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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
OR
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)
Delaware81-4895761
(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 classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareHYFMThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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.


TABLE OF CONTENTS

TABLE OF CONTENTS

Page




TABLE OF CONTENTS
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.”


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.


TABLE OF CONTENTS
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,
20212020
Assets
Current assets:
Cash and cash equivalents$12,679 $75,178 
Restricted cash1,777 1,777 
Accounts receivable, net35,338 21,626 
Inventories163,354 88,618 
Notes receivable311 3,151 
Prepaid expenses and other current assets9,000 9,567 
Total current assets222,459 199,917 
Property and equipment, net26,652 3,988 
Operating lease right-of-use assets30,007 18,289 
Goodwill297,525  
Intangible assets, net199,014 52,421 
Other assets7,379 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 liabilities54,048 21,615 
Current portion of lease liabilities6,097 3,701 
Current portion of long-term debt27,213 746 
Total current liabilities118,569 48,700 
Long-term lease liabilities24,962 15,320 
Long-term debt467 290 
Deferred tax liabilities3,185  
Other long-term liabilities811 567 
Total liabilities147,994 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 capital765,946 364,248 
Accumulated other comprehensive (loss) income(1,438)599 
Accumulated deficit(129,470)(153,932)
Total stockholders’ equity635,042 210,918 
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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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
Three months ended September 30,Nine months ended September 30,
2021202020212020
Net sales$123,822 $96,658 $369,011 $254,763 
Cost of goods sold93,833 78,473 286,209 207,139 
Gross profit29,989 18,185 82,802 47,624 
Operating expenses:
Selling, general and administrative32,149 12,524 76,233 37,084 
Impairment, restructuring and other246 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:
Basic43,760,975 20,688,439 38,497,925 20,688,439 
Diluted46,288,075 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,
2021202020212020
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
SharesAmountSharesAmount
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
SharesAmountSharesAmount
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,
20212020
Operating activities
Net income $24,462 $2,125 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization8,638 5,170 
Stock-based compensation expense3,326 410 
Non-cash operating lease expense3,678 2,538 
Deferred income tax benefit(21,252) 
Amortization of inventory step-up of basis2,034  
Other1,361 601 
Changes in assets and liabilities:
Accounts receivable(1,740)(7,694)
Inventories(53,106)(29,730)
Prepaid expenses and other current assets2,350 (3,650)
Other assets(2,567)14 
Accounts payable1,828 18,145 
Accrued expenses and other current liabilities16,505 7,166 
Lease liabilities(3,118)(2,379)
Other long-term liabilities91 (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 costs309,781  
Proceeds from exercises of investor warrants56,779  
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 facilities96,970 213,621 
Repayments of long-term debt and revolving credit facilities(70,680)(213,709)
Other(509)(570)
Net cash provided by financing activities374,447 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 period76,955 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,
2021202020212020
United States$104,623 $83,415 $306,651 $212,706 
Canada21,268 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 
Canada6,252 716 
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 cash1,777 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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Hydrofarm Holdings Group, Inc.
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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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:
Components of Purchase Price:Amount
Cash$60,287 
Common stock16,736 
Contingent consideration344 
Total purchase price$77,367 
Acquisition-related costs$2,865 
Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable, net$510 
Inventories1,451 
Prepaid expenses and other current assets34 
Property and equipment, net1,078 
Operating lease right-of-use assets1,088 
Other assets25 
Accounts payable(1,055)
Accrued expenses and other current liabilities(226)
Current portion of lease liabilities(274)
Long-term lease liabilities(868)
Net identifiable assets1,763 
Identifiable intangible assets
Backlog200 
Customer relationships5,100 
Trademarks and trade names18,500 
Technology and formulations & recipes33,600 
Total identifiable intangible assets57,400 
Goodwill18,204 
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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Hydrofarm Holdings Group, Inc.
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 
Inventories6,559 
Prepaid expenses and other current assets493 
Property and equipment, net358 
Operating lease right-of-use assets1,921 
Other assets213 
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
Backlog200 
Customer relationships11,600 
Trademarks and trade names29,100 
Technology and formulations & recipes53,600 
Total identifiable intangible assets94,500 
Goodwill55,876 
Total purchase price allocation$135,041 
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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)


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.
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.
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.

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 $19,300.

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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 Aurora:

Components of Purchase Price:Amount
Cash$135,371 
Common stock25,824 
Contingent consideration19,300 
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 
Inventories9,823 
Prepaid expenses and other current assets1,086 
Property and equipment, net18,619 
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 assets5 
Total identifiable intangible assets5 
Goodwill149,505 
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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Hydrofarm Holdings Group, Inc.
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$982 
Inventories7,089 
Prepaid expenses and other current assets447 
Property and equipment, net1,324 
Operating lease right-of-use assets2,393 
Other assets231 
Accounts payable(777)
Accrued expenses and other current liabilities(1,436)
Current portion of lease liabilities(624)
Long-term lease liabilities(1,836)
Net identifiable assets7,793 
Identifiable intangible assets
Other intangible assets247 
Total identifiable intangible assets247 
Goodwill75,578 
Total purchase price allocation$