SEC Filing | Hydrofarm

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hyfm-20210930

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 September 30, 2021


☐			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)

270 Canal Road

Fairless Hills, Pennsylvania 19030

(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 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 November 2, 2021, the registrant had 44,519,302 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	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	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	45

Part II - Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
	Signatures	48

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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:

•general economic and financial conditions, specifically in the U.S. and Canada;

•the adverse effects of public health epidemics, including the recent COVID-19 outbreak, on our business, results of operations and financial condition;

•federal and state legislation and regulations pertaining to the use and cultivation of cannabis in the U.S., and such laws and regulations in Canada;

•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 of breach of our information technology systems;

•our current level of indebtedness;

•our dependence on third parties;

•the performance of third parties on which we depend;

•the fluctuation in the prices of the products we distribute;

•competitive industry pressures;

•the consolidation of our industry;

• compliance with environmental, health and safety laws;

•our ability to protect and defend against litigation, including claims related to intellectual property and proprietary rights;

•product shortages and relationships with key suppliers;

•the conditions impacting our customers, including related crop prices and other factors impacting growers;

•our ability to attract 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.”

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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.

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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)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	12,679	$	75,178
Restricted cash	1,777		1,777
Accounts receivable, net	35,338		21,626
Inventories	163,354		88,618
Notes receivable	311		3,151
Prepaid expenses and other current assets	9,000		9,567
Total current assets	222,459		199,917
Property and equipment, net	26,652		3,988
Operating lease right-of-use assets	30,007		18,289
Goodwill	297,525		—
Intangible assets, net	199,014		52,421
Other assets	7,379		1,180
Total assets	$	783,036	$	275,795
Liabilities, convertible preferred stock and stockholders’ equity
Current liabilities:
Accounts payable	$	31,211	$	22,638
Accrued expenses and other current liabilities	54,048		21,615
Current portion of lease liabilities	6,097		3,701
Current portion of long-term debt	27,213		746
Total current liabilities	118,569		48,700
Long-term lease liabilities	24,962		15,320
Long-term debt	467		290
Deferred tax liabilities	3,185		—
Other long-term liabilities	811		567
Total liabilities	147,994		64,877
Commitments and contingencies (Note 13)
Convertible preferred stock ($0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020)	—		—
Stockholders’ equity
Common stock ($0.0001 par value; 300,000,000 shares authorized; 44,099,239 and 33,499,953 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively)	4		3
Additional paid-in capital	765,946		364,248
Accumulated other comprehensive (loss) income	(1,438)		599
Accumulated deficit	(129,470)		(153,932)
Total stockholders’ equity	635,042		210,918
Total liabilities, convertible preferred stock and stockholders’ equity	$	783,036	$	275,795

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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net sales	$	123,822	$	96,658	$	369,011	$	254,763
Cost of goods sold	93,833		78,473		286,209		207,139
Gross profit	29,989		18,185		82,802		47,624
Operating expenses:
Selling, general and administrative	32,149		12,524		76,233		37,084
Impairment, restructuring and other	246		184		262		276
(Loss) income from operations	(2,406)		5,477		6,307		10,264
Interest expense	(132)		(2,549)		(276)		(7,858)
Loss on debt extinguishment	—		—		(680)		—
Other (expense) income, net	(41)		(223)		86		103
(Loss) income before tax	(2,579)		2,705		5,437		2,509
Income tax benefit (expense)	19,844		(54)		19,025		(384)
Net income	17,265		2,651		24,462		2,125
Cumulative dividends allocated to Series A Convertible Preferred Stock	—		(682)		—		(1,990)
Net income attributable to common stockholders	$	17,265	$	1,969	$	24,462	$	135


Net income per share attributable to common stockholders:
Basic	$	0.39	$	0.09	$	0.64	$	0.01
Diluted	$	0.37	$	0.08	$	0.58	$	0.01
Weighted-average shares of common stock outstanding:
Basic	43,760,975		20,688,439		38,497,925		20,688,439
Diluted	46,288,075		21,111,975		42,494,624		20,892,507

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 INCOME (UNAUDITED)

(In thousands)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net income	17,265		2,651		$	24,462	$	2,125
Other comprehensive (loss) income:
Foreign currency translation (loss) gain	(2,640)		389		(2,037)		(246)
Total comprehensive income	$	14,625	$	3,040	$	22,425	$	1,879

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 CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except for share amounts)


	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance, June 30, 2020	7,725,045	$	26,902	20,688,439	$	2	$	155,036	$	(779)	$	(147,185)	$	7,074
Stock-based compensation expense	—	—		—	—		245		—		—		245
Series A Convertible Preferred Stock cumulative dividend	—	682		—	—		(682)		—		—		(682)
Net income	—	—		—	—		—		—		2,651		2,651
Foreign currency translation gain	—	—		—	—		—		389		—		389
Balance, September 30, 2020	7,725,045	$	27,584	20,688,439	$	2	$	154,599	$	(390)	$	(144,534)	$	9,677
Balance, June 30, 2021	—	$	—	41,296,585	$	4	$	707,690	$	1,202	$	(146,735)	$	562,161
Common stock issued upon exercise of options	—	—		23,464	—		198		—		—		198
Issuance of common stock for vesting of restricted stock units	—	—		287,236	—		—		—		—		—
Shares repurchased for withholding tax on restricted stock units	—	—		(57,709)	—		(2,984)		—		—		(2,984)
Issuance of common stock under cashless warrant exercise	—	—		77,047	—		—		—		—		—
Issuance of common stock under investor warrant exercise	—	—		2,016,117	—		33,992		—		—		33,992
Issuance of common stock in connection with business combination	—	—		456,499	—		25,824		—		—		25,824
Stock-based compensation expense	—	—		—	—		1,226		—		—		1,226
Net income	—	—		—	—		—		—		17,265		17,265
Foreign currency translation loss	—	—		—	—		—		(2,640)		—		(2,640)
Balance, September 30, 2021	—	$	—	44,099,239	$	4	$	765,946	$	(1,438)	$	(129,470)	$	635,042

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 CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except for share amounts)


	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance, January 1, 2020	7,007,429	$	21,802	20,688,439	$	2	$	156,179	$	(144)	$	(146,659)	$	9,378
Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $169	717,616	2,342		—	—		—		—		—		—
Collection of receivable for issuance of Series A Convertible Preferred Stock	—	1,450		—	—		—		—		—		—
Stock-based compensation expense	—	—		—	—		410		—		—		410
Series A Convertible Preferred Stock cumulative dividend	—	1,990		—	—		(1,990)		—		—		(1,990)
Net income	—	—		—	—		—		—		2,125		2,125
Foreign currency translation loss	—	—		—	—		—		(246)		—		(246)
Balance, September 30, 2020	7,725,045	$	27,584	20,688,439	$	2	$	154,599	$	(390)	$	(144,534)	$	9,677
Balance, January 1, 2021	—	$	—	33,499,953	$	3	$	364,248	$	599	$	(153,932)	$	210,918
Common stock issued upon exercise of options	—	—		125,411	—		1,057		—		—		1,057
Issuance of common stock for vesting of restricted stock units	—	—		652,983	—		—		—		—		—
Shares repurchased for withholding tax on restricted stock units	—	—		(204,369)	—		(11,805)		—		—		(11,805)
Issuance of common stock under cashless warrant exercise	—	—		418,309	—		—		—		—		—
Issuance of common stock under investor warrant exercise	—	—		3,367,647	—		56,779		—		—		56,779
Issuance of common stock in connection with follow-on public offering, net of offering costs of $16,303	—	—		5,526,861	1		309,781		—		—		309,782
Issuance of common stock in connection with business combination	—	—		712,444	—		42,560		—		—		42,560
Stock-based compensation expense	—	—		—	—		3,326		—		—		3,326
Net income					—		—		—		24,462		24,462
Foreign currency translation loss	—	—		—	—		—		(2,037)		—		(2,037)
Balance, September 30, 2021	—	$	—	44,099,239	$	4	$	765,946	$	(1,438)	$	(129,470)	$	635,042

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)


	Nine months ended September 30,
	2021		2020
Operating activities
Net income	$	24,462	$	2,125
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	8,638		5,170
Stock-based compensation expense	3,326		410
Non-cash operating lease expense	3,678		2,538
Deferred income tax benefit	(21,252)		—
Amortization of inventory step-up of basis	2,034		—
Other	1,361		601
Changes in assets and liabilities:
Accounts receivable	(1,740)		(7,694)
Inventories	(53,106)		(29,730)
Prepaid expenses and other current assets	2,350		(3,650)
Other assets	(2,567)		14
Accounts payable	1,828		18,145
Accrued expenses and other current liabilities	16,505		7,166
Lease liabilities	(3,118)		(2,379)
Other long-term liabilities	91		(493)
Net cash used in operating activities	(17,510)		(7,777)
Investing activities
Business Combinations, net of cash and cash equivalents acquired	(415,918)		—
Purchases of property and equipment	(3,069)		(700)
Proceeds from notes receivable	—		2,000
Other	(420)		28
Net cash (used in) provided by investing activities	(419,407)		1,328
Financing activities
Proceeds from issuance of common stock upon follow-on public offering, net of offering costs	309,781		—
Proceeds from exercises of investor warrants	56,779		—
Payment of withholding tax related to restricted stock units	(17,894)		—
Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs	—		3,792
Borrowings from PPP Loan	—		3,274
Borrowings under revolving credit facilities	96,970		213,621
Repayments of long-term debt and revolving credit facilities	(70,680)		(213,709)
Other	(509)		(570)
Net cash provided by financing activities	374,447		6,408
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(29)		39
Net decrease in cash, cash equivalents and restricted cash	(62,499)		(2)
Cash, cash equivalents and restricted cash at beginning of period	76,955		32,857
Cash, cash equivalents and restricted cash at end of period	$	14,456	$	32,855

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 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 in 1977. The Company is a leading distributor and manufacturer of controlled environment agriculture (“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.

Follow-on public offering

On May 3, 2021, the Company closed its follow-on public offering ("follow-on offering") under a registration statement effective April 28, 2021, in which it issued and sold 5,526,861 shares of its common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of common stock. The public offering price was $59.00 per share. The Company received net proceeds of approximately $309.8 million from the follow-on offering after deducting underwriting discounts and commissions and offering expenses.

Initial public offering

On December 14, 2020, the Company closed its initial public offering (“IPO”) under a registration statement effective December 9, 2020, in which it issued and sold 9,966,667 shares of its common stock, including the full exercise by the underwriters of their option to purchase 1,300,000 additional shares of common stock. The public offering price was $20.00 per share. The Company received net proceeds of approximately $182.3 million from the IPO 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 recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of December 31, 2020 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 ("2020 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 2020 Annual Report.

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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)

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, 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, 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) 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 an asset or liability are included in net income (loss) in the period. Changes in the fair value of contingent consideration classified as equity are not recognized.

For a given acquisition, the Company may identify certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess these contingencies as part of acquisition accounting, as applicable.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non‑controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquire (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).

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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)

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 two operating segments, the U.S. and Canada, which meet the criteria for aggregation, and the Company has elected to present them as one reportable segment, which is the distribution and manufacture of CEA equipment and supplies. Aggregation is based on similarities which include the nature of its products, production or acquisition of inventory, customer base, fulfillment and distribution and economic characteristics.

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

Entity-wide information

Sales to external customers and property and equipment, net in the United States and Canada, determined by the location of the subsidiaries, were as follows:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
United States	$	104,623	$	83,415	$	306,651	$	212,706
Canada	21,268		13,967		67,364		44,352
Intersegment eliminations	(2,069)		(724)		(5,004)		(2,295)
Total consolidated net sales	$	123,822	$	96,658	$	369,011	$	254,763


	September 30, 2021		December 31, 2020
United States	$	20,400	$	3,272
Canada	6,252		716
Total property and equipment, net	$	26,652	$	3,988

All of the products sold by the Company are similar and classified as CEA equipment and supplies. The Company’s underlying accounting records currently do not support presentation of disaggregated net sales and any attempt to report them would be impracticable.

Cash, cash equivalents and restricted cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the consolidated statements of cash flows.


	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	12,679	$	75,178
Restricted cash	1,777		1,777
Cash and cash equivalents, and restricted cash	$	14,456	$	76,955

Cash and cash equivalents and restricted cash as of September 30, 2020 were $31,078 and $1,777, respectively, for total cash, cash equivalents and restricted cash as of September 30, 2020 of $32,855.

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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)

Revenue recognition

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 controlled environment agriculture equipment and supplies. Inventory is maintained in regional distribution centers. Payment terms are primarily at the point of sale or due within thirty days.

The amount billed to customers for shipping and handling costs included in net sales was $2,242 and $5,170 during the three and nine months ended September 30, 2021, respectively, and $1,131 and $3,475 during the three and nine months ended September 30, 2020, respectively. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs included in cost of goods sold under the practical expedient provisions of ASC 606. Deferred revenues are not material. The Company does not receive noncash consideration for the sale of goods. There are no significant financing components. Excluded from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed on and concurrent with revenue-generating activities under the practical expedient provisions.

Income taxes—interim tax provision

The income tax provision is calculated for an interim period by distinguishing between elements recognized in the income tax provision through applying an estimated annual effective tax rate (the “ETR”) 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 for each interim period is the difference between the year-to-date amount for the current period and the year-to-date amount for the prior period. Under FASB ASC 740-270-30-36, entities subject to income taxes in multiple jurisdictions should apply one overall ETR instead of separate ETRs for each jurisdiction when calculating the interim-period income tax or benefit related to consolidated ordinary income (or loss) for the year-to-date interim period, except in certain circumstances.

The Company recorded a tax benefit of $19,844 and $19,025 for the three and nine months ended September 30, 2021, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2021 differ 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. In connection with the acquisition of shares of the H&G Entities (as defined below), the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets (see Note 3 - Business Combinations). As a result, a portion of the Company's valuation allowance was released and the Company recorded a $21,252 tax benefit for the three and nine months ended September 30, 2021. The tax benefit is 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 $54 and $384 for the three and nine months ended September 30, 2020, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2020 differ 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. The tax expense for the three and nine months ended September 30, 2020 was primarily due to foreign and state income tax expense.

Fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has applied the framework for measuring fair value which requires a fair value hierarchy to be applied to all fair value measurements. All financial instruments recognized at fair value are classified into one of three levels in the fair value hierarchy as follows:

Level 1 — Valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities.

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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)

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 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 using level 2 inputs. The fair value of contingent consideration is classified within level 3 of the fair value hierarchy (See discussion of contingent consideration in Note 3 - Business Combinations).

Recently issued accounting pronouncements

Adopted in 2021

In October 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-10, Codification Improvements. The amendments improve the codification by having all disclosure-related guidance available in the disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to the codification that are not expected to have a significant effect on current accounting practice. The amendments are effective for annual periods beginning after December 15, 2020 and early adoption is permitted. The Company early adopted the standard effective January 1, 2021 with no impact on the condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The amendments are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company early adopted the standard effective January 1, 2021 with no impact on the condensed consolidated financial statements.

Accounting standards not yet effective

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), with additional amendments issued subsequently. Topic 326 changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of Topic 326 will have on its condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

3. BUSINESS COMBINATIONS

Heavy 16 Acquisition

On May 3, 2021, the Company acquired 100% of the issued and outstanding membership interests of Field 16, LLC ("Heavy 16"), a manufacturer and supplier of branded plant nutritional products. As a result of the acquisition, the Company is broadening its proprietary branded offering into the plant nutrients category complementing other product offerings. The acquisition fair value of the consideration transferred for Heavy 16 was $77,367, consisting of $60,287 in cash, $16,736 of the Company's common stock and $344 contingent consideration. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The financial results of Heavy 16 are included in the U.S. operating segment since the acquisition date.

Pursuant to the purchase agreement, the Company may pay up to an additional $2,500 of contingent consideration based on $200 for each $1,000 above a $21,000 threshold for net sales in calendar year 2021. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $344 as of the acquisition date in the 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, including estimated financial forecasts. The key assumptions in applying the valuation model were as follows: a 10% required revenue metric risk premium and 0.33% discount periods. The contingent consideration was divided into thirteen standalone option calculations and utilized the same expected value of revenue which was calculated by discounting forecasted sales, by the revenue return metric, and adding year-to-date net sales.

The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved with changes in fair value being recognized within selling, general and administrative expense in the condensed consolidated statements of operations. As of September 30, 2021, the related contingent consideration was $218.

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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:


Components of Purchase Price:	Amount
Cash	$	60,287
Common stock	16,736
Contingent consideration	344
Total purchase price	$	77,367

Acquisition-related costs	$	2,865

Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable, net	$	510
Inventories	1,451
Prepaid expenses and other current assets	34
Property and equipment, net	1,078
Operating lease right-of-use assets	1,088
Other assets	25
Accounts payable	(1,055)
Accrued expenses and other current liabilities	(226)
Current portion of lease liabilities	(274)
Long-term lease liabilities	(868)
Net identifiable assets	1,763
Identifiable intangible assets
Backlog	200
Customer relationships	5,100
Trademarks and trade names	18,500
Technology and formulations & recipes	33,600
Total identifiable intangible assets	57,400
Goodwill	18,204
Total purchase price allocation	$	77,367

Goodwill arose on the acquisition of Heavy 16 because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets. The amount of goodwill is fully deductible for tax purposes.

The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 18 years. Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period as the Company's fair value assessments are finalized.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

House & Garden Acquisition

On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of capital stock of House & Garden, Inc. (“HG”), Humboldt Wholesale, Inc. (“HW”), Allied Imports & Logistics, Inc. (“Allied”), South Coast Horticultural Supply, Inc. (“SC” and, together with HG, HW and Allied, the “H&G Entities”), a manufacturer and distributor of plant nutrients and fertilizers to domestic and various international markets. As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients category complementing other product offerings. The acquisition date fair value of the consideration transferred for the H&G Entities was $135,041 in cash. The financial results of the H&G Entities are included in the U.S. operating segment since the acquisition date.

The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of the H&G Entities:


Component of Purchase Price:	Amount
Cash	$	135,041
Total purchase price	$	135,041

Acquisition-related costs	$	6,527

Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable, net	$	3,308
Inventories	6,559
Prepaid expenses and other current assets	493
Property and equipment, net	358
Operating lease right-of-use assets	1,921
Other assets	213
Accounts payable	(1,320)
Accrued expenses and other current liabilities	(481)
Current portion of lease liabilities	(447)
Deferred taxes	(24,438)
Long-term lease liabilities	(1,501)
Net identifiable assets	(15,335)
Identifiable intangible assets
Backlog	200
Customer relationships	11,600
Trademarks and trade names	29,100
Technology and formulations & recipes	53,600
Total identifiable intangible assets	94,500
Goodwill	55,876
Total purchase price allocation	$	135,041

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Goodwill arose on the acquisition of the H&G Entities because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets. The amount of goodwill is not deductible for 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 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 is further broadening its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Aurora was $180,280, consisting of $135,371 in cash, $25,824 of the Company's common stock, $19,300 contingent consideration less $215 forgiveness of accounts payable. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The forgiveness of accounts payable represents an effective settlement of a preexisting relationship between the parties. The financial results of Aurora are included in the U.S. operating segment since the acquisition date.

Pursuant to the purchase agreement, the Company may pay a maximum contingent consideration equal to $70,997. To the extent 2021 EBITDA of Aurora exceeds $15,556, the excess is multiplied by eleven to determine contingent consideration. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $19,300 as of the acquisition date in the 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 is based on significant inputs that are not observable in the market, which ASC 820 - Fair Value Measurements refers to as a Level 3 input.

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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 Aurora:


Components of Purchase Price:	Amount
Cash	$	135,371
Common stock	25,824
Contingent consideration	19,300
Forgiveness of accounts payable	(215)
Total purchase price	$	180,280

Acquisition-related costs	$	6,063

Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable, net	$	6,967
Inventories	9,823
Prepaid expenses and other current assets	1,086
Property and equipment, net	18,619
Accounts payable	(4,279)
Accrued expenses and other current liabilities	(782)
Other long-term liabilities	(664)
Net identifiable assets	$	30,770
Identifiable intangible assets
Other intangible assets	5
Total identifiable intangible assets	5
Goodwill	149,505
Total purchase price allocation	$	180,280

The Company is in the process of obtaining third-party valuations of certain tangible and intangible assets, including asset retirement obligations; thus, the provisional measurement of goodwill is subject to change. The amount of goodwill is fully deductible for tax purposes.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Greenstar/Grotek Acquisition

On August 3, 2021, the Company acquired 100% of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of horticultural products and solutions for global, domestic and commercial use. As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Greenstar was $83,618, consisting of $85,219 in cash, less $1,601 forgiveness of accounts payable, net, and obligations due under a distribution agreement. The forgiveness of accounts payable, net, and obligations due under a distribution agreement represent an effective settlement of a preexisting relationship between the parties. The financial results of Greenstar are included in the Canada operating segment since the acquisition date.

The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of Greenstar:


Components of Purchase Price:	Amount
Cash	$	85,219
Forgiveness of accounts payable, net, and obligations due under a distribution agreement	(1,601)
Total purchase price	$	83,618

Acquisition-related costs	$	2,946

Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable, net	$