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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, 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 19555
(707) 765-9990
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareHYFMNasdaq Global Select Market
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 October 31, 2022, the registrant had 45,170,429 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:
industry conditions, including oversupply and decreasing prices of our customers' products which, in turn, has materially adversely impacted our sales and other results of operations and which may continue to do so in the future;
the potential for future charges associated with the impairment of our long-lived assets, inventory allowances and purchase commitment losses, and accounts receivable reserves;
our liquidity;
potential dilution that may result from equity financings while our stock prices are depressed;
general economic and financial conditions, specifically in the United States and Canada;
the conditions impacting our customers, including related crop prices and other factors impacting growers;
the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial condition;
interruptions in our supply chain;
federal and state legislation and regulations pertaining to the use and cultivation of cannabis in the United States and Canada;
public perceptions and acceptance of cannabis use;
fluctuations in the price of various crops and other factors affecting growers;
the results of our recent acquisitions and strategic alliances;

our long-term non-cancellable leases under which many of our facilities operate, and our ability to renew or terminate our leases;

our reliance on, and relationships with, a limited base of key suppliers for certain products;
our ability to keep pace with technological advances;
our ability to execute our e-commerce business;
the costs of being a public company;
our ability to 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 or breach of our information technology systems or cyber-attack;
our current level of indebtedness;
our dependence on third parties;
any change to our reputation or to the reputation of our products;
the performance of third parties on which we depend;
the fluctuation in the prices of the products we distribute;
competitive industry pressures;
the consolidation of our industry;


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compliance with environmental, health and safety laws;
our ability to protect and defend against litigation, including claims related to intellectual property and proprietary rights;
product shortages and relationships with key suppliers;
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.”
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)
September 30,December 31,
20222021
Assets
Current assets:
Cash and cash equivalents$16,493 $26,607 
Restricted cash 1,777 
Accounts receivable, net23,800 41,484 
Inventories137,035 189,134 
Note receivable475 622 
Prepaid expenses and other current assets8,852 9,760 
Total current assets186,655 269,384 
Property, plant and equipment, net51,224 50,473 
Operating lease right-of-use assets49,251 45,245 
Goodwill 204,868 
Intangible assets, net306,168 314,819 
Other assets3,976 6,453 
Total assets$597,274 $891,242 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$19,044 $26,685 
Accrued expenses and other current liabilities12,505 33,996 
Deferred revenue7,066 18,273 
Current portion of lease liabilities8,009 7,198 
Current portion of long-term debt2,101 2,263 
Total current liabilities48,725 88,415 
Long-term lease liabilities42,710 38,595 
Long-term debt118,807 119,517 
Deferred tax liabilities 5,631 
Other long-term liabilities4,527 3,904 
Total liabilities214,769 256,062 
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,125,768 and 44,618,357 shares issued and outstanding at September 30, 2022, and December 31, 2021, respectively)
5 4 
Additional paid-in capital781,430 777,074 
Accumulated other comprehensive loss(8,267)(1,382)
Accumulated deficit(390,663)(140,516)
Total stockholders’ equity382,505 635,180 
Total liabilities and stockholders’ equity$597,274 $891,242 
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,
2022202120222021
Net sales$74,155 $123,822 $283,040 $369,011 
Cost of goods sold68,291 93,833 253,231 286,209 
Gross profit5,864 29,989 29,809 82,802 
Operating expenses:
Selling, general and administrative26,186 32,395 92,407 76,495 
Impairments  192,328  
(Loss) income from operations(20,322)(2,406)(254,926)6,307 
Interest expense(3,073)(132)(7,863)(276)
Loss on debt extinguishment   (680)
Other income (expense), net615 (41)971 86 
(Loss) income before tax(22,780)(2,579)(261,818)5,437 
Income tax (expense) benefit(759)19,844 11,671 19,025 
Net (loss) income$(23,539)$17,265 $(250,147)$24,462 
Net (loss) income per share:
Basic$(0.52)$0.39 $(5.57)$0.64 
Diluted$(0.52)$0.37 $(5.57)$0.58 
Weighted-average shares of common stock outstanding:
Basic45,089,286 43,760,975 44,907,355 38,497,925 
Diluted45,089,286 46,288,075 44,907,355 42,494,624 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
Three months ended September 30,Nine months ended September 30,
2022202120222021
Net (loss) income$(23,539)$17,265 $(250,147)$24,462 
 Other comprehensive loss:
    Foreign currency translation loss(4,714)(2,640)(6,885)(2,037)
      Total comprehensive (loss) income$(28,253)$14,625 $(257,032)$22,425 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except for share amounts)
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
 Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance, June 30, 202141,296,585 $4 $707,690 $1,202 $(146,735)$562,161 
Common stock issued upon exercise of options23,464  198   198 
Issuance of common stock for vesting of restricted stock units287,236      
Shares repurchased for withholding tax on restricted stock units(57,709) (2,984)  (2,984)
Issuance of common stock under cashless warrant exercise77,047      
Issuance of common stock under investor warrant exercise2,016,117  33,992   33,992 
Issuance of common stock in connection with business combination456,499  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 
Balance, June 30, 202245,011,652 $4 $779,911 $(3,553)$(367,124)$409,238 
Issuance of common stock for vesting of restricted stock units159,526 1    1 
Shares repurchased for withholding tax on restricted stock units(45,410) (149)  (149)
Stock-based compensation expense  1,668   1,668 
Net loss    (23,539)(23,539)
Foreign currency translation loss   (4,714) (4,714)
Balance, September 30, 2022
45,125,768 $5 $781,430 $(8,267)$(390,663)$382,505 
The accompanying notes are an integral part of the condensed consolidated financial statements.







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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except for share amounts)
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance, January 1, 202133,499,953 $3 $364,248 $599 $(153,932)$210,918 
Common stock issued upon exercise of options125,411  1,057   1,057 
Issuance of common stock for vesting of restricted stock units652,983      
Shares repurchased for withholding tax on restricted stock units(204,369) (11,805)  (11,805)
Issuance of common stock under cashless warrant exercise418,309      
Issuance of common stock under investor warrant exercise3,367,647  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 combination712,444  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 
Balance, January 1, 202244,618,357 $4 $777,074 $(1,382)$(140,516)$635,180 
Common stock issued upon exercise of options8,283  75   75 
Issuance of common stock for vesting of restricted stock units699,704 1    1 
Shares repurchased for withholding tax on restricted stock units(200,675) (2,368)  (2,368)
Issuance of common stock under cashless warrant exercise99      
Stock-based compensation expense  6,649   6,649 
Net loss    (250,147)(250,147)
Foreign currency translation loss   (6,885) (6,885)
Balance, September 30, 2022
45,125,768 $5 $781,430 $(8,267)$(390,663)$382,505 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months ended September 30,
20222021
Operating activities
Net (loss) income$(250,147)$24,462 
Adjustments to reconcile net (loss) income to net cash from (used in) operating activities:
Depreciation, depletion and amortization33,215 8,638 
Provision for inventory obsolescence16,348 1,052 
Stock-based compensation expense6,649 3,326 
Non-cash operating lease expense7,275 3,678 
Impairments192,328  
Change in fair value of contingent consideration(1,560)(126)
Deferred income tax benefit(12,387)(21,252)
Other1,064 434 
Changes in assets and liabilities:
Accounts receivable13,135 (1,740)
Inventories37,146 (51,071)
Prepaid expenses and other current assets(42)2,350 
Other assets(76)(2,567)
Accounts payable(6,542)(362)
Accrued expenses and other current liabilities(4,462)16,505 
Deferred revenue(10,971)2,190 
Lease liabilities(5,328)(3,118)
Other long-term liabilities(155)91 
Net cash from (used in) operating activities15,490 (17,510)
Investing activities
Business combinations, net of cash and cash equivalents 190 (415,918)
Purchases of property, plant and equipment(7,113)(3,069)
Other(463)(420)
Net cash used in investing activities(7,386)(419,407)
Financing activities
Proceeds from issuance of common stock upon follow-on public offering, net of offering costs 309,781 
Proceeds from exercises of investor warrants 56,779 
Payment of withholding tax related to restricted stock units(2,381)(17,894)
Borrowings under revolving credit facilities773 96,970 
Repayments of revolving credit facilities(891)(70,680)
Repayments of Term Loan(938) 
Payments to settle contingent consideration(15,574) 
Other(469)(509)
Net cash (used in) from financing activities(19,480)374,447 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(515)(29)
Net decrease in cash, cash equivalents and restricted cash(11,891)(62,499)
Cash, cash equivalents and restricted cash at beginning of period28,384 76,955 
Cash, cash equivalents and restricted cash at end of period$16,493 $14,456 
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 normal and 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, totaling $18,273 as of December 31, 2021, 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. Consistent with the reclassifications on the condensed consolidated balance sheet, the Company made corresponding reclassifications to conform with the current period presentation in the condensed consolidated statement of cash flows.
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 for the year ended December 31, 2021 ("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).
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.
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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 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, and operating lease right-of-use assets, 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,
2022202120222021
United States$61,234 $104,623 $233,328 $306,651 
Canada13,605 21,268 54,444 67,364 
Intersegment eliminations(684)(2,069)(4,732)(5,004)
Total consolidated net sales$74,155 $123,822 $283,040 $369,011 
September 30,
2022
December 31,
2021
United States$82,419 $85,167 
Canada18,056 10,551 
Total property, plant and equipment, and operating lease right-of-use assets, net$100,475 $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 first quarter of 2022 the third-party defaulted on interest payments, and the Company measured an impairment on the note receivable based on the estimated fair value of the collateral. The Company recorded impairment losses of zero and $2,636 during the three and nine months ended September 30, 2022, respectively, in “Impairments” on the condensed consolidated statements of operations. There were no impairment losses recorded in the three and nine months ended September 30, 2021. As of September 30, 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 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
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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)
volume rebates, cash discounts and sales returns and allowances. Variable consideration is estimated and recorded at the time of sale.
The amount billed to customers for shipping and handling costs included in net sales was $3,103 and $10,661 during the three and nine months ended September 30, 2022, respectively, and $2,242 and $5,170 during the three and nine months ended September 30, 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 $7,066 and $18,273 as of September 30, 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.
Intangible assets and goodwill
Definite-lived intangible assets are amortized using the straight-line method over their estimated useful lives. The Company has one trade name that is considered to have an indefinite useful life. Intangible assets with finite lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Goodwill represents the excess of the acquisition price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed in a business combination less any subsequent write-downs for impairment. Goodwill is tested for impairment on an annual basis in the fourth quarter and more frequently if indicators of potential impairment exist. Impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results. The Company has determined that its reporting units for the purpose of goodwill impairment testing are the U.S. and Canada.
Goodwill impairment reviews include performing either an initial qualitative or quantitative evaluation for each of the reporting units. Several methods may be used to estimate a reporting unit’s fair value, including market quotations, asset and liability fair values and other valuation techniques. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss. Intangible assets with indefinite lives are also tested for impairment at least annually and when events or changes in circumstances indicate that, more-likely-than-not, the asset is impaired. Significant judgment is required in estimating fair values and performing goodwill and indefinite-lived intangible asset impairment tests.
Primarily due to a sustained decline in the Company's market value of common stock and market conditions, the Company identified a triggering event requiring a test for impairment as of June 30, 2022. As a result of the triggering event and subsequent testing for impairment, the Company fully impaired its Goodwill to zero as of June 30, 2022, but determined that no impairment was needed for intangible assets. During the three months ended September 30, 2022, the Company assessed whether a triggering event had occurred which would again require testing the intangible assets for impairment, however, no triggering event was identified. Refer to Note 4 - Goodwill and Intangible Assets, Net for additional details.
Income taxes—interim tax provision
The Company recorded income tax expense and an income tax benefit of $759 and $11,671 for the three and nine months ended September 30, 2022, respectively. The effective income tax rate for the three months ended September 30, 2022, was (3.3%). Given the Company's valuation allowances, there was no significant income tax benefit recorded from the pre-tax loss during the three months ended September 30, 2022, and the Company recorded tax expense in certain profitable jurisdictions. The Company's effective income tax rate was 4.5% for the nine months ended September 30, 2022, and differs from the federal statutory rate of 21% primarily due to the impairment of goodwill for certain 2021 acquisitions which was not deductible for U.S. tax purposes, increases in the Company's valuation allowance on U.S. deferred tax assets, and the establishment of a valuation allowance for Canadian deferred tax assets. As described in Note 4 - Goodwill and Intangible Assets, Net, during the three months ended June 30, 2022, the Company fully impaired the goodwill associated with all 2021 acquisitions. For the nine
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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)
months ended September 30, 2022, the Company recorded discrete income tax benefits of $12,058 relating primarily to measurement period adjustments associated with 2021 acquisitions, and certain tax benefits related to goodwill impairment.
The Company recorded an income tax benefit of $19,844 and $19,025 for the three and nine months ended September 30, 2021, respectively. The Company’s effective tax rate for the nine months ended September 30, 2021, differs from the federal statutory rate of 21% primarily as a result of reducing valuation allowances on the Company's net deferred tax assets due to certain acquisitions in the prior year.
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 the Company's 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 these acquisitions as of June 30, 2022.
During the first quarter of 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 first quarter of 2022, which related to amortization expense that would have been recorded in the previous reporting period from the acquisition date through December 31, 2021. The intangible assets were assigned estimated useful lives as follows: (i) customer relationships: 7 to 12 years, (ii) technology, formulations and recipes: 8 to 12 years, 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. As of December 31, 2021, contingent consideration of $200 was calculated utilizing actual net sales for the full year ended December 31, 2021, and was paid in April 2022. The amount of goodwill is fully deductible for tax purposes. The financial results of Heavy 16 are included in the U.S. operating segment since the acquisition date.
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
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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)
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. The financial results of the H&G Entities are included in the U.S. operating segment since the acquisition date.
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.
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 “Selling, general and administrative expenses” ("SG&A") in the condensed consolidated statements of operations. The contingent consideration of $15,274 was paid in July 2022 using available cash on hand. The amount of goodwill is fully deductible for tax purposes. The financial results of Aurora are included in the U.S. operating segment since the acquisition date.
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. The financial results of Greenstar are included in the Canada operating segment since the acquisition date.
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 the IGE Entities are included in the U.S. operating segment since the acquisition date.
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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 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$3,109 $5,063 $7,358 $3,688 $2,150 
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)  (6,769)
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 6,989 
Identifiable intangible assets
Other intangible assets200 200 824 383 2,430 
Customer relationships5,100 12,500 6,400 11,100 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 23,383 26,530 
Goodwill18,204 49,633 46,440 50,009 27,383 
Total purchase price allocation$77,367 $133,483 $178,871 $