UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~2023


☐			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)


Delaware						81-4895761
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

1510 Main Street

Shoemakersville, Pennsylvania ~~19526~~19555

(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:

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~~Global Select Market ~~LLC~~

Indicate by check mark whether the Registrant (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 Registrant 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 registrant 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 accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒☐	Accelerated filer	☐☒
Non-accelerated filer	☐	Smaller reporting company	☐☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of April ~~28, 2022,~~30, 2023, the registrant had ~~44,868,669 shares~~45,367,678 shares of common stock, $0.0001 par value per share, outstanding.

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		Page
Part I - Financial Information
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss	3
	Condensed Consolidated Statements of Changes in ~~Convertible Preferred Stock and~~ Stockholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to the Condensed Consolidated Financial Statements	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3231
Item 4.	Controls and Procedures	3332

Part II - Other Information
Item 1.	Legal Proceedings	3433
Item 1A.	Risk Factors	3433
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3433
Item 3.	Defaults Upon Senior Securities	3433
Item 4.	Mine Safety Disclosures	3433
Item 5.	Other Information	3433
Item 6.	Exhibits	3534
	Signatures	3635

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q 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” 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, has 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;

•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 COVID-19 pandemic, on our business, results of operations and financial condition;

•interruptions in our 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;

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•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 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 Factors.”

~~TABLE OF CONTENTS~~

We have based these forward-looking statements largely on our current expectations and projections about 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 Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. 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” and other trade names and trademarks of ours appearing in this Quarterly Report on Form 10-Q are our property. This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to the terms “Hydrofarm”, “the Company,” “we,” “our” and “us” refer to Hydrofarm Holdings Group, Inc. and its subsidiaries.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)


		March 31,		December 31,			March 31,		December 31,
		2022		2021			2023		2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	12,157	$	26,607	Cash and cash equivalents	$	18,703	$	21,291
Restricted cash		1,777		1,777

Accounts receivable, net	Accounts receivable, net	45,319		41,484		Accounts receivable, net	22,601		17,227
Inventories	Inventories	189,996		189,134		Inventories	103,430		111,398
Notes receivable		475		622

Prepaid expenses and other current assets	Prepaid expenses and other current assets	11,312		9,760		Prepaid expenses and other current assets	6,104		5,032
Total current assets	Total current assets	261,036		269,384		Total current assets	150,838		154,948
Property, plant and equipment, net	Property, plant and equipment, net	51,349		50,473		Property, plant and equipment, net	50,989		51,135
Operating lease right-of-use assets	Operating lease right-of-use assets	54,566		45,245		Operating lease right-of-use assets	61,155		65,265
Goodwill		183,338		204,868

Intangible assets, net	Intangible assets, net	327,011		314,819		Intangible assets, net	294,348		300,366
Other assets	Other assets	4,170		6,453		Other assets	1,927		1,845
Total assets	Total assets	$	881,470	$	891,242	Total assets	$	559,257	$	573,559
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	36,374	$	26,685	Accounts payable	$	13,232	$	13,633
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	31,549		33,996		Accrued expenses and other current liabilities	10,116		13,208
Deferred revenue	Deferred revenue	10,887		18,273		Deferred revenue	2,539		3,654
Current portion of lease liabilities		7,773		7,198
Current portion of operating lease liabilities						Current portion of operating lease liabilities	8,967		9,099
Current portion of finance lease liabilities						Current portion of finance lease liabilities	1,012		704
Current portion of long-term debt	Current portion of long-term debt	2,298		2,263		Current portion of long-term debt	1,367		1,307
Total current liabilities	Total current liabilities	88,881		88,415		Total current liabilities	37,233		41,605
Long-term lease liabilities		46,755		38,595
Long-term operating lease liabilities						Long-term operating lease liabilities	53,879		56,299
Long-term finance lease liabilities						Long-term finance lease liabilities	9,426		1,200
Long-term debt	Long-term debt	119,194		119,517		Long-term debt	117,363		117,461
Deferred tax liabilities	Deferred tax liabilities	6,575		5,631		Deferred tax liabilities	2,685		2,685
Other long-term liabilities	Other long-term liabilities	4,608		3,904		Other long-term liabilities	4,468		4,428
Total liabilities	Total liabilities	266,013		256,062		Total liabilities	225,054		223,678
Commitments and contingencies (Note 13)	Commitments and contingencies (Note 13)	0		0		Commitments and contingencies (Note 13)
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Common stock ($0.0001 par value; 300,000,000 shares authorized; 44,822,866 and 44,618,357 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively)		4		4
Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,362,276 and 45,197,249 shares issued and outstanding at March 31, 2023, and December 31, 2022, respectively)						Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,362,276 and 45,197,249 shares issued and outstanding at March 31, 2023, and December 31, 2022, respectively)	5		5
Additional paid-in capital	Additional paid-in capital	778,463		777,074		Additional paid-in capital	784,101		783,042
Accumulated other comprehensive income (loss)		802		(1,382)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(7,123)		(7,235)
Accumulated deficit	Accumulated deficit	(163,812)		(140,516)		Accumulated deficit	(442,780)		(425,931)
Total stockholders’ equity	Total stockholders’ equity	615,457		635,180		Total stockholders’ equity	334,203		349,881
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	881,470	$	891,242	Total liabilities and stockholders’ equity	$	559,257	$	573,559

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


		Three months ended March 31,					Three months ended March 31,
		2022		2021			2023		2022
Net sales	Net sales	$	111,377	$	111,389	Net sales	$	62,178	$	111,377
Cost of goods sold	Cost of goods sold	94,771		88,166		Cost of goods sold	50,797		94,771
Gross profit	Gross profit	16,606		23,223		Gross profit	11,381		16,606
Operating expenses:	Operating expenses:					Operating expenses:
Selling, general and administrative	Selling, general and administrative	43,003		16,841		Selling, general and administrative	24,431		40,247
(Loss) income from operations		(26,397)		6,382
Impairments						Impairments	—		2,756
Loss from operations						Loss from operations	(13,050)		(26,397)
Interest expense	Interest expense	(2,366)		(90)		Interest expense	(3,692)		(2,366)
Loss on debt extinguishment		—		(680)
Other (expense) income, net		(102)		84
(Loss) income before tax		(28,865)		5,696
Income tax benefit (expense)		5,569		(756)
Net (loss) income		$	(23,296)	$	4,940

Other income (expense), net						Other income (expense), net	40		(102)
Loss before tax						Loss before tax	(16,702)		(28,865)
Income tax (expense) benefit						Income tax (expense) benefit	(147)		5,569
Net loss						Net loss	$	(16,849)	$	(23,296)

Net (loss) income per share:
Net loss per share:						Net loss per share:
Basic	Basic	$	(0.52)	$	0.15	Basic	$	(0.37)	$	(0.52)
Diluted	Diluted	$	(0.52)	$	0.13	Diluted	$	(0.37)	$	(0.52)
Weighted-average shares of common stock outstanding:	Weighted-average shares of common stock outstanding:					Weighted-average shares of common stock outstanding:
Basic	Basic	44,718,510		33,717,103		Basic	45,263,822		44,718,510
Diluted	Diluted	44,718,510		38,997,031		Diluted	45,263,822		44,718,510

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS) INCOME~~LOSS (UNAUDITED)

(In thousands)

Three months ended March 31,
2022 2021
Net (loss) income $ (23,296) $ 4,940
Other comprehensive (loss) income:
Foreign currency translation gain 2,184 223
Total comprehensive (loss) income $ (21,112) $ 5,163


	Three months ended March 31,
	2023		2022
Net loss	$	(16,849)	$	(23,296)
Other comprehensive loss:
Foreign currency translation gain	112		2,184
Total comprehensive loss	$	(16,737)	$	(21,112)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except for share amounts)


		Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive (Loss) Income		Accumulated Deficit				Total Stockholders’ Equity					Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Stockholders’ Equity
		Shares	Amount											Shares					Amount
Balance, January 1, 2021		33,499,953	$	3			$	364,248					$	599			$	(153,932)		$	210,918
Common stock issued upon exercise of options		32,272	—		272				—		—				272
Issuance of common stock for vesting of restricted stock units		214,324	—		—				—		—				—
Shares repurchased for withholding tax on restricted stock units		(88,360)	—		(5,506)				—		—				(5,506)
Issuance of common stock under cashless warrant exercise		312,175	—		—				—		—				—
Stock-based compensation expense		—	—		1,001				—		—				1,001
Net income		—	—		—				—		4,940				4,940
Foreign currency translation gain		—	—		—				223		—				223
Balance, March 31, 2021		33,970,364	$	3	$	360,015			$	822	$	(148,992)			$	211,848
Balance, January 1, 2022	Balance, January 1, 2022	44,618,357	$	4	$	777,074			$	(1,382)	$	(140,516)			$	635,180		Balance, January 1, 2022		44,618,357		$	4		$	777,074		$	(1,382)		$	(140,516)		$	635,180
Common stock issued upon exercise of options	Common stock issued upon exercise of options	7,765	—		70				—		—				70			Common stock issued upon exercise of options		7,765		—		70			—			—			70
Issuance of common stock for vesting of restricted stock units		278,002	—		—				—		—				—
Shares repurchased for withholding tax on restricted stock units		(81,357)	—		(1,589)				—		—				(1,589)
Issuance of common stock for vesting of stock awards																		Issuance of common stock for vesting of stock awards		278,002		—		—			—			—			—
Shares repurchased for withholding tax on stock awards																		Shares repurchased for withholding tax on stock awards		(81,357)		—		(1,589)			—			—			(1,589)
Issuance of common stock under cashless warrant exercise	Issuance of common stock under cashless warrant exercise	99	—		—				—		—				—			Issuance of common stock under cashless warrant exercise		99		—		—			—			—			—
Stock-based compensation expense	Stock-based compensation expense	—	—		2,908				—		—				2,908			Stock-based compensation expense		—		—		2,908			—			—			2,908
Net loss	Net loss	—	—		—				—		(23,296)				(23,296)			Net loss		—		—		—			—			(23,296)			(23,296)
Foreign currency translation gain	Foreign currency translation gain	—	—		—				2,184		—				2,184			Foreign currency translation gain		—		—		—			2,184			—			2,184
Balance, March 31, 2022	Balance, March 31, 2022	44,822,866	$	4	$	778,463			$	802	$	(163,812)			$	615,457		Balance, March 31, 2022		44,822,866		$	4	$	778,463		$	802		$	(163,812)		$	615,457

Balance, January 1, 2023																		Balance, January 1, 2023		45,197,249		$	5	$	783,042		$	(7,235)		$	(425,931)		$	349,881
Issuance of common stock for vesting of stock awards																		Issuance of common stock for vesting of stock awards		237,333		—		—			—			—			—
Shares repurchased for withholding tax on stock awards																		Shares repurchased for withholding tax on stock awards		(72,306)		—		(123)			—			—			(123)
Stock-based compensation expense																		Stock-based compensation expense		—		—		1,182			—			—			1,182
Net loss																		Net loss		—		—		—			—			(16,849)			(16,849)
Foreign currency translation gain																		Foreign currency translation gain		—		—		—			112			—			112
Balance, March 31, 2023																		Balance, March 31, 2023		45,362,276		$	5	$	784,101		$	(7,123)		$	(442,780)		$	334,203

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

Three months ended March 31,
2022 2021
Operating activities
Net (loss) income $ (23,296) $ 4,940
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, depletion and amortization 16,941 1,591
Provision for inventory obsolescence 3,229 16
Stock-based compensation expense 2,908 1,001
Non-cash operating lease expense 2,261 958
Impairment charges 2,756 —
Change in fair value of contingent consideration (1,560) —
Deferred income tax benefit (4,586) —
Other 258 624
Changes in assets and liabilities:
Accounts receivable (6,834) (11,554)
Inventories (143) (7,496)
Prepaid expenses and other current assets (2,315) (3,970)
Other assets (90) (414)
Accounts payable 10,454 14,398
Accrued expenses and other current liabilities (1,208) (1,840)
Deferred revenue (7,159) (66)
Lease liabilities (1,750) (826)
Other long-term liabilities (21) —
Net cash used in operating activities (10,155) (2,638)
Investing activities
Business combinations, net of cash and cash equivalents 190 —
Purchases of property, plant and equipment (2,470) (428)
Other (105) (17)
Net cash used in investing activities (2,385) (445)
Financing activities
Borrowings under revolving credit facilities 420 52,344
Repayments of revolving credit facilities (397) (52,250)
Repayments of long-term debt Term Loan (313) —
Payment of withholding tax related to restricted stock units (1,559) (11,595)
Other (104) (326)
Net cash used in financing activities (1,953) (11,827)
Effect of exchange rate changes on cash, cash equivalents and restricted cash 43 (4)
Net decrease in cash, cash equivalents and restricted cash (14,450) (14,914)
Cash, cash equivalents and restricted cash at beginning of period 28,384 76,955
Cash, cash equivalents and restricted cash at end of period $ 13,934 $ 62,041
(Page 1 of 2)


	Three months ended March 31,
	2023		2022
Operating activities
Net loss	$	(16,849)	$	(23,296)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization	8,007		16,941
(Benefit from) provision for doubtful accounts	(247)		166
Provision for inventory obsolescence	704		3,229
Restructuring expenses	327		—
Stock-based compensation expense	1,182		2,908
Non-cash operating lease expense	2,948		2,261
Impairment charges	—		2,756
Change in fair value of contingent consideration	—		(1,560)
Deferred income tax benefit	—		(4,586)
Other	456		92
Changes in assets and liabilities:
Accounts receivable	(5,141)		(6,834)
Inventories	7,321		(143)
Prepaid expenses and other current assets	(699)		(2,315)
Other assets	(188)		(90)
Accounts payable	(346)		10,454
Accrued expenses and other current liabilities	(3,139)		(1,208)
Deferred revenue	(1,116)		(7,159)
Lease liabilities	(2,166)		(1,750)
Other long-term liabilities	(4)		(21)
Net cash used in operating activities	(8,950)		(10,155)
Continued on next page

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

(Page 2 of 2)


	Three months ended March 31,
	2023		2022
Investing activities
Business combinations, net of cash and cash equivalents	—		190
Capital expenditures of property, plant and equipment	(1,653)		(2,470)
Other	51		(105)
Net cash used in investing activities	(1,602)		(2,385)
Financing activities
Proceeds from Sale-Leaseback Transaction	8,598		—
Borrowings under revolving credit facilities	169		420
Repayments of revolving credit facilities	(116)		(397)
Repayments of Term Loan	(312)		(313)
Payment of withholding tax related to stock awards	(123)		(1,559)
Other	(257)		(104)
Net cash from (used in) financing activities	7,959		(1,953)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	5		43
Net decrease in cash, cash equivalents and restricted cash	(2,588)		(14,450)
Cash, cash equivalents and restricted cash at beginning of period	21,291		28,384
Cash, cash equivalents and restricted cash at end of period	$	18,703	$	13,934

Non-cash investing and financing activities
Right-of-use assets (relinquished) acquired under operating lease obligations	$	(1,103)	$	10,991
Assets acquired under finance lease obligations	185		—
Supplemental information
Cash paid for interest	3,401		2,081
Cash paid for income taxes	180		2,710

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars 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”) was formed in May 2017 under the laws of the state of Delaware to acquire and continue the business ~~of Hydrofarm, LLC established~~originally founded in 1977. The Company is a leading independent manufacturer and distributor of controlled environment agriculture ~~(“CEA”~~("CEA", principally hydroponics) equipment and supplies, including a broad portfolio of proprietary branded products. Products offered include agricultural lighting devices, indoor climate control equipment, ~~hydroponics and~~ nutrients, and plant additives used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment settings that allow end users to control key farming variables including temperature, humidity, CO2, light intensity and color, nutrient concentration and pH.

~~Initial public offering and follow-on 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.

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 approximately $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 presentation

The condensed 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”) and the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company's annual consolidated financial statements and, in the opinion of management, reflect all ~~adjustments, consisting only of~~ normal and recurring adjustments which are necessary for the fair statement of the Company’s financial information. The Company reclassified balances of $704 and $1,200 as of December 31, 2022, previously reported in "Current portion of long-term debt" and "Long-term debt", respectively, into "Current portion of finance lease liabilities" and "Long-term finance lease liabilities", respectively, on consolidated balance sheet as of December 31, 2022, to conform to the current period presentation. The Company made reclassifications to the condensed consolidated statement of cash flows for the prior period to conform with the current period presentation. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, ~~2022,~~2023, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation. The Company reclassified the balance within "Impairment, restructuring and other" on the condensed consolidated statements of operations for the prior period into "Selling, general and administrative expenses" to conform to the current period presentation. The Company reclassified the balance of customer deposits previously reported in "accounts payable" into "deferred revenue" in the condensed consolidated balance sheet as of December 31, 2021 to conform to the current period presentation. The amount totaled $18,273 as of December 31, 2021.

The condensed consolidated balance sheet as of December 31, ~~2021,~~2022, has been derived from the audited consolidated financial statements of the Company, which is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 ("~~2021~~2022 Annual Report"). These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the ~~2021~~2022 Annual Report.

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~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Use of estimates

The preparation of condensed 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 condensed 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 circumstances. Significant estimates include provisions for sales returns, rebates and claims from customers, realization of accounts receivable and inventories, fair value of assets acquired and liabilities assumed for business combinations, valuation of intangible assets, ~~and goodwill,~~ estimated useful lives of ~~long lived~~long-lived assets, incremental borrowing rate applied in lease accounting, valuation of stock-based compensation, recognition of deferred income taxes, recognition of liabilities related to commitments and contingencies and valuation allowances. Actual results may differ from these estimates. On an ongoing basis, the 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,

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liabilities incurred to the former owners of the acquiree, and the equity interests issued in exchange for control of the acquiree. Acquisition related costs are recognized in net ~~income (loss)~~loss as 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. 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 a liability are included in net ~~income (loss)~~loss in the period. Changes in the fair value of contingent consideration classified as equity are not recognized. During 2022, the Company settled contingent consideration for certain acquisitions that were completed in 2021. Refer to Note 14 – Fair Value Measurements, for further discussion of the contingent consideration.

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 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 ~~acquire~~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 values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to net ~~income (loss).~~loss.

During 2021, the Company completed five acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of its portfolio of proprietary branded products and manufacturing capabilities. The 2021 acquisitions included (i) Heavy 16, a manufacturer of plant nutrients and additives, in May 2021; (ii) House & Garden, a manufacturer of plant nutrients and additives, in June 2021; (iii) Aurora Innovations, a manufacturer of soil, grow media, plant nutrients and additives, in July 2021; (iv) Greenstar Plant Products, a manufacturer of plant nutrients and additives, in August 2021; and (v) Innovative Growers Equipment, a manufacturer of horticultural benches, racks and grow lights, in November 2021. The Company finalized the determination of its allocation of the purchase price relating to the acquisitions during 2022.

During the three months ended March 31, 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 the three months ended March 31, 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.

Restructuring

The Company began a 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 restructuring plan include (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

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

strategic product consolidation entails 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 three months ended March 31, 2023, the Company recorded pre-tax expense of $1,411 relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges. The Company incurred $327 of non-cash charges during the three months ended March 31, 2023, relating to asset dispositions and write-downs. The Company recorded $1,237 of restructuring related charges within Cost of goods sold and $174 within Selling, general and administrative expenses on the consolidated statements of operations for the three months ended March 31, 2023. The following table presents the activity in accrued expenses and other current liabilities for restructuring costs for the three months ended March 31, 2023:


	December 31, 2022		Expense	Cash Payments	March 31, 2023
Restructuring accruals	$	696	1,084	(1,156)	$	624

The Company estimates it will incur additional restructuring charges of approximately $900 primarily during the second quarter of 2023. The amounts the Company will ultimately realize or disburse could differ from these estimates. Total costs incurred since the restructuring plan commenced in the fourth quarter of 2022 are (i) $6,790 relating to inventory markdowns and (ii) $2,308 relating primarily to the relocation and termination of certain facilities in Canada.

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 1one reportable segment, all required segment financial information is found in the condensed consolidated financial statements and footnotes with entity-wide disclosures presented below.

Entity-wide information

Sales to external customers and property, plant and equipment, and operating lease right-of-use assets, net in the United States and Canada, determined by the location of the subsidiaries, ~~were as follows:~~are shown below. Other foreign locations, which are immaterial, individually and in the aggregate, are included in the United States below.

Three months ended March 31,
2022 2021
United States $ 92,858 $ 90,672
Canada 21,502 22,264
Intersegment eliminations (2,983) (1,547)
Total consolidated net sales $ 111,377 $ 111,389
March 31,
2022 December 31,
2021
United States $ 87,121 $ 85,167
Canada 18,794 10,551
Total property, plant and equipment, and operating lease right-of-use assets, net $ 105,915 $ 95,718


	Three months ended March 31,
	2023		2022
United States	$	47,749	$	92,858
Canada	15,019		21,502
Intersegment eliminations	(590)		(2,983)
Total consolidated net sales	$	62,178	$	111,377



	March 31, 2023		December 31, 2022
United States	$	78,082	$	80,380
Canada	34,062		36,020
Total property, plant and equipment, net and operating lease right-of-use assets	$	112,144	$	116,400

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~~

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(Unaudited)

(dollars in thousands, except share and ~~any attempt to report them~~per share amounts)

Fair value measurements

Fair value is the price that would be ~~impracticable.~~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 was classified within level 3 of the fair value hierarchy.

Inventories

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. The Company maintains 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 reduced until the product is sold or otherwise disposed. If inventory is sold, any related reserves would be reversed in the period of sale. During the year ended December 31, 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 products and brands being removed from our portfolio. Hydrofarm's strategic product consolidation entails removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio.

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 ~~three months ended March 31,~~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 three months ended March 31, 2022, in ~~“Selling, general and administrative expenses” ("SG&A")~~Impairments on the condensed consolidated statements of operations. As of ~~March~~December 31, 2022, the note receivable carrying value was ~~$475.~~$475 and it was classified in Other assets on the condensed consolidated balance sheet. During the three months ended March 31, 2023, the Company agreed to forgive the note receivable in exchange for interest in a third-party equity investment with a cost basis of $475, which is reported within Other assets on the condensed consolidated balance sheet.

Revenue recognition

The Company follows Financial Accounting Standards Board ~~(“FASB”~~("FASB") Accounting Standards Codification ~~(“ASC”~~("ASC") 606, Revenue from Contracts with Customers (“ASC 606”) 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 CEA equipment and supplies.

810

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(Unaudited)

(dollars in thousands, except share and per share amounts)

~~by economic factors. The Company has determined that revenue is generated from one category, which is the distribution and manufacture of controlled environment agriculture 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 ~~is comprised~~net of ~~fixed consideration and~~ 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 $2,568 and $3,879 ~~and $1,245 for~~during the three months ended March 31, ~~2022,~~2023, and ~~2021,~~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 deferred revenue in the condensed consolidated balance sheets, totaled ~~$10,887~~$2,539 and ~~$18,273~~$3,654 as of March 31, ~~2022,~~2023, and December 31, ~~2021,~~2022, respectively. There are no significant financing components. Excluded from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed on and concurrent with revenue-generating activities.

Income ~~taxes—interim~~taxes

The income tax provision

~~The Company recorded~~ is calculated for an interim period by distinguishing between elements recognized in the income tax provision through applying an estimated annual effective tax rate to a measure of year-to-date operating results referred to as “ordinary income (or loss),” and discretely recognizing specific events referred to as “discrete items” as they occur. The income tax provision or benefit ~~of $5,569~~for each interim period is the difference between the year-to-date amount for the ~~three months ended March 31, 2022, representing an effective income tax rate of 19.3%. The Company’s effective income tax rate~~current period and the year-to-date amount for the three months ended March 31, 2022, differs from the federal statutory rate of 21% primarily as a result of a reduction in the valuation allowance recorded against the Company's net deferred tax assets, due to the acquisition of the IGE Entities (as defined below) which had an income tax rate benefit of 23.4%. In addition, as described in ~~Note 3 -~~ ~~Business Combinations,~~ t~~he 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 adjusting this provisional amount, the Company recorded a reduction to the valuation allowance, which resulted in an income tax rate benefit of 6.1%. These income tax benefits totaled $8,543, and were partially offset by income taxes from certain foreign jurisdictions where the Company conducts business and state minimum income taxes in the United States.

The Company recorded a tax expense of $756 for the three months ended March 31, 2021. The Company’s effective tax rates for the three months ended March 31, 2021, differs from the federal statutory rate of 21% primarily as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforwards.prior period.

Recent accounting pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the FASB. There were no ASUs that were assessed and determined to be applicable or expected to have a material impact on ~~our~~the Company's condensed consolidated financial statements.

3. ~~BUSINESS COMBINATIONS~~

~~During 2021, the Company~~ completed 5 acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of its portfolio of proprietary branded products and specialized manufacturing capabilities. The Company finalized the determination of its allocation of the purchase price relating to the Heavy 16, H&G Entities, and Aurora acquisitions (all as defined below) as of March 31, 2022. The allocation of purchase price relating to the Greenstar and IGE Entities acquisitions (as defined below) are based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized.

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~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

During the three months ended March 31, 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 the three months ended March 31, 2022, that 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, and (iii) trade names: 15 to 20 years.

~~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 broadened its proprietary branded offering into the plant nutrients category complementing other product offerings. The 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.

Pursuant to the 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 condensed 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.~~ ~~The contingent consideration was $200 as of December 31, 2021 and March 31, 2022, and was paid in April 2022. The amount of goodwill is fully deductible for tax purposes.~~

~~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 further broadened its proprietary branded offering into the plant nutrients category complementing other product offerings. The acquisition date fair value of the consideration transferred for the H&G Entities was $133,483 in cash. The amount of goodwill is not deductible for tax purposes. 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.

~~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 further broadened 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 $133,962 in cash, $25,824 of the Company's common stock, $19,300 contingent consideration and $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.

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~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Pursuant to the purchase agreement, the Company was required to 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 condensed 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 condensed consolidated statements of operations. As of March 31, 2022, the related contingent consideration was $15,274. The contingent consideration is expected to be paid in May 2022. The amount of goodwill is fully deductible for tax purposes.

~~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 further broadened 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 amount of goodwill is not deductible for U.S. tax purposes, but it is partially deductible for Canadian tax purposes.

~~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 $60,902, consisting of $49,129 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 amount of goodwill is not deductible for U.S. tax purposes.

~~The financial results of Heavy 16, the H&G Entities and the IGE Entities~~ are included in the U.S. operating segment since the acquisition date, and the financial results of Greenstar are included in the Canada operating segment since the acquisition date. The financial results of Aurora are included in both the U.S. and Canada operating segments.

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~~Hydrofarm Holdings Group, Inc.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars 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 Heavy 16, the H&G Entities, Aurora, Greenstar and the IGE Entities:~~

Heavy 16 H&G Entities Aurora Greenstar IGE Entities
Component of Purchase Price:
Cash $ 60,287 $ 133,483 $ 133,962 $ 85,121 $ 49,129
Common stock 16,736 — 25,824 — 11,051
Contingent consideration 344 — 19,300 — —
Forgiveness of assets and liabilities — — (215) (1,601) 722
Total purchase price $ 77,367 $ 133,483 $ 178,871 $ 83,520 $ 60,902
Acquisition-related costs $ 3,104 $ 5,063 $ 7,345 $ 3,697 $ 2,013
Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable $ 510 $ 3,308 $ 6,967 $ 982 $ 2,367
Inventories 1,451 6,559 11,031 8,728 30,592
Prepaid expenses and other current assets 34 493 1,086 447 470
Property, plant and equipment 1,078 358 37,991 1,717 4,274
Operating lease right-of-use assets 1,088 1,921 — 2,736 4,447
Other assets 25 213 — 176 —
Accounts payable (1,055) (1,320) (4,360) (777) (21,686)
Accrued expenses and other current liabilities (226) (445) (768) (1,421) (859)
Current portion of lease liabilities (274) (447) — (624) (815)
Current portion of long-term debt — — — — (482)
Long-term deferred tax liabilities — (25,589) — — (5,531)
Long-term lease liabilities (868) (1,501) — (1,836) (3,116)
Long-term debt — — — — (1,434)
Other long-term liabilities — — (3,840) — —
Net identifiable assets 1,763 (16,450) 48,107 10,128 8,227
Identifiable intangible assets
Other intangible assets 200 200 824 383 2,430
Customer relationships 5,100 12,500 6,400 18,100 6,300
Trademarks and trade names 18,500 31,400 59,100 9,100 14,000
Technology and formulations & recipes 33,600 56,200 18,000 2,800 3,800
Total identifiable intangible assets 57,400 100,300 84,324 30,383 26,530
Goodwill 18,204 49,633 46,440 43,009 26,145
Total purchase price allocation $ 77,367 $ 133,483 $ 178,871 $ 83,520 $ 60,902

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~~Hydrofarm Holdings Group, Inc.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~Supplemental Disclosure of Financial Results~~

The following represents certain estimated unaudited consolidated net sales and net income amounts for the quarter ended March 31, 2021 as if the 5 acquisitions had been included in the consolidated results of the Company for the entire period presented below. Management considers these estimates to represent an approximate measure of the performance of the combined Company (in millions):


			~~Three months ended March 31, 2021~~
			~~Estimated ($ in millions)~~
~~Net sales~~			~~160~~
~~Net income~~			17

~~TABLE OF CONTENTS~~

~~Hydrofarm Holdings Group, Inc.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

4. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

~~The Company's goodwill by reportable segment is $122,977 for the United States and $60,361 for Canada as of March 31, 2022. Goodwill is evaluated for impairment annually~~Primarily due to a sustained decline in the ~~fourth quarter, or on an interim basis when an event occurs, or circumstances change that indicates~~Company's market value of common stock and market conditions, the ~~carrying value may not be recoverable. The~~ Company ~~did not identify~~identified a triggering event requiring a ~~quantitative~~ test for impairment as of ~~March 31,~~June 30, 2022. The Company completed its goodwill impairment testing and recorded an impairment charge of $189,572 as the test determined that the carrying value of the U.S. 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 U.S. and Canada caused by macroeconomic and industry conditions.

The Company 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 common stock of Hydrofarm to corroborate the estimates used in the interim test for impairment. 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. Refer to Note 14 – 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 - IGE Entities - ~~remeasurement~~measurement period adjustments	(22,542)
Acquisition - all others - remeasurement adjustments and foreign currency translation adjustments, net	1,012
Balance at March 31, 2022	$	183,338

~~Intangible Assets, net~~

~~Intangible assets, net comprised the following:~~

March 31, 2022 December 31, 2021
Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value
Finite-lived intangible assets:
Computer software $ 8,929 $ (7,705) $ 1,224 $ 8,814 $ (7,208) $ 1,606
Customer relationship 107,800 (19,440) 88,360 101,222 (16,517) 84,705
Technology, formulations and recipes 114,403 (8,026) 106,377 110,561 (3,630) 106,931
Trade names 132,110 (5,060) 127,050 — — —
Other 4,878 (3,679) 1,199 2,428 (1,744) 684
Total finite-lived intangible assets, net 368,120 (43,910) 324,210 223,025 (29,099) 193,926
Indefinite-lived intangible asset:
Trade names 2,801 — 2,801 120,773 — 120,773
Other — — — 120 — 120
Total Intangible assets, net $ 370,921 $ (43,910) $ 327,011 $ 343,918 $ (29,099) $ 314,819

Total amortization expense was $14,746 and $1,206 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense in 2022 includes the impact from intangible assets recorded in connection with 5 acquisitions completed during the year ended December 31, 2021. The following are the estimated useful lives for the major classes of finite-lived intangible assets:


~~Computer software~~			~~5 years~~
~~Customer relationships~~			~~7 to 18 years~~
~~Technology, formulations and recipes~~			~~8 to 12 years~~
~~Trade names~~			~~15 to 20 years~~

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

Intangible assets, net

~~For~~Intangible assets, net comprised the following:


	March 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	$	9,425	$	(8,041)	$	1,384	$	9,408	$	(7,976)	$	1,432
Customer relationship	99,947		(26,374)		73,573		99,933		(24,533)		75,400
Technology, formulations and recipes	114,191		(17,790)		96,401		114,187		(15,344)		98,843
Trade names and trademarks	131,421		(11,725)		119,696		131,410		(10,052)		121,358
Other	4,780		(4,287)		493		4,778		(4,246)		532
Total finite-lived intangible assets, net	359,764		(68,217)		291,547		359,716		(62,151)		297,565
Indefinite-lived intangible asset:
Trade name	2,801		—		2,801		2,801		—		2,801
Total Intangible assets, net	$	362,565	$	(68,217)	$	294,348	$	362,517	$	(62,151)	$	300,366

Amortization expense related to intangible assets ~~subject to amortization,~~was $6,045 and $14,746 for the three months ended March 31, 2023 and 2022, respectively. The following are the estimated useful lives and the weighted-average amortization period as of March 31, ~~2022,~~2023, for ~~computer software, customer relationships, technology and formulations & recipes and trade names was 2 years, 12 years, 11 years, and 19 years, respectively.~~the major classes of finite-lived intangible assets:


	Useful lives	Weighted-average amortization period
Computer software	5 years	3 years
Customer relationships	7 to 18 years	11 years
Technology, formulations and recipes	8 to 12 years	10 years
Trade names and trademarks	15 to 20 years	18 years

The estimated aggregate future amortization expense for intangible assets subject to amortization as of March 31, ~~2022,~~2023, is summarized below:


		Estimated Future Amortization Expense			Estimated Future Amortization Expense
For the period of April 1, 2022 to December 31, 2022		$	19,743
For the period of April 1, 2023 to December 31, 2023				For the period of April 1, 2023 to December 31, 2023	$	18,397
Year ending December 31,	Year ending December 31,			Year ending December 31,
2023		25,036
2024	2024	24,876		2024	24,413
2025	2025	24,737		2025	24,342
2026	2026	20,493		2026	24,044
2027				2027	23,859
Thereafter	Thereafter	209,325		Thereafter	176,492
Total	Total	$	324,210	Total	$	291,547

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Hydrofarm Holdings Group, Inc.

5.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

4. EARNINGS (LOSS) PER COMMON SHARE (“EPS”)

Basic EPS is computed using net income (loss) divided by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock units (“RSUs”) and performance stock units ("PSUs").

Diluted EPS represents net income (loss) 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 EPS would be based on the number of shares of common ~~shares~~stock issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, assuming the result would be dilutive. Those contingently issuable shares would be included in the denominator of diluted EPS as of the beginning of the period, or as of the grant date of the share-based payment, if later.

The following table presents information necessary to calculate basic and diluted EPS for the three months ended March 31, ~~2022,~~2023 and ~~2021:~~2022:


		Three months ended March 31,					Three Months Ended March 31,
		2022		2021			2023		2022
Net (loss) income		$	(23,296)	$	4,940
Net loss						Net loss	$	(16,849)	$	(23,296)
Weighted-average shares of common stock outstanding	Weighted-average shares of common stock outstanding	44,718,510		33,717,103		Weighted-average shares of common stock outstanding	45,263,822		44,718,510
Dilutive effect of warrants using the treasury stock method		—		2,840,464
Dilutive effect of restricted stock units using the treasury stock method		—		1,658,866
Dilutive effect of stock options using the treasury stock method		—		780,598
Dilutive effect of warrants and share based compensation awards using the treasury stock method						Dilutive effect of warrants and share based compensation awards using the treasury stock method	—		—
Diluted weighted-average shares of common stock outstanding	Diluted weighted-average shares of common stock outstanding	44,718,510		38,997,031		Diluted weighted-average shares of common stock outstanding	45,263,822		44,718,510
Basic EPS	Basic EPS	$	(0.52)	$	0.15	Basic EPS	$	(0.37)	$	(0.52)
Diluted EPS	Diluted EPS	$	(0.52)	$	0.13	Diluted EPS	$	(0.37)	$	(0.52)

The computation of the weighted-average shares of common stock outstanding for diluted EPS excludes the following potential shares of common stock as their inclusion would have an anti-dilutive effect on diluted EPS:


	Three Months Ended March 31,
	2023	2022
Shares subject to warrants outstanding	17,669	17,669
Shares subject to unvested performance based and restricted stock units	2,048,606	1,234,857
Shares subject to stock options outstanding	658,296	696,071

5. ACCOUNTS RECEIVABLE, NET, AND INVENTORIES

Accounts receivable, net comprised the following:


	March 31, 2023		December 31, 2022
Trade accounts receivable	$	22,907	$	18,204
Allowance for doubtful accounts	(1,164)		(1,556)
Other receivables	858		579
Total accounts receivable, net	$	22,601	$	17,227

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

~~The computation 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:~~

Three months ended March 31,
2022 2021
Shares subject to warrants outstanding 17,669 —
Shares subject to unvested performance based and restricted stock units 1,234,857 —
Shares subject to stock options outstanding 696,071 —

~~6. ACCOUNTS RECEIVABLE, NET, AND INVENTORIES~~

~~Accounts receivable, net comprised the following:~~

March 31,
2022 December 31,
2021
Trade accounts receivable $ 43,691 $ 35,511
Allowance for doubtful accounts (1,112) (1,156)
Other receivables 2,740 7,129
Total accounts receivable, net $ 45,319 $ 41,484

Inventories comprised the following:


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Finished goods	Finished goods	$	145,573	$	145,298	Finished goods	$	75,795	$	83,134
Work-in-process	Work-in-process	8,786		5,967		Work-in-process	5,163		5,403
Raw materials	Raw materials	42,135		41,399		Raw materials	35,594		38,558
Allowance for inventory obsolescence	Allowance for inventory obsolescence	(6,498)		(3,530)		Allowance for inventory obsolescence	(13,122)		(15,697)
Total inventories	Total inventories	$	189,996	$	189,134	Total inventories	$	103,430	$	111,398

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 ~~obsolescence increased during the first quarter~~is subject to change from period to period based on a number of ~~2022 as a result~~factors including sales of ~~a reserve for certain durable products.~~products, changes in estimates, and disposals.

~~7. OPERATING~~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 ~~2032.~~2038. Also, the Company leases some 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 1020 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. ~~During~~The Company incurred operating lease costs of $3,647 and $2,597, during the three months ended March 31, ~~2022,~~2023, and ~~2021, the Company incurred operating lease costs of $2,597 and $1,494,~~March 31, 2022, respectively. These costs are included primarily within ~~selling, general and administrative expense~~SG&A in the condensed consolidated statements of operations.

The Company has operating subleases which have been accounted for by reference to the underlying asset subject to the lease, primarily as an offset to rent expense within SG&A. For the three months ended March 31, 2023, and March 31, 2022, the Company recorded sublease income of $642 and $314, respectively.

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 when annual rent is $964. The Company is accounting for the transaction as a failed sale-leaseback which requires retaining the asset 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. The Company intends to reinvest the net cash proceeds into certain permitted investments in 2023, such as capital expenditures.

TABLE OF CONTENTS

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

~~Supplemental balance sheet information related to the Company’s operating leases are~~Total right-of-use ("ROU") assets and lease liabilities were as follows:

March 31,
2022 December 31,
2021
Assets
Operating lease right-of-use assets, net of accumulated amortization $ 54,566 $ 45,245
Total leased assets $ 54,566 $ 45,245
Liabilities
Current portion of lease liabilities $ 7,773 $ 7,198
Long-term lease liabilities 46,755 38,595
Total lease liabilities $ 54,528 $ 45,793


	Balance Sheet Classification	March 31, 2023		December 31, 2022
Lease assets
Operating lease assets	Operating lease right-of-use assets	$	61,155	$	65,265
Finance lease assets	Property, plant and equipment, net	10,405		2,005
Total lease assets		$	71,560	$	67,270

Lease liabilities
Current:
Operating leases	Current portion of operating lease liabilities	$	8,967	$	9,099
Finance leases	Current portion of finance lease liabilities	1,012		704
Noncurrent:
Operating leases	Long-term operating lease liabilities	53,879		56,299
Finance leases	Long-term finance lease liabilities	9,426		1,200
Total lease liabilities		$	73,284	$	67,302

~~As of March 31, 2022,~~The aggregate future minimum lease payments under long-term non-cancelable operating and finance leases with remaining terms greater than one year as of March 31, 2023, are as follows:

Operating
For the period of April 1, 2022 to December 31, 2022 $ 7,003
Year ending December 31,
2023 9,311
2024 9,031
2025 8,338
2026 6,824
2027 6,369
Thereafter 14,208
Total rental payments 61,084
Less portion representing interest (6,556)
Total principal 54,528
Less current portion (7,773)
Long-term portion $ 46,755

During the three months ended March 31, 2022, the Company executed a lease for approximately 303,000 square feet of warehouse space in Shoemakersville, Pennsylvania, and recorded right-of-use assets for operating leases for $10,463.

~~During 2021, the Company executed new lease agreements that will commence in 2023. The future minimum lease payments for executed non-cancelable operating leases not yet commenced are as follows:~~


		Operating			Operating		Finance
For the period of April 1, 2022, to December 31, 2022		$	—
For the period of April 1, 2023 to December 31, 2023				For the period of April 1, 2023 to December 31, 2023	$	8,665	$	1,145
Year ending December 31,	Year ending December 31,			Year ending December 31,
2023		3,354
2024	2024	3,272		2024	10,642		1,441
2025	2025	3,610		2025	10,364		1,303
2026	2026	3,965		2026	9,179		851
2027	2027	4,076		2027	8,940		853
2028				2028	8,385		805
Thereafter	Thereafter	22,633		Thereafter	16,809		8,037
Total rental payments		$	40,910
Total lease payments				Total lease payments	72,984		14,435
Less portion representing interest				Less portion representing interest	(10,138)		(3,997)
Total principal				Total principal	62,846		10,438
Less current portion				Less current portion	(8,967)		(1,012)
Long-term portion				Long-term portion	$	53,879	$	9,426

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

8.7. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net comprised the following:


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Machinery and equipment	Machinery and equipment	$	26,587	$	25,177	Machinery and equipment	27,681		27,832
Peat bogs and related development	Peat bogs and related development	9,876		8,686		Peat bogs and related development	11,475		10,761
Building and improvements	Building and improvements	9,503		9,510		Building and improvements	9,927		9,920
Land	Land	6,116		6,120		Land	6,204		6,107
Furniture and fixtures						Furniture and fixtures	3,922		3,921
Computer equipment						Computer equipment	3,405		3,337
Leasehold improvements	Leasehold improvements	3,413		3,207		Leasehold improvements	4,535		4,177
Computer equipment		3,271		3,197
Furniture and fixtures		2,991		2,867
Gross property, plant and equipment	Gross property, plant and equipment	61,757		58,764		Gross property, plant and equipment	67,149		66,055
Less: accumulated depreciation	Less: accumulated depreciation	(10,408)		(8,291)		Less: accumulated depreciation	(16,160)		(14,920)
Total property, plant and equipment, net	Total property, plant and equipment, net	$	51,349	$	50,473	Total property, plant and equipment, net	$	50,989	$	51,135

Depreciation, depletion and amortization expense related to property, plant and equipment, net was ~~$2,195~~$1,962 and ~~$385~~$2,195 for the three months ended March 31, ~~2022,~~2023, and ~~2021,~~2022, respectively.

As of March 31, 2023, Land, Building and improvements, Computer equipment and Machinery and equipment contain finance leases assets, recorded at cost of $12,920, less accumulated depreciation of $2,515. 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 is in finance lease assets primarily relates to the Sale-Leaseback Transaction.

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities comprised the following:

March 31,
2022 December 31,
2021
Accrued compensation and benefits $ 4,283 $ 3,713
Freight, custom and duty accrual 2,366 2,094
Goods in transit accrual 2,413 3,473
Income tax accrual — 729
Contingent consideration 15,474 17,034
Other accrued liabilities 7,013 6,953
Total accrued expenses and other current liabilities $ 31,549 $ 33,996


	March 31, 2023		December 31, 2022
Accrued compensation and benefits	$	2,747	$	2,522
Freight, custom and duty accrual	735		1,022
Goods in transit accrual	787		1,172
Income tax accrual	—		451
Other accrued liabilities	5,847		8,041
Total accrued expenses and other current liabilities	$	10,116	$	13,208

1816

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

~~10.~~9. DEBT

Debt is comprised of the following:


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Term loan - net of unamortized discount and deferred financing costs of $5,807 and $6,025 at March 31, 2022, and December 31, 2021, respectively		$	118,880	$	118,975
Term loan - net of unamortized discount and deferred financing costs of $4,924 and $5,142 as of March 31, 2023, and December 31, 2022, respectively						Term loan - net of unamortized discount and deferred financing costs of $4,924 and $5,142 as of March 31, 2023, and December 31, 2022, respectively	$	118,514	$	118,608
Other	Other	2,612		2,805		Other	216		160
Total debt	Total debt	$	121,492	$	121,780	Total debt	$	118,730	$	118,768

Current portion of long-term debt	Current portion of long-term debt	$	2,298	$	2,263	Current portion of long-term debt	$	1,367	$	1,307
Long-term debt - net of unamortized discount and deferred financing costs of $5,807 and $6,025 at March 31, 2022, and December 31, 2021, respectively		119,194		119,517
Long-term debt - net of unamortized discount and deferred financing costs of $4,924 and $5,142 as of March 31, 2023, and December 31, 2022, respectively						Long-term debt - net of unamortized discount and deferred financing costs of $4,924 and $5,142 as of March 31, 2023, and December 31, 2022, respectively	117,363		117,461
Total debt	Total debt	$	121,492	$	121,780	Total debt	$	118,730	$	118,768

~~Senior Secured~~ Term Loan

On October 25, 2021, the Company and certain of its direct and indirect subsidiaries (the "Obligors") entered into a Credit and Guaranty Agreement with JPMorgan Chase Bank, N.A., as administrative agent for ~~certain~~the lenders, pursuant to which the Company borrowed a $125,000 senior secured term loan (“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 ("Maturity Date"). Deferred financing costs ~~and discount~~ totaled $6,190 at the inception of the Term Loan, and are being amortized to interest expense over the term of the loan. For the three months ended March 31, ~~2022,~~2023, the effective interest rate was ~~7.30%~~10.97% and interest expense was ~~$2,031 and~~$3,347, which includes amortization of deferred financing costs ~~was~~and discount of $218.

The principal amounts of the Term Loan are required 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. The Company is also required to make mandatory prepayments ~~upon~~in the ~~occurrence~~event of ~~certain events, including~~ (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. There were no such mandatory prepayments made since inception of the Term Loan. As of March 31, 2023, and December 31, 2022, the outstanding principal balance on the Term Loan was $123,438 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 March 31, ~~2022.~~ 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. ~~The Company may request additional term loan commitments subject to certain loan conditions.~~

~~TABLE OF CONTENTS~~

~~Hydrofarm Holdings Group, Inc.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~Revolving asset-backed credit facilities~~

~~Encina Credit Facility~~

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 Loan Services LLC Term Loan. The Encina Credit Facility was secured by working capital assets and a second lien on non-working capital assets. The Encina Credit Facility was repaid in December 2020 and replaced in March 2021 by the JPMorgan Credit Facility (as defined below). The unamortized deferred financing costs and early termination fees totaling $680 were recognized as a loss on debt extinguishment in the condensed consolidated statements of operations for the three months ended March 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")~~the Obligors entered into a Senior Secured Revolving Credit Facility (the ~~"JPMorgan~~"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 ~~JPMorgan~~Revolving Credit Facility is due on ~~the earlier of March 29, 2024,~~June 30, 2026, or any earlier date on which the revolving commitments are reduced to zero.

The ~~three-year JPMorgan~~Revolving Credit Facility originally 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").~~$50,000. 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 ~~recently~~previously acquired subsidiaries became party to the ~~JPMorgan~~Revolving 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.~~ On October 25, 2021, the Company and its subsidiaries entered into a second amendment (the “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 ~~the provisions of~~comport with the Term ~~Loan.~~

Loan provisions. The ~~unamortized debt issuance costs were $908 as of March 31,~~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 ~~are included in other assets in the condensed consolidated balance sheets. Deferred financing costs are being amortized to interest expense over the term of the Revolver. As of March 31,~~granted liens on their assets. On December 22, 2022, the ~~JPMorgan Obligors had approximately $99,674 available to borrow under the JPMorgan Credit Facility.~~

~~The JPMorgan Credit Facility is secured by the Company’s assets and the assets of certain of the Company’s subsidiaries. The~~ Company ~~is required to maintain certain reporting requirements, affirmative covenants, negative covenants and financial covenants ("debt covenants"~~entered into a fourth amendment (the “Fourth Amendment”)~~, including, in certain situations~~ pursuant to ~~terms outlined in the agreement, the maintenance of~~which a ~~minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis. The JPMorgan Obligors were in compliance with all debt covenants as of March 31, 2022.~~sale-leaseback

2017

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

transaction was permitted, and certain other changes were made, including a reduction of the 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 unamortized debt issuance costs were $686 as of March 31, 2023, and are included in other assets in the condensed consolidated balance sheets. Debt issuance 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 working capital assets of the Company and a second lien on the non-working capital assets of the Company (including most of the Company’s 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, pursuant to terms outlined in the agreement. 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 until 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 March 31, 2023, the Company is in compliance with the covenants contained in the Revolving Credit Facility.

~~11. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY~~

~~Capital stock~~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 0.25% per annum is charged for available but unused borrowings.

As of March 31, 2023, and December 31, 2022, the ~~following summarizes shares authorized, issued~~Company had zero borrowed under the facility. As of March 31, 2023, the Company would be able to borrow approximately $39 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 $216 and ~~outstanding:~~$160 as of March 31, 2023, and December 31, 2022, respectively, was primarily comprised of a foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage.

Capital stock authorized and outstanding: Shares
authorized Shares
outstanding
Convertible preferred stock 50,000,000 —
Common stock 300,000,000 44,822,866

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

Aggregate future principal payments

As of March 31, 2023, the aggregate future principal payments under long-term debt are as follows:


	Debt
For the period of April 1, 2023 to December 31, 2023	$	1,055
Year ending December 31,
2024	1,269
2025	1,269
2026	1,269
2027	1,270
2028	117,522
Total	$	123,654

10. STOCKHOLDERS’ EQUITY

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 ~~Company’s board~~Board. As of ~~directors (the ‘‘Board’’).~~March 31, 2023, there were 45,362,276 shares outstanding and 300,000,000 shares authorized.

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 is 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. As of March 31, 2023, and December 31, 2022, respectively, there were no Investor Warrants outstanding. In connection with the private placement, the Placement Agent was issued warrants (the “placement agent warrants”) which will expire on December 14, 2023.

As of March 31, ~~2022,~~2023, the following table summarizes the outstanding placement agent warrants:


	Number of Warrants	Exercise Price
Placement agent warrants	11,662	$	8.43
Placement agent warrants	6,007	$	16.86
Total	17,669	$	11.30

2119

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

As of December 31, 2022, the following table summarizes the outstanding placement agent warrants:

~~12.~~


	Number of Warrants	Exercise Price
Placement agent warrants	11,662	$	8.43
Placement agent warrants	6,007	$	16.86
Total	17,669	$	11.30

11. STOCK-BASED COMPENSATION

Stock-based compensation plan overview

The Company maintains 3three equity incentive plans: the 2018 Equity Incentive Plan (“2018 Plan”), the 2019 Employee, Director and Consultant Equity Incentive Plan (“2019 Plan”) and the 2020 Employee, Director, and Consultant Equity Incentive Plan (“2020 Plan” and collectively, “Incentive Plans”). The 2020 Plan serves as the successor to the 2019 Plan and 2018 Plan and provides for the issuance of incentive stock options ~~nonqualified stock options,~~("ISOs"), 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 the~~As of March 31, 2023, a total of 1,989,274 shares are available for grant under the 2020 Plan.

The Incentive Plans are administered by the 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”), subject to such limitations as the Board of Directors deems appropriate.

In November 2020, the Board of Directors and stockholders approved the 2020 Plan ~~1,732,432 remain~~and reserved an aggregate of 2,284,053 shares of common stock for issuance under the 2020 Plan. Pursuant to the 2020 Plan, the number of shares available for issuance under the 2020 Plan may 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, 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 ~~March 31, 2022.~~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 10 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.

~~RSU~~•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.

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 requirement (based on continuous employment). Upon vesting, the RSUs convert into shares of the Company's common stock. The stock-based compensation expense related to service-based awards is recorded over the requisite service period. During the three months ended March 31, ~~2022,~~2023, the Company granted RSU awards

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

that are expected to vest ~~either (i) ratably~~with two equal vesting tranches, which are scheduled to occur on October 31, 2023, and October 31, 2024.

The award granted to a former member of the Board (the "former Board member") in July 2020, and modified in November 2020, contained a market-based vesting condition based on the traded value of shares of the Company’s common stock following the IPO over a ~~three-year period on each anniversary~~specific time frame. For this award, the market condition was factored into its fair value. The fair value of the ~~grant~~award, at the modification date, ~~or (ii) with three vesting tranches, the first~~was $3,180, all of which ~~occurred on~~was recorded as stock-based compensation expense upon the ~~grant date,~~IPO. In July 2021, the market-based vesting condition for this award was satisfied and ~~the following two tranches on each subsequent anniversary~~148,315 RSUs of the ~~grant date.~~ former Board member vested. The remaining 111,236 unvested RSUs met the time-based vesting conditions during the year ended December 31, 2022, and vested at that time. No additional awards with market-based conditions have been granted.

The following table summarizes the activity related to the Company's RSUs for the three months ended March 31, ~~2022.~~2023. For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled ~~as of~~during the three months ended March 31, ~~2022:~~2023:


		Number of RSUs	Weighted average grant date fair value			Number of RSUs	Weighted average grant date fair value
Balance, December 31, 2021		1,087,608	$	9.71
Balance, December 31, 2022					Balance, December 31, 2022	992,633	$	8.57
Granted	Granted	339,076	$	15.93	Granted	173,411	$	1.73
Vested	Vested	(278,002)	$	11.92	Vested	(211,439)	$	10.14
Forfeited	Forfeited	(29,938)	$	52.51	Forfeited	(42,376)	$	11.03
Balance, March 31, 2022		1,118,744	$	9.90
Balance, March 31, 2023					Balance, March 31, 2023	912,229	$	6.80

As of March 31, ~~2022,~~2023, total unamortized stock-based compensation cost related to unvested RSUs was ~~$9,010~~$4,752 and the weighted-average period over which the compensation is expected to be recognized is ~~1.61~~1.21 years. For the three months ended March 31, ~~2022,~~2023, the Company recognized ~~$2,799~~$1,001, of total stock-based compensation expense for RSUs. As of March 31, 2023, there were 6,357 RSUs which had previously vested, but were not yet issued due to the recipients' elections to defer the awards.

Performance Stock Unit ("PSU") Activity

During the three months ended March 31, ~~2022,~~2023, the Company granted PSU awards that are subject to a one-year vesting requirement (based on continuous employment) and contain performance conditions based on certain performance metrics. The following table summarizes the activity related to the Company's PSUs for the three months ended March 31, ~~2022.~~2023:

Number of
PSUs Weighted
average grant
date fair value
Balance, December 31, 2021 — $ —
Granted 116,113 $ 15.74
Balance, March 31, 2022 116,113 $ 15.74


	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	(75,518)	$	14.78
Balance, March 31, 2023	1,136,377	$	1.77

During the three months ended March 31, 2023, the PSU forfeitures were primarily due to performance conditions that were not satisfied. As of March 31, 2023, total unamortized stock-based compensation cost related to unvested PSUs was $1,967 and the weighted-average period over which the compensation is expected to be recognized is less than one-year. For the three months ended March 31, 2023, the Company recognized $97 of total stock-based compensation expense for PSUs.

Stock Options

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.

2221

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

As of March 31, 2022, total unamortized stock-based compensation cost related to unvested PSUs was $1,783 and the weighted-average period over which the compensation is expected to be recognized is less than one year. ForThere were no stock options granted or exercised during the three months ended March 31, ~~2022, the Company recognized $45 of total stock-based compensation expense for PSUs.~~

~~Stock options~~

2023. The following table summarizes the stock option activity for the three months ended March 31, ~~2022:~~2023:

Number Weighted
average
exercise price Weighted
average grant
date fair value Weighted average
remaining contractual
term (years)
Outstanding as of December 31, 2021 720,549 $ 9.57 $ 2.21 7.37
Exercised (7,765) $ 9.04 $ 2.21
Cancelled (90) $ 11.06 $ 9.89
Forfeited (16,623) $ 11.51 $ 6.03
Outstanding as of March 31, 2022 696,071 $ 9.53 $ 2.12 6.84
Options exercisable as of March 31, 2022 548,551 $ 8.56 $ 1.08 6.53
Vested and expected to vest as of March 31, 2022 696,071 $ 9.53 $ 2.12 6.84


	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	(11,162)	$	10.19	$	4.10
Forfeited	(568)	$	10.05	$	4.03
Outstanding as of March 31, 2023	658,296	$	9.50	$	2.07	4.62
Options exercisable as of March 31, 2023	601,494	$	8.87	$	1.40	4.41
Vested and expected to vest as of March 31, 2023	658,296	$	9.50	$	2.07	4.62

The following table summarizes the unvested stock option activity for the three months ended March 31, ~~2022:~~2023:


		Number	Weighted average grant date fair value			Number	Weighted average grant date fair value
Unvested as of December 31, 2021		202,515	$	5.04
Unvested as of December 31, 2022					Unvested as of December 31, 2022	70,587	$	7.02
Vested	Vested	(38,372)	$	1.02	Vested	(13,217)	$	1.13
Forfeited	Forfeited	(16,623)	$	6.03	Forfeited	(568)	$	4.03
Unvested as of March 31, 2022		147,520	$	5.98
Unvested as of March 31, 2023					Unvested as of March 31, 2023	56,802	$	9.08

As of March 31, ~~2022,~~2023, total compensation cost related to unvested awards not yet recognized was ~~$730~~$357 and the weighted-average period over which the compensation is expected to be recognized is ~~1.95~~1.26 years. For the three months ended March 31, ~~2022,~~2023, the Company recognized ~~$64~~$84 of total stock-based compensation expense for stock options.

12. INCOME TAXES

The Company recorded an income tax expense of $147 for the three months ended March 31, 2023, representing an effective income tax rate of (0.9)%. The Company’s effective tax rate for the three months ended March 31, 2023, differs from the federal statutory rate of 21% primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets in the U.S. and most foreign jurisdictions. The tax expense for the three months ended March 31, 2023, was primarily due to foreign tax expense.

~~TABLE OF CONTENTS~~The Company recorded an income tax benefit of $5,569 for the three months ended March 31, 2022, representing an effective income tax rate of 19.3%. The Company’s effective tax rate for the three months ended March 31, 2022 differs from the federal statutory rate primarily as a result of a reduction in the valuation allowance recorded against the Company's net deferred tax assets due to the acquisition of certain entities which had an income tax rate benefit of 23.4%. As described in Note 2 – Basis of Presentation and Significant Accounting Policies, the Company determined that the preliminary allocation of assets acquired related to indefinite lived trade names have a finite useful life, and, as a result of adjusting this provisional amount, the Company recorded a reduction to the valuation allowance which resulted in an income tax benefit.

~~Hydrofarm Holdings Group, Inc.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

13. COMMITMENTS ~~CONTINGENCIES,~~ AND ~~RELATED PARTY TRANSACTIONS~~CONTINGENCIES

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.

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

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, 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~~

The Company leased a distribution center in Petaluma, California from entities in which a related party was a stockholder. For the three months ended March 2021, rent expense for the month-to-month lease totaled $320.

14. FAIR VALUE MEASUREMENTS

~~The following table summarizes~~Recurring

Contingent consideration, as described under the ~~estimated fair value of the Company's assets and liabilities for which disclosure of fair value is required:~~

March 31, 2022 December 31, 2021
Fair Value Hierarchy Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Term Loan Level 2 $ 125,000 $ 118,750 $ 125,000 $ 121,250

heading The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued and other current liabilities approximate their fair value due to their short-term maturities. The carrying value of the note receivable (as describedBusiness combinations in Note 2 -– Basis of Presentation and Significant Accounting Policies), was measured at estimated fair value on a recurring basis and ~~the carrying value of contingent consideration (as described in Note 3 -~~ ~~Business Combinations) are~~ based on ~~level~~Level 3 fair value ~~measurements and are reported at estimated fair value.~~measurements. The fair value of the contingent consideration for the Heavy 16 and Aurora 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 the three months ended March 31, 2022, and it was subsequently paid in April 2022. The change in the fair value of contingent consideration for the Aurora acquisition was a benefit of $1,560, during the three months ended March 31, 2022, and was recognized in SG&A on the condensed consolidated statements of operations during that period. The value of the contingent consideration was $15,274 as of March 31, 2022, and was subsequently paid in July 2022. As of March 31, 2023, and December 31, 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 three months ended June 30, 2022, as determined based on unobservable Level 3 inputs. Refer to Note 3 – Goodwill and Intangible Assets, Net, for further discussion.

The 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 three months ended March 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 three months ended March 31, 2022, recognized in Impairments on the condensed consolidated statements of operations. The carrying value of the note receivable was $475 as of December 31, 2022. As of December 31, 2022, the note receivable was included in other assets on the consolidated balance sheet.

Other Fair Value Measurements

The following table summarizes the fair value of the Company’s assets and liabilities which are provided for disclosure purposes:


		March 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	18,703	18,703	21,291	21,291

Liabilities
Finance leases	Level 3	10,438	10,438	1,904	1,904
Term Loan	Level 2	123,438	107,391	123,750	105,188

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Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands, except share and per share amounts)

Cash and cash equivalents included funds deposited in banks, and the carrying values approximated fair values due to their short-term maturities. The carrying values of other current assets and liabilities including accounts receivable, accounts payable, accrued expenses and other current liabilities approximated their fair value due to their short-term maturities.

The carrying amount of finance leases was $10,438 and $1,904 as of March 31, 2023, and December 31, 2022, respectively. The estimated fair value of finance leases approximated its carrying value given the applicable interest rates and the nature of the security interest in the Company’s assets, which were considered Level 3 fair value measurements. The fair value of the Term Loan was estimated based on Level 2 fair value measurements and was based on bank ~~quotes and~~quotes. The carrying amount of the ~~carrying amount~~Term Loan reported above excludes unamortized deferred financing costs and discount. Refer to Note 6 – Leases and Note 9 – Debt, for further discussion of the Company's finance leases and Term Loan, respectively.

The Company did not have any transfers between Levels within the fair value hierarchy during the periods presented.

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ITEM 2. 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 and unaudited consolidated financial statements and the notes contained elsewhere in this Quarterly Report on Form 10-Q and our ~~2021~~2022 Annual Report. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements are only predictions, and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this Quarterly Report on Form 10-Q, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in “Risk Factors” in our ~~2021~~2022 Annual Report. See “Special Note Regarding Forward-Looking Statements.”

Company Overview

We are a leading independent manufacturer and distributor of ~~CEA~~controlled environment agriculture ("CEA") equipment and supplies, including a broad portfolio of our own innovative 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.

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 sales~~online 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 products~~distributed across the ~~U.S.~~United States and Canada tothrough a diversified range of retailers of commercial and home gardening equipment and ~~supplies that~~supplies. 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.

~~During fiscal year 2021,~~Market Conditions

We experienced adverse financial results throughout 2022 and continuing into the three months ended March 31, 2023, which we ~~completed five acquisitions~~believe is primarily a result of ~~branded manufacturers~~an agricultural oversupply impacting our market. This has led to a reduction in our profitability, as compared to prior periods, and losses from operations. These market conditions continue to negatively impact our business and results of ~~CEA products, resulting in a significant expansion~~operations, and the extent to which this will continue is uncertain and difficult to predict at this time.

In connection with our previously disclosed evaluation of our facility footprint and product and brand portfolio, we began a restructuring plan during the three months ended December 31, 2022. We undertook significant actions to streamline our operations, reduce costs and improve efficiencies during the industry recession. Our major initiatives include (i) narrowing our product and brand portfolio and (ii) relocating and consolidating certain manufacturing and distribution centers, including headcount reductions and reorganization to drive a solution based approach. We are focusing commercial sales on competencies and product assortment gained from our recent acquisitions. During three months ended March 31, 2023, we recorded pre-tax charges of ~~proprietary branded~~$1.4 million relating primarily to the relocation and termination of certain facilities in Canada, the majority of which are cash charges primarily recorded within Cost of goods sold on the consolidated statements of operations.

We plan to incur approximately $0.9 million of additional charges in the remainder of 2023, which we expect to be primarily cash, associated with the execution of our restructuring plan. We expect to be substantially complete with our restructuring plan, as currently designed, in the second quarter of 2023. We are monitoring the aforementioned market conditions and impact on our net sales and profitability, and we may execute a second phase of our restructuring plan in 2023 and incur additional costs. Our strategic product consolidation entailed removing approximately one-third of all products and one-fifth of all brands relating to our ~~specialized manufacturing capabilities, including:~~

•~~Heavy 16, a manufacturer of plant nutrients and additives,~~primary product portfolio, which excluded our garden center business in ~~May 2021;~~Canada. We

•~~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.~~

~~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-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 global pandemic and actions taken to contain COVID-19 have adversely affected the global economy and financial markets.

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~~In response~~expect the restructuring and related actions to result in cost savings of approximately $7.0 million on an annualized basis. The amounts the ~~COVID-19 pandemic,~~Company will ultimately realize or disburse could differ from these estimates.

As of June 30, 2022, primarily due to a sustained decline in the market value of our common stock and the market conditions described above, we ~~implemented business continuity plans designed to address~~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 ~~impact~~test determined that the carrying value of the ~~COVID-19 pandemic on our business,~~goodwill reporting units of U.S. and we continue to follow safety protocols and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines. 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. Currently manufacturersCanada was in ~~China and in North America are generally back in operation; however, new waves~~excess of the ~~COVID-19 pandemic could result in~~fair value. The recognized impairment reduced the ~~re-closure~~goodwill balance to zero as 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 costsJune 30, 2022. The impairment was primarily 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~~a deterioration in ~~countries, primarily~~customer demand in the U.S. 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 ~~are currently affected by~~ the ~~COVID-19 pandemic. Many~~carrying amount may not be recoverable. We did not identify a triggering event requiring a test for impairment during the remainder of ~~these customers~~2022, or the three months ended March 31, 2023.

In connection with the 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 recent sales declines we have experienced, ~~shelter-in-place measures in attempts~~which we believe are primarily a result of an agricultural oversupply impacting our market, and a reduction to ~~contain the spread of COVID-19, including general lockdowns, closure of schools~~our profitability and ~~non-essential businesses, bans on gatherings and travel restrictions.~~

~~Our business has remained resilient during the COVID-19 pandemic. As of March 31, 2022, our manufacturing and distribution operations are viewed as essential services and continue~~loss from operations. These market conditions continued 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 ultimatelynegatively impact our business and results of operations ~~financial condition~~during the remainder of 2022, and ~~cash flows depends on~~the three months ended March 31, 2023.

We maintain an allowance for excess and obsolete inventory that is based upon assumptions about future ~~developments~~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 ~~are highly uncertain, rapidly evolving~~we may incur additional charges in the future and ~~difficult to predict at this time.~~actual results may differ significantly from these estimates and assumptions. Depending on the length and severity of ~~COVID-19,~~the industry and market conditions impacting our business, it is possible 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 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 continuityexecute additional restructuring plans and ~~response strategy.~~incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.

Results of Operations—Comparison of three months ended March 31, ~~2022~~2023 and ~~2021~~2022

The following table sets forth our unaudited interim condensed consolidated statements of operations for the three months ended March 31, ~~2022,~~2023, and ~~2021,~~2022, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):


	Three months ended March 31,
	2023				2022				Period change
Net sales	$	62,178	100.0	%	$	111,377	100.0	%	$	(49,199)	-44.2	%
Cost of goods sold	50,797		81.7	%	94,771		85.1	%	(43,974)		-46.4	%
Gross profit	11,381		18.3	%	16,606		14.9	%	(5,225)		-31.5	%
Operating expenses:
Selling, general and administrative	24,431		39.3	%	40,247		36.1	%	(15,816)		-39.3	%
Impairments	—		0.0	%	2,756		2.5	%	(2,756)		-100.0
Loss from operations	(13,050)		-21.0	%	(26,397)		-23.7	%	13,347		50.6	%
Interest expense	(3,692)		-5.9	%	(2,366)		-2.1	%	(1,326)		-56.0	%

Other income (expense), net	40		0.1	%	(102)		-0.1	%	142		139.2	%
Loss before tax	(16,702)		-26.9	%	(28,865)		-25.9	%	12,163		42.1	%
Income tax (expense) benefit	(147)		-0.2	%	5,569		5.0	%	(5,716)		-102.6	%
Net loss	$	(16,849)	-27.1	%	$	(23,296)	-20.9	%	$	6,447	27.7	%

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Three months ended March 31,
2022 2021 Period change
Net sales $ 111,377 100.0 % $ 111,389 100.0 % $ (12) 0.0 %
Cost of goods sold 94,771 85.1 % 88,166 79.2 % 6,605 7.5 %
Gross profit 16,606 14.9 % 23,223 20.8 % (6,617) -28.5 %
Operating expenses:
Selling, general and administrative 43,003 38.6 % 16,841 15.1 % 26,162 155.3 %
(Loss) income from operations (26,397) -23.7 % 6,382 5.7 % (32,779) -513.6 %
Interest expense (2,366) -2.1 % (90) -0.1 % (2,276) 2,528.9 %
Loss on debt extinguishment — 0.0 % (680) -0.6 % 680 n/a %
Other (expense) income, net (102) -0.1 % 84 0.1 % (186) -221.4 %
(Loss) income before tax (28,865) -25.9 % 5,696 5.1 % (34,561) -606.8 %
Income tax benefit (expense) 5,569 5.0 % (756) -0.7 % 6,325 -836.6 %
Net (loss) income (23,296) -20.9 % 4,940 4.4 % (28,236) -571.6 %

Net sales

Net sales for the three months ended March 31, ~~2022,~~2023, were ~~$111.4~~$62.2 million, ~~flat~~a decrease of $49.2 million, or 44.2% compared to the same period in ~~2021.~~ 2022.

The ~~flat performance of~~44.2% decrease in net sales for the three months ended March 31, ~~2022,~~2023, as compared to the same period in ~~2021~~2022, was due to a ~~2.1%~~42.5% decline in volume of products sold, ~~(a 36.7% decline in organic sales and~~ a ~~34.6% increase from recently-acquired proprietary brands), a 2.2% increase~~1.1% decrease in price and mix of products sold, and ~~0.1%~~a 0.6% decline from unfavorable foreign exchange rates. The decrease in volume of products sold was primarily related to ~~what we believe is a short-term~~the aforementioned oversupply ~~which put downward pressure on~~in the cannabis ~~growing activity predominantly in California and Canada but also in many other US states.~~industry. The ~~increase~~reduction in price was ~~primarily related~~mainly due to ~~list price increases, as well as higher freight recovery as we put multiple measures in place to combat rising freight costs.~~lower prices on specific previously reserved lighting products. The decrease in foreign exchange related to ~~recent~~ strength in the U.S. Dollar relative to the Canadian ~~Dollar and to the Euro.~~Dollar.

Gross profit

Gross profit for the three months ended March 31, ~~2022,~~2023, was ~~$16.6~~$11.4 million, a decrease of ~~$6.6~~$5.2 million, or ~~28.5%~~31.5%, compared to the same period in ~~2021.~~ 2022.

The decrease in gross profit for the three months ended March 31, ~~2022,~~2023, as compared to the same period in ~~2021~~2022, was related to higher freight and labor costs, certain non-cash purchase accounting inventory adjustments related predominately to the purchase of IGE completed in November 2021, and an increase in the inventory obsolescence allowance of $3.2 million primarily related to ~~certain slow-moving lighting products. These were partially offset by~~ the aforementioned ~~list price increases, as well as a much higher proportion of higher-margin proprietary brand sales.~~decrease in net sales. Our gross profit margin percentage ~~decreased~~(gross profit as a percent of net sales) increased to ~~14.9%~~18.3% for the three months ended March 31, ~~2022~~2023, from ~~20.8%~~14.9% in the same period in ~~2021.~~2022. The ~~lower~~prior year period's gross profit margin percentage ~~is primarily due~~was negatively impacted by acquisition expenses of $3.9 million and an increase in inventory allowances of $3.2 million. Additionally, during the three months ended March 31, 2023, we also realized a larger proportion of higher-margin proprietary brand sales and improved productivity, both of which contributed to the ~~aforementioned adjustments.~~

increase in gross profit margin from the prior year period.
The gross profit margin percentage increase was partially offset by restructuring costs of $1.2 million and higher freight and labor costs as percentage of net sales in the current year.

Selling, general and administrative expenses

Selling, general and administrative ~~expenses~~ ("SG&A") expenses for the three months ended March 31, ~~2022,~~2023, were ~~$43.0~~$24.4 million, ~~an increase~~a decrease of ~~$26.2~~$15.8 million compared to the same period in ~~2021.~~ 2022.

The $15.8 million decrease in SG&A ~~increase of $26.2 million~~expenses for the three months ended March 31, 2023, as compared to the same period in 2022, was primarily related to ~~(i) $13.5~~a $8.7 million ~~increase~~decline in amortization expenses as the prior year period included additional amortization expense ~~relating~~due to adjustments to the useful lives of intangible assets, ~~associated with our 2021 acquisitions, of which $5.9 million represented amortization expense from adjustments to useful lives that were determined~~as described in the current period, (ii) compensation costs (an increase of $3.1 million, of which $0.6 million was severance associated with a recent reduction-in-force), (iii) an impairment of a note receivable ($2.6 million; see Note 2 - – Basis of Presentation and Significant Accounting ~~Policies), (iv) share-based~~Policies. Additionally, SG&A decreased in the three months ended March 31, 2023, by $7.2 million due to lower expenses in several areas, including as a result of our cost saving and restructuring initiatives: (i) a $2.3 million decrease in salaries and benefits, including severance, (ii) a $1.9 million decrease in non-cash compensation ~~expense (an increase of $1.8 million), (v) facility costs (an increase of~~(iii) a $1.1 ~~million), (vi)~~million decrease in costs associated with the relocation of certain of our distribution centers ~~of $1.1~~incurred last year (iv) a $1.0 million ~~(vii)~~decrease in acquisition and integration expenses, (v) a $0.5 million decrease in professional and outside services, and (vi) a $0.4 million decrease in bad debt expense.

Impairments

The Company recorded impairment charges of ~~$1.0~~zero and $2.8 million for the three months ended March 31, 2023, and ~~(viii) insurance costs (an increase~~2022, respectively. The impairment charge during the three months ended March 31, 2022, primarily pertained to a note receivable after the third-party defaulted on interest payments, and the Company measured an impairment on the note receivable based on the estimated fair value of ~~$0.5 million), travel (an increase~~the collateral, as described in Note 2 – Basis of ~~$0.3 million),~~Presentation and ~~warranty costs (an increase of $0.3 million)~~Significant Accounting Policies andNote 14 – Fair Value Measurements. ~~These increases were largely the result of our accelerated M&A strategy and supporting our long-term growth strategy.~~

Interest expense

Interest expense for the three months ended March 31, ~~2022,~~2023, was ~~$2.4~~$3.7 million, an increase of ~~$2.3~~$1.3 million compared to the same period in the prior year. The increase was due to ~~the interest-bearing~~higher variable interest rates on our Term ~~Loan issued in the fourth quarter of 2021 and outstanding~~Loan.

Other income (expense), net

Other income for the ~~full period during~~three months ended March 31, 2023, was $40 thousand, and Other expense was $102 thousand for the ~~first quarter of~~three months ended March 31, 2022. The Other income for the three months ended March 31, 2023 was primarily driven by interest income, partially offset by foreign currency exchange rate losses.

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~~Loss on debt extinguishment~~Income tax (expense) benefit

~~Loss on debt extinguishment~~We recorded an income tax expense of $0.1 million for the three months ended March 31, 2023, representing an effective income tax rate of (0.9)%. Our effective tax rate for the three months ended March 31, 2023, differs from the federal statutory rate of 21% primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets in the U.S. and most foreign jurisdictions. The tax expense for the three months ended March 31, 2023, was primarily due to foreign tax expense.

We recorded an income tax benefit of $5.6 million for the three months ended March 31, 2022, ~~was zero, compared to $0.7 million in the prior year which resulted primarily from the write-off~~representing an effective income tax rate of ~~unamortized deferred financing costs associated with the payoff of the Encina Credit Facility.~~

~~Income~~19.3%. Our effective tax ~~(benefit) expense~~

~~Income tax benefit~~rate for the three months ended March 31, 2022, ~~was $5.6 million, compared to $0.8 million of income tax expense in the prior year. The Company's effective income tax rate was 19.3% for the three months ended March 31, 2022. This rate~~ differs from the ~~U.S.~~ federal statutory rate ~~of 21%~~ primarily as a result of a reduction in the valuation allowance recorded against the ~~Company's~~our net deferred tax assets, due to the acquisition of ~~the IGE Entities~~certain entities which had an income tax rate benefit of 23.4%. ~~In addition, as described in~~ ~~Note 3 -~~ ~~Business Combinations,~~ t~~he Company~~ ~~determined that the preliminary allocation~~

Liquidity and Capital Resources

Cash Flow from Operating, Investing, and Financing Activities

Comparison 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 adjusting this provisional amount, the Company recorded a reduction to the valuation allowance, which resulted in an income tax rate benefit of 6.1%.

~~For~~ the three months ended March 31, 2021, our income tax rate of 13.3% differs from the federal statutory rate of 21% primarily as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforwards.

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~~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 performance2023, and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net (loss) income 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 condensed unaudited 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 the significant 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 (loss) income, the most comparable GAAP financial measure, to Adjusted EBITDA for the three months ended March 31, 2022 ~~and 2021 (in thousands):~~

Three months ended March 31,
2022 2021
Net (loss) income $ (23,296) $ 4,940
  Interest expense 2,366 90
  Income tax (benefit) expense (5,569) 756
  Distribution center exit costs and other 1,086 —
  Depreciation, depletion and amortization 16,941 1,591
  Impairment, restructuring and other* 3,393 15
  Acquisition expenses** 4,986 659
Other expense (income), net 102 (84)
  Stock-based compensation*** 3,076 1,258
  Loss on debt extinguishment — 680
Adjusted EBITDA $ 3,085 $ 9,905
Adjusted EBITDA as a percent of net sales 2.8 % 8.9 %

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~~(*) Includes the elimination of impairment and other. During the quarter ended March 31, 2022, impairment primary related to a Note Receivable.~~

(**) Includes non-cash purchase accounting inventory adjustments for House and Garden, Aurora, Greenstar and Innovative Growers Equipment of $3.9 million, the elimination of acquisition and integration consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, Greenstar, and Innovative Growers Equipment acquisitions and certain potential acquisitions of $2.6 million, partially offset by the change in fair value of contingent consideration for Aurora of ($1.6 million) for the quarter ended March 31, 2022.

~~(***) Includes employer payroll taxes on stock-based compensation~~

~~Liquidity and Capital Resources~~

The following table summarizes our cash flows for the three months ended March 31, ~~2022,~~2023, and ~~2021~~2022 (amounts in thousands):


		Three months ended March 31,					Three months ended March 31,
		2022		2021			2023		2022
Net cash used in operating activities	Net cash used in operating activities	$	(10,155)	$	(2,638)	Net cash used in operating activities	$	(8,950)	$	(10,155)
Net cash used in investing activities	Net cash used in investing activities	(2,385)		(445)		Net cash used in investing activities	(1,602)		(2,385)
Net cash used in financing activities		(1,953)		(11,827)
Net cash from (used in) financing activities						Net cash from (used in) financing activities	7,959		(1,953)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	Effect of exchange rate changes on cash, cash equivalents and restricted cash	43		(4)		Effect of exchange rate changes on cash, cash equivalents and restricted cash	5		43
Net decrease in cash, cash equivalents and restricted cash	Net decrease in cash, cash equivalents and restricted cash	(14,450)		(14,914)		Net decrease in cash, cash equivalents and restricted cash	(2,588)		(14,450)
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	28,384		76,955		Cash, cash equivalents and restricted cash at beginning of period	21,291		28,384
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	13,934	$	62,041	Cash, cash equivalents and restricted cash at end of period	$	18,703	$	13,934

Operating Activities

Net cash used in operating activities was $9.0 million for the three months ended March 31, 2023, primarily due to a net loss of $16.8 million, partially offset by net non-cash items. Additionally, we had a $5.5 million net cash usage for working capital. This was primarily due to an increase of $5.1 million in accounts receivable, net, and decreases of $3.1 million of accrued expenses and other current liabilities, $2.2 million of lease liabilities, and $1.1 million in deferred revenue, partially offset by a decrease of $7.3 million in inventories.

Net cash used in operating activities was $10.2 million for the three months ended March 31, 2022, primarily due to a net loss of $23.3 million, partially offset by net non-cash items. Additionally, we had a $9.1 million net cash usage for working capital during the first quarter of 2022. This was primarily due to an increase of $6.8 million in accounts receivable and a decrease of $7.2 million in deferred revenue, partially offset by a $10.5 million increase in accounts payable.

Net cash used in operating activities was $2.6 million for the three months ended March 31, 2021, primarily consisting of $4.2 million in non-cash expense addbacks including depreciation and amortization and stock-based compensation expense, to reconcile net income of $4.9 million to net cash used in operating activities, less a $11.7 million increase in working capital. This change in working capital primarily reflects a $23.4 million increase in accounts receivable, inventories, prepaid expenses and other current assets, partially offset by a $14.4 million increase in accounts payable.

Investing Activities

Net cash used in investing activities was ~~$2.4~~$1.6 million and ~~$0.4~~$2.4 million for the three months ended March 31, 2023, and March 31, 2022, ~~and 2021,~~ respectively, ~~and was~~primarily due ~~primarily~~ to ~~purchases~~capital expenditures of property, plant and equipment.

Financing Activities

Net cash from financing activities was $8.0 million for the three months ended March 31, 2023, primarily driven by $8.6 million of proceeds from the Sale-Leaseback Transaction.

Net cash used in financing activities was $2.0 million for the three months ended March 31, ~~2022. We paid~~2022, primarily driven by payments of $1.6 million related to employee withholding tax in connection with the vesting of ~~restricted~~ stock ~~units. In addition, we paid $0.3 million on the Term Loan.~~

For the three months ended March 31, 2021, net cash used in financing activities was $11.8 million and was primarily due to the payment of employee withholding tax in connection with the vesting of restricted stock units.

awards.

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~~JPMorgan~~Availability and Use of Cash

Our ability to make investments in our business, service our debt and maintain strong 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 Revolving Credit Facility, will be adequate to support our ongoing operations, to fund debt service requirements, capital expenditures, lease obligations and working capital needs through the next twelve months of operations. However, we cannot ensure 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 Item 1A. Risk Factors includedin our 2022 Annual Report on Form 10-K.

~~On March 29, 2021, we~~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 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 ~~direct~~grow media and ~~indirect subsidiaries entered~~nutrient brands. We intend to reinvest the net cash proceeds into ~~a Senior Secured Revolving Credit Facility with JPMorgan Chase Bank, N.A.,~~certain permitted investments in 2023, such as ~~administrative agent, issuing bank~~capital expenditures.

If necessary, we believe that we could supplement our cash position through additional sale-leasebacks, asset sales and ~~swingline lender,~~equity financing. We believe it is prudent to be prepared if required and, the lenders from time-to-time party thereto. The JPMorgan Credit Facility replaced the Encina Credit Facility. The JPMorgan Credit Facility is due on the earlier of March 29, 2024, or any earlier date on which the revolving commitments are reducedaccordingly, continue to ~~zero.~~

~~The JPMorgan Credit Facility has been amended since its origination in connection with modifications to increase the borrowing limit and to consent to the Term Loan.~~

The three-year JPMorgan Credit Facility has a borrowing limit of $100 million subject to customary conditions. 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.

~~The JPMorgan Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants, including, in certain situations pursuant to terms outlined~~be engaged in the ~~agreement,~~process of evaluating and preparing to implement one or more of the maintenance of 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 March 31, 2022. As of March 31, 2022, the JPMorgan Obligors had approximately $99.7 million available to borrow under the JPMorgan Credit Facility.aforementioned activities.

~~The JPMorgan Credit Facility is secured by our assets and the assets of certain of our subsidiaries obligated under the 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 with JPMorgan Chase Bank, N.A., as administrative agent for ~~certain~~the 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 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.~~Date of October 25, 2028.

The Term Loan requires us to maintain certain reporting requirements, affirmative covenants, and negative ~~covenants, and we~~covenants. We were in compliance with all ~~requirements~~debt covenants as of March 31, ~~2022.~~ 2023. The Term Loan is secured by a first lien on ~~the~~our non-working capital assets ~~of the Company~~ and a second lien on ~~the~~our working capital assets. ~~We may request~~

Revolving Credit Facility

On March 29, 2021, we entered into the Revolving Credit Facility, which provided for a borrowing limit of $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 ~~term loan commitments subject~~$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,

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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 0.25% 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 ~~loan conditions.~~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 March 31, 2023. As of March 31, 2023, approximately $39 million was available to borrow under the undrawn Revolving Credit Facility, before the Company would be required to comply with the minimum fixed charge coverage ratio of 1.1x.

As of March 31, 2023, and December 31, 2022, the Company had zero borrowed under the Revolving Credit Facility.

Cash and cash equivalents

The cash and cash equivalents balances of $18.7 million and $21.3 million at March 31, 2023, and December 31, 2022, respectively, included $7.7 million and $7.3 million, respectively, held by foreign subsidiaries.

Material Cash Requirements

Our material cash requirements include interest payments on our long-term debt, operating lease payments, ~~the payment of contingent consideration~~ and purchase obligations to support our operations. Refer to Part I, Item 1, Financial Statements, Note ~~10 -~~9 – Debt, Note ~~7 -~~6 – ~~Operating~~ Leases, ~~Note 3 -~~ ~~Business Combinations~~ and Note 13 -– Commitments ~~Contingencies,~~ and ~~Related Party Transactions~~Contingencies for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, ~~contingent consideration,~~ and purchase obligations, respectively.

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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.

Critical Accounting Policies and Estimates

The preceding discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Our critical accounting policies and estimates are identified in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recently filed Form 10-K and include the discussion of estimates used in ~~business combinations,~~ goodwill and indefinite lived intangible assets, long-lived ~~assets.~~assets, and inventory valuation. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported. Goodwill is evaluated for impairment annually in the fourth quarter, or on an interim basis when an event occurs, or circumstances change that indicates the carrying value may not be recoverable. Such events or circumstances that may require an interim test for goodwill impairment include, but are not limited to, industry and market considerations, as well as Company financial performance. The Company did not identify a triggering event requiring a quantitative test for impairment for the three months ended March 31, 2022.

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ITEM 3. 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 March 31, ~~2022,~~2023, we had ~~$124.7~~$123.4 million of Term Loan debt that is subject to variable interest rates that are based on London interbank offered rate (“LIBOR”) or an alternate base rate. Refer to Part I, Item 1, Financial Statements, Note 9 – Debt for details relating to the debt.If ~~these~~the 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 March 31, 2023, our interest expense on the variable-rate debt would increase by an average of $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 LIBOR changes regularly. We do not currently hedge our interest rate risks, but may determine to do so in the future. See Item 1A, "Risk Factors" in our 2022 Annual Report —We may be adversely impacted by the transition from LIBOR to SOFR as a reference rate.

Foreign Currency Risk

The functional currencies of our foreign subsidiary operations are predominantly in the Canadian dollar (“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 that~~sell product in currencies different from the ~~exposure~~currency 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 product~~exchange 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. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. However, weWe cannot provide assurances that our results of operations and financial condition will not be materially impacted by inflation in the future.

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ITEM 4. 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”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 as of the end of the period covered by this Quarterly Report on Form 10-Q.

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.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. 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 1A. RISK FACTORS

For a discussion of risk factors, please read Item 1A, "Risk Factors" in our ~~2021~~2022 Annual ~~Report for the period ended December 31, 2021.~~Report. Such risk factors continue to be relevant to an understanding of our business, financial condition and operating results. As of the date of this Quarterly Report on Form 10-Q, there have been nothe following material changes with respect to such risk factors.

Failures at financial institutions at which we maintain or deposit funds, or at which parties with whom we conduct business maintain funds, could adversely affect us.

We deposit funds in financial institutions and may, from time to time, maintain cash balances at such financial institutions in excess of the ~~risk factors reported~~Federal Deposit Insurance Corporation ("FDIC") Limit of $250,000. Recently there has been significant volatility and instability among banks and financial institutions. For example, on March 10, 2023, Silicon Valley Bank, or SVB, was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver, and for a period of time, customers of the bank did not have access to their funds and there was uncertainty as to when, if at all, customers would have access to funds in excess of the ~~2021 Annual Report.~~FDIC insured amounts. Should a financial institution at which deposits are maintained fail, there is no guarantee as to the extent that we would recover the funds deposited, whether through FDIC coverage or otherwise, or the timing of any recovery. In addition, if any parties with whom we conduct business are unable to access funds pursuant to arrangements with their financial institution, such parties' ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

(a)Exhibits.


Exhibit						Description

10.1						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).
31.1*						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*#						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section ~~302~~906 of the Sarbanes-Oxley Act of 2002.
32.2*#						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section ~~302~~906 of the Sarbanes-Oxley Act of 2002.
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.

# The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-Q 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” 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 registrant 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.~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.


			Hydrofarm Holdings Group, Inc.

Date: May 10, ~~2022~~2023			/s/ William Toler
			William Toler
			Chief Executive Officer
			(Principal Executive Officer)




Date: May 10, ~~2022~~2023			/s/ B. John Lindeman
			B. John Lindeman
			Chief Financial Officer
			(Principal Financial Officer)

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	Heavy 16		H&G Entities		Aurora		Greenstar		IGE Entities
Component of Purchase Price:
Cash	$	60,287	$	133,483	$	133,962	$	85,121	$	49,129
Common stock	16,736		—		25,824		—		11,051
Contingent consideration	344		—		19,300		—		—
Forgiveness of assets and liabilities	—		—		(215)		(1,601)		722
Total purchase price	$	77,367	$	133,483	$	178,871	$	83,520	$	60,902

Acquisition-related costs	$	3,104	$	5,063	$	7,345	$	3,697	$	2,013

Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable	$	510	$	3,308	$	6,967	$	982	$	2,367
Inventories	1,451		6,559		11,031		8,728		30,592
Prepaid expenses and other current assets	34		493		1,086		447		470
Property, plant and equipment	1,078		358		37,991		1,717		4,274
Operating lease right-of-use assets	1,088		1,921		—		2,736		4,447
Other assets	25		213		—		176		—
Accounts payable	(1,055)		(1,320)		(4,360)		(777)		(21,686)
Accrued expenses and other current liabilities	(226)		(445)		(768)		(1,421)		(859)
Current portion of lease liabilities	(274)		(447)		—		(624)		(815)
Current portion of long-term debt	—		—		—		—		(482)
Long-term deferred tax liabilities	—		(25,589)		—		—		(5,531)
Long-term lease liabilities	(868)		(1,501)		—		(1,836)		(3,116)
Long-term debt	—		—		—		—		(1,434)
Other long-term liabilities	—		—		(3,840)		—		—
Net identifiable assets	1,763		(16,450)		48,107		10,128		8,227
Identifiable intangible assets
Other intangible assets	200		200		824		383		2,430
Customer relationships	5,100		12,500		6,400		18,100		6,300
Trademarks and trade names	18,500		31,400		59,100		9,100		14,000
Technology and formulations & recipes	33,600		56,200		18,000		2,800		3,800
Total identifiable intangible assets	57,400		100,300		84,324		30,383		26,530
Goodwill	18,204		49,633		46,440		43,009		26,145
Total purchase price allocation	$	77,367	$	133,483	$	178,871	$	83,520	$	60,902


	March 31, 2022						December 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Finite-lived intangible assets:
Computer software	$	8,929	$	(7,705)	$	1,224	$	8,814	$	(7,208)	$	1,606
Customer relationship	107,800		(19,440)		88,360		101,222		(16,517)		84,705
Technology, formulations and recipes	114,403		(8,026)		106,377		110,561		(3,630)		106,931
Trade names	132,110		(5,060)		127,050		—		—		—
Other	4,878		(3,679)		1,199		2,428		(1,744)		684
Total finite-lived intangible assets, net	368,120		(43,910)		324,210		223,025		(29,099)		193,926
Indefinite-lived intangible asset:
Trade names	2,801		—		2,801		120,773		—		120,773
Other	—		—		—		120		—		120
Total Intangible assets, net	$	370,921	$	(43,910)	$	327,011	$	343,918	$	(29,099)	$	314,819


	Operating
For the period of April 1, 2022 to December 31, 2022	$	7,003
Year ending December 31,
2023	9,311
2024	9,031
2025	8,338
2026	6,824
2027	6,369
Thereafter	14,208
Total rental payments	61,084
Less portion representing interest	(6,556)
Total principal	54,528
Less current portion	(7,773)
Long-term portion	$	46,755


Capital stock authorized and outstanding:	Shares authorized	Shares outstanding
Convertible preferred stock	50,000,000	—
Common stock	300,000,000	44,822,866