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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 March 31, 2022
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)
1510 Main Street
Shoemakersville, Pennsylvania 19526
(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 April 28, 2022, the registrant had 44,868,669 shares of common stock, $0.0001 par value per share, outstanding.


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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 United States and Canada;
the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial condition;
interruptions in our supply chain;
federal and state legislation and regulations pertaining to the use and cultivation of cannabis in the United States and Canada;
public perceptions and acceptance of cannabis use;
fluctuations in the price of various crops and other factors affecting growers;
the results of our recent acquisitions and strategic alliances;
our ability to execute our e-commerce business;
the costs of being a public company;
our ability to keep pace with technological advances;
our ability to successfully identify appropriate acquisition targets, successfully acquire identified targets or successfully integrate the business of acquired companies;
the success of our marketing activities;
a disruption of breach of our information technology systems;
our current level of indebtedness;
our dependence on third parties;
any change to our reputation or to the reputation of our products;
the performance of third parties on which we depend;
the fluctuation in the prices of the products we distribute;
competitive industry pressures;
the consolidation of our industry;
compliance with environmental, health and safety laws;
our ability to protect and defend against litigation, including claims related to intellectual property and proprietary rights;
product shortages and relationships with key suppliers;
the conditions impacting our customers, including related crop prices and other factors impacting growers;
our ability to attract 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.
“Hydrofarm” and other trade names and trademarks of ours appearing in this Quarterly Report on Form 10-Q are our property. This Quarterly Report on Form 10-Q contains trade names and trademarks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q to the terms “Hydrofarm”, “the Company,” “we,” “our” and “us” refer to Hydrofarm Holdings Group, Inc. and its subsidiaries.



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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
March 31,December 31,
20222021
Assets
Current assets:
Cash and cash equivalents$12,157 $26,607 
Restricted cash1,777 1,777 
Accounts receivable, net45,319 41,484 
Inventories189,996 189,134 
Notes receivable475 622 
Prepaid expenses and other current assets11,312 9,760 
Total current assets261,036 269,384 
Property, plant and equipment, net51,349 50,473 
Operating lease right-of-use assets54,566 45,245 
Goodwill183,338 204,868 
Intangible assets, net327,011 314,819 
Other assets4,170 6,453 
Total assets$881,470 $891,242 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$36,374 $26,685 
Accrued expenses and other current liabilities31,549 33,996 
Deferred revenue10,887 18,273 
Current portion of lease liabilities7,773 7,198 
Current portion of long-term debt2,298 2,263 
Total current liabilities88,881 88,415 
Long-term lease liabilities46,755 38,595 
Long-term debt119,194 119,517 
Deferred tax liabilities6,575 5,631 
Other long-term liabilities4,608 3,904 
Total liabilities266,013 256,062 
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock ($0.0001 par value; 300,000,000 shares authorized; 44,822,866 and 44,618,357 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively)
4 4 
Additional paid-in capital778,463 777,074 
Accumulated other comprehensive income (loss)802 (1,382)
Accumulated deficit(163,812)(140,516)
Total stockholders’ equity615,457 635,180 
Total liabilities and stockholders’ equity$881,470 $891,242 
The accompanying notes are an integral part of the condensed consolidated financial statements.
1

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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
Three months ended March 31,
20222021
Net sales$111,377 $111,389 
Cost of goods sold94,771 88,166 
Gross profit16,606 23,223 
Operating expenses:
Selling, general and administrative43,003 16,841 
(Loss) income from operations(26,397)6,382 
Interest expense(2,366)(90)
Loss on debt extinguishment (680)
Other (expense) income, net(102)84 
(Loss) income before tax(28,865)5,696 
Income tax benefit (expense)5,569 (756)
Net (loss) income$(23,296)$4,940 
Net (loss) income per share:
Basic$(0.52)$0.15 
Diluted$(0.52)$0.13 
Weighted-average shares of common stock outstanding:
Basic44,718,510 33,717,103 
Diluted44,718,510 38,997,031 
The accompanying notes are an integral part of the condensed consolidated financial statements.
2

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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
Three months ended March 31,
20222021
Net (loss) income$(23,296)$4,940 
 Other comprehensive (loss) income:
    Foreign currency translation gain2,184 223 
      Total comprehensive (loss) income$(21,112)$5,163 
The accompanying notes are an integral part of the condensed consolidated financial statements.
3

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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except for share amounts)
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
 (Loss) Income
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance, January 1, 2021
33,499,953 $3 $364,248 $599 $(153,932)$210,918 
Common stock issued upon exercise of options32,272  272   272 
Issuance of common stock for vesting of restricted stock units214,324      
Shares repurchased for withholding tax on restricted stock units(88,360) (5,506)  (5,506)
Issuance of common stock under cashless warrant exercise312,175      
Stock-based compensation expense  1,001   1,001 
Net income    4,940 4,940 
Foreign currency translation gain   223  223 
Balance, March 31, 2021
33,970,364 $3 $360,015 $822 $(148,992)$211,848 
Balance, January 1, 2022
44,618,357 $4 $777,074 $(1,382)$(140,516)$635,180 
Common stock issued upon exercise of options 7,765  70   70 
Issuance of common stock for vesting of restricted stock units278,002      
Shares repurchased for withholding tax on restricted stock units(81,357) (1,589)  (1,589)
Issuance of common stock under cashless warrant exercise99      
Stock-based compensation expense  2,908   2,908 
Net loss    (23,296)(23,296)
Foreign currency translation gain   2,184  2,184 
Balance, March 31, 2022
44,822,866 $4 $778,463 $802 $(163,812)$615,457 
The accompanying notes are an integral part of the condensed consolidated financial statements.
4

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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended March 31,
20222021
Operating activities
Net (loss) income$(23,296)$4,940 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, depletion and amortization16,941 1,591 
Provision for inventory obsolescence3,229 16 
Stock-based compensation expense2,908 1,001 
Non-cash operating lease expense2,261 958 
Impairment charges2,756  
Change in fair value of contingent consideration(1,560) 
Deferred income tax benefit(4,586) 
Other258 624 
Changes in assets and liabilities:
Accounts receivable(6,834)(11,554)
Inventories(143)(7,496)
Prepaid expenses and other current assets(2,315)(3,970)
Other assets(90)(414)
Accounts payable10,454 14,398 
Accrued expenses and other current liabilities(1,208)(1,840)
Deferred revenue(7,159)(66)
Lease liabilities(1,750)(826)
Other long-term liabilities(21) 
Net cash used in operating activities(10,155)(2,638)
Investing activities
Business combinations, net of cash and cash equivalents 190  
Purchases of property, plant and equipment(2,470)(428)
Other(105)(17)
Net cash used in investing activities(2,385)(445)
Financing activities
Borrowings under revolving credit facilities420 52,344 
Repayments of revolving credit facilities(397)(52,250)
Repayments of long-term debt Term Loan(313) 
Payment of withholding tax related to restricted stock units(1,559)(11,595)
Other(104)(326)
Net cash used in financing activities(1,953)(11,827)
Effect of exchange rate changes on cash, cash equivalents and restricted cash43 (4)
Net decrease in cash, cash equivalents and restricted cash(14,450)(14,914)
Cash, cash equivalents and restricted cash at beginning of period28,384 76,955 
Cash, cash equivalents and restricted cash at end of period$13,934 $62,041 
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 independent manufacturer and distributor 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.
Initial public offering and follow-on public offering
On December 14, 2020, the Company closed its initial public offering (“IPO”) under a registration statement effective December 9, 2020, in which it issued and sold 9,966,667 shares of its common stock, including the full exercise by the underwriters of their option to purchase 1,300,000 additional shares of common stock. The public offering price was $20.00 per share. The Company received net proceeds of $182,271 from the IPO after deducting underwriting discounts and commissions and offering expenses, of which $148 of offering expenses were paid in 2021.
On May 3, 2021, the Company closed its follow-on public offering ("follow-on offering") under a registration statement effective April 28, 2021, in which it issued and sold 5,526,861 shares of its common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of common stock. The public offering price was $59.00 per share. The Company received net proceeds of approximately $309,782 from the follow-on offering after deducting underwriting discounts and commissions and offering expenses.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company's annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal 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, 2022, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation. The Company reclassified the balance within "Impairment, restructuring and other" on the condensed consolidated statements of operations for the prior period into "Selling, general and administrative expenses" to conform to the current period presentation. The Company reclassified the balance of customer deposits previously reported in "accounts payable" into "deferred revenue" in the condensed consolidated balance sheet as of December 31, 2021 to conform to the current period presentation. The amount totaled $18,273 as of December 31, 2021.
The condensed consolidated balance sheet as of December 31, 2021, 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 ("2021 Annual Report"). These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the 2021 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, estimated useful lives of long lived assets, incremental borrowing rate applied in lease accounting, valuation of stock-based compensation, recognition of deferred income taxes, recognition of liabilities related to commitments and contingencies and valuation allowances. Actual results may differ from these estimates. On an ongoing basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or new information available.
Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred, 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 a 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 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, plant and equipment, net in the United States and Canada, determined by the location of the subsidiaries, were as follows:
Three months ended March 31,
20222021
United States$92,858 $90,672 
Canada21,502 22,264 
Intersegment eliminations(2,983)(1,547)
Total consolidated net sales$111,377 $111,389 
March 31,
2022
December 31,
2021
United States$87,121 $85,167 
Canada18,794 10,551 
Total property, plant and equipment, and operating lease right-of-use assets, net$105,915 $95,718 
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.
Note receivable

In 2019, the Company executed a note receivable secured by equipment to a third-party, the terms of which were amended and restated during the first quarter of 2021. The note receivable provided for interest and installment payments to the Company, and full maturity of the note in 2024. During the three months ended March 31, 2022, the third-party defaulted on interest payments, and the Company measured an impairment on the note receivable based on the estimated fair value of the collateral. The Company recorded an impairment loss of $2,636 during the three months ended March 31, 2022, in “Selling, general and administrative expenses” ("SG&A") on the condensed consolidated statements of operations. As of March 31, 2022, the note receivable carrying value was $475.
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
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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)


by economic factors. The Company has determined that revenue is generated from one category, which is the distribution and manufacture of controlled environment agriculture equipment and supplies.
Revenue is recognized as control of promised goods is transferred to customers which generally occurs upon receipt at customers’ locations determined by the specific terms of the contract. Arrangements generally have a single performance obligation and revenue reported is comprised of fixed consideration and variable consideration which includes applicable volume rebates, cash discounts and sales returns and allowances. Variable consideration is estimated and recorded at the time of sale; these allowances and accruals are not material to the financial statements.
The amount billed to customers for shipping and handling costs included in net sales was $3,879 and $1,245 for the three months ended March 31, 2022, and 2021, respectively. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs included in cost of goods sold. The Company does not receive noncash consideration for the sale of goods. Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company's contract liabilities, which consist primarily of customer deposits are reported within deferred revenue in the condensed consolidated balance sheets, totaled $10,887 and $18,273 as of March 31, 2022, and December 31, 2021, respectively. There are no significant financing components. Excluded from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed on and concurrent with revenue-generating activities.
Income taxes—interim tax provision

The Company recorded an income tax benefit of $5,569 for the three months ended March 31, 2022, representing an effective income tax rate of 19.3%. The Company’s effective income tax rate for the three months ended March 31, 2022, differs from the federal statutory rate of 21% primarily as a result of a reduction in the valuation allowance recorded against the Company's net deferred tax assets, due to the acquisition of the IGE Entities (as defined below) which had an income tax rate benefit of 23.4%. In addition, as described in Note 3 - Business Combinations, the Company determined that the preliminary allocation of assets acquired related to indefinite lived trade names have a finite useful life because the expected usefulness of the trade names is limited. As a result of adjusting this provisional amount, the Company recorded a reduction to the valuation allowance, which resulted in an income tax rate benefit of 6.1%. These income tax benefits totaled $8,543, and were partially offset by income taxes from certain foreign jurisdictions where the Company conducts business and state minimum income taxes in the United States.
The Company recorded a tax expense of $756 for the three months ended March 31, 2021. The Company’s effective tax rates for the three months ended March 31, 2021, differs from the federal statutory rate of 21% primarily as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforwards.
Recent accounting pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the FASB. There were no ASUs that were assessed and determined to be applicable or expected to have a material impact on our condensed consolidated financial statements.
3. BUSINESS COMBINATIONS

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

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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)


During the three months ended March 31, 2022, the Company evaluated and adjusted the useful lives of certain intangible assets associated with entities that were acquired during 2021. In addition, the Company determined that the preliminary allocation of assets acquired related to indefinite lived trade names have a finite useful life because the expected usefulness of the trade names is limited. As a result of these adjustments to the provisional amounts, the Company recorded $5,894 of additional amortization expense during the three months ended March 31, 2022, that related to amortization expense that would have been recorded in the previous reporting period from the acquisition date through December 31, 2021. The intangible assets were assigned estimated useful lives as follows: (i) customer relationships: 7 to 12 years, (ii) technology, formulations and recipes: 8 to 12 years, and (iii) trade names: 15 to 20 years.

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

Pursuant to the purchase agreement, the Company was required to pay up to an additional $2,500 of contingent consideration based on $200 for each $1,000 above a $21,000 threshold for net sales in calendar year 2021. As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $344 as of the acquisition date in the condensed consolidated balance sheets. The contingent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements. The contingent consideration was $200 as of December 31, 2021 and March 31, 2022, and was paid in April 2022. The amount of goodwill is fully deductible for tax purposes.
House & Garden Acquisition
On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of capital stock of House & Garden, Inc. (“HG”), Humboldt Wholesale, Inc. (“HW”), Allied Imports & Logistics, Inc. (“Allied”), South Coast Horticultural Supply, Inc. (“SC” and, together with HG, HW and Allied, the “H&G Entities”), a manufacturer and distributor of plant nutrients and fertilizers to domestic and various international markets. As a result of the acquisition, the Company further broadened its proprietary branded offering into the plant nutrients category complementing other product offerings. The acquisition date fair value of the consideration transferred for the H&G Entities was $133,483 in cash. The amount of goodwill is not deductible for tax purposes. As part of the share acquisition of the H&G Entities, the Company allocated a significant value of the acquisition to identified intangible assets that are not deductible for U.S. tax purposes. Therefore, a deferred tax liability arose providing an additional source of taxable income to support the realization of pre-existing deferred tax assets.
Aurora Acquisition
On July 1, 2021, the Company acquired 100% of the issued and outstanding membership interests of Gotham Properties LLC (“Gotham Properties”), Aurora Innovations LLC (“Aurora Innovations”), Aurora International LLC (“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”), a manufacturer of plant fertility product lines. As a result of the acquisition, the Company further broadened its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Aurora was $178,871, consisting of $133,962 in cash, $25,824 of the Company's common stock, $19,300 contingent consideration and $215 forgiveness of accounts payable. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The forgiveness of accounts payable represents an effective settlement of a preexisting relationship between the parties.

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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)


Pursuant to the purchase agreement, the Company was required to pay a maximum contingent consideration equal to $70,997. To the extent 2021 EBITDA of Aurora exceeded $15,556, the excess was multiplied by 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 was based on significant inputs that are not observable in the market, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements. The contingent consideration was remeasured to fair value at each reporting date until resolution with changes in fair value recognized within SG&A in the condensed consolidated statements of operations. As of March 31, 2022, the related contingent consideration was $15,274. The contingent consideration is expected to be paid in May 2022. The amount of goodwill is fully deductible for tax purposes.
Greenstar/Grotek Acquisition
On August 3, 2021, the Company acquired 100% of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of horticultural products and solutions for global, domestic and commercial use. As a result of the acquisition, the Company further broadened its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings. The preliminary acquisition fair value of the consideration transferred for Greenstar was $83,520, consisting of $85,121 in cash, less $1,601 forgiveness of accounts payable, net, and obligations due under a distribution agreement. The forgiveness of accounts payable, net, and obligations due under a distribution agreement represent an effective settlement of a preexisting relationship between the parties. The amount of goodwill is not deductible for U.S. tax purposes, but it is partially deductible for Canadian tax purposes.
Innovative Growers Equipment, Inc. Acquisition
On November 1, 2021, the Company acquired 100% of the issued and outstanding shares of Innovative Growers Equipment, Inc., an Illinois corporation (“IGE”), Innovative AG Installation, Inc., an Illinois corporation (“IAG”), Innovative Racking Systems, Inc., an Illinois corporation (“IRS”), and Innovative Shipping Solutions, Inc., an Illinois corporation (“ISS” and, together with IGE, IAG, IRS, and their respective subsidiaries, the “IGE Entities”), a manufacturer of horticulture benches, racking and LED lighting systems which complement the Company’s existing lineup of high performance, proprietary branded products. The preliminary acquisition fair value of the consideration transferred for the IGE Entities was $60,902, consisting of $49,129 in cash, $11,051 of the Company's common stock, and $722 forgiveness of a contract asset. The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date. The forgiveness of contract asset represents an effective settlement of a preexisting relationship between the parties. The amount of goodwill is not deductible for U.S. tax purposes.
The financial results of Heavy 16, the H&G Entities and the IGE Entities are included in the U.S. operating segment since the acquisition date, and the financial results of Greenstar are included in the Canada operating segment since the acquisition date. The financial results of Aurora are included in both the U.S. and Canada operating segments.








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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)


The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of Heavy 16, the H&G Entities, Aurora, Greenstar and the IGE Entities:
Heavy 16H&G EntitiesAuroraGreenstarIGE Entities
Component of Purchase Price:
Cash$60,287 $133,483 $133,962 $85,121 $49,129 
Common stock16,736  25,824  11,051 
Contingent consideration344  19,300   
Forgiveness of assets and liabilities  (215)(1,601)722 
Total purchase price$77,367 $133,483 $178,871 $83,520 $60,902 
Acquisition-related costs$3,104 $5,063 $7,345 $3,697 $2,013 
Allocation of Purchase Price:
Identifiable assets (liabilities)
Accounts receivable$510 $3,308 $6,967 $982 $2,367 
Inventories1,451 6,559 11,031 8,728 30,592 
Prepaid expenses and other current assets34 493 1,086 447 470 
Property, plant and equipment1,078 358 37,991 1,717 4,274 
Operating lease right-of-use assets1,088 1,921  2,736 4,447 
Other assets25 213  176  
Accounts payable(1,055)(1,320)(4,360)(777)(21,686)
Accrued expenses and other current liabilities(226)(445)(768)(1,421)(859)
Current portion of lease liabilities(274)(447) (624)(815)
Current portion of long-term debt    (482)
Long-term deferred tax liabilities (25,589)  (5,531)
Long-term lease liabilities(868)(1,501) (1,836)(3,116)
Long-term debt    (1,434)
Other long-term liabilities  (3,840)  
Net identifiable assets1,763 (16,450)48,107 10,128 8,227 
Identifiable intangible assets
Other intangible assets200 200 824 383 2,430 
Customer relationships5,100 12,500 6,400 18,100 6,300 
Trademarks and trade names18,500 31,400 59,100 9,100 14,000 
Technology and formulations & recipes33,600 56,200 18,000 2,800 3,800 
Total identifiable intangible assets57,400 100,300 84,324 30,383 26,530 
Goodwill18,204 49,633 46,440 43,009 26,145 
Total purchase price allocation$77,367 $133,483 $178,871 $83,520 $60,902 
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)



Supplemental Disclosure of Financial Results
The following represents certain estimated unaudited consolidated net sales and net income amounts for the quarter ended March 31, 2021 as if the five acquisitions had been included in the consolidated results of the Company for the entire period presented below. Management considers these estimates to represent an approximate measure of the performance of the combined Company (in millions):
Three months ended March 31, 2021
Estimated ($ in millions)
Net sales160 
Net income17 


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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)


4. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The Company's goodwill by reportable segment is $122,977 for the United States and $60,361 for Canada as of March 31, 2022. Goodwill is evaluated for impairment annually in the fourth quarter, or on an interim basis when an event occurs, or circumstances change that indicates the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of March 31, 2022. The changes in goodwill are as follows:
Goodwill
Balance at December 31, 2021$204,868 
Acquisition - IGE Entities - remeasurement adjustments(22,542)
Acquisition - all others - remeasurement adjustments and foreign currency translation adjustments, net1,012 
Balance at March 31, 2022$183,338 
Intangible Assets, net
Intangible assets, net comprised the following:
March 31, 2022December 31, 2021
Gross Carrying AmountAccumulated AmortizationNet Book ValueGross Carrying AmountAccumulated AmortizationNet Book Value
Finite-lived intangible assets: 
Computer software$8,929 $(7,705)$1,224 $8,814 $(7,208)$1,606 
Customer relationship107,800 (19,440)88,360 101,222 (16,517)84,705 
Technology, formulations and recipes114,403 (8,026)106,377 110,561 (3,630)106,931 
Trade names132,110 (5,060)127,050    
Other4,878 (3,679)1,199 2,428 (1,744)684 
Total finite-lived intangible assets, net368,120 (43,910)324,210 223,025 (29,099)193,926 
Indefinite-lived intangible asset: 
Trade names2,801  2,801 120,773  120,773 
Other   120  120 
Total Intangible assets, net$370,921 $(43,910)$327,011 $343,918 $(29,099)$314,819 
Total amortization expense was $14,746 and $1,206 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense in 2022 includes the impact from intangible assets recorded in connection with five acquisitions completed during the year ended December 31, 2021. The following are the estimated useful lives for the major classes of finite-lived intangible assets:
Computer software5 years
Customer relationships
7 to 18 years
Technology, formulations and recipes
8 to 12 years
Trade names
15 to 20 years
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)


For intangible assets subject to amortization, the weighted-average amortization period as of March 31, 2022, for computer software, customer relationships, technology and formulations & recipes and trade names was 2 years, 12 years, 11 years, and 19 years, respectively.
The estimated aggregate future amortization expense for intangible assets subject to amortization as of March 31, 2022, is summarized below:
Estimated Future Amortization Expense
For the period of April 1, 2022 to December 31, 2022$19,743 
Year ending December 31,
202325,036 
202424,876 
202524,737 
202620,493 
Thereafter209,325 
Total $324,210 

5. EARNINGS (LOSS) PER COMMON SHARE (“EPS”)
Basic EPS is computed using net income (loss) divided by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock units (“RSUs”).
Diluted EPS represents net income (loss) divided by the weighted-average number of common shares outstanding during the period, including common stock equivalents. Common stock equivalents consist of shares subject to warrants and share-based awards with exercise prices less than the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive. Regarding RSUs subject to a market condition, before the end of the contingency period, the number of contingently issuable shares (i.e., RSUs) to be included in diluted EPS would be based on the number of common shares issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, assuming the result would be dilutive. Those contingently issuable shares would be included in the denominator of diluted EPS as of the beginning of the period, or as of the grant date of the share-based payment, if later.
The following table presents information necessary to calculate basic and diluted EPS for the three months ended March 31, 2022, and 2021:
Three months ended March 31,
20222021
Net (loss) income$(23,296)$4,940 
Weighted-average shares of common stock outstanding44,718,510 33,717,103 
Dilutive effect of warrants using the treasury stock method 2,840,464 
Dilutive effect of restricted stock units using the treasury stock method 1,658,866 
Dilutive effect of stock options using the treasury stock method 780,598 
Diluted weighted-average shares of common stock outstanding44,718,510 38,997,031 
Basic EPS$(0.52)$0.15 
Diluted EPS$(0.52)$0.13 

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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)


The computation of the weighted-average shares of common stock outstanding for diluted EPS excludes the following potential common shares as their inclusion would have an anti-dilutive effect:
Three months ended March 31,
20222021
Shares subject to warrants outstanding17,669  
Shares subject to unvested performance based and restricted stock units1,234,857  
Shares subject to stock options outstanding696,071  
6. ACCOUNTS RECEIVABLE, NET, AND INVENTORIES
Accounts receivable, net comprised the following:
March 31,
2022
December 31,
2021
Trade accounts receivable$43,691 $35,511 
Allowance for doubtful accounts(1,112)(1,156)
Other receivables2,740 7,129 
Total accounts receivable, net$45,319 $41,484 
Inventories comprised the following:
March 31,
2022
December 31,
2021
Finished goods$145,573 $145,298 
Work-in-process8,786 5,967 
Raw materials42,135 41,399 
Allowance for inventory obsolescence(6,498)(3,530)
Total inventories$189,996 $189,134 
The allowance for inventory obsolescence increased during the first quarter of 2022 as a result of a reserve for certain durable products.
7. OPERATING LEASES
The Company leases its distribution centers and manufacturing facilities from third parties under various non-cancelable lease agreements expiring at various dates through 2032. Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 10 years. However, these options are generally not reflected in the calculation of the right-of-use assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. The Company recognizes operating lease costs over the respective lease periods, including short-term and month-to-month leases. During the three months ended March 31, 2022, and 2021, the Company incurred operating lease costs of $2,597 and $1,494, respectively. These costs are included primarily within selling, general and administrative expense in the condensed consolidated statements of operations.
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)


Supplemental balance sheet information related to the Company’s operating leases are as follows:
March 31,
2022
December 31,
2021
Assets
Operating lease right-of-use assets, net of accumulated amortization$54,566 $45,245 
Total leased assets$54,566 $45,245 
Liabilities
Current portion of lease liabilities$7,773 $7,198 
Long-term lease liabilities46,755 38,595 
Total lease liabilities$54,528 $45,793 
As of March 31, 2022, future minimum lease payments under non-cancelable operating leases are as follows:
Operating
For the period of April 1, 2022 to December 31, 2022$7,003 
Year ending December 31,
20239,311 
20249,031 
20258,338 
20266,824 
20276,369 
Thereafter14,208 
Total rental payments61,084 
Less portion representing interest(6,556)
Total principal54,528 
Less current portion(7,773)
Long-term portion$46,755 

During the three months ended March 31, 2022, the Company executed a lease for approximately 303,000 square feet of warehouse space in Shoemakersville, Pennsylvania, and recorded right-of-use assets for operating leases for $10,463.
During 2021, the Company executed new lease agreements that will commence in 2023. The future minimum lease payments for executed non-cancelable operating leases not yet commenced are as follows:
Operating
For the period of April 1, 2022, to December 31, 2022$ 
Year ending December 31,
20233,354 
20243,272 
20253,610 
2026