UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212023
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File Number: 001-39773
Hydrofarm Holdings Group, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 81-4895761 |
(State or other jurisdiction of
| | (I.R.S. Employer
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1510 Main Street
Shoemakersville, Pennsylvania 1952619555
(707) 765-9990
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common Stock, $0.0001 par value per share | | HYFM | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrantRegistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒☐ No ☐☒
Indicate by check mark if the registrantRegistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrantRegistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrantRegistrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company”company" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐☒ | Smaller reporting company | ☐☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrantRegistrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrantRegistrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the Registrant included in the filling reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the Registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the registrant,Registrant, based on the closing price of a share of common stock on June 30, 2021,2023, as reported by The Nasdaq Global Select Market on such date was $2.4 billion.$34 million. As of February 15, 2022,2024, the registrantRegistrant had 44,712,41345,794,691 shares of common stock, $0.0001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sRegistrant’s Proxy Statement for its 20222024 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’sRegistrant’s fiscal year ended December 31, 2021.2023.
TABLE OF CONTENTS
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| PART II | |
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| PART III | |
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| PART IV | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements concerning our business strategy and plans, future operating results and financial position, as well as our objectives and expectations for our future operations, are forward-looking statements.
In some cases, you can identify forward-looking statements by such terminology as “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect”"believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" and similar expressions that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these words. Forward-looking statements include, but are not limited to, statements about:
•industry conditions, including oversupply and decreasing prices of our customers' products which, in turn, have materially adversely impacted our sales and other results of operations and which may continue to do so in the future;
•the potential for future charges associated with the impairment of our long-lived assets, inventory allowances and purchase commitment losses, and accounts receivable reserves;
•our liquidity;
•our ability to meet the continued listing standards of The Nasdaq Capital Market ("Nasdaq");
•the impact of our restructuring activities on our expenses and cash expenditures;
•potential dilution that may result from equity financings while our stock prices are depressed;
•general economic and financial conditions, specifically in the United States and Canada;
•the conditions impacting our customers, including related crop prices and other factors impacting growers;
•the adverse effects of public health epidemics, including the ongoing COVID-19 outbreak,pandemic, on our business, results of operations and financial condition;
•interruptions in theour supply chain;
•federal and state legislation and regulations pertaining to the use and cultivation of cannabis in the United States and Canada;
•public perceptions and acceptance of cannabis use;
•fluctuations in the price of various crops and other factors affecting growers;
•the results of our recent acquisitions and strategic alliances;
•our long-term non-cancellable leases under which many of our facilities operate, and our ability to renew or terminate our leases;
•our reliance on, and relationships with, a limited base of key suppliers for certain products;
•our ability to keep pace with technological advances;
•our ability to execute our e-commerce business;
•the costs of being a public company;
•our ability to keep pace with technological advances;
•our ability to successfully identify appropriate acquisition targets, successfully acquire identified targets or successfully integrate the business of acquired companies;
•the success of our marketing activities;
•a disruption ofor breach of our information technology systems;systems or cyber-attack;
•our current level of indebtedness;
•our dependence on third parties;
•any change to our reputation or to the reputation of our products;
•the performance of third parties on which we depend;
•the fluctuation in the prices of the products we distribute;
•competitive industry pressures;
•the consolidation of our industry;
•compliance with environmental, health and safety laws;
•our ability to protect and defend against litigation, including claims related to intellectual property and proprietary rights;
•product shortages and relationships with key suppliers;
•the conditions impacting our customers, including related crop prices and other factors impacting growers;
•our ability to attract and retain key employees;
•the volatility of the price of our common stock;
•the marketability of our common stock; and
•other risks and uncertainties, including those listed in “Risk"Risk Factors.”"
We have based these forward-looking statements largely 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 assumptions described in the section titled “Risk Factors”"Risk Factors" and elsewhere in this Annual Report on Form 10-K. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We disclaim any intention or obligation to publicly update or revise any forward-looking statements for any reason or to conform such statements to actual results or revised expectations, except as required by law.
“Hydrofarm”"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.
Unless the context otherwise indicates, references in this Annual Report on Form 10-K to the terms “Hydrofarm”"Hydrofarm", “the"the Company,” “we,” “our”" "we," "our" and “us”"us" refer to Hydrofarm Holdings Group, Inc. and its subsidiaries.
PART I
Item 1. BUSINESS
Introduction
We are a leading independent manufacturer and distributor of controlled environment agriculture (“CEA”, principally hydroponics)("CEA") equipment and supplies, including a broad portfolio of our own innovative and 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 20212023 fiscal year, we hadour net sales of $479.4were $227 million. From 2005 through 2021,2023, we generated a net sales compound annual growth rate (“CAGR”("CAGR") of approximately 19%12%.
Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment. Hydroponics is the primary category of CEA, and we use the terms CEA and hydroponics interchangeably. Our products are 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 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.
We reach commercial farmers and consumers through a broad and diversified network of over 2,000 wholesale customer accounts, who we connect with primarily through our proprietary e-commerce marketplace. A substantial majority of our net salesonline ordering platform. Our products are to specialty hydroponic retailers, through which growers are able to enjoy specialized merchandise assortments and knowledgeable staff. We also distribute our productsdistributed across the United States and Canada toincluding through a diversified range of retailers of commercial and home gardening equipment and supplies thatsupplies. Our customers include specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. Specialty hydroponic retailers commercial greenhouse builders,can provide growers with specialized merchandise assortments and commercial resellers.
Business Developments
During the year ended December 31, 2021, we completed five acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of our portfolio of proprietary branded products and our specialized manufacturing capabilities, including:
•Heavy 16, a manufacturer of plant nutrients and additives, in May 2021;
•House & Garden, a manufacturer of plant nutrients and additives, in June 2021;
•Aurora Innovations, a manufacturer of soil, grow media, plant nutrients and additives, in July 2021;
•Greenstar Plant Products, a manufacturer of plant nutrients and additives, in August 2021; and
•Innovative Growers Equipment, a manufacturer of horticultural benches, racks and grow lights, in November 2021.
We have included additional information about these and other developments in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.knowledgeable staff.
How We Serve Our Customers
Our customer value proposition is centered on two pillars. First, we strive to offer the best selection by being a branded provider of all CEA needs. Second, we seek to be the gold standard in distribution and service, leveraging our infrastructure and reach to provide customers with just-in-time (“JIT”("JIT") delivery capabilities and exceptional service across the United States and Canada.
Complete Range of Innovative CEA Products
We offer thousands of innovative, branded CEA products spanningto provide solutions for our customers. Our product portfolio spans lighting, solutions, growing media (i.e., premium soils and soil alternatives), nutrients, equipment and supplies sold under leading proprietary, exclusive/preferred brands or non-exclusive/distributed brands. supplies.
Some of our most well-known proprietary brands include Phantom, PhotoBio,Active Air, Active Aqua, Active Air,Aurora Peat Products, HEAVY 16, House & Garden, Gaia Green, Grotek, Innovative Growers Equipment, Mad Farmer, Phantom, PHOTOBIO, Procision, Roots Organics, Soul, Procision, Grotek, Gaia Green, and Innovative Growers Equipment.SunBlaster. We estimate that in excess of two-thirdsapproximately three-quarters of our net sales relate to recurring consumable products, including growing media, nutrients and supplies that requireare subject to regular replenishment. The remaining portion of our net 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/exclusive or preferred brand relationships providing for attractiverelationships. These exclusive and preferred brands generally provide higher gross profit margins compared to distributed brands and provide a significant competitive advantage as we offer retailers and resellersour customers a breadth of products that cannot be purchased elsewhere.
We source individual components from our supplier base to assemble certain products. Raw materials used in our nutrient manufacturing operations primarily include nitrogen, potassium, and phosphate. In addition, our durables manufacturing operations primarily use steel, plastic, and aluminum as raw materials. We source these raw materials from suppliers located primarily in the United States, Canada, Europe, and China. One supplier accounted for over 10% of purchases in 2023 and 2022.
The following graphic illustrates a representative set of our market-leading products across key CEA product categories:
Infrastructure and Reach for Fast Delivery, High In-Stock Availability and Exceptional Service
Our infrastructure and reach enableenables us to provide delivery and service capabilities to a highly diverse group of customers acrossprimarily in the United States and Canada. We believe that our six U.S.-based distribution centers can reach approximately 90%a significant majority of theour U.S. populationcustomers within 24 to 48 hours and that our two Canadian distribution centers can provide timely coverage to the full Canadian market.
In the United States, we currently operate distribution centers in Fairfield, California; Fontana, California; Gresham, Oregon; Denver, Colorado; Fairless Hills,Shoemakersville, Pennsylvania; and New Hudson, Michigan. In Canada, we currently haveoperate distribution centers in Langley,Surrey, 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 andSpain. We use a third party in China to assist with our international supply chain management and quality assurance in Shenzhen, China.Asia. We partner with a network of third-party logisticstransportation companies that facilitate expeditious delivery to our customers across the globe.customers. The majority of customer orders are received through our business-to-business e-commerce platform. Through our differentiated Distributor Managed Inventory (“DMI”("DMI") Program, we partner with our network of retailers and resellerscustomers to create customized, JIT supply chain solutions for large commercial end users.
In connection with our recent acquisitions, we have acquired manufacturing facilities in the United States, we currently operate manufacturing facilities in Paramount, California; Arcata, California; Eugene, Oregon; Goshen, New York; and Sycamore, Illinois. In Canada, ourwe currently have manufacturing facilities are in Langley, British Columbia and Edmonton, Alberta.
Since 2005, we have grown our net sales at an approximate 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.
* Approximately 17% organic net sales growth and 2% M&A growth
We
The CEA Industry
Our principal industry opportunity is in the wholesale distribution of CEA equipment and supplies, which generally include nutrients and fertilizers; grow light systems; horticulture benches and racking systems; heating, ventilation, and air conditioning ("HVAC") systems; humidity and carbon dioxide monitors and controllers; water pumps, heaters, chillers, and filters; and various growing media typically made from soil, peat, rock wool or coconut fiber, among others. Today, we believe that a majority of our products are sold for use in CEA applications.
Pictured: PHOTOBIO MX LED, Active Air Commercial Humidifier, SunBlaster LED Grow Light Garden, Active Air Heavy Duty 16" Metal Wall Mount Fan, IGE Grow Racks, House & Garden Bud XL, and Roots Organics Soilless Hydroponic Coco Mix.
CEA is a component of the global commercial agriculture and consumer gardening sectors. According to industry remains poisedpublications, the global CEA industry was estimated at approximately $74 billion in 2022, and is expected to grow. grow to approximately $378 billion by 2032 representing a CAGR of 18%. The growth of CEA crop output may subsequently drive growth in the wholesale CEA equipment and supplies industry in which we operate.
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,grow particularly in the commercial agriculture industry, where CEA can be deployed to achieve results that are simultaneously more efficient for the planet and profitable for growers. The global cannabis industry is a rapidly developing business opportunity for us, particularly as the legal market in the United States continues to expand.
Our Industry Is Large and Growing
The Expanding Controlled Environment Agriculture Market
Our principal industry opportunity is in the wholesale distribution of CEA equipment and supplies, which generally include grow light systems; advanced heating, ventilation, and air conditioning (“HVAC”) systems; humidity and carbon dioxide monitors and controllers; water pumps, heaters, chillers, and filters; nutrient and fertilizer delivery systems; and various growing media typically made from soil, rock wool or coconut fiber, among others. Today, we believe that a majority of our products are sold for use in CEA applications.
Pictured: PHOTOBIO LED Light, Active Aqua Grow Flow 5 gal system, Active Aqua Flexible Air Stone, oxyCLONE Series 20 Site Cloning System, Active Air CO2 System with Timer, Roots Organics Precision Perlite, Roots Organics Soilless Hydroponic Coco Mix.
CEA is an increasingly significant and fast-growing component of the expansive global commercial agriculture and consumer gardening sectors. According to the U.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 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.
According to industry publications, the global CEA industry totaled approximately $75 billion in 2020, and is expected to grow at a CAGR of 19% from 2020 to 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 $9.5 billion in 2020 and is expected to grow at a CAGR of 11% from 2020 to 20262.
1 KD Market Insights Controlled Environment Agriculture Market, February 2021
2 Markets and MarketsTM Hydroponics Market Global Forecast, January 2021
Today, we believe that a majority of the CEA equipment and supplies we sell to our customers is ultimately purchased by participants in the cannabis industry, though we do not sell directly to cannabis growers or to retailers that sell only to the cannabis industry in the United States. The North AmericanAn agricultural
oversupply has impacted our industry, driving cannabis industry is massivewholesale prices down and growing, driven largely by state-level legalization effortsresulting in a decrease in indoor and outdoor cultivation. We believe the United States and federal-level legalization in Canada. Although thereoversupply has been what management believes is a short-term agricultural oversupply that has recently put downward pressure on cannabis growing activity, management believes thatimpacted by the state-level legalization efforts in the United States and increasing popular support (and related positivemarket impacts as further detailed below) will continue to increase the size of the cannabis market in North America for yearsCOVID-19 pandemic. Despite these factors negatively impacting the industry, according to come.
According tocertain industry publications,3, the U.S. cannabis market is projected to reach approximately $47.5$57 billion by 2026,2028, up from approximately $18.0an estimated $30 billion in 2020, representing an 18% CAGR. In Canada, the cannabis market is projected to reach approximately $6.7 billion by 2024, up from approximately $2.6 billion in 2020,2022, representing a 17%11.3% CAGR.
This significantWe believe this forecasted growth in the U.S. cannabis market is expected duemay be attributable to (i) state initiatives for new adult-useadult use and/or medical-usemedical use programs in additional U.S. states, (ii) expanded access for patients or consumers in existing state medical or adult-useadult use cannabis programs, and (iii) increased consumption driven by greater product diversity and choice, reduced stigma, and real and perceived health benefits inincluding pain management, the treatment of neurological and mental conditions, and sleep management. In addition, states with existing adult-use or medical-use programs.
•State initiatives for new adult-use or medical-use programs. We believe support forlegalized adult use cannabis legalization in the United States is gaining momentum.may offer state governments with additional taxation revenue and state job creation. According to a November 20192022 poll by Pew Research Center, public supportapproximately 59% of U.S. adults say that cannabis should be legal 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 United States since early 2020, many state government budgets are increasingly under pressure to identifyrecreational and medical use, while an 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 cannabis30% say it should be legal for medical 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-use
3 BDSA, September 2021
programs. We believe this fact points to the significant opportunity available to us if or when additional U.S. states legalize adult-use programs.
•Expanded access for patients and consumers in existing state medical and adult-use programs. The cannabis business in states with existing cannabis laws is in nascent stages in many cases and will continue to grow, creating jobs and opportunities for workers and entrepreneurs. Cultivators, manufacturers, dispensaries, delivery providers, labs and other cannabis-related businesses will continue to grow in these regions. As these businesses proliferate, consumers will benefit from easier access to cannabis products.
•Greater product diversity and choice, reduced stigma and real and perceived health benefits in states with existing adult-use or medical-use programs. Several key developments have contributed to an increase in cannabisonly. Cannabis product availability and breadth including the proliferation ofincludes cannabidiol (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).
AccelerationBenefits of CEA Adoption
Both the commercial agriculture and cannabis industries are increasingly adopting more advanced agricultural technologies in order to enhance the productivity and efficiency of operations. The benefits of CEA include:
•Greater product safety, quality and consistency;
•More reliable, climate-agnostic year-round crop supply from multiple, faster harvests per year as opposed to a single, large harvest with outdoor cultivation;
•Lower risk of crop loss from pests (and subsequently lower need for pesticides) and plant disease;
•Lower required water and pesticide use compared to conventional farming, offering incremental benefits in the form of reduced chemical runoff and lower labor requirements; and
•Potentially lower operating expenses from resource-saving technologies such as high-efficiency LED lights, precision nutrient and water systems and automation.
CEA implementation continues to increase globally,is driven by the factors listed above as well as growth in fruit and vegetable farming, consumer gardening and the continued adoption of vertical farming. Vertical farming, a subsector of CEA, has gained popularity mainly due to its unique advantage of maximizing yield by growing crops in layers. 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.
While a small portion of cannabis cultivation may be grown in non-CEA settings, given the multitude of benefits of CEA cultivation, we believe CEA will continue to be the primary method of growing cannabis, driving demand for our products. The movement towards the legalization of cannabis inIn the 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 regulationsproducts enhance product safety and transparency to consumers, butand usually necessitate the use of CEA in cannabis cultivation in order to meet mandated tetrahydrocannabinol (THC) content or impurity tolerances.
We believe certain of our CEA end-markets support environmental, social and governance ("ESG") trends as they may preserve resources, enhance the transparency and safety of our food supply chains, and deliver superior performance characteristics versus traditional agriculture.
Our Strategies and Competitive Strengths
Leading Market Position in our Industry
We are a leading independent manufacturer and distributor of CEA equipment and supplies in the United States and Canada. Over the course of our long operating history, we have developed product and market expertise that we believe has made us a leader in our industry.
Broad Portfolio with Innovative Proprietary Offerings and Recurring Consumables Sales
We have a large equipment and consumable product offering, including lighting solutions, growing media, nutrients, equipment and supplies. We offer everything growers need to ensure their operations are maximizing efficiency, output and quality. We maintain an extensive portfolio of products which includes approximately 35 internally developed or acquired proprietary brands across thousands of stock keeping units ("SKUs") as well as over 45 preferred brands. Approximately 75% of our sales relates to proprietary and preferred brands, which generally provide for higher gross profit margins compared to distributed brands and a competitive advantage as we offer products that cannot be purchased elsewhere. We believe that approximately three-quarters of our net sales are generated from consumable products subject to recurring revenue that includes growing media, nutrients and supplies.
Increased Consumer Home GrowingWe sell proprietary and preferred brands across all of our product categories. In 2021, we completed five acquisitions of branded manufacturers of soil, grow media, plant nutrients, and horticultural benches, racks and grow lights: (i) Heavy 16, (ii) House & Garden, (iii) Aurora Innovations, (iv) Greenstar Plant Products, and (v) Innovative Growers Equipment. We selectively add distributed products when the brand or technology provides us with a more comprehensive assortment to satisfy our customers' needs. In the fourth quarter of 2022, in connection with our restructuring plans, we strategically identified products and brands to exit from our portfolio, enabling us to better focus on higher value proprietary products and solutions for our customers.
Manufacturing Capabilities
We perceive consumer gardeningcurrently operate six manufacturing facilities in North America which include organic certified and synthetic liquid and dry nutrient blending and bottling, organic certified soil blending and bagging, perlite production, injection molding capabilities, custom and off the shelf horticulture benches and racking system fabrication, automated LED light manufacturing (LED surface mounting and light fixture assembly), and peat harvesting and baling. Our peat harvesting operation provides useful products for improving grow media and organic farming.
Supplier Relationships and Geographic Footprint
We have developed distribution relationships with a network of several hundred suppliers, giving us access to be a significant driverbest-in-class diverse product portfolio and allowing us to provide a full range of future CEA growth. Accordingsolutions to the National Gardening Survey, in 2017, 77%our customers. We have cultivated long-term relationships with several of U.S. households participated in lawn and garden activities, spending on average a record of $503 per household. We expect this growth in consumer gardening and growing spending to continue, driven by both increased participation by millennials and strong continued participation by married households, adults over age 55, and adults without children. We believe that these demographic dynamics will result in an increase in the number of consumer gardening category participants, resulting in the purchase of more CEA products.
Increased Focus on Environmental, Social, and Governance (“ESG”) Issues
We are committedmaintain a broad geographic footprint of eight distribution centers to ESG responsibilities as we expand our distribution and manufacturing capabilities. We believe the growth and change in our end-markets is in part driven by a variety of ESG trends aimed at preserving resources and enhancing the transparency and safety of our food supply chains. On January 11, 2022, we released our first ESG report to stakeholders, highlighting our continued environmental, health and safety focus and sustainable governance practices. Overall, we believe the CEA market delivers superior performance characteristics versus traditional agriculture .
COVID-19
The coronavirus (“COVID-19”) pandemic has caused significant shifts in consumer sentiment and behavior thereby altering the dynamics of the CEA industry. Vaccines 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 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 been and remains unpredictable. Management believes that COVID-19 has driven a greater volume of sales byefficiently serve our customers in select time periods, thus creating demand forNorth America. We also operate a distribution center in Zaragoza, Spain, and we are focusing on expanding our CEA supplies and equipment. We believe that these changes, as outlined below, will benefit our industry in the long term:
•New entrants into the consumer gardening and growing market. We believe that a meaningful portion of consumer gardening and growing product spending during the COVID-19 outbreak has 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 home more.international sales.
•Increased focusSolution Based Approach to Serve Our Customers
We currently maintain long-standing relationships with a diversified range of specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. We serve over 2,000 wholesale customer accounts across multiple channels in North America, providing customers with the capability to purchase their entire product range from us. To better serve our customers, we reorganized our commercial sales team to drive a solution based approach, focusing on food securityadded competencies and sustainable sourcing. The COVID-19 pandemic has intensified consumer focus on food securityproduct assortment gained from our 2021 acquisitions. Our DMI programs offer consultation, technical expertise, facilitated order fulfillment and transparencyJIT delivery of food production around the world. products. We leverage a seasoned sales team and our internal product category experts to provide industry insights, product capabilities and customer support.
Expanding our Offerings within CEA Food and Floral Markets and Garden Centers
CEA offers a more sustainable and secure alternative to traditional outdoor agriculture, allowing food to be grown closer to where it is ultimately consumed, thereby reducing supply chain-related risks and food waste.
•Pressure on governments to identify additional revenue streams, such as tax revenue from state legalized cannabis industries. The COVID-19 pandemic has put a significant strain on government budgets, increasing pressure to find revenue from previously unexplored streams including state legalized medical or adult-use cannabis.
•Home-centric lifestyle increasing 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.
•Essential service designation. During lockdowns related to the COVID-19 pandemic, our manufacturing and distribution operations and a great majority of our key suppliers, retailers and resellers were designated as essential and have remained open. This sets a key precedent about the vital importance of our operations and end-markets. Although certain of our key suppliers experienced significant challenges in 2020 and 2021, Additionally, we believe this precedent will benefitconsumer gardening can be an important driver of future CEA growth, as many U.S. households participate in lawn and gardening activities today. To that end, we have reorganized our sales efforts to focus on the CEA industry infood and floral market, and the long-term.consumer gardening markets, where we are well suited to expand our business.
Productivity and Cost Saving Initiatives
While maintaining our dedication to customer service and on-time delivery, we are focused on reducing costs and improving productivity within the organization. Our Competitive Strengths
We attributeinitiatives have included reducing headcount, implementing operational changes, consolidating our success to the following competitive strengths.
Leading Market Positions in Attractive Growing Markets
facility footprint, and focusing our sales efforts on our proprietary brand offerings. We are a leading independent manufacturer and distributor of CEA equipment and supplies in the 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 methodsexecuting on our previously announced restructuring plans 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,improve efficiency 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 carbon 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 United States, an increase in U.S. states’ implementation of adult-use and medical cannabis programs and increasing popular support will drive future growth.costs.
Experienced Management Team with Proven Track Record
Our managementWe have an experienced leadership team that possesses significant public market experience, a history of driving long-term organic growth and a track record of successful business consolidations. Bill Toler, Chairman and Chief Executive Officer, has over 35 years of executive leadership experience in supply chain and consumer packaged goods, most recently serving as President and Chief Executive Officer of Hostess Brands from April 2014 to March 2018. Under his leadership, Hostess Brands transitioned from a private to public company, regained a leading market position within the sweet baked goods category and returned to profitability. Bill also previously served as Chief Executive Officer of AdvancePierre 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, Executive Vice President and 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., 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.
Broad Portfolio with Innovative Proprietary Offerings and Recurring Consumables Sales
We have one of the largest equipment and consumable product offerings in the industry. From lighting solutions to nutrients to grow mediums, we offer nearly everything growers need to ensure their operations are maximizing efficiency, output and quality. We maintain an extensive portfolio of products which includes over 40 internally developed or acquired proprietary brands across thousands of stock keeping units ("SKUs") as well as over 35 exclusive/preferred 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.
Specialized Manufacturing Capabilities
Following our 2021 acquisitions of five branded manufacturers, we now have specialized manufacturing capabilities as a core competitive strength.Our manufacturing capabilities across seven locations in 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.
Proprietary Sourcing and Supplier Relationships Create Barriers to Entry
Our scale presents a significant barrier to entry as we have developed exclusive distribution relationships, proprietary brands and a geographic footprint that enables us to efficiently service customers across North America. We maintain approximately one million square feet of distribution space across six distribution centers in the 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 supplier accounted for more than 10% of purchases in 2020.
Unique Ability to Serve Our Strong Customer Base
We maintain long-standing relationships with a diversified range of leading hydroponic retailers, retailers of commercial and home gardening equipment and supplies that include garden centers, hardware stores, e-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 United States and our two distribution centers in Canada. We believe that our distribution footprint in the United States can reach approximately 90% of the population in 24 to 48 hours and our two distribution centers in British Columbia and Ontario can provide timely coverage to the full Canadian market. We maintain coverage of industry trends and consumer preferences via a robust, seasoned sales organization 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.
Proven Mergers and Acquisitions (“M&A”) Track Record
Our management team has extensive experience with execution and integration of M&A opportunities. In November 2017, we acquired Eddi’s Wholesale Garden Supplies, Ltd. (“Eddi’s”) and the distribution division of Greenstar Plant Products, Inc. Since our initial public offering (“IPO”) in December 2020, we have consummated five acquisitions, including HEAVY 16, House & Garden, Aurora, Greenstar, and Innovative Growers Equipment (as described and each defined below). Our understanding of commercial growers’ needs coupled with our experienced M&A team has enabled us to build a robust pipeline of potential acquisition targets and to 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.
Our Growth and Productivity Strategies
We are well positioned to capitalize on the growth of our underlying markets through the following strategies.
Capitalizing on Rapidly Growing Markets
Our customers benefit from macroeconomic factors driving the growth of CEA, including expanded adoption of CEA and vertical farming by commercial growers and consumers, as well as the growth in cannabis, hemp and other end-markets. As the world population grows and urbanizes, vertical farming is increasingly being used to meet the demand for food crops. Industry publications estimate that the global vertical farming market will expand at a 24% CAGR from 2019 to 2023. In addition, the U.S. and Canadian cannabis markets had an estimated value of approximately $14 billion in 2019, and are projected to grow to $37 billion by 2024. The hemp market has benefited from consumer adoption of hemp-derived CBD products. 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 expect to capitalize on favorable cannabis and hemp growth trends by continuing to expand our operations globally.
Expanding our Proprietary Product Offering
We are expanding the breadth of our product assortment through continued development of our own proprietary 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 last two years, including PhotoBio LED lighting equipment and Phantom Core HID lighting equipment. Through recent acquisitions, we have expanded our proprietary brands to include HEAVY 16, House & Garden, Mad Farmer, Roots Organics, Soul, Procision, Grotek, Gaia Green, and Innovative Growers Equipment.
Adding Strategic Distribution Relationships and Exclusive/Preferred Brands
We can increase revenue with significant cross-selling activity to our current installed customer base by offering a more comprehensive assortment of products required by commercial growers to engage in cultivation. We have identified, and in some cases acquired, key suppliers with product solutions that are well established in the grower community for exclusive/preferred brand relationships that 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.
Enabling Wholesaler Network to Effectively Serve Commercial Growers
Working with our wholesale network, we are leveraging our sophisticated technical sales team to provide our wholesale network the ability to address the needs, demanding requirements and higher volume of their larger-scale commercial customers. Establishing these relationships with our channel provides us with insight and access to growers’ evolving demands, leading to both increased equipment sales and recurring sales of consumables through our wholesale network. Our commercial grower outreach program, our analytically driven supply chain function and DMI capabilities enable our wholesaler network to anticipate customer demand for products and ensure their availability. The goal of these efforts is to maintain long-term relationships with our wholesalers by helping them be successful in providing cultivation square footage savings and access to JIT inventory to their customer base. We believe this can result in profitability for our wholesalers’ customers on consumables and equipment. We also believe that increasing the value to our wholesale network will allow us to grow within key accounts and expand sales of our products and services to new accounts.
Productivity Initiatives to Mitigate Costs and Enhance Margins
We have developed and begun to implement specific productivity initiatives across our business as an additional means of funding growth. We have 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.
Acquiring Value-Enhancing Businesses
The hydroponics industry is highly fragmented, which we believe presents a significant opportunity for growth through M&A. Management is continually evaluating M&A targets and we believe, in this fragmented market, there will be continued opportunities for M&A. M&A provides us an opportunity to significantly increase distribution with independent brands and to add new products based on identified needs of commercial growers. We utilize clear investment criteria to make disciplined M&A decisions with the goal of accelerating sales and EBITDA growth, increasing competitive strength and market share and expanding our proprietary brand portfolio.
We regularly pursue opportunities to grow our business through acquisitions of strategically complementary businesses and typically have a pipeline of numerous acquisition opportunities at differing stages of evaluation. We aim primarily to acquire companies that have a competitive market position with the potential to increase market share, a strong brand, high recurring revenue and strong margin potential. In the ordinary course of our business, we seek acquisition targets that can accelerate our growth and generate significant cash flows over time. As more fully described in “Recent Acquisitions”, we consummated five acquisitions in fiscal 2021.
In light of current market conditions and our efforts to fully integrate the acquisitions made in 2021, we anticipate that our acquisition activities will proceed at a slower pace, particularly during the first half of 2022. Nonetheless, we expect to continue to evaluate opportunities and maintain a pipeline of potential 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
include, in each case, a quality of earnings report from a third party provider and, in each case, audited financial statements, which we are requiring even though we do not expect the acquisitions to be “significant” and to require us to include such audits in our public filings under the SEC’s Regulation S-X. Even if our due diligence efforts lead us to desire to consummate acquisitions, there is no assurance that we will consummate the acquisition of any of the targets in our pipeline. In addition to the continuing diligence efforts outlined above, we will still need to enter into definitive agreements with the targets in a dynamic market which may impact corresponding valuation metrics and multiples and, even if an agreement is entered into, both parties would need to satisfy any applicable closing conditions. There are a number of other factors that could impact our ability to successfully complete these acquisitions, including competition for targets, sometimes from competitors with greater available resources for acquisitions.
It should be noted that acquisitions involve a number of risks and may not achieve our expectations; and, therefore, we could be adversely affected by any such acquisition. There are a number of risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities, and potential profitability of acquisition candidates, as well as the challenges of integrating acquired companies and achieving potential synergies once an acquisition is consummated, that may cause an acquisition to fail.
Recent Acquisitions
Innovative Growers Equipment, Inc. Acquisition
On November 1, 2021, we completed the acquisition of 100% of the issued and outstanding shares of Innovative Growers Equipment, Inc., an Illinois corporation (“IGE”), Innovative AG Installation, Inc., an Illinois corporation (“IAG”), Innovative Racking Systems, Inc., an Illinois corporation (“IRS”), and Innovative Shipping Solutions, Inc., an Illinois corporation (“ISS” and, together with IGE, IAG, IRS, and their respective subsidiaries, the “IGE Entities”), a manufacturer of horticulture benches, racking and LED lighting systems which complement our existing lineup of high performance, proprietary branded products. 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.
Greenstar/Grotek Acquisition
On August 3, 2021, we completed the acquisition of 100% of the issued and outstanding shares of Greenstar Plant Products Inc., a Canadian company (“Greenstar”).Greenstar produces premium horticultural products and solutions for global, domestic and commercial use since 1998. Greenstar’s owned brands include Grotek, Gaia Green, Supergreen and EarthSafe has been producing since 1998 and is sold internationally. Greenstar's brands are utilized by home gardeners and commercial operators including growers, landscapers, greenhouses, nurseries, and organic farms.
Greenstar manufactures plant products for both the retail and commercial markets and its vision is to cultivate mutually beneficial long-term relationships built on trust, quality horticultural products, and world-class service. See Note 3 - Business Combinations under Greenstar/Grotek Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Aurora Acquisition
On July 1, 2021, we completed the acquisition of 100% of the issued and outstanding membership interests of Gotham Properties LLC, an Oregon limited liability company (“Gotham Properties”), Aurora Innovations LLC., an Oregon limited liability company (“Aurora Innovations”), Aurora International LLC, an Oregon limited liability company (“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”). See Note 3, Business Combinations under Aurora Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Founded in 2020, Aurora was a family-owned business with a strong vertically integrated manufacturing base with three locations across North America. The company is dedicated to ethical and sustainable practices and offers comprehensive plant fertility product lines free from harmful chemical residues and pesticides. Aurora adds to our growing proprietary brand nutrient and grow media line-ups, including its first organic nutrient and premium soil brands. We also gained new domestic manufacturing and distribution capabilities on the east and west coasts along with a peat moss harvesting operation in Canada.
H&G Acquisition
On June 1, 2021, we completed the acquisition of 100% of the issued and outstanding shares of capital stock of House & Garden, Inc., a Nevada corporation (“HG”), Humboldt Wholesale, Inc., a California corporation (“HW”), Allied Imports &
Logistics, Inc., a California corporation (“Allied”), South Coast Horticultural Supply, Inc., a California corporation (“SC” and, together with HG, HW and Allied, the “H&G Entities”). The H&G Entities operate a manufacturing facility in Northern California. ESee Note 3 - Business Combinations under House & Garden Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The H&G Entities produce and distribute premium grade plant nutrients and fertilizers across the globe. We believe the strategic combination of our leading distribution capabilities with the H&G Entities’ local and global network and nutrient manufacturing capabilities will enable their brand to grow more rapidly across the combined company’s customer base. Moreover, we believe that the acquisition of the H&G Entities further developed our strategy of acquiring branded manufacturers in key CEA product categories, such as plant nutrients.
HEAVY 16 Acquisition
On May 3, 2021, we completed the acquisition of 100% of the issued and outstanding membership interests of Field 16, LLC, a Delaware limited liability company (‘‘HEAVY 16’’). See Note 3 - Business Combinations under Heavy 16 Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K
HEAVY 16 is a leading manufacturer and supplier of branded plant nutritional products, with nine core products that are currently sold across the United States. The HEAVY 16 products feature a full line of premium nutrients with the nine core products used in all stages of plant growth, helping to increase the yield and quality of crops. HEAVY 16 operates a manufacturing facility in Southern California.
Effectsffects of COVID-19 on Our Business
The World Health Organization recognized COVID-19 as a public health emergency of international concern on January 30, 2020 and as a global pandemic on March 11, 2020. Vaccines for2020, and it is now widely expected to become endemic. COVID-19 continue to be administered in the United Stateshas had significant and other countries around the world, but the extentongoing negative impacts on global societies, workplaces, economies and rate of vaccine adoption, the long-term efficacy of these vaccines and other factors remain uncertain. Authoritieshealth systems. At various times, 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 takenprograms, each of which have significantly impacted the ability of many companies to contain COVID-19 have adversely affected the global economy and financial markets.conduct business.
In response to the COVID-19 pandemic, we implemented business continuity plans designed to address the impact of the COVID-19 pandemic on our business, such as restrictions on non-essential business travel, the institution of work-from-home practices and the implementation of strategies for workplace safety at our facilities. We have historically and may continue to source select products from 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 datefiling of this Annual Report on Form 10-K, manufacturers in China and in North Americaour operations are generally back in operation; however,not impacted by any COVID-19 related facility closures, lockdown measures, travel restrictions or similar limitations. However, new waves of COVID-19 or its variants could cause the COVID-19 pandemic could result in the re-closurereinstatement of factories in China and/or in North America. Quarantine orderssuch limitations, and travel restrictions within the United States and other countriessuch limitations may also adversely impact our supply chains, the manufacturing of our own products and our ability to obtain necessary materials.materials, all of which could adversely affect our business, results of operations and financial condition. We are experiencingbelieve that COVID-19 may at times have contributed to some extended lead times in our supply chain, as well as increased shipping costs, and believe the COVID-19 pandemicthere is a contributing factor to those extended lead times and increased costs. Although we haveno guarantee that it will not to date, experienced any material interruptions inimpact our ability to fill our customers' orders or manufacture our own products, we mayoperations in the future be unable to obtain adequate inventory to fill purchasefuture.
We believe COVID-19 may have provided a positive demand impact for the Company in 2020 and 2021 from shelter-in-place orders or manufacture our own products, which could adversely affect our business, results of operationsin the United States, a possible negative supply chain impact from workforce disruption at international and financial condition. Furthermore, potentialdomestic suppliers, or sources of materials may pass the increaseand a possible negative growth rate impact in sourcing costs2022 and 2023 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021. Management believes that COVID-19 pandemic to us through price increases, thereby impactingdrove a greater volume of sales by our potential future profit margins. customers in select time periods, thus creating demand for our CEA supplies and equipment. 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.
Our customers reside in countries, primarily the United States and Canada, that are currently affected by the COVID-19 pandemic. Many of these customers have experienced shelter-in-place measures in attempts to contain the spread of COVID-19, including general lockdowns, closure of schools and non-essential businesses, bans on gatherings and travel restrictions.
Our business has remained resilient during the COVID-19 pandemic. As of December 31, 2021, our manufacturing and distribution operations are viewed as essential services and continue 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. state and Canadian government authorities.
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. Depending on the length and severity of COVID-19, we may experience an increase or decrease in customer orders driven by volatility in consumer shopping and consumption behavior. It is difficult to assess or quantify with precision the impact COVID-19 has directly had on our business since we cannot precisely quantify the impacts, if any, that the various effects (e.g. possible positive demand impact from shelter-in-place orders in the 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.
Government Regulation
WhileFor U.S. based operations, there is no national governmental regulation relating toregulatory body providing oversight of the saleHydrofarm portfolio of hydroponics equipment, certainproducts. A substantial number of our products included in our growing media and nutrients product linelines are subject to certain registration requirements with some U.S. state regulatorsspecific registration requirements. Organic listed products are audited by the California Department of Food and Agriculture and/or the Organic Materials Review Institute. Finished goods and ingredients labeled as pesticides are regulated by federal and state offices of the Environmental Protection Agency (the "EPA"). Canadian based operations and product lines are regulated under the Canadian Food Inspection Agency. Organic certified products are attested by EcoCert. Our peat harvesting operations are regulated by provincial and municipal bodies, including Alberta Environment and Parks regulations.
Grow Media and Nutrients
Our leading product lines are growingGrow media and nutrients products. These product linesproducts include organic listed soils, soils without organic listings, and both organic listed and synthetic nutrients that contain ingredients that require the companies that provide us with these products to register the productrequiring supplier registration with certain regulators. The use and disposal of these products in some jurisdictions are subject to regulation by various agencies. A decision by a regulatory agency to significantly restrict the use of impact on those companies providing us with such regulatedthese products and as a result,can limit our ability to sell these products.
International, federal, state, provincial and local laws and regulations relating to environmental, health and safety matters affect us in several ways in light of the ingredients that are used in products included in our growinggrow media and nutrients product line.nutrient products. In the United States, products containing pesticides generally must be registered with the Environmental Protection Agency (the “EPA”)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,Company, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected.affected, and whether pesticide claims or sales may be made by distributors of any Hydrofarm products which are not actively registered as such. The pesticides we use are either granted a license by the EPA and similar state agencies 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 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.
In addition, the use of certain pesticide products areis regulated by various international, federal, state, provincial and local environmental and public health agencies. Although we strive to comply with such laws and regulations and have processes in place designed to achieve compliance, we may be unable to prevent violations of these or other laws and regulations from occurring. Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which we apply or use them, could be effected by changing regulations or changing interpretations of the regulations, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances.
Cannabis Industry
We sell our products through third-party retailers and resellers which doand not exclusively selldirectly to cannabis growers in countries that prohibit the sale and use of cannabis, industry.including the United States. Nonetheless, it is evident to us that the legalization of cannabis in many U.S. states and Canada has ultimately had a significant, positive impact on our industry. Accordingly, laws and regulations governing the cultivation and sale of cannabis and related
products have an indirect effect on our business. Legislation and regulations pertaining to the use and growth of cannabis are enacted on both the state and federal government level within the United States. The federal and state laws and regulations governing the growth and use of cannabis may beare 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.
IndividualIn the United States, individual state laws regarding the cultivation, possession, and use of cannabis for adult and medical uses conflict with federal laws prohibiting the cultivation, possession and use of cannabis for any purpose. A number of states have passed legislation legalizing or decriminalizing cannabis for 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.
Certain of our products may be purchased for use in new and emerging industries and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, future scientific research and public perception.
We sell products, including hydroponic gardening products, through third-party retailers and resellers. End users may purchase these products for use in new and emerging industries, including the growing of cannabis, that may not grow or achieve market acceptance in a manner that we can predict. The demand for these products is dependent on the growth of these industries, which is uncertain, as well as the laws governing the growth, possession, and use of cannabis by adults for both adult and medical-use.
Laws and regulations affecting the U.S. cannabis industry are continually changing, which could detrimentally affect our growth, revenues, results of operations and success generally. Local, state and federal cannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require the end users of certain of our products or us to incur substantial costs associated with compliance or to alter our respective business plans. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operation and financial condition.
The public’s perception of cannabis may significantly impact the cannabis industry’s success. Both the medical and adult 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 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.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 adult cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult-useadult 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"Cannabis Industry Participants”Participants").
Demand for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop. We cannot predict the nature of such developments or the effect, if any, that such developments could have on our business.
We are subject to a number of risks, directly and indirectly through our Cannabis Industry Participants, because cannabis is illegal under United States federal law. Federal law and enforcement may adversely affect the implementation of medical cannabis and/or adult-useadult use cannabis laws, and may negatively impact our revenues and profits.
Under the United StatesU.S. Controlled Substances Act of 1970 (the “CSA”"CSA"), the U.S. government currently 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 StatesU.S. Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Cooperative, and Gonzales v. Raich, 532 U.S. 483 (2001), and Gonzales v.
Raich, 545 U.S. 1 (2005) 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 or decriminalize its use. Therefore, strict enforcement of federal law regarding cannabis would likely adversely affect our revenues and results of operations.
Other laws that directly impact the cannabis growers that are end users of certain of our products include:
•Businesses trafficking in cannabis may not take tax deductions for costs beyond costs of goods sold under Internal Revenue Code Section 280E. There is no way to predict how the federal government may treat cannabis businesses from a taxation standpoint in the future, and no assurance can be given to what extent Internal Revenue Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future.
•Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks. Our inability to register, or maintain, our trademarks or file for or enforce patents on any of our inventions could materially affect our ability to protect our name, brand and proprietary technologies. In addition, cannabis businesses may face court action by third parties under the Racketeer Influenced and Corrupt Organizations Act (“RICO”("RICO"). Our intellectual property and proprietary rights could be impaired as a result of our retailers’ and resellers’ involvement with cannabis business, and we could be named as a defendant in an action asserting a RICO violation.
•Similar to the risks relating to intellectual property and proprietary rights, there is an argument that the federal bankruptcy courts cannot provide relief for parties who engage in cannabis. Recent bankruptcy rulings have denied bankruptcies for cannabis dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the CSA. Therefore, due to our retailers’ and resellers’ involvement with cannabis businesses, we may not be able to seek the protection of the bankruptcy courts and this could materially affect our financial performance and/or our ability to obtain or maintain credit.
•Since cannabis is illegal under federal law, there is a strong argument that banks cannot accept for deposit funds from businesses involved in the cannabis industry. Consequently, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. Any such inability to open or maintain bank accounts may make it difficult for us to operate our business. Under the Bank Secrecy Act (“BSA”("BSA"), banks must report to the federal government any suspected illegal activity, which includes any transaction associated with a cannabis business. These reports must be filed even though the business is operating legitimately under state law. In addition, due to our retailers’ and resellers’ involvement with cannabis businesses, our existing bank accounts could be closed.
•Insurance that is otherwise readily available, such as general liability and directors and officer’s insurance, may be more difficult for us to find, and more expensive, to the extent we are deemed to operate in the cannabis industry.
The formerAny presidential administration, current or any new administration or attorney general,future, could change federal enforcement policy or execution and decide to enforce the federal cannabis laws more strongly. Recent administrations have disagreed on how strongly to enforce federal cannabis laws. Certain laws and regulations affecting the U.S. cannabis industry include the following:
•On August 29, 2013, the U.S. Department of Justice (the "DOJ") under the Obama administration issued a memorandum (the "Cole Memorandum"), characterizing strict enforcement as an inefficient use of federal investigative and prosecutorial resources. The Cole Memorandum provided guidance to all federal prosecutors and indicated that federal enforcement of the CSA against cannabis-related conduct should be focused on specific priorities, including cannabis distribution to minors, violence in connection with cannabis
distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels.
•On January 4, 2018, former U.S. Attorney General Jeff Sessionsthe DOJ under the Trump administration issued a memorandum rescinding previous guidance (directing U.S.(the "Sessions Memorandum"), which effectively rescinded the Cole Memorandum and directed federal prosecutors to enforce the CSA and to follow well-established principles when pursuing prosecutions related to cannabis activities. The DOJ under the Biden administration has not readopted the Cole Memorandum, but President Biden has indicated support for decriminalization of cannabis.
•On October 6, 2022, President Biden issued an executive order pardoning all persons convicted of simple possession of cannabis under the CSA. In the same executive order, President Biden also directed the Secretary of Health and Human Services and the Attorney General to initiate an administrative process to review the scheduling of cannabis under the CSA, and on August 29, 2023, the Department of JusticeHealth and Human Services officially recommended that the U.S. Attorneys’ officesDEA reschedule cannabis from Schedule I to focus their cannabis enforcement efforts under federalSchedule III, although the DEA is not obligated to follow this recommendation.
•On December 2, 2022, President Biden signed into law only in identified priority areas, such as sale to minors, criminal enterprises,the Medical Marijuana and interstate sales). UnderCannabidiol Research Expansion Act, which streamlines and expands the Sessions memorandum, local U.S. Attorneys’ offices retain discretion regardingprocess for researching the prosecutionmedical use of cannabis activity authorized under state laws and regulations. While former U.S. Attorney General William Barr expressed support for the National Organization to Reform Marijuana Laws (NORML) during his Senate testimony on April 10, 2019, further changecannabis.
Currently in the federal approach towards enforcement could negatively affectUnited States, 38 states have adopted frameworks that authorize and regulate cannabis cultivation and sale for medical use, while 24 states legalized cannabis for medical and recreational use. It is estimated that over half of the industry, potentially ending it entirely.United States population resides in a state where cannabis is currently legal for medical and recreational use.
We cannot predict how the current administration or future administrations will enforce the CSA or other laws against cannabis activities. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. The legal uncertainty and possible future changes in law could negatively affect our growth, revenues, results of operations and success generally.
Unless and until cannabis is de-scheduled entirely or rescheduled or Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA. Federal authorities may decide to change their current posture and begin to enforce current federal cannabis law and, if they decide to ignore the principles in the Cole Memorandum (as defined below) and begin to aggressively enforce such laws, it is possible that they could allege that we violated federal laws by selling products used in the cannabis industry. As a result, active enforcement of the current federal regulatory position on cannabis may thus directly or indirectly adversely affect our revenues and profits.
Violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the U.S. federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on our business, including our reputation and ability to conduct business, the listing of our securities on any stock exchanges, the settlement of trades of our securities, our ability to obtain banking services, our financial position, operating results, profitability or liquidity or the market price of our publicly tradedpublicly-traded shares. In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
Businesses involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.
We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry. Investments in the U.S. cannabis industry are subject to a variety of laws and regulations that involve money laundering, financial recordkeeping and proceeds of crime, including the BSA, as amended by the 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 United States. In February 2014, the Financial Crimes Enforcement Network (“FinCEN”("FinCEN") of the Treasury Department issued a memorandum (the “FinCEN Memo”"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. The FinCEN Memo currently remains in place, but it is unclear at this time whether the current administrationor future administrations will continue to follow the guidelines of the FinCEN Memo. Such requirementsAny abrogation or modification of the FinCEN Memo could negatively affect the ability of certain of the end users of our products to establish and maintain banking relationships.
Cannabis Industry Participants are subject to federal and state controlled substance laws and regulations. As a result, we are indirectly subject to a number of risks related to controlled substances.
We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry. Some of our products are sold toused by Cannabis Industry Participants and used in connection with cannabis businesses that are subject to federal and state controlled substance laws and regulations. Cannabis businesses are subject to a number of risks related to controlled substances, which risks could reduce demand for our products by Cannabis Industry Participants. Such risks include, but are not limited to, the following:
•Cannabis is currently a Schedule I drug under the CSA and regulated by the Drug Enforcement Administration (the “DEA”"DEA") as an illegal substance. The Food and Drug Administration (“FDA”("FDA"), in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis. If cannabis were to become legal under federal law, its sale and use could become regulated by the FDA or another federal agency.
•If cannabis were to become regulated by the FDA or another federal agency, extensive regulations may be imposed on the sale or use of cannabis. Such regulations could result in a decrease in cannabis sales and have a material adverse impact on the demand for our products. If we or our Cannabis Industry Participants are unable to comply with any applicable regulations and/or registration prescribed by the FDA, we may be unable to continue to conduct business with retailers and resellers that transact with cannabis businesses and/or our financial condition may be adversely impacted.
•Controlled substance legislation differs between states, and legislation in certain states may restrict or limit our ability to sell products to Cannabis Industry Participants. Our Cannabis Industry Participants may be required to obtain separate state registrations, permits or licenses in order to be able to obtain, handle and/or distribute controlled substances in a state. Such state regulatory requirements may be costly and, the failure of such Cannabis Industry Participants to meet such regulatory requirements could lead to enforcement and sanctions by the states in addition to any from the DEA or otherwise arising under federal law. We could be implicated in such enforcement or sanctions because of the sale of our products to such Cannabis Industry Participants.
•The failure of our Cannabis Industry Participants to comply with applicable controlled substance laws and regulations, or the cost of compliance with these laws and regulations, may adversely affect the demand for our products and, as a result, the financial results of our business operations and our financial condition.
Furthermore, the LoanOn March 29, 2021, we and Security Agreement by and among certain of our subsidiaries (the “Subsidiary Obligors”"Subsidiary Obligors") andentered into a senior secured revolving loan facility with JPMorgan Chase Bank, N.A. ("JPMorgan"), dated March 29,as administrative agent for the lenders, which was subsequently amended and currently provides for a maximum commitment amount of $55 million and terminates on June 30, 2026 (as amended, the "Revolving Credit 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, which was subsequently amended (the “JPMorgan"Term Loan"). The Revolving Credit Facility”Facility and the Term Loan (collectively, the "Credit Facilities") restricts our ability to selleach contain customary covenants, restrictions and defaults. The Credit Facilities prohibit us and the Subsidiary Obligors from selling our products, inventory or services directly to cannabis growers or to retailersoperating in any country that sell only toprohibits the sale and use of cannabis industryproducts other than in countries where it is federally illegal.accordance with the applicable laws of such country. As a result, the Subsidiary Obligors doCompany does not sell our products, inventory or services directly to the cannabis industry, cannabis growers or cultivators, or to sellers or retailersoperating in any country that sell only toprohibits the sale and use of cannabis industry.products
other than in accordance with the applicable laws of such country. See “—"Risk Factors— Risks Relating to our Indebtedness”Indebtedness" for further detail.
Intellectual Property
We own 15 issued U.S. design patents, 2 issued U.S. utility patents, 34 issued foreign patents and designs, 112106 registered U.S. trademarks, and 22121 registered foreign trademarks that enable us to position ourselves and our products to a wide range of customers.trademarks. Our 2021 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.products. Our owned U.S. and foreign issued patents are expected to expire between 20222024 and 2035.
Our ability to compete effectively depends in part on our rights to trademarks, patents and other intellectual property rights we own or license. We have not sought to register every one of our trademarks either in the 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. Litigation may be necessary to enforce our intellectual property and proprietary rights and protect our proprietary information, or to defend against claims by third parties that our products or services infringe, misappropriate or otherwise violate their intellectual property or proprietary rights. Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources.
We may need to obtain licenses to patents and other intellectual property and proprietary rights held by third parties to develop, manufacture and market our products, if, for example, we soughtshould wish to develop our products in conjunction with anythat incorporate or otherwise include, third-party patented technology. If we are unable to timely obtain these licenses on commercially reasonable terms (or at all) and maintain these licenses, our ability to commercially market our products, may be inhibited or prevented.
In addition, because the manufacturing (cultivation), harvesting, processing, distribution, sale, possession and use of cannabis is illegal under federal law, companies that transact with cannabis businesses may have restricted intellectual property and proprietary rights particularly with respect to obtaining and enforcing patents and trademarks. We do not believe these restrictions apply to our business. However, if we are unablerestricted in our ability to register, or maintain, our trademarks or to file for or enforce patents on any of our inventions, such an inability could materially affect our ability to protect our name, brand and proprietary technologies. See “—"— Risks Relating to Our Intellectual Property”Property" for more information on the risks associated with intellectual and proprietary rights.
Research and Development
We continually invest in research and development to improve our products, manufacturing processes, packaging and delivery systems. In addition to the benefits of our own research and development, we actively seek ways to leverage the research and development activities of our suppliers and other business partners.
Human Capital
Our continued success depends on management implementing effective human resource initiatives in order to recruit, develop and retain key employees. As of December 31, 2021,At Hydrofarm we employ 709 full-time employeesbelieve that having a strong support base will allow for greater productivity and 11 part-time employees. We also employ 106 temporary workers and 9 independent contractors. None of our employees are subject to collective bargaining agreements,satisfaction and we have had no labor-relatedare committed to open and healthy communication with our workforce. We seek to create an inclusive 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 striveenvironment in order to foster an innovative and team-oriented culture.
As of December 31, 2023, we had 369 full time employees globally, as compared to 498 full time employees as of December 31, 2022. Of this amount, approximately 69% are located in the United States, and the remainder primarily in Canada. During 2023, we reduced headcount and we may implement further reductions in the future to create operational efficiencies. Additionally, we use temporary workers as needed to provide flexibility for our business including for seasonal projects.
Our compensation philosophy is to implement a program that enables us to attract, motivate, reward, and retain high-performing employees who can create and sustain value for our stockholders over the long term. In addition, our compensation program is designed to provide a fair and balanced opportunity that appropriately rewards employees for their direct contributions to our success. We offer a comprehensive benefits platform including an Employee Assistance Program where our employees can seek professional assistance with psychological and other challenges.
Workplace safety is important to our business culture and viewwe believe that a safe and empowered workforce is critical to the success of our human capital resourcesbusiness. We maintain health and initiativessafety programs, including our Environmental Health and Safety ("EHS") management system. Our associates participate in safety committees, hazard identification, work order resolutions and mandatory compliance training. Additionally, we participate in third party health and safety inspections to meet regulatory requirements. To evaluate our health and safety performance, we use an EHS scorecard composed of leading and lagging indicators, such as an ongoing priority.
Summary of Risk Factors
Our business is subject to a number of risks and uncertainties that are summarized below. The below summary of risk factors should be read together with the more detailed discussion of risks set forth following this section under the heading “Risk Factors,” as well as elsewhere in this Annual Report on Form 10-K.
Risks Relating to Our Business
•our proprietary brand offerings expose us to various risks;
•competitive industry pressures;
•our ability to keep pace with technological advances;
•the risk of product defects;
•general economic and/or industry and financial conditions, specifically in the U.S. and Canada;
•the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial operations;
•the costs and risks of operating internationally;
•manufacturing risks as a result of recent acquisitions;
•our ability to comply with environmental regulations;
•interruptions in our supply chain;
•increasing scrutiny regarding environmental, social and governance practices;
•the impact of climate change on our facilities and operations;
•risks related to corporate and social responsibility and reputation;
•the costs of being a public company;
•limitations and possible failures of our internal control systems;
•we have in the past identified material weaknesses in our internal control over financial reporting, and if we are unable to 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;
•damage to our reputation could have an adverse effect on our business;
•a disruption or breach of our information technology systems;
•our commitments to long-term leases and our ability to renew our leases;
•potential inaccuracies in our estimates and assumptions relied upon in preparing consolidated financial statements;
•difficulties in managing growth;
•the costs of potential tariffs or a global trade war;
•unanticipated change in our tax provisions or new tax legislation;
•limitations in our ability to utilize net loss carryforwards to reduce future tax liability;
•possible difficulties in raising sufficient capital to fund our operations; and
•the potential for product liability lawsuits.
Risks Relating to Our Indebtedness
•restrictions imposed by our JPMorgan Credit Facilities on our ability to sell products directly to the cannabis industry; and
•significant risks associated with our outstanding and future indebtedness of certain of our subsidiaries;
Risks Relating to Third Parties
•we rely on a limited base of suppliers for certain products, which may result in disruptions to our business;
•disruption in the global supply chain;
•if our suppliers are unable to source raw materials or the prices of raw materials increase, this may adversely affect our results of operations; and
•if our suppliers decide to sell directly into the retail market that we conduct our current or future business in, we may face increased competition.
Risks Relating to the Cannabis Industry
•federal and state regulations pertaining to the use and cultivation of cannabis may adversely affect our business;
•new California regulations have caused licensing shortages and future regulations may create other limitations that decrease demand for our products;
•our products are subject to varying, inconsistent and rapidly changing laws;
•we are subject to a number of risks, directly and indirectly, because cannabis is illegal under federal law;
•our indirect involvement in the cannabis industry could adversely affect our public reputation; and
•businesses involved in the cannabis industry are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.
Risks Relating to Other Regulations
•we may be restricted by certain state and other regulations pertaining to the use of certain ingredients in growing media and plant nutrients, including the use of pesticides; and
•we may be restricted by certain U.S., state and foreign laws regarding how we collect, store and process personal information.
Risks Relating to Our Intellectual Property
•recent changes in laws make it difficult to predict how patents will be issued or enforced in our industry;
•we may not be able to adequately obtain, maintain, protect our enforce our intellectual property and other proprietary rights;
•we may need to rely on licenses to proprietary technologies, which could be difficult or expensive to obtain;
•we may be subject to infringement claims or claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
•we may become subject to costly intellectual property disputes that require us to divert resources from our usual operations;
•if we do not adequately protect our trademarks, we may struggle to build name recognition; and
•intellectual property rights might not be enough to address all threats to our competitive advantage.
Risks Relating to Our Capital Stock
•we may incur indebtedness or issue capital stock that rank senior or equally to our common stock with certain liquidation preference and other rights, which may dilute our stockholders’ ownership interest;
•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;
•risks related to us being a holding company;
•our largest stockholders will exercise significant influence over our company for the foreseeable future, including the outcome of matters requiring stockholder approval; and
•our common stock has only recently become publicly traded and the market price of our common stock may be volatile.
Corporate Structure
We have been in the business of supplying indoor gardeninggardeners since Hydrofarm, LLC, one of our wholly-owned subsidiaries, was formed in the State of California on May 4, 1977. We conduct our business through our wholly-owned, direct and indirect subsidiaries.
Corporate Information
We were incorporated in Delaware in January 2017 under the name Innovation Acquisition One Corp. Our predecessor company, originally called Applied Hydroponics, Inc., was founded in 1977 in Northern California. We changed our name to Hydrofarm Holdings Group, Inc. on August 3, 2018. Our principal executive offices are located at 1510 Main Street, Shoemakersville, Pennsylvania 19526 (the “HQ”)19555 and our telephone number is (707) 765-9990. Our website address is www.hydrofarm.com. The information contained on, or that can be accessed through, our website is not, and shall not be deemed to be part of, this Annual Report on Form 10-K. 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.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are filed with the SEC. Such reports and other information filed by us with the SEC are available free of charge on our website at www.investors.hydrofarm.cominvestors.hydrofarm.com when such reports are available on the SEC’s website. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at 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.
Smaller Reporting Company
We qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and have elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K.
Item 1A. RISK FACTORS
Summary of Risk Factors
Our business is subject to a number of risks and uncertainties that are summarized below. The below summary of risk factors should be read together with the more detailed discussion of risks set forth following this section.
Risks Relating to Our Business
•our proprietary brand offerings expose us to various risks;
•competitive industry pressures;
•long-lived assets and inventories represent a significant portion of our total assets and we may be required to record impairments or write-downs in future periods;
•if we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected;
•the risk of damage to, loss of, or theft of our inventory;
•manufacturing risks as a result of recent acquisitions;
•expenses and risks associated with our restructuring activities;
•the risk that adverse weather may impact our peat harvest;
•the risk of product defects;
•our ability to keep pace with technological advances;
•increased prices and inflation could negatively impact our margin performance and our financial results;
•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 commitments to long-term leases and our ability to renew or exit our leases;
•the costs and risks of operating internationally;
•our ability to comply with environmental regulations;
•interruptions in our supply chain;
•general economic and/or industry and financial conditions, specifically in the United States and Canada;
•increasing scrutiny, costs and compliance with environmental, social and governance practices;
•the impact of climate change on our facilities and operations;
•the costs of being a public company;
•limitations and possible failures of our internal control systems;
•our ability to maintain effective internal control over financial reporting;
•the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial operations;
•damage to our reputation could have an adverse effect on our business;
•our marketing activities may not be successful;
•a disruption or breach of our information technology systems;
•potential inaccuracies in our estimates and assumptions relied upon in preparing consolidated financial statements;
•the costs of potential tariffs or a global trade war;
•possible difficulties in raising sufficient capital to fund our operations; and
•the potential for product liability lawsuits.
Risks Relating to Our Indebtedness
•significant risks associated with our outstanding and future indebtedness of certain of our subsidiaries;
•our ability to make our debt service payments pursuant to the Credit Facilities; and
•restrictions imposed by our Credit Facilities, including on our ability to sell products directly to the cannabis industry.
Risks Relating to Third Parties
•we rely on a limited base of suppliers for certain products, which may result in disruptions to our business;
•if our suppliers are unable to source raw materials or the prices of raw materials increase, this may adversely affect our results of operations; and
•as our suppliers sell directly into the retail market that we conduct our current or future business in, we may face increased competition.
Risks Relating to the Cannabis Industry
•federal and state regulations pertaining to the use and cultivation of cannabis may adversely affect our business;
•our products are subject to varying, inconsistent and rapidly changing laws;
•we are subject to a number of risks, directly and indirectly, because cannabis is illegal under federal law;
•our indirect involvement in the cannabis industry could adversely affect our public reputation; and
•businesses involved in the cannabis industry are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.
Risks Relating to Other Regulations
•we may be restricted by certain state and other regulations pertaining to the use of certain ingredients in growing media and plant nutrients, including the use of pesticides; and
•we may be restricted by certain U.S., state and foreign laws regarding how we collect, store and process personal information.
Risks Relating to Our Intellectual Property
•we may not be able to adequately obtain, maintain, protect or enforce our intellectual property and other proprietary rights;
•we may need to rely on licenses to proprietary technologies, which could be difficult or expensive to obtain; and
•we may become subject to costly intellectual property disputes that require us to divert resources from our usual operations.
Risks Relating to Our Capital Stock
•we may incur indebtedness or issue capital stock that ranks senior or equally to our common stock with certain liquidation preference and other rights, which may dilute our stockholders’ ownership interest;
•certain provisions in the Credit Facilities, our corporate charter documents 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;
•risks related to us being a holding company;
•our ability to meet the continued listing standards of The Nasdaq Global Select Market; and
•the market price of our common stock may be volatile.
Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline.
Risks Relating to Our Business
Our proprietary brand offerings expose us to various risks.
We expect to continue to grow our portfolio of proprietary brand offerings. We have invested in acquisition and development and procurement resources and marketing efforts relating to theseof our proprietary brand offerings. Although we believe that our proprietary brand products offer value to our customers at each price point and generally provide us with higher gross margins than comparable third-party branded products we sell, the expansion of our proprietary brand offerings also subjects us to certain specific risks in addition to those discussed elsewhere in this section, such as:
• Potentialpotential mandatory or voluntary product recalls;
• Supplysupply chain disruptions;
• Ourour ability to successfully obtain, maintain, protect and enforce our intellectual property and proprietary rights (including defending against counterfeit, knock offs, grey-market, infringing or otherwise unauthorized goods); and
• Ourour ability to successfully navigate and avoid claims related to the proprietary rights of third parties.
An increase in sales of our proprietary brands may also adversely affect our sales of our vendors’ products, which may, in turn, adversely affect our relationship with our vendors. Our failure to adequately address some or all of these risks could have a material adverse effect on our business, results of operations and financial condition.
Our competitors and potential competitors may develop products and technologies that are more effective or commercially attractive than our products.
Our products compete against national and regional products and private label products produced by various suppliers, many of which are established companies that provide products that perform functions similar to our products. Our competitors may develop or market products that are more effective or commercially attractive than our current or future products. Some of our competitors have substantially greater financial, operational, marketing and technical resources than we do. Moreover, some of these competitors may offer a broader array of products and sell their products at prices lower than ours, and may have greater name recognition. In addition, if demand for our specialty indoor gardening supplies and products continues to grow, we may face competition from new entrants into our field. Due to this competition, there is no assurance that we will notmay encounter difficulties in generating or increasing revenues and capturing market share. In addition, increased competition may lead to reduced prices and/or margins for products we sell. We may not have the financial resources, relationships with key suppliers, technical expertise or marketing, distribution or support capabilities to compete successfully in the future.
We may not successfully develop new products or improve existing products or maintain our effectiveness in reaching consumers through rapidly evolving communication vehicles.
Our future success depends, in part, upon our ability to improve our existing products and to develop, manufacture and market new products to meet evolving consumer needs. We cannot be certain that we will be successful in developing, manufacturing and marketing new products or product innovations which satisfy consumer needs or achieve market acceptance, or that we will develop, manufacture and market new products or product innovations in a timely manner. If we fail to successfully develop, manufacture and market new products or product innovations, or if we fail to reach existing and potential consumers, our ability to maintain or grow our market share may be adversely affected, which in turn could materially adversely affect our business, financial condition and results of operations. In addition, the development and introduction of new products and product innovations require substantial research, development and marketing expenditures, which weexpenditures. We may be unable to invest in new products and innovations, and may be unable to recoup any such investments if suchour new products or innovations do not achieve market acceptance.
Many of the products we distribute and market, such as our fertilizers and nutrients, contain ingredients that are subject to regulatory approval or registration with certain U.S. state and, Canadian and/or international regulators. The need to obtain such approval or registration could delay the launch of new products or product innovations that contain such ingredients or
otherwise prevent us from developing and manufacturing certain products and product innovations. Failure to properly register and maintain these registrations for these products could result in significant penalties, additional costs, product stop-sales or recalls.
A significant product defect or product recall could materiallyLong-lived assets and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.
Provided we are successful in developing and selling our products, any product defect could materially harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers. A product recall would be particularly harmful to us because we will likely have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. As a result,inventories represent a significant product defect or product recall could cause a decline in our sales and profitability and could reduce or deplete our financial resources.
Negative economic and/or industry conditions, specifically in the United States and Canada, could adversely affect our business.
Uncertain global economic and/or industry conditions could adversely affect our business. Negative global economic trends, particularly in the 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 volumesportion 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.
Increased prices and inflation could negatively impact our margin performance and our financial results.
Increased inflation, including rising prices for raw materials, parts and components, freight, packaging, labor and energy increases, the costs to manufacture and distribute our products,total assets and we may be unablerequired to pass these costs onrecord impairments or write-downs in future periods.
Our consolidated balance sheet as of December 31, 2023 includes $275.9 million of intangible assets, net, $75.4 million of inventories, $47.4 million of property, plant, and equipment, net, and $54.5 million of operating lease right-of-use assets. In the three month period ending June 30, 2022, we recorded a $189.6 million goodwill impairment charge due to a decline in the estimated fair value of our customers. Additionally,reporting units, which reduced the carrying value of our goodwill to zero. During the years ended December 31, 2022 and 2023, we are exposed to fluctuations in other costsrecorded significant allowances for obsolete inventory and restructuring charges associated with inventory write-downs.
Long-lived assets, such as packaging, freight, laborintangible assets, property, plant and energy prices. If inflation in these costs increases beyond our ability to controlequipment and operating lease right-of-use assets are reviewed for them through measures such as implementing operating efficiencies, weimpairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be ablerecoverable. If we were to increase prices to sufficiently offset the effect of various cost increases without negatively impacting customer demand, thereby negatively impacting our margin performance and results of operations.
A disruption in the operationsconclude that a future write-down of our freight carriers, higher shipping costs or shipping delays could disrupt our supply chain and could negatively impact our margin performance and our financial results.
We are dependent on commercial freight carrierslong-lived assets is necessary, we would have to deliver our products. Ifrecord the operations of these carriers are disrupted for any reason, we may be unable to timely deliver our products to our customers who may choose alternative products causing our net revenues and gross margin to decline. When fuel costs increase, our freight costs generally do so as well. In addition, we operate abroad and international sales carry higher shipping costsappropriate charge, which could negatively impactresult in a material adverse effect on our gross margin and results of operations. If freightInventories consist of manufactured goods, goods acquired for resale, and energy costs materially increasematerials consumed in business operations. Inventories are stated at the lower of cost or net realizable value, and we maintain an allowance for excess and obsolete inventory. The estimate for excess and obsolete inventory is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions. We have experienced sales declines, which we believe are unable to successfully pass all or significant portionsprimarily a result of the increase along toagricultural oversupply impacting our customers, or we cannot otherwise offset such increases in our cost of net revenues, our gross margin and financial results could be adversely affected.
market. The effects of the COVID-19 pandemic are unpredictable and may materially affect our customers and how we operate our business, and the duration and extent to which the pandemic continues (including any re-emergence of COVID-19) to threaten our future results of operations and overall financial performance remains uncertain.
In December 2019, COVID-19 was identified.On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic.Since the emergence of the COVID-19 pandemic, numerous variants of the virus have been identified, some of which are more virulent than the original strain. The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide and has caused significant volatility in U.S. and international debt and equity markets.Vaccines for COVID-19these market conditions will 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 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.
Examples of how COVID-19 may impact our business, results of operations, and stock price include, butcash flows are not limited to:
•COVID-19uncertain and difficult to predict at this time, and may cause consumers to decrease spending, or pause such spending altogether, making it more difficult for us to acquire new customers, as well as retainresult in lower margins, inventory write-downs, accounts receivable allowances, and upsell existing customers;
•COVID-19 may interfere with our ability, or the abilityimpairments of our employees, workers, contractors, suppliers and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. COVID-19 may also cause disruptions from the temporary closure or suspension of activities related to the relocation of our facilities, third-party suppliers and manufacturers, restrictions on the shipment of our products, restrictionslong-lived assets which could have a material adverse effect on our employees’ and other service providers’ ability to travel, the decreased willingness or ability of our customers to travel or to utilize our services and shutdowns that may be requested or mandated by governmental authorities;
•COVID-19 and related government responses to address the COVID-19 pandemic may cause sudden and extreme changes in our stock price. Since COVID-19 was first reported, the volatility of U.S. equity markets increased to historic levels. This may cause extreme fluctuations in the market price of our stock. We cannot predict if and when these fluctuations will decrease or increase. In addition to general market conditions, the market price of our stock may become volatile or decline due to actual or anticipated impact of COVID-19 on ourbusiness, financial condition and results of operations or if our results of operations do not meet the expectations of the investor community or one or more of the analysts who cover our company change their recommendations regarding our company.operations.
The duration and extent of the impact on our business from the COVID-19 pandemic depends on ongoing 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. The COVID-19 pandemic has resulted in global supply chain constraints and transportation disruptions that have led to increased costs of goods and higher freight/import costs. If we are unablefail 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.
Our international operations make us susceptible to the costs and risks associated with operating internationally.
We operate some of our distribution centers in Canada and Spain and source products globally. We also operate a registered office in China. Accordingly, we are subject to risks associated with operating in foreign countries, including:
•fluctuations in currency exchange rates;
•limitations on the remittance of dividends and other payments by foreign subsidiaries;
•additional costs of compliance with local regulations;
•additional costs associated with fuel prices and freight/import expenses;
•in certain countries, historically higher rates of inflation than in the United States;
•changes in the economic conditions or consumer preferences or demand for our products in these markets;
•restrictive actions by multi-national governing bodies, foreign governments or subdivisions thereof;
•changes in foreign labor laws and regulations affecting our ability to hire and retain employees;
•changes in U.S. and foreign laws regarding trade and investment;
•less robust protection of our intellectual property and proprietary rights under foreign laws; and
•difficulty in obtaining distribution and support for our products.
In addition, our operations outside the 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 affectinventory effectively, our results of operations, financial condition and cash flowsliquidity may be materially and adversely affected.
Our business requires us to manage inventory effectively. We depend on our forecasts of demand for, and popularity of, various products to make purchase decisions and to manage our inventory of stock-keeping units. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the future.quantities that we expect. It may be difficult to accurately forecast demand and determine appropriate levels of product or components. From time to time in the normal course of business, we enter into agreements with our suppliers pursuant to which we are required to purchase minimum amounts of inventory over a defined time period. We receive favorable pricing terms in exchange for this arrangement, but such agreements could lead to an oversupply of inventory. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and results of operations.
Our inventory is vulnerable to damage or loss caused by accidents or natural disasters, and we face the risk of theft of our products from inventory or during shipment.
Our inventory is stored at warehouses in the United States, Canada and Spain. Our inventory is vulnerable to accidents, fire, flood, earthquakes, and similar events that may impact our facilities. Any damage to or loss of all or a significant portion of our inventory could cause significant delays in shipment of goods to our customers, resulting in negative publicity about and diminished customer confidence in our business. In addition, we may experience theft of our products while they are being held in inventory, or during the course of their shipment to other warehouses within our network, or during shipment to our customers. We maintain insurance to cover losses resulting from theft. Nevertheless, if our security measures fail, losses exceed our insurance coverage or are not otherwise covered by insurance, or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from damage, loss or theft, any of which could substantially harm our business and results of operations.
As a result of acquisitions, we are exposed to manufacturing risks that could adversely affect our business and results of operations.
In connection with our recent2021 acquisitions, we have acquired several manufacturing facilities. Expansion into manufacturing exposes us to all of the risks entailed in manufacturing activities generally and there is no assurance that our manufacturing activities will not cause us to incur material unexpected costs or liabilities. Our manufacturing processes may experience problems including equipment malfunctions, facility contamination, labor problems, raw material shortages or contamination, natural disasters, power outages, terrorist activities, safety and certification issues, or disruptions in the operations of our suppliers which could result in product defects, product recalls, product liability claims and insufficient inventory or supply of product for our customers. For example, our acquisition of the H&G Entities and their plant nutrient and fertilizer businessmanufacturing operations may expose us to handling potentially hazardous or explosive chemicals. We cannot eliminate the risk of accidental contamination or injury from such chemicals, and any accident caused by such chemicals could result in cleanup costs, diversion of management attention and potential liability, all of which could affect our reputation, business and results of operations. Any defects in the products we manufacture may result in delayed shipments to customers or reduced or canceled customer orders. If these defects or deficiencies are significant, our business reputation may be damaged. The failure of the products that we manufacture or of our manufacturing processes or facilities may subject us to regulatory enforcement, fines or penalties and, in some cases, require us to shut down, temporarily halt operations or incur considerable expense to correct a manufacturing process or facility. In addition, these defects may result in liability claims against us, expose us to liability to pay for the recall or remanufacture of a product or adversely affect product sales or our reputation. The storage, handling, production and disposal of materials in our manufacturing facilities may expose us to liability under environmental laws and regulations. Potentially significant expenditures could also be required to comply with evolving interpretations of existing environmental, health and safety laws and regulations or any new such laws and regulations (including concerns about global climate change and its impact) that may be adopted in the future. Costs associated with failure to comply with such laws and regulations could have an adverse effect on our business.
Government lawsIn connection with our restructuring plans, we have implemented and regulations, including environmental lawsmay continue to implement a number of restructuring initiatives designed to streamline our operations, reduce costs, and regulations, couldimprove efficiencies during the industry recession. See "Item 7. Management’s Discussion and Analysis of Financial Condition And Results of Operations – Market Conditions" below for more information regarding our restructuring plans. Restructuring actions typically result in material costs or otherwisecharges and cash expenditures that may adversely affect financial results for one or more periods, and efforts to minimize or eliminate such expenditures may not be successful. Moreover, restructuring actions can create unanticipated consequences, such as instability or distraction among our financial conditionworkforce or among management.
We cannot assure you that any restructuring plans or any other cost-saving initiatives we may undertake will be successful. A variety of factors, many of which are beyond our control, could cause us not to realize expected cost savings, including, but not limited to, unexpected costs incurred in connection with consolidating and/or closing certain operations or asset write-downs, delays or difficulty terminating leases, unexpected integration challenges, unintended attrition and resultstemporary instability. Any of operations.
The manufacturing, chemical composition, packaging, storage, distributionthese factors could hamper our ability to grow and labeling of our products and the mannermeet customer demand in which our business operations are conducted must comply with an extensive array of federal, state and foreign laws and regulations.future periods. If we are not successfulunable to structure our operations in complying with the requirementslight of all such regulations, we could be fined or other actions could be taken against us by the applicable governing body, including the possibility of a required product recall. Any such regulatory action could adversely affect our financial condition and results of operations. It is also possible that governments and regulatory agencies will increase regulation, including the adoption of further regulations relating to the transportation, storage or use of certain chemicals, to enhance homeland security or protect the environment and such increased regulation could negatively impact our ability to obtain raw materials, components and/or finished goods or could result in increased costs. In particular, legislators, consumers, investors and other stakeholders are increasingly focusing on climate change, petroleum usage, waste, recycled material content, and other sustainability concerns pertaining to companies’ ESG policies. Concern over climate change may result in new or increased legal and regulatory requirements to reduce or mitigate negative impacts to the environment or may result in new reporting and disclosure requirements. In the event that such regulations result in increased product or administrative costs, we may not be in a position to increase selling prices, and therefore an increase in costsevolving market conditions, this could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Our peat bogs are susceptible to sudden changes in weather and the impacts of climate change.
We maintain a peat moss harvesting operation in Alberta, Canada. Peat bogs rely on predictable weather; sun and wind are required to dry the top surface, and too much rain can cause compaction and impede the ability of vacuum harvesters to collect the peat. Peat must be harvested during a narrow window of three to five months during the summer/ fall, and if summer is late or especially wet, this can have an adverse impact on the year’s harvest. Conversely, if temperatures are too high, this can cause an increase in peat decomposition rates, and extended droughts can aggravate such decomposition. Any of these risks may be further exacerbated by climate change and the heightened risk of forest fires.If our peat bogs are damaged or our peat harvest is less than anticipated for one or more seasons, this could have an adverse impact on our business and results of operations.
Some ofA significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.
Provided we are successful in developing and selling our products, have chemical compositions that are controlled by various state, federalany product defect could materially harm our brand image and international lawscould force us to conduct a product recall. This could damage our relationships with our customers. A product recall would be particularly harmful to us because it could potentially consume significant financial and regulations that are subjectadministrative resources to change. We are required to comply with these lawseffectively manage a product recall and regulationsit would detract management’s attention from implementing our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and we seek to anticipate regulatory developments thatprofitability and could impactreduce or deplete our ability to continue to produce and market our products. We invest in research and development to maintain product formulations that comply with such laws and regulations. There can be no assurance that we will not be required to alter the chemical composition of one or more of our products in a way that will have an adverse effect upon the product’s efficacy or marketability. A delay or other inability of the Company to complete product research and development and successfully reformulate our products in response to any such regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
We are subject to numerous environmental laws and regulations that impose various environmental controls on our business operations, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous wastes and the investigation and remediation of soil and groundwaterresources.
affected by hazardous substances. Such lawsIncreased prices and regulations may otherwise relate to various health and safety matters that impose burdens upon our operations. These laws and regulations also impose strict, retroactive and joint and several liability for the costs of, and damages resulting from, cleaning up current sites, past spills, disposals and other releases of hazardous substances. We believe that our expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on our financial condition, results of operations or cash flows. However, the environmental laws under which we operate are complicated, often become increasingly more stringent and may be applied retroactively. Accordingly, there can be no assurance that we will not be required to incur additional expenditures to remain in or to achieve compliance with environmental laws in the future or that any such additional expenditures will not have a material adverse effect on our business, financial condition or results of operations.
Additional laws and regulations require that we carefully manage our supply chain for the production, distribution and sale of goods. Our failure to comply with any of these regulations or our inability to adequately predict the manner in which these local regulations are interpreted and applied to our business by the applicable enforcement agencies could have a materially adverse effect on our business, financial condition and results of operations.
Failure to optimize our supply chain or disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.
Our ability to make, move and sell products in coordination with our suppliers is critical to our success. Our inability to maintain sufficient internal production capacity or our inability to enter into co-packing arrangements on terms that are beneficial to the Company could have an adverse effect on our business. Failure to adequately handle increasing production costs and complexity, turnover of personnel, or production capability and efficiency issues could materially impact our ability to cost effectively produce our products and meet customer demand.
Additionally, damage or disruption to our production or distribution capabilities resulting from weather, any potential effects of climate change, natural disaster, disease, crop spoilage, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to produce or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, and may require additional resources to restore our supply chain.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their ESG practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, climate change, health and safety, supply chain management, diversity, labor conditions and human rights, both in our own operations and in our supply chain. Increased ESG-related compliance costs for the Company as well as among our suppliers, vendors and various other parties within our supply chain could result in material increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standardsinflation could negatively impact our reputation,margin performance and our financial results.
Increased inflation, including rising prices for raw materials, parts and components, freight, packaging, labor and energy increases, the costs to manufacture and distribute our products, and we may be unable to pass these costs on to our customers. Additionally, we are exposed to fluctuations in other costs such as packaging, freight, labor and energy prices. If inflation in these costs increases beyond our ability to do business with certain partners, access to capital, and our stock price.
Climate Change may impact the availability of our facilities and, in addition, we may incur substantial costs to comply with climate change legislation and related regulatory initiatives.
Changing weather patterns and the increase in frequency of weather eventscontrol for them through measures such as forest fires, hurricanes and tornadoes could cause disruptions or the complete loss of our facilities. In addition, climate change concerns, and changes in the regulation of such concerns, including greenhouse gas emissions, could also subject us to additional costs and restrictions, including increased energy and raw materials costs which could negatively impact our financial condition and results of operations. The effects of climate change can have an adverse effect not only to our operations, but also that of our suppliers and customers, and can lead to increased regulations and changes in consumer preferences, which could adversely affect our business, results of operations, and financial condition.
We are subject to risks related to corporate and social responsibility and reputation.
Many factors influence our reputation including the perception of us held by our customers, suppliers, partners, shareholders, other key stakeholders, and the communities in which we operate. We face increasing scrutiny related to
environmental, social and governance activities. We risk damage to our reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, sustainability, supply chain management, climate change, workplace conduct, and human rights. Any harm to our reputation could impact employee engagement and retention, our corporate culture, and the willingness of customers, suppliers, and partners to do business with us, which could have a material adverse effect on our business, results of operations and cash flows. Further, despite our policies to the contrary,implementing operating efficiencies, we may not be able to controlincrease prices to sufficiently offset the conducteffect of every individual actor, andvarious cost increases without negatively impacting customer demand, thereby negatively impacting our employees and personnel may violate environmental, social or governance standards or engage in other unethical conduct. These acts, or any accusation of such conduct, even if proven to be false, could adversely impact the reputation of our business.
We have incurred and will continue to incur increased costs as a result of being a public company.
We became a public company on December 9, 2020.As a public company, we have incurred and will continue to incur significant legal, accounting, Sarbanes-Oxley compliance, insurance and other expenses that we did not incur as a private company.For example, we have incurred and will continue to incur increased legal and accounting costs as a result of being subject to the information and reporting requirements of the Exchange Act, and other federal securities laws.The costs of preparing and filing periodic and other reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders, will cause significant increases in our expenses than if we had remained privately-held. The cost of being a public company diverts resources that might otherwise have been used to develop our business, which could have a material adverse effect on our company.
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 devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we incur as a public company or the specific timing of such costs.
As a public company, we, among other things:
•prepare and distribute periodic public reports and other stockholder communications in compliance;
•comply with our obligations under the federal securities laws and applicable listing rules;
•create or expand the roles and duties of our board of directors and committees of the board of directors;
•institute more comprehensive financial reporting and disclosure compliance functions;
•enhance our investor relations function;
•establish new internal policies, including those relating to disclosure controls and procedures; and
•involve and retain to a greater degree outside counsel and accountants in the activities listed above.
These matters 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 conditionmargin performance and results of operations. These laws and regulations 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.
In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate applicable listing standards. There could also be a negative reaction in the financial markets
due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, financial condition and results of operations.
The changes necessitated by becoming a public company require a significant commitment of resources and management supervision that has increased and may continue to increase our costs and might place a strain on our systems and resources. As a result, our management’s attention might be diverted from other business concerns. If we fail to maintain an effective internal control environment or to comply with the numerous legal and regulatory requirements imposed on public companies, we could make material errors in, and be required to restate, our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, as applicable, fines, sanctions and other regulatory action and potentially civil litigation.
As a result of being a public company, we are obligated to develop and maintain proper and effective internal controls over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.
As of December 31, 2021 we were no longer an emerging growth company, and we are now required to comply with Section 404 of the Sarbanes-Oxley Act. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may, in the future, be unable to comply with these requirements in a timely or cost-effective manner.
For the 2021 fiscal year just completed, management and our independent outside auditor have attested that our internal control environment was operating effectively and in compliance with Section 404 of the Sarbanes-Oxley Act. However, in the future 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.
We previously identified material weaknesses in our internal control over financial reporting and we may identify additional material weaknesses in the future, 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.
Prior to our 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.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.Our management determined that the previously disclosed material weaknesses were not 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 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.
During 2021, we remediated the identified material weaknesses. 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 remediated previously identified material weaknesses, we cannot assure you that the steps we have taken will prevent future material weaknesses 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.
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.
Acquisitions arehave been an important element of our overall corporate strategy, and these transactions entailentailed material investments by us andthat are material to our financial condition and results of operations. We expect tomay 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:
•diversion of management’s time and focus from operating our business to acquisition integration challenges;
•failure to successfully further develop the acquired business or products;
•implementation or remediation of controls, procedures and policies at the acquired company;
•integration of the acquired company’s accounting, information technology (IT) systems, human resources and other administrative systems, and coordination of product, engineering and sales and marketing functions;
•transition of operations, users and customers onto our existing platforms;
•reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters;
•failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;
•in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
•cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;
•liability for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and
•litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.
Our due diligence may fail to identify all liabilities associated with acquisitions and we may not assess the relative benefits and detriments of making an acquisition and may pay acquisition consideration exceeding the value of the acquired business. Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances, incur unanticipated liabilities, and harm our business generally.
Our acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or impairment of goodwill, intangible assets and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results of operations and cash flows.
Although acquisitions are an important element of our overall corporate strategy, there
There can be no assurance that we will be able to identify appropriate acquisition targets or potential strategic transactions, successfully acquire identified targetsexecute such potential transactions, or successfully integrate the business of acquired companies to realize the full, anticipated benefits of such acquisitions.
We occupy many of our facilities under long-term non-cancellable leases, and we may be unable to renew, sublease or terminate and exit our leases.
Many of our manufacturing facilities and distribution centers are located on leased premises subject to non-cancellable leases. Typically, our leases have initial terms ranging from three to twelve 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. In addition, we have executed sublease and/or third party logistics agreements at certain of our facilities. We may choose to sublease additional space, close certain operations and/or terminate lease agreements. We may remain liable for sublease obligations if the sublessee does not perform. Our inability to sublease excess space, 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.
In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and risks, which in turn could have a material adverse effect on our business and operating results. Further, we may not be able to secure a replacement facility in a location that is as commercially viable. Having to close a facility, even briefly to relocate, could reduce the sales that such facility would have contributed to our revenues. 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, and may continue to experience similar delays in the future.
A disruption in the operations of our freight carriers, higher shipping costs or shipping delays could disrupt our supply chain and could negatively impact our margin performance and our financial results.
We are dependent on commercial freight carriers to deliver our products. If the operations of these carriers are disrupted for any reason, we may be unable to timely deliver our products to our customers who may choose alternative products causing our net revenues and gross margin to decline. When fuel costs increase, our freight costs generally do so as well. In addition, we operate abroad and international sales carry higher shipping costs which could negatively impact our gross margin and results of operations. If freight and energy costs materially increase and we are unable to successfully pass all or significant portions of the increase along to our customers, or we cannot otherwise offset such increases in our cost of net revenues, our gross margin and financial results could be adversely affected.
Our international operations make us susceptible to the costs and risks associated with operating internationally.
We operate distribution centers in Canada and Spain and we source and sell products globally. We also use a supply chain management team in China. We are subject to risks associated with operating in foreign countries, including:
•fluctuations in currency exchange rates;
•limitations on the remittance of dividends and other payments by foreign subsidiaries;
•additional costs of compliance with local regulations;
•additional costs associated with fuel prices and freight/import expenses;
•in certain countries, historically higher rates of inflation than in the United States;
•changes in the economic conditions or consumer preferences or demand for our products in these markets;
•restrictive actions by multi-national governing bodies, foreign governments or subdivisions thereof;
•changes in foreign labor laws and regulations affecting our ability to hire and retain employees;
•changes in U.S. and foreign laws regarding trade and investment;
•less robust protection of our intellectual property and proprietary rights under foreign laws;
•difficulty in obtaining distribution and support for our products; and
•our ability to collect trade receivables in foreign jurisdictions.
In addition, our operations outside the 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.
Government laws and regulations, including environmental laws and regulations, could result in material costs or otherwise adversely affect our financial condition and results of operations.
The manufacturing, composition, packaging, storage, distribution and labeling of our products and the manner in which our business operations are conducted must comply with an extensive array of federal, state and foreign laws and regulations. If we are not successful in complying with the requirements of all such regulations, we could be fined or other actions could be taken against us by the applicable governing body, including the possibility of a required product recall. Any such regulatory action could adversely affect our financial condition and results of operations. It is also possible that governments and regulatory agencies will increase regulation, including the adoption of further regulations relating to the transportation, storage or use of certain ingredients, to enhance homeland security or protect the environment and such increased regulation could negatively impact our ability to obtain raw materials, components and/or finished goods or could result in increased costs. In particular, legislators, consumers, investors and other stakeholders are increasingly focusing on climate change, petroleum usage, waste, recycled material content, and other sustainability concerns pertaining to companies’ ESG policies. Concern over climate change may result in new or increased legal and regulatory requirements to reduce or mitigate negative impacts to the environment or may result in new reporting and disclosure requirements. In the event that such regulations result in increased product or administrative costs, we may not be in a position to increase selling prices, and therefore an increase in costs could have a material adverse effect on our business, financial condition and results of operations.
Some of our products have compositions that are controlled by various state, federal and international laws and regulations that are subject to change. We are required to comply with these laws and regulations and we seek to (i) anticipate regulatory developments that could impact our ability to continue to produce and market our products and (ii) maintain product formulations that comply with such laws and regulations. There can be no assurance that we will not be required to alter the composition and/or labelling of one or more of our products in a way that will have an adverse effect upon the product’s efficacy or marketability. A delay or other inability of the Company to complete product research and development and successfully reformulate and/or relabel our products in response to any such regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
We are subject to numerous environmental laws and regulations that impose various environmental controls on our business operations, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous wastes and the investigation and remediation of soil and groundwater affected by hazardous substances. Such laws and regulations may otherwise relate to various health and safety matters that impose burdens upon our operations. These laws and regulations also impose strict, retroactive and joint and several liability for the costs of, and damages resulting from, cleaning up current sites, past spills, disposals and other releases of hazardous substances. We believe that our expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on our financial condition, results of operations or cash flows. However, the environmental laws under which we operate are complicated, often become increasingly more stringent. Accordingly, there can be no assurance that we will not be required to incur additional expenditures to remain in or to achieve compliance with environmental laws in the future or that any such additional expenditures will not have a material adverse effect on our business, financial condition or results of operations.
Additional laws and regulations require that we carefully manage our supply chain for the production, distribution and sale of goods. Our failure to comply with any of these regulations or our inability to adequately predict the manner in which these local regulations are interpreted and applied to our business by the applicable enforcement agencies could have a material adverse effect on our business, financial condition and results of operations.
Failure to optimize our supply chain or disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.
Our ability to make, move and sell products in coordination with our suppliers is critical to our success. Our inability to maintain sufficient internal production capacity or our inability to enter into co-packing arrangements on terms that are beneficial to us could have an adverse effect on our business. Failure to adequately handle increasing production costs and
complexity, turnover of personnel, or production capability and efficiency issues could materially impact our ability to cost effectively produce our products and meet customer demand.
Additionally, damage or disruption to our production or distribution capabilities resulting from weather, any potential effects of climate change, natural disaster, disease, crop spoilage, fire or explosion, flooding, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to produce or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, and may require additional resources to restore our supply chain.
Negative economic and/or industry conditions, specifically in the United States and Canada, could adversely affect our business.
Uncertain global economic and/or industry conditions could adversely affect our business. Negative global economic trends, particularly in the 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 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.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their ESG practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, climate change, health and safety, supply chain management, diversity, labor conditions and human rights, both in our own operations and in our supply chain. Increased ESG-related compliance costs for us as well as among our suppliers, vendors and various other parties within our supply chain could result in material increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and our stock price.
Climate change may impact the availability of our facilities, we may incur substantial costs to comply with climate change legislation and related regulatory initiatives, and weather conditions could adversely impact financial results.
Changing weather patterns and the increase in frequency of weather events such as forest fires, flooding, hurricanes and tornadoes could cause disruptions or the complete loss of our facilities. In addition, climate change concerns, and changes in the regulation of such concerns, including greenhouse gas emissions, could also subject us to additional costs and restrictions, including increased energy and raw materials costs which could negatively impact our financial condition and results of operations. The effects of climate change can have an adverse effect not only to our operations, but also that of our suppliers and customers, and can lead to increased regulations and changes in consumer preferences, which could adversely affect our business, results of operations, and financial condition.
Our garden center customers and certain of our manufacturing facilities can be heavily impacted by weather conditions. For example, periods of abnormally wet or dry weather can adversely impact the sale of certain products, while increasing demand for other products with the overall impact to us difficult to predict. Additionally, our outdoor harvesting and other manufacturing operations may be impacted by adverse weather conditions or changing weather patterns which may adversely impact our ability to produce and sell our products.
We have incurred and will continue to incur increased costs as a result of being a public company.
We became a public company on December 9, 2020. As a public company, we have incurred and will continue to incur significant legal, accounting, Sarbanes-Oxley compliance, insurance and other expenses that we did not incur as a private company. For example, we have incurred and will continue to incur increased legal and accounting costs as a result of being subject to the information and reporting requirements of the Exchange Act, and other federal securities laws. The costs of preparing and filing periodic and other reports, proxy statements and other information with the SEC and furnishing audited
reports to stockholders, will cause significant increases in our expenses than if we had remained privately-held. The cost of being a public company diverts resources that might otherwise have been used to develop our business, which could have a material adverse effect on our 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 devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
These matters 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 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.
In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate applicable listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, financial condition and results of operations.
If we fail to maintain an effective internal control environment or to comply with the numerous legal and regulatory requirements imposed on public companies, we could make material errors in, and be required to restate, our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, as applicable, fines, sanctions and other regulatory action and potentially civil litigation.
We are a "smaller reporting company" and, because we have opted to use the reduced reporting requirements available to us, certain investors may find investing in our securities less attractive.
We are a "smaller reporting company" under the SEC’s disclosure rules, and as such, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to adopt certain of the accommodations available to smaller reporting companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies. If investors consider our common stock less attractive as a result of our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for our common stock and our share price may be more volatile.
If we fail to maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reporting and the price of our common stock may be adversely affected.
We are required to establish and maintain appropriate internal controls over financial reporting. In the past, our management identified weaknesses in our internal controls. Although our management believes such weaknesses have been remediated, our internal control over financial reporting may still or could in the future have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact the confidence of investors and the price of our common stock. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
The impact of the COVID-19 pandemic, the shift to a COVID-19 endemic approach and related risks could materially affect our results of operations, financial position and/or liquidity.
The COVID-19 pandemic resulted in a global slowdown of economic activity and disruption of normal business travel and working habits. While we are shifting to a COVID-19 endemic approach, there is still uncertainty about the impact of COVID-19 variants in the long-term. The COVID-19 pandemic may have impacted our results of operations, and a reversion to the COVID-19 restrictions could have a significant effect on our future business, results of operations and financial performance. The pandemic initially resulted in a sharp contraction in the global economy, tightening liquidity and increasing volatility and uncertainty in the capital markets. Coincident global mitigation responses stabilized markets and stimulated economic recovery. Continued macroeconomic volatility may persist affecting our businesses and related market opportunities. The impact of an ongoing pandemic on the financial markets may also adversely affect our ability to fund through public or private equity offerings, debt financings, and through other means at acceptable terms.
Damage to our reputation could have an adverse effect on our business.
Maintaining our strong reputation is a key component in our success. Product recalls, any 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.
In addition, perceptions that the products we distribute and market are not safe could adversely affect us and contribute to the risk that we will be subjected to legal action. We distribute and market a variety of products, such as nutrients, and growing media. On occasion, allegations or news reports may be made that some of these products have failed to perform up to expectations or have caused damage or injury to individuals or property. Public perception that the products we distribute or market are not safe could impair our reputation, involve us in litigation, damage our brand names and have a material adverse effect on our business.
Our marketing activities may not be successful.
We invest substantial resources inOur advertising, consumer promotions and other marketing activities are intended to maintain, extend and expand our brand image. There can be no assurance that our marketing strategies will be effective or that the amount we investspend in advertising activities will result in a corresponding increase in sales of our products. If our marketing initiatives are not successful, we will have incurred significant expenses without the benefit of higher revenues.
Our operations may be impaired if our information technology systems, or those of our third-party vendors, fail to perform adequately or if we or our third-party vendors are the subject of a data breach or cyber-attack.
We rely on information technology systems in order to conduct business, including communicating with employees and our distribution centers, ordering and managing materials from suppliers, selling and shipping products to retail customers and analyzing and reporting results of operations, as well as for storing sensitive, personal and other confidential information. While we have taken steps to ensure the security of our information technology systems, our security measures or those of our third-party vendors may not be effective and our or our third-party vendors’ systems may nevertheless be vulnerable to computer viruses, security breaches and other disruptions from unauthorized users. If our or our third-party vendors’ information technology systems are damaged or cease to be available or function properly for an extended period of time, whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well as with our retail customers could be significantly impaired, which may adversely impact our business. Our acquisition strategyWe may also result inhave increased 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 immediately took steps to isolate those systems and implemented measures to prevent the spread of the attack, including taking systems offline in an abundance of caution. Based on our investigation, we do not believe that there was any compromise to our main operating systems or controls over financial reporting.
Together with an outside cybersecurity forensics firm, we are continuing to investigate the attack to determine its nature, scope, duration, and impacts, as well as our vulnerability to another such attack and whether there was any exfiltration or misappropriation of data. At this point in the investigation, we have no evidence that the attack extended beyond the Aurora acquisition’s systems, We are assessing whether remedial measures will be required beyond integrating the acquisition’s systems with our main systems. At the time, we are unable to estimate the expenses we will incur in connection with the investigation and remediation efforts.
Additionally, the techniques used to obtain unauthorized, improper or illegal access to information technology systems are constantly evolving, may be difficult to detect quickly and often are not recognized until after they have been launched against a target. We may be unable to anticipate these techniques, react in a timely manner or implement adequate preventative or remedial measures. Any operational failure or breach of security from these increasingly sophisticated cyber threats could lead to the loss or disclosure of both our and our retail customers’ financial, product, and other confidential information, as well as personally identifiable information about our employees or customers, result in negative publicity and expensive and time-
consumingtime-consuming regulatory or other legal proceedings, damage our relationships with our customers and have a material adverse effect on our business and reputation. In addition, we may incur significant costs and operational consequences in connection with investigating, mitigating, remediating, eliminating and putting in place additional tools and devices designed to prevent future actual or perceived security incidents, as well as in connection with complying with any notification or other obligations resulting from any security incidents. Because we do not control our third-party vendors, or the processing of data by our third-party vendors, our ability to monitor our third-party vendors’ data security is limited and we cannot ensure the integrity or security of the measures they take to protect and prevent the loss of our or our consumers’ data. As a result, we are subject to
the risk that cyber-attacks on, or other security incidents affecting, our third-party vendors may adversely affect our business even if an attack or breach does not directly impact our systems.
While the Company maintainswe maintain cyber risk insurance, this insurance may not be sufficient to cover all losses from any breaches of the Company’sour systems and does not extend to reputational damage or costs incurred to improve or strengthen systems against future threats or activity. Cyber risk insurance has also become more difficult and expensive to obtain, and we cannot be certain that our current level of insurance or the breadth of its terms and conditions will continue to be available on economically reasonable terms.
We occupy many of our facilities under long-term non-cancellable leases, and we may be unable to renew our leases at the end of their terms.
Many of our manufacturing facilities and distribution centers are located on leased premises subject to non-cancellable leases.Typically, our leases have initial terms ranging from two to twelve 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 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.
In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional cost, if at all.If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and risks, which in turn could have a material adverse effect on our business and operating results.Further, we may not be able to secure a replacement facility in a location that is as commercially viable, including access to rail service.Having to close a facility, even briefly to relocate, could reduce the sales that such facility would have contributed to our revenues. 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.
The estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could prove inaccurate.
Our consolidated financial statements have been prepared in accordance with 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.
In order to manage our future expected growth, we may need to continue to grow the size of our organization, and we may experience difficulties in managing this growth.
Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to continue to grow our operation and compete effectively will depend, in part, on our ability to effectively manage any future growth.
Potential tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products and our financial results.
Since 2018, the 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 United States or other countries the cost of our products manufactured in China and imported into the 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.
Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.
We are subject to income and other taxes in the 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 United States, is dependent on our ability to generate future taxable income of the appropriate character in the relevant jurisdiction.
From time to time, tax proposals are introduced or considered by the U.S. Congress or the legislative bodies in local, state and foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our tax liabilities. Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses and funding. We are subject to ongoing tax audits in various jurisdictions. In connection with these audits (or future audits), tax authorities may disagree with our determinations and assess additional taxes. We regularly assess the likely outcomes of our audits in order to determine the appropriateness of our tax provision. As a result, the ultimate resolution of our tax audits, changes in tax laws or tax rates, and the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows in future periods.
We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.
As of December 31, 2021,2023, we had U.S. federal net operating loss (“NOL”("NOL") carryforwards of approximately $74.9$153.3 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”"Code"). Our federal NOL carryforwards will begin to expire in 2037. See Note 1312 - Income Taxes, in the notes to the 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, 2021,2023, we maintained a valuation allowance of approximately $14.9$55.7 million on the majority of our domestic and foreign net deferred tax assets.
An “ownership change”"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. 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.
If we need additional capital to fund our operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
In connection with our growth strategies, weWe may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. There can be no assurance that additional capital will be available to us. If we cannot obtain sufficient capitalus to fund our operations we may be forced to limitand the scopeexecution of our expansion.strategies.
If product liability lawsuits are brought against us, we may incur substantial liabilities.
We face a potential risk of product liability as a result of any of the products that we offer for sale. For example, we may be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: (i) decreased demand for products that we may offer for sale; (ii) injury to our reputation; (iii) costs to defend the related litigation; (iv) a diversion of management’s time and our resources; (v) substantial monetary awards to trial participants or patients; (vi) product recalls, withdrawals or labeling, marketing or promotional restrictions; or (vii) a decline in our stock price. Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We do not maintain any product liability insurance. Even if we obtain product liability insurance in the future, we may have to pay amounts awarded by a court or negotiated in a settlement that exceed our insurance coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Risks Relating to Our Indebtedness
The JPMorgan credit facilities have restrictions on our ability to sell our products directly to the cannabis industry.
On March 29, 2021, we and our subsidiaries (the “Subsidiary Obligors”) entered into a $50 million senior secured revolving loan facility with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent for the lenders, which was amended on 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 Term Loan Facility”). The JPMorgan Revolving Loan Facility and the JPMorgan Term Loan Facility each contain customary covenants, restrictions and defaults. The JPMorgan Revolving 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. The JPMorgan Term Loan Facility prohibits us and the Subsidiary Obligors from selling our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of cannabis products other than in accordance with the applicable laws of such country. We are in compliance with the terms set forth in the JPMorgan Revolving Loan Facility and the JPMorgan Term Loan Facility and maintain policies and procedures that are designed to promote and achieve continued compliance with such requirements.
These compliance requirements may require that we be more selective than our competitors when selecting to whom we sell our products, and in certain situations, may afford our competitors a competitive advantage 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 of these compliance requirements may result in the occurrence of an event of default under each of the JPMorgan Revolving Loan Facility and the JPMorgan Term Loan Facility, which would entitle JPMorgan to terminate the commitments thereunder and declare all loans then outstanding to be due and payable.The foregoing events would have a material adverse effect on our business, results of operations and financial condition.
Substantially all of our and our Subsidiary Obligors’ assets are pledged to secure obligations under the JPMorgan credit facilities.
We and our Subsidiary Obligors have granted a continuing security interest in substantially all of our assets to JPMorgan, as administrative agent on behalf of the lenders party to such agreements.If we or the Subsidiary Obligors default on any of our obligations under such agreements, JPMorgan will be entitled to exercise remedies available to 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 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.
The JPMorgan credit facilitiesCredit Facilities contain, and future debt facilities may contain, restrictions that limit our flexibility in operating our business; we fund interest and amortization payments from cash flows generated in our operations, and to the extent that cash flows deteriorate, it could be difficult or impossible to timely make our debt service payments or obtain additional debt financing.
We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. Our substantial indebtedness and interest expense could have important consequences to us, including:
•impacting our cash flows, results of operations and financial condition as interest rates rise, as our Credit Facilities incur interest at a floating rate;
•requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments necessary to operate the business to the extent our future cash flows are insufficient;
•requiring us to refinance the Revolving Credit Facility if the lenders do not agree to extend the maturity date beyond June 30, 2026;
•limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us;
•limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry;
•our inability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); and
•increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally.
The existing JPMorgan credit facilitiesCredit Facilities (as discussed in more detail in "Item 7. Management’s Discussion And Analysis of Financial Condition and Results of Operations – the Revolving Credit Facility and Term Loan") 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 investments; (5) make certain loans; (6) dispose of assets; (7) merge, amalgamate, combine or consolidate; (8) engage in certain transactions with stockholders or affiliates; (9) amend or otherwise alter the terms of our or our subsidiaries’ indebtedness; and (10) alter the business that we conduct. The existing JPMorgan credit facilitiesCredit Facilities also require, and any documents governing our or our subsidiaries’ future indebtedness may require, us to meet certain financial ratios and tests. Noncompliance withtests in order to enter into certain transactions, incur additional indebtedness, pay dividends and other actions. In addition, if we become subject to the applicable financial ratios and tests that are specified defaults underin the JPMorgan Revolving Loan Facility.
We and our Subsidiary Obligors’ ability to comply with these and other provisions of the existing JPMorgan credit facilitiesCredit 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 theseapplicable 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.
Uncertainty relatingThe Credit Facilities have restrictions on our ability to sell our products directly to the London interbank offered rate (“LIBOR”)cannabis industry.
Our Credit Facilities each contain customary covenants, restrictions and defaults. The Credit Facilities prohibit us and the potential discontinuationSubsidiary Obligors from selling our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of LIBORcannabis products other than in accordance with the applicable laws of such country. We are in compliance with the terms set forth in the futureRevolving Credit Facility and the Term Loan and maintain policies and procedures that are designed to promote and achieve continued compliance with such requirements.
These compliance requirements may adversely affectrequire that we be more selective than our interest expense.
competitors when selecting to whom we sell our products, and in certain situations, may afford our competitors a competitive advantage 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.
LIBOR has historically been widely usedSubstantially all of our and our Subsidiary Obligors’ assets are pledged to secure obligations under the Credit Facilities.
We and our Subsidiary Obligors have granted a continuing security interest in substantially all of our assets to JPMorgan, as a reference for settingadministrative agent on behalf of the lenders party to such agreements. If we or the Subsidiary Obligors default on any of our obligations under such agreements, JPMorgan will be entitled to exercise remedies available to them resulting from such default, including increasing the applicable interest rate on loans globally.LIBOR is the subject of recent national, internationalall amounts outstanding, declaring all amounts due thereunder immediately due and other regulatory guidance and proposals for reform or discontinuation.In particular, on July 27, 2017, the Chief Executivepayable, assuming possession of the U.K.Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates forsecured assets, and exercising rights and remedies of a secured party under 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. Following the end of 2021, LIBOR ceased being a widely used benchmark interest rate.
The JPMorgan Revolving 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%,Uniform Commercial Code, as applicable would continuethen in the United States, or the Personal Property Security Act, as applicable then in Canada. Our ability 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 Revolving Loan Facility utilizes one-month, 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, two months, three months or six months,conduct our business may be materially harmed as applicable)a result 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 costexercise of borrowing by a bank and SOFR does not have this component since it is based on overnight transactionsany remedies, in the Treasury repurchase market. Accordingly, thereevent that such remedies are inherent difficulties in matching these two rates and it is possible that the use of SOFR may result in a higher rate.
There is no guarantee that an alternate interest rate will be established for the JPMorgan Revolving 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.exercisable, by JPMorgan.
Risks Relating to Third Parties
Our reliance on a limited base of suppliers for certain products, such as light ballasts,fixtures, may result in disruptions to our business and adversely affect our financial results.
Although we continue to implement risk-mitigation strategies for single-source suppliers, we rely on a limited number of suppliers for certain of ourthe light ballasts used in manufacturing our lighting systems. A portion of our key suppliers
previously experienced significant volume demands, in 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.
Disruption in our global supply chain has impacted and may continue to negatively impact our businesses.
The products we sell are sourced from a wide variety of domestic and international vendors, and any disruption in our supply chain or inability to find qualified vendors and access products that meet requisite quality and safety standards in a timely and efficient manner could adversely impact our businesses. The loss or disruption of such supply arrangements for any reason, including for issues such as COVID-19 or other health epidemics or pandemics, labor disputes, loss or impairment of key manufacturing sites, inability to procure sufficient raw materials, quality control issues, ethical sourcing issues, a supplier’s financial distress, natural disasters, looting, vandalism or acts of war or terrorism, trade sanctions or other external factors over
which we have no control, could interrupt product supply and, if not effectively managed and remedied, have a material adverse impact on our business operations, financial condition and results of operations.
Also, as a result of the current geopolitical tensions and conflict between Russia and Ukraine, and the recent recognition by Russia of the independence of the self-proclaimed republics of Donetsk and Luhansk, in the Donbas region of Ukraine, the governments of the United States, the European Union, Japan and other jurisdictions have recently announced the imposition of sanctions on certain industry sectors and parties in Russia and the regions of Donetsk and Luhansk, as well as enhanced export controls on certain products and industries. These and any additional sanctions and export controls, as well as any counter responses by the governments of Russia or other jurisdictions, could adversely affect, directly or indirectly, the global supply chain, with negative implications on the availability and prices of raw materials, energy prices, and our customers, as well as the global financial markets and financial services industry.
A significant interruption in the operation of our or our suppliers’ facilities could impact our capacity to produce products and service our customers, which could adversely affect revenues and earnings.
Operations at our and our suppliers’ facilities are subject to disruption for a variety of reasons, including fire, flooding or other natural disasters, disease outbreaks or pandemics, acts of war, terrorism, government shut-downs and work stoppages. Some of our key suppliers experienced significant demand and increased volume for the year 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.
If our suppliers are unable to source raw materials in sufficient quantities, on a timely basis, and at acceptable costs, our ability to sell our products may be harmed.
The manufacture of some of our products is complex and requires precise high quality manufacturing that is difficult to achieve. We have in the past experienced, and may in the future experience, difficulties in manufacturing our products on a timely basis and in sufficient quantities. These difficulties in the past have primarily related to difficulties associated with ramping up production of newly introduced products and may result in increased delivery lead-times and increased costs of manufacturing these products. Our failure to achieve and maintain the required high manufacturing standards could result in further delays or failures in product testing or delivery, cost overruns, product recalls or withdrawals, increased warranty costs or other problems that could harm our business and prospects.
In determining the required quantities of our products and the manufacturing schedule, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amounts of products we require, which could harm our business and results of operations.
Disruptions in availability or increases in the prices of raw materials sourced by suppliers could adversely affect our results of operations.
We source many of our product components from outside of the 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.
A significant disruption in the availability of any of our key product components could negatively impact our business. In addition, increases in the prices of key commodities and other raw materials could adversely affect our ability to manage our cost structure. Market conditions may limit our ability to raise selling prices to offset increases in our raw material costs. Our proprietary technologies can limit our ability to locate or utilize alternative inputs for certain products. For certain inputs, new sources of supply may have to be qualified under regulatory standards, which can require additional investment and delay bringing a product to market.
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.
Our distribution and sales and marketing capabilities provide significant value to our suppliers. Distributed brand suppliers sell through us in order to access thousands of retail and commercial customers across the United States and Canada
with shortDistributed brand suppliers may sell through us in order lead times, no minimum order quantity on individual items, free or minimal freight expenseto access our customers across the United States and trade credit terms.Canada. Based on our knowledge and communication with our suppliers, we believe some of our suppliers sell directly to the retail market. If these suppliers were to cease working with us, or proceed to enhance their direct-to-customer efforts, our product offerings, reputation, operation and business could be materially adversely affected.
Risks Relating to the Cannabis Industry
In the United States, we sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry. It is evident to us that the movement towards the legalization of cannabis in the 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"Cannabis Industry Participants”Participants" means the potential customers and end-users of our products who are engaged in the cannabis industry.
We are subject to a number of risks, directly and indirectly through Cannabis Industry Participants, because cannabis is illegal under federal law.
Cannabis is illegal under United StatesU.S. federal law. Federal law and enforcement may adversely affect the implementation of medical cannabis and/or adult-useadult use cannabis laws, and may negatively impact our revenues and profits.
Under the Controlled Substances Act, the U.S. Governmentfederal government currently 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 StatesU.S. Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Cooperative and Gonzales v. Raich,, 532 U.S. 483 (2001)and Gonzales v. Raich, 545 U.S. 1 (2005) that the United StatesU.S. federal government has the right to regulate and criminalize cannabis, even for medical purposes.The illegality of cannabis under United StatesU.S. federal law preempts state laws that legalize or decriminalize its use. Therefore, strict enforcement of United StatesU.S. federal law regarding cannabis would likely adversely affect our revenues and results of operations.
Other laws that directly impact the cannabis growers that are end users of certain of our products include:
•Businesses trafficking in cannabis may not take tax deductions for costs beyond costs of goods sold under Code Section 280E. There is no way to predict how the federal government may treat cannabis 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.
•Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks. In addition, cannabis businesses may face court action by third parties under the Racketeer Influenced and Corrupt Organizations Act (“RICO”).RICO. Intellectual property and proprietary rights could be impaired as a result of cannabis business, and cannabis businesses could be named as a defendant in an action asserting a RICO violation.
•Federal bankruptcy courts cannot provide relief for parties who engage in cannabis or cannabis businesses. Recent bankruptcy rulings have denied bankruptcies for cannabis dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the CSA. Therefore, cannabis businesses may not be able to seek the protection of the bankruptcy courts and this could materially affect their financial performance and/or their ability to obtain or maintain credit.
•Since cannabis is illegal under federal law, there is a strong argument that banks cannot accept for deposit funds from businesses involved in the cannabis industry. Consequently, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. Any such inability to open or maintain bank accounts may make it difficult for cannabis businesses to operate. Under the Bank Secrecy Act (“BSA”),BSA, banks must report to the federal government any suspected illegal activity, which includes any transaction associated with a cannabis business. These reports must be filed even though the business is operating legitimately under state law.
•Insurance that is otherwise readily available, such as general liability and directors and officer’s insurance, may be more difficult to find, and more expensive.
The formerAny presidential administration, current or any new administration or attorney general,future, could change federal enforcement policy or execution and decide to enforce the federal cannabis laws more strongly. Recent administrations have disagreed on how strongly to enforce federal cannabis laws. For example, on August 29, 2013, the DOJ under the Obama administration issued the Cole Memorandum, characterizing strict enforcement as an inefficient use of federal investigative and prosecutorial resources. The Cole Memorandum provided guidance to all federal prosecutors indicating that federal enforcement of the CSA against cannabis-related conduct should be focused on specific priorities, including cannabis distribution to minors, violence in connection with cannabis distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels. On January 4, 2018, former U.S.the DOJ under the Trump administration issued the Sessions Memorandum, which effectively rescinded the Cole Memorandum and directed federal prosecutors to enforce the CSA and to follow well-established principles when pursuing prosecutions related to cannabis activities. The DOJ under the Biden administration has not readopted the Cole Memorandum, but President Biden has indicated support for decriminalization of cannabis. On October 6, 2022, President Biden issued an executive order pardoning all persons convicted of simple possession of cannabis under the CSA. In the same executive order, President Biden also directed the Secretary of Health and Human Services and the Attorney General Jeff Sessions issued a memorandum rescinding previous guidance (directing U.S.to initiate an administrative process to review the scheduling of cannabis under the CSA, and on August 29, 2023, the Department of JusticeHealth and Human Services officially recommended that the U.S. Attorneys’ officesDEA reschedule cannabis from Schedule I to focus theirSchedule III, although the DEA is not obligated to follow this recommendation. Further, on December 2, 2022, President Biden signed into law the Medical Marijuana and Cannabidiol Research Expansion Act, which streamlines and expands the process for researching the medical use of cannabis. We cannot predict how the current administration or future administrations will enforce the CSA or other laws against cannabis enforcement efforts under federal law only in identified priority areas, such as sale to minors, criminal enterprises, and interstate sales). Under the Sessions memorandum, local U.S. Attorneys’ offices retain discretion regarding the prosecution of cannabis activity authorized under state laws and regulations. While former U.S. Attorney General William Barr expressed support for the National Organization to Reform Marijuana Laws (“NORML”) during his Senate testimony on April 10, 2019, further change in the federal approach towards enforcement could negatively affect the industry, potentially ending it entirely.activities. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. The legal uncertainty and possible future changes in law could negatively affect our growth, revenues, results of operations and success generally.
Unless and until cannabis is de-scheduled entirely or Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA. Federal authorities may decide to change their current posture and begin to enforce current federal cannabis law and, if they decide to ignore the principles in the Cole Memorandum issued in 2013 (the “Cole Memorandum”) and begin to aggressively enforce such laws, it is possible that they could allege that we violated federal laws by selling products used in the cannabis industry. As a result, active enforcement of the current federal regulatory position on cannabis may thus directly or indirectly adversely affect our revenues and profits.
Violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the U.S. federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on our business, including our reputation and ability to conduct business, the listing of our securities on any stock exchanges, the settlement of trades of our securities, our ability to obtain banking services, our financial position, operating results, profitability or liquidity or the market price of our publicly tradedpublicly-traded shares. In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
Cannabis Industry Participants are subject to federal and state controlled substance laws and regulations. As a result, we are indirectly subject to a number of risks related to controlled substances.
We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry. Some of our products are sold to Cannabis Industry Participants and used in connection with cannabis businesses that are subject to federal and state controlled substance laws and regulations. Companies that transact directly or indirectly with cannabis businesses are subject to a number of risks related to controlled substances, which risks could reduce demand for our products by Cannabis Industry Participants. Such risks include, but are not limited to, the following:
•Cannabis is currently a Schedule I drug under the CSA and regulated by the Drug Enforcement Administration (the “DEA”)DEA as an illegal substance. The Food and Drug Administration (“FDA”),FDA, in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis. If cannabis were to become legal under federal law, its sale and use could become regulated by the FDA or another federal agency.
•If cannabis were to become regulated by the FDA or another federal agency, extensive regulations may be imposed on the sale or use of cannabis. Such regulations could result in a decrease in cannabis sales and have a material adverse impact on the demand for our products. If we or our Cannabis Industry Participants are unable to comply with any applicable regulations and/or registration prescribed by the FDA, we may be unable to continue to transact with retailers and resellers who sell products to cannabis businesses and/or our financial condition may be adversely impacted.
•Controlled substance legislation differs between states, and legislation in certain states may restrict or limit Cannabis Industry Participants from buying our products. Cannabis Industry Participants may be required to obtain separate state registrations, permits or licenses in order to be able to obtain, handle and/or distribute controlled substances in a state. Such state regulatory requirements may be costly and, the failure of such Cannabis Industry Participants to meet such regulatory requirements could lead to enforcement and sanctions by the states in addition to any from the DEA or otherwise arising under federal law. We could be implicated in such enforcement or sanctions because of the purchase of our products by such Cannabis Industry Participants.
•The failure of our Cannabis Industry Participants to comply with applicable controlled substance laws and regulations, or the cost of compliance with these laws and regulations, may adversely affect the demand for our products and, as a result, the financial results of our business operations and our financial condition.
Furthermore, the JPMorgan Credit Facility restrictsFacilities restrict our ability and the ability of the Subsidiary Obligors to sell our products directly to U.S. cannabis growers or to retailers that sell only to the U.S. cannabis industry.growers.
Our growth is highly dependent on the U.S. cannabis market. In the past, California regulations caused licensing shortages and future regulations may create other limitations that decrease the demand for our products. State level regulations adopted in the future may adversely impact our business. Supply and demand and prevailing prices for cannabis may also adversely impact our business.
The base of cannabis growers in the United States has grown over the past 20 years since the legalization of cannabis for medical uses in various U.S. 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.
Cannabis remains illegal under U.S. federal law, with cannabis currently listed as a Schedule I substance under the CSA. Notwithstanding laws in various states permitting certain cannabis activities, all cannabis activities, including possession, distribution, processing and manufacturing of cannabis and investment in, and financial services or transactions involving proceeds of, or promoting such activities remain illegal under various U.S. federal criminal and civil laws and regulations, including the CSA, as well as laws and regulations of several states that have not legalized some or any cannabis activities to date. Compliance with applicable state laws regarding cannabis activities does not protect us from federal prosecution or other enforcement action, such as seizure or forfeiture remedies, nor does it provide any defense to such prosecution or action. Cannabis activities conducted in or related to conduct in multiple states may potentially face a higher level of scrutiny from federal authorities. Penalties for violating federal drug, conspiracy, aiding, abetting, bank fraud and/or money laundering laws may include prison, fines, and seizure/forfeiture of property used in connection with cannabis activities, including proceeds derived from such activities.
We sell our products through third-party retailers and resellers, which do not exclusively sell to the cannabis industry, however, it is evident to us that the movement towards the legalization of cannabis in the U.S.United States and its legalization in Canada has ultimately had a significant, positive impact on our industry. We are not currently subject directly to any state laws or regulations controlling participants in the legal cannabis industry. However, regulation of the cannabis industry does impact those that we believe represent many end-users for our products and, accordingly, there can be no assurance that changes in regulation of the industry and more rigorous enforcement by federal authorities will not have a material adverse effect on us.
Legislation and regulations pertaining to the use and cultivation of cannabis are enacted on both the state and federal government level within the United States. As a result, the laws governing the cultivation and use of cannabis may be subject to 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.
Individual state laws regardingallowing the cultivation and possession of cannabis for adult and medical uses conflict with federal laws prohibiting the cultivation, possession and use of cannabis for any purpose. A number of states have passed legislation legalizing or decriminalizing cannabis for 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. Variations exist among those states’ cannabis laws. Evolving federal and state laws and regulations pertaining to the use or cultivation of cannabis, as well as active enforcement by federal or state authorities of the laws and regulations governing the use and cultivation of cannabis may indirectly and adversely affect our business, our revenues and our profits.
Furthermore, the JPMorgan Credit Facility restrictsFacilities restrict our ability and the ability of the Subsidiary Obligors to sell our products directly to cannabis growers or to retailers that sell only to the cannabis industry.growers. See “— Risks"Risks Relating to Our Indebtedness.”"
Certain of our products may be purchased for use in new and emerging industries and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, future scientific research and public perception.
We sell products, including hydroponic gardening products, through third-party retailers and resellers. End users may purchase these products for use in new and emerging industries, including the growing of cannabis that may not achieve market
acceptance in a manner that we can predict. The demand for these products is dependent on the growth of these industries, which is uncertain, as well as the laws governing the growth, possession, and use of cannabis by adults for both adult and medical-use.medical use.
Laws and regulations affecting the U.S. cannabis industry are continually changing, which could detrimentally affect our growth, revenues, results of operations and success generally. Local, state and federal cannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require the end users of certain of our products or us to incur substantial costs associated with compliance or to alter our respective business plans. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operation and financial condition.
Scientific research related to the benefits of cannabis remains in its early stages, is subject to a number of important assumptions, and may prove to be inaccurate. Future research studies and clinical trials may reach negative conclusions regarding the viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to medical cannabis, which could materially impact the demand for our products for use in the cannabis industry.
The public’s perception of cannabis may significantly impact the cannabis industry’s success. Both the medical and 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 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 adult-useadult use cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult-useadult use of cannabis where it is now legal, thereby limiting the Cannabis Industry Participants.
Demand for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop. We cannot predict the nature of such developments or the effect, if any, that such developments could have on our business.
Our indirect involvement in the cannabis industry could affect the public’s perception of us and be detrimental to our reputation.
Damage to our reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. Cannabis has often been associated with various other narcotics, violence and criminal activities, the risk of which is that our retailers and resellers that transact with cannabis businesses might attract negative publicity. There is also risk that the action(s) of other participants, companies and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and thereby negatively impact our reputation. The increased use of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views with regard to cannabis companies and their activities, whether true or not and the cannabis industry in general, whether true or not. We do not ultimately have direct control over how the cannabis industry is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our business strategy and realize our growth prospects, thereby having a material adverse impact on our business.
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.
Businesses involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.
We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry. Investments in the U.S. cannabis industry are subject to a variety of laws and regulations that involve money laundering, financial recordkeeping and proceeds of crime, including the BSA, as amended by the 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 United States. In February 2014, the Financial Crimes Enforcement Network ofFinCEN issued the Treasury Department
(“FinCEN”) issued a memorandum (the “FinCEN Memo”)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 CSAlaws and outlines extensive due diligence and reporting 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 that comply with applicable state law and regulations, these requirements can still present challenges for certain end users of our products in establishing and maintaining banking relationships, and restrictions on cannabis-related banking activities remain. In September 2019, the United StatesThe U.S. House of Representatives has passed the SAFE Banking Act whichnumerous times, and, if enacted, this bill would permit commercialprotect banks to offerand credit unions from federal prosecution for providing services to cannabis companies that are in compliance with state law, butcompanies. However, the Senate has not taken upthus far failed to pass the SAFE Banking Act or other similar legislation.legislation, despite industry expectations that the Senate would pass the SAFE Banking Act in late 2022. 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.Cannabis-related activities conducted in or related to conduct in multiple states may potentially face a higher level of scrutiny from federal authorities. Changes to current Justice DepartmentDOJ or Treasury Department policies or current state laws or regulations might adversely affect the legal risks under federal anti-money laundering laws posed by the acceptance directly by our distributors or indirectly by us of proceeds of our end users’ cannabis growing activities.
Risks Relating to Other Regulations
Certain state and other regulations pertaining to the use of certain ingredients in growing media and plant nutrients could adversely impact us by restricting our ability to sell such products.
One of our leading product lines is growing media and nutrients products. This product line includes certain products, such as organic soils and nutrients that contain ingredients that require the companies that provide us with these products to register the product registrations with certain regulators. The use and disposal of these products in some jurisdictions are subject to regulation by various agencies. A decision by a regulatory agency to significantly restrict the use of such products that have traditionally been used in the cultivation of our leading products could have an adverse impact on us or those companies providing us with such regulated products, and as a result, limit our ability to sell these products.
Our products and operations may be subject to increased regulatory and environmental scrutiny in jurisdictions in which we do business. For example, we are subject to regulations relating to our harvesting of peat moss in Canada, which has come under increasing regulatory and environmental scrutiny at the federal, provincial and territorial levels.
We are currently subject to, and may in the future become subject to additional, U.S., state and foreign laws and regulations imposing obligations on how we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business.
We are, and may increasingly become, subject to various laws and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our business, financial condition, results of operations and prospects.
In the 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”("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”("CPRA"). The CPRA comescame into effect on January 1, 2023, and will significantly modifymodifies the CCPA, including by expanding consumers’ rights with respect to certain personal information
and creating a new state agency to oversee implementation and enforcement efforts. Virginia and Colorado also enacted comprehensive data privacy laws similar to the CCPA, both of which will bebecame effective in 2023. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted.
Internationally, laws, regulations and standards in many jurisdictions apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. For example, the E.U. General Data Protection Regulation (“GDPR”("GDPR"), which became effective in May 2018, greatly increased the European Commission’s jurisdictional reach of its laws and adds a broad array of requirements for handling personal data. EU member states are tasked under the GDPR to enact, and have enacted, certain implementing legislation that adds to and/or further interprets the GDPR requirements and potentially extends our obligations and potential liability for failing to meet such obligations. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, use, retain, protect, disclose, transfer and otherwise process personal data. In particular, the GDPR includes obligations and restrictions concerning the consent and rights of individuals to whom the personal data relates, the transfer of personal data out of the European Economic Area or the United Kingdom, security breach notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater.
All of these evolving compliance and operational requirements impose significant costs, such as costs related to organizational changes, implementing additional protection technologies, training employees and engaging consultants, which are likely to increase over time. In addition, such requirements may require us to modify our data processing practices and policies, distract management or divert resources from other initiatives and projects, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Any failure or perceived failure by us to comply with any applicable federal, state or similar foreign laws and regulations relating to data privacy and security could result in damage to our reputation, as well as proceedings or litigation by government agencies or other third parties, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines, sanctions, awards, penalties or judgements, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Compliance with, or violation of, environmental, health and safety laws and regulations, including laws pertaining to the use of pesticides, could result in significant costs that adversely impact our reputation, businesses, financial position, results of operations and cash flows.
International, federal, state, provincial and local laws and regulations relating to environmental, health and safety matters affect us in several ways in light of the ingredients that are used in products included in our growing media and nutrients product line. In the United States, products containing pesticides generally must be registered with the Environmental Protection Agency (the “EPA”"EPA"), and similar state agencies before they can be sold or applied.sold. 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 usemay produce or distribute 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 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.
In addition, the end user application or use of certain pesticide products is regulated by various international, federal, state, provincial and local environmental and public health agencies. Although we strive to complyeducate the end user with such laws and regulations, and have processes in place designed to achieve compliance, we may be unable to prevent violations of these or other laws and regulations from occurring. Even if we are able to comply with all suchapplicable laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which we apply or use them,distribute, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances. The costs of compliance, noncompliance, investigation, remediation, combating
reputational harm or defending civil or criminal proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, businesses, financial position, results of operations and cash flows.
Risks Relating to Our Intellectual Property
Recent laws make it difficult to predict how patents will be issued or enforced in our industry.
Changes in either the patent laws or interpretation of the patent laws in the 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.
We may not be able to adequately obtain, maintain, protect or enforce our intellectual property and other proprietary rights that are material to our business.
Our ability to compete effectively depends in part on our rights to trademarks, patents and other intellectual property rights we own or license. We have not sought to register every one of our trademarks either in the 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 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.
The steps we take to obtain, maintain, protect and enforce our intellectual property and proprietary rights may be inadequate and despite our efforts to protect these rights, unauthorized third parties, including our competitors, may duplicate, reverse engineer, access, obtain, use or copy the proprietary aspects of our technology, processes, products or services without our permission. In addition, we cannot guarantee that we have entered into confidentiality agreements with each party that has or may have had access to our proprietary information, know-how and trade secrets. Moreover, our contractual arrangements may be breached or otherwise not effectively prevent disclosure of, or control access to, our intellectual property and confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure. If we are unable to obtain, maintain, protect or enforce our intellectual property and proprietary rights, including our proprietary information and/or brand names, we could suffer a material adverse effect on our business, financial condition and results of operations.
Litigation may be necessary to enforce our owned or in-licensed intellectual property rights and proprietary rights and protect our proprietary information against claims by third parties that our products or services infringe, misappropriate or otherwise violate their intellectual property rights or proprietary rights. Any litigation or claims brought by us could result in substantial costs and diversion of our resources and may not be successful, even when our rights have been infringed, misappropriated or otherwise violated. Our efforts to enforce our intellectual property and proprietary rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property and proprietary rights, and if such defenses, counterclaims or countersuits are successful, we could lose valuable intellectual property and proprietary rights. Additionally, the mechanisms for enforcement of intellectual property and proprietary rights in foreign jurisdictions may be inadequate.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.
Periodic maintenance or annuity fees on any issued patents are due to be paid to the USPTO, and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payments and other similar provisions during the patent application process. While an inadvertent or unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, nonpayment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our products, our competitors might be able to enter the market, which would have a material adverse effect on our business. Additionally, patents have a limited lifespan. In the 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 is
generally 15 years after its issue date. Even if patents covering our products or services are obtained, once the patent life has expired, we may be open to competition from competitive products or services. If one of our products requires extended development, testing and/or regulatory review, patents protecting such products might expire before or shortly after such products are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
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 need to obtain licenses to patents and other intellectual property and proprietary rights held by third parties to develop, manufacture and market our products, if, for example, we sought to develop our products, in conjunction with any patented technology. If we are unable to timely obtain these licenses on commercially reasonable terms (or at all) and maintain these licenses, our ability to commercially market our products, may be inhibited or prevented, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In spite of our best efforts, our licensors might conclude that we have materially breached our license agreements and might therefore terminate the license agreements, thereby removing our ability to develop and commercialize products, services and technology covered by these license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors may have the freedom to market products identical to ours and we may be required to cease using or commercializing our products, services and technology covered by such patents.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our success depends upon our ability to develop, manufacture, market and sell our products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the intellectual property or proprietary rights of third parties. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property or proprietary rights with respect to our products and technology, including interference or derivation proceedings and various other post-grant proceedings before the USPTO and/or non-United Statesnon-U.S. 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.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Although we try to ensure that our employees do not use the intellectual property and proprietary rights, including proprietary information or know-how, of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property or proprietary rights, including trade secrets or other proprietary information, of any such employee’s former employer. We are not aware of any threatened or pending claims related to these matters or concerning agreements with our employees, but in the future litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property or proprietary rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual property disputes could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the value of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent and other intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
If our owned or in-licensed trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
We regard our owned and in-licensed trademarks, trade names and service marks as having significant value and as an important factor in the success of our business. The registered or unregistered trademarks, trade names and service marks that we own or in-license from third parties may be challenged, infringed, circumvented, declared generic or determined to be infringing on or dilutive of other marks. Additionally, at times, competitors may adopt trademarks, trade names or service marks similar to the ones we own or in-license, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trademark, trade name or service mark infringement claims brought against us or our licensors by owners of other trademarks, trade names and service marks. Over the long term, if we are unable
to establish name recognition based on our owned and in-licensed trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. We may also license our trademarks, trade names and service marks out to third parties, such as our distributors. Though these license agreements may provide guidelines for how our trademarks, trade names and service marks may be used, a breach of these agreements or misuse of our trademarks, trade names and service marks by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names. Our efforts to enforce or protect our intellectual property and proprietary rights related to trademarks, trade names and service marks may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.
Intellectual property and proprietary rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property and proprietary rights is uncertain because intellectual property and proprietary rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative.
•Others may be able to construct products that are similar to our products but that are not covered by the claims of the patents that we own or have exclusively licensed;
•We or our licensors or strategic collaborators, if any, might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;
•We or our licensors or strategic collaborators, if any, might not have been the first to file patent applications covering certain of our inventions;
•Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing, misappropriating or otherwise violating our intellectual property and proprietary rights;
•It is possible that our current and future pending patent applications will not lead to issued patents;
•It is possible that our current and future pending trademark or service mark applications will not lead to registrations;
•We may fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection;
•Issued patents and other intellectual property and proprietary rights that we own or have exclusively licensed may not provide us with any competitive advantages, may not be sufficiently broad in scope or may be held invalid or unenforceable, as a result of legal challenges by third parties, including our competitors;
•Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
•We may not develop additional proprietary technologies that are patentable;
•The patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
Risks Relating to Our Capital Stock
We may incur indebtedness or issue capital stock that ranks senior or equally to our common stock as to liquidation preference and other rights and which may dilute our stockholders’ ownership interest.
Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, our amended and restated certificate of incorporation (the “Certificate"Certificate of Incorporation”Incorporation") does not prohibit us from issuing any series of preferred stock that would rank senior or equally to our common stock as to dividend payments and liquidation preference. Our Certificate of Incorporation allows for our board of directors to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock. We have the authority to issue up to 50,000,000 shares of our preferred stock without further stockholder approval. The issuances of any series of preferred stock could have the effect of reducing the amounts available to our holders of common stock in the event of our liquidation. In addition, if we issue preferred stock with voting rights that dilute the voting power of our common stock, the market price of our common stock could decrease. Additional issuances and sales of preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us. In addition, any additional capital raised through the sale of equity or equity-backed securities may dilute our stockholders’ ownership percentages and could also result in a decrease in the market value of our common stock.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock. Furthermore, we have the authority to issue up to 50,000,000 shares of our preferred stock without further stockholder approval, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a “poison pill”"poison pill" to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve. In addition, our Certificate of Incorporation and amended and restated bylaws (the “Bylaws”"Bylaws") contain provisions that may make the acquisition of our company more difficult, including the following:
•our authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise;
•our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause;
• 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;
•a special meeting of our stockholders may only be called by the chairperson of our board of directors or a majority of our board of directors;
•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and
•certain amendments to our Certificate of Incorporation and any amendments to our Bylaws by our stockholders will require the approval of at least two-thirds of our then-outstanding voting power entitled to vote generally in an election of directors, voting together as a single class.
Various provisions of our lending agreements with JPMorgan, in addition to our Certificate of Incorporation, Bylaws and other corporate documents, could delay or prevent a change of control.
The JPMorgan Credit FacilityFacilities prohibits us from undergoing a change of control. Any takeover attempt could be delayed, or prevented, if an amendment or waiver is not provided by the respective lenders. See “— Risks"Risks Relating to Our 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.”
We are a holding company and relyProvisions" which is attached to this Annual Report on dividends and other payments, advances and transfers of funds from our subsidiaries to meet our obligations and pay dividends, if any, and we may never pay any dividends to the holders of our common stock and capital appreciation, if any, of our common stock may be your sole source of gain on your investment.Form 10-K as Exhibit 4.2.
We have no direct operations and no significant assets other than the ownership of capital stock and equity interests of our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations. Legal and contractual restrictions in the JPMorgan Credit FacilityFacilities and other agreements which may govern future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. The earnings from, or other available assets of, our subsidiaries might not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or other obligations. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations and cash flows. In addition, our ability to pay dividends is restricted by the terms of the JPMorgan Credit FacilityFacilities and, in addition, future debt financing, if any, may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our securities.
We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any dividends to holders of our common stock in the foreseeable future, but will review this policy as circumstances dictate. The declaration and payment of all future dividends to holders of our common stock, if any, will be at the sole discretion of our board of directors, which retains the right to change our dividend policy at any time. In addition, our ability to pay dividends is restricted by the terms of the JPMorgan Credit FacilityFacilities and, in addition, future debt financing, if any, may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our securities. Consequently, capital appreciation, if any, of our common stock may be yourthe sole source of gain on your investment for the foreseeable future.
Our largest stockholders will exercise significant influence overIf we fail to meet the continued listing standards of Nasdaq, our company forcommon stock may be delisted, which may adversely affect the foreseeable future, including the outcome of matters requiring stockholder approval.
If our former directorsmarket price and their affiliates 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 saleliquidity of our company or all or a significant percentage of our assets.This concentration of ownership could limit your abilitycommon stock.
Our common stock is currently traded on the Nasdaq. Nasdaq requires us to influence corporate mattersmeet certain financial, public float, bid price and may haveliquidity standards on an ongoing basis in order to continue the effect of delaying or preventing a third party from acquiring control over us.
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 portionlisting of our common stock, these individuals and/or entities controlled by them,including that we maintain a minimum closing bid price of $1.00 per share. There can be no assurance that we will continue to collectively be able to strongly influence or effectively controlmaintain compliance with the requirements for continued listing of our decisions. Therefore, you should not invest in reliancecommon stock on yourNasdaq. If our common stock is delisted and we are unable to list our common stock on another U.S. national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Furthermore, if our common stock were delisted it could adversely affect our ability to have any control overobtain financing for the continuation of our company. See “Principal Stockholders,” “Certain Relationshipsoperations and/or result in the loss of confidence by investors, customers, suppliers and Related Party Transactions” and “Description of Capital Stock.”employees.
The market price of our common stock could be negatively affected by future sales of our common stock.
If our existing stockholders, our directors, their affiliates, or our executive officers, sell a substantial number of shares of our common stock in the public market, the market price of our common stock could decrease significantly. The perception
in the public market that these stockholders might sell our common stock could also depress the market price of our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities.
Our common stock has only recently become publicly traded, and the marketThe price of our common stock has been, volatile.
The market price of our common stock has fluctuated substantially due to a number of factors, many of which are beyond our control and may not be related to our operating performance.factors. 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:
•price and volume fluctuations in the overall stock market from time to time;
•volatility in the trading prices and trading volumes of stocks in our industry;
•changes in operating performance and stock market valuations of other companies generally, or those in our industry in particular;
•sales of shares of our common stock by us or our stockholders;
•failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;
•the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
•announcements by us or our competitors of new offerings or platform features;
•the public’s reaction to our press releases, other public announcements and filings with the SEC;
•rumors and market speculation involving us or other companies in our industry;
•actual or anticipated changes in our results of operations or fluctuations in our results of operations;
•actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
•litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
•developments or disputes concerning our intellectual property or other proprietary rights;
•announced or completed acquisitions of businesses, services or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidelines, interpretations or principles;
•any significant change in our management;
•the continued threat of terrorism and the impact of military and other action, including military actions
involving Russia and Ukraine;Ukraine and
•general economic conditions and slow or negative growth of our markets.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our Certificate of Incorporation provides that the doctrine of “corporate opportunity”"corporate opportunity" will not apply with respect to any director or stockholder who is not employed by us or our affiliates.
The doctrine of corporate opportunity generally provides that a corporate fiduciary may not develop an opportunity using corporate resources, acquire an interest adverse to that of the corporation or acquire property that is reasonably incident to the present or prospective business of the corporation or in which the corporation has a present or expectancy interest, unless that opportunity is first presented to the corporation and the corporation chooses not to pursue that opportunity. The doctrine of corporate opportunity is intended to preclude officers or directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our Certificate of Incorporation provides that the doctrine of “corporate opportunity”"corporate opportunity" does not apply with respect to any director or stockholder who is not employed by us or our affiliates. Any director or stockholder who is not employed by us or our affiliates will therefore have no duty to communicate or present corporate opportunities to us, and will have the right to either hold any corporate opportunity for their (and their affiliates’) own account and benefit or to recommend, assign or otherwise transfer such corporate opportunity to persons other than us, including to any director or stockholder who is not employed by us or our affiliates.
As a result, certain of our stockholders, directors and their respective affiliates will not be prohibited from operating or investing in competing businesses. We therefore may find ourselves in competition with certain of our stockholders, directors or their respective affiliates, and we may not have knowledge of, or be able to pursue, transactions that could potentially be beneficial to us. Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects.
If securities or industry analysts do not publish research or reports about our business, or they publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
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 Certificate of Incorporation and our Bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our Certificate of Incorporation or our Bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Notwithstanding the foregoing, the exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Exchange Act, the Securities Act or any other claim for which the federal courts have exclusive jurisdiction. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by applicable law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our Certificate of Incorporation and our Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially and adversely affect our business, financial condition, and results of operation.operations.
General Risk Factors
If we are unable to hire and retain key personnel, we may not be able to implement our business plan and our business may fail.fail; our headcount reductions may cause undesirable consequences.
Our future success depends to a large extent on our ability to attract, hire, train and retain qualified managerial, operational and other personnel. We face significant competition for qualified and experienced employees in our industry and from other industries and, as a result, we may be unable to attract and retain the personnel needed to successfully conduct and grow our operations. Additionally, key personnel, including members of management, may leave and compete against us.
At present, we believe we have the necessary key personnel to carry out our business plans but there can be no assurance that our beliefs will not prove unfounded. If we are unable to hire and retain key personnel, our business willmay be materially adversely affected. We reduced headcount in 2023 and 2022, and may implement further reductions in the future to create operational efficiencies. This workforce reduction may yield unintended consequences, such as attrition beyond our intended reductions and reduced employee morale, which may cause our employees who were not affected by the headcount reductions to seek alternate employment. We cannot provide assurance that we will not undertake additional workforce reductions or that we will be able to realize cost savings and other anticipated benefits from our previous or any future workforce reduction plans. In addition, this may adversely impact our ability to respond rapidly to any new product, growth or revenue opportunities and to execute on our business plans. In light of recent inflation, we may be required to increase the compensation we offer to current and prospective employees in order to compete for talent, and any wage increases may make it more difficult for us maintain general operating expenses at desired levels.
Litigation may adversely affect our business, financial condition and results of operations.
From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations.
Exercise of optionsThe Company's equity incentive plans 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.
The Company's equity incentive plans, including the vesting of restricted stock units and performance stock units, and the exercise of some or all of our outstanding options 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 December 31, 2021, we have outstanding options, held primarily by current and former employees of the Company, for the issuance of up to 720,549 shares of common stock at a weighted exercise price of $9.57 per share. The exercise of such existing outstanding stock options will further dilute our stockholders’ voting interests.To the extent options are exercised, additional shares of common stock will be issued, and such issuance will dilute stockholders.
In addition to the dilutive effects described above, the vesting or exercise of those securities would lead to an increase in the number of shares of common stock eligible for resale in the public market. Sales of substantial numbers of such shares of common stock in the public market could adversely affect the market price of our shares
of common stock. Substantial dilution and/or a substantial increase in the number of shares of common stock available for future resale may negatively impact the trading price of our shares of common stock.
Our security holders may be diluted by future issuances of securities by us.
In the future, we may issue our authorized but previously unissued equity securities, including additional shares of capital stock or securities convertible into or exchangeable for our capital stock. Such issuance of additional securities would dilute the ownership stake in us held by our existing stockholders and could adversely affect the value of our securities.
We may also issue additional shares of our common stock, warrants or other securities that are convertible into or exercisable for the purchase of shares of our common stock in connection with hiring and/or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock or other securities, for any reason including those stated above, may have a negative impact on the market price of our common stock. There can be no assurance that the issuance of any additional shares of common stock, warrants or other convertible securities may not be at a price (or exercise prices) below the price of the common stock offered hereby.
Failure to comply with the United StatesU.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As a Delaware corporation, we are subject to the United StatesU.S. Foreign Corrupt Practices Act, which generally prohibits United StatesU.S. 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.
Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.
Provisions of Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without the consent of our board of directors, for at least three years from the date they first hold 15% or more of the voting stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 1C. CYBERSECURITY
Cybersecurity Risk Management and Strategy
Cybersecurity is a critical risk to our business. We rely on complex information technology systems and networks to conduct business, including communicating with employees and our distribution centers, ordering and managing materials from suppliers, selling and shipping products and analyzing and reporting results of operations, as well as for storing sensitive, personal and other confidential information. While we employ resources to monitor and protect our technology infrastructure and sensitive information, these security measures or those of our third-party vendors may not prevent all attempted security breaches or cyber-attacks. If our or our third-party vendors’ information technology systems are damaged or cease to be available or function properly for an extended period of time, whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well as with our customers could be significantly impaired, which may adversely impact our business. Our acquisition strategy may also result in exposure to certain technology risks during integration of systems of acquired companies to our existing platform.
Addressing cybersecurity risks requires ongoing monitoring and vigilance, and the Company is making enhancements to its cybersecurity policies, procedures and practices to safeguard sensitive information as well as information from our partners, customers and employees. We employ a risk-based strategy focused on safeguarding critical assets by implementing controls around access, data, and infrastructure security to protect the confidentiality, integrity, and availability of our data. Maturation and refinement of the Company's cybersecurity risk management strategy and related procedures is a continuous
activity to ensure appropriate identification, assessment, and response to risks from cybersecurity threats that may adversely impact our operations. Our employee training and awareness programs are in place to improve cybersecurity awareness throughout the organization and we are committed to educating our employees on best practices for data protection and phishing awareness. We also engage with third-party cybersecurity assessors, consultants, and auditors that provide independent assessments of our systems and processes, contributing to our efforts to strengthen our cybersecurity posture and enhance our defenses.
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 immediately took steps to isolate those systems and implemented measures to prevent the spread of the attack, including taking systems offline in an abundance of caution. Together with an outside cybersecurity forensics firm, we investigated the attack to determine its nature, scope, duration, and impacts, as well as our vulnerability to another such attack and whether there was any exfiltration or misappropriation of data. There was no evidence that the attack extended beyond the Aurora acquisition’s systems, and it was determined that no critical data was accessed. We have subsequently taken steps to integrate the acquisition’s systems with our main systems, which we expect to complete in the first half of 2024.
We have not encountered cybersecurity incidents or identified risks from cybersecurity threats that have materially impaired our operations or financial standing. We maintain cyber insurance coverage to supplement our cybersecurity program given the complex and evolving nature of global cyber threats; however, the insurance may not be sufficient to cover all losses from any breaches of our systems and does not extend to reputational damage or costs incurred to improve or strengthen systems against future threats or activity. Given the increasing sophisticated threats, a disruption from a cybersecurity incident is possible to occur and we are actively taking actions to minimize the likelihood and impact of such incidents. In the event of such an incident, our information security team is continuously engaged to investigate and respond, including isolating systems, performing forensics, containing and eradicating malicious activity, and recovering systems in-line with business expectations and operations.
Cybersecurity Governance
Our Board of Directors oversees the cybersecurity risk management program and is regularly informed of cybersecurity risks through periodic updates provided by the Director of Information Technology ("IT"), to address our cybersecurity processes and risk mitigation efforts. Certain Board of Directors have cybersecurity risk certification credentials and experience with, and exposure to, cyber risk oversight. The periodic updates provided by management to the Board of Directors generally encompass emerging cyber threats, the Company’s security posture changes, significant cybersecurity incidents, progress of risk mitigation efforts, and cybersecurity strategies and investments. The frequency of these updates allows for timely decision-making and ensures that our Board is fully informed of our cybersecurity risks.
Our Director of IT is responsible for identifying, assessing, and mitigating cybersecurity risks across the Company. Supported by our Information Security team, the Director of IT monitors the cyber threat landscape, plans and implements security controls, and responds to incidents. The collective team has extensive experience in information security and cybersecurity risk management and performs detection and monitoring of cybersecurity threats and incidents on an ongoing basis using a combination of security tooling, automated systems and manual processes.
Item 2. PROPERTIES
We have approximately 1,000,000 square feetInformation regarding each of distribution space underour significant facilities, which may include multiple leases in strategic locations, including six distribution centers in the 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. Our headquartersat each location, is located in Shoemakersville, Pennsylvania. See “Certain Relationships and Related Party Transactions.”
In April 2021, we entered into leases for two new distribution centers aggregating approximately 322,000 square feet. One is located in Fairfield, California and is the distribution center that we have relocated to from our Petaluma, California distribution facility in connection 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 notes to the consolidated financial statements elsewhere in this Annual Report on Form 10-K.
In July 2021, we executed a lease for approximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada, commencing January 1, 2023. See Note 7 - Leases, in the notes to the consolidated financial statements elsewhere in this Annual Report on Form 10-K.
In November 2021, we executed a lease for approximately 109,000 square feet of warehouse in Cambridge, Ontario, Canada, commencing June 1, 2023 . See Note 7 - Leases, in the notes to the consolidated financial statements elsewhere in this Annual Report on Form 10-K.
In January 2022, we executed a lease for approximately 303,000 square feet of warehouse space in Shoemakersville, Pennsylvania, commencing March 1, 2022. See Note 7 - Leases, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We relocated our executive offices from 270 Canal Road, Fairless Hills, Pennsylvania 19030 to 1510 Main Street, Shoemakersville, Pennsylvania 19526, effective March 1, 2022.
set forth below. We believe that our existing facilities are adequate for our needs at this time, althoughtime.
| | | | | | | | | | | | | | |
| Location | | Square Footage | | Owned or Leased |
| Distribution Centers: | | | | |
| Fairfield, CA, U.S. | | 175,000 | | | Leased1 |
| Fontana, CA, U.S. | | 147,000 | | | Leased |
| Gresham, OR, U.S. | | 98,000 | | | Leased1 |
| Denver, CO, U.S. | | 87,000 | | | Leased |
| Shoemakersville, PA, U.S. | | 303,000 | | | Leased1 |
| New Hudson, MI, U.S. | | 126,000 | | | Leased1 |
| Surrey, BC, Canada | | 136,000 | | | Leased |
| Cambridge, ON, Canada | | 53,000 | | | Leased |
| Zaragoza, Spain | | 20,000 | | | Owned |
| Manufacturing Facilities: | | | | |
| Paramount, CA, U.S. | | 25,000 | | | Leased |
| Arcata, CA, U.S. | | 112,000 | | | Leased |
| Eugene, OR, U.S. | | 242,000 | | | Leased2 |
| Goshen, NY, U.S. | | 21,000 | | | Owned3 |
| Sycamore, IL, U.S. | | 209,800 | | | Leased1 |
| Edmonton, AB, Canada | | 26,000 | | | Leased |
1 We have one or more operating subleases or third-party logistics agreements at this location.
2 In January 2023, we do planentered into a sale-leaseback transaction. Refer to open new distribution centers inPart II, Item 8, Financial Statements, Note 6 - Leases for additional information about the sale and leaseback transaction at the Eugene, OR location.
3 In addition to the 21,000 square foot building that we own and occupy, we own approximately 100 acres of excess land suitable for future industrial/commercial development located adjacent to meet anticipated demand resulting from further deregulation of cannabis and overall market growth.our building.
Item 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on The Nasdaq Global Select Market under the symbol “HYFM”"HYFM" on December 10, 2020. Prior to that date, there was no public trading market for our common stock.
Holders of our Common Stock
As of February 17, 2022,15, 2024, there were approximately 18,74684 stockholders of record of our common stock. The number of stockholders of record does not include beneficial owners of our securities whose shares are held in the name of various security brokers, dealers and registered clearing agencies.
Dividend Policy
We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in any debt agreements, and other factors that our Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 6. RESERVED
Reserved.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and the 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 actualActual events or results may differ materially.materially from forward-looking statements. 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”"Risk Factors" in this Annual Report on Form 10-K. See “Special"Special Note Regarding Forward-Looking Statements.”"
Company Overview
We are a leading independent manufacturer and distributor of CEAbranded hydroponics equipment and supplies for controlled environment agriculture ("CEA"), including grow lights, climate control solutions, growing media and nutrients, as well as a broad portfolio of our own innovative and proprietary branded products. We primarily serve the U.S. and Canadian markets, and believe we are one of the leading competitors by market sharecompanies 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.
Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment. Hydroponics is the primary category of CEA and we use the terms CEA and hydroponics interchangeably. Our products are 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, 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.
We reach commercial farmers and consumers through a broad and diversified network of over 2,000 wholesale customer accounts, who we connect with primarily through our proprietary e-commerce marketplace. A substantial majority of our net salesonline ordering platform. Our products are to specialty hydroponic retailers, through which growers are able to enjoy specialized merchandise assortments and knowledgeable staff. We also distribute our productsdistributed across the U.S.United States and Canada tothrough a diversified range of retailers of commercial and home gardening equipment and supplies thatsupplies. Our customers include specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. Specialty hydroponic retailers commercial greenhouse builders,can provide growers with specialized merchandise assortments and commercial resellers.knowledgeable staff.
Recent DevelopmentsMarket Conditions
Innovative Growers Equipment, Inc. Acquisition
On November 1, 2021,We have experienced adverse financial results which we closed the acquisitionbelieve is primarily a result of the IGE Entities. See Note 3 - Business Combinations under Innovative Growers Equipment, Inc. Acquisition, an agricultural oversupply impacting our market. An agricultural oversupply has impacted our industry, driving cannabis wholesale prices down and resulting in a decrease in indoor and outdoor cultivation in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.markets where we operate. 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.
Senior Secured Term Loan
On October 25, 2021, we entered into a senior secured term loan facility, in the aggregate principal amount of $125 million, with JPMorgan Chase Bank, N.A. as administrative agent for certain lenders (the "Term Loan"). The Term Loan bears interest at a rate of either LIBOR (with a 1.0% floor) plus 5.50%, or an alternate base rate (with a 2.0% floor) plus 4.50% and matures on October 25, 2028. We used the net proceeds from the Term Loan to fund the cash portion of the IGE Entities' acquisition and for general corporate purposes, which may include, among other things, repaying any outstanding balance under our existing revolving facility and funding future M&A opportunities. Should additional capital needs arise, we can, per the terms of the Term Loan agreement, seek to upsize the facility. The Term Loan is more fully described in Note 10 - Debt under Term loans - Senior Secured Term Loan in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Greenstar/Grotek Acquisition
On August 3, 2021, we closed the acquisition of Greenstar. See Note 3 - Business Combinations under Greenstar/Grotek Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Greenstar produces premium horticultural products and solutions for global, domestic and commercial use. Greenstar’s owned brands include Grotek, Gaia Green, Supergreen, and EarthSafe. Grotek has been producing since 1998 and is sold internationally. Greenstar’s brands are utilized by commercial operators including growers, landscapers, greenhouses, nurseries, organic farms, as well as independent retailers. Greenstar manufactures products for both the retail and commercial market.
Investor Warrant Redemption
On July 19, 2021, we completed the redemption (the “Warrant Redemption”) of certain of our 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.
Aurora Acquisition
On July 1, 2021, we completed the acquisition of 100% of the issued and outstanding membership interests of Aurora. See Note 3 - Business Combinations under Aurora Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Founded in 2000, Aurora was a family-owned business with a strong vertically integrated manufacturing base with three locations across North America. The company is dedicated to ethical and sustainable practices and offers comprehensive plant fertility product lines free from harmful chemical residues and pesticides. Aurora adds to our growing proprietary brand nutrient and grow media line-ups, including its first organic nutrient and premium soil brands. We gained new domestic manufacturing and distribution capabilities on the east and west coasts along with a peat moss harvesting operation in Canada.
House and Garden Acquisition
On June 1, 2021, we acquired 100% of the issued and outstanding shares of capital stock of the H&G Entities. See Note 3 - Business Combinations under House & Garden Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The H&G entities are located in Arcata, California, and produce and distribute premium grade plant nutrients and fertilizers across the globe. The H&G entities offer a strong product line of plant nutrients that strengthens our position in the nutrient sector and complement our rapidly expanding portfolio of premium products for controlled environment agriculture.
Follow-on Public Offering
On May 3, 2021, we closed our follow-on offering, in which we issued and sold 5,526,861 shares of our common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of our common stock, at a public offering price of $59.00 per share, which resulted in net proceeds of approximately $309.8 million after deducting underwriting discounts and commissions and offering expenses. We used the proceeds from the follow-on offering for acquisitions, working capital and other general corporate purposes.
Heavy 16 Acquisition
On May 3, 2021, we acquired 100% of the issued and outstanding membership interests of Heavy 16. See Note 3 - Business Combinations under Heavy 16 Acquisition, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Heavy 16 is a leading manufacturer and supplier of branded plant nutritional products, with nine core products that are currently sold across the United States. The Heavy 16 products feature a full line of premium nutrients used in all stages of plant growth, helping to increase the yield and quality of crops.
JPMorgan Credit Facility
On March 29, 2021, we and certain of our 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, and the lenders from time to time party thereto. The JPMorgan Credit Facility replaced the Loan and Security 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 $50 million. We had 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. Our and our subsidiaries’ obligations under the JPMorgan 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 Credit Facility was amended to increase the 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.
New Distribution Centers
In April 2021, we entered into leases for two new distribution centers aggregating approximately 322,000 square feet. One is located in Fairfield, California and is the distribution center that we relocated to from our Petaluma, California distribution facility in the fourth quarter of 2021. The other distribution center is located in Fontana, California which we relocated to from our Santa Fe Springs, California distribution facility in the third quarter of 2021. See Note 7 - Leases, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In July 2021, we executed a lease for approximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada to be available upon expiration of the lease 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.
In November 2021, we executed a lease for approximately 109,000 square feet of warehouse space in Cambridge, Ontario, Canada to be available upon expiration of the lease 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 Form 10-K.
In January 2022, we executed a lease for approximately 303,000 square feet of warehouse space in Shoemakersville, Pennsylvania to be available upon expiration of the lease for existing space, commencing March 1, 2022. See Note 7 - Leases, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Effects of COVID-19 on Our Business
The World Health Organization recognized COVID-19 as a public health emergency of international concern on January 30, 2020 and as a global pandemic on March 11, 2020. Vaccines for COVID-19extent these market conditions will 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 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.
In response to the COVID-19 pandemic, we implemented business continuity plans designed to address thenegatively impact of the COVID-19 pandemic on our business such as restrictions on non-essential business travel, the institution of work-from-home practices and the implementation of strategies for workplace safety at our facilities. We have historically and may continue to source select products from 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 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. 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, 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.
Our customers reside in countries, primarily the U.S. and Canada, that are currently affected by the COVID-19 pandemic. Many of these customers have experienced shelter-in-place measures in attempts to contain the spread of COVID-19, including general lockdowns, closure of schools and non-essential businesses, bans on gatherings and travel restrictions.
Our business has remained resilient during the COVID-19 pandemic. As of December 31, 2021, our manufacturing and distribution operations are viewed as essential services and continue 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. State and Canadian government authorities. 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 highlyis uncertain rapidly evolving and difficult to predict at this time. Depending on the length and severity ofWe believe COVID-19 we may experience an increase or decrease in customer orders driven by volatility in consumer shopping and consumption behavior. It is difficult to assess or quantify with precision the impact COVID-19 has directly had on our business since we cannot precisely quantify the impacts, if any, that the various effects (e.g. possiblehave provided a positive demand impact for the Company in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and domestic portsa possible negative growth rate impact in 2022 and 2023 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.
In connection with our previously disclosed evaluation of our facility footprint and product and brand portfolio, we initiated a restructuring plan (the "Restructuring Plan") during the quarter ended December 31, 2022. In connection with the first phase of our Restructuring Plan, we have undertaken significant actions to streamline our operations, reduce costs and improve efficiencies during the industry recession. Our major initiatives included (i) narrowing our product and brand portfolio, including removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio, which excluded our garden center business in Canada, and (ii) relocating and consolidating certain manufacturing and distribution centers including headcount reductions and reorganization to drive a solution based approach, focusing commercial sales on competencies and product assortment gained from our recent acquisitions.
During the year ended December 31, 2022, we recorded pre-tax charges of $6.8 million relating to the inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $0.9 million relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges. During the year ended December 31, 2023, we recorded a pre-tax restructuring charges of $2.1 million for the first phase of the Restructuring
Plan, which were primarily costs related to the relocation and termination of certain facilities in Canada. The restructuring charges are primarily recorded within Cost of goods sold on the consolidated statements of operations. Total costs incurred relating to this first phase of the Restructuring Plan since it commenced in the fourth quarter of 2022, are (i) $6.4 million relating primarily to inventory markdowns, and (ii) $3.4 million relating primarily to the relocation and termination of certain facilities in Canada.
As a result of the continued adverse market conditions, in the third quarter of 2023 we announced and began implementing a second phase of the Restructuring Plan, including U.S. manufacturing facility consolidations, in particular with respect to our production of certain durable equipment products. We are reducing facility space and consolidating our manufacturing operations in the U.S. to improve efficiency and reduce costs. During the year ended December 31, 2023, we recorded estimated pre-tax charges of $9.2 million for the second phase of restructuring relating primarily to non-cash raw material inventory write-downs as we sell certain assets and reduce capacity and facility space, given low customer demand for these products. We also may evaluate other alternatives or opportunities to maximize our recovery of the inventory value. These restructuring charges are primarily recorded within Cost of goods sold on the consolidated statements of operations. Further, we estimate additional charges associated with this second phase of the Restructuring Plan may exceed $2.0 million and be incurred through the next several quarters as we consolidate and exit facilities. These estimated additional charges include an estimated cash impact that may exceed $1.0 million for facility consolidations and lease and other contract terminations. We anticipate the second phase of our restructuring plan and related actions may result in cost savings of approximately $1.5 million on an annualized basis. The amounts we will ultimately realize or disburse in connection with both phases of the Restructuring Plan could differ materially from our estimates, and we may not be able to realize the full extent of our anticipated cost savings.
As of June 30, 2022, primarily due to a sustained decline in the market value of our common stock and the possible negative impact on transportation costs) have had onmarket conditions described above, we identified a triggering event requiring a test for goodwill impairment. We completed our goodwill impairment testing and recorded an impairment charge of $189.6 million as the overall business. And so, while we dotest determined that the carrying value of the goodwill reporting units of U.S. and Canada was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as of June 30, 2022. The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions. We also review intangible assets with finite lives and indefinite lives for impairment when events or changes in circumstances indicate that the carrying amount may not believe that we are experiencing net material adverse impacts at this time, givenbe recoverable. We did not identify a triggering event requiring a test for impairment during the global economic slowdown,remainder of 2022, or the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associatedyear ended December 31, 2023.
In connection with the COVID-19 pandemic,goodwill impairment analysis performed as of June 30, 2022, we determined the fair value of the U.S. and Canada reporting units based on an income approach, using the present value of future discounted cash flows, and based on a market approach. The fair values were reconciled to the market value of our common stock to corroborate the estimates used in the interim test for impairment. The fair value determinations were a reflection of sales declines we experienced, which we believe were primarily a result of an agricultural oversupply impacting our market, and a reduction to our profitability and loss from operations. These market conditions continued to negatively impact our business financial condition,and results of operations during the remainder of 2022, and growth prospects could be materiallythe year ended December 31, 2023.
We maintain an allowance for excess and adversely affected.obsolete inventory that is based upon assumptions about future demand and market conditions. While we believe our estimates of charges relating to our Restructuring Plan, long-lived assets, inventory obsolescence, and accounts receivable allowances are reasonable, it is possible that we are well positioned formay incur additional charges in the future as we navigateand actual results may differ significantly from these estimates and assumptions. Depending on the crisislength and prepare for an eventual return to a more normal operating environment, we continue to closely monitorseverity of the COVID-19 pandemic as we evolveindustry and market conditions impacting our business, continuity plansit is possible we may execute additional restructuring plan actions and response strategy.incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.
Other TransactionsFiling Status
Initial Public Offering
On December 14, 2020, we completed our initial public offering (“IPO”), in which we issued and sold 9,966,667As of June 30, 2023, the market capitalization of outstanding shares of our common stock includingowned by non-affiliates decreased to below $60 million, which triggered the full exercise byCompany being classified as a non-accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2023. As a result, our annual assessment of the underwriters of their option to purchase 1,300,000 additional shareseffectiveness of our common stock, atinternal control over financial reporting does not require an audit by our external audit firm in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 for this Annual Report on Form 10-K for the year ended December 31, 2023. The Company continues to qualify as a public offering price of $20.00 per share, which resultedsmaller reporting company in net proceeds of $182.3 million after deducting underwriting discounts and commissions and offering expenses. The proceeds from the IPO were used to (i) repay amounts outstandingaccordance with Rule 12b-2 under the previous term loan with Brightwood Loan Services, LLCExchange Act and continues to follow certain of $76.6 million (includes accrued interest and fees of $0.3 million), (ii) to pay down certain amounts outstanding under the Encina Credit Facility of $33.4 million, (iii) to repay $3.3 million under the promissory note to JPMorgan Chase, N.A. through the U.S. Small Business Administration Paycheck Protection Program, and (iv) to pay $2.6 million to settle the Series A preferred stock dividend. Our common stock began trading on the Nasdaq Global Select Market on December 10, 2020.scaled back disclosure accommodations.
Our board of directors and stockholders approved an amendment to our amended and restated certificate of incorporation effecting a 1-for-3.3712 reverse stock split of our issued and outstanding shares of common stock. The reverse split was effected on November 24, 2020 without any change in the par value per share.Components of Results of Operations
Net sales
We generate net sales from the distributionmanufacturing and manufacturingdistribution of hydroponic equipment and supplies to our customers. The hydroponic equipment and supplies that we sell include consumable products, such as growing media, nutrients and supplies that requireare subject to regular replenishment and durable products, such as lighting and hydroponic equipment. Our scale allows us to provide delivery and service capabilities to a highly diverse group ofour customers acrossprimarily in the U.S. and Canada. We
generally do not sell directly to growers but rather our customer base consists of specialty hydroponic retailers, garden centers, eCommerce and greenhouse suppliers.
We periodically offer sales incentives to our customers, including early pay discounts, volume-based rebates, temporary price reductions, advertising credits and other trade activities. Net sales reflect our gross sales less sales incentives which are estimated and recorded at the time of sale plus amounts billed to customers for shipping and handling costs. We anticipate that sales incentives and/or the amount billed to customers for shipping and handling costs could impact our net sales and that changes in such promotional activities or freight recovery charges could impact period-over-period results.
Cost of goods sold
Cost of goods sold consists primarily of material costs, inbound and outbound freight costs, direct labor costs primarily for manufacturing and warehouse personnel, facility costs for manufacturing operations, and depreciation, depletion and amortization of manufacturing and warehouse improvements and equipment.equipment, restructuring costs, inventory allowances, and certain acquisition and integration expenses. We expect that our cost of goods sold towould increase in absolute dollars in conjunction with ournet sales growth and as a result of higher freight and labor costs.when/if that occurs in the future. However, we expect that, over time, cost of goods sold willmay decrease as a percentage of net revenue as a result of the scaling ofsales if we are successful in instituting our restructuring and related productivity and cost saving initiatives and/or if we are able to scale our business includingas we obtain a higher proportion of the amount ofnet sales associated with proprietary and exclusive branded products that we sell.products.
Selling, general and administrative
Selling, general and administrative expenses ("SG&A") consists primarily of marketing and advertising, facility costs for distribution operations, stock-based compensation, depreciation and amortization of all other assets, certain acquisition and integration expenses, marketing and advertising, and other selling, general and administrative costs, including but not limited to salaries, benefits, bonuses, stock-based compensation, professional fees, and various costs related to becomingbeing a publicly-traded company. We expect selling, general and administrative expenses to increase in absolute dollar terms as we scale our operations to meet increased demand for our products and operate as a public company with increased costs associated with insurance, finance, legal and accounting functions; however, we also expect that the significant increase in our scale will result in selling, general and administrative expenses as a percentage of net sales decreasing over time.
Results of Operations Data
The results of operations data in the following tables for the years ended December 31, 2021, 2020, and 2019 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Results of Operations - Comparison of Years Ended December 31, 20212023, and 20202022
The following table sets forth our consolidated statementsresults of operations fordata in the years ended December 31, 2021, and 2020,following table, including amounts and percentages of net sales for each year and the year-to-year change in dollars and percent, for the years ended December 31, 2023, and 2022, have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K (amounts in thousands):
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| 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 | | % |
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| Years ended December 31, | | | | | |
| 2023 | | 2022 | | Year to year change |
| Net sales | $ | 226,581 | | | 100.0 | | % | | $ | 344,501 | | | 100.0 | | % | | $ | (117,920) | | | -34.2 | | % |
| Cost of goods sold | 188,969 | | | 83.4 | | % | | 315,165 | | | 91.5 | | % | | (126,196) | | | -40.0 | | % |
| Gross profit | 37,612 | | | 16.6 | | % | | 29,336 | | | 8.5 | | % | | 8,276 | | | 28.2 | | % |
| Operating expenses: | | | | | | | | | | | | | | |
| Selling, general and administrative | 87,314 | | | 38.5 | | % | | 118,604 | | | 34.4 | | % | | (31,290) | | | -26.4 | | % |
| Impairments | — | | | 0.0 | | % | | 192,328 | | | 55.8 | | % | | (192,328) | | | -100.0 | | % |
| Loss from operations | (49,702) | | | -21.9 | | % | | (281,596) | | | -81.7 | | % | | 231,894 | | | 82.3 | | % |
| Interest expense | (15,442) | | | -6.8 | | % | | (10,958) | | | -3.2 | | % | | 4,484 | | | 40.9 | | % |
| Other income, net | 118 | | | 0.1 | | % | | 696 | | | 0.2 | | % | | (578) | | | -83.0 | | % |
| Loss before tax | (65,026) | | | -28.7 | | % | | (291,858) | | | -84.7 | | % | | 226,832 | | | 77.7 | | % |
| Income tax benefit | 213 | | | 0.1 | | % | | 6,443 | | | 1.9 | | % | | (6,230) | | | -96.7 | | % |
| Net loss | (64,813) | | | -28.6 | | % | | (285,415) | | | -82.8 | | % | | 220,602 | | | 77.3 | | % |
Net sales
Net sales for the year ended December 31, 20212023, were $479.4$226.6 million, an increasea decrease of $137.2$117.9 million, or 40.1%34.2%, compared to the same period in 2020.2022. The 40.1% increase34.2% decrease was primarily due to an approximate 35.0% increasea 32% decline in volume of products sold (a 13.1% increase in organic sales and a 21.9% increase from recently-acquired proprietary brands), a 3.6% increase2% decrease in price and mix of products sold, and 1.5% growth from favorable foreign exchange rates.sold. The increasedecrease in volume of products sold was primarily related to (i) expansion of our proprietary and preferred brands, (ii) large expansion of our plant nutrients products, (iii) first-half expansion in our business predominantly in California, Oklahoma and Missouri, and (iv) growth from our acquisitions. The increase in price was primarily related to list price increases. The increase in foreign exchange related to recent weaknessthe aforementioned oversupply in the U.S. Dollarcannabis industry. During the year ended December 31, 2023, we sold a higher mix of generally lower-priced consumables relative to the Canadian Dollarhigher-priced durable products, and to the Euro.reduced selling prices for certain brands and product segments, including previously reserved lighting products.
Gross profit
Gross profit for the year ended December 31, 20212023, was $101.5$37.6 million, an increase of $37.9$8.3 million, or 59.5%28.2%, compared to the same period in 2020. 2022. The increase in gross profit was primarily relateddue to (i) incurring lower inventory charges in the aforementioned increasecurrent year, as the prior year 2022 was impacted by $18.5 million of inventory reserves and related charges, (ii) a $4.8 million reduction in acquisition and integration expenses compared to the prior year, and (iii) benefits from selling a higher proportion of proprietary brand products, lower freight costs, and improved productivity. Our restructuring plan and related cost-saving initiatives contributed to realizing these net benefits. These improvements were partially offset by lower net sales in the current year and (ii) a significant increase$3.2 million of higher restructuring charges in our gross profit margin percentage (gross profit as a percentage of net sales).2023 compared to the prior year period. The restructuring charges were primarily due to non-cash inventory markdowns. Our gross profit margin percentage increased to 21.2%16.6% for the year ended December 31, 20212023, from 18.6%8.5% in the same period in 2020. The higher gross profit margin percentage is primarily due to a more favorable sales mix of proprietary and preferred brand products (due in part to the aforementioned proprietary brands that were recently acquired and the preferred brands products added in the year-to-date period), which typically carry a higher gross margin than our distributed branded products, partially offset by higher freight and labor costs which escalated significantly as a percentage of net sales in our third and fourth fiscal quarters.2022.
Selling, general and administrative expenses
Selling, general and administrativeSG&A expenses ("SG&A") for the year ended December 31, 20212023, were $103.9$87.3 million, an increasea decrease of $45.4$31.3 million, or 26.4%, compared to the same period in 2020. 2022. The decrease was partially due toThe increase is primarily a $9.7 million decline in amortization and depreciation expenses, as the prior year period included additional amortization expense due to adjustments to the useful lives of intangible assets, as described in Note 2 – Basis of Presentation and Significant Accounting Policies. Additionally, SG&A expenses decreased $21.6 million in the year ended December 31, 2023, due to lower expenses in several areas, including as a result of our cost saving and restructuring initiatives: (i) $5.5 million decrease in salaries and benefits, (ii) $4.1 million decrease in accounts receivable reserves and related tocharges, (iii) $3.4 million decrease in stock-based compensation, (iv) $2.9 million decrease in acquisition and integration expenses, and (v) $2.1 million decrease in professional and outside services, along with other expense reductions in multiple areas.
Impairments
The Company did not record any impairment charges for the year ended December 31, 2023. The Company recorded goodwill impairment charges of $19.7$189.6 million costs associated withfor the relocationyear ended December 31, 2022, as we determined that the carrying value of certainthe reporting units of our distribution centersU.S. and Canada was in excess of $1.9 million, non-compensation generalthe fair value. The recognized impairment reduced the goodwill balance to zero as of June 30, 2022. The impairment was primarily due to a deterioration in customer demand in the United States and administrative costs associated withCanada caused by macroeconomic and industry conditions. For the new acquisitions (an increaseyear ended December 31, 2022, the Company also recorded an impairment of $9.2 million), compensation costs (an increase of $7.2 million), insurance costs (an increasea note receivable of $2.6 million), marketing (an increasemillion. Refer to Note 2 – Basis of $2.3 million), facility costs (an increase of $2.3 million), consulting fees (an increase of $1.7 million),Presentation and $1.9 million of solicitation fees incurred inSignificant
connection withFair Value Measurements for further description regarding the Warrant Redemption, offset by share-based compensation (a decrease of ($3.4) million). These increases were largely the result of (i) our accelerated M&A strategy and (ii) the increased costs associated with running a public company and supporting our long-term growth strategy. The decrease in share-based compensation was due to the vesting of restricted stock units ("RSUs") last December with performance-based vesting requirements 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.note receivable impairment.
Interest expense
Interest expense for the year ended December 31, 20212023, was $2.1$15.4 million, a decreasean increase of $8.0$4.5 million, or 78.9%40.9%, compared to the same period in the prior year. The decreaseincrease was primarily due to the payoff of the prior term loan with Brightwood Loan Services, LLC and pay down of the Encina Credit Facility in connection with the December 2020 IPO.higher variable interest rates on our Term Loan.
Loss on debt extinguishmentOther income, net
Loss on debt extinguishmentOther income, net for the year ended December 31, 20212023, was $0.7$0.1 million, which resulteda decrease of $0.6 million compared to the same period in the prior year. Other income, net for the year ended December 31, 2023, was primarily fromdriven by foreign currency exchange rate gains and interest income, partially offset by legal fees associated with the amendment of the Term Loan. Other income, net for the year ended December 31, 2022 was primarily driven by foreign exchange rate gains, partially offset by the write-off of unamortized deferred financing costs associated with the terminationmodification of the EncinaRevolving Credit Facility. Loss on debt extinguishmentFacility entered into during the fourth quarter of 2022.
Income tax benefit
We recorded an income tax benefit of $0.2 million for the year ended December 31, 2020 was $0.9 million, which resulted primarily2023, representing an effective tax rate of 0.3%. Our effective tax rate for the year ended December 31, 2023, differs from the write-offfederal statutory rate of unamortized21% primarily due to maintaining a full valuation allowance against our net deferred financings costs associated withtax assets in the payoff of the prior term loan with Brightwood Loan Services, LLC.
IncomeUnited States and most foreign jurisdictions. The income tax benefit (expense)for the year ended December 31, 2023, was primarily due to minor foreign tax benefits in certain jurisdictions.
Income tax benefit for the year ended December 31, 20212022, was approximately $19.1$6.4 million. Our effective income tax benefitrate was 2.2% for the year ended December 31, 2022, and differs from the U.S. federal statutory rate of 21% primarily due to the resultimpairment of goodwill for certain 2021 acquisitions which was not deductible for U.S. tax purposes, increases in our valuation allowance on U.S. deferred tax assets, and the establishment of a reduction in the valuation allowance recorded against our netfor Canadian deferred tax assets. As described in Note 3 - Goodwill and Intangible Assets, Net, during the year ended December 31, 2022, we fully impaired the goodwill associated with all 2021 acquisitions. In connection with the acquisition ofmeasurement period adjustments associated with 2021 acquisitions, the H&G Entities, weCompany recorded a net deferred tax liability which provided an additional source of taxable income to support the realization of the pre-existing deferred tax assets. OurThe Company's income tax benefit was partially offset by income taxes from certain foreign jurisdictions where we conduct business and state minimum income taxes in the United States. We have a valuation allowance for deferred tax assets, including net operating loss carryforwards. The income tax expense for the year ended December 31, 2020 was primarily due to foreign and state income tax expense.
Results of Operations – Comparison of Years Ended December 31, 2020 and 2019
The following table sets forth our consolidated statements of operations for the years ended December 31, 2020 and 2019, including amounts and percentages of net sales for each year and the year-to-year change in dollars and percent (amounts in thousands):
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| 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 | | % |
Net sales
Net sales for the year ended December 31, 2020 increased by $107.1 million or 45.6% compared to the year ended December 31, 2019. The increase in net sales was primarily due to a 42.0% increase in volume of products sold and a 3.6% increase in price of products sold. The increase in volume of products sold was primarily related to (i) higher demand from the end-markets across numerous U.S. states, including but not limited to Michigan, Oklahoma and California, and Canada and (ii) higher demand for our proprietary and preferred branded products which grew at a faster pace than our distributed brands during the period. The increase in price was primarily related to list price increases and more effective sales incentives.
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 March 2020 in response to the COVID-19 pandemic. A portion of our net sales during this period could have 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.
Gross profit
Gross profit for the year ended December 31, 2020 increased by $36.5 million or 134.9% compared to the year ended December 31, 2019. The increase in gross profit was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales). Our gross profit margin percentage increased to 18.6% for the year ended December 31, 2020 compared to 11.5% for the year ended December 31, 2019. The higher gross profit margin percentage was 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.
Selling, general and administrative expenses
Selling, general and administrative 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.
To support our long-term growth plan and our IPO, we undertook several initiatives in mid-to-late 2019 and early 2020 which resulted in the aforementioned $14.7 million increase in selling, general and administrative expenses, including increased stock-based compensation expenses, increased compensation costs (an increase of $3.9 million), and increased professional service fees, including, but not limited to, the hiring of executives such as our new Chief Executive Officer, President and Chief Financial Officer and engaging new third parties such as an IT consulting firm, a new auditor, and several accounting and audit-related consultants (an increase of $4.4 million).
As more fully discussed in Note 12 - Stock-based compensation, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we granted 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.
Impairment, restructuring and other
Impairment, restructuring and other expenses declined to $0.9 million for the year ended December 31, 2020. For the year ended December 31, 2019, we recognized a $5.4 million expense related to impairment of intangible assets for customer relationships; $2.0 million for restructuring costs, and $1.5 million for other expenses. We also incurred $1.1 million for a registration statement which was delayed, and accordingly, the third-party costs were expensed. See Note 15 - Impairment, restructuring and other, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Interest expense
Interest expense decreased by $3.3 million or 24.7% for the year ended December 31, 2020 compared to the year ended December 31, 2019. The average balance of our interest bearing debt for the year ended December 31, 2020 increased by $2.3 million compared to the year ended December 31, 2019. This increase was offset by a decrease in the effective interest rate on the term loan with Brightwood Loan Services, LLC ("Brightwood Term 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 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.
Loss on debt extinguishment
Loss on debt extinguishment for the year ended December 31, 2020 resulted from the write-off of unamortized deferred financing costs associated with the payoff of the Brightwood Term Loan 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.
Income tax expense
Income tax expense for the year ended December 31, 2020 generally reflects minimum U.S. state income taxes which do not fluctuate with pre-tax income or loss and Canadian taxes in one of our profitable Canadian subsidiaries.
The net income tax benefit for the year ended December 31, 2019 is comprised of two amounts: (i) minimum U.S. state and Canadian provincial taxes which do not fluctuate with pre-tax income or loss; and, (ii) a deferred income tax benefit of $0.7 million primarily generated from the tax consequence of the impairment write-off which is not expected to recur.
Cumulative dividends allocated to Series A convertible preferred stock
Our Series A Preferred Stock accrued a cumulative dividend during 2020 which is presented as a reduction of net loss which results in the net loss attributable to common stockholders. Dividends did not accrue prior to 2020. Upon the consummation of our IPO in December 2020, the Series A Preferred Stock automatically converted into 2,291,469 shares of our common stock and we paid $2.6 million in cash to settle the Series A Preferred Stock dividend.
Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted 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.
To supplement our audited consolidated financial statements which are prepared in accordance with GAAP, we use “Adjusted EBITDA” and “Adjusted EBITDA as a percent of sales” which are non-GAAP financial measures (collectively referred to as “Adjusted EBITDA”). Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include:
• Adjusted EBITDA does not reflect interest expense, or the amounts necessary to service interest or principal payments on our indebtedness;
• Adjusted EBITDA excludes depreciation and amortization, and although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future;
• Adjusted EBITDA does not reflect our tax provision that adjusts cash available to us;
• Adjusted EBITDA excludes the non-cash component of stock-based compensation;
• Adjusted EBITDA excludes the amount of employer payroll taxes on stock-based compensation; and
• Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.
We define Adjusted EBITDA as net income (loss) excluding interest expense, income taxes, depreciation and amortization, stock-based compensation, employer payroll taxes on stock-based compensation and other unusual and/or infrequent costs, which we do not consider in our evaluation of ongoing operating performance.
The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for 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) | % |
(*) Includes consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, Greenstar/Grotek and IGE acquisitions and certain potential acquisitions.
(**) Includes employer payroll taxes on stock-based compensation
Liquidity and Capital Resources
Cash Flow from Operating, Investing, and Financing Activities -
Comparison of Years Ended December 31, 2021, 2020,2023, and 20192022
The following table summarizes our cash flows for the years ended December 31, 2021, 20202023, and 20192022 (amounts in thousands):
| | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
| Years ended December 31, |
| 2023 | | 2022 |
| Net cash from operating activities | $ | 7,044 | | | $ | 21,989 | |
| Net cash used in investing activities | (4,170) | | | (8,487) | |
| Net cash from (used in) financing activities | 6,065 | | | (20,200) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 82 | | | (395) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 9,021 | | | (7,093) | |
| Cash, cash equivalents and restricted cash at beginning of year | 21,291 | | | 28,384 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 30,312 | | | $ | 21,291 | |
Operating Activities
Net cash used infrom operating activities was $45.1$7.0 million for the year ended December 31, 2021,2023, was primarily consistingdue to a $12.4 million net cash inflow from a reduction of $13.4working capital, partially offset by a reported net loss of $64.8 million inless non-cash items of $59.5 million. The net income, $4.4 million in net non-cash expense reductions, which were largely comprised of depreciation, depletion and amortization, stock-based compensation expense, non-cash operating lease expense, deferred income tax benefit and other non-cash expenses, less a $62.9 million increase in working capital. This changereduction in working capital was primarily reflects an aggregate increasedriven by a $26.1 million decrease of $47.8inventories, partially offset by decreases of $9.2 million of lease liabilities and $3.5 million of accrued expenses and other current liabilities. During the year ended December 31, 2023, we paid $13.1 million in cash interest, compared to $9.6 million in the prior year. In addition, we obtained cash income tax refunds of $1.0 million in 2023 compared to $3.9 million of cash income tax payments in the prior year.
Net cash from operating activities was $22.0 million for the year ended December 31, 2022, primarily due to a $39.6 million net cash inflow from a reduction of working capital related assets and liabilities. This included a decrease of $57.0 million in inventories and a decrease of $16.7 million in accounts receivable, inventories, prepaid expensesnet, partially offset by decreases of $13.3 million in deferred revenue and other current assets, and other assets for the period as well as an aggregate net decrease of $15.1$16.5 million in accounts payable, accrued expenses and other current liabilities, andliabilities. The net cash inflow from a decrease in lease liabilities due to payments on lease obligations during the period.
Net cash used in operating activities was $44.8 million for the year ended December 31, 2020 consistingreduction of $20.2 million in non-cash expense addbacks which were largely composed of stock-based compensation, depreciation and amortization and non-cash operating lease expense, lessworking capital is partially offset by consolidated net loss on the statement of $7.3 million, payment of interest capitalized to principal of long-term debt of $13.9 million and a $43.8 million increase in working capital. The change in working capital primarily reflects a $43.2 million increase in accounts receivable and inventory for the period offset by a $10.7 million increase in accounts payable and accrued expenses. The net change was due to the additional working capital needed to support our growth in net sales.
Net cash used in operating activities was $13.3 million for the year ended December 31, 2019 consisting of net loss of $40.1 million offset by $26.2 million in non-cash addbacks 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.operations.
Investing Activities
Net cash used in investing activities for the year ended December 31, 20212023, was $468.2$4.2 million, due primarily to five business acquisitions we completed during the period, which totaled $462.2 millioncapital expenditures for property, plant and equipment. The 2023 cash usage primarily includes investments in cash outflows and $6.0 millionour peat moss harvesting operation in purchases of property and equipment and other.
We had minimal investing activities for the years ended December 31, 2020 and 2019. We made advances on notes receivable to third parties of $3.1 million the year ended December 31, 2019 and were repaid $2.0 million the year ended December 31, 2020. Our business was not capital intensive during the years ended December 31, 2020 or 2019 and purchases of property and equipment were $1.4 million and $0.8 million, respectively.
Financing Activities
Net cash provided by financing activities was $464.7 million for the year ended December 31, 2021. We received $309.8 million proceeds from our follow-on offering, $119.9 million proceeds from our senior secured Term Loan, net ofCanada.
discountNet cash used in investing activities for the year ended December 31, 2022, was $8.5 million, due primarily to capital expenditures for property, plant and issuance costs,equipment, which increased over the prior year primarily due to investments in our manufacturing operations and received an additional $56.8the expansion and relocation of certain of our distribution centers. The 2022 cash usage primarily includes investments in the peat moss harvesting operation in Canada and IGE manufacturing operations in the U.S.
Financing Activities
Net cash from financing activities was $6.1 million for the year ended December 31, 2023, primarily driven by $8.6 million of proceeds from the exerciseSale-Leaseback Transaction, partially offset by $1.3 million of warrants, includingquarterly principal payments of the Warrant Redemption.Term Loan.
Net cash used in financing activities was $20.2 million for the year ended December 31, 2022, primarily consisting of $15.5 million in payments to settle contingent consideration, primarily on our Aurora acquisition. We also paid $20.0$2.5 million related to employee'semployees' withholding tax in connection with the vesting of certain restricted stock units.
Our IPO was completed in December 2020 generating $182.4 In addition, we paid $1.3 million in net proceeds. We used a portion of the proceeds to pay off the Brightwood Term Loan, to pay off our PPP loan and to paydown the outstanding balance under the Encina Credit Facility. Other activity was a net of $1.2 million from transactions with our Series A preferred stock investors andprincipal payments of $0.7 million on finance leases. Our net cash provided by these activities was $88.1 million for the period which we used for business growth and expansion.
For the year ended December 31, 2019, our borrowings under the working capital credit facilities marginally exceeded repayments which reflected stable working capital needs for the period. We also received $21.7 million from our Series A Preferred Stock offering including proceeds from the issuance of notes which converted into the Series A Preferred Stock. Net cash provided by these activities was $19.9 million for the period.
JPMorgan Revolving Credit Facility
On March 29, 2021, we entered into the JPMorgan Credit Facility, which provided for a borrowing limit of $50 million. The JPMorgan Credit Facility replaced the Encina Credit Facility. The JPMorgan Credit Facility is due on March 29, 2024.
On August 31, 2021, the JPMorgan Credit Facility was amended to increase the borrowing limit to $100 million and on October 25, 2021 was further amended to permit the Term Loan and to conform to provisions of the Term Loan.
The JPMorgan Credit Facility has an interest rate of LIBOR plus 1.95% and has a 0.0% LIBOR floor. A fee of 0.25% per annum is charged for available but unused borrowings. Our obligations under the JPMorgan 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 Canadian Pledge and Security Agreement dated March 29, 2021 and other security documents
The JPMorgan Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants ("debt covenants"). The financial covenants include that we must maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis. We were in compliance with all debt covenants as of December 31, 2021. As of December 31, 2021, approximately $83.6 million was available to borrow under the undrawn JPMorgan Credit Facility.
Senior Secured Term Loan
On October 25, 2021, we and certain of our 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.
The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the $125 million principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date.
The Term Loan requires us to maintain certain reporting requirements, affirmative covenants, and negative covenants. The Term Loan is secured by a first lien on our non-working capital assets and a second lien on our working capital assets.
Contractual obligations
See Note 7 - Leases, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for discussions on future minimum lease payments under long-term non-cancelable operating and financing leases with remaining terms greater than one year.
See Note 10 - Debt, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for discussions on future principal payments under long-term debt.
From time to time in the normal course of business, we will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period. We had no material purchase commitments as of December 31, 2021.
Seasonality
Our net sales tend to be seasonally stronger in our fiscal second and third quarters due to robust sales in the warmer spring and summer months in North America (the United States and Canada are our primarily markets). This seasonal trend primarily relates to the 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 nutrients) in outdoor applications.
Availability and Use of Cash
Our ability to make investments in our business, service our debt and maintain liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. We believe that our cash flows from operating activities, combined with current cash levels and borrowing availability under the JPMorganRevolving Credit Facility, and Term Loan will be sufficientadequate to meetsupport our ongoing operations, to fund debt service requirements, capital expenditures, lease obligations and working capital needs and debt repayments forthrough the foreseeable future.next twelve months of operations. However, we cannot ensureguarantee that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in Part I, Item 1A.1A, Risk Factors included in this Annual Report on Form 10-K.
In January 2023, Gotham Properties LLC, an Oregon limited liability company and our subsidiary ("Seller"), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company ("Purchaser") pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8.6 million and then leased back by Seller (the "Sale Leaseback Transaction"). The new lease has a term of 15 years with annual rent starting at approximately $0.7 million and increases to the final year when annual rent is approximately $1.0 million. The Eugene Property serves as the manufacturing and processing site for certain of our grow media and nutrient brands. Refer to further discussion below relating to Term Loan reinvestment provisions regarding the net cash proceeds of the Sale Leaseback Transaction.
If necessary, we believe that we could supplement our cash position through additional sale-leasebacks, asset sales and equity financing. We believe it is prudent to be prepared if required and, accordingly, continue to be engaged in the process of evaluating and preparing to implement one or more of the aforementioned activities. Any potential such event may be subject to provisions referenced in our Term Loan and Revolving Credit Facility, such as subjecting the Company to making mandatory prepayments.
Term Loan
On October 25, 2021, we and certain of our direct and indirect subsidiaries entered into the Term Loan with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which we borrowed a $125.0 million senior secured term loan (the "Term Loan"). The Term Loan was amended by Amendment No. 1 effective as of June 27, 2023, to replace the LIBOR referenced rates with SOFR referenced rates. Pursuant to Amendment No. 1, any Term Loan that constitutes a Eurodollar Rate Loan that was outstanding as of the Amendment No. 1 closing date continued until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto continued and remained in effect (notwithstanding the occurrence of the Amendment No. 1 closing date) until the end of the applicable interest period for such Eurodollar Rate Loan, after which such provisions had no further force or effect. Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan. The ABR Loans shall bear interest at the Alternate Base Rate (with a 2.0% floor) plus 4.50%, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0% floor) plus 5.50%. As of the date of filing this Annual Report on Form 10-K, the ABR Loan and Term Benchmark Loan credit spreads of 4.50% and 5.50%, respectively, within the Amendment No. 1 have not changed from the credit spreads in the original Term Loan. The Term Loan matures on October 25, 2028.
The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the original principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date of October 25, 2028. We are also required to make mandatory prepayments in the event of (i) achieving certain excess cash flow criteria, including the achievement and maintenance of a specific leverage ratio, (ii) selling assets that are collateral, or (iii) upon the issuance, offering, or placement of new debt obligations. As described in Note 6 – Leases, we received net cash proceeds in January 2023 from the Sale-Leaseback Transaction and are subject to a provision whereby such net cash proceeds can be reinvested into certain investments, such as capital expenditures. This provision of the Term Loan includes (i) cash investments made within a one-year period from the Sale Leaseback Transaction, and (ii) investments which are contractually committed within one-year of the Sale Leaseback Transaction, and paid within 180 days after entering into such contractual commitment. The amount of any net cash proceeds which are not reinvested would require us to make an offer to prepay the corresponding amount on the Term Loan in 2024. In accordance with this provision, we classified $1.7 million as current debt on our consolidated balance sheet as of December 31, 2023, and offer to prepay the Term Loan in this amount. In addition, we have $2.2 million of contractual commitments pursuant to this provision. Should any of the $2.2 million of contractual commitments not be paid within 180 days of their contractual commitment dates, we will be required to make an additional offer to prepay the corresponding amount in 2024. The foregoing description of the reinvestment provision does not purport to be complete and is qualified in its entirety by reference to the provisions of the Term Loan.
As of December 31, 2023, and 2022, the outstanding principal balance on the Term Loan was $122.5 million and $123.8 million, respectively.
The Term Loan requires us to maintain certain reporting requirements, affirmative covenants, and negative covenants. We were in compliance with all debt covenants as of December 31, 2023. The Term Loan is secured by a first lien on our non-working capital assets and a second lien on our working capital assets.
Revolving Credit Facility
On March 29, 2021, we and certain of our subsidiaries entered into a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender for a revolving line of credit up to $50 million. The Revolving Credit Facility was amended by the First Amendment dated August 31, 2021, which increased the revolving line of credit by an additional $50 million for an aggregate borrowing limit of $100 million. The Revolving Credit Facility was further amended by the Second Amendment dated October 25, 2021 which, among other things, permitted the incurrence of the Term Loan and made certain other changes including subordinating its liens on non-working capital assets to the obligations under the Term Loan. The Revolving Credit Facility was further amended by the Third Amendment and Joinder dated August 23, 2022, pursuant to which several previously acquired subsidiaries became parties to the Revolving Credit Facility and granted liens on their assets. On December 22, 2022, the Company entered into the Fourth Amendment pursuant to which a sale-leaseback transaction was permitted, and certain other changes were made, including a reduction of the maximum commitment amount under the Revolving Credit Facility from $100 million to $75 million and transitioning the LIBOR based rates to SOFR based rates. On March 31, 2023, the Company and certain of its subsidiaries entered into the Fifth Amendment, pursuant to which the maturity date was extended to June 30, 2026, the maximum commitment amount under the Revolving Credit Facility was reduced to $55 million, and the interest rate on borrowings was revised to various spreads, based on the Company's fixed charge coverage ratio.
The Revolving Credit Facility provides for various interest rate options including the Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the CB Floating Rate, the Adjusted Daily Simple SOFR, the CBFR, the Canadian Prime Rate, or the CDOR Rate. The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the CBFR rate) use the Term SOFR Rate plus 1.95%. Each rate has a 0.0% floor. A fee of 0.40% per annum is charged for available but unused borrowings. Our obligations under the Revolving 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 Canadian Pledge and Security Agreement dated March 29, 2021 and other security documents, as amended to include additional subsidiaries.
The Revolving Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants. A certain financial covenant becomes applicable in the event that our excess availability under the Revolving Credit Facility is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $55 million) and would require us to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.
In order to consummate permitted acquisitions or to make restricted payments, the Company would be required to comply with a higher fixed charge coverage ratio of 1.15x, but no such acquisitions or payments are currently contemplated.
We were in compliance with all debt covenants as of December 31, 2023. As of December 31, 2023, approximately $22 million was available to borrow under the Revolving Credit Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1x.
As of December 31, 2023, and December 31, 2022, the Company had zero borrowed under the Revolving Credit Facility.
The aforementioned financing arrangements and other transactions are more fully described in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Cash and cash equivalents
The cash and cash equivalents balances of $30.3 million and $21.3 million at December 31, 2023, and December 31, 2022, respectively, included $8.5 million and $7.3 million, respectively, held by foreign subsidiaries.
Material Cash Requirements
Our estimated 2024 material cash requirements include (i) principal repayments and anticipated interest payments based on current variable rates on our long-term debt of $3.0 million and $14.8 million, respectively, (ii) finance lease payments of $1.4 million, (iii) operating lease payments of $10.4 million, and (iv) $2.2 million subject to the Term Loan's reinvestment provision, as well as other purchase obligations to support our operations. We have estimated our material cash requirements assuming no borrowings under the Revolving Credit Facility and considering the current variable interest rates on our Term Loan that are based on Secured Overnight Financing Rate. However, these assumptions may change and variable rates on our Term Loan are subject to change as further described in Item 7A. The aforementioned estimated 2024 material cash requirements are substantially similar to our 2023 cash requirements. Refer to the above discussion relating to our cash flows from operating, investing and financing activities for the year ended December 31, 2023. Also refer to Item 8, Financial Statements, Note 9 - Debt, Note 6 - Leases, and Note 13 - Commitments and Contingencies for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, and purchase obligations, respectively. From time to time in the normal course of business, we will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period.
Seasonality
Our net sales are typically seasonally stronger in our first three fiscal quarters due to robust sales in preparation of and during the warmer spring and summer months in North America (the United States and Canada are our primarily markets). This seasonal trend is primarily due to the garden center portion of our customer base, and because certain of our customers may use some of our products (such as grow media and nutrients) in outdoor applications. Likely due to the industry recession, our net sales have declined in 2023 compared to 2022 and have led to seasonal patterns that may have less consistency. Also, we typically expect to utilize cash from operating activities in the first quarter to fund our working capital requirements related to the seasonal sales pattern described above.
Critical Accounting Policies and Estimates
Certain accounting policies require us to make estimates and judgments in 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 policies that required the application of significant judgments as of December 31, 20212023 and 2022 follows.
Business Combinations
Acquisitions of businesses are accounted for under the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair value ofGoodwill and indefinite-lived intangible assets transferred, liabilities incurred to the former owners of the acquiree and the equity interest issued in exchange for control of the acquiree. Acquisition related costs are expensed as incurred.
When the consideration transferred in a business combination includes a contingent consideration arrangement, which is where 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 business combination. Contingent consideration is classified as a liability when the obligation 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 contingent 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 measurement period, which cannot exceed one year from the acquisition date, about facts and circumstances that existed 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 recognized.
For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and we may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess these contingencies as part of acquisition accounting.
Goodwill is measuremeasured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net acquisition-date fair value amounts of the identified assets acquired and liabilities assumed.
If the initial accounting forassumed in a business combinationcombination.
Goodwill is incomplete byevaluated for impairment annually in the endfourth quarter, or on an interim basis when an event or change in circumstances occurs, indicating that the carrying value may not be recoverable. Primarily due to a decline in the market value of the reporting periodour common stock and market conditions, we identified a triggering event requiring a test for impairment as of June 30, 2022. We completed our goodwill impairment testing and recorded a full impairment of all goodwill due to market softness in which the business combination occurs, we report provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized to reflect new
information obtained about factsdemand in the U.S. and circumstances that existed atCanada. We determined the acquisition date that, if known, would have affected the amounts recognized at the time. Upon conclusionfair value of the measurement period or final determinationU.S. and Canada reporting units based on an income approach, using the present value of future discounted cash flows, and based on a market approach. Significant estimates used to determine fair value include the weighted average cost of capital, financial forecasts, and pricing multiples derived from publicly-traded companies that are comparable to the reporting units. The fair values were reconciled to the market value of our common stock to corroborate the assets acquired or liabilities assumed, whichever occurs first, any subsequent adjustments are recorded to net income (loss).
Goodwill and indefinite-lived intangible assets
Our consolidated balance sheet at December 31, 2021 includes goodwill of acquired businesses and other indefinite-lived intangible assets. We evaluate these assets for impairment annuallyestimates used in the fourth quarter and on an interim basis if the facts and circumstances lead us to believe that more-likely-than-not there has been antest for impairment. Goodwill and indefinite-lived intangible asset impairment reviews include performing either an initial qualitative or quantitative evaluation for each of our reporting 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 our consolidated balance sheet were not impaired.
Long-lived tangible and finite-lived intangible assets
Long-lived tangible assets and finite-lived intangible assets are stated at cost. Depreciation, depletion and amortization expense is primarily 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 are subject to amortization. These intangibleIntangible assets are being amortized over their estimated useful economicwith finite lives typically ranging from 5 to 18 years. Long-lived tangible and finite-lived intangible assetsindefinite lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. AsFor the quarter ended June 30, 2022, we performed an evaluation of long-lived tangibles and intangible assets for impairment in connection with the triggering event identified requiring a quantitative test for goodwill impairment. This impairment evaluation included a comparison of the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. Based on our evaluation, there was no impairment of intangible assets or other long-lived assets for the quarter ended June 30, 2022. No such triggering event was identified during the remainder of 2022 or the year ended December 31, 2021, we concluded2023.
We believe that the intangible asset impairment evaluations were based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Changes to or a failure to achieve our long-lived tangibleprojected business assumptions, including growth and finite-lived intangible assets recordedprofitability, could result in our consolidated balance sheet werea valuation that would trigger an impairment in future periods.
Inventory valuation
Inventories consist of finished goods, work-in-process, and raw materials used in manufacturing products. Inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting. We maintain an allowance for excess and obsolete inventory. The estimate for excess and obsolete inventory is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions. Management reviews these assumptions periodically to determine if any adjustments are needed to the allowance for excess and obsolete inventory. The establishment of an allowance for excess and obsolete inventory establishes a new cost basis in the inventory. Such allowance is not impaired.reduced until the product is sold. If inventory is sold, any related reserves would be reversed in the period of sale. The Company estimates inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's planned actions with respect to inventory.
Recent accounting pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 - BasisBasis 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in financial market prices and rates. Our primary market risk has been interest rate, foreign currency and inflation risk. We do not have material exposure to commodity risk.
Interest Rate Risk
We are exposed to interest rate risk through our variable rate debt. As of December 31, 2021,2023, we had $125.0$122.5 million of Term Loan debt that is subject to variable interest rates that are based on London interbank offered rateSecured Overnight Financing Rate (“LIBOR”SOFR”) or an alternate base rate. Refer to Note 10 - Debt for details relating to the debt. If thesethe rates were to increase above their respective floors, 1% for LIBOR or 2% for an alternate base rate, by 100 basis points from the rates in effect as of December 31, 2023, our interest expense on the variable-ratevariable rate debt would increase by an average of $1.2$1.1 million annually. There are inherent limitations in the sensitivity analysis presented, primarily due to the assumptions that interest rate changes would be instantaneous, while SOFR changes regularly. We do not currently hedge our interest rate risks, but may determine to do so in the future. See Risk Factors—Uncertainty relating to the LIBOR and the potential discontinuation of LIBOR in the future may adversely affect our interest expense.
Foreign Currency Risk
The functional currencies of our foreign subsidiary operations are predominantly in the Canadian dollar (“CAD”("CAD") and 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. 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 are impacted by changes in foreign currency exchange rates when we believe thatsell product in currencies different from the exposurecurrency in which costs were incurred. The functional currencies and our purchasing and sales activities primarily include USD, CAD and Euro. As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency fluctuation from productexchange rate risk on sales, purchasing transactions, and operating expenses is not significant at this time as the related product sales and costs do not constitute a significant portion of our total net sales and expenses. As we grow and expand the geographic reach of our operations, our exposure to foreign currency risk could become more significant.labor. To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.
Impact of Inflation
Our results of operations and financial condition are presented based on historical costs. Inflation affectsWe cannot provide assurances that our manufacturing costs, distribution costs and operating expenses. We believe that volatile prices for commodities have impacted our net sales and results of operations. We maintain strategies to mitigateoperations and financial condition will not be materially impacted by inflation in the 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.future.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
Hydrofarm Holdings Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hydrofarm Holdings Group, Inc. and subsidiaries (the "Company") as of December 31, 20212023 and 2020,2022, the related consolidated statements of operations, comprehensive income (loss),loss, changes in convertible preferred stock and stockholders' equity, and cash flows, for each of the threetwo years in the period ended December 31, 2021,2023, 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, 20212023 and 2020,2022, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2021,2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting 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 and our report dated March 1, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (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.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 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.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
AcquisitionsInventory Valuation - Refer to Note 3Notes 2 and 5 to the financial statements
Critical Audit Matter Description
The Company completed various acquisitions duringCompany’s inventories are stated at the year ended December 31, 2021 for an aggregate purchase pricelower of approximately $533.3 million. The Company accounted forcost or net realizable value, principally determined by the acquisitions under the acquisitionfirst in, first out method of accounting for business combinations. Accordingly, the purchase price was allocatedaccounting. As described in Notes 2 and 5 to the assets acquiredconsolidated financial statements, the Company maintains an allowance for excess and liabilities assumedobsolete inventory that is based on their respective fair values, includingupon assumptions about current and anticipated demand, customer relationship intangible assets of $42.1 million, trademarkpreferences, business strategies, and tradename intangible assets of $118.1 million, technologymarket conditions. Management reviews these assumptions periodically to determine if any adjustments are needed to the allowance for excess and formulations & recipes of $110.6 million, and other intangible assets of $1.6 million, for total intangible assets recognized of $272.4 million. Management estimated the fair value of the intangible assets using the income approach specifically, the multi-period excess earnings and relief from royalty methods. The fair value determination of the intangible assets required management to make significant estimates and assumptions related to future cash flows and selection of the discount rates.obsolete inventory.
We identified the fair value determination of the intangible assetsinventory valuation as a critical audit matter because of the significantquantitative and qualitative materiality of the inventory excess and obsolescence reserve balance, coupled with the judgments necessary to identify and record the inventory excess and obsolescence reserve timely. Additionally, our audit procedures performed to evaluate management’s estimates and assumptions management makes to determineof the fairnet realizable value for the inventory on-hand as of these assets. This requiredthe reporting date involved a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of future cash flows and the selection of the discount rates used in the determination of the initial fair value of the intangible assets.judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future cash flows and the selection of the discount rate for the acquired intangible assetsinventory valuation included the following, among others:other things:
•We tested the effectivenessdesign and implementation of internal controls over the inventory valuation process, including controls over the inputs that are used in management's valuation of the intangible assets, including management’s controls over forecasts of future cash flowsexcess and selection of the discount rate.
•We assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results and certain peer companies’ historical results.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:
–Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.
–Developing a range of independent estimates and comparing those to the discount rate selected by management.obsolescence reserve analysis.
•We evaluated whether the estimated future cash flows were consistent with evidence obtainedappropriateness and consistency of management’s methodology and assumptions used in other areasdetermining the inventory valuation of the audit.excess and obsolescence reserve.
•We obtained the Company’s valuation of the inventory excess and obsolescence reserve calculation and tested the mathematical accuracy.
•We selected a sample of inventory items and compared the recorded unit cost against the most recent sales price to determine if inventory was recorded at lower of cost or net realizable value.
•We selected a sample of inventory items and evaluated historical sales trends, gross margins, and management’s ability to sell-through inventory.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 1, 2022
We have served as the Company's auditor since 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Hydrofarm Holdings Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 1, 2022, expressed an unqualified opinion on those consolidated financial statements.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Heavy 16, House and Garden, 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 statement amounts as of and for the year ended December 31, 2021. 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.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability 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 maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 1, 2022
Hydrofarm Holdings Group, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | December 31, |
| 2021 | | 2020 |
| | December 31, | | | | December 31, |
| | 2023 | | | | 2023 | | 2022 |
| Assets | Assets | | | | |
| Current assets: | Current assets: | |
| Current assets: | |
| Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 26,607 | | | $ | 75,178 | |
| Restricted cash | | 1,777 | | | 1,777 | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Accounts receivable, net | Accounts receivable, net | | 41,484 | | | 21,626 | |
| Inventories | Inventories | | 189,134 | | | 88,618 | |
| Notes receivable | | 622 | | | 3,151 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 9,760 | | | 9,567 | |
| Total current assets | Total current assets | | 269,384 | | | 199,917 | |
| Property, plant and equipment, net | Property, plant and equipment, net | | 50,473 | | | 3,988 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 45,245 | | | 18,289 | |
| Goodwill | | 204,868 | | | — | |
| Intangible assets, net | Intangible assets, net | | 314,819 | | | 52,421 | |
| Other assets | Other assets | | 6,453 | | | 1,180 | |
| Total assets | Total assets | | $ | 891,242 | | | $ | 275,795 | |
| Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | | | | |
| Current liabilities: | Current liabilities: | |
| Current liabilities: | |
| Current liabilities: | |
| Accounts payable | |
| Accounts payable | |
| Accounts payable | Accounts payable | | $ | 44,958 | | | $ | 22,638 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | | 33,996 | | | 21,615 | |
| Current portion of lease liabilities | | 7,198 | | | 3,701 | |
| Deferred revenue | |
| Current portion of operating lease liabilities | |
| Current portion of finance lease liabilities | |
| Current portion of long-term debt | Current portion of long-term debt | | 2,263 | | | 746 | |
| Total current liabilities | Total current liabilities | | 88,415 | | | 48,700 | |
| Long-term lease liabilities | | 38,595 | | | 15,320 | |
| Long-term operating lease liabilities | |
| Long-term finance lease liabilities | |
| Long-term debt | Long-term debt | | 119,517 | | | 290 | |
| Long-term deferred tax liabilities | | 5,631 | | | — | |
| Deferred tax liabilities | |
| Other long-term liabilities | Other long-term liabilities | | 3,904 | | | 567 | |
| Total liabilities | Total liabilities | | 256,062 | | | 64,877 | |
| Commitments and contingencies (Note 14) | | 0 | | 0 |
| Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | | |
| Stockholders’ equity | 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 | |
| Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,789,890 and 45,197,249 shares issued and outstanding at December 31, 2023, and December 31, 2022, respectively) | |
| Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,789,890 and 45,197,249 shares issued and outstanding at December 31, 2023, and December 31, 2022, respectively) | |
| Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,789,890 and 45,197,249 shares issued and outstanding at December 31, 2023, and December 31, 2022, respectively) | |
| Additional paid-in capital | Additional paid-in capital | | 777,074 | | | 364,248 | |
| Accumulated other comprehensive (loss) income | | (1,382) | | | 599 | |
| Accumulated other comprehensive loss | |
| Accumulated deficit | Accumulated deficit | | (140,516) | | | (153,932) | |
| Total stockholders’ equity | Total stockholders’ equity | | 635,180 | | | 210,918 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 891,242 | | | $ | 275,795 | |
The accompanying notes are an integral part of the consolidated financial statements.
Hydrofarm Holdings Group, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
| | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Years ended December 31, | | | Years ended December 31, |
| | 2023 | | | | 2023 | | 2022 |
| Net sales | Net sales | | $ | 479,420 | | | $ | 342,205 | | | $ | 235,111 | |
| Cost of goods sold | Cost of goods sold | | 377,934 | | | 278,572 | | | 208,025 | |
| Gross profit | Gross profit | | 101,486 | | | 63,633 | | | 27,086 | |
| Operating expenses: | Operating expenses: | |
| Selling, general and administrative | 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) | |
| Selling, general and administrative | |
| Selling, general and administrative | |
| Impairments | |
| Loss from operations | |
| Interest expense | Interest expense | | (2,138) | | | (10,141) | | | (13,467) | |
| Loss on debt extinguishment | | (680) | | | (907) | | | (679) | |
| Other (expense) income, net | | (204) | | | 70 | | | 105 | |
| Other income, net | |
| Loss before tax | 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) | |
| Income tax benefit | |
| Net loss | |
| | | Net income (loss) per share attributable to common stockholders: | |
| | Net loss per share: | |
| | Net loss per share: | |
| | Net loss per share: | |
| Basic | |
| Basic | |
| Basic | Basic | | $ | 0.34 | | | $ | (0.46) | | | $ | (1.94) | |
| Diluted | Diluted | | $ | 0.31 | | | $ | (0.46) | | | $ | (1.94) | |
| Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | |
| Weighted-average shares of common stock outstanding: | |
| Basic | |
| Basic | |
| Basic | Basic | | 39,991,809 | | | 21,298,849 | | | 20,688,439 | |
| Diluted | Diluted | | 42,989,195 | | | 21,298,849 | | | 20,688,439 | |
The accompanying notes are an integral part of the consolidated financial statements.
Hydrofarm Holdings Group, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| 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) | |
| | | | | | | | | | | | | | |
| Years ended December 31, |
| | 2023 | | 2022 |
| Net loss | | $ | (64,813) | | | $ | (285,415) | |
| Other comprehensive income (loss): | | | | |
| Foreign currency translation gain (loss) | | 738 | | | (5,853) | |
| Total comprehensive loss | | $ | (64,075) | | | $ | (291,268) | |
The accompanying notes are an integral part of the consolidated financial statements.
Hydrofarm Holdings Group, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(In thousands, except for share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Convertible
Preferred Stock | | Common
Stock | | Additional
Paid-In
Capital | | Accumulated
Other
Comprehensive
(Loss) Income | | Accumulated
Deficit | | Total
Stockholders’
Equity |
| Shares | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-In
Capital | | Accumulated
Other
Comprehensive Loss | | Accumulated
Deficit | | Total
Stockholders’
Equity |
| Shares | | Amount | | | | |
| Balance, January 1, 2022 | 44,618,357 | | | $ | 4 | | | $ | 777,074 | | | $ | (1,382) | | | $ | (140,516) | | | $ | 635,180 | |
| Common stock issued upon exercise of options | 8,283 | | | — | | | 75 | | | — | | | — | | | 75 | |
| Issuance of common stock for vesting of stock awards | 818,489 | | | 1 | | | — | | | — | | | — | | | 1 | |
| Shares repurchased for withholding tax on stock awards | (247,979) | | | — | | | (2,461) | | | — | | | — | | | (2,461) | |
| Issuance of common stock under cashless warrant exercise | 99 | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation expense | — | | | — | | | 8,354 | | | — | | | — | | | 8,354 | |
| Net loss | — | | | — | | | — | | | — | | | (285,415) | | | (285,415) | |
| Foreign currency translation loss | — | | | — | | | — | | | (5,853) | | | — | | | (5,853) | |
| Balance, December 31, 2022 | 45,197,249 | | | $ | 5 | | | $ | 783,042 | | | $ | (7,235) | | | $ | (425,931) | | | $ | 349,881 | |
| Issuance of common stock for vesting of stock awards | 805,306 | | | — | | | — | | | — | | | — | | | — | |
| Shares repurchased for withholding tax on stock awards | (212,665) | | | — | | | (271) | | | — | | | — | | | (271) | |
| Stock-based compensation expense | — | | | — | | | 5,075 | | | — | | | — | | | 5,075 | |
| Net loss | — | | | — | | | — | | | — | | | (64,813) | | | (64,813) | |
| Foreign currency translation gain | — | | | — | | | — | | | 738 | | | — | | | 738 | |
| Balance, December 31, 2023 | 45,789,890 | | | $ | 5 | | | $ | 787,846 | | | $ | (6,497) | | | $ | (490,744) | | | $ | 290,610 | |
The accompanying notes are an integral part of the consolidated financial statements.
Hydrofarm Holdings Group, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | | | | | | | | | |
Hydrofarm Holdings Group, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) |
|
|
|
| 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 |
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| Operating activities | | 2023 | | 2022 |
| Net loss | | $ | (64,813) | | | $ | (285,415) | |
| Adjustments to reconcile net loss to net cash from operating activities: | | | | |
| Depreciation, depletion and amortization | | 32,075 | | | 41,527 | |
| (Benefit from) provision for doubtful accounts | | (386) | | | 2,998 | |
| Provision for inventory obsolescence | | 1,587 | | | 16,449 | |
| Non-cash restructuring expenses | | 9,703 | | | 6,091 | |
| Stock-based compensation expense | | 5,075 | | | 8,354 | |
| Non-cash operating lease expense | | 9,942 | | | 9,751 | |
| Impairment charges | | — | | | 192,328 | |
| Change in fair value of contingent consideration | | — | | | (1,560) | |
| Deferred income tax expense (benefit) | | 2 | | | (9,310) | |
| Other | | 1,500 | | | 1,210 | |
| Changes in assets and liabilities: | | | | |
| Accounts receivable | | 766 | | | 16,665 | |
| Inventories | | 26,112 | | | 57,023 | |
| Prepaid expenses and other current assets | | (49) | | | 3,663 | |
| Other assets | | (172) | | | 262 | |
| Accounts payable | | (1,105) | | | (11,998) | |
| Accrued expenses and other current liabilities | | (3,537) | | | (4,532) | |
| Deferred revenue | | (439) | | | (13,297) | |
| Lease liabilities | | (9,162) | | | (7,850) | |
| Other long-term liabilities | | (55) | | | (370) | |
| Net cash from operating activities | | 7,044 | | | 21,989 | |
| Investing activities | | | | |
| Business combinations, net of cash and cash equivalents | | — | | | 190 | |
| Capital expenditures of property, plant and equipment | | (4,215) | | | (8,229) | |
| Other | | 45 | | | (448) | |
| Net cash used in investing activities | | (4,170) | | | (8,487) | |
| Financing activities | | | | |
| Proceeds from Sale-Leaseback Transaction | | 8,598 | | | — | |
| Payment of withholding tax related to stock awards | | (271) | | | (2,470) | |
| Borrowings under foreign revolving credit facilities | | 965 | | | 853 | |
| Repayments of foreign revolving credit facilities | | (970) | | | (1,102) | |
| Repayments of Term Loan | | (1,250) | | | (1,250) | |
| Payments to settle contingent consideration | | — | | | (15,474) | |
| Finance lease principal payments | | (1,007) | | | (757) | |
| Net cash from (used in) financing activities | | 6,065 | | | (20,200) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 82 | | | (395) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 9,021 | | | (7,093) | |
| Cash, cash equivalents and restricted cash at beginning of year | | 21,291 | | | 28,384 | |
| Cash and cash equivalents at end of year | | $ | 30,312 | | | $ | 21,291 | |
| | | | |
| Non-cash investing and financing activities | | | | |
| Right-of-use assets (relinquished) acquired under operating lease obligation | | $ | (1,067) | | | $ | 28,972 | |
| Assets acquired under finance lease obligation | | 185 | | | 409 | |
| Capital expenditures included in accounts payable and accrued liabilities | | 200 | | | 611 | |
| Additions of leasehold improvements and related asset retirement obligations | | 349 | | | 987 | |
| Supplemental information | | | | |
| Cash paid for interest | | 13,101 | | | 9,643 | |
| Cash (refunds) paid for income taxes | | (1,000) | | | 3,906 | |
The accompanying notes are an integral part of the consolidated financial statements.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. DESCRIPTION OF THE BUSINESS
Description of the business
Hydrofarm Holdings Group, Inc. and(collectively with its subsidiaries, (collectively, the “Company”"Company") was formed in May 2017 under the laws of the state of Delaware to acquire and continue the business of Hydrofarm, LLC establishedoriginally founded in 1977. The Company is a leading independent manufacturer and distributor of CEAbranded hydroponics equipment and supplies for controlled environment agriculture ("CEA"), including grow lights, climate control solutions, growing media and nutrients, as well as a broad portfolio of innovative and 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, light intensity and color, nutrient concentration and pH.
Reverse stock split
In November 2020, the board of directors (the “Board”) of the Company approved a 1-for-3.3712 reverse stock split of the Company’s outstanding common stock, which was effected on November 24, 2020. All common stock and per share information has been retroactively adjusted to give effect to this reverse stock split for all periods presented. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately decreased and the respective per share value and exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities. There were no changes in the authorized shares or par values of the Company’s common stock and preferred stock as a result of the reverse stock split.
Initial public offering
On 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 their option to purchase 1,300,000 additional shares of common stock. 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.
Follow-on public offering
On May 3, 2021, the Company closed its follow-on public offering ("follow-on offering") under a registration statement effective April 28, 2021, in which it issued and sold 5,526,861 shares of its common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of common stock. The public offering price was $59.00 per share. The Company received net proceeds of $309,782 from the follow-on offering after deducting underwriting discounts and commissions and offering expenses.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation and presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“("U.S. GAAP”GAAP") and include the accountsrequirements of the U.S. Securities and Exchange Commission ("SEC") for year end financial reporting. The Company reclassified balances of $704 and its wholly owned subsidiaries$1,200 as of December 31, 2022, previously reported in "Current portion of long-term debt" and any entities"Long-term debt", respectively, into "Current portion of finance lease liabilities" and "Long-term finance lease liabilities", respectively, on the consolidated balance sheet as of December 31, 2022, to conform to the current period presentation. The Company reclassified the balance of $145 as of December 31, 2022, previously reported in which it maintains a controlling financial interest."Loss on debt extinguishment or modification" into "Other income, net", on the consolidated statement of operations for the year ended December 31, 2022, to conform to the current period presentation. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share circumstances. Significant estimates include provisions for sales returns, rebates and per share amounts)
circumstances.claims from customers, realization of accounts receivable and inventories, fair value of assets acquired and liabilities assumed for business combinations, valuation of intangible assets, estimated useful lives of long-lived assets, incremental borrowing rate applied in lease accounting, valuation of stock-based compensation, recognition of deferred income taxes, classification of debt pursuant to certain terms in our credit agreements, recognition of liabilities related to commitments and contingencies, asset retirement obligations, and valuation allowances. Actual results may differ from these estimates. On an ongoing basis, managementthe Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or new information available.
Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred, liabilities incurred to the former owners of the acquiree, and the equity interests issued in exchange for control of the acquiree. Acquisition-relatedAcquisition related costs are recognized in net loss as selling, general and administrative expenses in the periods in which the costs are incurred and services are received.incurred.
When the consideration transferred in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination. Contingent consideration is established for business acquisitions where the Company has the obligation to transfer additional assets or equity interests to the former owners if specified future events occur or conditions are met. Contingent consideration is classified as a liability when the obligation requires settlement in cash or other assets and is classified as equity when the obligation requires settlement in the Company's own equity instruments.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Changes in the fair value of the contingent 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 measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. All other subsequent changes in the fair value of contingent consideration classified as an asset ora liability are included in selling, general and administrative expensesnet loss in the period. Changes in the fair value of contingent consideration classified as equity are not recognized.
For a given acquisition, the Company may identify certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess these contingencies as part of acquisition accounting, as applicable.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non‑controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition‑date fair value amounts of the identifiable assets acquired, and the liabilities assumed.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that time. Upon conclusion of the measurement period or final determination of the netvalues of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to net income (loss)loss.
During 2022, the Company finalized the determination of its allocation of the purchase price relating to certain acquisitions, and obtained third-party valuation reports of certain tangible and identifiable intangible assets to support its evaluation. Goodwill arose on the acquisitions because the consideration paid effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets.
During 2022, the Company evaluated and adjusted the useful lives of certain intangible assets associated with entities that were acquired during 2021. In addition, the Company determined that the preliminary allocation of assets acquired related to indefinite lived trade names have a finite useful life because the expected usefulness of the trade names is limited. As a result of these adjustments to the provisional amounts, the Company recorded $5,894 of additional amortization expense during 2022, which related to amortization expense that would have been recorded in the previous reporting period from the acquisition date through December 31, 2021. The intangible assets were assigned estimated useful lives as follows: (i) customer relationships: 7 to 12 years, (ii) technology, formulations and recipes: 8 to 12 years, (iii) computer software: 3 years, and (iv) trade names and trademarks: 15 to 20 years.
Pursuant to the Heavy 16 purchase agreement, the Company was required to pay up to an additional $2,500 of contingent consideration based on $200 for each $1,000 above a $21,000 threshold for net sales in calendar year 2021. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $344 as of the acquisition date in the consolidated balance sheets. The contingent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820 - Fair Value Measurements. The key assumptions in applying the valuation model were as follows: a 10% required revenue metric risk premiumand 0.33% discount periods.The contingent consideration was divided into thirteen standalone option calculations and utilized the same expected value of revenue which was calculated by discounting forecasted sales, by the revenue return metric, and adding year-to-date net sales. The contingent consideration was remeasured to fair value at each reporting date until the contingency was resolved with changes in fair value being recognized within "Selling, general and administrative expenses" ("SG&A") in the consolidated statements of operations. As of December 31, 2021, contingent consideration of $200 was calculated utilizing actual net sales for the full year ended December 31, 2021. The change in the fair value of the contingent consideration of $144 during the year ended December 31, 2021, was recognized as a benefit in SG&A on the consolidated statement of operations during the period. There were no changes to the fair value of contingent consideration in 2022, and the balance was paid in April 2022.
Pursuant to the Aurora purchase agreement, the Company was required to pay a maximum contingent consideration equal to $70,997. To the extent 2021 earnings before interest, taxes, depreciation, and amortization ("EBITDA") of Aurora
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
exceeded $15,556, the excess was multiplied by eleven to determine contingent consideration. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $19,300 as of the acquisition date in the consolidated balance sheets. The contingent consideration was estimated using the discounted cash flow method, which estimated the incremental EBITDA based on the Company's forecasted 2021 EBITDA of Aurora as of the acquisition date, discounted to a present value as of the acquisition date using a discount rate of 15%. That measure was based on significant inputs that are not observable in the market, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements. The contingent consideration was remeasured to fair value at each reporting date until resolution with changes in fair value recognized within SG&A in the consolidated statements of operations. As of December 31, 2021, the contingent consideration of $16,834 was calculated utilizing actual 2021 EBITDA for the full year ended December 31, 2021. The change in the fair value of the contingent consideration of $2,466 during the year ended December 31, 2021, was recognized as a benefit in SG&A on the consolidated statement of operations during the period. During 2022, the Company recognized an additional $1,560 benefit to SG&A as the contingent consideration was revalued to $15,274, and paid in July 2022 using available cash on hand.
Restructuring
The Company began a restructuring plan (the "Restructuring Plan") during the three months ended December 31, 2022, and undertook significant actions to streamline operations, reduce costs and improve efficiencies. The major initiatives of the first phase of the Restructuring Plan included (i) narrowing the Company's product and brand portfolio and (ii) the relocation and consolidation of certain manufacturing and distribution centers, including headcount reductions and reorganization to drive a solution based approach. The Company's strategic product consolidation entailed removing approximately one-third of all products and one-fifth of all brands relating to the Company's primary product portfolio, which excludes the garden center business in Canada.
During the year ended December 31, 2022, the Company recorded pre-tax charges of $6,790 relating to the inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $897 relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges. During the year ended December 31, 2023, we recorded a pre-tax restructuring charges of $2,084 for the first phase of the Restructuring Plan, which were primarily costs related to the relocation and termination of certain facilities in Canada. The restructuring charges are primarily recorded within Cost of goods sold on the consolidated statements of operations. Total costs incurred relating to this first phase of the Restructuring Plan since it commenced in the fourth quarter of 2022, are (i) $6,398 relating primarily to inventory markdowns, and (ii) $3,373 relating primarily to the relocation and termination of certain facilities in Canada.
As a result of the continued adverse market conditions, the Company implemented a second phase of the Restructuring Plan beginning in the third quarter of 2023, including U.S. manufacturing facility consolidations, in particular with respect to production of certain durable equipment products. The Company is reducing facility space and consolidating manufacturing operations to improve efficiency and reduce costs. During the year ended December 31, 2023, the Company recorded pre-tax restructuring charges of $9,185 for the second phase, relating primarily to non-cash raw material inventory write-downs as Company liquidates these assets and reduces storage space within certain manufacturing facilities. These restructuring charges are recorded primarily within Cost of goods sold on the consolidated statements of operations, and are subject to significant estimate.
Including both phases of the Restructuring Plan, the Company recorded $10,664 of total restructuring charges within Cost of goods sold on the consolidated statements of operations for the year ended December 31, 2023. The Company recorded total charges for both phases of the Restructuring Plan of $605 within SG&A expenses on the consolidated statements of operations for the year ended December 31, 2023. Of the $11,269 of total restructuring charges recorded for the year ended December 31, 2023, $9,703 were non-cash charges primarily related to inventory write-downs and asset dispositions.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following table presents the activity in accrued expenses and other current liabilities for restructuring costs related to the first and second phases of the Restructuring Plan for the year ended December 31, 2023:
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2023 |
| | Phase 1 | | Phase 2 |
| Restructuring Accruals as of January 1, 2023 | | $ | 696 | | | $ | — | |
| Expense | | 1,247 | | | 272 |
| Cash Payments | | (1,943) | | | (85) | |
| Restructuring Accruals as of December 31, 2023 | | $ | — | | | $ | 187 | |
Refer to Item 7. Management’s Discussion And Analysis Of Financial Condition And Results of Operations – Market Conditions for further explanation of the Restructuring Plan and estimates of additional costs that may be incurred. The amounts the Company will ultimately realize or disburse could differ from these estimates.
Segment and entity-wide information
Segment information
The Company's chief operating decision maker is the chief executive officer ("CEO") who reviews financial information for the purposes of making operating decisions, assessing financial performance and allocating resources. The business is organized as 2two operating segments, the U.S.United States and Canada, which meet the criteria for aggregation, and the Company has elected to present them as 1one 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.
Since the Company operates as one reportable segment, all required segment financial information is found in the consolidated financial statements and footnotes with entity-wide disclosures presented below.
Entity-wide information
Net sales and property, plant and equipment, net and operating lease right-of-use assets, in the United States and Canada, determined by the location of the subsidiaries, are shown below. Other foreign locations, which are immaterial, individually and in the aggregate, are included in the United States below.
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2023 | | 2022 |
| United States | | $ | 179,844 | | | $ | 280,464 | |
| Canada | | 49,668 | | | 68,153 | |
| Intersegment eliminations | | (2,931) | | | (4,116) | |
| Total consolidated net sales | | $ | 226,581 | | | $ | 344,501 | |
| | | | | | | | | | | |
| Years ended December 31, |
| 2023 | | 2022 |
| United States | $ | 68,270 | | | $ | 80,380 | |
| Canada | 33,584 | | | 36,020 | |
| Total property, plant and equipment, net and operating lease right-of-use assets | $ | 101,854 | | | $ | 116,400 | |
All of the products sold by the Company are similar and classified as CEA equipment and supplies.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Since the Company operates as 1 reportable segment, all required segment financial information is found in the consolidated financial statements and footnotes with entity-wide disclosures presented below.
Entity-wide information
Sales to external customers and property, plant and equipment, net and operating lease right-of-use assets in the United States and Canada, determined by the location of the subsidiaries, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
All of the products sold by the Company are similar and classified as CEA equipment and supplies. The Company’s underlying accounting records currently do not support presentation of disaggregated net sales and any attempt to report them would be impracticable.
Concentrations of business and credit risk
The Company maintains cash balances at certain financial institutions that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”("FDIC"). The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area.
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, and 2019.2023, or 2022. 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 of2023, or December 31, 2019.2022. 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 2020.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share2023 and per share amounts)
2022.Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has applied the framework for measuring fair value which requires a fair value hierarchy to be applied to all fair value measurements. All financial instruments recognized at fair value are classified into one of three levels in the fair value hierarchy as follows:
Level 1 — Valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities.
Level 2 — Valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not in active markets; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived from or, corroborated by, observable market data by correlation or other means.
Level 3 — Valuation techniques with significant unobservable market inputs.
The Company measures certain non-financial assets and liabilities, including long-lived assets, intangible assets and goodwill, at fair value on a nonrecurring basis. The fair value of contingent consideration iswas classified within level 3 of the fair value hierarchy (Seehierarchy. Refer to Note 14 – Fair Value Measurements, for further discussion of the contingent consideration in Note 3 - Business Combinations).consideration.
Foreign currency matters
The Company reports its financial results in United States dollars, which is the currency of the primary economic environment in which it operates. The functional currency for each of the Company’s foreign subsidiaries is generally its local currency. Monetary assets and liabilities, and transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the exchange rate in effect at the end of each period. Foreign currency transaction gains and losses are included in the determination of net income (loss)Net loss and classified as other (expense)Other income, net, in the consolidated statements of operations. Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at the end of each period. Revenues, expenses, gains and losses are translated at the average rates of exchange prevailing during the period. Accumulated deficit and other equity accounts are translated at historical rates. Translation gains and losses are included in accumulated other comprehensive (loss) incomeloss within stockholders’ equity.
The effect of currency translation adjustments on cash, cash equivalents and restricted cash is presented separately in the consolidated statements of cash flows.
Cash, cash equivalents and restricted cash
Cash includes funds deposited in banks. Cash equivalents include highly liquid investments such as term deposits and money market instruments with original maturities of three months or less. As of December 31, 2021,2023, and 2020,2022, there were no amounts included in restricted cash represent those funds required to be set asideclassified 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, |
| 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 | |
As of December 31, 2019, cash and cash equivalents and restricted cash were $22,866 and $9,991, respectively, for total cash, cash equivalents, and restricted cash, as of $32,857.all previous restrictions lapsed during the year ended December 31, 2022.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Accounts receivable, net
AccountsTrade accounts receivable net represents amounts due from customers less the allowance for doubtful accounts.
customers. Other receivables represent other current non-trade receivables. Allowance for doubtful accounts reflects the Company’s estimate of amounts in its existing accounts receivable that may not be collected due to customer claims or customer inability or unwillingness to pay. The allowance is determinedestimated based on a combination of factors, including, but not limited to the age of the account, the credit worthiness of the customer, payment terms, the customer’s historical payment history and general economic conditions. Management reviews these factors quarterly to determine if any adjustments are needed to the allowance for doubtful accounts. Accounts receivable are written off when the receivables are deemed uncollectible. Subsequent collections are recorded in SG&A on the consolidated statement of operations when they are received.
Inventories
Inventories consist of manufacturedfinished goods, goods acquired for resale,work-in-process, and raw materials consumedused in business operations.manufacturing products. Inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting. The Company maintains an allowance for excess and obsolete inventory. The estimate for excess and obsolete inventory is based upon assumptions about futurecurrent and anticipated demand, customer preferences, business strategies, and market conditions. Management reviews these assumptions periodically to determine if any adjustments are needed to the allowance for excess and obsolete inventory. 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.sold or otherwise disposed. If inventory is sold, any related reserves would be reversed in the period of sale. During the years ended December 31, 2023, and 2022 the Company estimated inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's actions with respect to inventory raw materials and products and brands being removed from the Company's portfolio.
Leases
Leases are accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")ASC 842 - Leases. At inception of a contract, the Company determines whether that contract is or contains a lease. A contract is or contains a lease if 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 patternlocation of expense recognition in the consolidated statements of operations.
Right-of-use assets ("ROU") represent the right to use an underlying asset for the lease term while lease liabilities represent the obligation to make lease payments arising from a lease, measured on a discount basis. All leases greater than 12 months result in the recognition of a ROU 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 and the contractual lease term and the Company’s applicable borrowing rate.term. 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.
The Company accounts for lease components separately from non-lease components, other than for office equipment. The Company has certain leases that include one or more options to renew with renewal terms that can extend the lease term. The exercise of the lease renewal options is at the Company’s discretion. 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.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Property, plant and equipment
Property, plant and equipment ("PP&E") is recorded at cost less accumulated depreciation, depletion and amortization. PP&E assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Property, plant and equipment, excluding leasehold improvements and peat bogs and related development, are depreciated using the straight-line method. Leasehold improvements are amortized using the straight-line method. The following table summarizes the estimated useful lives 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 years |
| Furniture and fixtures | 5 years |
The useful lives of property, plant and equipment recorded under finance leases are further limited to the term of lease.
Peat bogs and related development costs are depleted using the units of production method over the total expected volume of the peat bogs.
The Company operates peat bogs in Alberta Canada. Under current provincial laws the Company is subject to certain asset retirement obligations ("AROs") and the remediation of the peat bog sites are under provincial oversight. The Company periodically evaluates expected remediation costs associated with the peat bog sites that it operates. Where the Company concludes that it is probable that a liability has been incurred, a provision is made for management's estimate of the liability. As of December 31, 2023, and 2022, the Company has AROs of $759 and $262, respectively, recorded in Accrued expenses and other current liabilities on the consolidated balance sheet. As of December 31, 2023, and 2022, the Company has AROs of $4,457 and $4,370, respectively, recorded in Other long-term liabilities on the consolidated balance sheet. The ARO changes related to the various components of accretion, and additional obligations incurred during 2023 and 2022 were not significant.
Intangible assets and goodwill
Definite-lived intangible assets are amortized using the straight-line method over their estimated useful lives. Certain trademarks andThe Company has one trade names arename that is considered to have an indefinite useful lives.life. Intangible assets with finite lives are reviewedalso tested for impairment at least annually and when events or changes in circumstances indicate that, more-likely-than-not, the carrying amount may not be recoverable.
The following are the estimated useful lives for the major classes of definite-lived Significant judgment is required in estimating fair values and performing goodwill and intangible assets:
| | | | | |
Computer software | 5 years |
Customer relationships | 10 to 20 years |
Technology and formulations & recipes | 10 to 18 years |
asset impairment tests.Goodwill represents the excess of the acquisition 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. Goodwill is tested for impairment on an annual basis in the fourth quarter and more frequently if indicators of potential impairment exist. Impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results. The Company has determined that its reporting units for the purpose of goodwill impairment testing are the United StatesU.S. and Canada.
Goodwill impairment reviews include performing either an initial qualitative or quantitative evaluation for each of the reporting units. Several methods may be used to estimate a reporting unit’s fair value, including market quotations, asset and liability fair values and other valuation techniques. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss. Intangible
Note Receivable and Investment
In 2019, the Company executed a note receivable secured by equipment to a third-party, the terms of which were amended and restated during the first quarter of 2021. The note receivable provided for interest and installment payments to the Company, and full maturity of the note in 2024. During the first quarter of 2022 the third-party defaulted on interest payments, and the Company measured an impairment on the note receivable based on the estimated fair value of the collateral. The Company recorded an impairment loss of $2,636 during the year ended December 31, 2022, in Impairments on the consolidated statements of operations. As of December 31, 2022, the note receivable carrying value was $475 and it was classified in Other assets with indefinite lives are also tested for impairment at least annually and when events or changes in circumstances indicate that, more-likely-than-not,on the asset is impaired. Significant judgment is required in estimating fair values and performing goodwill and indefinite-lived intangible asset impairment tests.condensed consolidated balance sheet. During the first quarter of 2023, the Company agreed to forgive the note
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Warrants issuedreceivable in connection with financings
exchange for interest in a third-party equity investment. The Company generally accounts for warrants issued in connection with debt and equity financings as a componentinvestment is recorded at an estimated cost basis of equity unless$531, inclusive of capitalized transaction costs, which is reported within Other assets on the warrants include a conditional obligation to issue a variable number of shares among other conditions or it is possible that the Company may need to settle the warrants in cash.consolidated balance sheet.
Revenue recognition
The Company follows ASC 606 - Revenue from Contracts with Customers which requires that revenue recognized from contracts with customers be disaggregated into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company has determined that revenue is generated from one category, which is the distribution and manufacture of controlled environment agricultureCEA equipment and supplies.
Revenue is recognized as control of promised goods is transferred to customers, which generally occurs upon receipt at customers’ locations determined by the specific terms of the contract. Arrangements generally 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; these allowances and accruals are not material to the financial statements.sale.
The amount billed to customers for shipping and handling costs included in net sales was $8,050, $4,314,$9,523 and $2,790$13,180 in 2021, 2020,the years ended December 31, 2023, and 2019,2022, 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. 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 indeferred revenue on the consolidated balance sheets, totaled $18,273$3,231 and $1,079$3,654 as of December 31, 20212023, and 2020,2022, respectively. There are no significant financing components.components and the majority of revenue is recognized within one year. 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.
Deferred offering costsWarrants issued in connection with financings
The Company capitalizes certain legal, accountinggenerally accounts for warrants issued in connection with debt and other third-party fees that are directly related to an equity financing that is probable of successful completion until such financing is consummated. After consummation of an equity financing, these costs are recordedfinancings as a reductioncomponent of equity unless the proceeds received aswarrants include a resultconditional obligation to issue a variable number of shares among other conditions or it is possible that the financing. Should a planned equity financing be abandoned, terminated or significantly delayed,Company may need to settle the deferred offering costs are immediately written off to operating expenseswarrants in the consolidated statements of operations in the period of determination.cash.
Stock-based compensation
The Company accounts for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of U.S. GAAP, which requires compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service period. The Company accounts for forfeitureforfeitures when they occur and any compensation expense previously recognized on unvested shares will be reversed when forfeited.
Service-based awards
The Company records stock-based compensation expense for restricted stock units (“RSUs”("RSUs") and service-based stock options on a straight-line basis over the requisite service period.
The fair value of grants of restricted stock is based on the fair value of the common stock underlying the award. The fair value of the underlying common stock for RSUs 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. For 2021,awards granted after the Company's IPO, 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.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The fair value of option-based awards is estimated using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions. For inputs into the Black-Scholes model, the expected volatility is based on historical implied volatility from recent stock price volatility foroption transactions at the common stock is estimated by taking the average historic price volatilitytime of the Company's common stock or industry peers equivalent. Industry peers consist of several public companies in the Company’s industry which are of similar size, complexity and stage of development.grant. 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”"simplified method" to determine the expected term which is the midpoint between the vesting date and the end of the
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
contractual term because it has insufficient history upon which to base an assumption about the term. The expected dividend yield is 0.0% as the Company has not paid and does not anticipate paying dividends on its common stock.
Performance-based awards
The Company has granted RSUperformance stock unit ("PSU") awards that vest upon the satisfaction of both service-based and performance-based conditions. The service-based condition for these awards generally is satisfied over four years.one year. The performance-based conditions generally are satisfied upon achieving specified performance targets, such as the occurrence of a qualifying event, defined as the earlier of (i) the closing of certain specific liquidation or change in control transactions, or (ii) an IPO.targets. The Company records stock-based compensation expense for performance-based equity awards on a straight-line basis over the requisite service period and only if performance-based conditions are considered probable to be satisfied. The cumulative portion of the service-based award that would have vested prior to the performance condition becoming probable is recognized once both conditions are satisfied.
Market-based awards
The Company has granted RSUs that vest only upon the satisfaction of both performance-based and market-based conditions. The performance-based conditions are satisfied upon achieving specified performance targets, such as the occurrence of a qualifying event, as described above for performance-based awards. The market-based condition is satisfied upon the Company’s achievement of a qualifying traded share price within the specified time frame. The Company records stock-based compensation expense once the performance condition is satisfied regardless of whether the market condition is eventually met. For one award granted in 2020, the market condition was factored into its fair value.
Tovalue and the Company used a "Monte Carlo Simulation Method" ("MCSM") to estimate the fair value of the award granted in 2020 with the market-based condition, the “Monte Carlo Simulation Method” ("MCSM") was used which assessesaward. The MCSM assessed 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. For the years ended December 31, 2023, and 2022, there were no performance awards with market-based conditions granted.
Employee benefit plan
The resulting risk-adjusted probability was then appliedCompany has a savings retirement plan that covers substantially all full-time employees who meet the plan’s eligibility requirements and provides for an employee elective contribution. The Company made matching contributions to the underlying fair valueplan and incurred expense of common stock incorporating scenarios under which various performance conditions$261 and share price outcomes were modeled over$280 for 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,years ended December 31, 2023, and number of simulation trials.2022, respectively.
Income taxes
The asset and liability method of accounting for income taxes is followed whereby deferred income tax assets are recognized for deductible temporary differences and operating loss carryforwards, and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes.
Deferred income tax assets are recognized only to the extent that management determines that it is more-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.
The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income by jurisdiction, and the impact of tax planning strategies. Changes in the relevant facts can impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
The Company will establish a liability for tax return positions when there is uncertainty as to whether the position will ultimately be sustained. Amounts for uncertain tax positions will be adjusted when new information becomes available or when positions are effectively settled. The Company will recognize interest expense and penalties related to these unrecognized tax benefits within income tax expense. U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
appeals or litigation processes, based on the technical merits of the position. The amount recognized is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the related tax authority.
Recently issued accounting pronouncements
Adopted in 2021
In October 2020,November 2023, the FASB issued Accounting Standards Update ("ASU"(“ASU”) No. 2020-10,2023-07, CodificationSegment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments improve the codification by having all disclosure-related guidance available in the (ASU 2023-07), which requires an enhanced disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present informationsignificant segment expenses on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to the codification that are not expected to have a significant effect on current accounting practice. The amendments are effective foran annual periods beginning after December 15, 2020 and early adoption is permitted. The Company adopted the standard effective January 1, 2021 with no impact on the consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity.interim basis. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The amendments arewill be effective for fiscal years beginning after December 15, 2021,2023, and earlyinterim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which requires greater disaggregation of information in the effective tax rate reconciliation, income taxes paid disaggregated by jurisdiction, and certain other amendments related to income tax disclosures. This guidance will be effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company early adoptedis currently evaluating the standard effective January 1, 2021 with no impact of this ASU on theits consolidated financial statements.
In August 2018,
3. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Primarily due to a sustained decline in the FASB issued ASU No. 2018-15, Intangibles-GoodwillCompany's market value of common stock and Other-Internal-Use Software (Topic 350): Customer’s Accountingmarket conditions, the Company identified a triggering event requiring a test for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.impairment as of June 30, 2022. The Company early adoptedcompleted its goodwill impairment testing and recorded an impairment charge of $189,572 as the standard effective October 1, 2021 with no impact ontest determined that the consolidated financial statements.carrying value of the United States and Canada reporting units was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as of June 30, 2022. The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU. The Company recognizes an allowance for credit losses for financial assets carried at amortized cost to presentdetermined the net amount expected to be collected asfair value of the balance sheet date. Such allowance isU.S. and Canada reporting units based on an income approach, using the credit losses expected to arise over the lifepresent value of the asset (contractual term) which includes consideration of prepaymentsfuture discounted cash flows, and based on our expectationa market approach. The fair values were reconciled to the market value of common stock of Hydrofarm to corroborate the estimates used in the interim test for impairment. Significant estimates used to determine fair value included the weighted average cost of capital, financial forecasts, and pricing multiples derived from publicly-traded companies that are comparable to the reporting units. Refer to Note 15 - Fair Value Measurements, for further discussion of valuation inputs. The changes in goodwill are as follows:
| | | | | |
| Goodwill |
| Balance at December 31, 2021 | $ | 204,868 | |
| Acquisition - Innovative Growers Equipment - measurement period adjustments | (21,304) | |
| Acquisition - Greenstar Plant Products - measurement period adjustments | 7,000 | |
| Acquisition - all others - remeasurement adjustments and foreign currency translation adjustments, net | (992) | |
| Impairments | (189,572) | |
| Balance at December 31, 2022 | $ | — | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Intangible assets, net
Intangible assets, net comprised the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Finite-lived intangible assets: | | | | | | | | | | |
| Computer software | $ | 9,325 | | | $ | (8,357) | | | $ | 968 | | | $ | 9,408 | | | $ | (7,976) | | | $ | 1,432 | |
| Customer relationships | 99,805 | | | (31,883) | | | 67,922 | | | 99,933 | | | (24,533) | | | 75,400 | |
| Technology, formulations and recipes | 114,181 | | | (25,124) | | | 89,057 | | | 114,187 | | | (15,344) | | | 98,843 | |
| Trade names and trademarks | 131,493 | | | (16,740) | | | 114,753 | | | 131,410 | | | (10,052) | | | 121,358 | |
Other | 4,802 | | | (4,422) | | | 380 | | | 4,778 | | | (4,246) | | | 532 | |
| Total finite-lived intangible assets, net | 359,606 | | | (86,526) | | | 273,080 | | | 359,716 | | | (62,151) | | | 297,565 | |
| Indefinite-lived intangible asset: | | | | | | | | | | |
| Trade name | 2,801 | | | — | | | 2,801 | | | 2,801 | | | — | | | 2,801 | |
| Total Intangible assets, net | $ | 362,407 | | | $ | (86,526) | | | $ | 275,881 | | | $ | 362,517 | | | $ | (62,151) | | | $ | 300,366 | |
The Company also reviewed intangible assets with finite lives and indefinite lives for impairment as of June 30, 2022, however no impairment was noted. We did not identify a triggering event requiring a test for impairment during the balance sheet date.remainder of 2022, or the year ended December 31, 2023.
Amortization expense related to intangible assets was $24,355 and $33,308 for the years ended December 31, 2023, and 2022, respectively. The Company adoptedfollowing are the standard effective October 1, 2021 with no impact onestimated useful lives and the consolidated financial statements.weighted-average amortization period remaining as of December 31, 2023, for the major classes of finite-lived intangible assets:
| | | | | | | | | | | |
| Useful lives | | Weighted-average amortization period |
| Computer software | 3 to 5 years | | 2 years |
| Customer relationships | 7 to 18 years | | 10 years |
| Technology, formulations and recipes | 8 to 12 years | | 9 years |
| Trade names and trademarks | 15 to 20 years | | 17 years |
The estimated aggregate future amortization expense for intangible assets subject to amortization as December 31, 2023, is summarized below:
| | | | | | | | |
| | Estimated Future Amortization Expense |
| Year ending December 31, | | |
| 2024 | | $ | 24,396 | |
| 2025 | | 24,289 | |
| 2026 | | 24,053 | |
| 2027 | | 23,820 | |
| 2028 | | 23,185 | |
| Thereafter | | 153,337 | |
| Total | | $ | 273,080 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
3. BUSINESS COMBINATIONS
Heavy 16 Acquisition
On May 3, 2021, the Company acquired 100% of the issued and outstanding membership interests of Field 16, LLC ("Heavy 16"), a manufacturer and supplier of branded plant nutritional products. As a result of the acquisition, the Company is broadening its proprietary branded offering into the plant nutrients category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Heavy 16 was $77,367, consisting of $60,287 in cash, $16,736 of the Company's common stock and $344 contingent consideration. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The financial results of Heavy 16 are included in the U.S. operating segment since the acquisition date.
Pursuant to the purchase agreement, the Company may pay up to an additional $2,500 of contingent consideration based on $200 for each $1,000 above a $21,000 threshold for net sales in calendar year 2021. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $344 as of the acquisition date in the consolidated balance sheets. The contingent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements, including estimated financial forecasts. The key assumptions in applying the valuation model were as follows: a 10% required revenue metric risk premiumand 0.33% discount periods. The contingent consideration was divided into thirteen standalone option calculations and utilized the same expected value of revenue which was calculated by discounting forecasted sales, by the revenue return metric, and adding year-to-date net sales.
The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved with changes in fair value being recognized within selling, general and administrative expense in the consolidated statements of operations. As of December 31, 2021, contingent consideration of $200 was calculated utilizing actual net sales for the full year ended December 31, 2021 and was included in accrued expenses and other current liabilities in the consolidated balance sheets. The contingent consideration is expected to be paid in April 2022.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following table sets forth the components and preliminary allocation of the purchase price for the Company's acquisition of Heavy 16:
| | | | | |
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 | |
The Company has obtained a preliminary third-party valuation report of certain tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information. The primary area that remains preliminary relates to the fair value of all identifiable intangible assets acquired
Goodwill arose on the acquisition of Heavy 16 because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets. The amount of goodwill is fully deductible for U.S. tax purposes.
The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 18 years. The trademarks and trade names are considered to have indefinite useful lives.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
House & Garden Acquisition
On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of capital stock of House & Garden, Inc. (“HG”), Humboldt Wholesale, Inc. (“HW”), Allied Imports & Logistics, Inc. (“Allied”), South Coast Horticultural Supply, Inc. (“SC” and, together with HG, HW and Allied, the “H&G Entities”), a manufacturer and distributor of plant nutrients and fertilizers to domestic and various international markets. As a result of the acquisition, the Company is further broadening its proprietary 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 results of the H&G Entities are included in the U.S. operating segment since the acquisition date.
The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of the H&G Entities:
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
| | | | | |
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 | |
The Company has obtained a preliminary third-party valuation report of certain tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information. The primary area that remains preliminary relates to the fair value of all identifiable intangible assets acquired
Goodwill arose on the acquisition of the H&G Entities because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets. The amount of goodwill is not deductible for U.S. tax purposes.
The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 18 years. The trademarks and trade names are considered to have indefinite useful lives. As part of the share acquisition of the H&G Entities, the Company allocated a significant value of the acquisition to identified intangible assets that are not deductible for U.S. tax purposes. Therefore, a deferred tax liability arose providing an additional source of taxable income to support the realization of pre-existing deferred tax assets.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Aurora Acquisition
On July 1, 2021, the Company acquired 100% of the issued and outstanding membership interests of Gotham Properties LLC (“Gotham Properties”), Aurora Innovations LLC (“Aurora Innovations”), Aurora International LLC (“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”), a manufacturer of plant fertility product lines. As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Aurora was $178,871, consisting of $134,961 in cash, $25,824 of the Company's common stock, $19,300 contingent consideration, less $999 escrow receivable, $215 forgiveness of accounts payable. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The forgiveness of accounts payable represents an effective settlement of a preexisting relationship between the parties. The financial results of Aurora are included in the U.S. operating segment since the acquisition date.
Pursuant to the purchase agreement, the Company may pay a maximum contingent consideration equal to $70,997. To the extent 2021 EBITDA of Aurora exceeded $15,556, the excess was multiplied by 11 to determine contingent consideration. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $19,300 as of the acquisition date in the consolidated balance sheets. The contingent consideration was estimated using the discounted cash flow method, which estimated the incremental EBITDA based on the Company's forecasted 2021 EBITDA of Aurora as of the acquisition date, discounted to a present value as of the acquisition date using a discount rate of 15%. That measure was based on significant inputs that were not observable in the market, which ASC 820 - Fair Value Measurements refers to as a Level 3 input.
The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved with changes in fair value being recognized within selling, general and administrative expense in the consolidated statements of operations. As of December 31, 2021, contingent consideration of $16,834 was calculated utilizing actual 2021 EBITDA for the full year ended December 31, 2021 and was included in accrued expenses and other current liabilities in the consolidated balance sheets. The contingent consideration and is expected to be paid in April 2022.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of Aurora:
| | | | | |
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 | |
The Company has obtained a preliminary third-party valuation report of tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information. Accordingly, the preliminary purchase price allocation is subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The amount of goodwill is fully deductible for U.S. tax purposes.
Goodwill arose on the acquisition of Aurora because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets.
The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 16 and 18 years, respectively. The trademarks and trade names are considered to have indefinite useful lives.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Greenstar/Grotek Acquisition
On August 3, 2021, the Company acquired 100% of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of horticultural products and solutions for global, domestic and commercial use. As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Greenstar was $83,520, consisting of $85,121 in cash, less $1,601 forgiveness of accounts payable, net, and obligations due under a distribution agreement. The forgiveness of accounts payable, net, and obligations due under a distribution agreement represent an effective settlement of a preexisting relationship between the parties. The financial results of Greenstar are included in the Canada operating segment since the acquisition date.
The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of Greenstar:
| | | | | |
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 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The Company has obtained a preliminary third-party valuation report of certain tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information. The primary area that remains preliminary relates to the fair value of all identifiable intangible assets acquired. Accordingly, the preliminary purchase price allocation is subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The amount of goodwill is not deductible for U.S. tax purposes, but it is partially deductible for Canadian tax purposes.
The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 18 years. The trademarks and trade names are considered to have indefinite useful lives.
Innovative Growers Equipment, Inc. Acquisition
On November 1, 2021, the Company acquired 100% of the issued and outstanding shares of Innovative Growers Equipment, Inc., an Illinois corporation (“IGE”), Innovative AG Installation, Inc., an Illinois corporation (“IAG”), Innovative Racking Systems, Inc., an Illinois corporation (“IRS”), and Innovative Shipping Solutions, Inc., an Illinois corporation (“ISS” and, together with IGE, IAG, IRS, and their respective subsidiaries, the “IGE Entities”), a manufacturer of horticulture benches, racking and LED lighting systems which complement the Company’s existing lineup of high performance, proprietary branded products. The preliminary acquisition fair value of the consideration transferred for the IGE Entities was $60,093, consisting of $48,320 in cash, $11,051 of the Company's common stock, and $722 forgiveness of a contract asset. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The forgiveness of contract asset represents an effective settlement of a preexisting relationship between the parties. The financial results of the IGE Entities are included in the U.S. operating segment since the acquisition date.
The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of the IGE Entities:
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
| | | | | |
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 | |
The Company is in the process of obtaining third-party valuations of certain tangible and intangible assets; thus, the provisional measurement of goodwill is subject to change. The amount of goodwill is not deductible for U.S. tax purposes.
Supplemental Disclosure of Financial Results
The following represents the unaudited consolidated statements of operations as if the acquisitions had been included in the consolidated results of the Company for the entire periods presented below. Management considers these estimates to represent an approximate measure of the performance of the combined Company (in millions):
| | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 |
| Net sales | $ | 596 | | | $ | 492 | |
| Net income (loss) | $ | 79 | | | $ | (11) | |
These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the acquisitions to reflect the additional amortization of intangibles and the purchase price adjustments as if they had been applied on January 1, 2020. The supplemental net income for the year ended December 31, 2021 were adjusted to exclude the acquisition-related and integration costs incurred in connection with the acquisitions. Accordingly, the 2020 supplemental net income was adjusted to include these charges. For the tax effects of the net income adjustments, the Company factored in its net operating loss carryforwards.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Since the acquisition date, the estimated net sales and net income of these acquisitions are as follows (in millions):
| | | | | |
| Year ended December 31, |
| 2021 |
Net sales | $ | 76 | |
Net income | $ | 14 | |
The Company is in the process of integrating the operations of these acquisitions into Hydrofarm, LLC and its subsidiaries and their existing functions (e.g., sales, supply chain, marketing, etc.). Accordingly, the net sales and net income of these acquisitions represent an approximation.
4. GOODWILL AND INTANGIBLE ASSETS, NET
As of December 31, 2021, the Company completed the acquisitions of Heavy 16, the H&G Entities, Aurora, Greenstar and the IGE Entities (see Note 3 - Business Combinations).
Goodwill
The changes in goodwill are as follows:
| | | | | |
| December 31,
2021 |
Balance 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 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Intangible Assets, net
Intangible assets, net comprised the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Customer relationship (1) | 101,222 | | | (16,517) | | | 84,705 | | | 59,375 | | | (12,010) | | | 47,365 | |
Technology and formulations & recipes (1) | 110,561 | | | (3,630) | | | 106,931 | | | — | | | — | | | — | |
Other (1) | 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: | | | | | | | | | | | |
Trade names (1) | 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 | |
(1) Includes the intangible assets acquired from Heavy 16, the H&G Entities and Greenstar. See Note 3 - Business Combinations.
Amortization expense was $10,354, $5,154 and $5,307 for the years ended December 31, 2021, 2020 and 2019, respectively.
For intangible assets subject to amortization, the weighted-average amortization period as of December 31, 2021 for computer software, customer relationships, and technology and formulations & recipes was 5.0 years, 18.0 years, and 18.0 years, respectively.
The estimated aggregate future amortization expense for intangible assets subject to amortization as December 31, 2021 is summarized below:
| | | | | |
| 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 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
5. NET INCOME (LOSS)LOSS PER COMMON SHARE (“EPS”)
Basic EPSloss per common share is computed using net income (loss) attributable to common stockholdersloss divided by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock units (“RSUs”("RSUs") and performance stock units ("PSUs").
Diluted EPSloss per common share represents net income (loss) attributable to common stockholdersloss divided by the weighted-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 EPSloss per common share would be based on the number of shares of common sharesstock 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 EPSloss per common share as of the beginning of the period, or as of the grant date of the share-based payment, if later.
Basic and diluted net income (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 and the application of the if-converted method is not more dilutive.
Net income (loss) per share attributable to common stockholders
The following table presents information necessary to calculate basic and diluted EPSloss per common share for the years ended December 31, 2021, 20202023, and 2019:2022:
| | | | | | | | | | | | | | | | | | | | |
| 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) | | |
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2023 | | 2022 |
| Net loss | | $ | (64,813) | | | $ | (285,415) | |
| Weighted-average shares of common stock outstanding | | 45,508,363 | | | 44,974,856 | |
| Dilutive effect of warrants and share based compensation awards using the treasury stock method | | — | | | — | |
| Diluted weighted-average shares of common stock outstanding | | 45,508,363 | | | 44,974,856 | |
| Basic loss per common share | | $ | (1.42) | | | $ | (6.35) | |
| Diluted loss per common share | | $ | (1.42) | | | $ | (6.35) | |
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2023 | | 2022 |
| Shares subject to warrants outstanding | | — | | | 17,669 | |
| Shares subject to unvested performance and restricted stock units | | 2,163,392 | | | 1,088,879 | |
| Shares subject to stock options outstanding | | 571,359 | | | 670,026 | |
5. ACCOUNTS RECEIVABLE, NET AND INVENTORIES
Accounts receivable, net comprised the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Trade accounts receivable | | $ | 16,740 | | | $ | 18,204 | |
| Allowance for doubtful accounts | | (920) | | | (1,556) | |
| Other receivables | | 1,070 | | | 579 | |
| Total accounts receivable, net | | $ | 16,890 | | | $ | 17,227 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The computationchange in the allowance for doubtful accounts consisted of the weighted-average shares of common stock outstanding for diluted EPS excludes the following potential common shares as their inclusion would have an anti-dilutive effect on diluted EPS attributable to common stockholders:
| | | | | | | | | | | | | | | | | | | | |
| | Years 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 | |
6. ACCOUNTS RECEIVABLE, NET AND INVENTORIES
Accounts receivable, net comprised the following:
| | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2023 | | 2022 |
| Beginning balance | | $ | (1,556) | | | $ | (1,156) | |
| Changes in estimates | | (1,280) | | | (3,274) | |
| Write-offs | | 310 | | | 2,375 | |
| Collections/Other | | 1,606 | | | 499 | |
| Ending balance | | $ | (920) | | | $ | (1,556) | |
Inventories comprised the following:
| | December 31, |
| 2021 | | 2020 |
| | December 31, | | | | December 31, |
| | 2023 | | | | 2023 | | 2022 |
| Finished goods | Finished goods | $ | 145,298 | | | $ | 83,213 | |
| Work-in-process | Work-in-process | 5,967 | | | — | |
| Raw materials | Raw materials | 41,399 | | | 7,837 | |
| Allowance for inventory obsolescence | Allowance for inventory obsolescence | (3,530) | | | (2,432) | |
| Total inventories | Total inventories | $ | 189,134 | | | $ | 88,618 | |
Inventories are stated at the lower of cost or net realizable value, and the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions. The allowance for excess and obsolete inventory is subject to change from period to period based on a number of factors including sales of products, changes in estimates, and disposals.
6. LEASES
The Company leases its distribution centers and manufacturing facilities from third parties under various non-cancelable lease agreements expiring at various dates through 2038. Also, the Company leases some property, plant and equipment under finance leases. Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 20 years. However, these options are generally not reflected in the calculation of the right-of-use assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. The Company recognizes operating lease costs over the respective lease periods, including short-term and month-to-month leases.
The December 31, 2020 amountsCompany has operating subleases which have been accounted for raw materials were reclassified from finished goods to separate line items to conformby reference to the currentunderlying asset subject to the lease, primarily as an offset to rent expense within SG&A.
In January 2023, Gotham Properties LLC, an Oregon limited liability company and a subsidiary of the Company (“Seller”), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company (“Purchaser”) pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8,598 and then leased back by Seller (the “Sale-Leaseback Transaction”). The new lease has a term of 15 years with annual rent starting at $731 and fixed increases to the final year presentation.
when annual rent is $964. The Company is accounting for the transaction as a failed sale-leaseback which requires retaining the assets associated with the property and recognizing a corresponding financial liability for the cash received. The Eugene Property serves as the manufacturing and processing site for certain of the Company’s grow media and nutrient brands. Refer to Note 9 -
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. LEASES
The Company leases its distribution centers and certain manufacturing facilities from third parties under various non-cancelable operatingTotal right-of-use ("ROU") assets, finance lease agreements. Also, the Company leases some equipment under finance leases.
As of December 31, 2021 and 2020, no renewal option periods were included in any estimated minimum lease terms as the options were not deemed reasonably certain to be exercised.
Total ROU assets, and lease liabilities were as follows:
| | December 31, |
| Balance Sheet Classification | | 2021 | | 2020 |
| Leased assets | | | | | |
| Operating ROU assets | Operating lease right-of-use assets | | $ | 45,245 | | | $ | 18,289 | |
| | | | December 31, | | | | | December 31, |
| Balance Sheet Classification | | | Balance Sheet Classification | | 2023 | | 2022 |
| Lease assets | |
| Operating lease assets | |
| Operating lease assets | |
| Operating lease assets | |
| Finance lease assets | Finance lease assets | Property and equipment, net | | $ | 2,365 | | | $ | 383 | |
| Total lease assets | |
| | Lease liabilities | Lease liabilities | |
| Lease liabilities | |
| Lease liabilities | |
| Current: | Current: | |
| Current: | |
| Current: | |
| Operating leases | |
| Operating leases | |
| Operating leases | Operating leases | Current portion of lease liabilities | | $ | 7,198 | | | $ | 3,701 | |
| Finance leases | Finance leases | Current portion of long-term debt | | 739 | | | 159 | |
| Noncurrent: | Noncurrent: | |
| Operating leases | Operating leases | Long-term lease liabilities | | 38,595 | | | 15,320 | |
| Operating leases | |
| Operating leases | |
| Finance leases | Finance leases | Long-term debt | | 1,628 | | | 223 | |
| Total lease liabilities | Total lease liabilities | | $ | 48,160 | | | $ | 19,403 | |
Total lease incomecosts and costssublease income were as follows:
| | For the years ended December 31, |
| Classification | | 2021 | | 2020 | | 2019 |
| | | Years ended December 31, | | | | | Years ended December 31, |
| Classification | | | Classification | | 2023 | | 2022 |
| Operating lease costs | Operating lease costs | Selling, general and administrative | | $6,664 | | $4,260 | | $4,580 |
| Finance lease costs: | Finance lease costs: | |
| Amortization of lease assets | Amortization of lease assets | Selling, general and administrative | | 291 | | 257 | | 239 |
| Amortization of lease assets | |
| Amortization of lease assets | |
| Amortization of lease assets | |
| Interest on lease liabilities | Interest on lease liabilities | Interest expense | | 33 | | 58 | | 46 |
| Gain on lease termination | Impairment, restructuring, and other | | — | | — | | (160) |
| Sublease income | Sublease income | Selling, general and administrative | | (277) | | (57) | | (369) |
(1) Operating lease costs are primarily recorded in SG&A.
In addition to the operating lease costs above, short-term and month-to-month lease expense was $2,268, $1,406$182 and $1,276$341 for the years ended December 31, 2021, 2020,2023, and 2019,2022, respectively, and other costs associated with operating leases were $1,957, $1,464$3,132 and $1,496,$2,573, respectively, for non-lease components such as common area maintenance and other miscellaneous items. These costs were included primarily within SG&A in the consolidated statements of operations.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
miscellaneous items. These costs were included within selling, general and administrative expenses in the consolidated statements of operations.
The aggregate future minimum lease payments under long-term non-cancelable operating and finance leases with remaining terms greater than one year as of December 31, 20212023, are as follows:
| | Year ending December 31, | Year ending December 31, | | Operating | | Finance | Year ending December 31, | | Operating | | Finance |
| 2022 | | $ | 8,569 | | | $ | 830 | |
| 2023 | | 7,924 | | | 707 | |
| 2024 | 2024 | | 7,182 | | | 582 | |
| 2025 | 2025 | | 6,442 | | | 441 | |
| 2026 | 2026 | | 5,031 | | | — | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 16,300 | | | — | |
| Total rental payments | | 51,448 | | | 2,560 | |
| Total lease payments | |
| Less portion representing interest | Less portion representing interest | | 5,655 | | | 193 | |
| Total principal | Total principal | | 45,793 | | | 2,367 | |
| Less current portion | Less current portion | | 7,198 | | | 739 | |
| Long-term portion | Long-term portion | | $ | 38,595 | | | $ | 1,628 | |
The following table summarizes the weighted-average remaining lease term as well as the weighted average discount rate as of December 31, 2021, 20202023, and 2019 as well as the weighted-average discount rate on long-term leases for the years ended December 31, 2021, 2020 and 2019:2022:
| | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Weighted-average remaining lease term in years: | | | | |
| Operating leases | | 6.7 | | 7.1 |
| Finance leases | | 12.5 | | 3.1 |
| | | | |
| Weighted-average discount rate: | | | | |
| Operating leases | | 4.20 | % | | 4.00 | % |
| Finance leases | | 5.25 | % | | 3.63 | % |
Cash paid for amounts included in lease liabilities in 2021, 2020 and 2019 were:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Cash 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) | |
In July 2021, the Company executed a lease for approximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada to be available upon expiration of the lease for existing space. The new lease commencing January 1, 2023 has a term of 120 months with 2 options to renew 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,years ended December 31, 2023, and increases periodically to the final year when the monthly rent is $293.2022, were:
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| Cash paid for amounts included in lease liabilities: | | 2023 | | 2022 |
| Operating cash flows from operating leases | | $ | (12,121) | | | $ | (9,035) | |
| Operating cash flows from finance leases | | (516) | | | (61) | |
| Financing cash flows from finance leases | | (1,007) | | | (757) | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
In November 2021, the Company executed a lease for approximately 109,000 square feet of warehouse in Cambridge, Ontario, Canada. The new lease commencing June 1, 2023 has a term of 120 months with 2 options to renew for an additional five years each at the then prevailing fair market rental value. Rent is abated for the first month. Thereafter, monthly rent starts at approximately $71, and increases periodically to the final year where the monthly rent is $92.
In January 2022, the Company executed a lease for approximately 303,000 square feet of warehouse in Shoemakersville, Pennsylvania to be available upon expiration of the lease for existing space. The new lease commencing March 1, 2022 has a term of 84 months with an option to renew for 1 additional period of five years at the prevailing market rate. Rent is abated for the first two months. Thereafter, monthly rent is approximately $68, and increases periodically to the final year where the monthly rent is $162.
The future minimum lease payments for executed non-cancelable operating leases not yet commenced are as follows:
| | | | | |
| Operating |
| 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 | |
8.7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net comprised the following:
| | | | | | | | | | | |
| 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 | |
Peat bogs and related development | 8,686 | | | — | |
| Computer equipment | 3,197 | | | 2,079 | |
| Furniture and fixtures | 2,867 | | | 1,154 | |
Gross property, plant, and equipment | 58,764 | | | 9,363 | |
| Less: accumulated depreciation, depletion and amortization | (8,291) | | | (5,375) | |
| Total property, plant and equipment, net | $ | 50,473 | | | $ | 3,988 | |
The table above includes the property, plant, and equipment assets acquired from Heavy 16, the H&G Entities, Aurora, Greenstar, and the IGE Entities (see Note 3 - Business Combinations).
The December 31, 2020, amounts for building and improvements, land, and computer equipment were reclassified from other to separate line items to conform to the current year presentation. | | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Machinery and equipment | | $ | 27,417 | | | $ | 27,832 | |
| Peat bogs and related development | | 12,256 | | | 10,761 | |
| Building and improvements | | 10,132 | | | 9,920 | |
| Land | | 6,114 | | | 6,107 | |
| Furniture and fixtures | | 4,360 | | | 3,921 | |
| Computer equipment | | 3,301 | | | 3,337 | |
| Leasehold improvements | | 5,169 | | | 4,177 | |
Gross property, plant, and equipment | | 68,749 | | | 66,055 | |
| Less: accumulated depreciation | | (21,389) | | | (14,920) | |
| Total property, plant and equipment, net | | $ | 47,360 | | | $ | 51,135 | |
Depreciation, depletion and amortization expense related to property, plant, and equipment, net was $4,580 for the year ended December 31, 2021. Depreciation$7,720 and amortization was $1,625 and $1,688$8,219 for the years ended December 31, 20202023, and 2019,2022, respectively.
As of December 31, 2023, Land, Building and improvements, Computer equipment and Machinery and equipment contain finance leases assets, recorded at cost of $12,783, less accumulated depreciation of $3,468. As of December 31, 2022, Computer equipment and Machinery and equipment contains finance leases assets, recorded at cost of $3,128, less accumulated depreciation of $1,123. The increase in finance lease assets in 2023 primarily relates to the Sale-Leaseback Transaction.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities comprised the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Accrued compensation and benefits | | $ | 2,096 | | | $ | 2,522 | |
| Interest accrual | | 1,214 | | | 108 | |
| Freight, custom and duty accrual | | 1,040 | | | 1,022 | |
| Goods in transit accrual | | 360 | | | 1,172 | |
| Income tax accrual | | — | | | 451 | |
| Other accrued liabilities | | 4,819 | | | 7,933 | |
| Total accrued expenses and other current liabilities | | $ | 9,529 | | | $ | 13,208 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities comprised the following:
| | | | | | | | | | | |
| 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 | |
The December 31, 2020, amounts for corporate tax accrual was reclassified from other accrued liabilities to a separate line item and the obligations due under a distribution agreement were reclassified to other accrued liabilities to conform to the current year presentation.
10. DEBT
Debt is comprised of the following:
| | | | | | | | | | | |
| 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 loans | | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Term Loan - net of unamortized discount and deferred financing costs of $4,259 and $5,142 as of December 31, 2023, and December 31, 2022, respectively | | $ | 118,241 | | | $ | 118,608 | |
| Other | | 160 | | | 160 | |
| Total debt | | $ | 118,401 | | | $ | 118,768 | |
| | | | |
| Current portion of long-term debt | | $ | 2,989 | | | $ | 1,307 | |
| Long-term debt - net of unamortized discount and deferred financing costs of $4,259 and $5,142 as of December 31, 2023, and December 31, 2022, respectively | | 115,412 | | | 117,461 | |
| Total debt | | $ | 118,401 | | | $ | 118,768 | |
Term Loan with Brightwood
In May 2017, a term loan inOn October 25, 2021, the aggregate principal amount of $75,000 (the “Brightwood Term Loan”) was obtained by Hydrofarm Holdings LLCCompany and certain of its direct and indirect subsidiaries (the “Brightwood Term Loan Obligors”"Obligors") from Brightwood Loan Services LLC. The Brightwood Term Loan was scheduled to mature on May 12, 2022, and was secured by substantially all non-working capital assets and a second lien on working capital assets of the Brightwood Term Loan Obligors.
Interest was calculated at LIBOR plus a margin of 700 basis points on LIBOR based loans assuming the net leverage ratio as defined was met, otherwise at LIBOR plus a margin of 850 basis points. Principal payments at an annual basis of 2.5% of the original loan amount were due quarterly. Deferred financing costs were being amortized to interest expense over the term of the loan.
The Brightwood Term Loan was 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.
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,
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2020, the effective interest rate was 10.18%, interest expense was $6,892, and amortization of deferred financing costs was $610.
The balance of the Brightwood 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.
Senior Secured Term Loan
On October 25, 2021, the Company and its subsidiaries entered into a Credit and Guaranty Agreement with JPMorgan Chase Bank, N.A., as administrative agent for certainthe lenders, pursuant to which the Company borrowed a $125,000 senior secured term loan (“("Term Loan”Loan"). The Term Loan bearswas amended by Amendment No. 1 to Credit and Guaranty Agreement (“Amendment No. 1”) effective on June 27, 2023, to replace the LIBOR referenced rates with SOFR referenced rates. Pursuant to Amendment No. 1, any Term Loan that constitutes a Eurodollar Rate Loan that is outstanding as of the Amendment No. 1 closing date shall continue until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto shall continue and remain in effect (notwithstanding the occurrence of the Amendment No. 1 closing date) until the end of the applicable interest period for such Eurodollar Rate Loan, after which such provisions shall have no further force or effect. Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan. The ABR Loans shall bear interest at LIBORthe Alternate Base Rate (with a 2.0% floor) plus 4.50%, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0% floor), plus 5.50%. The ABR Loan and Term Benchmark Loan credit spreads of 4.50% and 5.50%, or an alternative base rate (with a 2.0% floor), plus 4.50%,respectively, within the Amendment No. 1 have not changed from the credit spreads in the original Term Loan. Legal fees associated with Amendment No. 1 were not material, and were included in Other income, net, on the Consolidated Statements of Operations for the year ended December 31, 2023. The foregoing description of Amendment No. 1 does not purport to be complete and is qualified in its entirety by reference to the provisions of Amendment No. 1, included as Exhibit 10.8 to this Annual Report on Form 10-K. Capitalized terms referenced above are defined in the Term Loan.
The Term Loan was subject to a call premium of 2% in year one, 1% in year two,if called prior to October 25, 2023, and 0% thereafter, and matures on October 25, 2028 ("Maturity Date"). DeferredDeferred financing costs totaled $6,190 and are being amortized to interest expense over the term of the loan. For the year ended December 31, 2023, the effective interest rate was 11.55% and interest expense was $14,245, which includes amortization of deferred financing costs and discount of $883. For the year ended December 31, 2022, the effective interest rate was 8.30% and interest expense was $10,331, which included amortization of deferred financing costs and discount of $883.
The principal amounts of the Term Loan are scheduledrequired to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the $125,000original principal amount of the Term Loan, on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date. The Company is also required to make mandatory prepayments in the event of (i) achieving certain excess cash flow criteria, including the achievement and maintenance of a specific leverage ratio, (ii) selling assets that are collateral, or (iii) upon the issuance, offering, or placement of new debt obligations.
As described in Note 6 – TheLeases, the Company received net cash proceeds in January 2023 from the Sale-Leaseback Transaction and is subject to a provision whereby such net cash proceeds can be reinvested into certain investments, such as capital expenditures. This provision of the Term Loan requiresincludes (i) cash investments made within a one-year period from the Company to maintain certain reporting requirements, affirmative covenants,Sale Leaseback Transaction, and negative covenants. The Term Loan is secured by a first lien on the non-working capital assets(ii) investments which are contractually committed within one-year of the CompanySale Leaseback Transaction and a second lien on the working capital assets of the Company.paid within 180 days after entering into such contractual commitment. The Company may request additional term loan commitments subject to certain loan conditions.
The Company was in compliance with all reporting requirements, affirmative covenants, and negative covenants as of December 31, 2021.
For the year ended December 31, 2021, the effective interest rate was 1.36%, interest expense was $1,535, and amortization of deferred financing costs was $165.
Revolving asset-backed credit facilities
Bank of America and Encina Credit Facility
In May 2017, a credit facility (“BofA Credit facility”) was obtained by Hydrofarm Holdings LLC and certain of its direct and indirect subsidiaries (the “BofA Obligors”) from Bank of America and the lenders’ party thereto.
The BofA Credit Facility was 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.
On July 11, 2019, the Company and certain of its direct and indirect subsidiaries (the “Encina Obligors”) entered 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. The Encina Credit Facility was due on the earlier of July 11, 2022 or 90 days prior to the scheduled maturity date of the Brightwood Term Loan. The Encina Credit Facility was secured by working capital assets and a second lien on non-working capital assets.any net cash proceeds
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Interest was 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 was charged for available, but unused borrowings as defined. An additional 200 basis points was added to the interest rate for any period during which the loan was in default. Deferred financing costs were amortized over the term of the Encina Credit Facility.
The Encina Credit Facility was subject to numerous amendments since its origination generally in connection with modifications to available borrowings, financial covenants, permitted indebtedness and permitted capital expenditures. Certain amendments required payments of fees. All amendments were accounted for as debt modifications.
For the year ended December 31, 2019, the combined effective interest rate for the BofA Credit Facility and the Encina Credit Facility was 9.86%, interest expense was $2,161, all of which was added to the principal, and amortization of deferred financing costs was $228. 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.
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. The balance of the Encina Credit Facility was $0 as of December 31, 2020, which reflected 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. The Encina Obligors were in compliance with all debt covenants as of December 31, 2020.
The Encina Credit Facility was replaced in March 2021 by the JPMorgan Revolving Credit Facility. For the year ended December 31, 2021, the Company recognized interest expense of $82. The unamortized deferred financing costs and 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.
JPMorgan Revolving Credit Facility
On March 29, 2021, Hydrofarm Holdings Group, Inc. and certain of its direct and indirect subsidiaries (the "JPMorgan Obligors") 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 lenders from time to time party thereto. The JPMorgan Credit Facility is due on March 29, 2024. Deferred financing costs totaled $1,226 and are being amortized to interest expense over the term of the loan. The deferred financing costs for the JPMorgan Credit Facility are included in other assets in the consolidated balance sheets as of December 31, 2021.
The three-year JPMorgan Credit Facility had a borrowing limit of $50,000 with an option to request an increase in the revolving commitment by up to $25,000, drawn in $5,000 increments, for a total not to exceed $75,000, subject to customary condition ("Revolver").
On August 31, 2021, the JPMorgan Obligors entered into an amendment (the "First Amendment") to increase their original borrowing limit to $100,000. In connection with the First Amendment, the Company's acquired subsidiaries became party to the JPMorgan Credit Facility as either borrowers or as guarantors. The Revolver maintains an interest rate of LIBOR plus 1.95% and has a 0.0% LIBOR floor. A fee of 0.25% per annum is charged for available, but unused borrowings as defined.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
which are not reinvested would require the Company to make an offer to prepay the corresponding amount on the Term Loan in 2024. In accordance with this provision, the Company classified $1,665 as current debt as of December 31, 2023, and offer to prepay the Term Loan in this amount. In addition, the Company has $2,187 of contractual commitments pursuant to this provision. Should any of the $2,187 balance not be paid within 180 days of the contractual commitment dates, the Company will be required to make an additional offer to prepay the corresponding amount in 2024. The foregoing description of the reinvestment provision does not purport to be complete and is qualified in its entirety by reference to the provisions of the Term Loan.
As of December 31, 2023, and 2022, the outstanding principal balance on the Term Loan was $122,500 and $123,750, respectively.
The Term Loan requires the Company to maintain certain reporting requirements, affirmative covenants, and negative covenants, and the Company was in compliance with all requirements as of December 31, 2023. The Term Loan is secured by a first lien on the non-working capital assets of the Company and a second lien on the working capital assets of the Company.
Revolving Credit Facility
On March 29, 2021, the Obligors entered into a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender, and the lenders from time to time party thereto. The Revolving Credit Facility is due on June 30, 2026, or any earlier date on which the revolving commitments are reduced to zero.
The Revolving Credit Facility originally had a borrowing limit of $50,000. On August 31, 2021, the Obligors entered into an amendment (the "First Amendment") to increase their original borrowing limit to $100,000. In connection with the First Amendment, the Company's previously acquired subsidiaries became party to the Revolving Credit Facility as either borrowers or as guarantors. On October 25, 2021, the Company and its subsidiaries entered into a second amendment (the “Second Amendment”"Second Amendment"), with JPMorgan Chase Bank, N.A., pursuant to which the parties consented to the Term Loan and the lien priorities described above, and made certain conforming changes to comport with the provisionsTerm Loan provisions. The Revolving Credit Facility was further amended by a third amendment and joinder dated August 23, 2022 (the "Third Amendment"), pursuant to which several previously acquired subsidiaries became parties to the Revolving Credit Facility and granted liens on their assets. On December 22, 2022, the Company entered into a fourth amendment (the "Fourth Amendment") pursuant to which a sale-leaseback transaction was permitted, and certain other changes were made, including a reduction of the Term Loan. All amendments in 2021 were accounted for as debt modifications.maximum commitment amount under the Revolving Credit Facility from $100,000 to $75,000 and transitioning the LIBOR based rates to SOFR based rates. On March 31, 2023, the Company and certain of its subsidiaries entered into an amendment (the “Fifth Amendment”) pursuant to which the maturity date was extended to June 30, 2026, the maximum commitment amount under the Revolving Credit Facility was reduced to $55,000, and the interest rate on borrowings was revised to various spreads, based on the Company's fixed charge coverage ratio.
The JPMorganunamortized debt discount and deferred financing costs were $538 and $580 as of December 31, 2023, and 2022, respectively, and are included in other assets in the consolidated balance sheet. Debt discount and deferred financing costs are being amortized to interest expense over the term of the Revolving Credit Facility.
The Revolving Credit Facility is an asset-based facility that is secured by a first lien on the Company’s assets and theworking capital assets of certainthe Company and a second lien on the non-working capital assets of the Company (including most of the Company’s subsidiaries. subsidiaries). The borrowing base is based on a detailed monthly calculation of the sum of (a) a percentage of the Eligible Accounts at such time, plus (b) the lesser of (i) a percentage of the Eligible Inventory, at such time, valued at the lower of cost or market value, determined on a first-in-first-out basis, and (ii) the product of a percentage multiplied by the Net Orderly Liquidation Value percentage identified in the most recent inventory appraisal ordered by the Administrative Agent multiplied by the Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, minus (c) Reserves (each of the defined terms above, as defined in the Revolving Credit Facility documents).
The Company is required to maintain certain reporting requirements, affirmative covenants and negative covenants, and financial covenants. The financial covenants includepursuant to terms outlined in the maintenanceagreement. Additionally, if the Company’s Excess Availability (as defined in the Revolving Credit Facility documents) is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $55,000), the Company will be required to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.
For the year ended December 31, 2021, the effective interest rate was 4.36%, interest expense was $117, and amortization of deferred financing costs was $206. The balance of the JPMorgan Credit Facility was $0 as of December 31, 2021. The Company had approximately $83,619 available to borrow under the Revolver as of December 31, 2021.
The JPMorgan Obligors were in compliance with all debt covenants as of December 31, 2021.
Note under Paycheck Protection Program
In April 2020, the Company entered into a U.S. Small Business Administration (“SBA”) Paycheck Protection Program promissory note in the principal amount of $3,274 with JPMorgan Chase Bank’s SBA loan program under the March 2020 Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) (the “PPP Loan”). The PPP Loan bore interest at 1% per annum and payments were deferred for the first six months. On October 7, 2020, the Small Business Administration and Treasury Department confirmed a ten-month extension of the deferral period, granted by the PPP Flexibility Act of 2020, which automatically applied to all PPP Loans. Interest expense for the year ended December 31, 2020 was $22. The maturity date was April 7, 2022. The full balance of the PPP Loan, including accrued interest, of $3,296 was repaid on December 15, 2020 with proceeds from the IPO.
Debt convertible into preferred stock
In September and October 2019, the Company issued debt to investors convertible into preferred stock for cash of $7,532, less issuance costs of $552, in the form of unsecured subordinated promissory notes with interest at 6.0% per annum due on March 30, 2020.
The notes contained an automatic conversion feature triggered by a qualified financing as defined (e.g., private placement or initial public offering) of preferred stock of $5,000 or more. The number of shares into which the notes converted was 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.
In December 2019, the Company completed an offering of Series A Convertible Preferred Stock which triggered conversion of $7,532 of principal plus $105 of accrued interest into 2,182,083 shares of Series A Convertible Preferred Stock (see Note 11, Stockholders’ Equity). The total unamortized deferred financing costs was $288 and was recognized as a loss on debt extinguishment in the consolidated statements of operations in 2019.basis until
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
the Excess Availability is more than 10% of the Aggregate Revolving Commitment for thirty consecutive days. In order to consummate permitted acquisitions or to make restricted payments, the Company would be required to comply with a higher fixed charge coverage ratio of 1.15x, but no such acquisitions or payments are currently contemplated. As of December 31, 2023, the Company is in compliance with the covenants contained in the Revolving Credit Facility.
The Revolving Credit Facility provides for various interest rate options including the Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the CB Floating Rate, the Adjusted Daily Simple SOFR, the CBFR, the Canadian Prime Rate, or the CDOR Rate. The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the CBFR rate) use the Term SOFR Rate plus 1.95%. Each rate has a 0.0% floor. A fee of 0.40% per annum is charged for available but unused borrowings.
As of December 31, 2023, and 2022, the Company had zero borrowed under the facility. As of December 31, 2023 the Company would be able to borrow approximately $22 million under the Revolving Credit Facility, before the Company would be required to comply with the minimum fixed charge coverage ratio of 1.1x.
Other debt
Other debt of $160 and $160 as of December 31, 2023, and December 31, 2022, respectively, was primarily comprised of foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage.
Loss on debt modification
The losses on debt modification of $59 and $145 for the years ended December 31, 2023 and 2022, respectively, resulting primarily from the financing transactions described above, are presented in Other income, net on the consolidated statement of operations.
Aggregate future principal payments
As of December 31, 2021,2023, the aggregate estimated future principal payments under long-term debt excluding payments due under finance lease obligations presented in Note 7, Leases, are as follows:
| | | | | |
| Debt |
| 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 | |
The following is a reconciliation of payment due:
| | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | |
| | | | | | | | |
| | Debt |
| Year ending December 31, | | |
| 2024 | | $ | 2,989 | |
| 2025 | | 1,269 | |
| 2026 | | 1,270 | |
| 2027 | | 1,270 | |
| 2028 | | 115,862 | |
| Total | | $ | 122,660 | |
11.10. STOCKHOLDERS’ EQUITY
Capital stock
As of December 31, 2021, the following summarizes shares authorized, issued and outstanding:
| | | | | | | | | | | | | | |
| Capital stock authorized and outstanding: | | Shares
authorized | | Shares
outstanding |
| Convertible preferred stock | | 50,000,000 | | | — | |
| Common stock | | 300,000,000 | | | 44,618,357 | |
As of December 31, 2021, the following summarizes shares of common stock reserved for issuance:
| | | | | |
Common stock reserved for issuance: | Shares reserved
for issuance |
Warrants | 17,817 | |
2020 Employee, Director, and Consultant Equity Incentive Plan | 2,118,067 | |
Restricted stock units | 1,087,608 | |
Stock options | 720,549 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Convertible preferred stock
In December 2019, the Company issued 7,007,429 shares of Series A Convertible Preferred Stock (the "Series A preferred stock") with a par value of $24,526 in return for cash of $15,439, conversion of debt with a basis of $7,637, and $1,450 in receivables that were settled in January 2020, less offering costs totaled $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.
The Series A preferred stock purchase agreement provided for mandatory conversion upon a qualified IPO based on a formula. Under this formula, all outstanding shares of Series A preferred stock converted into 2,291,469 shares of common stock concurrent with the IPO in December 2020 and the cumulative dividend of $2,597 was settled in cash at the option of the Company rather than in shares of common stock.
Common stock
Each holder of common stock is entitled to one vote for each share of common stock. Common stockholders have no pre-emptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption rights and carries no subscription or conversion rights. In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies all liabilities and after provision is made for any class of capital stock having preference over the common stock. Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board.Board of Directors. As of December 31, 2023, there were 45,789,890 shares outstanding and 300,000,000 shares authorized.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Warrants
Redemption of investor warrants
On July 19, 2021, the Company completed the redemption ("Redemption") of certain of its outstanding warrants (the "Investor Warrants") that were issued in connection with a private placement of units (the "private placement"), each consisting of a share of common stock and a warrant to purchase an additional one-half (1/2) shares of common stock, which concluded in the fall of 2018.
The Company was entitled to redeem all of the outstanding Investor Warrants for a redemption price of $0.00033712 per Investor Warrant ("redemption price") if (i) there was an effective registration statement covering the resale of the shares of common stock underlying the Investor Warrants, and (ii) the volume-weighted average price of the Company's common stock for the twenty consecutive trading days prior to the date of the 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.
Prior to the redemption date, 3,367,647 Investor Warrants were exercised, generating total gross proceeds of $56,778. The Company redeemed 1,491 Investor Warrants at the redemption price.
stock. In connection with the private placement, the Company agreed to engage the placement agent (the "Placement Agent") as the Company's warrant solicitation agent in the event the Investor Warrants were called for Redemption. The Company agreed to pay a warrant solicitation fee to the Placement Agent equal to 5five percent of the amount of net cash proceeds solicited by the Placement Agent upon the exercise of certain Investor Warrants following such call for Redemption. For the yearyears ended December 31, 2021, warrant solicitation fee expense totaled $1,9492023 and was included in selling, general and administrative expenses in the consolidated statements of operations.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Redemption of placement agents warrants
2022, respectively, there were no Investor Warrants outstanding. In connection with the private placement, placement agents werethe Placement Agent was issued warrants to purchase 517,067 shares of common stock in the Company of(the “placement agent warrants”) 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 exercisedexpired on a "cashless" basis.
For the year ended December 31, 2021, 166,343 placement agent warrants were exercised on a cashless basis at a price of $16.86 per share for 129,265 shares of common stock and 332,907 placement agent warrants were exercised on as cashless basis at a price of $8.43 per share for 289,368 shares of common stock.14, 2023.
As of December 31, 2021,2023, there were no outstanding placement agent warrants. As of December 31, 2022, the following table summarizes the outstanding warrants:
| | Number of Warrants | | Exercise Price |
| | Number of Warrants | | | | Number of Warrants | | Exercise Price |
| Placement agent warrants | Placement agent warrants | | 11,809 | | | $ | 8.43 | |
| Placement agent warrants | Placement agent warrants | | 6,008 | | | $ | 16.86 | |
| Total | Total | | 17,817 | | | $ | 11.27 | |
12.11. STOCK-BASED COMPENSATION
Stock-based compensation plan overview
The Company maintains 3three equity incentive plans: the 2018 Equity Incentive Plan (“("2018 Plan”Plan"), the 2019 Employee, Director and Consultant Equity Incentive Plan (“("2019 Plan”Plan") and the 2020 Employee, Director, and Consultant Equity Incentive Plan (“("2020 Plan”Plan" and collectively, “Incentive Plans”"Incentive Plans"). The 2020 Plan serves as the successor to the 2019 Plan and 2018 Plan and provides for the issuance of incentive stock options ("ISOs"), nonqualified stock options ("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 Plan. Of theAs of December 31, 2023, a total of 1,400,453 shares were available for grant under the 2020 Plan, 2,118,067 shares remain available as of December 31, 2021.Plan.
The Incentive Plans are administered by the Board.Company's Board of Directors. Notwithstanding the foregoing, the Board of Directors may delegate concurrent responsibility for administering each plan, including with respect to designated classes of persons eligible to receive an award under each plan, to a committee or committees (which term shall include subcommittees) consisting of one or more members of the Board of Directors (collectively, the “Plan Administrator”"Plan Administrator"), subject to such limitations as the Board of Directors deems appropriate.
In November 2020, the Board of Directors and stockholders approved the 2020 Plan and reserved an aggregate of 2,284,053 shares of common stock for issuance under the 2020 Plan. SubjectPursuant to the provision of the 2020 Plan, the number of shares available for issuance under the 2020 Plan willmay be increased on January 1 of each year, beginning on January 1, 2021, and ending on January 2, 2030, in an amount equal to the lesser of (i) 4% of the outstanding shares of the Company’s common stock on such date or (ii) such number of shares determined by the Plan Administrator.
The 2020 Plan provides for the grant of ISOs, NSOs,nonqualified stock options, stock grants, and stock-based awards that are based in whole or in part by reference to the Company’s common stock.
•The Plan Administrator may grant options designated as incentive stock options or nonqualified stock options. Options shall be granted with an exercise price per share not less than 100% of the fair market value of the common stock on the grant date, subject to certain limitations and exceptions as described in the plan agreements. Generally, the maximum term of an option shall be ten10 years from the grant date. The Plan Administrator shall establish and set forth in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable.
•The Plan Administrator may grant stock grants and stock-based awards, including securities convertible into shares, stock appreciation rights, phantom stock awards or stock units on such terms and conditions which may be based on continuous service with the Company or related company or the achievement of any performance goals, as the Plan Administrator shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the award.
GrantsThe tax benefits recognized in the consolidated statements of restricted stock unitsoperations for stock-based compensation arrangements for the years ended December 31, 2023, and 2022, were not material to the financial statements.
Restricted Stock Unit ("RSU") Activity
RSUs granted to certain executives, employees and members of the Board of Directors expire 10 years after the grant date. The awards generally have a time-based vesting conditionrequirement (based on continuous employment) and certain awards also have a performance-based vesting condition (defined as a qualifying liquidity event including an initial public offering); on the date the performance-based vesting condition is satisfied, the employee becomes vested in the number of RSUs that have satisfied the time-based vesting condition, if any.. Upon vesting, the RSUs convert into shares of the Company’sCompany's common stock.
Through December 8, 2020, no stock-based compensation expense had been recognized for certain awards with a performance-based condition based on the occurrence of a qualifying liquidity event, as such qualifying event was not probable. Upon the IPO, the performance-based vesting condition was satisfied 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. For the year ended December 31, 2020, the Company 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.
For the year ended December 31, 2020, the Company withheld 239,702 of the 718,928 shares of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements. The total tax withholding obligation of $6,089 as of December 31, 2020 was 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. During the first quarter of 2023, the Company granted RSU awards that are expected to vest with two equal vesting tranches; one tranche vested on October 31, 2023, and the second one is scheduled to vest on October 31, 2024. During the second quarter of 2023, the Company granted RSU awards to members of the Board of Directors that are expected to vest on the one year anniversary of the grant date. During the third quarter of 2023, the Company granted RSU awards that are expected to vest with three equal vesting tranches, annually on the anniversary of the grant date.
The award granted to a former member of the Board (the "former Board member") in July 2020, and modified in November 2020, containscontained a market-based vesting condition based on the traded value of shares of the Company’s common stock following the IPOCompany's initial public offering ("IPO") over a specific time frame. For this award, the market condition was factored into its fair value. The fair value of the award, at the modification date, was $3,180, all of which was recorded as stock-based compensation expense 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 theremaining 111,236 unvested RSUs subject tomet the time-based vesting conditions were 111,236 as of December 31, 2021. Forduring the year ended December 31, 2021, there were no performance2022, and vested at that time. No additional awards with market-based conditions have been granted.
For the year ended December 31, 2021, the Company recognized $4,566 of total stock-based compensation expense for restricted stock units. For the year ended December 31, 2021, the Company withheld 268,867 of the 851,741 of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements. The tax withholding 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.
The following table summarizes the activity related to the Company's RSUs for the year ended December 31, 2021.2023. For purposes of this table, vested RSUs represent the shares for which the service requirementscondition had been fulfilled asduring the year ended December 31, 2023:
| | | | | | | | | | | | | | |
| | Number of
RSUs | | Weighted
average grant
date fair value |
| Balance, December 31, 2022 | | 992,633 | | | $ | 8.57 | |
| Granted | | 1,091,726 | | | $ | 1.19 | |
| Vested | | (779,412) | | | $ | 6.82 | |
| Forfeited | | (62,737) | | | $ | 11.05 | |
| Balance, December 31, 2023 | | 1,242,210 | | | $ | 3.06 | |
The total vest date fair value of RSUs vested for the years ended December 31, 2023, and 2022, was $948, and $8,397, respectively.
As of December 31, 2021:2023, total unamortized stock-based compensation cost related to unvested RSUs was $2,021 and the weighted-average period over which the compensation is expected to be recognized is 1.09 years. As of December 31, 2023, there were 6,357 RSUs which had vested, but were not yet issued due to the recipients' elections to defer the awards.
| | | | | | | | |
| Number of
RSUs | Weighted
average grant
date fair value |
| Balance, 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 | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The total fair valuewithholding payments of RSUs vested for$256 were made in 2023.
Performance Stock Unit ("PSU") Activity
During the yearsyear ended December 31, 2021, 20202023, the Company granted PSU awards that are subject to a one-year vesting requirement (based on continuous employment) and 2019 was $6,090, $4,598,contain performance conditions based on certain performance metrics. The following table summarizes the activity related to the Company's PSUs for the year ended December 31, 2023:
| | | | | | | | | | | | | | |
| | Number of
PSUs | | Weighted
average grant
date fair value |
| Balance, December 31, 2022 | | 96,246 | | | $ | 15.74 | |
| Granted | | 1,141,543 | | | $ | 1.77 | |
| Vested | | (25,894) | | | $ | 15.74 | |
| Forfeited | | (290,713) | | | $ | 5.15 | |
| Balance, December 31, 2023 | | 921,182 | | | $ | 1.77 | |
During the year ended December 31, 2023, the PSU forfeitures were due to employee terminations and $0, respectively.performance conditions that were not satisfied, while PSU vests were from awards granted in prior periods. The Company anticipates that a majority of the PSUs outstanding as of December 31, 2023 will forfeit in 2024 as a result of not meeting certain performance conditions.
As of December 31, 2021,2023, total unamortized stock-based compensation cost related to unvested RSUsPSUs was $7,997$72 and the weighted-average period over which the compensation is expected to be recognized is 1.65 years.less than one-year.
The tax benefits recognized intotal vest date fair value of PSUs vested for the consolidated statements of operations for stock-based compensation arrangements foryear ended December 31, 2023, was $44.
For the years ended December 31, 20212023, and 20202022, respectively, the Company recognized $300, and $355, of total stock-based compensation expense for PSUs. For the year ended December 31, 2023, the Company withheld 8,909, of the 25,894, of common stock issued upon vesting of PSUs to meet employees' payroll tax withholding requirements. The tax withholding payments of $15 were not material to the financial statements. There was no tax benefit recognizedmade in 2019.2023.
Stock optionsOptions
The vesting of stock options 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.
There were no stock options granted or exercised during the year ended December 31, 2023. The following table summarizes the stock option activity for the year ended December 31, 2021:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number | | Weighted
average
exercise price | | Weighted
average grant
date fair value | | Weighted 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 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Number | | Weighted
average
exercise price | | Weighted
average grant
date fair value | | Weighted average
remaining contractual
term (years) |
| Outstanding as of December 31, 2022 | 670,026 | | | $ | 9.50 | | | $ | 2.05 | | | 5.25 |
| Cancelled | (91,443) | | | $ | 9.44 | | | $ | 2.19 | | | |
| Forfeited | (7,224) | | | $ | 12.28 | | | $ | 7.69 | | | |
| Outstanding as of December 31, 2023 | 571,359 | | | $ | 9.47 | | | $ | 2.01 | | | 3.69 |
| Options exercisable as of December 31, 2023 | 554,685 | | | $ | 9.16 | | | $ | 1.71 | | | 3.59 |
| Vested and expected to vest as of December 31, 2023 | 571,359 | | | $ | 9.47 | | | $ | 2.01 | | | 3.69 |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The following table summarizes the unvested stock option activity for the year ended December 31, 2023:
| | | | | | | | | | | | | | |
| | |
| | Number | | Weighted
average grant
date fair value |
| Unvested as of December 31, 2022 | | 70,587 | | | $ | 7.02 | |
| Vested | | (46,689) | | | $ | 5.68 | |
| Forfeited | | (7,224) | | | $ | 7.69 | |
| Unvested as of December 31, 2023 | | 16,674 | | | $ | 12.15 | |
There were no stock options granted for the year ended December 31, 2023. The weighted average grant date fair value of stock options granted was $12.95 for the year ended December 31, 2022.
Since stock options represent equity awards of the Company, such awards are fair valued as of the grant date for the purposes of measurement and recognition under U.S. GAAP. To measure the fair value of an option, the Black-Scholes valuation model was utilized. The valuation model requires the input of highly subjective assumptions. For inputs into the Black-Scholes model, the expected volatility is based on historical implied volatility from recent stock option transactions at the time of grant. 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 expected dividend yield is 0.0% as the Company has not paid and does not anticipate paying dividends on its common stock. Inputs to the model were as follows for the periodsperiod indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Years 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 |
| | | | | |
| Year ended December 31, 2022 |
| Weighted average exercise price of common stock underlying the options | $13.12 |
| Volatility | 200% |
| Risk-free rate | 2.8% |
| Dividend yield | Nil |
| Expected term in years | 6.0 |
As of December 31, 2021,2023, the total compensation cost related to unvested awardsoptions not yet recognized was $919$113 and the weighted-average period over which the compensation is expected to be recognized is 1.96 years.
Totalless than one-year. For the years ended December 31, 2023, and 2022, respectively, the Company recognized $273 and $361, of total stock-based compensation expense for stock options. The total intrinsic value of options exercised was $440, $206, and $208 in 2021, 2020, and 2019, respectively.$82 for the year ended December 31, 2022.
12. INCOME TAXES
Loss before tax was as follows:
| | | | | | | | | | | |
| Years ended December 31, |
| 2023 | | 2022 |
| United States | $ | (58,068) | | | $ | (235,215) | |
| Foreign | (6,958) | | | (56,643) | |
| Loss before tax | $ | (65,026) | | | $ | (291,858) | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
13. INCOME TAXES
Loss from continuing operations before tax was as follows:
| | | | | | | | | | | | | | | | | |
| Years 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) | |
Significant components of income tax (benefit) expense from continuing operationsbenefit consist of the following:
| | Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| Years ended December 31, | | | Years ended December 31, |
| 2023 | | | 2023 | | 2022 |
| Current: | Current: | | | | | |
| Federal | |
| Federal | |
| Federal | Federal | $ | — | | | $ | — | | | $ | — | |
| State | State | 72 | | | 91 | | | 18 | |
| Foreign | Foreign | 1,787 | | | 433 | | | 9 | |
| Total current | 1,859 | | | 524 | | | 27 | |
| Total current expense | |
| | Deferred: | Deferred: | |
| Deferred: | |
| Deferred: | |
| Federal | |
| Federal | |
| Federal | Federal | (18,275) | | | — | | | — | |
| State | State | (1,962) | | | — | | | — | |
| Foreign | Foreign | (759) | | | 52 | | | (718) | |
| Total deferred | (20,996) | | | 52 | | (718) | |
| Total income tax (benefit) expense | $ | (19,137) | | | $ | 576 | | | $ | (691) | |
| Total deferred expense (benefit) | |
| Total income tax benefit | |
The reconciliation of income tax computed at the U.S. federal statutory tax rates of 21% to income tax expense (benefit) from continuing operations consistbenefit consists of the following:
| | Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| Years ended December 31, | | | Years ended December 31, |
| 2023 | | | 2023 | | 2022 |
| Effective rate reconciliation | Effective rate reconciliation | | | | | |
| U.S. federal tax benefit at statutory rate | |
| U.S. federal tax benefit at statutory rate | |
| U.S. federal tax benefit at statutory rate | U.S. federal tax benefit at statutory rate | $ | (1,201) | | | $ | (1,406) | | | $ | (8,563) | |
| State income taxes, net | State income taxes, net | 68 | | | (171) | | | (1,247) | |
| Permanent items | Permanent items | 542 | | | 19 | | | 89 | |
| Global intangible low-taxed income | 972 | | | 866 | | | — | |
| Goodwill impairment | |
| Foreign rate differential | Foreign rate differential | 1,032 | | | 854 | | | (891) | |
| 162(m) officers compensation | 162(m) officers compensation | 6,969 | | | 3,514 | | | — | |
| Share-based compensation | Share-based compensation | (8,118) | | | (2,834) | | | — | |
| Deferred adjustments | Deferred adjustments | 67 | | | (230) | | | 563 | |
| Transaction costs | 2,290 | | | 90 | | | — | |
| Other, net | Other, net | (973) | | | — | | | — | |
| Valuation allowance | Valuation allowance | (20,785) | | | (126) | | | 9,358 | |
| Total income tax (benefit) expense | $ | (19,137) | | | $ | 576 | | | $ | (691) | |
| Total income tax benefit | |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Deferred income tax assets and liabilities consist of the following:
| | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Deferred tax assets | | | |
| Lease liabilities | $ | 16,646 | | | $ | 17,079 | |
| Accrued expenses | 2,022 | | | 1,453 | |
| Share-based compensation | 177 | | | 865 | |
| Intangible assets | 1,422 | | | 2,110 | |
| Net operating loss | 38,729 | | | 31,425 | |
| Inventories | 5,437 | | | 6,346 | |
| Interest expense | 9,466 | | | 4,183 | |
| Other | 1,543 | | | 1,130 | |
| Deferred tax assets | 75,442 | | | 64,591 | |
| Valuation allowance | (55,742) | | | (39,293) | |
| Total deferred tax assets | 19,700 | | | 25,298 | |
| | | |
| Deferred tax liabilities | | | |
| Property, plant and equipment | (8,618) | | | (10,216) | |
| Operating lease right-of-use assets | (14,063) | | | (17,767) | |
| Other | (37) | | | — | |
| Total deferred tax liabilities | (22,718) | | | (27,983) | |
| Net deferred tax liability | $ | (3,018) | | | $ | (2,685) | |
| | | |
| Other long-term assets - deferred tax assets | $ | 214 | | | $ | — | |
| Long-term deferred tax liabilities | (3,232) | | | (2,685) | |
| Net deferred tax liability | $ | (3,018) | | | $ | (2,685) | |
As of December 31, 2021,2023, the Company had federal and state net operating loss (“NOL”("NOL") carryforwards of approximately $74,900$153,300 and $56,900,$113,100, respectively. The federal and state NOL carryforwards, if not utilized, will begin to expire in 2037 and 2027, respectively, and $62,000$140,000 of the federal losses are indefinite. As of December 31, 2022, the Company had federal and state NOL carryforwards of approximately $107,100 and $80,800, respectively. Foreign NOL carryforwards were approximately $1,000 and $3,000$8,900 at December 31, 2021 and 2020, respectively.2023. The foreign NOLs, if not utilized, will begin to expire in 2040.
The Company determined the amount of its valuation allowance based on its estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income by jurisdiction, in which it operates overand the periods in which the related deferredimpact of tax assets will be recoverable.planning strategies. As of December 31, 20212023, and 2020,2022, the Company believes it is more-likely-than-not that it will not be able to realize its U.S. deferred tax assets and therefore has maintained a full valuation allowance against its U.S. deferred tax assets. The Company has also provided a full valuation allowanceallowances against the majority of its Spanishcertain foreign deferred tax assets.
In connection with the acquisition of shares of H&G, the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of pre-existing deferred tax assets. As a result, a portion of the Company's valuation allowance was released and the Company recorded a $20,785 tax benefit. The amount of valuation allowance has decreased $19,542 for the year ended December 31, 2021. The decrease is mainly due to deferred tax liabilities recorded as a result of purchase price accounting, slightly offset by other changes in deferred tax assets and liabilities during the year.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Carryforwards of NOLs are subject to possible limitation should a change in ownership occur, as defined by Internal Revenue Code Section 382. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholdersstockholders in any three-year period. As a result of the IPO, theThe Company experienced an aggregate ownership change which exceeded the 50% threshold.threshold in connection with the Company's IPO, and future changes in stock ownership may occur. To the extent that the Company earns net taxable income, the Company's ability to use NOLs to offset such taxable income may be subject to limitations. The annual limitation resulting from thisthe IPO ownership change is not expected to result in the expiration of the NOL carry forwards before utilization.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In 2021thousands, except share and 2020,per share amounts)
In 2023 and 2022, 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, 2021.
2023. 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.
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carry-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.
The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. The CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. In addition, the CARES Act allows companies to defer making certain payroll tax payments until future years. With the enactment of the CARES Act, the Company does not expect a financial statement impact on income taxes. The Company has not recorded any income tax expense or benefit related to the CARES Act for the year ended December 31, 2021.
14.13. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Purchase commitments
From time to time in the normal course of business, the Company will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period.
Contingencies
In the normal course of business, certain claims have been brought against the Company and, where applicable, its suppliers. While there is inherent difficulty in predicting the outcome of such matters, management has vigorously contested the validity of these claims. Based on available information, management believes the claims are without merit and does not expect that the outcome of any matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, results of operations, cash flows or future earnings of the Company.
14. FAIR VALUE MEASUREMENTS
Recurring
Contingent consideration, as described under the heading Business combinations in Note 2 – Basis of Presentation and Significant Accounting Policies, was measured at estimated fair value on a recurring basis and based on Level 3 fair value measurements. The fair value of the contingent consideration for the Heavy 16 and Aurora Innovations acquisitions was $200 and $16,834, respectively, as of December 31, 2021. There was no change in the fair value of the contingent consideration for the Heavy 16 acquisition during fiscal year 2022, and it was paid in April 2022. The change in the fair value of contingent consideration for the Aurora Innovations acquisition was a benefit of $1,560, during the six months ended June 30, 2022, and was recognized in SG&A on the consolidated statements of operations during that period. The value of the contingent consideration was $15,274 as of June 30, 2022, and was subsequently paid in July 2022. As of December 31, 2023, and 2022, the Company had no remaining unsettled contingent consideration relating to the Company's five acquisitions from 2021.
Nonrecurring
Nonrecurring fair value measurements include the Company’s goodwill impairment recognized during the year ended December 31, 2022, as determined based on unobservable Level 3 inputs. Refer to Note 3 – Goodwill and Intangible Assets, Net, for further discussion.
The Company's note receivable, as described in Note 2 – Basis of Presentation and Significant Accounting Policies, was measured at fair value on a nonrecurring basis. During the year ended December 31, 2022, the Company measured an impairment on the note receivable based on the estimated fair value of the collateral, which was considered a Level 3 fair value measurement. The carrying value of the note receivable was $3,111 as of December 31, 2021. The Company recorded an impairment loss of $2,636 during the year ended December 31, 2022, recognized in Impairments on the consolidated statements of operations. The carrying value of the note receivable was $475 as of December 31, 2022, and was included in other assets on the consolidated balance sheet.
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
that the outcome, individually or in the aggregate, would have a material adverse effect on the consolidated financial positions, results of operations, cash flows or future earnings.
Related party transactions—Hydrofarm Distribution Center and Certain Facilities
The Company leased a distribution center in Petaluma, California from entities in which a related party was a stockholder. For the years ended December 31, 2021, 2020 and 2019, rent expense for the month to month lease totaled $639, $1,278, and $1,445, respectively.
The Company leases certain facilities from a member of management who is also a member in a LLC that is the lessor. For the year ended December 31, 2021, rent expense for the 2 leases totaled $149.
Related party transactions — Consulting Agreement
In July 2020, the Company entered into a consulting agreement with a director to serve as an advisor to the Board and the chief executive officer. The agreement includes an award of 296,630 restricted stock units. In November 2020, the related consulting agreement was canceled and the award was modified (see Note 12, Stock-based Compensation).
15. IMPAIRMENT, RESTRUCTURING AND OTHER
In 2021, the Company incurred $297 of costs primarily related to an aborted convertible loan transaction. In 2020, the Company incurred $860 of costs related to SEC filings and other transactions. In 2019, the Company recognized $10,035 of impairment of intangible assets, several restructuring and recapitalization events, and fees for various statutory filings. The impairment of intangible assets of $5,390 in 2019 was related to the Canadian customer relationships.
16. FAIR VALUE MEASUREMENTSOther Fair Value Measurements
The following table summarizes the fair value of the Company’s assets and liabilities which are provided for which disclosure purposes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 | | December 31, 2022 |
| Fair Value Hierarchy Level | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| Assets | | | | | | | | | |
| Cash and cash equivalents | Level 1 | | 30,312 | | 30,312 | | 21,291 | | 21,291 |
| | | | | | | | | |
| Liabilities | | | | | | | | | |
| Finance leases | Level 3 | | 9,688 | | 9,688 | | 1,904 | | 1,904 |
| Term Loan | Level 2 | | 122,500 | | 98,000 | | 123,750 | | 105,188 |
Cash and cash equivalents included funds deposited in banks, and the fair values approximated carrying values due to their short-term maturities. The fair values of other current assets and liabilities including accounts receivable, accounts payable, accrued expenses and other current liabilities approximated their carrying value due to their short-term maturities.
The estimated fair value is required:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 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 |
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shareof finance leases approximated their carrying value given the applicable interest rates and per share amounts)
17. SUBSEQUENT EVENTS
the nature of the security interest in the Company’s assets, which were considered Level 3 fair value measurements. Finance leases primarily relate to the Sale-Leaseback transaction that was entered into in the first quarter of 2023. The Company executed a new operating lease after December 31, 2021, which is described infair value of the Term Loan was estimated based on Level 2 fair value measurements and was based on bank quotes. The carrying amount of the Term Loan reported above excludes unamortized debt discount and deferred financing costs. Refer to Note 7 -6 – Leases. and Note 9 – Debt, for further discussion of the Company's finance leases and Term Loan, respectively.
Schedule II – Valuation and
Qualifying Accounts
Hydrofarm Holdings Group, Inc.
For the years ended December 31, 2021, 2020, and 2019
(in thousands)
| | | | | | | | | | | | | | |
| 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 DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act")) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective for the period covered by this Annual Report on Form 10-K.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost 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 effective for the period covered by this Annual Report.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 20212023 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In accordance with guidance issued by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their first assessment of internal control over financial reporting following the date of acquisition. Based on those guidelines, management’s assessment of the effectiveness of our internal control over financial reporting excluded Heavy 16, House and Garden, Aurora, Greenstar and Innovative 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 consolidated financial statements for 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.
As a result of this assessment, management concluded that, as of December 31, 2021,2023, our internal control over financial reporting was 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 effectivenessThis annual report does not include an attestation report of our internal control over financial reporting and its reportindependent registered public accounting firm as it is included above.not required.
Changes in Internal Controls over Financial Reporting
During 2021, we remediated material weaknesses that were identified in 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. Other than disclosed above, thereThere 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 period covered by this Annual Report on Form 10-K that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be included in the 20222024 Proxy Statement and is incorporated herein by reference.
The following table sets forth the name and position of each of our executive officers and directors as of February 29, 2024.
| | | | | |
| Name | Position |
| William Toler | Chairman of the Board and Chief Executive Officer |
| B. John Lindeman | Executive Vice President and Chief Financial Officer |
| Kevin O'Brien | Chief Accounting Officer |
| Mark Parker | Executive Vice President |
| Patrick Chung | Director |
| Susan P. Peters | Director, Chairperson of Compensation Committee |
| Renah Persofsky | Director, Chairperson of Nominating and Corporate Governance Committee |
| Richard D. Moss | Director, Chairperson of Audit Committee and Mergers and Acquisitions Committee |
| Melisa Denis | Director |
William Toler, Chairman of the Board and Chief Executive Officer
Mr. Toler has served as our Chairman of our board of directors and Chief Executive Officer since January 1, 2019. Prior to joining Hydrofarm in 2019, Mr. Toler was the Chief Executive Officer of Hostess Brands, Inc. (Nasdaq: TWNK) ("Hostess"), a food and beverage company, from April 2014 to March 2018. Under his leadership, Hostess successfully re-established the iconic Hostess brand as a leader within the sweet baked goods category, returned the company to profitability and transitioned Hostess from a private to public company. Mr. Toler has over 35 years of executive leadership experience in supply chain management and consumer packaged goods, including previously having served as Chief Executive Officer of AdvancePierre Foods, from September 2008 to August 2013, and President of Pinnacle Foods. He has also held executive roles at Campbell Soup Company (NYSE: CPB), Nabisco, and Procter & Gamble (NYSE: PG). Mr. Toler served on the board of directors of Collier Creek Holdings from September 2018 to September 2020, Hostess Brands from May 2014 to March 2018, AdvancePierre Foods from 2008 to 2013 and Pinnacle Foods from 2007 to 2008. In addition, Mr. Toler has also served as a senior advisor at Oaktree Capital Management, an investment management firm, from September 2013 to April 2014. Mr. Toler holds a B.A. in Business Management and Economics from North Carolina State University.
B. John Lindeman, Chief Financial Officer
Mr. Lindeman has served as our Executive Vice President since August 2022 and Chief Financial Officer since March 2020. From August 2015 until assuming his current role at Hydrofarm in March 2020, Mr. Lindeman served as Chief Financial Officer and Corporate Secretary at Calavo Growers, Inc. (Nasdaq-GS: CVGW) ("Calavo"), a global avocado-industry leader and expanding provider of valued-added fresh food, where he was responsible for the finance, accounting, IT and human resource functions. Prior to joining Calavo, Mr. Lindeman held various leadership positions within the finance and investment banking industries, including serving as managing director at Sageworth Trust Company, a family office and private trust company, from March 2015 to July 2015, managing director and co-head of the consumer and retail group at Janney Montgomery Scott from August 2009 to March 2015, managing director at Stifel, Nicolaus & Co., Inc. from December 2005 to August 2009 and principal at Legg Mason from October 1999 to December 2005. Prior to joining Legg Mason, he was a Manager at PricewaterhouseCoopers LLP from August 1996 to October 1999. Mr. Lindeman has also served as a director of Utz Brands, Inc. (NYSE: UTZ) since September 2020. Mr. Lindeman is a Chartered Financial Analyst and holds a B.S. in Business Administration from the University of Mary Washington.
Kevin O’Brien, Chief Accounting Officer
Mr. O’Brien has served as our Chief Accounting Officer since March 2022. Prior to joining Hydrofarm, Mr. O’Brien served as the Chief Accounting Officer of CPI Card Group Inc. (Nasdaq: PMTS) since April 2018. Mr. O’Brien previously
served as the Director of Corporate Accounting and SEC Reporting at the same company from March 2016 until April 2018. Mr. O’Brien has 20 years of accounting experience, including serving as a Senior Audit Manager at Deloitte & Touche LLP. Mr. O’Brien is a Colorado Certified Public Accountant and received a Bachelor of Science in Business with an Emphasis in Accounting from University of Colorado and a Master of Science with an Emphasis in Accounting from the same institution.
Mark Parker, Executive Vice President
Mr. Parker has served as our Executive Vice President since February 2022. Mr. Parker has over 30 years of experience in sales and marketing, and leading complex integration projects in multiple industries, in particular with consumer packaging goods. From May 2019 until February 2022, Mr. Parker served as our Senior Vice President of Business Development. Prior to joining Hydrofarm Mr. Parker was the founder and Chief Executive Officer of iQ Solutions, where he spent nine years assisting organizations in commercialization efforts focused on sales and marketing. Mr. Parker also previously served as Senior Vice President of Trade Marketing, U.S. Soup Division, for Campbell Soup Company (NYSE: CPB), where he introduced innovative initiatives as "Soup to Go" (convenience in a package) and iQ Shelf, an in-store approach to simplify consumer shopping experience and drive mutual share growth. Mr. Parker holds a B.S. in Economics from Wingate University.
Susan P. Peters, Director
Ms. Peters has served as our director since November 10, 2020. Previously, she was the Senior Vice President of Human Resources for General Electric Company (“GE”) (NYSE: GE) from July 2013 until December 2017 after which she retired following 38 years of service. In her role as Chief Human Resource Officer (“CHRO”), Ms. Peters was a member of GE’s senior leadership team. From 2001 to 2007 Ms. Peters served as GE’s Vice President of Executive Development and served as Chief Learning Officer since 2007. In her role as the CHRO, Ms. Peters oversaw all aspects of the Human Resource function for GE’s workforce of approximately 325,000 employees in 175 countries. She was responsible for all of GE’s talent acquisition, talent development, learning, compensation and benefits, payroll, union relations, and security. Approximately 5,000 human resource employees worked under her leadership. Ms. Peters was first appointed as an officer at GE in 1997. Ms. Peters was a founding member of the GE Women’s Network and was also a member of the GE Foundation Board and the GE Pension Board. Ms. Peters also served on the National Board of Directors of Girl Scouts of the USA from 2008 until 2017. She is currently a member of the Loews Corporation (NYSE: L) board of directors. Ms. Peters received her B.A. from St. Mary’s College, Notre Dame and her Masters in Education from the University of Virginia. Ms. Peters was selected to serve on our board of directors because of her expertise in leadership and development and her experience serving as an officer of a global industrial company.
Patrick Chung, Director
Mr. Chung has served as our director since November 10, 2020. Mr. Chung has served as Vice President of Investments at CentreCourt since October 2022. Previously, Mr. Chung served as the Vice President of Finance at Serruya Private Equity Inc. from March 2018 to October 2022. In this role, Mr. Chung oversaw financial reporting and asset management for the fund, led the real estate investments team, and played a strategic role in the growth of investee companies. Previously, Mr. Chung was the Director of Finance for Inside Edge Properties Ltd. from March 2017 to March 2018. From January 2015 to March 2017, Mr. Chung served as the Assistant Manager of Finance Advisory for Deloitte. Prior to January 2015, Mr. Chung served as an Associate of Risk Assurance Services at PricewaterhouseCoopers Canada. In December 2015, Mr. Chung was designated as a Chartered Professional Accountant by the Chartered Professional Accountants of Ontario. Mr. Chung received his Bachelor of Accounting and Finance and Minor in Economics from the University of Waterloo in December 2011 and his Masters of Accounting from the University of Waterloo in August 2012. Mr. Chung was selected to serve on our board of directors because of his expertise in financial accounting and investment management.
Renah Persofsky, Director
Ms. Persofsky has served as our director since November 10, 2020. Ms. Persofsky has over 40 years of business experience. Ms. Persofsky has served as the Chief Executive Officer of Strajectory Corp. since 2010 and served as an executive consultant of Canadian Imperial Bank of Commerce (NYSE: CM) from 2011 to 2021. Ms. Persofsky served as the Chairwoman of BookJane Inc. from October 2016 to December 2021; a director of Tilray Brands, Inc. (Nasdaq: TLRY) (f/k/a Aphria Inc.) since October 2017 and the Vice Chairwoman and Lead Director since October 2019; the Chairwoman of Green Gruff Inc. since July 2019; a director of Greenlane Holdings (Nasdaq: GNLN) since April 2022; and a director at Oceansix Future Paths Ltd. (TSXV: OSIX) (f/k/a K.B. Recycling Industries Ltd.) since April 2021. Ms. Persofsky has also previously served as an executive consultant to many iconic brands including Tim Hortons, Canadian Tire (OTCMKTS: CDNAF), Canada Post and Interac, and was an executive officer of the Bank of Montreal (NYSE: BMO). Ms. Persofsky previously co-chaired the Canadian Minister’s Advisory Committee on Electronic Commerce, as well as served as a special advisor to the Minister of Foreign Affairs and Trade. Ms. Persofsky received her degree from the Rotman School of Management at the University of
Toronto. Ms. Persofsky was selected to serve on our board of directors because of her global business and e-commerce expertise, and her experience with the cannabis industry.
Richard D. Moss, Director
Mr. Moss has served as our director since November 10, 2020. Mr. Moss served as Chief Financial Officer of Hanesbrands Inc. (NYSE: HBI), a leading Fortune 500 apparel company, from October 2011 until October 2017, after which he served in an advisory role at Hanesbrands until his retirement on December 31, 2017. Prior to his appointment as Chief Financial Officer, Mr. Moss led several key financial functions, including treasury and tax, at Hanesbrands from 2006 to 2011. From 2002 to 2005, Mr. Moss served as Vice President and Chief Financial Officer of Chattem Inc. (Nasdaq: CHTT), a leading marketer and manufacturer of branded over-the-counter health-care products, toiletries and dietary supplements. Mr. Moss also previously served as a senior advisor to Nexo Capital Partners from January 2018 until December 2020. Mr. Moss has served as a director of Winnebago Industries, Inc. (NYSE: WGO), a leading U.S. recreational vehicle manufacturer since February 2017 and has served as a director of Nature’s Sunshine Products, Inc. (Nasdaq: NATR) since May 2018. Mr. Moss received a B.A. and an M.B.A. from Brigham Young University. Mr. Moss was selected to serve on our board of directors because of his significant financial and corporate governance experience, including experience with public, consumer-oriented companies.
Melisa Denis, Director
Ms. Denis has served as our director since November 20, 2020. Ms. Denis is currently President of Miracle Pointe Development, a real estate development company. Ms. Denis has served as a director of Smartkem, Inc. (OTCMKTS: SMTK), an electronics and display technology organization, since November 2023. Ms. Denis previously served as a partner at KPMG from 1998 to October 2020, including as National Tax Leader for Consumer Goods and as the leader of the Consumer and Industrial Market for Dallas. Ms. Denis has served as a member of the Board of Regents for the University of North Texas System since January 2020, an advisory board member of Women Corporate Directors since 2011, and a board member of Enactus, a global non-profit, since 2019. Ms. Denis is a Certified Public Accountant and received her degree in accounting and her Masters of accounting and tax from the University of North Texas. Ms. Denis was selected to serve on our board of directors because of her significant financial and tax experience, including experience with companies in the consumer goods industry.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the 20222024 Proxy Statement and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be included in the 20222024 Proxy Statement and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be included in the 20222024 Proxy Statement and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be included in the 20222024 Proxy Statement and is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules.
(1) Consolidated Financial Statements
See Index to Consolidated Financial Statements at Item 8 herein.
(2) Financial Statement Schedules
See Index to Consolidated Financial Statements at Item 8 herein.
(3) Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
| | | | | | | | | | | | | | |
| Exhibit | | Description | | |
| | | | |
| 2.1+ | | Stock Purchase Agreement, dated as of May 21, 2021, by and among House & Garden Holdings, LLC, House & Garden, Inc., Humboldt Wholesale, Inc., Allied Imports & Logistics, Inc., South Coast Horticultural Supply, Inc., the Sellers (as defined therein), and Steven Muller, as Sellers’ Representative (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 001-39773) filed with the SEC on May 26, 2021). | | |
2.2+† | | Securities Purchase Agreement, dated as of June 17, 2021, by and among Hydrofarm Holdings Group, Inc., Gotham Properties LLC, Aurora Innovations Inc., an Oregon corporation, Aurora International, Inc., and certain equity holders party thereto (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 001-39773) filed with the SEC on June 21, 2021). | | |
2.3+† | | Share Purchase Agreement, dated as of August 3, 2021, by and among Hydrofarm Holdings Group, Inc., Greenstar Plant Products Inc., GSPP Investments Inc., Funance Productions Corp., Michael Nemirow, and 13213684 Canada Ltd. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 001-39773) filed with the SEC on August 3, 2021). | | |
| 2.4 | | | | |
2.5+† | | | | |
| 2.6 | | | | |
| 3.1 | | | | |
| 3.2 | | | | |
| 3.3 | | | | |
| 3.4 | | | | |
| 4.1 | | | | |
4.2*4.2 | | | | |
| 10.1 | | | | |
| | | | | | | | | | | | | | |
| Exhibit | | Description | | |
| | | | |
| 10.2+ | | | | |
10.3+ | | First Amendment and Joinder to Credit Agreement, dated as of August 31, 2021, by and among Hydrofarm Holdings Group, Inc., Hydrofarm, LLC, Hydrofarm Investment Corp., Hydrofarm Holdings LLC, EHH Holdings LLC, Sunblaster LLC, Hydrofarm Canada, LLC, Sunblaster Holdings ULC, Eddi’s Wholesale Garden Supplies Ltd., Field 16, LLC, House & Garden, Inc., Humboldt Wholesale, Inc., Aurora Innovations, LLC, House & Garden Holdings, LLC, Gotham Properties LLC, Aurora International, LLC, Allied Imports & Logistics, Inc., Aurora Peat Products ULC, Greenstar Plant Products Inc., the lenders party thereto and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (File No. 001-39773) filed with the SEC on September 7, 2021). | | |
10.4+10.3+ | | Second Amendment to Credit Agreement, dated as of October 25, 2021, by and among Hydrofarm Holdings Group, Inc., Hydrofarm, LLC, Field 16, LLC, House & Garden, Inc., Humboldt Wholesale, Inc., Aurora Innovations, LLC, Hydrofarm Investment Corp., Hydrofarm Holdings LLC, EHH Holdings LLC, Sunblaster LLC, Hydrofarm Canada, LLC, Sunblaster Holdings ULC, Eddi’s Wholesale Garden Supplies Ltd., House & Garden Holdings, LLC, Gotham Properties LLC, Aurora International, LLC, Allied Imports & Logistics, Inc., Aurora Peat Products ULC, Greenstar Plant Products Inc., the lenders party thereto and JPMorgan Chase Bank, N.A.(incorporated (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 15, 2021). | | |
10.5+10.4 | | Third Amendment and Joinder to Credit Agreement, dated as of August 23, 2022, by and among Hydrofarm Holdings Group, Inc., Hydrofarm, LLC, Field 16, LLC, Aurora Innovations, LLC, Innovative Growers Equipment, Inc., Manufacturing & Supply Chain Services, Inc., Hydrofarm Investment Corp., Hydrofarm Holdings LLC, EHH Holdings LLC, Sunblaster LLC, Hydrofarm Canada, LLC, Sunblaster Holdings ULC, Eddi’s Wholesale Garden Supplies Ltd., House & Garden Holdings, LLC, Gotham Properties LLC, Aurora International, LLC, Aurora Peat Products ULC, Greenstar Plant Products Inc., Innovative AG Installation, Inc., Innovative Racking Systems, Inc., Innovative Shipping Solutions, Inc., Innovative Growers Equipment Canada, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (File No. 001-39773), filed with the SEC on November 09, 2022). | |
| 10.5 | | Fourth Amendment to Credit Agreement and Limited Consent and Waiver, dated December 22, 2022, by and among Hydrofarm Holdings Group, Inc., Hydrofarm, LLC, Field 16, LLC, Aurora Innovations, LLC, Innovative Growers Equipment, Inc., Manufacturing & Supply Chain Services, Inc., Hydrofarm Investment Corp., Hydrofarm Holdings LLC, EHH Holdings, LLC, Sunblaster LLC, Hydrofarm Canada, LLC, Sunblaster Holdings ULC, Eddi’s Wholesale Garden Supplies Ltd., House & Garden Holdings, LLC, Gotham Properties LLC, Aurora International, LLC, Aurora Peat Products ULC, Greenstar Plant Products Inc., Innovative Ag Installation, Inc., Innovative Racking Systems, Inc., Innovative Shipping Solutions, Inc., Innovative Growers Equipment Canada, Inc., JPMorgan Chase Bank, N.A. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (File No. 001-39773), filed with the SEC on December 29, 2022). | |
| 10.6 | | Fifth Amendment to Credit Agreement, dated March 31, 2023, by and among Hydrofarm Holdings Group, Inc., Hydrofarm, LLC, Field 16, LLC, Innovative Growers Equipment, Inc., Manufacturing & Supply Chain Services, Inc., Hydrofarm Investment Corp., Hydrofarm Holdings LLC, EHH Holdings, LLC, Sunblaster LLC, Hydrofarm Canada, LLC, Sunblaster Holdings ULC, Eddi’s Wholesale Garden Supplies Ltd., House & Garden Holdings, LLC, Gotham Properties LLC, Aurora International, LLC, Aurora Peat Products ULC, Greenstar Plant Products Inc., Innovative AG Installation, Inc., Innovative Racking Systems, Inc., Innovative Shipping Solutions, Inc., Innovative Growers Equipment Canada, Inc., JPMorgan Chase Bank, N.A., as lender, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2023). | |
| 10.7+ | | | | |
10.6*10.8 | | Amendment No. 1 to Credit and Guaranty Agreement, dated as of June 27, 2023, by and among Hydrofarm Holdings Group, Inc., the subsidiaries of Hydrofarm Holdings Group, Inc. party thereto from time to time, the lenders party thereto and JP Morgan Chase Bank, N.A., as administrative agent and as collateral Agent. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 3, 2023). | |
| 10.9+ | | | |
| 10.10** | | | |
| | | | | | | | | | | |
| Exhibit | | Description | |
| | | |
| 10.11** | | | |
| 10.12** | | | |
| 10.13** | | | |
| 10.14** | | | |
| 10.15** | | | |
| 10.16** | | | |
| 10.17** | | | |
| 10.18 | | | |
| 10.19** | | | | |
10.7*10.20** | | | |
| 19.1 | | | |
| 21.1* | | | | |
| 23.1* | | | | |
| 31.1* | | | | |
| 31.2* | | | | |
| 32.1*# | | | | |
| 32.2*# | | | |
| 97.1 | | | |
| 101. INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | |
| 101.SCH | | Inline XBRL Taxonomy Schema Linkbase Document. | | |
| 101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document. | | |
| 101.DEF | | Inline XBRL Taxonomy Definition Linkbase Document. | | |
| 101.LAB | | Inline XBRL Taxonomy Labels Linkbase Document. | | |
| 101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document. | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | |
* Filed herewith.
** Denotes management contract or compensatory plan or arrangement.
# The certifications attached as Exhibits 32.1 and 32.2 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed”"filed" by the Company for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing of the registrantRegistrant under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
+ Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.
† Certain confidential portions (indicated by brackets and asterisks) have been omitted from this exhibit.
Item 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| Hydrofarm Holdings Group, Inc. |
| |
Date: March 1, 2022February 29, 2024 | /s/ William Toler |
| William Toler |
| Chief Executive Officer |
| (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrantRegistrant and in the capacities indicated below and on the dates indicated.
| | | | | | | | | | | | | | |
| Signatures | | Title | | Date |
| | | | |
| /s/ William Toler | | Chief Executive Officer and Chairman of the Board | | March 1, 2022February 29, 2024 |
| William Toler | | (Principal Executive Officer) | | |
| | | | |
| /s/ B. John Lindeman | | Chief Financial Officer | | March 1, 2022February 29, 2024 |
| B. John Lindeman | | (Principal Financial Officer) | | |
| | | | |
/s/ Joseph D. RumleyKevin O'Brien | | Chief Accounting Officer | | March 1, 2022February 29, 2024 |
Joseph D. RumleyKevin O'Brien | | (Principal Accounting Officer) | | |
| | | | |
| /s/ Susan Peters | | | | March 1, 2022February 29, 2024 |
| Susan Peters | | Director | | |
| | | | |
| /s/ Patrick Chung | | | | March 1, 2022February 29, 2024 |
| Patrick Chung | | Director | | |
| | | | |
| /s/ Renah Persofsky | | | | March 1, 2022February 29, 2024 |
| Renah Persofsky | | Director | | |
| | | | |
| /s/ Richard D. Moss | | | | March 1, 2022February 29, 2024 |
| Richard D. Moss | | Director | | |
| | | | |
| /s/ Melisa Denis | | | | March 1, 2022February 29, 2024 |
| Melisa Denis | | Director | | |
| | | | |
