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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, 2023
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, 2023, the registrant had 45,759,575 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;
our ability to meet the continued listing standards of Nasdaq;
our restructuring activities may increase our expenses and cash expenditures, and may not have the intended cost saving effects;
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 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;


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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;
our ability to attract and retain 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 herein as well as under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 9, 2023 (the “2022 Annual Report”).
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,
20232022
Assets
Current assets:
Cash and cash equivalents$32,457 $21,291 
Accounts receivable, net17,070 17,227 
Inventories80,101 111,398 
Prepaid expenses and other current assets4,272 5,032 
Total current assets133,900 154,948 
Property, plant and equipment, net48,119 51,135 
Operating lease right-of-use assets56,655 65,265 
Intangible assets, net281,990 300,366 
Other assets1,766 1,845 
Total assets$522,430 $573,559 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$13,028 $13,633 
Accrued expenses and other current liabilities8,023 13,208 
Deferred revenue3,564 3,654 
Current portion of operating lease liabilities8,505 9,099 
Current portion of finance lease liabilities974 704 
Current portion of long-term debt1,295 1,307 
Total current liabilities35,389 41,605 
Long-term operating lease liabilities49,843 56,299 
Long-term finance lease liabilities8,956 1,200 
Long-term debt117,169 117,461 
Deferred tax liabilities2,684 2,685 
Other long-term liabilities4,465 4,428 
Total liabilities218,506 223,678 
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock ($0.0001 par value; 300,000,000 shares authorized; 45,688,695 and 45,197,249 shares issued and outstanding at September 30, 2023, and December 31, 2022, respectively)
5 5 
Additional paid-in capital786,829 783,042 
Accumulated other comprehensive loss(7,381)(7,235)
Accumulated deficit(475,529)(425,931)
Total stockholders’ equity303,924 349,881 
Total liabilities and stockholders’ equity$522,430 $573,559 
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 September 30,Nine months ended September 30,
2023202220232022
Net sales$54,168 $74,155 $179,397 $283,040 
Cost of goods sold50,859 68,291 150,234 253,231 
Gross profit3,309 5,864 29,163 29,809 
Operating expenses:
Selling, general and administrative19,543 26,186 67,442 92,407 
Impairments   192,328 
Loss from operations(16,234)(20,322)(38,279)(254,926)
Interest expense(3,963)(3,073)(11,423)(7,863)
Other income, net402 615 22 971 
Loss before tax(19,795)(22,780)(49,680)(261,818)
Income tax (expense) benefit(89)(759)82 11,671 
Net loss$(19,884)$(23,539)$(49,598)$(250,147)
Net loss per share:
Basic$(0.44)$(0.52)$(1.09)$(5.57)
Diluted$(0.44)$(0.52)$(1.09)$(5.57)
Weighted-average shares of common stock outstanding:
Basic45,607,195 45,089,286 45,429,139 44,907,355 
Diluted45,607,195 45,089,286 45,429,139 44,907,355 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
Three months ended September 30,Nine months ended September 30,
2023202220232022
Net loss$(19,884)$(23,539)$(49,598)$(250,147)
Other comprehensive loss:
Foreign currency translation loss(1,686)(4,714)(146)(6,885)
Total comprehensive loss$(21,570)$(28,253)$(49,744)$(257,032)
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
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance, June 30, 202245,011,652 $4 $779,911 $(3,553)$(367,124)$409,238 
Issuance of common stock for vesting of stock awards159,526 1    1 
Shares repurchased for withholding tax on stock awards(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 
Balance, June 30, 202345,540,217 $5 $785,893 $(5,695)$(455,645)$324,558 
Issuance of common stock for vesting of stock awards226,685      
Shares repurchased for withholding tax on stock awards(78,207) (86)  (86)
Stock-based compensation expense  1,022   1,022 
Net loss    (19,884)(19,884)
Foreign currency translation loss   (1,686) (1,686)
Balance, September 30, 2023
45,688,695 $5 $786,829 $(7,381)$(475,529)$303,924 
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
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
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 stock awards699,704 1    1 
Shares repurchased for withholding tax on stock awards(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 
Balance, January 1, 202345,197,249 $5 $783,042 $(7,235)$(425,931)$349,881 
Issuance of common stock for vesting of stock awards665,012      
Shares repurchased for withholding tax on stock awards(173,566) (234)  (234)
Stock-based compensation expense  4,021   4,021 
Net loss    (49,598)(49,598)
Foreign currency translation loss   (146) (146)
Balance, September 30, 2023
45,688,695 $5 $786,829 $(7,381)$(475,529)$303,924 
The accompanying notes are an integral part of the condensed consolidated financial statements
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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
(Page 1 of 2)
Nine months ended September 30,
20232022
Operating activities
Net loss$(49,598)$(250,147)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation, depletion and amortization24,165 33,215 
Provision for inventory obsolescence1,132 16,348 
Restructuring expenses8,443  
Stock-based compensation expense4,021 6,649 
Non-cash operating lease expense7,718 7,275 
Impairment charges 192,328 
Change in fair value of contingent consideration (1,560)
Deferred income tax benefit (12,387)
Other1,089 1,064 
Changes in assets and liabilities:
Accounts receivable183 13,135 
Inventories22,566 37,146 
Prepaid expenses and other current assets1,174 (42)
Other assets(164)(76)
Accounts payable(542)(6,542)
Accrued expenses and other current liabilities(4,419)(4,462)
Deferred revenue(87)(10,971)
Lease liabilities(6,972)(5,328)
Other long-term liabilities(80)(155)
Net cash from operating activities8,629 15,490 
Continued on next page
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Hydrofarm Holdings Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
(Page 2 of 2)
Nine months ended September 30,
20232022
Investing activities
Business combinations, net of cash and cash equivalents  190 
Capital expenditures of property, plant and equipment(4,056)(7,113)
Other(2)(463)
Net cash used in investing activities(4,058)(7,386)
Financing activities
Proceeds from Sale-Leaseback Transaction8,598  
Borrowings under foreign revolving credit facilities753 773 
Repayments of foreign revolving credit facilities(778)(891)
Repayments of Term Loan(938)(938)
Payment of withholding tax related to stock awards(234)(2,381)
Payments to settle contingent consideration (15,574)
Other(757)(469)
Net cash from (used in) financing activities6,644 (19,480)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(49)(515)
Net increase (decrease) in cash, cash equivalents and restricted cash11,166 (11,891)
Cash, cash equivalents and restricted cash at beginning of period21,291 28,384 
Cash, cash equivalents and restricted cash at end of period$32,457 $16,493 
Non-cash investing and financing activities
Right-of-use assets (relinquished) acquired under operating lease obligations$(768)$10,991 
Assets acquired under finance lease obligations185 160 
Supplemental information
Cash paid for interest10,519 6,860 
Cash (refunds) paid for income taxes(1,039)3,577 

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. (collectively with its subsidiaries, the “Company”) was formed in May 2017 under the laws of the state of Delaware to acquire and continue the business originally founded in 1977. The Company is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture ("CEA"), including grow lights, climate control solutions, growing media and nutrients, as well as a broad portfolio of innovative and proprietary branded products. Products offered include agricultural lighting devices, indoor climate control equipment, 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.
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 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. The Company reclassified balances of $704 and $1,200 as of December 31, 2022, previously reported in "Current portion of long-term debt" and "Long-term debt", respectively, into "Current portion of finance lease liabilities" and "Long-term finance lease liabilities", respectively, on consolidated balance sheet as of December 31, 2022, to conform to the current period presentation. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2022, has been derived from the audited consolidated financial statements of the Company, which is included in the 2022 Annual Report. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the 2022 Annual Report.
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, estimated useful lives of long-lived assets, incremental borrowing rate applied in lease accounting, valuation of stock-based compensation, recognition of deferred income taxes, classification of debt pursuant to certain terms in our credit agreements, 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 loss as incurred.
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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)
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 loss in the period. Changes in the fair value of contingent consideration classified as equity are not recognized. During 2022, the Company settled contingent consideration for certain acquisitions that were completed in 2021. Refer to Note 14 – Fair Value Measurements, for further discussion of the contingent consideration.
For a given acquisition, the Company may identify certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period to obtain sufficient information to assess these contingencies as part of acquisition accounting, as applicable.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non‑controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition‑date fair value amounts of the identifiable assets acquired, and the liabilities assumed.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that time. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to net loss.
During 2021, the Company completed five acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of its portfolio of proprietary branded products and manufacturing capabilities. The 2021 acquisitions included (i) Heavy 16, a manufacturer of plant nutrients and additives, in May 2021; (ii) House & Garden, a manufacturer of plant nutrients and additives, in June 2021; (iii) Aurora Innovations, a manufacturer of soil, grow media, plant nutrients and additives, in July 2021; (iv) Greenstar Plant Products, a manufacturer of plant nutrients and additives, in August 2021; and (v) Innovative Growers Equipment, a manufacturer of horticultural benches, racks and grow lights, in November 2021. The Company finalized the determination of its allocation of the purchase price relating to the acquisitions during 2022.
During the 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, (iii) computer software: 3 years, and (iv) trade names and trademarks: 15 to 20 years.
Restructuring
The Company began a restructuring plan (the "Restructuring Plan") during the three months ended December 31, 2022, and undertook significant actions to streamline operations, reduce costs and improve efficiencies. The major initiatives of the first phase of the Restructuring Plan include (i) narrowing the Company's product and brand portfolio and (ii) the relocation and consolidation of certain manufacturing and distribution centers, including headcount reductions and reorganization to drive a solution based approach. The Company's strategic product consolidation entailed removing approximately one-third of all products and one-fifth of all brands relating to the Company's primary product portfolio, which excludes the garden center business in Canada.
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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 September 30, 2023, the Company recorded a net restructuring benefit of $243 for the first phase of the Restructuring Plan, primarily due to reversing an immaterial restructuring accrual. During the nine months ended September 30, 2023, the Company recorded net pre-tax charges of $1,956 which were primarily related to the relocation and termination of certain facilities in Canada, partially offset by the aforementioned restructuring benefit. The Company incurred $0 and $744 of non-cash charges during the three and nine months ended September 30, 2023, respectively, relating to asset dispositions and write-downs. Total costs incurred relating to this first phase of the Restructuring Plan since it commenced in the fourth quarter of 2022 are (i) $6,398 relating to inventory markdowns and (ii) $3,245 relating primarily to the relocation and termination of certain facilities in Canada.
As a result of the continued adverse market conditions, the Company is implementing a second phase of the Restructuring Plan, including U.S. manufacturing facility consolidations, in particular with respect to production of certain durable equipment products. The Company is reducing facility space and consolidating manufacturing operations to improve efficiency and reduce costs. During the three and nine months ended September 30, 2023, the Company recorded pre-tax restructuring charges of $7,846 for the second phase, relating primarily to non-cash raw material inventory write-downs as the Company plans to sell these assets and reduce storage space within certain manufacturing facilities. These restructuring charges are recorded within Cost of goods sold on the condensed consolidated statements of operations, and are subject to significant estimate.
Including both phases of the Restructuring Plan, the Company recorded $7,444 and $9,401 of total restructuring charges within Cost of goods sold on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023, respectively. The Company recorded total charges for both phases of the Restructuring Plan of $159 and $401 within Selling, general and administrative ("SG&A") expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023, respectively.
The following table presents the activity in accrued expenses and other current liabilities for restructuring costs related to the first and second phases of the Restructuring Plan for the three and nine months ended September 30, 2023:
Three Months Ended
September 30, 2023
Phase 1Phase 2
Restructuring Accruals as of July 1, 2023$493 $ 
(Reversal) Expense(243)150 
Cash Payments(225) 
Restructuring Accruals as of September 30, 2023
$25 $150 

Nine Months Ended
September 30, 2023
Phase 1Phase 2
Restructuring Accruals as of January 1, 2023$696 $ 
Expense1,213 150 
Cash Payments(1,884) 
Restructuring Accruals as of September 30, 2023
$25 $150 

Refer to Item 2. Management’s Discussion And Analysis Of Financial Condition And Results of Operations – Market Conditions for further explanation of the Restructuring Plan and estimates of additional costs that may be incurred. The amounts the Company will ultimately realize or disburse could differ from these estimates.
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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 United States 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 and operating lease right-of-use assets in the United States and Canada, determined by the location of the subsidiaries, are shown below. Other foreign locations, which are immaterial, individually and in the aggregate, are included in the United States below.
Three months ended September 30,Nine months ended September 30,
2023202220232022
United States$45,683 $61,234 $142,180 $233,328 
Canada9,242 13,605 38,826 54,444 
Intersegment eliminations(757)(684)(1,609)(4,732)
Total consolidated net sales$54,168 $74,155 $179,397 $283,040 
September 30,
2023
December 31,
2022
United States$71,538 $80,380 
Canada33,236 36,020 
Total property, plant and equipment, net and operating lease right-of-use assets$104,774 $116,400 
All of the products sold by the Company are similar and classified as CEA equipment and supplies.
Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has applied the framework for measuring fair value which requires a fair value hierarchy to be applied to all fair value measurements. All financial instruments recognized at fair value are classified into one of three levels in the fair value hierarchy as follows:
Level 1 — Valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities.
Level 2 — Valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not in active markets; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived from or, corroborated by, observable market data by correlation or other means.
Level 3 — Valuation techniques with significant unobservable market inputs.
The Company measures certain non-financial assets and liabilities, including long-lived assets, intangible assets and goodwill, at fair value on a nonrecurring basis. The fair value of contingent consideration was classified within level 3 of the fair value hierarchy. Refer to Note 14 – Fair Value Measurements, for further discussion of the contingent consideration.
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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)
Inventories
Inventories consist of finished goods, work-in-process, and raw materials used in manufacturing products. Inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting. The Company maintains an allowance for excess and obsolete inventory. The estimate for excess and obsolete inventory is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions. Management reviews these assumptions periodically to determine if any adjustments are needed to the allowance for excess and obsolete inventory. The establishment of an allowance for excess and obsolete inventory establishes a new cost basis in the inventory. Such allowance is not reduced until the product is sold or otherwise disposed. If inventory is sold, any related reserves would be reversed in the period of sale. During the year ended December 31, 2022, and the three and nine months ended September 30, 2023, the Company estimated inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's actions with respect to inventory raw materials, products and brands being removed from the Company's portfolio. Hydrofarm's strategic product consolidation entailed removing approximately one-third of all products and one-fifth of all brands relating to the Company's primary product portfolio.
Note receivable and Investment
In 2019, the Company executed a note receivable secured by equipment to a third-party, the terms of which were amended and restated during the first quarter of 2021. The note receivable provided for interest and installment payments to the Company, and full maturity of the note in 2024. During the 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. As of December 31, 2022, the note receivable carrying value was $475 and it was classified in Other assets on the condensed consolidated balance sheet. During the first quarter of 2023, the Company agreed to forgive the note receivable in exchange for interest in a third-party equity investment. The investment is recorded at an estimated cost basis of $531, inclusive of capitalized transaction costs, which is reported within Other assets on the condensed consolidated balance sheet.
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 CEA equipment and supplies.
Revenue is recognized as control of promised goods is transferred to customers, which generally occurs upon receipt at customers’ locations determined by the specific terms of the contract. Arrangements generally have a single performance obligation and revenue is reported net of 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.
The amount billed to customers for shipping and handling costs included in net sales was $1,813 and $7,099 during the three and nine months ended September 30, 2023, respectively, and $3,103 and $10,661 during the three and nine months ended September 30, 2022, respectively. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs included in cost of goods sold. The Company does not receive noncash consideration for the sale of goods. Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company's contract liabilities, which consist primarily of customer deposits reported within deferred revenue in the condensed consolidated balance sheets, totaled $3,564 and $3,654 as of September 30, 2023, and December 31, 2022, respectively. There are no significant financing components. Excluded from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed on and concurrent with revenue-generating activities.
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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)
Income taxes
The income tax provision is calculated for an interim period by distinguishing between elements recognized in the income tax provision through applying an estimated annual effective tax rate to a measure of year-to-date operating results referred to as “ordinary income (or loss),” and discretely recognizing specific events referred to as “discrete items” as they occur. The income tax provision or benefit for each interim period is the difference between the year-to-date amount for the current period and the year-to-date amount for the prior period.
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. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
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. The Company completed its goodwill impairment testing and recorded an impairment charge of $189,572 as the test determined that the carrying value of the U.S. and Canada reporting units was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as of June 30, 2022. The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions.
The Company determined the fair value of the U.S. and Canada reporting units based on an income approach, using the present value of future discounted cash flows, and based on a market approach. The fair values were reconciled to the market value of common stock of Hydrofarm to corroborate the estimates used in the interim test for impairment. Significant estimates used to determine fair value include the weighted average cost of capital, financial forecasts, and pricing multiples derived from publicly-traded companies that are comparable to the reporting units. Refer to Note 14 – Fair Value Measurements, for further discussion of valuation inputs. The changes in goodwill are as follows:
Goodwill
Balance at December 31, 2021$204,868 
Acquisition - Innovative Growers Equipment - measurement period adjustments(21,304)
Acquisition - Greenstar Plant Products - measurement period adjustments7,000 
Acquisition - all others - remeasurement adjustments and foreign currency translation adjustments, net(992)
Impairments(189,572)
Balance at September 30, 2022$ 
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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)
Intangible assets, net
Intangible assets, net comprised the following:
September 30, 2023December 31, 2022
Gross Carrying AmountAccumulated AmortizationNet Book ValueGross Carrying AmountAccumulated AmortizationNet Book Value
Finite-lived intangible assets: 
Computer software$9,338 $(8,256)$1,082 $9,408 $(7,976)$1,432 
Customer relationships99,808 (30,046)69,762 99,933 (24,533)75,400 
Technology, formulations and recipes114,181 (22,679)91,502 114,187 (15,344)98,843 
Trade names and trademarks131,491 (15,066)116,425 131,410 (10,052)121,358 
Other4,775 (4,357)418 4,778 (4,246)532 
Total finite-lived intangible assets, net359,593 (80,404)279,189 359,716 (62,151)297,565 
Indefinite-lived intangible asset: 
Trade name2,801  2,801 2,801  2,801 
Total Intangible assets, net$362,394 $(80,404)$281,990 $362,517 $(62,151)$300,366 
Amortization expense related to intangible assets was $6,180 and $18,272 for the three and nine months ended September 30, 2023, respectively. Amortization expense related to intangible assets was $6,218 and $27,209 for the three and nine months ended September 30, 2022, respectively. The following are the estimated useful lives and the weighted-average amortization period remaining as of September 30, 2023, for the major classes of finite-lived intangible assets:
Useful lives
Weighted-average amortization period remaining
Computer software
3 to 5 years
2 years
Customer relationships
7 to 18 years
10 years
Technology, formulations and recipes
8 to 12 years
9 years
Trade names and trademarks
15 to 20 years
17 years
The estimated aggregate future amortization expense for intangible assets subject to amortization as of September 30, 2023, is summarized below:
Estimated Future Amortization Expense
For the period of October 1, 2023 to December 31, 2023$6,136 
Year ending December 31,
202424,489 
202524,271 
202624,011 
202723,820 
Thereafter176,462 
Total $279,189 
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)
4. EARNINGS (LOSS) PER COMMON SHARE (“EPS”)
Basic EPS is computed using net income (loss) divided by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock units (“RSUs”) and performance stock units ("PSUs").
Diluted EPS represents net income (loss) divided by the weighted-average number of common shares outstanding during the period, including common stock equivalents. Common stock equivalents consist of shares subject to warrants and share-based awards with exercise prices less than the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive. Regarding RSUs subject to a market condition, before the end of the contingency period, the number of contingently issuable shares (i.e., RSUs) to be included in diluted EPS would be based on the number of shares of common stock issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, assuming the result would be dilutive. Those contingently issuable shares would be included in the denominator of diluted EPS as of the beginning of the period, or as of the grant date of the share-based payment, if later.
The following table presents basic and diluted EPS for the three and nine months ended September 30, 2023 and 2022:
Three months ended September 30,Nine months ended September 30,
2023202220232022
Net loss$(19,884)$(23,539)$(49,598)$(250,147)
Weighted-average shares of common stock outstanding45,607,195 45,089,286 45,429,139 44,907,355 
Dilutive effect of warrants and share based compensation awards using the treasury stock method    
Diluted weighted-average shares of common stock outstanding45,607,195 45,089,286 45,429,139 44,907,355 
Basic EPS$(0.44)$(0.52)$(1.09)$(5.57)
Diluted EPS$(0.44)$(0.52)$(1.09)$(5.57)
The computation of the weighted-average shares of common stock outstanding for diluted EPS excludes the following potential shares of common stock as their inclusion would have an anti-dilutive effect on diluted EPS:
Three months ended September 30,Nine months ended September 30,
2023202220232022
Shares subject to warrants outstanding17,669 17,669 17,669 17,669 
Shares subject to unvested performance and restricted stock units2,310,588 1,220,733 2,310,588 1,220,733 
Shares subject to stock options outstanding577,961 682,361 577,961 682,361 
5. ACCOUNTS RECEIVABLE, NET, AND INVENTORIES
Accounts receivable, net comprised the following:
September 30,
2023
December 31,
2022
Trade accounts receivable$17,331 $18,204 
Allowance for doubtful accounts(1,344)(1,556)
Other receivables1,083 579 
Total accounts receivable, net$17,070 $17,227 
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)
Inventories comprised the following:
September 30,
2023
December 31,
2022
Finished goods$61,378 $83,134 
Work-in-process3,731 5,403 
Raw materials25,102 38,558 
Allowance for inventory obsolescence(10,110)(15,697)
Total inventories$80,101 $111,398 
Inventories are stated at the lower of cost or net realizable value, and the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions. The allowance for excess and obsolete inventory is subject to change from period to period based on a number of factors including sales of products, changes in estimates, and disposals.
6. LEASES
The Company leases its distribution centers and manufacturing facilities from third parties under various non-cancelable lease agreements expiring at various dates through 2038. Also, the Company leases some property, plant and equipment under finance leases. Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 20 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. The Company incurred operating lease costs of $2,897 and $9,622 during the three and nine months ended September 30, 2023, respectively, and $2,929 and $8,548 during the three and nine months ended September 30, 2022, respectively. These costs are included primarily within SG&A in the condensed consolidated statements of operations.
The Company has operating subleases which have been accounted for by reference to the underlying asset subject to the lease, primarily as an offset to rent expense within SG&A. For the three and nine months ended September 30, 2023, the Company recorded sublease income of $323 and $1,495, respectively. For the three and nine months ended September 30, 2022, the Company recorded sublease income of $351 and $900, respectively.
In January 2023, Gotham Properties LLC, an Oregon limited liability company and a subsidiary of the Company (“Seller”), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company (“Purchaser”) pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8,598 and then leased back by Seller (the “Sale-Leaseback Transaction”). The new lease has a term of 15 years with annual rent starting at $731 and fixed increases to the final year when annual rent is $964. The Company is accounting for the transaction as a failed sale-leaseback which requires retaining the asset associated with the property and recognizing a corresponding financial liability for the cash received. The Eugene Property serves as the manufacturing and processing site for certain of the Company’s grow media and nutrient brands. The Company intends to reinvest the net cash proceeds into certain permitted investments, such as capital expenditures. Refer to Note 9 - Debt for further discussion. The foregoing description of the reinvestment provisions does not purport to be complete and is qualified in its entirety by reference to the provisions of the Term Loan.

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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)
Total right-of-use ("ROU") assets and lease liabilities were as follows:
Balance Sheet ClassificationSeptember 30,
2023
December 31,
2022
Lease assets
Operating lease assetsOperating lease right-of-use assets$56,655 $65,265 
Finance lease assetsProperty, plant and equipment, net9,595 2,005 
Total lease assets$66,250 $67,270 
Lease liabilities
Current:
 Operating leasesCurrent portion of operating lease liabilities$8,505 $9,099 
 Finance leasesCurrent portion of finance lease liabilities974 704 
Noncurrent:
 Operating leasesLong-term operating lease liabilities49,843 56,299 
 Finance leasesLong-term finance lease liabilities8,956 1,200 
Total lease liabilities$68,278 $67,302 
The aggregate future minimum lease payments under long-term non-cancelable operating and finance leases with terms greater than one year as of September 30, 2023, are as follows:
OperatingFinance
For the period of October 1, 2023 to December 31, 2023$2,723 $374 
Year ending December 31,
202410,668 1,441 
202510,597 1,302 
20269,273 851 
20278,931 853 
20288,377 806 
Thereafter16,777 8,038 
Total lease payments67,346 13,665 
Less portion representing interest(8,998)(3,735)
Total principal58,348 9,930 
Less current portion(8,505)(974)
Long-term portion$49,843 $8,956 
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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)
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net comprised the following:
September 30,
2023
December 31,
2022
Machinery and equipment27,622 27,832 
Peat bogs and related development11,597 10,761 
Building and improvements10,099 9,920 
Land6,104 6,107 
Furniture and fixtures3,947 3,921 
Computer equipment3,320 3,337 
Leasehold improvements5,054 4,177 
Gross property, plant and equipment
67,743 66,055 
Less: accumulated depreciation(19,624)(14,920)
Total property, plant and equipment, net$48,119 $51,135 
Depreciation, depletion and amortization expense related to property, plant and equipment, net was $1,728 and $5,893 for the three and nine months ended September 30, 2023, respectively. Depreciation, depletion and amortization expense related to property, plant and equipment, net was $2,221 and $6,006 for the three and nine months ended September 30, 2022, respectively.
As of September 30, 2023, Land, Building and improvements, Computer equipment and Machinery and equipment contain finance leases assets, recorded at cost of $12,774, less accumulated depreciation of $3,179. As of December 31, 2022, Computer equipment and Machinery and equipment contains finance leases assets, recorded at cost of $3,128, less accumulated depreciation of $1,123. The increase in finance lease assets primarily relates to the Sale-Leaseback Transaction.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities comprised the following:
September 30,
2023
December 31,
2022
Accrued compensation and benefits$2,403 $2,522 
Freight, custom and duty accrual981 1,022 
Goods in transit accrual841 1,172 
Income tax accrual281 451 
Other accrued liabilities3,517 8,041 
Total accrued expenses and other current liabilities$8,023 $13,208 
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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)
9. DEBT
Debt is comprised of the following:
September 30,
2023
December 31,
2022
Term loan - net of unamortized discount and deferred financing costs of $4,481 and $5,142 as of September 30, 2023, and December 31, 2022, respectively
$118,332 $118,608 
Other132 160 
Total debt$118,464 $118,768 
Current portion of long-term debt$1,295 $1,307 
Long-term debt - net of unamortized discount and deferred financing costs of $4,481 and $5,142 as of September 30, 2023, and December 31, 2022, respectively
117,169 117,461 
Total debt$118,464 $118,768 
Term Loan
On October 25, 2021, the Company and certain of its direct and indirect subsidiaries (the "Obligors") entered into a Credit and Guaranty Agreement with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which the Company borrowed a $125,000 senior secured term loan (“Term Loan”). The Term Loan was amended by Amendment No. 1 to Credit and Guaranty Agreement (“Amendment No. 1”) effective on June 27, 2023, to replace the LIBOR referenced rates with SOFR referenced rates. Pursuant to Amendment No. 1, any Term Loan that constitutes a Eurodollar Rate Loan that is outstanding as of the Amendment No. 1 closing date shall continue until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto shall continue and remain in effect (notwithstanding the occurrence of the Amendment No. 1 closing date) until the end of the applicable interest period for such Eurodollar Rate Loan, after which such provisions shall have no further force or effect. Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan. The ABR Loans shall bear interest at the Alternate Base Rate (with a 2.0% floor) plus 4.50%, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0% floor) plus 5.50%. The ABR Loan and Term Benchmark Loan credit spreads of 4.50% and 5.50%, respectively, within the Amendment No. 1 have not changed from the credit spreads in the original Term Loan. Legal fees associated with Amendment No. 1 were not material, and were included in Other income, net, on the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2023. The foregoing description of Amendment No. 1 does not purport to be complete and is qualified in its entirety by reference to the provisions of Amendment No. 1, included as Exhibit 10.2 to this Form 10-Q. Capitalized terms referenced above are defined in the Term Loan.
The Term Loan is subject to a call premium of 1% if called prior to October 25, 2023, and 0% thereafter, and matures on October 25, 2028 ("Maturity Date"). Deferred financing costs are being amortized to interest expense over the term of the loan. For the three months ended September 30, 2023, the effective interest rate was 11.82% and interest expense was $3,667, which includes amortization of deferred financing costs and discount of $223. For the nine months ended September 30, 2023, the effective interest rate was 11.42% and interest expense was $10,543, which includes amortization of deferred financing costs and discount of $661.
The principal amounts of the Term Loan are required to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the original principal amount of the Term Loan, on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date. The Company is also required to make mandatory prepayments in the event of (i) achieving certain excess cash flow criteria, including the achievement and maintenance of a specific leverage ratio, (ii) selling assets that are collateral, or (iii) upon the issuance, offering, or placement of new debt obligations. As described in Note 6 – Leases, the Company intends to reinvest the net cash proceeds received in January 2023 from the Sale-Leaseback Transaction into certain permitted investments, such as capital expenditures. This provision of the Term Loan includes cash investments made within a one-year period from the Sale Leaseback Transaction, and includes investments which are contractually committed within one-year, and paid within 180 days after entering into such contractual commitment. If applicable, the amount of any net cash proceeds which are not reinvested would require the Company to make
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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)
an offer to prepay the corresponding amount on the Term Loan in 2024. The foregoing description of the reinvestment provision does not purport to be complete and is qualified in its entirety by reference to the provisions of the Term Loan.
There were no such mandatory prepayments made since inception of the Term Loan. As of September 30, 2023, and December 31, 2022, the outstanding principal balance on the Term Loan was $122,813 and $123,750, respectively.
The Term Loan requires the Company to maintain certain reporting requirements, affirmative covenants, and negative covenants, and the Company was in compliance with all requirements as of September 30, 2023. The Term Loan is secured by a first lien on the non-working capital assets of the Company and a second lien on the working capital assets of the Company.
Revolving Credit Facility
On March 29, 2021, the Obligors entered into a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender, and the lenders from time to time party thereto. The Revolving Credit Facility is due on June 30, 2026, or any earlier date on which the revolving commitments are reduced to zero.
The Revolving Credit Facility originally had a borrowing limit of $50,000. On August 31, 2021, the Obligors entered into an amendment (the "First Amendment") to increase their original borrowing limit to $100,000. In connection with the First Amendment, the Company's previously acquired subsidiaries became party to the Revolving Credit Facility as either borrowers or as guarantors. On October 25, 2021, the Company and its subsidiaries entered into a second amendment (the “Second Amendment”), with JPMorgan Chase Bank, N.A., pursuant to which the parties consented to the Term Loan described above, and made certain conforming changes to comport with the Term Loan provisions. The Revolving Credit Facility was further amended by a third amendment and joinder dated August 23, 2022 (the “Third Amendment”), pursuant to which several previously acquired subsidiaries became parties to the Revolving Credit Facility and granted liens on their assets. On December 22, 2022, the Company entered into a fourth amendment (the “Fourth Amendment”) pursuant to which a sale-leaseback transaction was permitted, and certain other changes were made, including a reduction of the maximum commitment amount under the Revolving Credit Facility from $100,000 to $75,000 and transitioning the LIBOR based rates to SOFR based rates. On March 31, 2023, the Company and certain of its subsidiaries entered into an amendment (the “Fifth Amendment”) pursuant to which the maturity date was extended to June 30, 2026, the maximum commitment amount under the Revolving Credit Facility was reduced to $55,000, and the interest rate on borrowings was revised to various spreads, based on the Company's fixed charge coverage ratio.
The unamortized debt discount and deferred financing costs were $573 as of September 30, 2023, and are included in other assets in the condensed consolidated balance sheets. Debt discount and deferred financing costs are being amortized to interest expense over the term of the Revolving Credit Facility.
The Revolving Credit Facility is an asset-based facility that is secured by a first lien on the working capital assets of the Company and a second lien on the non-working capital assets of the Company (including most of the Company’s subsidiaries). The borrowing base is based on a detailed monthly calculation of the sum of (a) a percentage of the Eligible Accounts at such time, plus (b) the lesser of (i) a percentage of the Eligible Inventory, at such time, valued at the lower of cost or market value, determined on a first-in-first-out basis, and (ii) the product of a percentage multiplied by the Net Orderly Liquidation Value percentage identified in the most recent inventory appraisal ordered by the Administrative Agent multiplied by the Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, minus (c) Reserves (each of the defined terms above, as defined in the Revolving Credit Facility documents).
The Company is required to maintain certain reporting requirements, affirmative covenants and negative covenants, pursuant to terms outlined in the agreement. Additionally, if the Company’s Excess Availability (as defined in the Revolving Credit Facility documents) is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $55,000), the Company will be required to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis until the Excess Availability is more than 10% of the Aggregate Revolving Commitment for thirty consecutive days. In order to consummate permitted acquisitions or to make restricted payments, the Company would be required to comply with a higher fixed charge coverage ratio of 1.15x, but no such acquisitions or payments are currently contemplated. As of September 30, 2023, the Company is in compliance with the covenants contained in the Revolving Credit Facility.
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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 Revolving Credit Facility provides for various interest rate options including the Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the CB Floating Rate, the Adjusted Daily Simple SOFR, the CBFR, the Canadian Prime Rate, or the CDOR Rate. The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the CBFR rate) use the Term SOFR Rate plus 1.95%. Each rate has a 0.0% floor. A fee of 0.40% per annum is charged for available but unused borrowings.
As of September 30, 2023, and December 31, 2022, the Company had zero borrowed under the facility. As of September 30, 2023, the Company would be able to borrow approximately $28 million under the Revolving Credit Facility, before the Company would be required to comply with the minimum fixed charge coverage ratio of 1.1x.
Other Debt
Other debt of $132 and $160 as of September 30, 2023, and December 31, 2022, respectively, was primarily comprised of a foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage.
Aggregate future principal payments
As of September 30, 2023, the aggregate future principal payments under long-term debt are as follows:
Debt
For the period of October 1, 2023 to December 31, 2023$344 
Year ending December 31,
20241,268 
20251,269 
20261,269 
20271,269 
2028117,526 
Total$122,945 
10. STOCKHOLDERS’ EQUITY
Common stock
Each holder of common stock is entitled to one vote for each share of common stock. Common stockholders have no pre-emptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption rights and carries no subscription or conversion rights. In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies all liabilities and after provision is made for any class of capital stock having preference over the common stock. Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board of Directors. As of September 30, 2023, there were 45,688,695 shares outstanding and 300,000,000 shares authorized.
Warrants
On July 19, 2021, the Company completed the redemption ("Redemption") of certain of its outstanding warrants (the "Investor Warrants") that were issued in connection with a private placement of units (the "private placement"), each consisting of a share of common stock and a warrant to purchase an additional one-half (1/2) shares of common stock. In connection with the private placement, the Company agreed to engage the placement agent (the "Placement Agent") as the Company's warrant solicitation agent in the event the Investor Warrants were called for Redemption. The Company agreed to pay a warrant solicitation fee to the Placement Agent equal to five percent of the amount of net cash proceeds solicited by the Placement Agent upon the exercise of certain Investor Warrants following such call for Redemption. As of September 30, 2023, and December 31, 2022, respectively, there were no Investor Warrants outstanding. In connection with the private placement, the Placement Agent was issued warrants (the “placement agent warrants”) which will expire on December 14, 2023.
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)
As of September 30, 2023, the following table summarizes the outstanding placement agent warrants:
Number of WarrantsExercise Price
Placement agent warrants11,662 $8.43 
Placement agent warrants6,007 $16.86 
Total17,669 $11.30 
As of December 31, 2022, the following table summarizes the outstanding placement agent warrants:
Number of WarrantsExercise Price
Placement agent warrants11,662 $8.43 
Placement agent warrants6,007 $16.86 
Total17,669 $11.30 
11. STOCK-BASED COMPENSATION
Stock-based compensation plan overview
The Company maintains three equity incentive plans: the 2018 Equity Incentive Plan (“2018 Plan”), the 2019 Employee, Director and Consultant Equity Incentive Plan (“2019 Plan”) and the 2020 Employee, Director, and Consultant Equity Incentive Plan (“2020 Plan” and collectively, “Incentive Plans”). The 2020 Plan serves as the successor to the 2019 Plan and 2018 Plan and provides for the issuance of incentive stock options ("ISOs"), stock grants and stock-based awards to employees, directors, and consultants of the Company. No further awards will be issued under the 2018 Plan and 2019 Plan. As of September 30, 2023, a total of 1,427,455 shares are available for grant under the 2020 Plan.
The Incentive Plans are administered by the Company's Board of Directors. Notwithstanding the foregoing, the Board of Directors may delegate concurrent responsibility for administering each plan, including with respect to designated classes of persons eligible to receive an award under each plan, to a committee or committees (which term shall include subcommittees) consisting of one or more members of the Board of Directors (collectively, the “Plan Administrator”), subject to such limitations as the Board of Directors deems appropriate.
In November 2020, the Board of Directors and stockholders approved the 2020 Plan and reserved an aggregate of 2,284,053 shares of common stock for issuance under the 2020 Plan. Pursuant to the 2020 Plan, the number of shares available for issuance under the 2020 Plan may be increased on January 1 of each year, beginning on January 1, 2021, and ending on January 2, 2030, in an amount equal to the lesser of (i) 4% of the outstanding shares of the Company’s common stock on such date or (ii) such number of shares determined by the Plan Administrator.
The 2020 Plan provides for the grant of ISOs, nonqualified stock options, stock grants, and stock-based awards that are based in whole or in part by reference to the Company’s common stock.
The Plan Administrator may grant options designated as incentive stock options or nonqualified stock options. Options shall be granted with an exercise price per share not less than 100% of the fair market value of the common stock on the grant date, subject to certain limitations and exceptions as described in the plan agreements. Generally, the maximum term of an option shall be 10 years from the grant date. The Plan Administrator shall establish and set forth in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable.
The Plan Administrator may grant stock grants and stock-based awards, including securities convertible into shares, stock appreciation rights, phantom stock awards or stock units on such terms and conditions which may be based on continuous service with the Company or related company or the achievement of any performance goals, as the Plan
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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)
Administrator shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the award.
Restricted Stock Unit ("RSU") Activity
RSUs granted to certain executives, employees and members of the Board of Directors expire 10 years after the grant date. The awards generally have a time-based vesting requirement (based on continuous employment). Upon vesting, the RSUs convert into shares of the Company's common stock. The stock-based compensation expense related to service-based awards is recorded over the requisite service period. During the first quarter of 2023, the Company granted RSU awards that are expected to vest with two equal vesting tranches, which are scheduled to occur on October 31, 2023, and October 31, 2024. During the second quarter of 2023, the Company granted RSU awards to members of the Board of Directors that are expected to vest on the one year anniversary of the grant date. During the three months ended September 30, 2023, the Company granted RSU awards that are expected to vest with three equal vesting tranches, annually on the anniversary of the grant date.
The award granted to a former member of the Board (the "former Board member") in July 2020, and modified in November 2020, contained a market-based vesting condition based on the traded value of shares of the Company’s common stock following the Company's initial public offering ("IPO") over a specific time frame. For this award, the market condition was factored into its fair value. The fair value of the award, at the modification date, was $3,180, all of which was recorded as stock-based compensation expense upon the IPO. In July 2021, the market-based vesting condition for this award was satisfied and 148,315 RSUs of the former Board member vested. The remaining 111,236 unvested RSUs met the time-based vesting conditions during the year ended December 31, 2022, and vested at that time. No additional awards with market-based conditions have been granted.
The following table summarizes the activity related to the Company's RSUs for the nine months ended September 30, 2023. For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled during the nine months ended September 30, 2023:
Number of
RSUs
Weighted
average grant
date fair value
Balance, December 31, 2022992,633 $8.57 
Granted1,091,726 $1.19 
Vested(639,118)$7.54 
Forfeited(62,723)$11.05 
Balance, September 30, 2023
1,382,518 $3.11 
As of September 30, 2023, total unamortized stock-based compensation cost related to unvested RSUs was $3,022 and the weighted-average period over which the compensation is expected to be recognized is 1.29 years. For the three and nine months ended September 30, 2023, the Company recognized $1,073 and $3,501, respectively, of total stock-based compensation expense for RSUs. As of September 30, 2023, there were 6,357 RSUs which had previously vested, but were not yet issued due to the recipients' elections to defer the awards.
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Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)
Performance Stock Unit ("PSU") Activity
During the first quarter of 2023, the Company granted PSU awards that are subject to a one-year vesting requirement (based on continuous employment) and contain performance conditions based on certain performance metrics. The following table summarizes the activity related to the Company's PSUs for the nine months ended September 30, 2023:
Number of
PSUs
Weighted
average grant
date fair value
Balance, December 31, 202296,246 $15.74 
Granted1,141,543 $1.77 
Vested(25,894)$15.74 
Forfeited(283,825)$5.23 
Balance, September 30, 2023
928,070 $1.77 
During the nine months ended September 30, 2023, the PSU forfeitures were due to employee terminations and performance conditions that were not satisfied, while PSU vests were from awards granted in prior periods. As of September 30, 2023, total unamortized stock-based compensation cost related to unvested PSUs was $231 and the weighted-average period over which the compensation is expected to be recognized is less than one-year. For the three and nine months ended September 30, 2023, the Company recognized $(110) and $306, respectively, of total stock-based compensation (benefit) expense for PSUs.
Stock Options
The vesting of stock options is subject to certain change in control provisions as provided in the incentive plan agreements and options may be exercised up to 10 years from the date of issuance.
There were no stock options granted or exercised during the nine months ended September 30, 2023. The following table summarizes the stock option activity for the nine months ended September 30, 2023:
NumberWeighted
average
exercise price
Weighted
average grant
date fair value
Weighted average
remaining contractual
term (years)
Outstanding as of December 31, 2022670,026 $9.50 $2.05 5.25
Cancelled(87,749)$8.80 $1.69 
Forfeited(4,316)$12.85 $7.85 
Outstanding as of September 30, 2023
577,961 $9.58 $2.15 3.81
Options exercisable as of September 30, 2023543,551 $9.23 $1.61 3.63
Vested and expected to vest as of September 30, 2023
577,961 $9.58 $2.15 3.81
The following table summarizes the unvested stock option activity for the nine months ended September 30, 2023:
NumberWeighted
average grant
date fair value
Unvested as of December 31, 202270,587 $7.02 
Vested(31,861)$4.38 
Forfeited(4,316)$7.85 
Unvested as of September 30, 2023
34,410 $10.62 
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TABLE OF CONTENTS
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)
As of September 30, 2023, total compensation cost related to unvested awards not yet recognized was $209 and the weighted-average period over which the compensation is expected to be recognized is 1.06 years. For the three and nine months ended September 30, 2023, the Company recognized $59 and $214, respectively, of total stock-based compensation expense for stock options.
12. INCOME TAXES
The Company recorded income tax expense of $89 for the three months ended September 30, 2023, representing an effective tax rate of (0.4)%. The Company recorded an income tax benefit of $82 for the nine months ended September 30, 2023, representing an effective income tax rate of 0.2%. The Company’s effective tax rate for the nine months ended September 30, 2023, differs from the federal statutory rate of 21% primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets in the U.S. and most foreign jurisdictions. The income tax expense and benefit for the three and nine months ended September 30, 2023, respectively, was primarily due to minor foreign tax items in certain jurisdictions.
The Company recorded income tax expense of $759 for the three months ended September 30, 2022, representing an effective tax rate of (3.3)%. The Company recorded an income tax benefit of $11,671 for the nine months ended September 30, 2022, representing an effective income tax rate of 4.5%. The Company’s effective tax rate for the nine months ended September 30, 2022, differs from the federal statutory rate primarily due to the impairment of goodwill for certain 2021 acquisitions which was not deductible for United States 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 3 – 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 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.
13. COMMITMENTS AND CONTINGENCIES
Purchase commitments
From time to time in the normal course of business, the Company will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period.
Contingencies
In the normal course of business, certain claims have been brought against the Company and, where applicable, its suppliers. While there is inherent difficulty in predicting the outcome of such matters, management has vigorously contested the validity of these claims. Based on available information, management believes the claims are without merit and does not expect that the outcome, individually or in the aggregate, would have a material adverse effect on the consolidated financial positions, results of operations, cash flows or future earnings.
14. FAIR VALUE MEASUREMENTS
Recurring
Contingent consideration, as described under the heading Business combinations in Note 2 – Basis of Presentation and Significant Accounting Policies, was measured at estimated fair value on a recurring basis and based on Level 3 fair value measurements. The fair value of the contingent consideration for the Heavy 16 and Aurora Innovations acquisitions was $200 and $16,834, respectively, as of December 31, 2021. There was no change in the fair value of the contingent consideration for the Heavy 16 acquisition during fiscal year 2022, and it was paid in April 2022. The change in the fair value of contingent consideration for the Aurora Innovations acquisition was a benefit of $1,560, during the six months ended June 30, 2022, and was recognized in SG&A on the condensed consolidated statements of operations during that period. The value of the contingent consideration was $15,274 as of June 30, 2022, and was subsequently paid in July 2022. As of September 30, 2023,
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TABLE OF CONTENTS
Hydrofarm Holdings Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except share and per share amounts)
and December 31, 2022, the Company had no remaining unsettled contingent consideration relating to the Company's five acquisitions from 2021.
Nonrecurring
Nonrecurring fair value measurements include the Company’s goodwill impairment recognized during the three and six months ended June 30, 2022, as determined based on unobservable Level 3 inputs. Refer to Note 3 – Goodwill and Intangible Assets, Net, for further discussion.
The note receivable, as described in Note 2 – Basis of Presentation and Significant Accounting Policies, was measured at fair value on a nonrecurring basis. During the nine months ended September 30, 2022, the Company measured an impairment on the note receivable based on the estimated fair value of the collateral, which was considered a Level 3 fair value measurement. The carrying value of the note receivable was $3,111 as of December 31, 2021. The Company recorded an impairment loss of zero and $2,636 during the three and nine months ended September 30, 2022, recognized in Impairments on the condensed consolidated statements of operations. The carrying value of the note receivable was $475 as of December 31, 2022. As of December 31, 2022, the note receivable was included in other assets on the condensed consolidated balance sheet.
Other Fair Value Measurements
The following table summarizes the fair value of the Company’s assets and liabilities which are provided for disclosure purposes:
September 30, 2023December 31, 2022
Fair Value Hierarchy Level
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
Assets
Cash and cash equivalents
Level 1
32,45732,457