairment. Goodwill and future demandindefinite-lived intangible asset impairment reviews include performing either an initial qualitative or quantitative evaluation for inventory, expected future selling price we expect to realize by selling the inventory and our contractual arrangements with customers. Reserves for excess and obsolete inventory are based upon quantities on hand, projected volumes from demand forecasts and net realizable value. The estimates are subjective in nature and are made at a point in time, using available information, expected business plans, and expected market conditions. As a result, the actual amount received on sale could differ from the estimated value of inventory. Periodic reviews are performed on the inventory balance. The impact of changes in inventory reserves is reflected in cost of goods sold. The adequacyeach of our adjustments could be materially affected by changesreporting units and indefinite-lived intangible assets. As of December 31, 2021, we concluded it is more likely than not that goodwill and indefinite-live intangible assets recorded in the supply and demand for our products. including right-of-use assetsprimarily property and equipment,finite-lived intangible assets are stated at cost; right-of-use assets are recorded under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 842, Leases.cost. Depreciation and amortization expense is provided on the straight-line method and based on the estimated useful economic lives of the long-lived tangible assets. Intangible assets with finite lives and thereforeare subject to amortization, include customer relationships, enterprise resource software and certain tradenames.amortization. These intangible assets are being amortized over their estimated useful economic lives typically ranging from 5 to 18 years.56 We qualitatively assess potential indicators of impairment, referred to informally as Step 0, of our long-lived Long-lived tangible and finite-lived intangible assets wheneverare reviewed for impairment when events or changes in circumstances indicate that the asset or asset group’s carrying valueamount may not be recoverable. An asset group is defined as the lowest level for which identifiable cash flows can be associated with groupsAs of assets and related liabilities. If indicators are present,December 31, 2021, we follow a quantitative two-step process when testing for impairment. In Step 1, we perform a recoverability test by analyzing whether the carrying amount of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from their use over their expected life and eventual disposition. If the sum of the future undiscounted cash flows is greater than the carrying amount, the test is passed and no further work is performed. If the carrying amount is greater than the sum of the future undiscounted cash flows, the recovery test is deemed to have failed, and Step 2 is performed. In Step 2, the fair values of theconcluded that our long-lived tangible and definite-livedfinite-lived intangible assets are determined, and an impairment charge is recognized based on the excess of the carrying amount of the long-lived asset over its respective fair value.We use assumptions for revenue and expenses such as forecasted growth rates, margin estimates, historical cost ratios, capital additions and working capital needs, which are consistent with internal projections and operating plans. The forecast period is estimated using the remaining useful lives of primary assets in the group which involves judgement about assets to be included in the group subject to the test and to economic and technological obsolesce impacting the term. These and other assumptions are impacted by economic conditions and expectations of management and materially different assumptions in the future regarding the performance of the businesses could impact the useful lives of assets or estimate of future undiscounted cash flows.Share-based compensation arrangementsStock-based compensation cost is measured as of the grant date based on the fair value of the award and is expensed ratably over the service period of the award, which is typically the vesting period for time-based awards. Performance-based awards are expensed over the requisite service period based on achievement of performance criteria. We have elected to account for forfeitures when they occur, and any compensation expense previously recognized on unvested shares will be reversed.The fair value of restricted stock awards is estimated based on the fair value of the common stock underlying the restricted stock awards. We estimated the fair value of option-based awards subject to only a service condition on the date of grant using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected term and the price volatility of the underlying stock. The highly subjective and complex assumptions in the Black-Scholes model also include the estimated fair value of our common stock underlying the options.57 To measure the value of the underlying common stock, the initial grant-date fair value of shares of common stock underlying the award is determined. Such valuation is the responsibility of, and determined by, the board of directors, with input from management. Until our IPO in December 2020, there was no public market for our common stock. Therefore, the board of directors determined the fair value of common stock at the grant date by considering a number of objective, subjective and highly complex factors including independent third-party valuations of our common stock, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors.For purposes of determining the fair market value of our common stock during the periods prior to our IPO, we used a third-party valuation service provider to provide support for our analysis. For most of 2019, we primarily relied on valuation methods which included using the discounted cash flow and guideline public company methods. From latter part of 2019 until our IPO, a “probability weighted expected return method” (the “PWERM method”) analysis was used which placed greater emphasis on the Preferred Stock Offering completed in December 2019 to establish the value of our common stock; the PWERM method requires us to develop assumptions and estimates for both the probability of an IPO liquidity event and remaining private outcomes, as well as the values we expect those outcomes could yield. These methods consider operating and financial performance including estimating future cash flows and discounting those cash flows at an appropriate rate, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. These estimates will not be necessary to determine the fair value of underlying shares of common stock for new awards once the underlying shares begin trading. Estimates of fair market value for awards grants near our IPO incorporated the offering price in the calculation.In 2020, we granted a restricted stock award that vest only upon the satisfaction of both performance-based and market-based conditions. In determining the fair value of the award, the “Monte Carlo Simulation Method” (the MCSM) was used to assess the likelihood of vesting of the restricted stock units based on the probability of both a triggering event and qualifying traded share price within the specified time frame. The resulting risk-adjusted probability was then applied to the underlying fair value of common stock incorporating scenarios under which various performance conditions and share price outcomes are modeled over the course of numerous iterations. Importantly, key assumptions in the MSCM included volatility, time horizon corresponding to the vesting measurement period of the award forecasted based on daily trading prices, risk free rate, and number of simulation trials.For inputs into the Black-Scholes model, the expected stock price volatility for the common stock is estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in our industry which are of similar size, complexity and stage of development. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. We have elected to use the “simplified method” to determine the expected term which is the midpoint between the vesting date and the end of the contractual term because it has no history upon which to base an assumption about the term; we believe the simplified method approximates a term if it were to be based on expected life.We will continue to use the Black-Scholes model for option pricing.Application of these approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.Emerging Growth Company StatusWe are an emerging growth company as defined in the JOBS Act. Under the JOBS Act, companies have extended transition periods available for complying with new or revised accounting standards. We have elected this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Where allowable, we have early adopted certain standards as described in Note 1, Description of the business, basis of presentation and significant accounting policies, recorded in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, we are entitled to rely on certain exemptions as an emerging growth company, we arebalance sheet were not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b), (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items. These exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.1, Description of the business, basis2 - Basis of presentation and significant accounting policies — Recently issued accounting pronouncements, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.59 Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have material exposure to commodity risk.currently have no material exposureare exposed to interest rate risk from investments. In the future, we intend to investthrough our excess cash primarily in money market funds, debt instruments of the U.S. government and its agencies and in high quality corporate bonds and commercial paper. Due to the short-term nature of these investments, we do not believe that there will be material exposure to interestvariable rate risk arising from our investments.Our operating results are subject to risk from interest rate fluctuations on credit facilities which typically carry variable interest rates.debt. As of December 31, 2020,2021, we had less than $1$125.0 million of interest bearing debt outstanding. However, we expectsubject to arrange credit facilities during 2021 and such facilities are likely to carry variable interest rates.currencycurrencies of our Eddi’s and Sunblasterforeign subsidiary operations isare predominantly in the Canadian dollar (“CAD”) and the functional currency for Eltac is the Euro. For the purposes of presenting these consolidated financial statements, the assets and liabilities of subsidiaries with CAD or Euro functional currencies are translated into USD using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average rate prevailing during the period with exchange differences impacting other comprehensive income (loss) in equity. Currently a portion of our inventory purchases for Eddi’s and Sunblaster is in USD. However, Eddi’s sales will primarily be in CAD while Sunblaster sales will be in both USD and CAD. Additionally, Eddi’s and Sunblaster settle their operating expenses in CAD. Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, principally the CAD. However, we cannot provide assurances that ourwill not be materiallyare presented based on historical costs. Inflation affects our manufacturing costs, distribution costs and operating expenses. We believe that volatile prices for commodities have impacted by foreign currency fluctuation inour net sales and results of operations. We maintain strategies to mitigate the future.impact of higher raw material, energy and commodity costs, which include cost reduction, sourcing, passing along certain cost increases to customers and other actions, which may offset only a portion of the adverse impact.Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAPage Report of Independent Registered Public Accounting Firm – MNP LLPF-261 20202021 and 2019,2020, the related consolidated statements of operations, comprehensive loss,income (loss), changes in convertible preferred stock and stockholders’stockholders' equity, and cash flows, for each of the twothree years in the period ended December 31, 2020,2021, and the related notes and Schedule II listed in the Index to Consolidated Financial Statements (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2020,2021, in conformity with accounting principles generally accepted in the United States of America.ChangePrincipleAs discussedOversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Noteto2022, expressed an unqualified opinion on the Company's internal control over financial statements, effective January 1, 2019, the Company adopted Financial Accounting Standards Board ASC Topic 842, Leases, using the modified retrospective approach. Our opinion is not modified with respect to this matter.Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.San Francisco, CA30, 2021and Shareholders of Hydrofarm Holdings Group, Inc.the ConsolidatedInternal Control over Financial Statementsaccompanyinginternal control over financial reporting of Hydrofarm Holdings Group, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.operations, comprehensive loss, changes in convertible preferred stock and stockholders’ equity, and cash flows for the year ended December 31, 2018,2021, of the Company and our report dated March 1, 2022, expressed an unqualified opinion on those consolidated financial statements.related notesinternal control over financial reporting at Heavy 16, House and schedule (collectively referred to asGarden, Aurora, Greenstar and Innovative Growers Equipment, Inc., which were acquired on May 3, June 1, July 1, August 3 and November 1, 2021 respectively, and whose financial statements constitute 85% and 68% of net and total assets, respectively, 13% of revenues, and 37% of net income of the consolidated financial statements)statement amounts as of Hydrofarm Holdings Group, Inc. (the “Company”).In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s consolidated operations and its consolidated cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted2021. Accordingly, our audit did not include the internal control over financial reporting at Heavy 16, House and Garden, Aurora, Greenstar and Innovative Growers Equipment, Inc.United States of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management.accompanying Management’s Annual Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidatedinternal control over financial statementsreporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of itseffective internal control over financial reporting. As part of ourreporting was maintained in all material respects. Our audit we are required to obtainincluded obtaining an understanding of internal control over financial reporting, but not forassessing the purposerisk that a material weakness exists, testing and evaluating the design and operating effectiveness of expressing an opinioninternal control based on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,assessed risk, and performing such other procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresas we considered necessary in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.circumstances. We believe that our audit provides a reasonable basis for our opinion.
Chartered Professional AccountantsLicensed Public AccountantsWe have served asCompany’s auditor since 2018. Toronto, OntarioMay 10, 2019 (December 1, 2020 asreliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the effectsmaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the reverse stock split discussedassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in Note 1)
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. for share and per share amounts) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 75,178 $ 22,866 Restricted cash 1,777 9,991 Accounts receivable, net 21,626 15,246 Inventories 88,618 50,228 Notes receivable 3,151 4,796 Prepaid expenses and other current assets 9,567 1,840 Total current assets 199,917 104,967 Property and equipment, net 3,988 3,550 Operating lease right-of-use assets 18,289 18,521 Intangible assets, net 52,421 57,406 Other assets 1,180 1,207 Total assets $ 275,795 $ 185,651 Liabilities, convertible preferred stock and stockholders’ equity Current liabilities: Accounts payable $ 22,638 $ 17,224 Accrued expenses and other current liabilities 21,615 9,188 Current portion of lease liabilities 3,701 3,181 Current portion of long-term debt 746 34,827 Total current liabilities 48,700 64,420 Long-term lease liabilities 15,320 15,786 Long-term debt 290 73,105 Other long-term liabilities 567 1,160 Total liabilities 64,877 154,471 Commitments and contingencies (Note 13) Convertible preferred stock ($0.0001 par value; 50,000,000 shares authorized; 0 and 7,007,429 shares issued and outstanding at December 31, 2020 and 2019, respectively) — 21,802 Stockholders’ equity Common stock ($0.0001 par value; 300,000,000 shares authorized at December 31, 2020 and 2019, respectively; 33,499,953 and 20,688,439 shares issued and outstanding at December 31, 2020 and 2019) 3 2 Additional paid-in capital 364,248 156,179 Accumulated other comprehensive income (loss) 599 (144 ) Accumulated deficit (153,932 ) (146,659 ) Total stockholders’ equity 210,918 9,378 Total liabilities, convertible preferred stock and stockholders’ equity $ 275,795 $ 185,651 December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 26,607 $ 75,178 Restricted cash 1,777 1,777 Accounts receivable, net 41,484 21,626 Inventories 189,134 88,618 Notes receivable 622 3,151 Prepaid expenses and other current assets 9,760 9,567 Total current assets 269,384 199,917 Property, plant and equipment, net 50,473 3,988 Operating lease right-of-use assets 45,245 18,289 Goodwill 204,868 — Intangible assets, net 314,819 52,421 Other assets 6,453 1,180 Total assets $ 891,242 $ 275,795 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 44,958 $ 22,638 Accrued expenses and other current liabilities 33,996 21,615 Current portion of lease liabilities 7,198 3,701 Current portion of long-term debt 2,263 746 Total current liabilities 88,415 48,700 Long-term lease liabilities 38,595 15,320 Long-term debt 119,517 290 Long-term deferred tax liabilities 5,631 — Other long-term liabilities 3,904 567 Total liabilities 256,062 64,877 Commitments and contingencies (Note 14) 0 0 Stockholders’ equity Common stock ($0.0001 par value; 300,000,000 shares authorized; 44,618,357 and 33,499,953 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively) 4 3 Additional paid-in capital 777,074 364,248 Accumulated other comprehensive (loss) income (1,382) 599 Accumulated deficit (140,516) (153,932) Total stockholders’ equity 635,180 210,918 Total liabilities and stockholders’ equity $ 891,242 $ 275,795 F-3 Years ended December 31, 2020 2019 2018 Net sales $ 342,205 $ 235,111 $ 211,813 Cost of goods sold 278,572 208,025 187,743 Gross profit 63,633 27,086 24,070 Operating expenses: Selling, general and administrative 58,492 43,784 42,229 Impairment, restructuring and other 860 10,035 7,169 Income (loss) from operations 4,281 (26,733 ) (25,328 ) Interest expense (10,141 ) (13,467 ) (11,606 ) Loss on debt extinguishment (907 ) (679 ) — Other income, net 70 105 995 Loss before tax (6,697 ) (40,774 ) (35,939 ) Income tax (expense) benefit (576 ) 691 397 Net loss (7,273 ) (40,083 ) (35,542 ) Cumulative dividends allocated to Series A Convertible Preferred Stock (2,597 ) — — Net loss attributable to non-controlling interest — — (2,650 ) Net loss attributable to common stockholders $ (9,870 ) $ (40,083 ) $ (32,892 ) Net loss per share attributable to common stockholders (2018 assumes retroactive conversion of non-controlling interest into controlling interest): Basic $ (0.46 ) $ (1.94 ) $ (2.31 ) Diluted $ (0.46 ) $ (1.94 ) $ (2.31 ) Weighted-average shares used to compute net loss per share attributable to common stockholders: Basic 21,298,849 20,688,439 15,390,086 Diluted 21,298,849 20,688,439 15,390,086 Years ended December 31, 2021 2020 2019 Net sales $ 479,420 $ 342,205 $ 235,111 Cost of goods sold 377,934 278,572 208,025 Gross profit 101,486 63,633 27,086 Operating expenses: Selling, general and administrative 103,888 58,492 43,784 Impairment, restructuring and other 297 860 10,035 (Loss) income from operations (2,699) 4,281 (26,733) Interest expense (2,138) (10,141) (13,467) Loss on debt extinguishment (680) (907) (679) Other (expense) income, net (204) 70 105 Loss before tax (5,721) (6,697) (40,774) Income tax benefit (expense) 19,137 (576) 691 Net income (loss) 13,416 (7,273) (40,083) Cumulative dividends allocated to Series A Convertible Preferred Stock — (2,597) — Net income (loss) attributable to common stockholders $ 13,416 $ (9,870) $ (40,083) Net income (loss) per share attributable to common stockholders: Basic $ 0.34 $ (0.46) $ (1.94) Diluted $ 0.31 $ (0.46) $ (1.94) Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: Basic 39,991,809 21,298,849 20,688,439 Diluted 42,989,195 21,298,849 20,688,439 F-4LOSS Years ended December 31, 2020 2019 2018 Net loss $ (7,273 ) $ (40,083 ) $ (35,542 ) Other comprehensive income (loss): Foreign currency translation gain (loss) 743 1,709 (2,418 ) Total comprehensive loss (6,530 ) (38,374 ) (37,960 ) Comprehensive loss attributable to non-controlling interest — — (2,828 ) Comprehensive loss attributable to common stockholders $ (6,530 ) $ (38,374 ) $ (35,132 ) Years ended December 31, 2021 2020 2019 Net income (loss) $ 13,416 $ (7,273) $ (40,083) Other comprehensive (loss) income: Foreign currency translation (loss) gain (1,981) 743 1,709 Total comprehensive income (loss) $ 11,435 $ (6,530) $ (38,374) F-5 Controlling Interest Convertible Preferred Stock Common Stock Shares Amount Shares Amount Additional
Paid-In
Capital Accumulated Other
Comprehensive
Income
(Loss) Accumulated
Deficit Total
Stockholders'
Equity Non-
controlling
Interest Total
Stockholders'
Equity Balance, January 1, 2018 — $ — 11,171,293 $ 1 $ 90,809 $ 484 $ (62,074 ) $ 29,220 $ 4,071 $ 33,291 Exchange of new shares for non-controlling interest in subsidiary — — 1,593,096 — 12,950 (97 ) (11,610 ) 1,243 (1,243 ) — Concurrent Offering of shares and warrants for cash — — 1,323,157 — 11,146 — — 11,146 — 11,146 Concurrent Offering of shares and warrants for conversion of loan from related party — — 484,681 — 4,088 — — 4,088 — 4,088 Reverse merger with Hydrofarm Holdings Group, Inc. as accounting acquiree — — 1,186,487 — 1 — — 1 — 1 Offering of shares and warrants for cash — — 4,929,725 1 41,498 — — 41,499 — 41,499 Offering and Concurrent Offering costs — — — — (4,521 ) — — (4,521 ) — (4,521 ) Net loss — — — — — — (32,892 ) (32,892 ) (2,650 ) (35,542 ) Foreign currency translation loss — — — — — (2,240 ) — (2,240 ) (178 ) (2,418 ) Balance, December 31, 2018 — — 20,688,439 2 155,971 (1,853 ) (106,576 ) 47,544 — 47,544 Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $1,274 4,825,346 15,615 — — — — — — — — Issuance of Series A Convertible Preferred Stock upon conversion of debt 2,182,083 7,637 — — — — — — — — Receivable exchanged for issuance of Series A Convertible Preferred Stock — (1,450 ) — — — — — — — — Stock-based compensation expense — — — — 208 — — 208 — 208 Net loss — — — — — — (40,083 ) (40,083 ) — (40,083 ) Foreign currency translation gain — — — — — 1,709 — 1,709 — 1,709 Balance, December 31, 2019 7,007,429 21,802 20,688,439 2 156,179 (144 ) (146,659 ) 9,378 — 9,378 Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $169 717,616 2,342 — — — — — — — — Collection of receivable for issuance of Series A Convertible Preferred Stock — 1,450 — — — — — — — — Stock-based compensation expense — — — — 8,895 — — 8,895 — 8,895 Series A Convertible Preferred Stock cumulative dividend — 2,597 — — (2,597 ) — — (2,597 ) — (2,597 ) Issuance of common stock in connection with initial public offering, net of offering costs of $17,063 — — 9,966,667 1 182,270 — — 182,271 — 182,271 Conversion of Series A Convertible Preferred Stock to common stock (7,725,045 ) (25,594 ) 2,291,469 — 25,594 — — 25,594 — 25,594 Payment of Series A Convertible Preferred Stock cumulative dividend — (2,597 ) — — — — — — — — Issuance of common stock for vesting of restricted stock units — — 793,080 — — — — — — — Shares withheld for payroll taxes related to vesting of restricted stock units — — (239,702 ) — (6,089 ) — — (6,089 ) — (6,089 ) Other — — — — (4 ) — — (4 ) — (4 ) Net loss — — — — — — (7,273 ) (7,273 ) — (7,273 ) Foreign currency translation gain — — — — — 743 — 743 — 743 Balance, December 31, 2020 — $ — 33,499,953 $ 3 $ 364,248 $ 599 $ (153,932 ) $ 210,918 $ — $ 210,918 Convertible
Preferred StockCommon
StockAdditional
Paid-In
CapitalAccumulated
Other
Comprehensive
(Loss) IncomeAccumulated
DeficitTotal
Stockholders’
EquityShares Amount Shares Amount Balance, January 1, 2019 — $ — 20,688,439 $ 2 $ 155,971 $ (1,853) $ (106,576) $ 47,544 Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $1,274 4,825,346 15,615 — — — — — — Issuance of Series A Convertible Preferred Stock upon conversion of debt 2,182,083 7,637 — — — — — — Receivable exchanged for issuance of Series A Convertible Preferred Stock — (1,450) — — — — — — Stock-based compensation expense — — — — 208 — — 208 Net loss — — — — — — (40,083) (40,083) Foreign currency translation gain — — — — — 1,709 — 1,709 Balance, December 31, 2019 7,007,429 21,802 20,688,439 2 156,179 (144) (146,659) 9,378 Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $169 717,616 2,342 — — — — — — Collection of receivable for issuance of Series A Convertible Preferred Stock — 1,450 — — — — — — Stock-based compensation expense — — — — 8,895 — — 8,895 Series A Convertible Preferred Stock cumulative dividend — 2,597 — — (2,597) — — (2,597) Issuance of common stock in connection with initial public offering, net of offering costs of $17,063 — — 9,966,667 1 182,270 — — 182,271 Conversion of Series A Convertible Preferred Stock to common stock (7,725,045) (25,594) 2,291,469 — 25,594 — — 25,594 Payment of Series A Convertible Preferred Stock cumulative dividend — (2,597) — — — — — — Issuance of common stock for vesting of restricted stock units — — 793,080 — — — — — Shares repurchased for withholding tax on restricted stock units — — (239,702) — (6,089) — — (6,089) Other — — — — (4) — — (4) Net loss — — — — — — (7,273) (7,273) Foreign currency translation gain — — — — — 743 — 743 Balance, December 31, 2020 — — 33,499,953 3 364,248 599 (153,932) 210,918 Common stock issued upon exercise of options — — 186,633 — 1,595 — — 1,595 Issuance of common stock for vesting of restricted stock units — — 851,741 — — — — — Shares repurchased for withholding tax on restricted stock units — — (268,867) — (13,945) — — (13,945) Issuance of common stock under cashless warrant exercise — — 418,633 — — — — — Issuance of common stock under investor warrant exercise — — 3,367,647 — 56,778 — — 56,778 Issuance of common stock in connection with follow-on public offering, net of offering costs of $16,303 — — 5,526,861 1 309,781 — — 309,782 Issuance of common stock in connection with business combinations — — 1,035,756 — 53,611 — — 53,611 Stock-based compensation expense — — — — 5,006 — — 5,006 Net income — — — — — — 13,416 13,416 Foreign currency translation loss — — — — — (1,981) — (1,981) Balance, December 31, 2021 — $ — 44,618,357 $ 4 $ 777,074 $ (1,382) $ (140,516) $ 635,180 F-6 Years ended December 31, 2020 2019 2018 Operating activities Net loss $ (7,273 ) $ (40,083 ) $ (35,542 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,779 6,995 8,260 Provision for doubtful accounts 83 933 534 (Benefit from) provision for inventory obsolescence (803 ) 707 (824 ) Stock-based compensation expense 8,895 208 — Amortization of inventory step-up of basis — — 798 Impairment charges — 5,390 2,716 Non-cash operating lease expense 3,469 3,650 — Amortization of deferred financing costs 928 967 643 Loss on debt extinguishment 907 679 — Interest expense capitalized to principal of long-term debt 20 9,644 6,883 Interest income capitalized to principal of notes receivable (101 ) — — Payment of interest capitalized to principal of long-term debt (13,901 ) (2,360 ) — Deferred income tax expense (benefit) 52 (718 ) (899 ) Other (59 ) 105 (22 ) Changes in assets and liabilities: Accounts receivable (6,329 ) (620 ) 6,821 Inventories (36,859 ) 2,725 22,043 Prepaid expenses and other current assets (7,733 ) (9 ) 509 Other assets 24 494 560 Accounts payable 4,795 (1,199 ) (5,652 ) Accrued expenses and other current liabilities 5,900 2,364 (3,079 ) Lease liabilities (3,126 ) (3,297 ) — Other long-term liabilities (493 ) 123 688 Net cash (used in) provided by operating activities (44,825 ) (13,302 ) 4,437 Investing activities Purchases of property and equipment (1,447 ) (768 ) (1,343 ) Purchases of intangible assets (61 ) — — Proceeds from sale of property and equipment 54 — — Issuance of notes receivable — (3,050 ) (2,000 ) Proceeds from notes receivable 2,000 — — Other — — 31 Net cash provided by (used in) investing activities 546 (3,818 ) (3,312 ) Financing activities Proceeds from issuance of common stock upon initial public offering, net of offering costs 182,419 — — Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs 3,792 14,165 — Payments of Series A Preferred Stock cumulative dividend upon initial public offering (2,597 ) — — Proceeds from issuance of convertible debt — 7,532 — Borrowings from PPP Loan 3,274 — — Borrowings under revolving credit facilities 305,965 256,862 192,903 Payments of deferred financing costs (13 ) (1,697 ) — Repayments of PPP loan, long-term debt and revolving credit facilities (404,021 ) (256,785 ) (220,309 ) Payments made on financing leases (674 ) (177 ) — Proceeds from Offering and Concurrent Offering — — 52,645 Payments of offering costs on Offering and Concurrent Offering — — (4,521 ) Proceeds from loans from related party — — 6,000 Payments of loans from related party — — (2,000 ) Other — — 798 Net cash provided by financing activities 88,145 19,900 25,516 Effect of exchange rate changes on cash, cash equivalents and restricted cash 232 2,154 (924 ) Net increase in cash, cash equivalents and restricted cash 44,098 4,934 25,717 Cash, cash equivalents and restricted cash at beginning of year 32,857 27,923 2,206 Cash, cash equivalents and restricted cash at end of year $ 76,955 $ 32,857 $ 27,923 Non-cash investing and financing activities Conversion of Series A Convertible Preferred Stock to common stock $ 25,594 $ — $ — Shares withheld for payroll taxes related to vesting of restricted stock units 6,089 — — Right-of-use assets acquired under operating lease obligation 3,166 — — Property and equipment acquired under finance lease obligation 323 251 279 Purchases of property and equipment included in accounts payable and accrued liabilities 243 3 — Offering costs included in accounts payable and accrued liabilities 148 — — Assets transferred from other assets to property and equipment and intangible assets 129 — — Other assets deposit applied to finance lease upon payoff 66 — — Issuance of Series A Convertible Preferred Stock upon conversion of debt and accrued interest — 7,637 — Receivable related to issuance of Series A Convertible Preferred Stock — 1,450 — Deferred financing costs capitalized to principal of long-term debt — 615 — Conversion of loan from related party to common shares — — 4,088 Supplemental information Cash paid for interest 23,142 5,492 4,710 Cash paid for income taxes 94 63 613 Years ended December 31, 2021 2020 2019 Operating activities Net income (loss) $ 13,416 $ (7,273) $ (40,083) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation, depletion and amortization 14,934 6,779 6,995 Stock-based compensation expense 5,006 8,895 208 Non-cash operating lease expense 5,660 3,469 3,650 Impairment charges — — 5,390 Interest expense capitalized to principal of long-term debt — 20 9,644 Change in fair value of contingent consideration (2,610) — — Payment of interest capitalized to principal of long-term debt — (13,901) (2,360) Deferred income tax (benefit) expense (20,996) 52 (718) Other 2,455 955 3,391 Changes in assets and liabilities: Accounts receivable (1,926) (6,329) (620) Inventories (46,849) (36,859) 2,725 Prepaid expenses and other current assets 2,761 (7,733) (9) Other assets (1,781) 24 494 Accounts payable (7,223) 4,795 (1,199) Accrued expenses and other current liabilities (3,238) 5,900 2,364 Lease liabilities (4,676) (3,126) (3,297) Other long-term liabilities — (493) 123 Net cash used in operating activities (45,067) (44,825) (13,302) Investing activities Business combinations, net of cash and cash equivalents (462,172) — — Purchases of property and equipment (5,402) (1,447) (768) Issuance of notes receivable — — (3,050) Proceeds from notes receivable — 2,000 — Other (610) (7) — Net cash (used in) provided by investing activities (468,184) 546 (3,818) Continued Years ended December 31, 2021 2020 2019 Financing activities Proceeds from issuance of common stock upon follow-on public offering, net of offering costs 309,782 — — Proceeds from issuance of term loan, net of discount and issuance costs 119,879 — — Borrowings under revolving credit facilities 142,628 305,965 256,862 Repayments of PPP loan, long-term debt and revolving credit facilities (143,003) (404,021) (256,785) Proceeds from exercises of investor warrants 56,778 — — Payment of withholding tax related to restricted stock units (20,025) — — Proceeds from issuance of common stock upon initial public offering, net of offering costs — 182,419 — Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs — 3,792 14,165 Payments of Series A Preferred stock cumulative dividend upon initial public offering — (2,597) — Borrowings from PPP Loan — 3,274 — Other (1,332) (687) 5,658 Net cash provided by financing activities 464,707 88,145 19,900 Effect of exchange rate changes on cash, cash equivalents and restricted cash (27) 232 2,154 Net (decrease) increase in cash, cash equivalents and restricted cash (48,571) 44,098 4,934 Cash, cash equivalents and restricted cash at beginning of year 76,955 32,857 27,923 Cash, cash equivalents and restricted cash at end of year $ 28,384 76,955 32,857 Non-cash investing and financing activities Issuance of common stock as consideration in connection with business combinations $ 53,611 $ — $ — Increase in accrued expenses and other current liabilities for contingent consideration 19,644 — — Right-of-use assets acquired under operating lease obligation 22,873 3,166 — Conversion of Series A Convertible Preferred Stock to common stock — 25,594 — Shares repurchased for withholding tax on restricted stock units 9 6,089 — Issuance of Series A Convertible Preferred Stock upon conversion of debt and accrued interest — — 7,637 Receivable related to issuance of Series A Convertible Preferred Stock — — 1,450 Supplemental information Cash paid for interest 1,621 23,142 5,492 Cash paid for income taxes 1,963 94 63 Concluded F-7inIn thousands, except share and per share amounts)1.DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIESand manufacturer of controlled environment agriculture (“CEA”, principally hydroponics)CEA equipment and supplies, including a broad portfolio of proprietary branded products. Products offered include agricultural lighting devices, indoor climate control equipment, hydroponics and nutrients, and plant additives used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment settings that allow end users to control key farming variables including temperature, humidity, CO2,CO2, light intensity and color, nutrient concentration and pH.Prior to the fall of 2018, the legal parent of Hydrofarm, LLC, the primary operating subsidiary, was Hydrofarm Investment Corp. As discussed further below under “Recapitalization and reverse merger in 2018”, Hydrofarm Investment Corp. underwent a recapitalization and reverse merger in a series of transactions in which Hydrofarm Holdings Group, Inc., a shell company, became the legal parent.Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)Initial public offeringOn December 14, 2020, the Company closed its initial public offering (“IPO”) under a registration statement effective December 9, 2020, in which it issued and sold 9,966,667 shares of its common stock, including the full exercise by the underwriters of its option to purchase 1,300,000 additional shares of the common stock. The price was $20.00 per share. The Company received net proceeds of approximately $182.3 million from the IPO after deducting underwriting discounts and commissions and offering expenses.Recapitalizationreverse merger in 2018The OfferingInsold 9,966,667 shares of its common stock, including the fallfull exercise by the underwriters of 2018, Hydrofarm Holdings Group, Inc., previously a shell entity with nominal assets and liabilities and 1,186,487their option to purchase 1,300,000 additional shares of common stock outstanding, completedstock. The public offering price was $20.00 per share. The Company received net proceeds of $182,271 from the IPO after deducting underwriting discounts and commissions and offering expenses, of which $148 of offering expenses were paid in 2021.private placement (the “Offering”)registration statement effective April 28, 2021, in which it issued and sold 5,526,861 shares of units offered to third -party investors at a price of $8.43 each. Each unit consisted of one share ofits common stock, and a warrant entitlingincluding the holderfull exercise by the underwriters of their option to purchase one-half (1/2) share of common stock at an exercise price of $16.86 per common share (the “Units”). The Offering raised $41,499 (excluding fees and expenses) for 4,929,725 (pre-split: 16,619,616) Units.The Concurrent Offering and reverse mergerAt approximately the same time as, and in relation to, the Offering, Hydrofarm Holdings Group, Inc. offered to investors in Hydrofarm Investment Corp. Units with the same terms as those in the Offering (the “Concurrent Offering”). Hydrofarm Holdings Group, Inc. raised $15,234 in the Concurrent Offering. Consideration consisted of $11,146 in cash for 1,323,157 (pre-split: 4,460,659) Units and the conversion to Units of a $4,000 loan outstanding plus accrued interest of $88 from a related party for 484,681 (pre-split: 1,633,958) Units (excluding fees and expenses).On August 28, 2018, in connection with the Offering and Concurrent Offering, in a series of concurrent transactions, the shareholders in Hydrofarm Investment Corp. and the holder of the non-controlling interest (“NCI”) in Hydrofarm Holdings LLC exchanged all of the holder’s interests for 12,764,389 shares of Hydrofarm Holdings Group, Inc.’s common stock which, along with 1,807,838 shares issued in the Concurrent Offering, totaled 14,572,227 shares and represented a 70.4% controlling interest. The exchange ratio for the 12,764,389 shares was 0.2966 Hydrofarm Holdings Group, Inc. common share for 0.4147 Hydrofarm Investment Corp. common share. As a result of the exchange, Hydrofarm Investment Corp. and its subsidiaries became wholly-owned subsidiaries of Hydrofarm Holdings Group, Inc. Hydrofarm, LLC continues as the principal operating subsidiary. Since this exchange was a common control transaction, the carrying value of the NCI was transferred to controlling interest allocated between paid in capital and the NCI’s share of accumulated losses at net book value. The transaction was treated as a tax-free exchange under Section 368(a) of the Internal Revenue Code of 1986, as amended.Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, since the members of Hydrofarm Investment Corp. prior to the exchange continued to hold a controlling interest in Hydrofarm Holdings Group, Inc. after the exchange (e.g., there was no change in control of Hydrofarm Investment Corp.), Hydrofarm Investment Corp. is deemed to be the “accounting acquirer” and Hydrofarm Holdings Group, Inc. is deemed to be the “accounting acquiree.” From an accounting perspective, the consolidated financial statements of the combined entity represent a continuation of the financial position and results of operations of the accounting acquirer/legal acquiree. Accordingly, the historical cost basis of assets, liabilities, capital and accumulated deficit of Hydrofarm Investment Corp. as the accounting acquirer/legal acquiree are carried over to the consolidated financial statements of the merged company.Hydrofarm Holdings Group, Inc. had no assets prior to the merger except $1 in cash, and no liabilities or operations; accordingly, it is considered a “shell company” which does not meet the definition of a “business” under ASC 805. For accounting purposes, mergers of operating companies into shell companies are considered to be capital transactions rather than business combinations. These transactions are equivalent to the issuance of stock by the private company for the net monetary assets, if any, of the shell corporation, accompanied by a recapitalization. The accounting for the transaction is identical to that resulting from a reverse acquisition, except that goodwill or other intangible assets would not be recognized. Since Hydrofarm Holdings Group, Inc. was a shell company, there is no accounting basis associated with the 1,186,487 shares of Hydrofarm Holdings Group, Inc. common stock deemed acquired in the merger other than the $1 in cash.Consolidated financial statements prepared following a reverse merger are issued under the name of the legal parent (accounting acquiree) and are a continuation of the financial statements of the legal subsidiary (accounting acquirer), with one adjustment. The adjustment retroactively states the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree. Accordingly, the share and stated capital of Hydrofarm Investment Corp. have been retroactively adjusted in these consolidated financial statements and footnotes using the exchange ratio established in the merger agreements to reflect the number of shares of Hydrofarm Holdings Group, Inc. issued in the exchange.For convenience hence-forth here-in, the consolidated financial statements for periods prior to the exchange are referred to as those of the “Company” unless otherwise noted.Warrants issued to placement agentsAs part of the Offering and Concurrent Offering, placement agents were issued warrants to purchase 517,067720,894 additional shares of common stock instock. The public offering price was $59.00 per share. The Company received net proceeds of $309,782 from the Company of which 172,351 shares subject to warrants are exercisable at a price of $16.86 per sharefollow-on offering after deducting underwriting discounts and 344,716 shares subject to warrants are exercisable at a price of $8.43 per share.The following is a summary of the aggregate shares of common stockcommissions and shares subject to warrants issued as part of the Offering and Concurrent Offering: Common Stock Shares Subject to
Warrants Offering 4,929,725 2,465,201 Concurrent Offering 1,323,157 661,583 Conversion of Loan 484,681 242,340 Subtotal 6,737,563 3,369,124 Placement agent warrants - 517,067 Total 6,737,563 3,886,191 F-9Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)believed to be reasonable under the circumstances. Significant estimates include provisions for sales returns, rebatesclaims from customers, realization of accounts receivable and inventories, valuation of intangible assets and goodwill, valuation of stock and warrants issued in private placements, valuation of stock-based compensation, recognition of deferred income taxes, recognition of liabilities related to commitments and contingencies and valuation allowances.per share amounts)the Companymanagement reviews its estimates to ensure that these estimates appropriately reflect changes in its business or new information available. information and entity-wide disclosuresCompany’sCompany's chief operating decision maker (“CODM”) is the chief executive officer (“CEO”("CEO") who reviews financial information for the purposes of making operating decisions, assessing financial performance and allocating resources.two2 operating segments, the U.S. and Canada, which meet the criteria for aggregation, and the Company has elected to present them as one1 reportable segment, which is the distribution and manufacture of CEA equipment and supplies. Aggregation is based on similarities which include the nature of its products, production or acquisition of inventory, customer base, fulfillment and distribution and economic characteristics.one1 reportable segment, all required segment financial information is found in the consolidated financial statements and footnotes with entity-wide disclosures presented below.disclosures For the years ended
December 31, 2020 2019 2018 United States $ 287,884 $ 194,618 $ 169,018 Canada 58,079 44,515 49,147 Intersegment eliminations (3,758 ) (4,022 ) (6,352 ) Total consolidated net sales $ 342,205 $ 235,111 $ 211,813 December 31, 2020 2019 United States $ 3,272 $ 2,660 Canada 716 890 Total property and equipment, net $ 3,988 $ 3,550 Years ended December 31, 2021 2020 2019 United States $ 399,749 $ 287,884 $ 194,618 Canada 87,281 58,079 44,515 Intersegment eliminations (7,610) (3,758) (4,022) Total consolidated net sales $ 479,420 $ 342,205 $ 235,111 December 31, 2021 2020 United States $ 85,167 $ 19,025 Canada 10,551 3,252 Total property, plant and equipment, net and operating lease right-of-use assets $ 95,718 $ 22,277 F-10Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)2019, and 2018.2019. No customer accounted for more than 10% of accounts receivable in 2021. One customer accounted for 11% of accounts receivable as of December 31, 2020 and another customer accounted for 11% of accounts receivable as of December 31, 2019. One supplier accounted for 10% of purchases in 2021 and another supplier accounted for 10% of purchases in 2019. No supplier accounted for more than 10% of purchases in 20202020.2018, and one supplier accounted for 10% of purchases in 2019.Certain significant risks and uncertainties – COVID-19Due to the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on the Company’s business. The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on the timelines for the Company’s product development and expansion efforts. However, the extent to which the COVID-19 pandemic impacts the Company’s business product development and expansion efforts, corporate development objectives and the value of and market for the Company’s common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease. The global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.FairThe fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analysescontingent consideration is classified within level 3 of long-lived assets, intangible assets and goodwill. These inputs are classified as Level 3 in the fair value hierarchy. Seehierarchy (See discussion of impairment lossescontingent consideration in Note 7, Intangible assets and goodwill3 - Business Combinations).transactionstheseforeign subsidiaries are translated at the exchange rates in effect at the end of each year. Incomeperiod. Revenues, expenses, gains and expense itemslosses are translated at the average rates of exchange prevailing during the year.period. Accumulated deficit and other equity accounts are translated at historical rates. Translation gains and losses arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive (loss) income (loss) within stockholders’ equity. Foreign currency transaction gains and losses are included in the determination of net loss and classified as other income, net in the consolidated statements of operations.F-11Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)2020,2021, and 2019,2020, amounts included in restricted cash represent those funds required to be set aside as security for letters of credits, and other various contractual arrangements. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows: December 31, 2020 2019 Cash and cash equivalents $ 75,178 $ 22,866 Restricted cash 1,777 9,991 Cash and cash equivalents, and restricted cash $ 76,955 $ 32,857 December 31, 2021 2020 Cash and cash equivalents $ 26,607 $ 75,178 Restricted cash 1,777 1,777 Cash and cash equivalents, and restricted cash $ 28,384 $ 76,955 Accounts receivable balancesManagement reviews these factors quarterly to determine if any adjustments are charged off againstneeded to the allowance account when the Company believes it is probable the receivable will not be recovered.are primarily comprisedconsist of finishedmanufactured goods, goods acquired for resale, and materials consumed in business operations. Inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting. Inventory costs include the purchase price and other costs such as import duties, taxes, and transportation costs. Trade discounts are deducted from the purchase price.If actual conditionsManagement reviews these assumptions periodically to determine if any adjustments are less favorable than those projected, it may be necessaryneeded to increase the allowance for excess and obsolete inventory. Any increase in the allowance will adversely impact results of operations. The establishment of an allowance for excess and obsolete inventory establishes a new cost basis in the inventory. Such allowance is not reduced until the product is sold. If inventory is sold, any related reserves would be reversed in the period of sale.Leased assetsFASB ASCFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842, Leases (“ASC 842”). The Company early adopted ASC 842 using the modified retrospective approach effective January 1, 2019, and no cumulative effect adjustment was required to be recorded. The adoptionAt inception of the new standard resulted in the recognition of operating lease right of use (“ROU”) assets and lease liabilities in the amount of approximately $24,872 and $25,135, respectively, in the Company’s consolidated balance sheets. The Company elected the “package of practical expedients” available at the time of implementation which permitteda contract, the Company to carry over from FASB ASC 840, Leases, its prior conclusions about lease identification, lease classification and initial direct costs. The short-term lease exemption for all leases with an initial term of 12 monthsdetermines whether that contract is or less was elected.F-12Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)The Company determines if an arrangementcontains a lease. A contract is or contains a lease at inception. ROUif the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Leases are then classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations.for thearising from a lease, term. Leases are then classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations.measured on a discount basis. All leases greater than 12 months result in the recognition of a ROU asset and a lease liability at the lease commencement date based on the present value of the lease payments over the lease term. The present value of the lease payments is calculated using the applicable weighted-average discount rate. The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, the applicable incremental borrowing rate is estimated. The incremental borrowing rate is estimated using the currency denomination of the lease, the contractual lease term and the Company’s applicable borrowing rate. To determine the incremental borrowing rate, reference is made to interest rates that would be available to finance assets similar to the assets under lease in their related geographical location.term from one to ten years.term. The exercise of the lease renewal options is at the Company’s discretion and arediscretion. A lease renewal option is included in the determination of the ROU asset and lease liability when the option is reasonably certain of being exercised.Prior to adoption of ASC 842Prior to January 1, 2019, operating lease payments were recognized as expense on a straight-line basis over the lease term. the event that lease incentives were received to enter into operating leases, such incentives were recognized as a liabilitythousands, except share and recognized as a reduction of rental expense on a straight-line basis. netprovisionsamortization. PP&E assets are reviewed for impairment if any. Expenditures for maintenance and repairs are expensed as incurred, while costs related to betterments and improvementswhen events or changes in circumstances indicate that extend the useful lives of propertycarrying amount may not be recoverable.are capitalized. When propertyexcluding leasehold improvements and equipment are retired or otherwise disposed of, the cost of the assetpeat bogs and related accumulated depreciationdevelopment are removed from the accounts with the resulting gain or loss being reflected in income (loss) from operations. Depreciation of property and equipment is provided ondepreciated using the straight-line method and is based onmethod. Leasehold improvements are amortized using the straight-line method. The following table summarizes the estimated useful economic lives of the assets as follows:Buildings and improvements 10 - 40 years Machinery and equipment 5 - 15 years Leasehold improvements Lesser of useful life or term of the lease Computer equipment 3 –- 4 yearsFurniture and fixtures 5 years The cost of internal use computer software is expensedIntangible assets with finite lives are reviewed for impairment when events or capitalized depending on whether it is incurredchanges in circumstances indicate that the preliminary project stage, application development stage or the post-implementation/operation stage. carrying amount may not be recoverable.definite lifedefinite-lived intangible assets:Computer software 5 years Customer relationships 10 to 20 years Customer relationshipsTechnology and formulations & recipes10 to 18 years Intellectual property and licenses5 – 15 years or the lesser of useful life and term of licenseTrade names2 yearscostacquisition price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed in a business combination less any subsequent write-downs for impairment.F-13Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)ImpairmentThe Company evaluates its long-lived assets, including amortizable intangible assets Goodwill is tested for indicators of possible impairment when events or changes in circumstances indicate the carrying amount ofon an asset or asset group (collectively, the “asset group”) may not be fully recoverable. The Company measures the recoverability of the asset group by comparing the carrying amount of such asset groups to the estimated future undiscounted cash flows it expects the asset group to generate. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets. Impairment, if any, is measured as the amount by which the carrying value of the asset group exceeds its fair value and is recorded in impairment, restructuring and other in the consolidated statements of operations.The Company reviews its indefinite-lived intangible assets (primarily, trade names) annuallyannual basis in the fourth quarter or whenever events or changes in circumstances indicate the carrying amount may not be fully recoverable. Whenand more frequently if indicators of potential impairment exist. Impairment testing the trade names for impairment, the Company first performs an assessment of qualitative factors. If qualitative factors indicate that it is more likely than not that the fair value of the trade names are less than its carrying amount, the Company tests the trade names for impairment at the asset level using the relief-from-royalty method to determine fair value. The Company determines the fair value of the trade names and compares it to the carrying value. If the carrying value of the trade names exceeds the fair value, the Company recognizes an impairment loss in an amount equal to the excess.The Company reviews the carrying amount of goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events that result in an impairment review include significant changes in the business climate, declines in operating results, or an expectation that the carrying amount may not be recoverable. When testing goodwill for impairment, the Company first performs a Step 0 Test. If qualitative factors indicate that it is more likely than not that the fair value of the relevant reporting unit is less than its carrying amount, the Company tests goodwill for impairmentconducted at the reporting unit level, usingwhich is generally defined as an operating segment or one level below an operating segment (also known as a two-step approach. In step one,component), for which discrete financial information is available and segment management regularly reviews the Company determines if the fair value of the reporting unit exceeds the reporting unit’s carrying value. If step one indicates that the fair value of the reporting unit is less than its carrying value, the Company performs step two, determining the fair value of goodwill and, if the carrying value of goodwill exceeds its implied fair value, an impairment charge is recorded.operating results. The Company has determined that its reporting units for the purpose of goodwill impairment testing are the United States and Canada.The Company early adopted FASB (“ASC 606”), on January 1, 2018, with no material impact on its consolidated financial statements.ASC 606CEAcontrolled environment agriculture equipment and supplies. Inventory is maintained in regional distribution centers. Payment terms are primarily at the point of sale or due within thirty days.$1,826 in 2020, 2019, and 2018, respectively. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs included in cost of goods sold under the practical expedient provisions of ASC 606. Deferred revenues are not material.sold. The Company does not receive noncash consideration for the sale of goods. Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company's contract liabilities, which consist primarily of customer deposits are reported within accounts payable in the consolidated balance sheets, totaled $18,273 and $1,079 as of December 31, 2021 and 2020, respectively. There are no significant financing components. Excluded from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed on and concurrent with revenue-generating activities under the practical expedient provisions.Advertising and warranty costsAdvertising costs paid to third-party vendors totaling $276, $666, and $771 in 2020, 2019, and 2018, respectively, were expensed as incurred.F-14Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)An estimate of exposure for warranty claims is accrued based on both current and historical product sales data and warranty costs incurred. Product warranties, where applicable, range from one year to five years. The Company assesses the adequacy of its recorded warranty liability periodically and adjusts the amount as necessary. Warranty expense and the related accrual are not material to the financial statements. Upon the closing of the IPO in December 2020, all deferred offering costs were reclassified from prepaid expenses and other current assets and recorded as a reduction of the IPO proceeds in additional paid-in capital.it occurs,they occur and any compensation expense previously recognized on unvested shares will be reversed when forfeited.grantsRSUs prior to the Company’s IPO in December 2020 was determined by considering a number of objective, subjective and highly complex factors including independent third-party valuations of the Company’s common stock, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook among other factors.assumptions, including the option’s expected term and the price volatility of the underlying stock.assumptions. For inputs into the Black-Scholes model, the expected stock price volatility for the common stock is estimated by taking the average historic price volatility forof the Company's common stock or industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants.equivalent. Industry peers consist of several public companies in the Company’s industry which are of similar size, complexity and stage of development. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The Company has elected to use the “simplified method” to determine the expected term which is the midpoint between the vesting date and the end of the contractual term because it has insufficient history upon which to base an assumption about the term; the Company believes the simplified method approximates a term if it were to be based on expected life.term. The expected dividend yield is 0.0% as the Company has not paid and does not anticipate paying dividends on its common stock.F-15Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)(the MCSM)("MCSM") was used which assesses the likelihood of vesting of the RSU grants based on the probability of both a triggering event and qualifying traded share price within the specified time frame. The resulting risk-adjusted probability was then applied to the underlying fair value of common stock incorporating scenarios under which various performance conditions and share price outcomes arewere modeled over the course of numerous iterations. Key assumptions in the MSCM included volatility, time horizon corresponding to the vesting measurement period of the award forecasted based on daily trading prices, risk free rate, and number of simulation trials.more likely than notmore-likely-than-not that the deferred income tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The income tax expense or benefit is the income tax payable or recoverable for the year plus or minus the change in deferred income tax assets and liabilities during the year.more likely than notmore-likely-than-not that the position will be sustained upon examination, including resolutions of any relatedComprehensive lossComprehensive loss consists of two components: net loss and other comprehensive income. Other comprehensive income refers to gains that under U.S. GAAP are recorded directly as an element of stockholders’ equity, but are excluded from net loss, and comprised of currency translation adjustments relating to the Company’s foreign subsidiaries whose functional currency is not the U.S. dollar.2020August 2018,October 2020, the FASB issued Accounting Standards Update (“ASU”("ASU") No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurement for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The Company adopted the standard effective January 1, 2020 with no impact on its disclosures about fair value measurements.In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company adopted the standard effective March 12, 2020 with no impact on the consolidated financial statements and related disclosures.F-16Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and improving consistent application of and simplifying U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted (including in an interim period). The Company early adopted the standard effective October 1, 2020 with no impact on the consolidated financial statements and related disclosures.Accounting standards not yet effectiveIn June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), with additional amendments issued subsequently. Topic 326 changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of Topic 326 will have on its consolidated financial statements.In October 2020, the FASB issued ASU No. 2020-10, currentlypart of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The amendments are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company early adopted the standard effective January 1, 2021 with no impact on the consolidated financial statements.Components of Purchase Price: Amount Cash $ 60,287 Common stock 16,736 Contingent consideration 344 Total purchase price $ 77,367 Acquisition-related costs $ 2,885 Allocation of Purchase Price: Identifiable assets (liabilities) Accounts receivable $ 510 Inventories 1,451 Prepaid expenses and other current assets 34 Property and equipment 1,078 Operating lease right-of-use assets 1,088 Other assets 25 Accounts payable (1,055) Accrued expenses and other current liabilities (226) Current portion of lease liabilities (274) Long-term lease liabilities (868) Net tangible assets 1,763 Identifiable intangible assets Other intangible assets 200 Customer relationships 5,100 Trademarks and trade names 18,500 Technology and formulations & recipes 33,600 Total identifiable intangible assets 57,400 Goodwill 18,204 Total purchase price allocation $ 77,367 impactinformation. The primary area that remains preliminary relates to the adoptionfair value of this ASU willall identifiable intangible assets acquiredonindefinite useful lives.consolidatedproprietary branded offering into the plant nutrients category complementing other product offerings. The preliminary acquisition date fair value of the consideration transferred for the H&G Entities was $133,483 in cash. The financial statements.results of the H&G Entities are included in the U.S. operating segment since the acquisition date.2.NET LOSS PER COMMON SHARE (“EPS”)Component of Purchase Price: Amount Cash $ 133,483 Total purchase price $ 133,483 Acquisition-related costs $ 4,908 Allocation of Purchase Price: Identifiable assets (liabilities) Accounts receivable $ 3,308 Inventories 6,559 Prepaid expenses and other current assets 493 Property and equipment 358 Operating lease right-of-use assets 1,921 Other assets 213 Accounts payable (1,320) Accrued expenses and other current liabilities (519) Current portion of lease liabilities (447) Long-term deferred tax liabilities (25,589) Long-term lease liabilities (1,501) Net tangible assets (16,524) Identifiable intangible assets Other intangible assets 200 Customer relationships 12,500 Trademarks and trade names 31,400 Technology and formulations & recipes 56,200 Total identifiable intangible assets 100,300 Goodwill 49,707 Total purchase price allocation $ 133,483 Components of Purchase Price: Amount Cash $ 134,961 Common stock 25,824 Contingent consideration 19,300 Forgiveness of accounts payable (215) Escrow receivable (999) Total purchase price $ 178,871 Acquisition-related costs $ 6,698 Allocation of Purchase Price: Identifiable assets (liabilities) Accounts receivable $ 6,967 Inventories 11,086 Prepaid expenses and other current assets 1,086 Property, plant and equipment 37,991 Accounts payable (4,360) Accrued expenses and other current liabilities (804) Other long-term liabilities (3,852) Net tangible assets $ 48,114 Identifiable intangible assets Other intangible assets 824 Customer relationships 6,400 Trademarks and trade names 59,100 Technology and formulations & recipes 18,000 Total identifiable intangible assets 84,324 Goodwill 46,433 Total purchase price allocation $ 178,871 Components of Purchase Price: Amount Cash $ 85,121 Forgiveness of accounts payable, net, and obligations due under a distribution agreement (1,601) Total purchase price $ 83,520 Acquisition-related costs $ 3,451 Allocation of Purchase Price: Identifiable assets (liabilities) Accounts receivable $ 982 Inventories 8,728 Prepaid expenses and other current assets 447 Property and equipment 1,717 Operating lease right-of-use assets 2,736 Other assets 176 Accounts payable (777) Accrued expenses and other current liabilities (1,421) Current portion of lease liabilities (624) Long-term lease liabilities (1,836) Net tangible assets 10,128 Identifiable intangible assets Other intangible assets 383 Customer relationships 18,100 Trademarks and trade names 9,100 Technology and formulations & recipes 2,800 Total identifiable intangible assets 30,383 Goodwill 43,009 Total purchase price allocation $ 83,520 Component of Purchase Price: Amount Cash $ 48,320 Common stock 11,051 Forgiveness of contract asset 722 Total purchase price $ 60,093 Acquisition-related costs $ 1,417 Allocation of Purchase Price: Identifiable assets (liabilities) Accounts receivable $ 4,424 Inventories 27,017 Prepaid expenses and other current assets 466 Property and equipment 3,907 Operating lease right-of-use assets 3,998 Accounts payable (21,912) Accrued expenses and other current liabilities (559) Current portion of lease liabilities (813) Current portion of long-term debt (478) Long-term lease liabilities (3,185) Long-term debt (1,459) Net tangible assets 11,406 Goodwill 48,687 Total purchase price allocation $ 60,093 Years ended December 31, 2021 2020 Net sales $ 596 $ 492 Net income (loss) $ 79 $ (11) Year ended December 31, 2021 Net sales $ 76 Net income $ 14 December 31,
2021Balance at beginning of year $ — Acquisition - Heavy 16 18,204 Acquisition - H&G Entities 49,707 Acquisition - Aurora 46,433 Acquisition - Greenstar 43,009 Acquisition - IGE Entities 48,687 Foreign currency translation adjustments, net (1,172) Balance at end of year $ 204,868 December 31, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Finite-lived intangible assets: Computer software $ 8,814 $ (7,208) $ 1,606 $ 7,775 $ (5,640) $ 2,135 101,222 (16,517) 84,705 59,375 (12,010) 47,365 110,561 (3,630) 106,931 — — — 2,428 (1,744) 684 1,156 (1,156) — Total finite-lived intangible assets, net 223,025 (29,099) 193,926 68,306 (18,806) 49,500 Indefinite-lived intangible asset: 120,773 — 120,773 2,801 — 2,801 Other 120 — 120 120 — 120 Total Intangible assets, net $ 343,918 $ (29,099) $ 314,819 $ 71,227 $ (18,806) $ 52,421 Estimated Future Amortization Expense Year ending December 31, 2022 $ 12,871 2023 12,246 2024 12,181 2025 12,069 Thereafter 144,559 Total $ 193,926 lossincome (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding during each period, excluding unvested RSUs.lossincome (loss) attributable to common stockholders divided by the weighted- averageweighted-average number of common shares outstanding during the period, including common stock equivalents. Common stock equivalents consist of shares subject to warrants and share-based awards with exercise prices less than the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive. Regarding RSUs subject to a market condition, before the end of the contingency period, the number of contingently issuable shares (i.e., RSUs) to be included in diluted EPS would be based on the number of common shares issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, assuming the result would be dilutive. Those contingently issuable shares would be included in the denominator of diluted EPS as of the beginning of the period, or as of the grant date of the share-based payment, if later.Impact of recapitalization and reverse merger on 2018 EPSFASB ASC 260-10-55-12 states that nominal issuances of common stock are deemed to be in substance recapitalizations and should be reflected in EPS computations in a manner similar to a stock split or stock dividend for which retroactive treatment is required. In August 2018, the holders of a non-controlling interest in a subsidiary, which was previously presented as NCI, exchanged their interest for 1,593,096 shares of common stock in the Company (see Note 1, Description of the business, basis of presentation and significant accounting policies - Recapitalization and reverse merger in 2018). This exchange is deemed to be a nominal issuance of common stock; accordingly, the exchange is considered to have occurred as of inception (March 21, 2017) for the purposes of calculation of EPS for 2018. Furthermore, the net loss allocable to the NCI is assumed to have converted into a controlling interest as of inception for this purpose.In accordance with FASB ASC 805-40-45, the equity structure in the consolidated financial statements following a reverse merger reflects the equity structure of the legal acquirer (the accounting acquiree), including the equity interests issued by the legal acquirer to effect the merger. In calculating the weighted-average number of common stock outstanding (the denominator of the EPS calculation) during the period in which the reverse merger occurs:·The number of common stock outstanding from the beginning of that period to the acquisition date shall be computed on the basis of the weighted-average number of common stock of the legal acquiree (accounting acquirer) outstanding during the period multiplied by the exchange ratio established in the merger agreement.·The number of common stock outstanding from the acquisition date to the end of that period shall be the actual number of common stock of the legal acquirer (the accounting acquiree) outstanding during that period.F-17Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)Basic EPS for each comparative period before the acquisition date presented in the consolidated financial statements following a reverse merger shall be calculated by dividing (a) the income of the legal acquiree attributable to common stockholders in each of those periods by (b) the legal acquiree’s historical weighted average number of common stock outstanding multiplied by the exchange ratio established in the acquisition agreement.Net loss per share attributable to common stockholdersOn December 14, 2020, the Company closed its IPO, in which it issued and sold 9,966,667 shares of its common stock at a price of $20.00 per share. On that date, all of the Company’s outstanding Series A Convertible Preferred Stock automatically converted into 2,291,469 shares of common stock. These shares were included in the Company’s issued and outstanding common stock starting on that date.The following table presents information necessary to calculate basic and diluted EPS for the years ended December 31, 2020, 2019, and 2018 For the years ended December 31, 2020 2019 2018 Net loss (2018 assumes retroactive conversion of NCI into controlling interest) $ (7,273 ) $ (40,083 ) $ (35,542 ) Cumulative dividends allocated to Series A Convertible Preferred Stock (2,597 ) - - Basic and diluted net loss attributable to common stockholders (9,870 ) (40,083 ) (35,542 ) Less: Effect on net loss of dilutive securities using the "if converted" method - - - Diluted net loss attributable to common stockholders after adjustment for assumed conversions $ (9,870 ) $ (40,083 ) $ (35,542 ) Weighted-average shares of common stock outstanding for basic and diluted EPS (2018 assumes retroactive conversion of NCI into controlling interest) 21,298,849 20,688,439 15,390,086 Basic and diluted net loss per share attributable to common stockholders $ (0.46 ) $ (1.94 ) $ (2.31 ) Since the Company was in a loss position for the years ended December 31, 2020, 2019, and 2018 basic EPS was the same as diluted EPS for the periods presented.lossincome (loss) per share attributable to common stockholders is computed using the two-class method as the convertible preferred stock is determined to be a participating security; however,security and the application of the if-converted method is not more dilutive.participation incommon stockholdersnet loss is anti-dilutiveyears ended December 31, 2021, 2020 and therefore the impact is excluded.Years ended December 31, 2021 2020 2019 Net income (loss) $ 13,416 $ (7,273) $ (40,083) Cumulative dividends allocated to Series A Convertible Preferred Stock — (2,597) — Net income (loss) available for distribution 13,416 (9,870) (40,083) Less: Undistributed earnings allocable to participating securities — — — Basic and diluted net income (loss) attributable to common stockholders $ 13,416 $ (9,870) $ (40,083) Less: Effect on net income (loss) of dilutive securities using the “if converted” method — — — Diluted net income (loss) attributable to common stockholders after adjustment for assumed conversions $ 13,416 $ (9,870) $ (40,083) Weighted-average shares of common stock outstanding for basic net income (loss) per share attributable to common stockholders 39,991,809 21,298,849 20,688,439 Dilutive effect of warrants using the treasury stock method 1,395,393 — — Dilutive effect of restricted stock units using the treasury stock method 1,068,984 — — Dilutive effect of stock options using the treasury stock method 533,009 — — Weighted-average shares of common stock outstanding for diluted net income per share attributable to common stockholders 42,989,195 21,298,849 20,688,439 Basic net income (loss) per share attributable to common stockholders $ 0.34 $ (0.46) $ (1.94) Diluted net income (loss) per share attributable to common stockholders $ 0.31 $ (0.46) $ (1.94) For the years ended December 31, 2020 2019 2018 Shares subject to warrants outstanding 3,886,191 �� 3,886,191 3,886,191 Shares subject to stock options outstanding 922,796 819,879 - Shares subject to unvested restricted stock units 1,857,444 1,820,598 - Series A preferred stock convertible into common shares - 2,078,605 - F-18Years ended December 31, 2021 2020 2019 Shares subject to warrants outstanding 17,817 3,886,191 3,886,191 Shares subject to unvested restricted stock units with performance and/or time-based vesting conditions — 1,857,444 1,820,598 Shares subject to unvested restricted stock units with time-based vesting conditions 71,871 — — Shares subject to stock options outstanding 10,641 922,796 819,879 Shares of common stock subject to conversion of 7,725,045 shares Series A Convertible Preferred Stock — — 2,078,605 December 31, 2021 2020 Trade accounts receivable $ 35,511 $ 20,252 Allowance for doubtful accounts (1,156) (918) Other receivables 7,129 2,292 Total accounts receivable, net $ 41,484 $ 21,626 December 31, 2021 2020 Finished goods $ 145,298 $ 83,213 Work-in-process 5,967 — Raw materials 41,399 7,837 Allowance for inventory obsolescence (3,530) (2,432) Total inventories $ 189,134 $ 88,618 inIn thousands, except share and per share amounts)3. ACCOUNTS RECEIVABLE, NET AND INVENTORIESAccounts receivable, net comprised the following: December 31, 2020 2019 Trade accounts receivable $ 20,252 $ 16,577 Allowance for doubtful accounts (918 ) (1,776 ) Other receivables 2,292 445 Total accounts receivable, net $ 21,626 $ 15,246 Inventories comprised the following: December 31, 2020 2019 Finished goods $ 91,050 $ 54,050 Allowance for inventory obsolescence (2,432 ) (3,822 ) Total inventories $ 88,618 $ 50,228 4.NOTES RECEIVABLEThe Company advanced $2,000 in the form of a note receivable secured by equipment to a third-party in December 2018. As of December 31, 2019, the principal remained outstanding and total interest income at 8.0% per annum earned in 2019 was $160. Interest income recognized in 2020 was $24. The note was to mature on the earlier of a) 90 days after abandonment of a potential merger, b) acceleration due to default conditions, or c) December 2023. In January 2020, the Company formally abandoned the merger, and all outstanding principal and interest was repaid in February 2020.During 2019, the Company advanced a total of $2,931 in the form of a note receivable secured by equipment to another third-party, which earned interest at a rate of 8.0% for total interest earned in 2020 and 2019 of $101 and $119, respectively. The note was to mature on the earlier of a) four months or 12 months after abandonment of a potential merger by the third-party or the Company, respectively, b) acceleration due to default conditions or c) May 29, 2023. As of December 31, 2019, the third-party had defaulted on the interest payment due on September 20, 2019, triggering an increase to the default rate of 13%. In January 2020, the Company formally abandoned the merger and arranged for the principal balance to be paid in monthly installments of $254 through January 2021. Effective April 23, 2020, due to the third-party being in default on the note, the parties entered a forbearance agreement stipulating that payments commenced on May 8, 2020.As of December 31, 2020, the third-party had defaulted on the payments. Effective February 19, 2021, the Company amended and restated the note receivable secured by equipment to allow the third-party to receive equity financing that will be used to fund operations. The amended and restated terms modified a) the interest rate to a range from 6% to 8% over the term of the note, b) the maturity date to December 2024, and c) the installment payments to a range from 10% to 25% of the unpaid principal balance every six months beginning June 2022. The accrued interest of $220 as of December 31, 2020 was paid in January 2021.F-19Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)5.LEASESoperating and finance leases.20202021 and 2019,2020, no renewal option periods were included in any estimated minimum lease terms as the options were not deemed to be reasonably certain to be exercised. The depreciable life of ROU assets and leasehold improvements are limited by the expected lease term. None of the lease agreements include variable rental payments that are adjusted periodically for inflation based on the index rate; rather, most leases for the distributions centers provide for fixed periodic increases. The Company’s lease agreements do not contain any residual value guarantees or unusual restrictive covenants. December 31, Balance Sheet Classification 2020 2019 Leased assets Operating ROU assets at cost Operating lease right-of-use assets $ 21,739 $ 21,906 Accumulated amortization Operating lease right-of-use assets (3,450 ) (3,385 ) Net book value $ 18,289 $ 18,521 Finance lease assets at cost Property and equipment, net $ 602 $ 1,060 Accumulated amortization Property and equipment, net (219 ) (375 ) Net book value $ 383 $ 685 Lease liabilities Current: Operating leases Current portion of lease liabilities $ 3,701 $ 3,181 Finance leases Current portion of long-term debt 159 431 Noncurrent: Operating leases Long-term lease liabilities 15,320 15,786 Finance leases Long-term debt 223 368 Total lease liabilities $ 19,403 $ 19,766 December 31, Balance Sheet Classification 2021 2020 Leased assets Operating ROU assets Operating lease right-of-use assets $ 45,245 $ 18,289 Finance lease assets Property and equipment, net $ 2,365 $ 383 Lease liabilities Current: Operating leases Current portion of lease liabilities $ 7,198 $ 3,701 Finance leases Current portion of long-term debt 739 159 Noncurrent: Operating leases Long-term lease liabilities 38,595 15,320 Finance leases Long-term debt 1,628 223 Total lease liabilities $ 48,160 $ 19,403 For the years ended December 31, Classification 2020 2019 Operating lease costs Selling, general and administrative $ 4,260 $ 4,580 Finance lease costs: Amortization of lease assets Selling, general and administrative 257 239 Interest on lease liabilities Interest expense 58 46 Gain on lease termination Impairment, restructuring, and other — (160 ) Sublease income Selling, general and administrative (57 ) (369 ) For the years ended December 31, Classification 2021 2020 2019 Operating lease costs Selling, general and administrative $6,664 $4,260 $4,580 Finance lease costs: Amortization of lease assets Selling, general and administrative 291 257 239 Interest on lease liabilities Interest expense 33 58 46 Gain on lease termination Impairment, restructuring, and other — — (160) Sublease income Selling, general and administrative (277) (57) (369) arewere included within selling, general and administrative expenses in the consolidated statements of operations.F-20Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)noncancelablenon-cancelable operating and finance leases with remaining terms greater than one year as of December 31, 20202021 are as follows:Year ending December 31, Operating Finance 2021 $ 4,421 $ 176 2022 4,055 176 2023 2,490 56 2024 2,103 — 2025 2,156 — Thereafter 6,851 — Total rental payments 22,076 408 Less portion representing interest 3,055 26 Total principal 19,021 382 Less current portion 3,701 159 Long-term portion $ 15,320 $ 223 Year ending December 31, Operating Finance 2022 $ 8,569 $ 830 2023 7,924 707 2024 7,182 582 2025 6,442 441 2026 5,031 — Thereafter 16,300 — Total rental payments 51,448 2,560 Less portion representing interest 5,655 193 Total principal 45,793 2,367 Less current portion 7,198 739 Long-term portion $ 38,595 $ 1,628 andas well as the weighted-average discount rate on long-term leases for the years ended December 31, 2021, 2020 and 2019: 2020 2019 Weighted-average remaining lease term in years: Operating leases 6.8 7.5 Finance leases 2.2 2.4 Weighted-average discount rate: Operating leases (for leases expiring after 2020) 4.26 % 4.50 % Finance leases 5.61 % 7.17 % 2021 2020 2019 Weighted-average remaining lease term in years: Operating leases 6.8 6.8 7.5 Finance leases 3.5 2.2 2.4 Weighted-average discount rate: Operating leases 3.32 % 4.26 % 4.50 % Finance leases 4.62 % 5.61 % 7.17 % Years ended December 31, Cash paid for amounts included in lease liabilities: 2020 2019 Operating cash flows from operating leases $ (3,917 ) $ (4,225 ) Operating cash flows from finance leases (58 ) (43 ) Financing cash flows from finance leases (674 ) (177 ) DisclosureCash paid for amounts included in lease liabilities: 2021 2020 2019 Operating cash flows from operating leases $ (5,675) $ (3,917) (4,225) Operating cash flows from finance leases (33) (58) (43) Financing cash flows from finance leases (302) (674) (177) leasesapproximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada to be available upon expiration of the lease for 2018 under ASC 840Rent expense relatedexisting space. The new lease commencing January 1, 2023 has a term of 120 months with 2 options to certain warehouse, distributionrenew for an additional five years each at the greater of an amount equal to the annual rent payable for the last twelve months of the initial term or the then fair market value. There is no rent abatement. Monthly rent fee starts at approximate $230, and office facilities, vehicles and office equipment under leases with terms greater than oneincreases periodically to the final year was $6,509 in 2018. Other costs of $1,169 were associated with month-to-month leases. These costs are included in selling, general and administrative expenses inwhen the consolidated statement of operations.F-21inIn thousands, except share and per share amounts)6.PROPERTY AND EQUIPMENT, NETOperating Year ending December 31, 2022 $ 542 2023 4,624 2024 4,938 2025 5,322 2026 5,723 Thereafter 30,425 Total rental payments $ 51,574 December 31, 2020 2019 Machinery and equipment $ 3,648 $ 3,200 Leasehold improvements 2,068 2,721 Other 3,647 2,197 Gross property and equipment 9,363 8,118 Less: accumulated depreciation (5,375 ) (4,568 ) Total property and equipment, net $ 3,988 $ 3,550 December 31, 2021 2020 Machinery and equipment $ 25,177 $ 3,648 Building and improvements 9,510 190 Land 6,120 224 Leasehold improvements 3,207 2,068 8,686 — Computer equipment 3,197 2,079 Furniture and fixtures 2,867 1,154 58,764 9,363 Less: accumulated depreciation, depletion and amortization (8,291) (5,375) Total property, plant and equipment, net $ 50,473 $ 3,988 and $2,391 in 2020, 2019, and 2018, respectively.7.INTANGIBLE ASSETS AND GOODWILLIntangible assets comprisedfor the following: December 31, 2020 December 31, 2019 Gross Carrying
Amount Accumulated
Amortization Net Book
Value Gross Carrying
Amount Accumulated
Amortization Net Book
Value Finite-lived intangible assets: Computer software $ 7,775 $ (5,640 ) $ 2,135 $ 7,701 $ (4,136 ) $ 3,565 Customer relationship 59,375 (12,010 ) 47,365 59,375 (8,712 ) 50,663 Other 1,156 (1,156 ) - 1,133 (756 ) 377 Total finite-lived intangible assets, net 68,306 (18,806 ) 49,500 68,209 (13,604 ) 54,605 Indefinite-lived intangible asset: Trade names 2,801 - 2,801 2,801 - 2,801 Other 120 - 120 - - - Total Intangible assets, net $ 71,227 $ (18,806 ) $ 52,421 $ 71,010 $ (13,604 ) $ 57,406 Amortization expense was $5,154, $5,307, and $5,869 in 2020, 2019, and 2018, respectively. Estimated aggregate amortization expense for each of the five years ending December 31, 2021 through 2025 and thereafter is $4,829, $3,846, $3,338, $3,312, $3,303 and $30,872, respectively.For intangible assets subject to amortization, the weighted-average amortization period as ofended December 31, 2020 for computer software and customer relationships, was 5.0 years and 18.0 years, respectively.Intangible asset impairmentThe Company has one type of indefinite-lived intangible asset, trade names. If the fair value of the trade names is lower than the carrying amount, an impairment charge is recognized in an amount equal to the difference. In 2020 and 2019, the Company performed its annual Step 0 Test and the assessment of the qualitative factors indicated that it was more likely than not that the fair value of the trade name exceeded its carrying amount. In 2018, the Company estimated the fair value of the indefinite-lived trade names using the relief from-royalty method and determined that the fair value of trade names exceeded the carrying value. Accordingly, no impairment was recognized in 2020, 2019 or 2018.In 2020, for all amortizable intangible assets, the Company did not identify any events or changes in circumstances that would indicate that the carrying amount of the Company’s amortizable intangible assets would not be fully recoverable.During 2019 and 2018, for all amortizable intangible assets except for the customer relationships, the Company did not identify any events or changes in circumstances that would indicate that the carrying amount of the Company’s amortizable intangible assets would not be fully recoverable, therefore, there was no impairment of these intangible assets recognized in 2019 and 2018.For the customer relationships, the undiscounted cash flows over their useful lives were estimated primarily based on management’s assumptions and estimates related to revenue, compound annual growth rates and direct operating expenses. The Company used internal financial forecast models that included historical information and projected growth rates based on various assumption such as consumer health trends, potential medical benefits, regulatory challenges, and overall market developments. Revenue was adjusted annually for estimated customer attrition. For the US customer relationships in 2019 and 2018, and for the Canadian customer relationships in 2018, the sum of the future estimated undiscounted cash flows exceeded the carrying values, and accordingly, there was no impairment recognized.F-22inIn thousands, except share and per share amounts)For Canadian customer relationships in 2019, the sum of the estimated future undiscounted cash flows was insufficient to recover the asset carrying value. The Company then performed Step 2, a computation of fair value, which estimated revenues and direct expenses adjusted for organic growth, customer attrition and capital expenditures for the remaining life of customer relationships; a revisionary value was added to the cash flows. The projected future cash flows were then discounted to fair value which indicated little or no value associated with the intangible asset. Accordingly, the carrying value of the customer relationships totaling $5,390 was impaired and the charge was included in impairment, restructuring and other in the consolidated statements of operations.GoodwillGoodwill arose from the acquisition of certain businesses in Canada and other transactions during the year ended December 31, 2017. There were no additions to or disposals of goodwill in 2020, 2019 or 2018, and no impairment of goodwill in 2019. Goodwill was fully impaired as of December 31, 2018. Goodwill for the United States reporting unit had a gross value and corresponding accumulated impairment losses of $32,204 for a net book value of zero, and goodwill for the Canada reporting unit had a gross value and corresponding accumulated impairment losses totaling $3,244 for a net book value of zero as of both December 31, 2020, and 2019.In the fourth quarter of 2018, the Company performed Step 1 of the goodwill impairment test to determine if the fair value of the goodwill of the Canadian reporting unit was greater than the carrying amount. The fair value of invested capital for the Canadian reporting unit was determined using the income approach and included a comparison to the value using a market approach for reasonableness. Internal forecasts were used to estimate future cash flows, which included assumptions for forecasted revenue growth rates, margin estimates, various expenses, capital additions and working capital needs, which were consistent with internal projections and operating plans. A terminal value was included in the forecast based on capitalization multiple. The cash flows were discounted using a weighted average cost of capital (“WACC”) of 19.3%. The capitalization multiple and WACC were based in part on rates derived from an analysis of guideline companies, and generally considered commensurate with the risks and uncertainty inherent in the respective businesses and internally developed forecasts. As a result of the completion of Step 1, it was determined that the carrying amount exceeded the fair value of invested capital. Accordingly, the Company proceeded to Step 2 to measure impairment charges.In Step 2, the fair value of the reporting unit’s “implied goodwill,” was determined by allocating the reporting unit’s fair value derived in Step 1 to all of the reporting unit’s assets and liabilities other than goodwill and comparing the result to the carrying amount of goodwill. After determining the fair value of the Canadian reporting unit and considering the fair values of other assets contained therein, the Company concluded that there was no value remaining in the implied fair value of goodwill. Accordingly, goodwill allocated to the Canadian reporting unit was deemed to be fully impaired, and the Company recognized an impairment charge of $3,244 in 2018, which is included in impairment, restructuring and other in the consolidated statements of operations.Additionally, in 2018, the Company recorded a decrease in deferred tax liabilities and a decrease in the goodwill impairment related to the United States reporting unit of $528.The above resulted in a net impairment loss of $2,716 in 2018.8.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES December 31, 2020 2019 Accrued compensation and benefits $ 9,902 $ 1,857 Goods in transit accrual 3,845 1,005 Freight, custom and duty accrual 2,603 977 Obligations due under a distribution agreement 590 1,154 Costs related to issuance of Series A Convertible Preferred Stock - 1,239 Other accrued liabilities 4,675 2,956 Total accrued expenses and other current liabilities $ 21,615 $ 9,188 December 31, 2021 2020 Accrued compensation and benefits $ 3,713 $ 9,902 Freight, custom and duty accrual 2,094 2,603 Goods in transit accrual 3,473 3,845 Corporate tax accrual 729 585 Contingent consideration 17,034 — Other accrued liabilities 6,953 4,680 Total accrued expenses and other current liabilities $ 33,996 $ 21,615 prior year amountDecember 31, 2020, amounts for freight, custom and dutycorporate tax accrual was reclassified from other accrued liabilities to its owna separate line item and the obligations due under a distribution agreement were reclassified to other accrued liabilities to conform to the current year presentation.F-23Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)9.DEBT December 31, 2020 December 31, 2019 Unamortized Unamortized Outstanding Discount and Deferred Net Carrying Outstanding Discount and Deferred Net Carrying Principal Financing Costs Amount Principal Financing Costs Amount Term loan $ - $ - $ - $ 85,111 $ (1,513 ) $ 83,598 Line of credit - - - 23,864 (792 ) 23,072 Other 1,036 - 1,036 1,262 - 1,262 Total debt 1,036 - 1,036 110,237 (2,305 ) 107,932 Current portion 746 - 746 34,827 - 34,827 Long term 290 - 290 75,410 (2,305 ) 73,105 Total debt $ 1,036 $ - $ 1,036 $ 110,237 $ (2,305 ) $ 107,932 December 31, 2021 2020 Term loan - net of unamortized discount & deferred financing costs of $6,025 $ 118,975 $ — Other 2,805 1,036 Total debt $ 121,780 $ 1,036 Current portion of long-term debt $ 2,263 $ 746 Long-term debt - net of discount and deferred financing costs of $6,025 119,517 290 Total debt $ 121,780 $ 1,036 “Term“Brightwood Term Loan”) was obtained by Hydrofarm Holdings LLC and certain of its direct and indirect subsidiaries (the “Term“Brightwood Term Loan Obligors”) from Brightwood Loan Services LLC, as administrative agent (“Brightwood”), and the lenders party thereto. Hydrofarm Holdings LLC is a shell entity and a subsidiary of Hydrofarm Holdings Group, Inc. Hydrofarm Holdings LLC’s subsidiary is Hydrofarm, LLC, the primary operating entity of the Company.LLC. The Brightwood Term Loan was scheduled to mature on May 12, 2022. The Term Loan2022, and was secured by substantially all non-working capital assets and a second lien on working capital assets of the Brightwood Term Loan Obligors.has beenwas subject to numerous amendments since its origination generally in connection with modifications to debt service, interest payments, interest rates, and debt covenants. Certain amendments required payments of fees. All amendments were accounted for as debt modifications.In order to comply with the financial covenant provisions as of November 30, 2018, the Term Loan Obligors (and BofA Obligors) issued a cure notice and made a debt service payment of $1,151 with proceeds from an equity contribution to Hydrofarm Holdings LLC from its ultimate parent, Hydrofarm Holdings Group, Inc., in January 2019 to the BofA Credit Facility (as defined below). The Brightwood fourth amendment on March 15, 2019 required that the Term Loan Obligors make a $3,000 principal prepayment on the Term Loan.F-24Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)The Brightwood sixth amendment dated October 15, 2019, and a related side letter that was amended on January 16, 2020, provided that a portion of the proceeds raised in the December 2019 offering of Series A Convertible Preferred Stock would be used pay down the Term Loan; the amount was ultimately determined to be $8,370. As of December 31, 2019, cash of $8,370 is presented as a component of restricted cash on the accompanying consolidated balance sheet and an equal amount of the Term Loan is included in current portion of long-term debt. The payment was made in January 2020.For the year ended December 31, 2020, the effective interest rate was 10.18%, interest expense was $6,892, and amortization of deferred financing costs was $610. For the year ended December 31, 2019, the effective interest rate was 13.02%, interest expense was $10,151, of which $7,106 was added to the principal, and amortization of deferred financing costs was $483. For the year ended December 31, 2018,12.13%10.18%, interest expense was $9,191, of which $6,795 was added to the principal,$6,892, and amortization of deferred financing costs was $493.term loanBrightwood Term Loan of $76,610 (including accrued interest) was repaid with proceeds from the IPO on December 14, 2020. A loss on debt extinguishment of $907 representing unamortized deferred financing costs was recognized at the time of repayment.F-25Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)has beenwas subject to numerous amendments since its origination generally in connection with modifications to debt service, interest payments, interest rates, debt covenants, extension of due dates and the eventual payoff in July 2019. Certain amendments required payments of fees and each amendment was accounted for as a debt modification.As part of a forbearance agreement, a stockholder agreed to provide Hydrofarm Holdings LLC with an unsecured subordinated loan of $4,000 for a period and at terms specified in the forbearance agreement to provide for working capital needs of the BofA Obligors.Hydrofarm Holdings LLCthe Company and certain of its direct and indirect subsidiaries (the “Encina Obligors”) replaced the BofA Credit Facility withentered into the Encina Credit Facility through a certain Loan and Security Agreement whereby the Encina Obligors obtained a revolving asset-based loan commitment in the maximum amount of $45,000 (inclusive of a limit of up to $15,000 of borrowings for the Canadian borrowers and a swingline facility of up to $2,000), subject to applicable borrowing base availability, through Encina Business Credit, LLC (“Encina”). The amount of the facility is limited to the borrowing base (primarily calculated based on eligible accounts receivable and inventory) subject to certain reserves and limitations.LLC. The Encina Credit Facility iswas due on the earlier of July 11, 2022 or 90 days prior to the scheduled maturity date of the Brightwood Term Loan.due monthly, iswas calculated at LIBOR or a base rate, plus an applicable margin ranging between 3.75% to 5.50% per annum determined based on the fixed charge coverage ratio calculated over an applicable time period. A fee of 0.50% per annum iswas charged for available, but unused borrowings as defined. An additional 200 basis points iswas added to the interest rate for any period during which the loan iswas in default. Deferred financing costs are beingwere amortized over the term of the Encina Credit Facility.is secured by working capital assets and a second lien on non-working capital assets, and requires various restrictive and protective covenants and financial ratios. Additionally, the agreement requires the Encina Obligors to be in compliance with the financial and qualitative covenants of all other existing debt. The Encina Credit Facility provides for several financial covenants, as defined and limits on capital expenditures.Prior to April 2020, the Encina Credit Facility has beenwas subject to numerous amendments since its origination generally in connection with modifications to available borrowings, financial covenants, permitted indebtedness and permitted capital expenditures. In April 2020 and May 2020, the Encina Credit Facility was amended by the third, fourth and fifthCertain amendments which (i) replaced the existing “fixed charge coverage ratio/minimum excess availability” financial covenant with an amended “availability block” and increased the “inventory sublimit,” each as more fully described in the amendment, (ii) provided for permitted indebtedness related to the PPP Loan, and (iii) increased permitted capital expenditures during any fiscal year to $750. In September 2020, the Encina Credit Facility was amended by the sixth amendment, which (i) further increased the “inventory sublimit” (as defined), and (ii) increased permitted capital expenditures during any fiscal year to $2,000. In December 2020, the Encina Credit Facility was amended by the seventh amendment, which (i) added to the Loan Agreement the definitionrequired payments of “IPO” and (ii) amended and restated the definition of “Change of Control”.fees. All amendments were accounted for as debt modifications.For the year ended December 31, 2020, the effective interest rate was 9.27%, interest expense was $2,248 and amortization of deferred financing costs was $318.Total combined fees for the BofA Credit Facility and the Encina Credit Facility of $377 were added to the principal in 2019. Additionally, the unamortized deferred financing costs related to the BofA Credit Facility totaling $391 were written off and recognized as a loss on debt extinguishment in the consolidated statements of operations in 2019. Therates on the BofA Credit Facility ranged from 5.00% to 5.06% in 2018rate was 9.27%, interest expense was $2,248, and the amortization of deferred financing costs was $150 in 2018.reflectsreflected a pay-down of $33,353 with proceeds from the IPO. The Encina Obligors had approximately $34,521 available to borrow under the Encina Credit Facility as of December 31, 2020.20202020.2019.Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts) to be based on a formula which divided outstanding principal and accrued interest by the per share price of the offering. The conditional share-settled conversion feature was deemed to be embedded derivative that did not meet the criteria to be bifurcated and carried at fair value; accordingly, all of the proceeds net of the issuance costs were allocated to the debt instrument.10, Convertible preferred stock and stockholders’ equity11, Stockholders’ Equity). The total unamortized deferred financing costs at the time of the conversion ofwas $288 were written-off and are included inwas recognized as a loss on debt extinguishment in the consolidated statements of operations in 2019.2020,2021, the aggregate future principal payments under long-term debt, are not material to the financial statements and areexcluding payments due on various dates from 2021 to 2023. The aggregate future principal payments under finance lease obligations are includedpresented in Note 5, 7, Leases.10.CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITYDebt Year ending December 31, 2022 $ 1,524 2023 1,307 2024 1,268 2025 1,270 2026 1,270 Thereafter 118,799 Total principal payments under long-term debt $ 125,438 Finance lease obligations Debt Total Current portion of long-term debt $ 739 $ 1,524 $ 2,263 Long-term debt 1,628 123,914 125,542 Total payments due $ 2,367 $ 125,438 $ 127,805 2020,2021, the following summarizes shares authorized, issued and outstanding: Shares Shares authorized outstanding Convertible preferred stock at $0.0001 par value per share 50,000,000 - Common stock at $0.0001 par value per share 300,000,000 33,499,953 Capital stock authorized and outstanding: Shares
authorizedShares
outstandingConvertible preferred stock 50,000,000 — Common stock 300,000,000 44,618,357 2020,2021, the following summarizes shares of common stock reserved for future issuance:Shares reservedCommon stock reserved for issuance: Shares reserved
for issuanceWarrants 17,817 3,886,1912020 Employee, Director, and Consultant Equity Incentive Plan 2,118,067 2,197,396Restricted stock units 1,087,608 1,857,444Stock options 720,549 922,7962020. Offering2020, less offering costs totaled $1,274, of which $1,239 was included in accrued expense and other current liabilities in the consolidated balance sheet as of December 31, 2019.$1,274. In January and February 2020, an additional 717,616 shares of Series A preferred stock were issued primarily to existing investors for $2,511, less offering costs of $169, for net cash proceeds of $2,342.Convertible Preferred Stock was issued at $3.50 and ranked senior to all other classes of preferred and common stock. The preferred stock agreement provided for conversion to common stock at a ratio of 3.3712:1 at the option of the holder, a preference on liquidation, voting rights, and liquidity rights in the event an IPO did not occur within 18 months of the issuance date. Dividends were provided at a 10% dividend yield, cumulative, payable in cash or PIK (Series A Convertible Preferred Stock) at the issuer’s discretion; the rate was to increase to 11% after the 9-month anniversary and 12% after the 18-month anniversary.F-27Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)The Series A Convertible Preferred Stock contained a redemption feature not solely within the control of the Company’s common shareholders and was, therefore, classified outside of permanent equity. None of the embedded features required bifurcation from the host instrument.The preferred stockpurchase agreement provided for mandatory conversion upon a qualified IPO based on a formula. Under this formula, all outstanding shares of Series A Preferred Stockpreferred stock converted into 2,291,469 shares of common stock concurrent with the IPO in December 2020. The2020 and the cumulative dividend of $2,597 was settled in cash at the option of the Company rather than in shares of common stock.AsDecember 31, 2020,investor warrants2019, aggregatea warrant to purchase an additional one-half (1/2) shares of common stock, issuable under warrants totaled 3,886,191.Warrants issued to investorswhich concluded in the Offeringfall of 2018.Concurrent Offering(ii) the volume-weighted average price of the Company's common stock for the purchasetwenty consecutive trading days prior to the date of 3,369,124 shares (the “Investor Warrants”) arethe notice of redemption was at least $25.28, of which both requirements were met. Investor Warrants were exercisable at a price of $16.86 per share until July 19, 2021 (the "redemption date"). Any Investor Warrants that remained unexercised immediately after the redemption date were void and no longer exercisable, and the holders of those Investor Warrants were entitled to receive the redemption price.whole or in part subjectthe event the Investor Warrants were called for Redemption. The Company agreed to typical adjustments for anti-dilution. The warrants expire three years from December 10, 2020 and are callablepay a warrant solicitation fee to the Placement Agent equal to 5 percent of the amount of net cash proceeds solicited by the Company solely at its discretion ifPlacement Agent upon the exercise of certain conditions are met. Placement agentInvestor Warrants following such call for Redemption. For the year ended December 31, 2021, warrant solicitation fee expense totaled $1,949 and was included in selling, general and administrative expenses in the consolidated statements of operations. forof 172,351517,067 shares of common stock in the Company of which 172,351 shares subject to warrants are exercisable at a price of $16.86 per share and 344,716 shares subject to warrants are exercisable at a price of $8.43 per share. Placement agent warrants are exercisable in whole or in part subject to typical adjustments for anti-dilution and may be exercised on a “cashless”"cashless" basis.Restrictionability to pay dividendsUnderfollowing table summarizes the terms of the Encina Credit Facility, substantially all consolidated net assets of the Encina Obligors are subject to limitations regarding the restriction of payment of dividends to any direct or indirect parent.11.STOCK-BASED COMPENSATION AND 401K PLANNumber of Warrants Exercise Price Placement agent warrants 11,809 $ 8.43 Placement agent warrants 6,008 $ 16.86 Total 17,817 $ 11.27 three3 equity incentive plans: the 2018 Equity Incentive Plan (“2018 Plan”), the 2019 Employee, Director and Consultant Equity Incentive Plan (“2019 Plan”) and the 2020 Employee, Director, and Consultant Equity Incentive Plan (“2020 Plan” and collectively, “Incentive Plans”). The 2020 Plan serves as the successor to the 2019 Plan and 2018 PlansPlan and provides for the issuance of incentive stock options (“ISOs”("ISOs"), nonqualified stock options (“NSOs”("NSOs"), stock grants and stock-based awards to employees, directors, and consultants of the Company. No further awards will be issued under the 2018 Plan and 2019 Plans.F-28inIn thousands, except share and per share amounts)As of December 2020, 2,197,396 shares of common stock are available for grant under the 2020 Plan. No awards were granted prior to 2019.requirementcondition (based on continuous employment) and certain awards also have a performance-based vesting requirementcondition (defined as a qualifying liquidity event including an initial public offering); on the date the performance-based vesting requirementcondition is satisfied, the employee will becomebecomes vested in the number of RSUs that have satisfied the time-based vesting requirement,condition, if any. In November 2020, five new independent directors were appointed to the Board replacing most of the members who previously served on the Board. In anticipation of reconstituting the Board, in October 2020, the compensation committee of the Board approved grants of 74,152 restricted stock units, in the aggregate, to certain Board members who were being replaced and their affiliates. These awards were fully vested at the time of grant.stock and unvested RSUs are not considered outstanding common shares.The following table summarizes the activity related to the Company’s RSUs for the year ended December 31, 2020. For purposes of this table, vested RSUs represent the shares for which the performance and service conditions had been fulfilled as of December 31, 2020: Number of RSUs Weighted average
grant date fair value Balance, January 1, 2020 1,820,598 $ 5.10 Granted 829,926 $ 9.01 Vested (793,080 ) $ 5.80 Balance, December 31, 2020 1,857,444 $ 6.55 performanceperformance-based condition based on the occurrence of a qualifying liquidity event, (i.e., IPO), as such qualifying event was not probable. Upon the IPO, the performanceperformance-based vesting condition was metsatisfied and the Company recognized $2,967 of stock-based compensation expense for RSUs which was the cumulative portion of the service-based awards that vested. As ofFor the year ended December 31, 2020, the performance-based vesting requirement on all outstanding awards had been met.AsCompany recognized $8,689 of stock-based compensation expense for RSUs. No stock-based compensation expense was recognized for RSUs for the year ended December 31, 2019.certain RSUs to meet the employees’employees' payroll tax withholding requirements. The total tax withholding obligation of $6,089 as of December 31, 2020 iswas included in accrued expenses and other current liabilities in the consolidated balance sheets. The payment was made in January 2021. After the IPO, the stock-based compensation expense related to remaining service-based awards is recorded over the remaining requisite service period.The following table summarizes the grant date fair value, expense for the year ended December 31, 2020 (no expense was recognized during the year ended December 31, 2019), and the balance of unamortized stock-based compensation related to RSUs as of December 31, 2020: Number of
RSUs Grant date fair
value Expense
during the
year Unamortized
compensation RSUs subject only to the passage of time: Vested 793,080 $ 4,598 $ (4,598 ) $ - Total RSUs vested 793,080 $ 4,598 $ (4,598 ) $ — RSUs subject only to the passage of time: Unvested 1,560,814 $ 8,990 $ (911 ) $ 8,079 RSUs subject to market condition and passage of time: Unvested 296,630 3,180 (3,180 ) — Total RSUs outstanding 1,857,444 $ 12,170 $ (4,091 ) $ 8,079 The unamortized compensation costs of $8,079 are expected to be recognized over a weighted-average period of approximately 2.56 years.F-29Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)thea former member of the Board (the "former Board member") in July 2020 and modified in November 2020 contains a market-based vesting condition based on the traded value of shares of the Company’s common stock following the IPO over a specific time frame. For this award, the market condition was factored into its fair value; key assumptions used on the MCSM included volatility of 52.90%; time horizon of 2.64 years corresponding to the vesting measurement period of the award forecasted based on daily trading prices; risk-free rate of 0.23%; and 10,000 simulation trials.value. The fair value of the award, at the modification date, was $3,180, all of which was recorded as stock-based compensation expense when the performance condition was met upon the IPO. In July 2021, the market-based vesting condition for this award was satisfied and 148,315 RSUs of the former Board member vested. The total shares under the unvested RSURSUs subject to a market-basedtime-based vesting condition are 296,630conditions were 111,236 as of December 31, 2020.benefitwithholding payments of $13,936 were made in 2021 in addition to the tax withholding obligation from 2020 paid in 2021 (as described above). The total tax withholding obligation of $9 as of December 31, 2021 was included in accrued expenses and other current liabilities in the consolidated balance sheets.Number of
RSUsWeighted
average grant
date fair valueBalance, January 1, 2021 1,857,444 $ 6.55 Granted 81,905 $ 54.72 Vested (851,741) $ 7.15 Balance, December 31, 2021 1,087,608 $ 9.71 yearyears ended December 31, 2021 and 2020 waswere not material to the financial statements. There was no tax benefit recognized in 2019.Options issued through December 31, 2020 vest under onethree schedules as follows: 20% vest as of the date of grant, then 1/45th on the last day of the month for the following 36 months; 25% vest on the first anniversary of the date of grant, then 1/48th on the last day of the month for the following 36 months; or,stock options vest upon grant. Vesting is subject to certain change in control provisions as provided in the incentive plan agreements and options may be exercised up to 10 years from the date of issuance.2020: Number Weighted
average
exercise price Weighted
average grant
date fair value Weighted average
remaining contractual
term (years) Outstanding at January 1, 2020 819,879 $ 8.43 $ 0.71 9.27 Granted 150,119 $ 10.77 $ 7.10 Forfeited (47,202 ) $ 8.43 $ 0.70 Exercised - - Expired - - Outstanding at December 31, 2020 922,796 $ 8.81 $ 1.78 8.08 Exercisable as of December 31, 2020 476,910 $ 8.43 $ 0.71 7.39 Unvested at December 31, 2020 445,886 $ 9.22 $ 2.93 2.44 Vested and expected to vest as of December 31, 2020 922,796 $ 8.81 $ 1.78 8.08 Number Weighted
average
exercise priceWeighted
average grant
date fair valueWeighted average
remaining contractual
term (years)Outstanding as of January 1, 2021 922,796 $ 8.81 $ 1.78 8.08 Granted 10,641 $ 59.03 $ 25.58 Exercised (186,633) $ 8.54 $ 0.96 Cancelled (510) $ 8.43 $ 0.70 Forfeited (25,745) $ 10.26 $ 5.67 Outstanding as of December 31, 2021 720,549 $ 9.57 $ 2.21 7.37 Exercisable as of December 31, 2021 518,034 $ 8.57 $ 1.10 7.25 Unvested as of December 31, 2021 202,515 $ 12.13 $ 5.04 1.96 Vested and expected to vest as of December 31, 2021 720,549 $ 9.57 $ 2.21 7.37 Black ScholesBlack-Scholes valuation model was utilized. The valuation model requires the input of highly subjective assumptions. Inputs to the model were as follows for the periods indicated: Years ended December 31, 2020 2019 Fair Value of common stock underlying the options $6.07 to $17.85 $4.82 to $6.07 Volatility 45% to 55% 30% Risk-free rate 0.03% to 0.89% 1.37% to 2.49% Dividend yield Nil Nil Expected term in years 5.00 to 5.61 5.00 to 5.62 F-30Years ended December 31, 2021 2020 2019 Fair value of common stock underlying the options $59.03 $6.07 to $17.85 $4.82 to $6.07 Volatility 45% 45% to 55% 30% Risk-free rate 0.85% 0.03% to 0.89% 1.37% to 2.49% Dividend yield Nil Nil Nil Expected term in years 6.0 5.00 to 5.61 5.00 to 5.62 Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)The estimated fair value of the common stock range used in 2020 was from $6.07 per share to $17.85 per share. These amounts compare to the range used of $4.82 to $6.07 per share for all option grants in 2019. The change in the estimated fair value of common stock was due to a number of factors including a higher enterprise valuation in 2020 due to improvement in financial performance, namely (i) an increase in net sales; and (ii) a higher gross profit margin percentage. Another factor which impacted assumptions for the fair value of the common stock during 2020 was a higher probability of a successful IPO compared to assumptions in 2019. Also, the exercise prices for options granted after June 2020 were no longer in excess of the fair value of the underlying common share which further increased the option value compared to awards granted in 2019. The volatility for the year ended December 31, 2020 increased compared to the same period in 2019 as a result of increases in the volatilities of the public comparable companies used to determine the Company’s volatility. As result of these factors, the weighted average fair value per share of $0.71 for options outstanding as of January 1, 2020 was increased to a weighted-average fair value per share of $7.10 for options granted during the year ended December 31, 2020.Total compensation expense for stock options was approximately $206 and $208 in 2020 and 2019, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations. No tax benefit related to the stock option expense was recognized in 2020 and 2019.2020,2021, total compensation cost related to unvested option awards not yet recognized was $1,231$919 and the weighted-average period over which the compensation is expected to be recognized is 2.441.96 years.401K PlanThe Company maintains a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code, which providesvoluntary contributions from the Companystock options was $440, $206, and its employees. Contributions from the Company were $191, $190,$208 in 2021, 2020, and nil in 2020, 2019, respectively.2018, respectively.12.per share amounts)follows for the years ended: Years ended December 31, 2020 2019 2018 United States $ (9,908 ) $ (30,409 ) $ (31,493 ) Foreign 3,211 (10,365 ) (4,446 ) Loss from continuing operations before tax $ (6,697 ) $ (40,774 ) $ (35,939 ) F-31Years ended December 31, 2021 2020 2019 United States $ (9,262) $ (9,908) $ (30,409) Foreign 3,541 3,211 (10,365) Loss from continuing operations before tax $ (5,721) $ (6,697) $ (40,774) Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts) (benefit) from continuing operations consist of the following: Years ended December 31, 2020 2019 2018 Current: Federal $ - $ - $ 216 State 91 18 79 Foreign 433 9 207 Total current 524 27 502 Deferred: Federal - - 269 State - - - Foreign 52 (718 ) (1,168 ) Total deferred tax expense (benefit) 52 (718 ) (899 ) Total income tax expense (benefit) $ 576 $ (691 ) $ (397 ) Years ended December 31, 2021 2020 2019 Current: Federal $ — $ — $ — State 72 91 18 Foreign 1,787 433 9 Total current 1,859 524 27 Deferred: Federal (18,275) — — State (1,962) — — Foreign (759) 52 (718) Total deferred (20,996) 52 (718) Total income tax (benefit) expense $ (19,137) $ 576 $ (691) Years ended December 31, 2020 2019 2018 Effective rate reconciliation U.S. federal tax benefit at statutory rate $ (1,406 ) $ (8,563 ) $ (7,547 ) State income taxes, net (171 ) (1,247 ) (1,009 ) Permanent items 19 89 1,692 Global intangible low-taxed income 866 - - Foreign rate differential 854 (891 ) (590 ) 162(m) Officers Compensation 3,514 - - Share-based compensation (2,834 ) - - Deferred adjustments (230 ) 563 - Tax Entity Classification Adjustment - - (1,927 ) Non-controlling interest - - 433 Transaction Costs 90 - - Valuation allowance (126 ) 9,358 6,370 Other, net - - 2,181 Total income tax expense (benefit) $ 576 $ (691 ) $ (397 ) F-32Years ended December 31, 2021 2020 2019 Effective rate reconciliation U.S. federal tax benefit at statutory rate $ (1,201) $ (1,406) $ (8,563) State income taxes, net 68 (171) (1,247) Permanent items 542 19 89 Global intangible low-taxed income 972 866 — Foreign rate differential 1,032 854 (891) 162(m) officers compensation 6,969 3,514 — Share-based compensation (8,118) (2,834) — Deferred adjustments 67 (230) 563 Transaction costs 2,290 90 — Other, net (973) — — Valuation allowance (20,785) (126) 9,358 Total income tax (benefit) expense $ (19,137) $ 576 $ (691) inIn thousands, except share and per share amounts)from continuing operations consistsconsist of the following as of: As of December 31, 2020 2019 Deferred tax assets Lease liabilities $ 4,838 $ 4,836 Accrued expenses 1,245 1,129 Share-based compensation 979 - Intangible assets 9,546 10,602 Net operating loss 17,152 17,589 Inventories 2,548 3,022 Interest expense 3,556 3,746 Deferred tax assets 39,864 40,924 Valuation allowance (34,434 ) (34,746 ) Total deferred tax assets 5,430 6,178 Deferred tax Liabilities Property and equipment (432 ) (1,054 ) Operating lease right-of-use assets (4,657 ) (4,729 ) Total deferred tax liabilities (5,089 ) (5,783 ) Net deferred tax assets $ 341 $ 395 The deferred income tax assets included in other long-term assets were $341 and $395 as of December 31, 2020 and 2019, respectively.December 31, 2021 2020 Deferred tax assets Lease liabilities $ 11,714 $ 4,838 Accrued expenses 1,215 1,245 Share-based compensation 460 979 Intangible assets — 9,546 Net operating loss 19,543 17,152 Inventories 4,948 2,548 Interest expense 2,154 3,556 Other 1,243 — Deferred tax assets 41,277 39,864 Valuation allowance (14,892) (34,434) Total deferred tax assets 26,385 5,430 Deferred tax liabilities Intangible assets (17,526) — Property, plant and equipment (2,518) (432) Operating lease right-of-use assets (11,579) (4,657) Total deferred tax liabilities (31,623) (5,089) Net deferred tax (liability) asset $ (5,238) $ 341 Other long-term assets - deferred tax assets $ 393 $ 341 Long-term deferred tax liabilities (5,631) — Net deferred tax (liability) asset $ (5,238) $ 341 2020,2021, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $62,500$74,900 and $52,300,$56,900, respectively. The federal and state NOL carryforwards, if not utilized, will begin to expire in 2037 and 2027, respectively, and $49,000$62,000 of the federal losses are indefinite. In 2020, the Company had foreignForeign NOL carryforwards ofwere approximately $3,000. The foreign NOLs, if not utilized, will begin to expire in 2037.20202021 and 2019,2020, the Company believes it is more-likely-than-not that it will not be able to realize its USU.S. deferred tax assets and therefore has maintained a full valuation allowance against its USU.S. deferred tax assets. The Company has also provided a full valuation allowance against the majority of its Canadian and Spanish deferred tax assets.20202021 and 2019,2020, the Company did not record any liabilities related to uncertain tax positions. The Company does not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2020.F-33Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)carrybackcarry-back NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.2020.13.2021.In June 2020, as part of negotiations with a supplier that began in late 2019, the Company amended its October 2017 agreement to distribute and sell certain garden products for a term ending in December 2024. Under the amended agreement, the Company committed to purchase inventory in periodic minimum volumes on a take-or-pay basis, as defined, over the term of the agreement in return for pricing that would provide the Company with a minimum gross margin along with the potential for rebates. Cost of goods sold in 2019 and 2018 include an additional $1,134 and $1,108 for amounts due associated with volumes purchased below minimum thresholds. Inventory purchased under this agreement totaled $9,146, $3,641, and $2,644 in 2020, 2019, and 2018, respectively. Minimum purchase requirements are $3,000, $3,500, $4,000 and $4,500 for 2021, 2022, 2023 and 2024, respectively. The Company expects that these minimum purchase commitment obligations will be met.transactions — transactions—Hydrofarm Distribution Centerleasesleased a distribution center in Petaluma, California from entities in which a related party is an investor. One lease iswas a stockholder. For the years ended December 31, 2021, 2020 and 2019, rent expense for the month to month and another lease terminated in June 2019. In 2020 and 2019, aggregate rent expense wastotaled $639, $1,278, and $1,445, respectively.F-34Hydrofarm Holdings Group, Inc.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(The Company leases certain facilities from a member of management who is also a member in thousands, except share and per share amounts)11, 12, Stock-based compensation and 401K planCompensation).Subordinated loans from related partyOn May 22, 2018, in connection with forbearance and amendments to the BofA Credit Facility and Term Loan agreements discussed in Note 9, Debt, the Company obtained a subordinated note of $4,000 from a stockholder of the Company to fund operations. Interest was at a rate of 8.24% per annum with no payment of interest and principal made in cash prior to the maturity date. On June 29, 2018, in connection with and under the same terms as the May 22, 2018 subordinated note, an additional amount of $2,000 was secured from the stockholder. As discussed in Note 1, Description of the business, basis of presentation and significant accounting policies – Recapitalization and reverse merger in 2018, the $4,000 note plus accrued interest of $88 was converted into equity in exchange for shares and warrants. The $2,000 subordinated loan was repaid in August 2018.14.and 2018, certain expenses were incurred primarily related to recognitionthe Company recognized $10,035 of impairment onof intangible assets, several restructuring and goodwill as discussed in Note 7, Intangible assetsrecapitalization events, and goodwill; restructuring costs; fees for various statutory filings; severance costs for a reduction-in-force; and, costs to early terminate several leases. Restructuring costs were for professional feesfilings. The impairment of intangible assets of $5,390 in 2019 was related to consultation and assistance with re-engineering initiatives related to financial reporting, operational processes, and cost savings strategies.Impairment, restructuring and other comprised the following: For the years ended December 31, 2020 2019 2018 Costs related to SEC filings $ 529 $ 1,080 $ 776 Impairment of intangible assets and goodwill — 5,390 2,716 Restructuring costs — 1,973 3,431 Severance costs — 784 — Costs related to early termination of leases, net of gains — 337 — Other, net 331 471 246 $ 860 $ 10,035 $ 7,169 15. SUBSEQUENT EVENTSOn March 29, 2021,Canadian customer relationships.Company and certainfair value of its subsidiaries entered into a Credit Facility agreement with JPMorgan Chase Bank, N.A. (“Chase”) (the “Chase Agreement”), whereby Chase agreed to provide a $50,000,000 revolving credit facility with an option to request an increase in the Revolving Commitment by up to $25 million, drawn in $5.0 million increments, for a total not to exceed $75 million, subject to customary conditions (“Revolver”). The Chase Agreement replaced the Encina Credit Facility.The maturity of the Revolver is three years from the date of the Chase Agreement. The Revolver maintains an interest rate of LIBOR plus 1.95% and has a 0.0% LIBOR floor.The Chase Agreement maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants. The financial covenants include that the Company must maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.The Chase Agreement is secured by the Company’s assets and the assetsliabilities for which disclosure of certain of the Company’s subsidiaries obligated under the Chase Agreement.F-352021 2020 Fair Value Hierarchy Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Assets Cash and cash equivalents Level 1 26,607 26,607 75,178 75,178 Restricted cash Level 1 1,777 1,777 1,777 1,777 Note receivable Level 3 3,111 3,111 3,151 3,151 Liabilities Contingent consideration: Heavy 16 Acquisition Level 3 200 200 N/A N/A Aurora Acquisition Level 3 16,834 16,834 N/A N/A Term Loan Level 2 125,000 121,250 N/A N/A Revolving asset-backed credit facilities: Encina Credit Facility Level 3 N/A N/A — — JPMorgan Credit Facility Level 3 — — N/A N/A Other debt Level 3 2,805 2,805 1,036 1,036 Account2019, and 2018 Balance as of
beginning of year Provisions
/(Benefit) Deductions Balance as of
end of year Year ended December 31, 2020 Allowance for doubtful accounts $ 1,776 $ 83 $ (941 ) $ 918 Allowance for inventory obsolescence 3,822 (803 ) (587 ) 2,432 Year ended December 31, 2019 Allowance for doubtful accounts 1,227 933 (384 ) 1,776 Allowance for inventory obsolescence 3,219 707 (104 ) 3,822 Year ended December 31, 2018 Allowance for doubtful accounts 2,955 534 (2,262 ) 1,227 Allowance for inventory obsolescence 4,618 (824 ) (575 ) 3,219 Balance as of (Benefits) / Other / Balance as of beginning of year Provisions Deductions end of year Year ended December 31, 2021 Allowance for doubtful accounts $ 918 $ (110) $ 348 $ 1,156 Allowance for inventory obsolescence 2,432 1,201 (103) 3,530 Year ended December 31, 2020 Allowance for doubtful accounts 1,776 83 (941) 918 Allowance for inventory obsolescence 3,822 (803) (587) 2,432 Year ended December 31, 2019 Allowance for doubtful accounts 1,227 933 (384) 1,776 Allowance for inventory obsolescence 3,219 707 (104) 3,822 Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A.CONTROLS AND PROCEDUREScost-benefitcost benefit relationship of possible controls and procedures. Our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2020 due tofor the material weaknesses previously disclosed in our registration statementperiod covered by this Annual Report.Form S-1 which was declared effective on December 9, 2020.62 A “material weakness”a deficiency, or a combination of deficiencies, inresponsible for establishing and maintaining adequate internal control over financial reporting, such that there is a reasonable possibility that a material misstatementas defined in Rule 13a-15(f) of the Exchange Act. Management has assessed the effectiveness of our annual or interiminternal control over financial statements will not be prevented or detected on a timely basis. Our management determined that the previously disclosed material weaknesses have not been remediatedreporting as of December 31, 2020: that (i) we did not maintain a sufficient complement2021 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of personnelSponsoring Organizations of the Treadway Commission.an appropriate degreeguidance issued by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their first assessment of technical knowledge commensurate withinternal control over financial reporting following the date of acquisition. Based on those guidelines, management’s assessment of the effectiveness of our accountinginternal control over financial reporting excluded Heavy 16, House and reporting requirementsGarden, Aurora, Greenstar and (ii) our controls relatedInnovative Growers Equipment, Inc., which were acquired on May 3, June 1, July 1, August 3 and November 1, 2021 respectively. See Note 3 to the preparation, review, and analysis of accounting information andconsolidated financial statements were not adequately designed or appropriately implemented to identify material misstatementsfor additional information on our acquisitions. We have included the financial results of these acquisitions in the consolidated financial statements from the date of the respective acquisitions. These acquisitions represented 85% and 68% of net and total assets, respectively, 13% of revenues, and 37% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2021.on a timely basiswas effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Deloitte & Touche LLP has independently assessed the effectiveness of our U.S. entitiesinternal control over financial reporting and Eddi’s. Theseits report is included above.could resultthat were identified in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.We have taken several actions towards remediating these material weaknesses.2020. In particular, we (i) hired and continue to hire, additional qualified accounting and financial reporting personnel with technical and/or public company experience, (ii) implemented new control procedures over certain areas previously deemed ineffective related to the preparation, review, and analysis of accounting information and financial statements and (iii) engaged and continue to engage an external advisor to assist management in completing a Sarbanes-Oxley Act compliant risk assessment, creating detailed control documentation for in-scope business and information technology processes, identifying further control gaps and providing assistance on remediation procedures, and designing and implementing a Sarbanes-Oxley Act sub-certification process. Although we have taken steps to address the material weaknesses, we are still in the process of completing the remediation; we cannot assure you that the steps we are taking will be sufficient to remediate our material weaknesses or prevent future material weaknesses or significant deficiencies from occurring.We can give no assurance that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.Management’s Report on Internal Control Over Financial ReportingThis Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.Attestation Report of the Registered Public Accounting FirmThis Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered public accounting firm will not be required to opine on our internal control over financial reporting until we are no longer an emerging growth company.Changes in Internal Controls over Financial Reportingfourth quarter of 2020period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B.OTHER INFORMATIONOn March 29, 2021, the Company and certain of its subsidiaries entered into a Senior Secured Revolving Credit Facility (the “JPMorgan Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender (“JPMorgan”), and the lenders from time to time party thereto. The JPMorgan Credit Facility replaces the Encina Credit Facility. There was no outstanding indebtedness under the Encina Credit Facility when it was replaced. All capitalized terms used in this 9B and not otherwise defined in this Annual Report on Form 10-K shall have the meanings set forth in the JPMorgan Credit Facility.The JPMorgan Credit Facility, among other things, provides for an asset based senior revolving credit line (the “Senior Revolver”) with JPMorgan as the initial lender. The three-year Senior Revolver has a borrowing limit of $50 million. The Company has the right to increase the amount of the Senior Revolver in an amount up to $25 million by obtaining commitments from JPMorgan or from other lenders. The loans are available in both US and Canadian dollars. Loans denominated in US dollars bear interest at the Eurodollar Rate plus 1.95% and those denominated in Canadian dollars bear interest at the CDOR rate plus 1.95%. Both rates are ultimately based on LIBOR and there is a floor of 0.0% for each rate. Because the LIBOR rate may no longer be an appropriate reference rate commencing in 2022, the JPMorgan Credit Facility contains benchmark replacement terms pursuant to which the LIBOR-based rates will convert to SOFR based rates or other alternative rates upon the occurrence of certain events. Interest is payable monthly. Any outstanding principal is due at the end of the term.The obligations of the Company and its subsidiaries under the JPMorgan Credit Facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of their respective personal property assets pursuant to the terms of a U.S. and a Canadian Pledge and Security Agreement, dated March 29, 2021 and the other security documents.The JPMorgan Credit Facility contains customary representations and warranties and restrictive covenants including prohibitions on indebtedness, liens, investments, restricted payments and other items. In addition, during any period when Excess Availability is less than 10%, the Company and its subsidiaries must maintain a Fixed Charge Coverage Ratio in excess of 1.10 to 1.0.The JPMorgan Credit Facility contains customary events of default, including payment and covenant defaults (subject to grace and cure periods), breaches of representations and warranties, defaults under certain other indebtedness, change of control, insolvency events, and the occurrence of a material adverse effect. If an event of default occurs, JPMorgan would be entitled to take various actions, including the acceleration of amounts due under the JPMorgan Credit Facility and all actions permitted to be taken by a secured creditor.The foregoing description of the JPMorgan Credit Facility is only a summary of its material terms and does not purport to be complete. This summary is qualified in its entirety by reference to the description of the JPMorgan Credit Facility, a copy of which is filed as an exhibit to this Annual Report on Form 10-K.63 Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE20212022 Proxy Statement and is incorporated herein by reference.Item 11.EXECUTIVE COMPENSATION20212022 Proxy Statement and is incorporated herein by reference.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS20212022 Proxy Statement and is incorporated herein by reference.Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE20212022 Proxy Statement and is incorporated herein by reference.Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES20212022 Proxy Statement and is incorporated herein by reference.64 PART IVItem 15.Exhibits, Financial Statement Schedules.(1)Consolidated Financial Statements(2)Financial Statement Schedules(3)Exhibits65 66 Previously filed.+ Indicates aFiled herewith.plan.Item 16.FORM 10-K SUMMARY67 authorized.authorized.Hydrofarm Holdings Group, Inc. Date: March 30, 20211, 2022By:/s/ William Toler William Toler Chief Executive Officer (Principal Executive Officer) KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William Toler and B. John Lindeman, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and in his or her name, place or stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.SignaturesTitleDateSignatures Title Date /s/ William Toler March 30, 20211, 2022William Toler Officer)Officer)March 30, 20211, 2022B. John Lindeman andOfficer)/s/ Joseph D. Rumley Chief Accounting Officer )March 1, 2022 Joseph D. Rumley /s/ Susan Peters March 30, 20211, 2022Susan Peters Director March 30, 20211, 2022Patrick Chung Director March 30, 20211, 2022Renah Persofsky Director March 30, 20211, 2022Richard D. Moss Director March 30, 20211, 2022Melisa Denis Director 68