What changed in this filing

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Item 1. Financial Statements

2021-11-15 compared with 2021-08-13 · 329 added, 167 removed, 619 unchanged (44% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

June 30, December 31,

September 30, December 31,

Current assets:

21 unchanged sentences

Long-term debt 467 290

Deferred tax liabilities 3,185 —

Other long-term liabilities 811 567

3 unchanged sentences

50,000,000 shares authorized;

0 shares issued and outstanding at June 30, 2021 and December 31, 2020)

0 shares issued and outstanding at September 30, 2021 and December 31, 2020)

Stockholders’ equity

1 unchanged sentence

300,000,000 shares authorized;

41,296,585 and 33,499,953 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively)

44,099,239 and 33,499,953 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively)

Additional paid-in capital 765,946 364,248

Accumulated other comprehensive income 1,202 599

Accumulated other comprehensive (loss) income ( 1,438 ) 599

Accumulated deficit ( 129,470 ) ( 153,932 )

5 unchanged sentences

(In thousands, except share and per share amounts)

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

5 unchanged sentences

Impairment, restructuring and other 246 184 262 276

Income from operations 2,331 4,954 8,713 4,787

(Loss) income from operations ( 2,406 ) 5,477 6,307 10,264

Interest expense ( 132 ) ( 2,549 ) ( 276 ) ( 7,858 )

Loss on debt extinguishment — — ( 680 ) —

Other income, net 43 305 127 326

Income (loss) before tax 2,320 2,753 8,016 ( 196 )

Income tax expense ( 63 ) ( 186 ) ( 819 ) ( 330 )

Net income (loss) 2,257 2,567 7,197 ( 526 )

Other (expense) income, net ( 41 ) ( 223 ) 86 103

(Loss) income before tax ( 2,579 ) 2,705 5,437 2,509

Income tax benefit (expense) 19,844 ( 54 ) 19,025 ( 384 )

Net income 17,265 2,651 24,462 2,125

Cumulative dividends allocated to Series A Convertible Preferred Stock — ( 682 ) — ( 1,990 )

Net income (loss) attributable to common stockholders $ 2,257 $ 1,893 $ 7,197 $ ( 1,834 )

Net income (loss) per share attributable to common stockholders:

Net income attributable to common stockholders $ 17,265 $ 1,969 $ 24,462 $ 135

Net income per share attributable to common stockholders:

Basic $ 0.39 $ 0.09 $ 0.64 $ 0.01

5 unchanged sentences

Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Net income (loss) 2,257 2,567 $ 7,197 $ ( 526 )

Other comprehensive income (loss):

Foreign currency translation gain (loss) 380 648 603 ( 635 )

Total comprehensive income (loss) $ 2,637 $ 3,215 $ 7,800 $ ( 1,161 )

Net income 17,265 2,651 $ 24,462 $ 2,125

Other comprehensive (loss) income:

Foreign currency translation (loss) gain ( 2,640 ) 389 ( 2,037 ) ( 246 )

Total comprehensive income $ 14,625 $ 3,040 $ 22,425 $ 1,879

The accompanying notes are an integral part of the condensed consolidated financial statements.

10 unchanged sentences

Shares Amount Shares Amount

Balance, March 31, 2020

Balance, June 30, 2020

7,725,045 $ 26,902 20,688,439 $ 2 $ 155,036 $ ( 779 ) $ ( 147,185 ) $ 7,074

3 unchanged sentences

Foreign currency translation gain — — — — — 389 — 389

Balance, June 30, 2020

Balance, September 30, 2020

7,725,045 $ 27,584 20,688,439 $ 2 $ 154,599 $ ( 390 ) $ ( 144,534 ) $ 9,677

Balance, March 31, 2021

Balance, June 30, 2021

— $ — 41,296,585 $ 4 $ 707,690 $ 1,202 $ ( 146,735 ) $ 562,161

4 unchanged sentences

Issuance of common stock under investor warrant exercise — — 2,016,117 — 33,992 — — 33,992

Issuance of common stock in connection with follow-on public offering, net of offering costs of $ 16,303

— — 5,526,861 1 309,781 — — 309,782

Issuance of common stock in connection with business combination — — 456,499 — 25,824 — — 25,824

1 unchanged sentence

Net income — — — — — — 17,265 17,265

Foreign currency translation gain — — — — — 380 — 380

Balance, June 30, 2021

Foreign currency translation loss — — — — — ( 2,640 ) — ( 2,640 )

Balance, September 30, 2021

— $ — 44,099,239 $ 4 $ 765,946 $ ( 1,438 ) $ ( 129,470 ) $ 635,042

18 unchanged sentences

Series A Convertible Preferred Stock cumulative dividend — 1,990 — — ( 1,990 ) — — ( 1,990 )

Net loss — — — — — — ( 526 ) ( 526 )

Net income — — — — — — 2,125 2,125

Foreign currency translation loss — — — — — ( 246 ) — ( 246 )

Balance, June 30, 2020

Balance, September 30, 2020

7,725,045 $ 27,584 20,688,439 $ 2 $ 154,599 $ ( 390 ) $ ( 144,534 ) $ 9,677

11 unchanged sentences

Net income — — — 24,462 24,462

Foreign currency translation gain — — — — — 603 — 603

Balance, June 30, 2021

Foreign currency translation loss — — — — — ( 2,037 ) — ( 2,037 )

Balance, September 30, 2021

— $ — 44,099,239 $ 4 $ 765,946 $ ( 1,438 ) $ ( 129,470 ) $ 635,042

3 unchanged sentences

(In thousands)

Six months ended June 30,

Nine months ended September 30,

Operating activities

Net income (loss) $ 7,197 $ ( 526 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Net income $ 24,462 $ 2,125

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization 8,638 5,170

1 unchanged sentence

Non-cash operating lease expense 3,678 2,538

Deferred income tax benefit ( 21,252 ) —

Amortization of inventory step-up of basis 2,034 —

Other 1,361 601

10 unchanged sentences

Investing activities

Business Combinations, net of cash, cash equivalents and restricted cash acquired ( 195,816 ) —

Business Combinations, net of cash and cash equivalents acquired ( 415,918 ) —

Purchases of property and equipment ( 3,069 ) ( 700 )

9 unchanged sentences

Borrowings under revolving credit facilities 96,970 213,621

Repayments of revolving credit facilities ( 69,716 ) ( 126,314 )

Repayments of long-term debt and revolving credit facilities ( 70,680 ) ( 213,709 )

Other ( 509 ) ( 570 )

1 unchanged sentence

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 29 ) 39

Net increase in cash, cash equivalents and restricted cash 118,412 595

Net decrease in cash, cash equivalents and restricted cash ( 62,499 ) ( 2 )

Cash, cash equivalents and restricted cash at beginning of period 76,955 32,857

11 unchanged sentences

Follow-on public offering

On May 3, 2021, the Company closed its follow-on public offering ("follow-on offering") under a registration statement effective April 28, 2021, in which it issued and sold 5,526,861 shares of its common stock, including the full exercise by the underwriters of its option to purchase 720,894 additional shares of common stock.

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.

1 unchanged sentence

Initial public offering

On December 14, 2020, the Company closed its initial public offering (“IPO”) under a registration statement effective December 9, 2020, in which it issued and sold 9,966,667 shares of its common stock, including the full exercise by the underwriters of its option to purchase 1,300,000 additional shares of common stock.

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.

19 unchanged sentences

Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

Significant estimates include provisions for sales returns, rebates and claims from customers, realization of accounts receivable and inventories, fair value of assets acquired and liabilities assumed for business combinations, valuation of intangible assets and goodwill, incremental borrowing rate applied in lease accounting, valuation of stock, valuation of stock-based compensation, recognition of deferred income taxes, recognition of liabilities related to commitments and contingencies and valuation allowances.

Significant estimates include provisions for sales returns, rebates and claims from customers, realization of accounts receivable and inventories, fair value of assets acquired and liabilities assumed for business combinations, valuation of intangible assets and goodwill, incremental borrowing rate applied in lease accounting, valuation of stock-based compensation, recognition of deferred income taxes, recognition of liabilities related to commitments and contingencies and valuation allowances.

Actual results may differ from these estimates.

21 unchanged sentences

Segment information

The Company's chief operating decision maker ("CODM") is the chief executive officer ("CEO") who reviews financial information for the purposes of making operating decisions, assessing financial performance and allocating resources.

The Company's chief operating decision maker is the chief executive officer ("CEO") who reviews financial information for the purposes of making operating decisions, assessing financial performance and allocating resources.

The business is organized as two operating segments, the U.S.

4 unchanged sentences

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

3 unchanged sentences

Total consolidated net sales $ 123,822 $ 96,658 $ 369,011 $ 254,763

September 30,

2021 December 31,

6 unchanged sentences

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

September 30,

2021 December 31,

2 unchanged sentences

Cash and cash equivalents, and restricted cash $ 14,456 $ 76,955

Cash and cash equivalents and restricted cash as of June 30, 2020 were $ 31,827 and $ 1,625 , respectively, for total cash, cash equivalents and restricted cash as of June 30, 2020 of $ 33,452 .

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

Hydrofarm Holdings Group, Inc.

6 unchanged sentences

Payment terms are primarily at the point of sale or due within thirty days.

The amount billed to customers for shipping and handling costs included in net sales was $ 1,683 and $ 2,928 during the three and six months ended June 30, 2021, respectively, and $ 1,588 and $ 2,344 during the three and six months ended June 30, 2020, respectively.

The amount billed to customers for shipping and handling costs included in net sales was $ 2,242 and $ 5,170 during the three and nine months ended September 30, 2021, respectively, and $ 1,131 and $ 3,475 during the three and nine months ended September 30, 2020, respectively.

Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs included in cost of goods sold under the practical expedient provisions of ASC 606.

7 unchanged sentences

Under FASB ASC 740-270-30-36, entities subject to income taxes in multiple jurisdictions should apply one overall ETR instead of separate ETRs for each jurisdiction when calculating the interim-period income tax or benefit related to consolidated ordinary income (or loss) for the year-to-date interim period, except in certain circumstances.

The Company’s effective tax rates for the six months ended June 30, 2021 and 2020 differ from the federal statutory rate of 21% principally as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforward.

The Company recorded a tax benefit of $ 19,844 and $ 19,025 for the three and nine months ended September 30, 2021, respectively.

The Company’s effective tax rates for the three and nine months ended September 30, 2021 differ from the federal statutory rate of 21% primarily as a result of a reduction in the valuation allowance recorded against the Company's net deferred tax assets.

In connection with the acquisition of shares of the H&G Entities (as defined below), the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets (see Note 3 - Business Combinations) .

As a result, a portion of the Company's valuation allowance was released and the Company recorded a $ 21,252 tax benefit for the three and nine months ended September 30, 2021.

The tax benefit is partially offset by income taxes from certain foreign jurisdictions where the Company conducts business and state minimum income taxes in the United States.

The Company recorded a tax expense of $ 54 and $ 384 for the three and nine months ended September 30, 2020, respectively.

The Company’s effective tax rates for the three and nine months ended September 30, 2020 differ from the federal statutory rate of 21% primarily as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforwards.

The tax expense for the three and nine months ended September 30, 2020 was primarily due to foreign and state income tax expense.

Fair value 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.

2 unchanged sentences

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Level 2 — Valuation techniques based on inputs that are quoted prices of similar instruments in active markets;

5 unchanged sentences

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Recently issued accounting pronouncements

22 unchanged sentences

The Company is currently evaluating the impact the adoption of Topic 326 will have on its condensed consolidated financial statements.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

BUSINESS COMBINATIONS

Heavy 16 Acquisition

On May 3, 2021, the Company acquired 100 % of the issued and outstanding membership interests of Field 16, LLC ("Heavy 16"), a leading manufacturer and supplier of branded plant nutritional products.

On May 3, 2021, the Company acquired 100 % of the issued and outstanding membership interests of Field 16, LLC ("Heavy 16"), a manufacturer and supplier of branded plant nutritional products.

As a result of the acquisition, the Company is broadening its proprietary branded offering into the plant nutrients category complementing other product offerings.

5 unchanged sentences

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 continent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements, including estimated financial forecasts .

The contingent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements, including estimated financial forecasts .

The key assumptions in applying the valuation model were as follows:

2 unchanged sentences

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

As of June 30, 2021, the related contingent consideration was $ 604 .

As of September 30, 2021, the related contingent consideration was $ 218 .

Hydrofarm Holdings Group, Inc.

31 unchanged sentences

The amount of goodwill is fully deductible for tax purposes.

The customer relationships and technology and formulation & recipes were assigned estimated useful lives of 18 years.

The trademarks and trade names are considered to have indefinite useful lives and will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that assets are impaired.

The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 18 years.

Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period as the Company's fair value assessments are finalized.

7 unchanged sentences

(“Allied”), South Coast Horticultural Supply, Inc.

(“SC” and, together with HG, HW and Allied, the “H&G Entities”), a manufacturer and distributor of premium grade plant nutrients and fertilizers to domestic and various international markets.

(“SC” and, together with HG, HW and Allied, the “H&G Entities”), a manufacturer and distributor of plant nutrients and fertilizers to domestic and various international markets.

As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients category complementing other product offerings.

18 unchanged sentences

Current portion of lease liabilities ( 447 )

Deferred taxes ( 24,438 )

Long-term lease liabilities ( 1,501 )

Net identifiable assets ( 15,335 )

Identifiable intangible assets

Customer relationships 11,600

Trademarks and trade names 29,100

Technology and formulations & recipes 53,600

Total identifiable intangible assets 94,500

Goodwill 55,876

Total purchase price allocation $ 135,041

The Company is in the process of obtaining third-party valuations of certain intangible assets;

thus, the provisional measurement of goodwill is subject to change.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Goodwill arose on the acquisition of the H&G Entities because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce.

These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets.

The amount of goodwill is not deductible for tax purposes.

The customer relationships and technology and formulations & recipes were assigned estimated useful lives of 18 years.

Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period as the Company's fair value assessments are finalized.

As part of the share acquisition of the H&G Entities, the Company allocated a significant value of the acquisition to identified intangible assets that are not deductible for tax purposes.

Therefore, a deferred tax liability arose providing an additional source of taxable income to support the realization of pre-existing deferred tax assets.

Aurora Acquisition

On July 1, 2021, the Company acquired 100 % of the issued and outstanding membership interests of Gotham Properties LLC (“Gotham Properties”), Aurora Innovations LLC (“Aurora Innovations”), Aurora International LLC (“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”), a manufacturer of plant fertility product lines.

As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings.

The preliminary acquisition fair value of the consideration transferred for Aurora was $ 180,280 , consisting of $ 135,371 in cash, $ 25,824 of the Company's common stock, $ 19,300 contingent consideration less $ 215 forgiveness of accounts payable.

The fair value of the common stock issued was determined based on the closing market price of the Company's common stock on the acquisition date.

The forgiveness of accounts payable represents an effective settlement of a preexisting relationship between the parties.

The financial results of Aurora are included in the U.S.

operating segment since the acquisition date.

Pursuant to the purchase agreement, the Company may pay a maximum contingent consideration equal to $ 70,997 .

To the extent 2021 EBITDA of Aurora exceeds $ 15,556 , the excess is multiplied by eleven to determine contingent consideration.

As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $ 19,300 as of the acquisition date in the condensed consolidated balance sheets.

The contingent consideration was estimated using the discounted cash flow method, which estimated the incremental EBITDA based on the Company's forecasted 2021 EBITDA of Aurora as of the acquisition date, discounted to a present value as of the acquisition date using a discount rate of 15 %.

That measure is based on significant inputs that are not observable in the market, which ASC 820 - Fair Value Measurements refers to as a Level 3 input .

As of September 30, 2021, the related contingent consideration was $ 19,300 .

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

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

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

Components of Purchase Price:

Cash $ 135,371

Common stock 25,824

Contingent consideration 19,300

Forgiveness of accounts payable ( 215 )

Total purchase price $ 180,280

Acquisition-related costs $ 6,063

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable, net $ 6,967

Inventories 9,823

Prepaid expenses and other current assets 1,086

Property and equipment, net 18,619

Accounts payable ( 4,279 )

Accrued expenses and other current liabilities ( 782 )

Other long-term liabilities ( 664 )

Net identifiable assets $ 30,770

Identifiable intangible assets

Other intangible assets 5

Total identifiable intangible assets 5

Goodwill 149,505

Total purchase price allocation $ 180,280

The Company is in the process of obtaining third-party valuations of certain tangible and intangible assets, including asset retirement obligations;

thus, the provisional measurement of goodwill is subject to change.

The amount of goodwill is fully deductible for tax purposes.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Greenstar/Grotek Acquisition

On August 3, 2021, the Company acquired 100 % of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of horticultural products and solutions for global, domestic and commercial use.

As a result of the acquisition, the Company is further broadening its proprietary branded offering into the plant nutrients and grow media category complementing other product offerings.

The preliminary acquisition fair value of the consideration transferred for Greenstar was $ 83,618 , consisting of $ 85,219 in cash, less $ 1,601 forgiveness of accounts payable, net, and obligations due under a distribution agreement.

The forgiveness of accounts payable, net, and obligations due under a distribution agreement represent an effective settlement of a preexisting relationship between the parties.

The financial results of Greenstar are included in the Canada operating segment since the acquisition date.

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

Components of Purchase Price:

Cash $ 85,219

Forgiveness of accounts payable, net, and obligations due under a distribution agreement

Total purchase price $ 83,618

Acquisition-related costs $ 2,946

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable, net $ 982

Inventories 7,089

Prepaid expenses and other current assets 447

Property and equipment, net 1,324

Operating lease right-of-use assets 2,393

Other assets 231

Accounts payable ( 777 )

Accrued expenses and other current liabilities ( 1,436 )

Current portion of lease liabilities ( 624 )

Long-term lease liabilities ( 1,836 )

Net identifiable assets 7,793

Identifiable intangible assets

Other intangible assets 247

Total identifiable intangible assets 247

Goodwill 75,578

Total purchase price allocation $ 83,618

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company is in the process of obtaining third-party valuations of certain intangible assets;

thus, the provisional measurement of goodwill is subject to change.

The amount of goodwill is not deductible for tax purposes.

Supplemental Disclosure Of Financial Results

The following represents the condensed consolidated statements of operations as if the acquisitions had been included in the consolidated results of the Company for the entire periods presented below.

Management considers these estimates to represent an approximate measure of the performance of the combined Company.

Three months ended June 30, Six months ended June 30,

Management considers these estimates to represent an approximate measure of the performance of the combined Company (in millions):

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

2 unchanged sentences

These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the acquisitions to reflect the additional amortization of intangibles and the purchase price adjustments as if they had been applied on January 1, 2020.

The supplemental net income for the three and six months ended June 30, 2021 were adjusted to exclude the acquisition-related costs incurred in connection with the acquisitions.

The supplemental net income for the three and nine months ended September 30, 2021 were adjusted to exclude the acquisition-related costs incurred in connection with the acquisitions.

Accordingly, the 2020 supplemental net income was adjusted to include these charges.

For the tax effects of the net income adjustments, the Company factored in its net operating loss carryforwards.

Since the acquisition date, the estimated net sales and net income of these acquisitions for the three and six months ended June 30, 2021 are $ 9 million and $ 4 million, respectively.

The Company is in the process of vertically integrating the operations of these acquisitions into Hydrofarm, LLC and its existing functions (e.g., sales, supply chain, marketing, etc.).

Since the acquisition date, the estimated net sales and net income of these acquisitions are as follows (in millions):

Three months ended Nine months ended

September 30, 2021

Net sales $ 31 $ 40

Net income $ 9 $ 13

The Company is in the process of vertically integrating the operations of these acquisitions into Hydrofarm, LLC and its subsidiaries and their existing functions (e.g., sales, supply chain, marketing, etc.).

Accordingly, the net sales and net income of these acquisitions represent an approximation.

Aurora Acquisition

On July 1, 2021, the Company completed the acquisition of 100 % of the issued and outstanding membership interests of Gotham Properties LLC (“Gotham Properties”), Aurora Innovations Inc.

(“Aurora Innovations”), Aurora International, Inc.(“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”), a manufacturer of plant fertility product lines free from harmful chemical residues and pesticides.

The total purchase price was up to $ 161 million, consisting of $ 135 million in cash and $ 26 million of the Company's common stock, subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness of Aurora.

The purchase price excludes a potential earn out payment estimated at approximately $ 21 million based on achievement of certain performance metrics.

Greenstar/Grotek Acquisition

On August 3, 2021, the Company closed the acquisition of 100 % of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of premium horticultural products and solutions for global, domestic and commercial use since 1998.

The Company paid a purchase price of approximately $ 83 million in cash subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness of Greenstar.

Innovative Growers Equipment, Inc.

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 purchase price, which is subject to customary adjustments for closing cash and working capital, was approximately $ 58 million and was comprised of approximately $ 46.4 million in cash and $ 11.6 million in the Company's common stock.

Hydrofarm Holdings Group, Inc.

2 unchanged sentences

GOODWILL AND INTANGIBLE ASSETS, NET

As of June 30, 2021, the Company completed the acquisitions of all of the assets of Heavy 16 and the H&G Entities.

The acquisitions were accounted for as a business combination, resulting in recognition of $ 147,032 in goodwill and $ 57,400 in intangible assets (See Note 3 - Business Combinations).

As of September 30, 2021, the Company completed the acquisitions of Heavy 16, the H&G Entities, Aurora, and Greenstar (see Note 3 - Business Combinations ).

The changes in goodwill are as follows:

September 30,

2021 December 31,

Balance, beginning of period $ — $ —

Acquisitions (Note 3) 147,032 —

Acquisition - Heavy 16 18,204 —

Acquisition - H&G Entities 55,876 —

Acquisition - Aurora 149,505 —

Acquisition - Greenstar 75,578 —

Foreign currency translation adjustments, net ( 1,638 ) —

Balance, end of period $ 297,525 $ —

4 unchanged sentences

Intangible assets, net comprised the following:

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value

12 unchanged sentences

Total Intangible assets, net $ 223,947 $ ( 24,933 ) $ 199,014 $ 71,227 $ ( 18,806 ) $ 52,421

( 1 ) Includes intangible assets acquired from Heavy 16 (See Note 3 - Business Combinations)

Amortization expense was $ 1,766 and $ 1,349 for the three months ended June 30, 2021 and 2020, respectively.

Amortization expense was $ 2,972 and $ 2,724 for the six months ended June 30, 2021 and 2020, respectively.

For intangible assets subject to amortization, the weighted-average amortization period as of June 30, 2021 for computer software, customer relationships, and technology and formulations & recipes, was 5.0 years, 18.0 years, and 18.0 years, respectively.

The estimated aggregate future amortization expense for intangible assets subject to amortization as June 30, 2021 is summarized below:

( 1 ) Includes the intangible assets acquired from Heavy 16 and the H&G Entities (See Note 3 - Business Combinations)

Amortization expense was $ 3,197 and $ 1,162 for the three months ended September 30, 2021 and 2020, respectively.

Amortization expense was $ 6,169 and $ 3,886 for the nine months ended September 30, 2021 and 2020, respectively.

For intangible assets subject to amortization, the weighted-average amortization period as of September 30, 2021 for computer software, customer relationships, and technology and formulations & recipes was 5.0 years, 18.0 years, and 18.0 years, respectively.

The estimated aggregate future amortization expense for intangible assets subject to amortization as September 30, 2021 is summarized below:

Estimated Future Amortization Expense

For the period of July 1, 2021 to December 31, 2021 $ 3,580

For the period of October 1, 2021 to December 31, 2021 $ 2,725

Year ending December 31,

4 unchanged sentences

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

NET INCOME (LOSS) PER COMMON SHARE (“EPS”)

NET INCOME PER COMMON SHARE (“EPS”)

Basic EPS is computed using net income (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock units (“RSUs”).

3 unchanged sentences

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.

Net income (loss) per share attributable to common stockholders

The following table presents information necessary to calculate basic and diluted EPS for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30, Six months ended June 30,

Basic and diluted net income (loss) per share attributable to common stockholders is computed using the two-class method as the convertible preferred stock is determined to be a participating security and the application of the if-converted method is not more dilutive.

Net income per share attributable to common stockholders

The following table presents information necessary to calculate basic and diluted EPS for the three and nine months ended September 30, 2021 and 2020:

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Net income (loss) $ 2,257 $ 2,567 $ 7,197 $ ( 526 )

Net income $ 17,265 $ 2,651 $ 24,462 $ 2,125

Cumulative dividends allocated to Series A Convertible Preferred Stock — ( 682 ) — ( 1,990 )

Net income (loss) available for distribution 2,257 1,893 7,197 ( 1,834 )

Net income available for distribution 17,265 1,969 24,462 135

Undistributed earnings allocable to participating securities — ( 196 ) — ( 13 )

Basic and diluted net income (loss) attributable to common stockholders $ 2,257 $ 1,704 $ 7,197 $ ( 1,834 )

Effect on net income (loss) of dilutive securities using the “if converted” method — — — —

Diluted net income (loss) attributable to common stockholders after adjustment for assumed conversions $ 2,257 $ 1,704 $ 7,197 $ ( 1,834 )

Weighted-average shares of common stock outstanding for basic net income (loss) per share attributable to common stockholders 37,862,417 20,688,439 35,792,374 20,688,439

Basic and diluted net income attributable to common stockholders $ 17,265 $ 1,773 $ 24,462 $ 122

Effect on net income of dilutive securities using the “if converted” method — — — —

Diluted net income attributable to common stockholders after adjustment for assumed conversions $ 17,265 $ 1,773 $ 24,462 $ 122

Weighted-average shares of common stock outstanding for basic net income per share attributable to common stockholders 43,760,975 20,688,439 38,497,925 20,688,439

Dilutive effect of warrants using the treasury stock method 710,760 81,971 1,860,523 29,113

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Dilutive effect of stock options using the treasury stock method 641,061 142,232 711,992 47,411

Weighted-average shares of common stock outstanding for diluted net income (loss) per share attributable to common stockholders 42,044,929 20,877,167 40,523,686 20,688,439

Basic net income (loss) per share attributable to common stockholders $ 0.06 $ 0.08 $ 0.20 $ ( 0.09 )

Diluted net income (loss) per share attributable to common stockholders $ 0.05 $ 0.08 $ 0.18 $ ( 0.09 )

The computation of the weighted-average shares of common stock outstanding for diluted EPS includes the

Weighted-average shares of common stock outstanding for diluted net income per share attributable to common stockholders 46,288,075 21,111,975 42,494,624 20,892,507

Basic net income per share attributable to common stockholders $ 0.39 $ 0.09 $ 0.64 $ 0.01

Diluted net income per share attributable to common stockholders $ 0.37 $ 0.08 $ 0.58 $ 0.01

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

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

following potential common shares attributable to common stockholders using the treasury stock method for the weighted-average period during which the units were outstanding:

Three months ended June 30, Six months ended June 30,

The computation of the weighted-average shares of common stock outstanding for diluted EPS includes the following potential common shares attributable to common stockholders using the treasury stock method for the weighted-average period during which the units were outstanding:

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Shares subject to warrants outstanding 1,073,839 344,716 2,532,580 344,716

Shares subject to unvested restricted stock units subject to time-based and/or market-based conditions vesting 1,554,156 309,348 1,659,654 —

Shares subject to unvested restricted stock units with time-based and/or market-based vesting conditions 1,294,652 402,151 1,536,886 402,151

Shares subject to stock options outstanding 808,127 824,221 858,952 848,837

The computation of the weighted-average shares of common stock outstanding for diluted EPS excludes the following potential common shares as their inclusion would have an anti-dilutive effect on diluted EPS attributable to common stockholders:

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Shares subject to warrants outstanding — 3,541,475 — 3,541,475

Shares subject to unvested restricted stock units with performance conditions — 1,820,598 — 1,820,598

Shares subject to unvested restricted stock units subject only to time-based vesting 22,979 — 11,553 91,650

Shares subject to unvested restricted stock units with performance vesting conditions — 2,117,228 — 2,117,228

Shares subject to unvested restricted stock units with only time-based vesting conditions 66,451 — 29,816 —

Shares subject to stock options outstanding 44 — 11 —

4 unchanged sentences

Accounts receivable, net comprised the following:

September 30,

2021 December 31,

4 unchanged sentences

Inventories comprised the following:

September 30,

2021 December 31,

4 unchanged sentences

Total inventories $ 163,354 $ 88,618

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The December 31, 2020 amounts for raw materials were reclassified from finished goods to separate line items to conform to the current year presentation.

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The Company recognizes operating lease costs over the respective lease periods, including short-term and month-to-month leases.

During the three and six months ended June 30, 2021, the Company incurred operating lease costs of $ 1,678 and $ 3,172 , respectively, and during the three and six months ended June 30, 2020, the Company incurred operating lease costs of $ 1,410 and $ 2,828 , respectively.

During the three and nine months ended September 30, 2021, the Company incurred operating lease costs of $ 2,429 and $ 5,601 , respectively, and during the three and nine months ended September 30, 2020, the Company incurred operating lease costs of $ 1,418 and $ 4,246 , respectively.

These costs are included primarily within selling, general and administrative expense in the condensed consolidated statements of operations.

Supplemental balance sheet information related to the Company’s operating leases are as follows:

September 30,

2021 December 31,

4 unchanged sentences

Total lease liabilities $ 31,059 $ 19,021

As of June 30, 2021, future minimum lease payments under non-cancelable operating leases are as follows:

For the period of July 1, 2021 to December 31, 2021 $ 3,099

As of September 30, 2021, future minimum lease payments under non-cancelable operating leases are as follows:

For the period of October 1, 2021 to December 31, 2021 $ 1,726

Year ending December 31,

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Monthly rent fee starts at approximate $ 229 , and increases periodically to the final year when the monthly rent is $ 293 .

In July 2021, the Company executed a lease of approximately 6,000 square feet for an office in Petaluma, CA.

The new lease commencing August 1, 2021 has a term of 25 months with an option to renew for another two years at the then fair market value.

Rent is abated for the first month.

Thereafter, monthly rent is approximately $ 8 until the final year.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

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

In April 2021, the Company executed a lease for approximately 175,000 square feet of warehouse space in Fairfield, CA for a distribution center that the Company will relocate to from its Petaluma, California distribution facility.

The new lease commencing August 15, 2021 has a term of 126 months with an option to renew at the then fair market value for another ten years .

In April 2021, the Company executed a lease for approximately 175,000 square feet of warehouse space in Fairfield, California for a distribution center that the Company will relocate to from its Petaluma, California distribution facility.

The new lease commencing approximately December 1, 2021 has a term of 126 months with an option to renew at the then fair market value for another ten years .

Rent is abated for the first six months .

Thereafter, monthly rent is approximately $ 77 , and increases periodically to the final year when the monthly rent is $ 134 .

In November 2021, the Company executed a lease for approximately 109,000 square feet of warehouse in Cambridge, Ontario, Canada.

The new lease commencing June 1, 2023 has a term of 120 months with two options to renew for an additional five years each at the then prevailing fair market rental value.

Rent is abated for the first month.

Thereafter, monthly rent starts at approximate $ 71 , and increases periodically to the final year where the monthly rent is $ 92 .

The future minimum lease payments for executed non-cancelable operating leases not yet commenced are as follows:

For the period of July 1, 2021 to December 31, 2021 $ 1,100

For the period of October 1, 2021 to December 31, 2021 $ 112

Year ending December 31,

1 unchanged sentence

Total rental payments $ 53,791

In July 2021, the Company executed a sublease agreement for its Santa Fe Springs, CA location.

The sublease commences August 1, 2021 and terminates June 30, 2023 in alignment with the master lease.

Sublease income for 2021, 2022 and 2023 are $ 378 , $ 917 and $ 467 , respectively.

In July 2021, the Company executed a sublease agreement for its Santa Fe Springs, California location.

The sublease commences October 1, 2021 and terminates June 30, 2023 in alignment with the master lease.

Sublease income for 2021, 2022 and 2023 is $ 176 , $ 823 and $ 415 , respectively.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

PROPERTY AND EQUIPMENT, NET

Property and equipment comprised the following:

September 30,

2021 December 31,

Machinery and equipment $ 12,883 $ 3,648

Building and improvements 6,030 190

Land 3,076 224

Leasehold improvements 3,066 2,068

Peat bogs and related development

Computer equipment 2,858 2,079

Furniture and fixtures 2,615 1,154

Gross property and equipment (2)

accumulated depreciation ( 6,865 ) ( 5,375 )

Total property and equipment, net (2)

$ 26,652 $ 3,988

(2) Includes the property and equipment assets acquired from Heavy 16, the H&G Entities, Aurora, and Greenstar (see Note 3 - Business Combinations).

The December 31, 2020 amounts for building and improvements, land, and computer equipment were reclassified from other to separate line items to conform to the current year presentation.

Depreciation and amortization expense related to property and equipment, net was $ 1,662 and $ 346 for the three months ended September 30, 2021 and 2020, respectively.

Depreciation and amortization expense related to property and equipment, net was $ 2,469 and $ 1,284 for the nine months ended September 30, 2021 and 2020, respectively.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities comprised the following:

September 30,

2021 December 31,

Acquisition post-close related payable $ 4,805 $ —

Accrued compensation and benefits $ 5,043 $ 9,902

4 unchanged sentences

Obligations due under a distribution agreement — 590

Contingent consideration 19,518 —

Taxes assumed related to acquisitions 9,718 —

Acquisition post-close related payable 669 —

Other accrued liabilities 7,287 3,853

4 unchanged sentences

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

Debt is comprised of the following:

September 30,

2021 December 31,

Line of credit $ 26,500 $ —

Other 1,180 1,036

Total debt $ 27,680 $ 1,036

Current portion $ 27,213 $ 746

Long term 467 290

Total debt $ 27,680 $ 1,036

Term Loan with Brightwood

In May 2017, a term loan in the aggregate principal amount of $ 75,000 (the “Term Loan”) was obtained by Hydrofarm Holdings LLC and certain of its direct and indirect subsidiaries (the “Term Loan Obligors”) from Brightwood Loan Services LLC.

The Term Loan was to mature on May 12, 2022 and was secured by substantially all non-working capital assets and a second lien on working capital assets of the Term Loan Obligors.

For the three months ended June 30, 2020, the effective interest rate was 10.00 % and interest expense was $ 1,552 .

For the six months ended June 30, 2020, the effective interest rate was 10.52 % and interest expense was $ 3,760 .

The Term Loan was repaid in December 2020.

In May 2017, a term loan in the aggregate principal amount of $ 75,000 (the “Brightwood Term Loan”) was obtained by Hydrofarm Holdings LLC and certain of its direct and indirect subsidiaries (the “Term Loan Obligors”) from Brightwood Loan Services LLC.

The Brightwood Term Loan was to mature on May 12, 2022 and was secured by substantially all non-working capital assets and a second lien on working capital assets of the Term Loan Obligors.

For the three months ended September 30, 2020, the effective interest rate was 9.64 % and interest expense was $ 1,700 .

For the nine months ended September 30, 2020, the effective interest rate was 10.22 % and interest expense was $ 5,460 .

The Brightwood Term Loan was repaid in December 2020.

Senior Secured Term Loan

On October 25, 2021, the Company and its subsidiaries entered into a Credit and Guaranty Agreement with JPMorgan Chase Bank, N.A., as administrative agent for certain lenders, pursuant to which the Company borrowed a $ 125.0 million senior secured term loan (“Term Loan”).

The Term Loan bears interest at LIBOR (with a 1.0 % floor) plus 5.50 %, or an alternative base rate (with a 2.0 % floor), plus 4.50 %, and is subject to a call premium of 2 % in year one, 1 % in year two, and 0 % thereafter, and matures on October 25, 2028 ("Maturity Date").

The Company received estimated net proceeds of $ 119.2 million from the Term Loan after deducting discounts and deferred financing costs.

The principal amounts of the Term Loan are to be repaid in consecutive quarterly installments in amounts equal to 0.25 % of the principal amount of the Term Loan outstanding 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 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.

The Term Loan requires the Company to maintain certain reporting requirements, affirmative covenants, and negative covenants.

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.

The Company may request additional term loan commitments subject to certain loan conditions.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Revolving asset-backed credit facilities

On July 11, 2019, Hydrofarm Holdings LLC and certain of its direct and indirect subsidiaries (the “Encina Obligors”) entered into the Encina Credit Facility through a certain Loan and Security Agreement whereby the Encina Obligors obtained a revolving asset-based loan commitment in the maximum amount of $ 45,000 (inclusive of a limit of up to $ 15,000 of borrowings for the Canadian borrowers and a swingline facility of up to $ 2,000 ), subject to applicable borrowing base availability, through Encina Business Credit, LLC.

Encina Credit Facility

On July 11, 2019, the Company and certain of its direct and indirect subsidiaries (the “Encina Obligors”) entered into the Encina Credit Facility through a certain Loan and Security Agreement whereby the Encina Obligors obtained a revolving asset-based loan commitment in the maximum amount of $ 45,000 (inclusive of a limit of up to $ 15,000 of borrowings for the Canadian borrowers and a swingline facility of up to $ 2,000 ), subject to applicable borrowing base availability, through Encina Business Credit, LLC.

The Encina Credit Facility was due on the earlier of July 11, 2022 or 90 days prior to the scheduled maturity date of the Term Loan.

The Encina Credit Facility was secured by working capital assets and a second lien on non-working capital assets.

For the three months ended June 30, 2020, the effective interest rate was 9.60 % and interest expense was $ 509 .

For the six months ended June 30, 2020, the effective interest rate was 9.39 % and interest expense was $ 1,032 .

For the three months ended September 30, 2020 , the effective interest rate was 9.06 % and interest expense was $ 593 .

For the nine months ended September 30, 2020, the effective interest rate was 9.27 % and interest expense was $ 1,625 .

The Encina Credit Facility was repaid in December 2020 and replaced in March 2021.

The unamortized deferred financing costs and early termination fees totaling $ 680 were recognized as a loss on debt extinguishment in the condensed consolidated statements of operations for the six months ended June 30, 2021.

JPMorgan Revolving Credit Facility

On March 29, 2021, Hydrofarm Holdings Group, Inc.

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The JPMorgan Credit Facility is due on the earlier of March 29, 2024 or any earlier date on which the revolving commitments are reduced to zero.

The three-year JPMorgan Credit Facility has a borrowing limit of $ 50,000 with an option to request an increase in the revolving commitment by up to $ 25,000 , drawn in $ 5,000 increments, for a total not to exceed $ 75,000 , subject to customary condition ("Revolver").

The three-year JPMorgan Credit Facility had a borrowing limit of $ 50,000 with an option to request an increase in the revolving commitment by up to $ 25,000 , drawn in $ 5,000 increments, for a total not to exceed $ 75,000 , subject to customary condition ("Revolver").

On August 31, 2021, the JPMorgan 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 recently acquired subsidiaries became party to the JPMorgan Credit Facility as either borrowers or as guarantors.

The Revolver maintains an interest rate of LIBOR plus 1.95 % and has a 0.0 % LIBOR floor.

A fee of 0.25 % per annum is charged for available but unused borrowings as defined.

The JPMorgan Obligors had approximately $ 50,000 available to borrow under the JPMorgan Credit Facility as of June 30, 2021.

The JPMorgan Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants ("debt covenants").

The financial covenants include that the Company must maintain a minimum fixed charge coverage ratio of 1.1 x on a rolling twelve-month basis.

The JPMorgan Obligors were in compliance with all debt covenants as of June 30, 2021.

The JPMorgan Credit Facility is secured by the Company’s assets and the assets of certain of the Company’s subsidiaries obligated under the JPMorgan Credit Facility.

For the three months ended September 30, 2021, the effective interest rate was 2.89 % and interest expense was $ 69 .

For the nine months ended September 30, 2021, the effective interest rate was 3.72 % and interest expense was $ 73 .

The unamortized debt issuance costs were $ 978 as of September 30, 2021.

Deferred financing costs are being amortized over the term of the Revolver.

As of September 30, 2021, the JPMorgan Obligors had approximately $ 78,617 available to borrow under the JPMorgan Credit Facility of which $ 51,755 was unused.

The JPMorgan Credit Facility is secured by the Company’s assets and the assets of certain of the Company’s subsidiaries.

The Company is required to maintain certain reporting requirements, affirmative covenants, negative covenants and financial covenants ("debt covenants").

The financial covenants include the maintenance of a minimum fixed charge coverage ratio of 1.1 x on a rolling twelve-month basis.

The JPMorgan Obligors were in compliance with all debt covenants as of September 30, 2021.

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 it consented to the Term Loan and the lien priorities described above, and made certain conforming changes to the provisions of the Term Loan.

All amendments were accounted for as debt modifications.

Hydrofarm Holdings Group, Inc.

3 unchanged sentences

Capital stock

As of June 30, 2021, the following summarizes shares authorized, issued and outstanding:

As of September 30, 2021, the following summarizes shares authorized, issued and outstanding:

Capital stock authorized and outstanding:

2 unchanged sentences

Common stock 300,000,000 44,099,239

As of June 30, 2021, the following summarizes shares of common stock reserved for issuance:

As of September 30, 2021, the following summarizes shares of common stock reserved for issuance:

Common stock reserved for issuance:

10 unchanged sentences

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 share of common stock or other securities.

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.

13 unchanged sentences

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.

For the three and six months ended June 30, 2021, total warrant solicitation fee expense was $ 844 and is included in selling, general and administrative expenses in the condensed consolidated statements of operations.

In July 2021, the Company estimates the warrant solicitation fee expense to be approximately $ 1,105 subject to finalization during the quarter ending September 30, 2021.

As of June 30, 2021, the following table summarizes the outstanding warrants:

For the three and nine months ended September 30, 2021, total warrant solicitation fee expense was $ 1,105 and $ 1,949 , respectively, and is included in selling, general and administrative expenses in the condensed consolidated statements of operations.

As of September 30, 2021, the following table summarizes the outstanding warrants:

Number of Warrants Exercise Price

Investor warrants 2,017,594 $ 16.86

Placement agent warrants 12,229 $ 8.43

1 unchanged sentence

Total 18,236 $ 11.21

For the six months ended June 30, 2021, 163,006 placement agent warrants were exercised on a cashless basis at a price of $ 16.86 per share for 126,937 shares of common stock and 242,214 placement agent warrants were exercised on as cashless basis at a price of $ 8.43 per share for 214,325 shares of common stock.

For the nine months ended September 30, 2021, 166,343 placement agent warrants were exercised on a cashless basis at a price of $ 16.86 per share for 129,265 shares of common stock and 332,488 placement agent warrants were exercised on as cashless basis at a price of $ 8.43 per share for 289,044 shares of common stock.

Hydrofarm Holdings Group, Inc.

7 unchanged sentences

No further awards will be issued under the 2018 Plan and 2019 Plan.

Of the total shares available for grant under the 2020 Plan, 2,140,960 remain available as of June 30, 2021.

Of the total shares available for grant under the 2020 Plan, 2,119,223 remain available as of September 30, 2021.

RSUs granted to certain executives, employees and members of the Board expire 10 years after the grant date.

2 unchanged sentences

The stock-based compensation expense related to remaining service-based awards is recorded over the remaining requisite service period.

The following table summarizes the activity related to the Company's RSUs for the six months ended June 30, 2021.

For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled as of June 30, 2021:

The following table summarizes the activity related to the Company's RSUs for the nine months ended September 30, 2021.

For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled as of September 30, 2021:

RSUs Weighted

5 unchanged sentences

Vested ( 652,983 ) $ 6.89

Balance, June 30, 2021

Balance, September 30, 2021

1,276,188 $ 9.32

As of June 30, 2021, total unamortized stock-based compensation cost related to unvested RSUs was $ 9,236 and the weighted-average period over which the compensation is expected to be recognized is 2.11 years.

The award granted to a member of the Board in July 2020 and modified in November 2020 contains a market-based vesting condition based on the traded value of shares of the Company’s common stock following the IPO over a specific time frame.

For this award, the market condition was factored into its fair value.

All of the stock-based compensation expense related to this award was recognized upon the IPO in December 2020.

The total shares under the unvested RSUs subject to a market-based vesting condition are 296,630 as of June 30, 2021.

As of September 30, 2021, total unamortized stock-based compensation cost related to unvested RSUs was $ 9,309 and the weighted-average period over which the compensation is expected to be recognized is 1.90 years.

The award granted to a former member of the Board (the "former Board member") in July 2020 and modified in November 2020 contains a market-based vesting condition based on the traded value of shares of the Company’s common stock following the IPO over a specific time frame.

For this award, the market condition was factored into its fair value and all of the stock-based compensation expense was recognized upon the IPO in December 2020.

In July 2021, the market-based vesting condition for this award was satisfied and 148,315 RSUs of the former Board member fully vested.

The total shares under the unvested RSUs subject to time-based vesting conditions were 148,315 as of September 30, 2021.

For the three and nine months ended September 30, 2021, there were no performance awards with market-based targets granted.

Hydrofarm Holdings Group, Inc.

2 unchanged sentences

Stock options

The following table summarizes the stock option activity for the six months ended June 30, 2021:

The following table summarizes the stock option activity for the nine months ended September 30, 2021:

Number Weighted

8 unchanged sentences

Forfeited ( 8,982 ) $ 9.81 $ 5.25

Outstanding as of June 30, 2021

Outstanding as of September 30, 2021

799,044 $ 9.53 $ 2.23 7.43

Exercisable as of June 30, 2021

Exercisable as of September 30, 2021

513,571 $ 8.51 $ 0.87 6.93

Unvested as of June 30, 2021

Unvested as of September 30, 2021

285,473 $ 11.35 $ 4.66 2.06

Vested and expected to vest as of June 30, 2021

Vested and expected to vest as of September 30, 2021

799,044 $ 9.53 $ 2.23 7.43

2 unchanged sentences

The valuation model requires the input of highly subjective assumptions.

The weighted average assumptions for awards granted as of June 30, 2021 are as follows:

The weighted average assumptions for awards granted as of September 30, 2021 are as follows:

Estimated weighted-average fair value per stock option $ 59.03

3 unchanged sentences

Expected term in years 6.0

As of June 30, 2021, total compensation cost related to unvested awards not yet recognized was $ 1,250 and the weighted-average period over which the compensation is expected to be recognized is 2.18 years.

As of September 30, 2021, total compensation cost related to unvested awards not yet recognized was $ 1,120 and the weighted-average period over which the compensation is expected to be recognized is 2.06 years.

Hydrofarm Holdings Group, Inc.

4 unchanged sentences

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.

In June 2020, as part of negotiations with the supplier that began in late 2019, the Company amended its October 2017 agreement to distribute and sell certain garden products for a term ending in December 2024.

In June 2020, as part of negotiations with Greenstar that began in late 2019, the Company amended its October 2017 agreement to distribute and sell certain garden products for a term ending in December 2024.

Under the amended agreement, the Company committed to purchase inventory in periodic minimum volumes on a take-or-pay basis, as defined, over the term of the agreement.

In 2021, the Company expects to meet the minimum purchase commitment obligations.

In August 2021, the Company acquired 100 % of the issued and outstanding shares of Greenstar which is described in Note 3 - Business Combinations .

Contingencies

3 unchanged sentences

Related party transactions—Hydrofarm Distribution Center

The Company leases a distribution center in Petaluma, California from entities in which a related party is a stockholder.

For the three months ended June 30, 2021 and 2020, rent expense for the month to month lease totaled $ 319 and $ 320 , respectively.

For the six months ended June 30, 2021 and 2020, rent expense for the month to month lease totaled $ 639 for both periods.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company leased a distribution center in Petaluma, California from entities in which a related party was a stockholder.

For the three months ended September 30, 2021 and 2020, rent expense for the month to month lease totaled $ 0 and $ 320 , respectively.

For the nine months ended September 30, 2021 and 2020, rent expense for the month to month lease totaled $ 639 and $ 959 , respectively.

SUBSEQUENT EVENTS

On July 29, 2021, the Company executed an intercreditor and subordination agreement ("Agreement") related to the amended and restated note receivable, which is included in notes receivable and other assets, allowing the third-party payee to receive debt financing ("Subordinated Note") that will be used to fund operations.

Pursuant to the Agreement, the Subordinated Note is hereby junior to and subordinated in right of payment to all indebtedness, obligations and liabilities of the third-party payee to the Company.

The Company completed two acquisitions after June 30, 2021, which are described in Note 3 - Business Combinations.

The Company completed the redemption of certain of its outstanding warrants after June 30, 2021, which is described in Note 10 - Convertible Preferred Stock and Stockholders' Equity .

The Company executed operating leases after June 30, 2021, which are described in Note 7 - Operating Leases.

The Company completed one acquisition after September 30, 2021, which is described in Note 3 - Business Combinations.

The Company and its subsidiaries entered into the Term Loan with JPMorgan Chase Bank, N.A.

after September 30, 2021.

In connection with the Term Loan, the Company and its subsidiaries entered into the Second Amendment to Credit Agreement which is described in Note 10 - Debt.

After September 30, 2021, the Company has reached an understanding with the lessor to extend the month to month lease of its warehouse facilities in Petaluma, California through January 15, 2022.

The extension will allow time for the Company to move to its new warehouse in Fairfield, California.

The agreed upon extension for the period of November 2021 through January 15, 2022 is $ 1,500 .

The Company executed a new operating lease after September 30, 2021, which is described in Note 7 - Operating Leases .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements