What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-13 · 138 added, 81 removed, 189 unchanged (54% of the section changed)

21 unchanged sentences

Recent Developments

Innovative Growers Equipment, Inc.

On November 1, 2021, we closed the acquisition of the IGE Entities.

(see Note 3 - Business Combinations under Innovative Growers Equipment, Inc.

Acquisition, in the notes to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q).

The IGE Entities are a manufacturer of horticulture benches, racking and LED lighting systems.

The addition of the IGE Entities' commercial equipment product range complements our existing lineup of high performance, proprietary branded products.

Senior Secured Term Loan

On October 25, 2021, we entered into a $125 million senior secured term loan facility with JPMorgan Chase Bank, N.A.

as administrative agent for certain lenders.

The Term Loan bears interest at a rate of either LIBOR (with a 1.0% floor) plus 5.50%, or an alternate base rate (with a 2.0% floor) plus 4.50% and matures on October 25, 2028.

We used the net proceeds from the Term Loan to fund the cash portion of the IGE purchase and for general corporate purposes, which may include, among other things, repaying any outstanding balance under our existing revolving facility and funding future M&A opportunities.

Should additional capital needs arise, we can, per the terms of the Term Loan agreement, seek to upsize the facility.

The Term Loan is more fully described in Note 10 - Debt in the notes to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Greenstar/Grotek Acquisition

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The company is dedicated to ethical and sustainable practices and offers comprehensive plant fertility product lines free from harmful chemical residues and pesticides.

Aurora will add to our growing proprietary brand nutrient and grow media line-ups, including its first organic nutrient and premium soil brands.

We will also gain new domestic manufacturing and distribution capabilities on the east and west coasts along with a peat moss harvesting operation in Canada.

Aurora adds to our growing proprietary brand nutrient and grow media line-ups, including its first organic nutrient and premium soil brands.

We gained new domestic manufacturing and distribution capabilities on the east and west coasts along with a peat moss harvesting operation in Canada.

House and Garden Acquisition

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The H&G entities are located in Arcata, California, and produce and distribute premium grade plant nutrients and fertilizers across the globe.

The H&G entities offer a strong product line of plant nutrients that will strengthen our position in the nutrient sector and complement our rapidly expanding portfolio of premium products for controlled environment agriculture.

The H&G entities offer a strong product line of plant nutrients that strengthens our position in the nutrient sector and complement our rapidly expanding portfolio of premium products for controlled environment agriculture.

Follow-on Public Offering

On May 3, 2021, we closed our follow-on offering, in which we issued and sold 5,526,861 shares of our common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of our common stock, at a public offering price of $59.00 per share, which resulted in net proceeds of approximately $309.8 million after deducting underwriting discounts and commissions and offering expenses.

We expect to use the proceeds from the follow-on offering for acquisitions, working capital and other general corporate purposes.

We used the proceeds from the follow-on offering for acquisitions, working capital and other general corporate purposes.

Heavy 16 Acquisition

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One is located in Fairfield, California and is the distribution center that we will relocate to from our Petaluma, California distribution facility in connection with the sale of that building by our lessor.

The other distribution center is located in Fontana, California which we will relocate to from our Santa Fe Springs, California distribution facility.

Additionally, in July 2021, we executed a lease for approximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada to be available upon expiration of the lease for existing space, commencing January 1, 2023 (see Note 7:

Operating Leases , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

The other distribution center is located in Fontana, California which we relocated to from our Santa Fe Springs, California distribution facility in the third quarter of 2021.

(see Note 7 - Operating Leases , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

In July 2021, we executed a lease for approximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada to be available upon expiration of the lease for existing space, commencing January 1, 2023 (see Note 7 - Operating Leases , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

In November 2021, we 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.

(see Note 7 - Operating Leases , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q).

In November 2021, we have reached an understanding with the lessor to extend the month to month lease of our warehouse facilities in Petaluma, California through January 15, 2022.

The extension will allow time for us to move to our new warehouse in Fairfield, California.

The agreed upon extension for the period of November 2021 through January 15, 2022 is $1.5 million.

Effects of Coronavirus on Our Business

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In response to the COVID-19 pandemic, we implemented business continuity plans designed to address the impact of the COVID-19 pandemic on our business, such as restrictions on non-essential business travel, the institution of work-from-home practices and the implementation of strategies for workplace safety at our facilities.

While we are not currently experiencing material adverse impacts to our supply chain, we intend to continue to source many products from China.

It is difficult to predict the extent to which COVID-19 may continue to spread.

As of the date of this Quarterly Report on Form 10-Q

manufacturers in China and in North America are generally back in operation;

As of the date of this Quarterly Report on Form 10-Q, manufacturers in China and in North America are generally back in operation;

however, new waves of the COVID-19 pandemic could result in the re-closure of factories in China and/or in North America.

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and other countries may also adversely impact our supply chains, the manufacturing of our own products and our ability to obtain necessary materials.

Consequently, we may be unable to obtain adequate inventory to fill purchase orders or manufacture our own products, which could adversely affect our business, results of operations and financial condition.

We are experiencing some interruptions in our supply chain, as well as increased shipping costs and believe the COVID-19 pandemic is a contributing factor to those interruptions and increased costs.

Although we have not, to date, experienced any material interruptions in our ability to fill our customers' orders or manufacture our own products.

Con sequently, we may be unable to obtain adequate inventory to fill purchase orders or manufacture our own products, which could adversely affect our business, results of operations and financial condition.

Furthermore, potential suppliers or sources of materials may pass the increase in sourcing costs due to the COVID-19 pandemic to us through price increases, thereby impacting our potential future profit margins.

We continue to monitor the COVID-19 pandemic and will adjust our mitigation strategies as necessary to address and changing health, operational of financial risks that may arise.

Our customers reside in countries, primarily the U.S.

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Many of these customers have experienced shelter-in-place measures in attempts to contain the spread of COVID-19, including general lockdowns, closure of schools and non-essential businesses, bans on gatherings and travel restrictions.

Our sales growth for the six months ended June 30, 2021 was approximately $42.6 million or 46.7% higher than the same period in 2020.

A portion of our net sales during this period could be due to pull-through demand for our products due to higher consumption of CEA products from individuals spending more time at home due to shelter-in-place measures.

Our sales growth for the nine months ended September 30, 2021 was approximately $114.2 million or 44.8% higher than the same period in 2020.

Our business has remained resilient during the COVID-19 pandemic.

As of June 30, 2021, our manufacturing and distribution operations are viewed as essential services and continue to operate.

As of September 30, 2021, our manufacturing and distribution operations are viewed as essential services and continue to operate.

Our key suppliers, retailers and resellers have been designated as essential services and remain open at this time;

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The JPMorgan Credit Facility, among other things, provides for an asset based senior revolving credit line (the “Senior Revolver”) with JPMorgan as the initial lender.

The three-year Senior Revolver has a borrowing limit of $50 million.

We have the right to increase the amount of the Senior Revolver in an amount up to $25 million by obtaining commitments from JPMorgan or from other lenders.

The three-year Senior Revolver had a borrowing limit of $50 million.

We had the right to increase the amount of the Senior Revolver in an amount up to $25 million by obtaining commitments from JPMorgan or from other lenders.

Our and our subsidiaries’ obligations under the JPMorgan Credit Facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of our and our subsidiaries’ respective personal property assets pursuant to the terms of a U.S.

and a Canadian Pledge and Security Agreement, dated March 29, 2021 and the other security documents.

On August 31, 2021 the JPMorgan Credit Facility was amended to increase the borrowing limit to $100 million and on October 25, 2021 was further amended to permit the Term Loan and to conform changes to provisions of the Term Loan.

The JPMorgan Credit Facility is more fully described in Note 10 - Debt under Revolving asset-backed credit facilities in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Transactions

Initial Public Offering

On December 14, 2020, we completed our initial public offering (“IPO”), in which we issued and sold 9,966,667 shares of our common stock, including the full exercise by the underwriters of their option to purchase 1,300,000 additional shares of our common stock, at a public offering price of $20.00 per share, which resulted in net proceeds of $182.3 million after deducting underwriting discounts and commissions and offering expenses.

The proceeds from the IPO were used to (i) repay amounts outstanding under the Term Loan by and among Term Loan Obligors, Brightwood Loan Services, LLC and the other lenders party thereto of $76.6 million (includes accrued interest and fees of $0.3 million), (ii) to pay down certain amounts outstanding under the Encina Credit Facility of $33.4 million, (iii) to repay $3.3 million under the promissory note to JPMorgan Chase, N.A.

The proceeds from the IPO were used to (i) repay amounts outstanding under the Brightwood Term Loan by and among Term Loan Obligors, Brightwood Loan Services, LLC and the other lenders party thereto of $76.6 million (includes accrued interest and fees of $0.3 million), (ii) to pay down certain amounts outstanding under the Encina Credit Facility of $33.4 million, (iii) to repay $3.3 million under the promissory note to JPMorgan Chase, N.A.

through the U.S.

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The reverse split was effected on November 24, 2020 without any change in the par value per share.

Results of Operations—Comparison of three and six months ended June 30, 2021 and 2020

The following table sets forth our unaudited interim condensed consolidated statements of operations for the three months ended June 30, 2021 and 2020, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):

Three months ended June 30,

Results of Operations—Comparison of three and nine months ended September 30, 2021 and 2020

The following table sets forth our unaudited interim condensed consolidated statements of operations for the three months ended September 30, 2021 and 2020, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):

Three months ended September 30,

2021 2020 Period change

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Impairment, restructuring and other 246 0.2 % 184 0.2 % 62 33.7 %

Income from operations 2,331 1.7 % 4,954 5.4 % (2,623) -52.9 %

(Loss) income from operations (2,406) -1.9 % 5,477 5.7 % (7,883) -143.9 %

Interest expense (132) -0.1 % (2,549) -2.6 % 2,417 -94.8 %

Loss on debt extinguishment — 0.0 % — 0.0 % — n/a %

Other income, net 43 0.0 % 305 0.3 % (262) -85.9 %

Income before tax 2,320 1.7 % 2,753 3.0 % (433) -15.7 %

Income tax expense (63) 0.0 % (186) -0.2 % 123 -66.1 %

Other expense, net (41) 0.0 % (223) -0.2 % 182 -81.6 %

(Loss) income before tax (2,579) -2.1 % 2,705 2.8 % (5,284) -195.3 %

Income tax benefit (expense) 19,844 16.0 % (54) -0.1 % 19,898 -36,848.1 %

Net income 17,265 13.9 % 2,651 2.7 % 14,614 551.3 %

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Net income attributable to common stockholders $ 17,265 13.9 % $ 1,969 2.0 % $ 15,296 776.8 %

The following table sets forth our unaudited interim condensed consolidated statements of operations for the six months ended June 30, 2021 and 2020, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):

Six months ended June 30,

The following table sets forth our unaudited interim condensed consolidated statements of operations for the nine months ended September 30, 2021 and 2020, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):

Nine months ended September 30,

2021 2020 Period change

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Other income, net 86 0.0 % 103 0.0 % (17) -16.5 %

Income (loss) before tax 8,016 3.3 % (196) -0.1 % 8,212 -4,189.8 %

Income tax expense (819) -0.3 % (330) -0.2 % (489) 148.2 %

Net income (loss) 7,197 2.9 % (526) -0.3 % 7,723 -1,468.3 %

Income before tax 5,437 1.5 % 2,509 1.0 % 2,928 116.7 %

Income tax benefit (expense) 19,025 5.2 % (384) -0.2 % 19,409 -5,054.4 %

Net income 24,462 6.6 % 2,125 0.8 % 22,337 1,051.2 %

Cumulative dividends allocated to Series A Convertible Preferred Stock — 0.0 % (1,990) -0.8 % 1,990 -100.0 %

Net income (loss) attributable to common stockholders $ 7,197 2.9 % $ (1,834) -1.2 % $ 9,031 -492.4 %

Net sales for the three months ended June 30, 2021 were $133.8 million, an increase of $42.6 million, or 46.7%, compared to the same period in 2020.

Net sales for the six months ended June 30, 2021 were $245.2 million, an increase of $87.1 million, or 55.1%, compared to the same period in 2020.

The 46.7% increase in net sales for the three months ended June 30, 2021 as compared to the same period in 2020 was due to a 40.5% increase in volume of products sold (inclusive of incremental sales from acquisitions closed within the second quarter of 2021 and preferred brands added in the year-to-date period), a 2.7% increase in price/mix of products sold, and 3.5% growth from favorable foreign exchange rates.

The increase in volume of products sold was primarily related to (i) higher demand from end-markets across numerous U.S.

states, including, but not limited, to California, Oklahoma, Michigan and Canada and (ii) higher demand for our proprietary and preferred branded products which was primarily due to recently acquired proprietary brands and added preferred brands.

Net income attributable to common stockholders $ 24,462 6.6 % $ 135 0.1 % $ 24,327 18,020.0 %

Net sales for the three months ended September 30, 2021 were $123.8 million, an increase of $27.2 million, or 28.1%, compared to the same period in 2020.

Net sales for the nine months ended September 30, 2021 were $369.0 million, an increase of $114.2 million, or 44.8%, compared to the same period in 2020.

The 28.1% increase in net sales for the three months ended September 30, 2021 as compared to the same period in 2020 was due to a 24.4% increase in volume of products sold (a 7.7% decline in organic sales and a 32.1% increase from recently-acquired proprietary brands), a 2.8% increase in price and mix of products sold, and 0.8% growth from favorable foreign exchange rates.

The decrease in volume of products sold was primarily related to what we believe was a short-term oversupply, which put downward pressure on cannabis growing activity predominantly in California and Canada.

The increase in price was primarily related to list price increases.

The 55.1% increase in net sales for the six months ended June 30, 2021 as compared to the same period in 2020 was due to a 48.5% increase in volume of products sold, a 3.9% increase in price/mix of products sold, and 2.7% growth from favorable foreign exchange rates.

The increase in volume of products sold was primarily related to (i) expansion of our proprietary and preferred brands, (ii) large expansion of our nutraceutical products, (iii) continued growth in our base business in California, coupled with rapid expansion in high-growth areas such as Oklahoma and Missouri, and (iv) inorganic growth from our acquisitions, which accounted for approximately one-tenth of our total growth.

The increase in foreign exchange related to recent weakness in the U.S.

Dollar relative to the Canadian Dollar and to the Euro.

The 44.8% increase in net sales for the nine months ended September 30, 2021 as compared to the same period in 2020 was due to a 39.3% increase in volume of products sold (a 23.6% increase in organic sales and a 15.7% increase from recently-acquired proprietary brands), a 3.7% increase in price and mix of products sold, and 1.9% growth from favorable foreign exchange rates.

The increase in volume of products sold was primarily related to (i) expansion of our proprietary and preferred brands, (ii) large expansion of our plant nutrients products, (iii) first-half expansion in our base business predominantly in California, Oklahoma and Missouri, and (iv) growth from our acquisitions.

The increase in price was primarily related to list price increases.

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Dollar relative to the Canadian Dollar and to the Euro.

Gross profit for the three months ended June 30, 2021 was $29.6 million, an increase of $11.7 million, or 65.5%, compared to the same period in 2020.

Gross profit for the six months ended June 30, 2021 was $52.8 million, an increase of $23.4 million, or 79.4%, compared to the same period in 2020.

The increase in gross profit for the three months ended June 30, 2021 as compared to the same period in 2020 was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales).

Our gross profit margin percentage increased to 22.1% for the three months ended June 30, 2021 from 19.6% in the same period in 2020.

The higher gross profit margin percentage is primarily due to a more favorable sales mix of proprietary brand products (due in part to the aforementioned proprietary brands that were recently acquired and the preferred brand added in the year-to-date period), which typically carries a higher gross margin than our distributed branded products, as well as improved labor efficiency.

The increase in gross profit for the six months ended June 30, 2021 as compared to the same period in 2020 was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales).

Our gross profit margin percentage increased to 21.5% for the six months ended June 30, 2021 from 18.6% in the same period in 2020.

Gross profit for the three months ended September 30, 2021 was $30.0 million, an increase of $11.8 million, or 64.9%, compared to the same period in 2020.

Gross profit for the nine months ended September 30, 2021 was $82.8 million, an increase of $35.2 million, or 73.9%, compared to the same period in 2020.

The increase in gross profit for the three months ended September 30, 2021 as compared to the same period in 2020 was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales).

Our gross profit margin percentage increased to 24.2% for the three months ended September 30, 2021 from 18.8% in the same period in 2020.

The higher gross profit margin percentage is primarily due to a more favorable sales mix of proprietary brand products (due in part to the aforementioned proprietary brands that were recently acquired and the preferred brands added in the year-to-date period), which typically carry a higher gross margin than our distributed branded products, which more than offset higher freight/import costs and labor costs.

The increase in gross profit for the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales).

Our gross profit margin percentage increased to 22.4% for the nine months ended September 30, 2021 from 18.7% in the same period in 2020.

The higher gross profit margin percentage is primarily due to a more favorable sales mix of proprietary brand products (due in part to the aforementioned proprietary brands that were recently acquired and the preferred brand added in the year-to-date period), which typically carry a higher gross margin than our distributed branded products, as well as improved labor efficiencies realized in the first half of 2021, which more than offset higher freight/import costs.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2021 was $27.3 million, an increase of $14.4 million compared to the same period in 2020.

SG&A expenses for the six months ended June 30, 2021 was $44.1 million, an increase of $19.5 million compared to the same period in 2020.

For the three months ended June 30, 2021, the $14.4 million increase in selling, general and administrative expenses is primarily related to acquisition-related costs of $9.6 million, compensation costs (an increase of $1.3 million), insurance costs (an increase of $0.7 million), depreciation and amortization associated with the new acquisitions (an increase of $0.6 million), share-based compensation (an increase of $1.1 million) and $0.8 million of solicitation fees incurred in connection with the Redemption.

Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2021 were $32.1 million, an increase of $19.6 million compared to the same period in 2020.

SG&A expenses for the nine months ended September 30, 2021 were $76.2 million, an increase of $39.1 million compared to the same period in 2020.

For the three months ended September 30, 2021, the $19.6 million increase in selling, general and administrative expenses is primarily related to acquisition-related costs of $8.9 million, compensation costs (an increase of $2.0 million), marketing (an increase of $0.5 million), travel (an increase of $0.3 million), insurance (an increase of $0.7 million), non-compensation general and administrative costs associated with the new acquisitions (an increase of $3.6 million), share-based compensation (an increase of $1.1 million), facility costs (an increase of $1.1 million), and $1.1 million of solicitation fees incurred in connection

with the Redemption.

These increases were largely the result of (i) our accelerated M&A strategy and (ii) the increased costs associated with running a public company and support of our long-term growth strategy.

The $19.5 million increase in selling, general and administrative expenses for the six months ended June 30, 2021 is primarily related to acquisition-related costs of $10.2 million, compensation costs (an increase of $2.8 million), consulting fees (an increase of $1.8 million), insurance costs (an increase of $1.2 million), depreciation and amortization associated with the new acquisitions (an increase of $0.6 million), share-based compensation (an increase of $2.4 million) and $0.8 million of solicitation fees incurred in connection with the Redemption.

The $39.1 million increase in selling, general and administrative expenses for the nine months ended September 30, 2021 is primarily related to acquisition-related costs of $18.8 million, compensation costs (an increase of $4.7 million), consulting fees (an increase of $0.9 million), marketing (an increase of $1.0 million), travel (an increase of $0.2 million), insurance costs (an increase of $2.0 million), non-compensation general and administrative costs associated with the new acquisitions (an increase of $4.3 million), share-based compensation (an increase of $3.5 million) facility costs (an increase of $1.4 million), and $1.9 million of solicitation fees incurred in connection with the Redemption.

These increases were largely the result of increased costs associated with (i) our accelerated M&A strategy and (ii) running a public company and support of our long-term growth strategy.

Interest expense

Interest expense for the three months ended June 30, 2021 was $0.1 million, a decrease of $2.5 million, or 97.8%, compared to the same period in the prior year.

Interest expense for the six months ended June 30, 2021 was $0.1 million, a decrease of $5.2 million, or 97.3%, compared to the same period in the prior year.

The decreases were due to the payoff of the Term Loan and pay down of the Encina Credit Facility in connection with the December 2020 IPO and the May 2021 follow-on offering which has helped fund recent acquisitions.

Interest expense for the three months ended September 30, 2021 was $0.1 million, a decrease of $2.4 million, or 94.8%, compared to the same period in the prior year.

Interest expense for the nine months ended September 30, 2021 was $0.3 million, a decrease of $7.6 million, or 96.5%, compared to the same period in the prior year.

The decreases were due to the payoff of the Brightwood Term Loan and pay down of the Encina Credit Facility in connection with the December 2020 IPO and the May 2021 follow-on offering which has helped fund recent acquisitions.

Loss on debt extinguishment

Loss on debt extinguishment for the six months ended June 30, 2021 was $0.7 million, which resulted primarily from the write-off of unamortized deferred financing costs associated with the payoff of the Encina Credit Facility.

Loss on debt extinguishment for the nine months ended September 30, 2021 was $0.7 million, which resulted primarily from the write-off of unamortized deferred financing costs associated with the payoff of the Encina Credit Facility.

Income tax expense

Income tax expense for the six months ended June 30, 2021 increased by $0.5 million compared to the same period in the prior year, due to an increase in income before taxes.

Income tax benefit for the three and nine months ended September 30, 2021 was $19.8 million and $19.0 million, respectively.

Our income tax benefit was primarily the result of a reduction in the valuation allowance recorded against our net deferred tax assets.

In connection with the acquisitions of the H&G Entities, we recorded a net deferred tax liability which provided an additional source of taxable income to support the realization of the pre-existing deferred tax assets.

Our income tax benefit was partially offset by income taxes from certain foreign jurisdictions where we conduct business and state minimum income taxes in the United States.

We have a valuation allowance for deferred tax assets, including net operating loss carryforwards.

Income tax expense for the three and nine months ended September 30, 2020, was $0.1 million and $0.4 million, respectively.

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

Non-GAAP Financial Measures

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We define Adjusted EBITDA as net income (loss) excluding interest expense, income taxes, depreciation and amortization, stock-based compensation, employer payroll taxes on stock-based compensation and other unusual and/or infrequent costs, which we do not consider in our evaluation of ongoing operating performance.

The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the three months ended June 30, 2021 and 2020 (In thousands):

Three months ended June 30,

The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA for the three months ended September 30, 2021 and 2020 (in thousands):

Three months ended September 30,

Net Income $ 17,265 $ 2,651

Interest expense 132 2,549

Income taxes 63 186

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

Distribution center exit costs and other 328 —

Depreciation and amortization 4,860 1,508

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Investor warrant solicitation fees 1,105 —

Other income, net (43) (305)

Other expense, net 41 223

Stock-based compensation** 1,347 245

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Adjusted EBITDA as a percent of net sales 13.0 % 7.7 %

The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the six months ended June 30, 2021 and 2020 (In thousands):

Six months ended June 30,

Net Income (Loss) $ 7,197 $ (526)

The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA for the nine months ended September 30, 2021 and 2020 (in thousands):

Nine months ended September 30,

Net Income $ 24,462 $ 2,125

Interest expense 276 7,858

Income taxes 819 330

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

Distribution center exit costs and other 328 —

Depreciation and amortization 8,638 5,170

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Adjusted EBITDA as a percent of net sales 11.4 % 6.3 %

(*) Includes consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, and Greenstar/Grotek acquisitions and certain potential acquisitions.

(*) Includes consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, Greenstar/Grotek and IGE acquisitions and certain potential acquisitions.

(**) Includes employer payroll taxes on stock-based compensation

Liquidity and Capital Resources

The following table summarizes our cash flows for the six months ended June 30, 2021 and 2020 (amounts in thousands):

Six months ended June 30,

The following table summarizes our cash flows for the nine months ended September 30, 2021 and 2020 (amounts in thousands):

Nine months ended September 30,

Net cash used in operating activities $ (17,510) $ (7,777)

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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

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Operating Activities

Net cash used in operating activities was $0.5 million for the six months ended June 30, 2021, primarily consisting of $9.2 million in non-cash expense addbacks, which were largely composed of depreciation and amortization, stock-based compensation expense, non-cash operating lease and other non-cash expense, to reconcile net income of $7.2 million to net cash used in operating activities, less a $16.9 million increase in working capital.

Net cash used in operating activities was $17.5 million for the nine months ended September 30, 2021, primarily consisting $24.5 million in net income, $2.2 million in net non-cash expense reductions, which were largely comprised of depreciation and amortization, stock-based compensation expense, non-cash operating lease expense, deferred income tax benefit and other non-cash expenses, less a $39.8 million increase in working capital.

This change in working capital primarily reflects an aggregate increase of $55.1 million in accounts receivable, inventories, prepaid expenses and other current assets, and other assets for the period offset by an aggregate net increase of $15.3 million in accounts payable, accrued expenses and other current liabilities, and a decrease in lease liabilities due to payments on lease obligations during the period.

Investing Activities

Investing activities for the six months ended June 30, 2021 were $196.6 million, due mostly to the Heavy 16 and the H&G entities acquisitions we completed during the period.

The outflows associated with the Heavy 16 acquisition and the H&G entities acquisitions totaled $195.8 million.

In addition, for the six months ended June 30, 2020, we received proceeds from a $2.0 million note receivable from a third party.

Net cash used in investing activities for the nine months ended September 30, 2021 was $419.4 million, due primarily to four business acquisitions we completed during the period, which totaled $415.9 million in cash outflows and $3.1 of property and equipment purchases.

Financing Activities

For the six months ended June 30, 2021, we received proceeds of $309.8 million from our follow-on offering, and received an additional $20.3 million from the Redemption.

We received the remaining balance of the $56.8 million of gross proceeds from the Redemption in July 2021.

Net cash provided by financing activities was $374.4 million for the nine months ended September 30, 2021.

We received proceeds of $309.8 million from our follow-on offering, and received an additional $56.8 million from the Redemption.

We also paid $17.9 million related to employee's withholding tax in connection with the vesting of certain restricted stock units.

For the six months ended June 30, 2020, draws under the Encina Credit Facility were less than repayments by $6.4 million.

We also received net proceeds of $3.8 million from the issuance of Series A preferred stock, and received proceeds of $3.3 million under the promissory note to JPMorgan Chase, N.A.

In addition, we had $26.3 million in net borrowings on our revolving line of credit during the period.

For the nine months ended September 30, 2020, we received net proceeds of $3.8 million from the issuance of Series A preferred stock, and received proceeds of $3.3 million under the promissory note to JPMorgan Chase, N.A.

through the U.S.

Small Business Administration Paycheck Protection Program, which was repaid in December 2020.

Credit Facilities

On March 29, 2021, we and certain of our direct and indirect subsidiaries (the "JPMorgan Obligors") entered into a Senior Secured Revolving Credit Facility (the "JPMorgan 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.

JPMorgan Revolving Credit Facility

On March 29, 2021, we and certain of our direct and indirect subsidiaries entered into a Senior Secured 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 JPMorgan Credit Facility replaced the Encina Credit Facility.

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 $50.0 million with an option to request an increase in the revolving commitment by up to $25.0 million, drawn in $5.0 million increments, for a total not to exceed $75.0 million, subject to customary condition ("Revolver").

The JPMorgan Credit Facility has been amended since its origination in connection with modifications to increase the borrowing limit and to consent to the Term Loan.

The three-year JPMorgan Credit Facility has a borrowing limit of $100 million subject to customary conditions.

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 $50.0 million 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 we must maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.

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

As of June 30, 2021, we had no borrowings outstanding under the JPMorgan Credit Facility.

As of August 9, 2021, we had borrowings outstanding under the JPMorgan Credit Facility of $16.0 million.

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

As of September 30, 2021, the JPMorgan Obligors had approximately $78.6 million available to borrow under the JPMorgan Credit Facility of which $51.8 million was unused.

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

Senior Secured Term Loan

On October 25, 2021, we and certain of our direct and indirect subsidiaries entered into the Term Loan with JPMorgan Chase Bank, N.A., as administrative agent for certain lenders, pursuant to which we borrowed a $125.0 million senior secured 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.

We 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 Term Loan requires us 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.

We may request additional term loan commitments subject to certain loan conditions.

Emerging Growth Company Status

9 unchanged sentences

The 2020 Annual Report includes additional information about us, our operations, our financial condition, our critical accounting policies and accounting estimates, and should be read in conjunction with this Quarterly Report on Form 10-Q.

In consideration of recent business combinations, we are updating our critical accounting policies and estimates to include business combinations and goodwill.

Business Combinations

Acquisitions of businesses are accounted for under 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 value of assets transferred, liabilities incurred to the former owners of the acquiree and the equity interest issued in exchange for control of the acquiree.

Acquisition related costs are expensed as incurred.

When the consideration transferred in a business combination includes a contingent consideration arrangement, which is where we may have the obligation to transfer additional assets or equity interest to the former owners if specified future events or conditions are met, the contingent consideration is measured at its acquisition date fair value and is included as part of the consideration transferred in a business combination.

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 our own equity instruments.

Changes in fair value of 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 fair value of contingent consideration classified as a liability are included in net income in the period and changes in fair value of contingent consideration classified as equity are not recognized.

For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and we may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess these contingencies as part of acquisition accounting.

Goodwill is measure 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 acquisition-date fair value amounts of the identified assets acquired and liabilities assumed.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we report 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 effected the amounts recognized at the time.

Upon conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever occurs first, any subsequent adjustments are recorded to net income (loss).

Goodwill represents the excess cost of an acquired business over the fair value of the identifiable assets and liabilities assumed in a business combination less any subsequent write-downs for impairment.

We evaluate the carrying amount of goodwill for impairment annually in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying may not be recoverable.

When testing for goodwill impairment, we first perform a Step 0 test.

If qualitative factors indicate that it is more likely than not that the fair value of the relevant reporting unit is less than its carrying value, we test goodwill for impairment at the reporting unit level using a two-step approach.

In step one, we determine if the fair value of the reporting unit exceeds the reporting unit's carrying value.

If step one indicates that the fair value of the reporting unit is less than the carrying value, we perform step two, determining the fair value of goodwill and if the carrying value exceeds its implied fair value, an impairment charge is recorded.

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 2. Management’s Discussion and Analysis