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Item 8. Financial Statements and Supplementary Data

2022-03-01 compared with 2021-03-30 · 1239 added, 1699 removed, 233 unchanged (93% of the section changed)

FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP

Report of Independent Registered Public Accounting Firm –

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

Schedule II –

Valuation and Qualifying Accounts

Schedule II – Valuation and Qualifying Accounts

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Hydrofarm Holdings

To the stockholders and the Board of Directors of Hydrofarm Holdings Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of Hydrofarm Holdings Group, Inc.

and subsidiaries (the "Company") as of December 31, 2020 and 2019,

the related consolidated statements of operations, comprehensive loss, changes in convertible preferred stock and stockholders’

equity, and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes and Schedule II listed

in the Index to Consolidated Financial Statements (collectively referred to as the "financial statements").

In our opinion,

the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020

and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020,

in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements,

effective January 1, 2019, the Company adopted Financial Accounting Standards Board ASC Topic 842, Leases , using the modified

retrospective approach.

Our opinion is not modified with respect to this matter.

We have audited the accompanying consolidated balance sheets of Hydrofarm Holdings Group, Inc.

and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in convertible preferred stock and stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and Schedule II listed in the Index to Consolidated Financial Statements (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility

of the Company's management.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to

be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations

of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to

assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that

respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well

as evaluating the overall presentation of the financial statements.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisitions - Refer to Note 3 to the financial statements

Critical Audit Matter Description

The Company completed various acquisitions during the year ended December 31, 2021 for an aggregate purchase price of approximately $533.3 million.

The Company accounted for the acquisitions under the acquisition method of accounting for business combinations.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including customer relationship intangible assets of $42.1 million, trademark and tradename intangible assets of $118.1 million, technology and formulations & recipes of $110.6 million, and other intangible assets of $1.6 million, for total intangible assets recognized of $272.4 million.

Management estimated the fair value of the intangible assets using the income approach specifically, the multi-period excess earnings and relief from royalty methods.

The fair value determination of the intangible assets required management to make significant estimates and assumptions related to future cash flows and selection of the discount rates.

We identified the fair value determination of the intangible assets as a critical audit matter because of the significant estimates and assumptions management makes to determine the fair value of these assets.

This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of future cash flows and the selection of the discount rates used in the determination of the initial fair value of the intangible assets.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the forecasts of future cash flows and the selection of the discount rate for the acquired intangible assets included the following, among others:

• We tested the effectiveness of controls over the valuation of the intangible assets, including management’s controls over forecasts of future cash flows and selection of the discount rate.

• We assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results and certain peer companies’ historical results.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:

– Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.

– Developing a range of independent estimates and comparing those to the discount rate selected by management.

• We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit.

/s/ Deloitte & Touche LLP

San Francisco, CA

Minneapolis, Minnesota

March 1, 2022

We have served as the Company's auditor since 2020.

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Hydrofarm Holdings Group,

Opinion on the Consolidated Financial Statements

We have audited the accompanying

consolidated statements of operations, comprehensive loss, changes in convertible preferred stock and stockholders’

and cash flows for the year ended December 31, 2018, and the related notes and schedule (collectively referred to as the

consolidated financial statements) of Hydrofarm Holdings Group, Inc.

(the “Company”).

In our opinion, the consolidated financial statements

present fairly, in all material respects, the results of the Company’s consolidated operations and its consolidated cash flows for

the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Hydrofarm Holdings Group, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Hydrofarm Holdings Group, Inc.

and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 1, 2022, expressed an unqualified opinion on those consolidated financial statements.

As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Heavy 16, House and Garden, Aurora, Greenstar and Innovative Growers Equipment, Inc., which were acquired on May 3, June 1, July 1, August 3 and November 1, 2021 respectively, and whose financial statements constitute 85% and 68% of net and total assets, respectively, 13% of revenues, and 37% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2021.

Accordingly, our audit did not include the internal control over financial reporting at Heavy 16, House and Garden, Aurora, Greenstar and Innovative Growers Equipment, Inc.

Basis for Opinion

These consolidated financial statements are the

responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial

statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)

(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we

engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding

of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides

a reasonable basis for our opinion.

Chartered Professional Accountants

Licensed Public Accountants

We have served as the Company’s auditor since 2018.

Toronto, Ontario

May 10, 2019 (December 1, 2020 as to the effects of the reverse stock

split discussed in Note 1)

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

March 1, 2022

Hydrofarm Holdings Group, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share

(In thousands, except share and per share amounts)

Current assets:

2 unchanged sentences

Accounts receivable, net 41,484 21,626

Inventories 189,134 88,618

Notes receivable 622 3,151

Prepaid expenses and other current

Prepaid expenses and other current assets 9,760 9,567

Total current assets 269,384 199,917

Property and equipment, net

Property, plant and equipment, net 50,473 3,988

Operating lease right-of-use assets 45,245 18,289

Goodwill 204,868 —

Intangible assets, net 314,819 52,421

Liabilities, convertible preferred

stock and stockholders’

Other assets 6,453 1,180

Total assets $ 891,242 $ 275,795

Liabilities and stockholders’ equity

Current liabilities:

6 unchanged sentences

Long-term debt 119,517 290

Long-term deferred tax liabilities 5,631 —

Other long-term liabilities 3,904 567

1 unchanged sentence

Commitments and contingencies (Note 14)

Convertible preferred stock ($0.0001

50,000,000 shares authorized;

0 and 7,007,429 shares issued and outstanding at December 31, 2020 and 2019, respectively)

Stockholders’

Stockholders’ equity

Common stock ($ 0.0001 par value;

300,000,000 shares authorized;

at December 31, 2020 and 2019, respectively;

33,499,953 and 20,688,439 shares issued and outstanding at December 31, 2020 and 2019)

44,618,357 and 33,499,953 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively)

Additional paid-in capital 777,074 364,248

Accumulated other comprehensive income (loss)

Accumulated other comprehensive (loss) income ( 1,382 ) 599

Accumulated deficit ( 140,516 ) ( 153,932 )

Total stockholders’

Total liabilities,

convertible preferred stock and stockholders’

Total stockholders’ equity 635,180 210,918

Total liabilities and stockholders’ equity $ 891,242 $ 275,795

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

Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS

OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

ended December 31,

Years ended December 31,

2021 2020 2019

Net sales $ 479,420 $ 342,205 $ 235,111

Cost of goods sold 377,934 278,572 208,025

Gross profit 101,486 63,633 27,086

Operating expenses:

Selling, general and administrative 103,888 58,492 43,784

Impairment, restructuring

Income (loss) from operations

Impairment, restructuring and other 297 860 10,035

(Loss) income from operations ( 2,699 ) 4,281 ( 26,733 )

Interest expense ( 2,138 ) ( 10,141 ) ( 13,467 )

Loss on debt extinguishment ( 680 ) ( 907 ) ( 679 )

Other income,

Other (expense) income, net ( 204 ) 70 105

Loss before tax ( 5,721 ) ( 6,697 ) ( 40,774 )

Income tax (expense)

Cumulative dividends allocated to Series

A Convertible Preferred Stock

Net loss attributable

to non-controlling interest

attributable to common stockholders

Net loss per share attributable to common stockholders (2018

assumes retroactive conversion of non-controlling interest into controlling interest):

Weighted-average shares used to compute net loss per share

attributable to common stockholders:

The accompanying notes are an integral part of the consolidated

financial statements.

Income tax benefit (expense) 19,137 ( 576 ) 691

Net income (loss) 13,416 ( 7,273 ) ( 40,083 )

Cumulative dividends allocated to Series A Convertible Preferred Stock — ( 2,597 ) —

Net income (loss) attributable to common stockholders $ 13,416 $ ( 9,870 ) $ ( 40,083 )

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

Basic $ 0.34 $ ( 0.46 ) $ ( 1.94 )

Diluted $ 0.31 $ ( 0.46 ) $ ( 1.94 )

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

Basic 39,991,809 21,298,849 20,688,439

Diluted 42,989,195 21,298,849 20,688,439

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

Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS

OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

ended December 31,

Other comprehensive income (loss):

Foreign currency

translation gain (loss)

Total comprehensive loss

Comprehensive loss attributable to non-controlling

Comprehensive loss attributable

to common stockholders

The accompanying notes are an integral part of the consolidated

financial statements.

Years ended December 31,

2021 2020 2019

Net income (loss) $ 13,416 $ ( 7,273 ) $ ( 40,083 )

Other comprehensive (loss) income:

Foreign currency translation (loss) gain ( 1,981 ) 743 1,709

Total comprehensive income (loss) $ 11,435 $ ( 6,530 ) $ ( 38,374 )

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

Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS

OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(In thousands, except for share amounts)

Controlling Interest

Preferred Stock

Preferred Stock Common

Stock Additional

Capital Accumulated

Comprehensive

Stockholders'

(Loss) Income Accumulated

Deficit Total

Stockholders’

Shares Amount Shares Amount

Balance, January 1, 2019 — $ — 20,688,439 $ 2 $ 155,971 $ ( 1,853 ) $ ( 106,576 ) $ 47,544

Exchange of new shares for non-controlling

interest in subsidiary

Concurrent Offering of shares and warrants

for conversion of loan from related party

Reverse merger with Hydrofarm Holdings

as accounting acquiree

Offering of shares and warrants for

Offering and Concurrent Offering costs

Foreign currency

translation loss

Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $ 1,274

4,825,346 15,615 — — — — — —

Issuance of Series A Convertible Preferred Stock upon conversion of debt 2,182,083 7,637 — — — — — —

Receivable exchanged for issuance of Series A Convertible Preferred Stock — ( 1,450 ) — — — — — —

Stock-based compensation expense — — — — 208 — — 208

Net loss — — — — — — ( 40,083 ) ( 40,083 )

Foreign currency translation gain — — — — — 1,709 — 1,709

Balance, December 31, 2019 7,007,429 21,802 20,688,439 2 156,179 ( 144 ) ( 146,659 ) 9,378

Proceeds from issuance of Series A Convertible

Preferred Stock, net of issuance costs of $1,274

Issuance of Series A Convertible Preferred

Stock upon conversion of debt

Receivable exchanged for issuance of

Series A Convertible Preferred Stock

Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs of $ 169

717,616 2,342 — — — — — —

Collection of receivable for issuance of Series A Convertible Preferred Stock — 1,450 — — — — — —

Stock-based compensation expense — — — — 8,895 — — 8,895

Foreign currency

translation gain

Series A Convertible Preferred Stock cumulative dividend — 2,597 — — ( 2,597 ) — — ( 2,597 )

Issuance of common stock in connection with initial public offering, net of offering costs of $ 17,063

— — 9,966,667 1 182,270 — — 182,271

Conversion of Series A Convertible Preferred Stock to common stock ( 7,725,045 ) ( 25,594 ) 2,291,469 — 25,594 — — 25,594

Payment of Series A Convertible Preferred Stock cumulative dividend — ( 2,597 ) — — — — — —

Issuance of common stock for vesting of restricted stock units — — 793,080 — — — — —

Shares repurchased for withholding tax on restricted stock units — — ( 239,702 ) — ( 6,089 ) — — ( 6,089 )

Other — — — — ( 4 ) — — ( 4 )

Net loss — — — — — — ( 7,273 ) ( 7,273 )

Foreign currency translation gain — — — — — 743 — 743

Balance, December 31, 2020

Proceeds from issuance of Series A Convertible

Preferred Stock, net of issuance costs of $169

Collection of receivable for issuance

of Series A Convertible Preferred Stock

— — 33,499,953 3 364,248 599 ( 153,932 ) 210,918

Common stock issued upon exercise of options — — 186,633 — 1,595 — — 1,595

Issuance of common stock for vesting of restricted stock units — — 851,741 — — — — —

Shares repurchased for withholding tax on restricted stock units — — ( 268,867 ) — ( 13,945 ) — — ( 13,945 )

Issuance of common stock under cashless warrant exercise — — 418,633 — — — — —

Issuance of common stock under investor warrant exercise — — 3,367,647 — 56,778 — — 56,778

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 combinations — — 1,035,756 — 53,611 — — 53,611

Stock-based compensation expense — — — — 5,006 — — 5,006

Series A Convertible Preferred Stock

cumulative dividend

Issuance of common stock in connection

with initial public offering, net of offering costs of $17,063

Conversion of Series A Convertible Preferred

Stock to common stock

Payment of Series A Convertible Preferred

Stock cumulative dividend

Issuance of common stock for vesting

of restricted stock units

Shares withheld for payroll taxes related

to vesting of restricted stock units

Foreign currency

translation gain

Net income — — — — — — 13,416 13,416

Foreign currency translation loss — — — — — ( 1,981 ) — ( 1,981 )

Balance, December 31, 2021

The accompanying notes are an integral part of the consolidated

financial statements.

— $ — 44,618,357 $ 4 $ 777,074 $ ( 1,382 ) $ ( 140,516 ) $ 635,180

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

Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS

OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

ended December 31,

Years ended December 31,

2021 2020 2019

Operating activities

Adjustments to reconcile net loss to net cash used in operating

Depreciation and amortization

Provision for doubtful accounts

(Benefit from) provision for inventory

Net income (loss) $ 13,416 $ ( 7,273 ) $ ( 40,083 )

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

Depreciation, depletion and amortization 14,934 6,779 6,995

Stock-based compensation expense 5,006 8,895 208

Amortization of inventory step-up of

Impairment charges

Non-cash operating lease expense 5,660 3,469 3,650

Amortization of deferred financing

Loss on debt extinguishment

Interest expense capitalized to principal

of long-term debt

Interest income capitalized to principal

of notes receivable

Payment of interest capitalized to

principal of long-term debt

Deferred income tax expense (benefit)

Impairment charges — — 5,390

Interest expense capitalized to principal of long-term debt — 20 9,644

Change in fair value of contingent consideration ( 2,610 ) — —

Payment of interest capitalized to principal of long-term debt — ( 13,901 ) ( 2,360 )

Deferred income tax (benefit) expense ( 20,996 ) 52 ( 718 )

Other 2,455 955 3,391

Changes in assets and liabilities:

Accounts receivable ( 1,926 ) ( 6,329 ) ( 620 )

Prepaid expenses and other current

Inventories ( 46,849 ) ( 36,859 ) 2,725

Prepaid expenses and other current assets 2,761 ( 7,733 ) ( 9 )

Other assets ( 1,781 ) 24 494

Accounts payable ( 7,223 ) 4,795 ( 1,199 )

Accrued expenses and other current

Accrued expenses and other current liabilities ( 3,238 ) 5,900 2,364

Lease liabilities ( 4,676 ) ( 3,126 ) ( 3,297 )

Other long-term

Net cash (used

in) provided by operating activities

Other long-term liabilities — ( 493 ) 123

Net cash used in operating activities ( 45,067 ) ( 44,825 ) ( 13,302 )

Investing activities

Business combinations, net of cash and cash equivalents ( 462,172 ) — —

Purchases of property and equipment ( 5,402 ) ( 1,447 ) ( 768 )

Purchases of intangible assets

Proceeds from sale of property and

Issuance of notes receivable — — ( 3,050 )

Proceeds from notes receivable — 2,000 —

Net cash provided

by (used in) investing activities

Other ( 610 ) ( 7 ) —

Net cash (used in) provided by investing activities ( 468,184 ) 546 ( 3,818 )

Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Years ended December 31,

2021 2020 2019

Financing activities

Proceeds from

issuance of common stock upon initial public offering, net of offering costs

Proceeds from issuance of Series A

Convertible Preferred Stock, net of issuance costs

Payments of Series A Preferred Stock

cumulative dividend upon initial public offering

Proceeds from issuance of convertible

Borrowings from PPP Loan

Proceeds from issuance of common stock upon follow-on public offering, net of offering costs 309,782 — —

Proceeds from issuance of term loan, net of discount and issuance costs 119,879 — —

Borrowings under revolving credit facilities 142,628 305,965 256,862

Payments of deferred financing costs

Repayments of PPP loan, long-term debt

and revolving credit facilities

Payments made on financing leases

Proceeds from Offering and Concurrent

Payments of offering costs on Offering

and Concurrent Offering

Proceeds from loans from related party

Payments of loans from related party

Net cash provided

by financing activities

Effect of exchange rate changes on cash,

cash equivalents and restricted cash

Net increase in cash, cash equivalents and restricted

Cash, cash equivalents and restricted

cash at beginning of year

Cash, cash equivalents and restricted

cash at end of year

Repayments of PPP loan, long-term debt and revolving credit facilities ( 143,003 ) ( 404,021 ) ( 256,785 )

Proceeds from exercises of investor warrants 56,778 — —

Payment of withholding tax related to restricted stock units ( 20,025 ) — —

Proceeds from issuance of common stock upon initial public offering, net of offering costs — 182,419 —

Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs — 3,792 14,165

Payments of Series A Preferred stock cumulative dividend upon initial public offering — ( 2,597 ) —

Borrowings from PPP Loan — 3,274 —

Other ( 1,332 ) ( 687 ) 5,658

Net cash provided by financing activities 464,707 88,145 19,900

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 27 ) 232 2,154

Net (decrease) increase in cash, cash equivalents and restricted cash ( 48,571 ) 44,098 4,934

Cash, cash equivalents and restricted cash at beginning of year 76,955 32,857 27,923

Cash, cash equivalents and restricted cash at end of year $ 28,384 76,955 32,857

Non-cash investing and financing activities

Conversion of Series A Convertible

Preferred Stock to common stock

Shares withheld for payroll taxes related

to vesting of restricted stock units

Right-of-use assets acquired under

operating lease obligation

Property and equipment acquired under

finance lease obligation

property and equipment included in accounts payable and accrued liabilities

Offering costs included in accounts

payable and accrued liabilities

Assets transferred from other assets

to property and equipment and intangible assets

Other assets deposit applied to finance

lease upon payoff

Issuance of Series

A Convertible Preferred Stock upon conversion of debt and accrued interest

Receivable related to issuance of Series

A Convertible Preferred Stock

Deferred financing costs capitalized

to principal of long-term debt

Conversion of loan from related party

to common shares

Issuance of common stock as consideration in connection with business combinations $ 53,611 $ — $ —

Increase in accrued expenses and other current liabilities for contingent consideration 19,644 — —

Right-of-use assets acquired under operating lease obligation 22,873 3,166 —

Conversion of Series A Convertible Preferred Stock to common stock — 25,594 —

Shares repurchased for withholding tax on restricted stock units 9 6,089 —

Issuance of Series A Convertible Preferred Stock upon conversion of debt and accrued interest — — 7,637

Receivable related to issuance of Series A Convertible Preferred Stock — — 1,450

Supplemental information

1 unchanged sentence

Cash paid for income taxes 1,963 94 63

The accompanying notes are an integral part of the consolidated

financial statements.

Hydrofarm Holdings Group,

THE CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share

and per share amounts)

DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION

AND SIGNIFICANT ACCOUNTING POLICIES

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

DESCRIPTION OF THE BUSINESS

Hydrofarm Holdings Group,

and its subsidiaries (collectively, the “Company”) was formed in May 2017 under the laws of the state of Delaware to

acquire and continue the business of Hydrofarm, LLC established in 1977.

The Company is a leading distributor and manufacturer of controlled

environment agriculture (“CEA”, principally hydroponics) equipment and supplies, including a broad portfolio of proprietary

branded products.

Products offered include agricultural lighting devices, indoor climate control equipment, hydroponics and nutrients,

and plant additives used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment

settings that allow end users to control key farming variables including temperature, humidity, CO2, light intensity and color, nutrient

concentration and pH.

Prior to the fall of 2018,

the legal parent of Hydrofarm, LLC, the primary operating subsidiary, was Hydrofarm Investment Corp.

As discussed further below under

Recapitalization and reverse merger in 2018 ”, Hydrofarm Investment Corp.

underwent a recapitalization and reverse

merger in a series of transactions in which Hydrofarm Holdings Group, Inc., a shell company, became the legal parent.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

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 the common stock.

The price was $20.00 per share.

The Company received net proceeds of approximately $182.3 million

from the IPO after deducting underwriting discounts and commissions and offering expenses.

Reverse stock split

In November 2020, the board

of directors (the “Board”) of the Company approved a 1-for-3.3712 reverse stock split of the Company’s outstanding

common stock, which was effected on November 24, 2020.

All common stock and per share information has been retroactively adjusted to

give effect to this reverse stock split for all periods presented.

Shares of common stock underlying outstanding stock options and other

equity instruments were proportionately decreased and the respective per share value and exercise prices, if applicable, were proportionately

increased in accordance with the terms of the agreements governing such securities.

There were no changes in the authorized shares or

par values of the Company’s common stock and preferred stock as a result of the reverse stock split.

Recapitalization and reverse merger in 2018

In the fall of 2018, Hydrofarm

Holdings Group, Inc., previously a shell entity with nominal assets and liabilities and 1,186,487 shares of common stock outstanding,

completed a private placement (the “Offering”) of units offered to third -party investors at a price of $8.43 each.

Each unit consisted of one share of common stock and a warrant entitling the holder to purchase one-half (1/2) share of common stock

at an exercise price of $16.86 per common share (the “Units”).

The Offering raised $41,499 (excluding fees and expenses)

for 4,929,725 (pre-split:

16,619,616) Units.

The Concurrent Offering and reverse merger

At approximately the same

time as, and in relation to, the Offering, Hydrofarm Holdings Group, Inc.

offered to investors in Hydrofarm Investment Corp.

the same terms as those in the Offering (the “Concurrent Offering”).

Description of the business

Hydrofarm Holdings Group, Inc.

raised $15,234 in the

Concurrent Offering.

Consideration consisted of $11,146 in cash for 1,323,157 (pre-split:

4,460,659) Units and the conversion to

Units of a $4,000 loan outstanding plus accrued interest of $88 from a related party for 484,681 (pre-split:

1,633,958) Units (excluding

fees and expenses).

On August 28, 2018, in

connection with the Offering and Concurrent Offering, in a series of concurrent transactions, the shareholders in Hydrofarm Investment

and the holder of the non-controlling interest (“NCI”) in Hydrofarm Holdings LLC exchanged all of the holder’s

interests for 12,764,389 shares of Hydrofarm Holdings Group, Inc.’s common stock which, along with 1,807,838 shares issued in the

Concurrent Offering, totaled 14,572,227 shares and represented a 70.4% controlling interest.

The exchange ratio for the 12,764,389 shares

was 0.2966 Hydrofarm Holdings Group, Inc.

common share for 0.4147 Hydrofarm Investment Corp.

common share.

As a result of the exchange,

Hydrofarm Investment Corp.

and its subsidiaries became wholly-owned subsidiaries of Hydrofarm Holdings Group, Inc.

Hydrofarm, LLC continues

as the principal operating subsidiary.

Since this exchange was a common control transaction, the carrying value of the NCI was transferred

to controlling interest allocated between paid in capital and the NCI’s share of accumulated losses at net book value.

The transaction

was treated as a tax-free exchange under Section 368(a) of the Internal Revenue Code of 1986, as amended.

Under Financial Accounting

Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations , since

the members of Hydrofarm Investment Corp.

prior to the exchange continued to hold a controlling interest in Hydrofarm Holdings Group,

after the exchange (e.g., there was no change in control of Hydrofarm Investment Corp.), Hydrofarm Investment Corp.

be the “accounting acquirer”

and Hydrofarm Holdings Group, Inc.

is deemed to be the “accounting acquiree.”

an accounting perspective, the consolidated financial statements of the combined entity represent a continuation of the financial position

and results of operations of the accounting acquirer/legal acquiree.

Accordingly, the historical cost basis of assets, liabilities, capital

and accumulated deficit of Hydrofarm Investment Corp.

as the accounting acquirer/legal acquiree are carried over to the consolidated

financial statements of the merged company.

Hydrofarm Holdings Group,

had no assets prior to the merger except $1 in cash, and no liabilities or operations;

accordingly, it is considered a “shell

company”

which does not meet the definition of a “business”

under ASC 805.

For accounting purposes, mergers of operating

companies into shell companies are considered to be capital transactions rather than business combinations.

These transactions are equivalent

to the issuance of stock by the private company for the net monetary assets, if any, of the shell corporation, accompanied by a recapitalization.

The accounting for the transaction is identical to that resulting from a reverse acquisition, except that goodwill or other intangible

assets would not be recognized.

Since Hydrofarm Holdings Group, Inc.

was a shell company, there is no accounting basis associated with

the 1,186,487 shares of Hydrofarm Holdings Group, Inc.

common stock deemed acquired in the merger other than the $1 in cash.

Consolidated financial statements

prepared following a reverse merger are issued under the name of the legal parent (accounting acquiree) and are a continuation of the

financial statements of the legal subsidiary (accounting acquirer), with one adjustment.

The adjustment retroactively states the accounting

acquirer’s legal capital to reflect the legal capital of the accounting acquiree.

Accordingly, the share and stated capital of

Hydrofarm Investment Corp.

have been retroactively adjusted in these consolidated financial statements and footnotes using the exchange

ratio established in the merger agreements to reflect the number of shares of Hydrofarm Holdings Group, Inc.

issued in the exchange.

For convenience hence-forth

here-in, the consolidated financial statements for periods prior to the exchange are referred to as those of the “Company”

unless otherwise noted.

Warrants issued to placement agents

As part of the Offering and

Concurrent Offering, placement agents were issued warrants to purchase 517,067 shares of common stock in the Company of which 172,351

shares subject to warrants are exercisable at a price of $16.86 per share and 344,716 shares subject to warrants are exercisable at a

price of $8.43 per share.

The following is a summary of the aggregate shares of common stock

and shares subject to warrants issued as part of the Offering and Concurrent Offering:

Concurrent Offering

Conversion of Loan

Placement agent warrants

and its subsidiaries (collectively, the “Company”) was formed in May 2017 under the laws of the state of Delaware to acquire and continue the business of Hydrofarm, LLC established in 1977.

The Company is a leading independent manufacturer and distributor of CEA equipment and supplies, including a broad portfolio of proprietary branded products.

Products offered include agricultural lighting devices, indoor climate control equipment, hydroponics and nutrients, and plant additives used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment settings that allow end users to control key farming variables including temperature, humidity, CO 2 , light intensity and color, nutrient concentration and pH.

Reverse stock split

In November 2020, the board of directors (the “Board”) of the Company approved a 1-for-3.3712 reverse stock split of the Company’s outstanding common stock, which was effected on November 24, 2020.

All common stock and per share information has been retroactively adjusted to give effect to this reverse stock split for all periods presented.

Shares of common stock underlying outstanding stock options and other equity instruments were proportionately decreased and the respective per share value and exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities.

There were no changes in the authorized shares or par values of the Company’s common stock and preferred stock as a result of the reverse stock split.

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 their option to purchase 1,300,000 additional shares of common stock.

The public offering price was $ 20.00 per share.

The Company received net proceeds of $ 182,271 from the IPO after deducting underwriting discounts and commissions and offering expenses, of which $ 148 of offering expenses were paid in 2021.

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 their option to purchase 720,894 additional shares of common stock.

The public offering price was $ 59.00 per share.

The Company received net proceeds of $ 309,782 from the follow-on offering after deducting underwriting discounts and commissions and offering expenses.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation and presentation

The consolidated financial

statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and include the accounts of the Company and its wholly owned subsidiaries and any entities in which it maintains a controlling

financial interest.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and include the accounts of the Company and its wholly owned subsidiaries and any entities in which it maintains a controlling financial interest.

All intercompany balances and transactions have been eliminated in consolidation.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

Use of estimates

The preparation of consolidated

financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts

of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements

and the reported amounts of revenues and expenses during the reporting period.

Estimates are based on historical experience and on various

other assumptions that are believed to be reasonable under the circumstances.

Significant estimates include provisions for sales returns,

rebates and claims from customers, realization of accounts receivable and inventories, valuation of intangible assets and goodwill, valuation

of stock and warrants issued in private placements, valuation of stock-based compensation, recognition of deferred income taxes, recognition

of liabilities related to commitments and contingencies and valuation allowances.

The preparation of consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Estimates are based on historical experience and on various other assumptions that are reasonable under the

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

circumstances.

Actual results may differ from these estimates.

an ongoing basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or new

information available.

Segment information and entity-wide disclosures

On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in its business or new information available.

Business combinations

Acquisitions of businesses are accounted for using the acquisition method.

The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred, liabilities incurred to the former owners of the acquiree and the equity interests issued in exchange for control of the acquiree.

Acquisition-related costs are recognized as selling, general and administrative expenses in the periods in which the costs are incurred and services are received.

When the consideration transferred in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination.

Contingent consideration is established for business acquisitions where the Company has the obligation to transfer additional assets or equity interests to the former owners if specified future events occur or conditions are met.

Contingent consideration is classified as a liability when the obligation requires settlement in cash or other assets and is classified as equity when the obligation requires settlement in the Company's own equity instruments.

Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with a corresponding adjustment to goodwill.

Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are included in selling, general and administrative expenses in the period.

Changes in the fair value of contingent consideration classified as equity are not recognized.

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

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non‑controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition‑date fair value amounts of the identifiable assets acquired and the liabilities assumed.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete.

Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that time.

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

Segment and entity-wide information

Segment information

The Company’s chief

operating decision maker (“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 business is organized

as two operating segments, the U.S.

and Canada, which meet the criteria for aggregation, and the Company has elected to present them

as one reportable segment, which is the distribution and manufacture of CEA equipment and supplies.

Aggregation is based on similarities

which include the nature of its products, production or acquisition of inventory, customer base, fulfillment and distribution and economic

characteristics.

Since the Company operates

as one reportable segment, all required segment financial information is found in the consolidated financial statements and footnotes

with entity-wide disclosures presented below.

Entity-wide disclosures

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:

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

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

and Canada, which meet the criteria for aggregation, and the Company has elected to present them as one reportable segment, which is the distribution and manufacture of CEA equipment and supplies.

Aggregation is based on similarities which include the nature of its products, production or acquisition of inventory, customer base, fulfillment and distribution and economic characteristics.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Since the Company operates as one reportable segment, all required segment financial information is found in the consolidated financial statements and footnotes with entity-wide disclosures presented below.

Entity-wide information

Sales to external customers and property, plant and equipment, net and operating lease right-of-use assets in the United States and Canada, determined by the location of the subsidiaries, were as follows:

Years ended December 31,

2021 2020 2019

United States $ 399,749 $ 287,884 $ 194,618

Canada 87,281 58,079 44,515

Intersegment eliminations ( 7,610 ) ( 3,758 ) ( 4,022 )

Total consolidated

Total consolidated net sales $ 479,420 $ 342,205 $ 235,111

United States $ 85,167 $ 19,025

Total property and

equipment, net

All of the products sold

by the Company are similar and classified as CEA equipment and supplies.

The Company’s underlying accounting records currently

do not support presentation of disaggregated net sales and any attempt to report them would be impracticable.

Canada 10,551 3,252

Total property, plant and equipment, net and operating lease right-of-use assets $ 95,718 $ 22,277

All of the products sold by the Company are similar and classified as CEA equipment and supplies.

The Company’s underlying accounting records currently do not support presentation of disaggregated net sales and any attempt to report them would be impracticable.

Concentrations of business and credit risk

The Company maintains cash

balances at certain financial institutions that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

The Company maintains cash balances at certain financial institutions that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

Accounts receivable, which

are unsecured except those that are backed by personal guarantees, expose the Company to credit risks such as collectability and business

risks such as customer concentrations.

Exposure to losses on receivables is principally dependent on each customer’s financial

Credit risk is mitigated by investigating the credit worthiness of most customers prior to establishing relationships with

them and performing periodic review of the credit activities of those customers.

Accounts receivable, which are unsecured except those that are backed by personal guarantees, expose the Company to credit risks such as collectability and business risks such as customer concentrations.

Exposure to losses on receivables is principally dependent on each customer’s financial condition.

Credit risk is mitigated by investigating the credit worthiness of most customers prior to establishing relationships with them and performing periodic review of the credit activities of those customers.

Receivables arising from sales are not collateralized;

however, credit risk is somewhat mitigated as a result of the large diverse customer base.

No customer accounted for more than 10% of

revenues in 2020, 2019, and 2018.

One customer accounted for 11% of accounts receivable as of December 31, 2020, and 2019.

accounted for more than 10% of purchases in 2020 and 2018, and one supplier accounted for 10% of purchases in 2019.

Certain significant risks and uncertainties –

Due to the ongoing COVID-19

pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic

on the Company’s business.

The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on

the timelines for the Company’s product development and expansion efforts.

However, the extent to which the COVID-19 pandemic impacts

the Company’s business product development and expansion efforts, corporate development objectives and the value of and market

for the Company’s common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence

at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure

requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease.

The global economic

slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with

the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth

No customer accounted for more than 10% of revenues in 2021, 2020, and 2019.

No customer accounted for more than 10% of accounts receivable in 2021.

One customer accounted for 11 % of accounts receivable as of December 31, 2020 and another customer accounted for 11 % of accounts receivable as of December 31, 2019.

One supplier accounted for 10 % of purchases in 2021 and another supplier accounted for 10 % of purchases in 2019.

No supplier accounted for more than 10% of purchases in 2020.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Fair value measurements

Fair value is the price that

would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement

The Company has applied the framework for measuring fair value which requires a fair value hierarchy to be applied to all fair

value measurements.

All financial instruments recognized at fair value are classified into one of three levels in the fair value hierarchy

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

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

quoted prices for identical

or similar instruments in markets that are not in active markets;

inputs other than quoted prices used in a valuation model that are

observable for that instrument;

and inputs that are derived from or, corroborated by, observable market data by correlation or other

Level 3 —

Valuation techniques with significant

unobservable market inputs.

The Company measures certain

non-financial assets and liabilities, including long-lived assets, intangible assets and goodwill, at fair value on a nonrecurring basis.

Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived

assets, intangible assets and goodwill.

These inputs are classified as Level 3 in the fair value hierarchy.

See discussion of impairment

losses in Note 7, Intangible assets and goodwill .

Foreign currency transactions

The Company reports its financial

results in United States dollars, which is the currency of the primary economic environment in which it operates.

The functional currency

for each of the Company’s foreign subsidiaries is generally its local currency.

Assets and liabilities of these subsidiaries are

translated at the exchange rates in effect at the end of each year.

Income and expense items are translated at the average rates of exchange

prevailing during the year.

Translation gains and losses arising from the use of differing exchange rates from period to period are included

in accumulated other comprehensive income (loss) within stockholders’

Foreign currency transaction gains and losses are

included in the determination of net loss and classified as other income, net in the consolidated statements of operations.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The effect of currency translation

adjustments on cash, cash equivalents and restricted cash is presented separately in the consolidated statements of cash flows.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company has applied the framework for measuring fair value which requires a fair value hierarchy to be applied to all fair value measurements.

All financial instruments recognized at fair value are classified into one of three levels in the fair value hierarchy as follows:

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

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

quoted prices for identical or similar instruments in markets that are not in active markets;

inputs other than quoted prices used in a valuation model that are observable for that instrument;

and inputs that are derived from or, corroborated by, observable market data by correlation or other means.

Level 3 — Valuation techniques with significant unobservable market inputs.

The Company measures certain non-financial assets and liabilities, including long-lived assets, intangible assets and goodwill, at fair value on a nonrecurring basis.

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

Foreign currency matters

The Company reports its financial results in United States dollars, which is the currency of the primary economic environment in which it operates.

The functional currency for each of the Company’s foreign subsidiaries is generally its local currency.

Monetary assets and liabilities, and transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the exchange rate in effect at the end of each period.

Foreign currency transaction gains and losses are included in the determination of net income (loss) and classified as other (expense) income, net in the consolidated statements of operations.

Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at the end of each period.

Revenues, expenses, gains and losses are translated at the average rates of exchange prevailing during the period.

Accumulated deficit and other equity accounts are translated at historical rates.

Translation gains and losses are included in accumulated other comprehensive (loss) income within stockholders’ equity.

The effect of currency translation adjustments on cash, cash equivalents and restricted cash is presented separately in the consolidated statements of cash flows.

Cash, cash equivalents and restricted cash

Cash includes funds deposited

Cash equivalents include highly liquid investments such as term deposits and money market instruments with original maturities

of three months or less.

As of December 31, 2020, and 2019, amounts included in restricted cash represent those funds required to be

set aside as security for letters of credits, and other various contractual arrangements.

The following table provides a reconciliation

of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash

Cash includes funds deposited in banks.

Cash equivalents include highly liquid investments such as term deposits and money market instruments with original maturities of three months or less.

As of December 31, 2021, and 2020, amounts included in restricted cash represent those funds required to be set aside as security for letters of credits, and other various contractual arrangements.

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

Cash and cash equivalents $ 26,607 $ 75,178

1 unchanged sentence

Cash and cash equivalents, and restricted cash $ 28,384 $ 76,955

Accounts receivable, net

As of December 31, 2019, cash and cash equivalents and restricted cash were $ 22,866 and $ 9,991 , respectively, for total cash, cash equivalents, and restricted cash as of $ 32,857 .

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Accounts receivable, net

represents amounts due from customers less the allowance for doubtful accounts.

Allowance for doubtful accounts

reflects the Company’s estimate of amounts in its existing accounts receivable that may not be collected due to customer claims

or customer inability or unwillingness to pay.

The allowance is determined based on a combination of factors, including the age of the

account, the credit worthiness of the customer, payment terms, the customer’s historical payment history and general economic conditions.

Accounts receivable balances are charged off against the allowance account when the Company believes it is probable the receivable will

not be recovered.

Inventories are primarily

comprised of finished goods and are stated at the lower of cost or net realizable value, principally determined by the first in, first

out method of accounting.

Inventory costs include the purchase price and other costs such as import duties, taxes, and transportation

Trade discounts are deducted from the purchase price.

The Company maintains an

allowance for excess and obsolete inventory.

The estimate for excess and obsolete inventory is based upon assumptions about future demand

and market conditions.

If actual conditions are less favorable than those projected, it may be necessary to increase the allowance for

excess and obsolete inventory.

Any increase in the allowance will adversely impact results of operations.

The establishment of an allowance

for excess and obsolete inventory establishes a new cost basis in the inventory.

Accounts receivable, net represents amounts due from customers less the allowance for doubtful accounts.

Allowance for doubtful accounts reflects the Company’s estimate of amounts in its existing accounts receivable that may not be collected due to customer claims or customer inability or unwillingness to pay.

The allowance is determined based on a combination of factors, including, but not limited to the age of the account, the credit worthiness of the customer, payment terms, the customer’s historical payment history and general economic conditions.

Management reviews these factors quarterly to determine if any adjustments are needed to the allowance for doubtful accounts .

Inventories consist of manufactured goods, goods acquired for resale, and materials consumed in business operations.

Inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting.

The Company maintains an allowance for excess and obsolete inventory.

The estimate for excess and obsolete inventory is based upon assumptions about future demand and market conditions.

Management reviews these assumptions periodically to determine if any adjustments are needed to the allowance for excess and obsolete inventory.

The establishment of an allowance for excess and obsolete inventory establishes a new cost basis in the inventory.

Such allowance is not reduced until the product is sold.

If inventory is sold, any related reserves would be reversed in the period of sale.

Leased assets are accounted

for under FASB ASC 842, Leases (“ASC 842”).

The Company early adopted ASC 842 using the modified retrospective approach

effective January 1, 2019, and no cumulative effect adjustment was required to be recorded.

The adoption of the new standard resulted

in the recognition of operating lease right of use (“ROU”) assets and lease liabilities in the amount of approximately $24,872

and $25,135, respectively, in the Company’s consolidated balance sheets.

The Company elected the “package of practical expedients”

available at the time of implementation which permitted the Company to carry over from FASB ASC 840, Leases , its prior conclusions

about lease identification, lease classification and initial direct costs.

The short-term lease exemption for all leases with an initial

term of 12 months or less was elected.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The Company determines if

an arrangement contains a lease at inception.

ROU assets represent the right to use an underlying asset for the lease term while lease

liabilities represent the obligation to make lease payments for the lease term.

Leases are then classified as either finance or operating,

with classification affecting the pattern of expense recognition in the consolidated statements of operations.

All leases greater

than 12 months result in the recognition of a ROU asset and liability at the lease commencement date based on the present value of the

lease payments over the lease term.

The present value of the lease payments is calculated using the applicable weighted-average discount

The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily

determinable from the lease, the applicable incremental borrowing rate is estimated.

The incremental borrowing rate is estimated using

the currency denomination of the lease, the contractual lease term and the Company’s applicable borrowing rate.

To determine the

incremental borrowing rate, reference is made to interest rates that would be available to finance assets similar to the assets under

lease in their related geographical location.

The Company accounts for

lease components separately from non-lease components, other than for office equipment.

The Company has certain leases that include one

or more options to renew with renewal terms that can extend the lease term from one to ten years.

The exercise of the lease renewal options

is at the Company’s discretion and are included in the determination of the ROU asset and lease liability when the option is reasonably

certain of being exercised.

to adoption of ASC 842

Prior to January 1,

2019, o perating lease payments were recognized as expense on a straight-line basis over the lease

In the event that lease incentives were received to enter into operating leases, such incentives were recognized as a liability

and recognized as a reduction of rental expense on a straight-line basis.

Property and equipment, net

Property and equipment is

recorded at cost less accumulated depreciation and provisions for impairment, if any.

Expenditures for maintenance and repairs are expensed

as incurred, while costs related to betterments and improvements that extend the useful lives of property and equipment are capitalized.

When property and equipment are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation are removed

from the accounts with the resulting gain or loss being reflected in income (loss) from operations.

Depreciation of property and equipment

is provided on the straight-line method and is based on the estimated useful economic lives of the assets as follows:

Machinery and equipment

Leasehold improvements

Lesser of useful life or term of the lease

Computer equipment

Furniture and fixtures

Leases are accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842, Leases .

At inception of a contract, the Company determines whether that contract is or contains a lease.

A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

Leases are then classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations.

Right-of-use assets ("ROU") represent the right to use an underlying asset for the lease term while lease liabilities represent the obligation to make lease payments arising from a lease, measured on a discount basis.

All leases greater than 12 months result in the recognition of a ROU and a lease liability at the lease commencement date based on the present value of the lease payments over the lease term.

The present value of the lease payments is calculated using the applicable weighted-average discount rate.

The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, the applicable incremental borrowing rate is estimated.

The incremental borrowing rate is estimated using the currency denomination of the lease, the contractual lease term and the Company’s applicable borrowing rate.

To determine the incremental borrowing rate, reference is made to interest rates that would be available to finance assets similar to the assets under lease in their related geographical location.

The Company accounts for lease components separately from non-lease components, other than for office equipment.

The Company has certain leases that include one or more options to renew with renewal terms that can extend the lease term.

The exercise of the lease renewal options is at the Company’s discretion.

A lease renewal option is included in the determination of the ROU asset and lease liability when the option is reasonably certain of being exercised.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Property, plant and equipment

Property, plant and equipment ("PP&E") is recorded at cost less accumulated depreciation, depletion and amortization.

PP&E assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Property, plant and equipment excluding leasehold improvements and peat bogs and related development are depreciated using the straight-line method.

Leasehold improvements are amortized using the straight-line method.

The following table summarizes the estimated useful lives as follows:

Buildings and improvements 10 - 40 years

Machinery and equipment 5 - 15 years

Leasehold improvements Lesser of useful life or term of the lease

Computer equipment 3 - 4 years

Furniture and fixtures 5 years

Peat bogs and related development costs are depleted using the units of production method over the total expected volume of the peat bogs.

Intangible assets and goodwill

Definite-lived intangible

assets are amortized using the straight-line method over their estimated useful lives.

Certain trade names are considered to have indefinite

useful lives.

The cost of internal use computer software is expensed or capitalized depending on whether it is incurred in the preliminary

project stage, application development stage or the post-implementation/operation stage.

The following are the estimated useful lives

for the major classes of definite life intangible assets:

Computer software

Customer relationships

Intellectual property and licenses

15 years or the lesser of useful life and

term of license

represents the excess of the cost of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed

in a business combination less any subsequent write-downs for impairment.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The Company evaluates its

long-lived assets, including amortizable intangible assets for indicators of possible impairment when events or changes in circumstances

indicate the carrying amount of an asset or asset group (collectively, the “asset group”) may not be fully recoverable.

Company measures the recoverability of the asset group by comparing the carrying amount of such asset groups to the estimated future

undiscounted cash flows it expects the asset group to generate.

The asset group is defined as the lowest level for which identifiable

cash flows are available and largely independent of the cash flows of other groups of assets.

Impairment, if any, is measured as the

amount by which the carrying value of the asset group exceeds its fair value and is recorded in impairment, restructuring and other in

the consolidated statements of operations.

The Company reviews its indefinite-lived

intangible assets (primarily, trade names) annually in the fourth quarter or whenever events or changes in circumstances indicate the

carrying amount may not be fully recoverable.

When testing the trade names for impairment, the Company first performs an assessment of

qualitative factors.

If qualitative factors indicate that it is more likely than not that the fair value of the trade names are less

than its carrying amount, the Company tests the trade names for impairment at the asset level using the relief-from-royalty method to

determine fair value.

The Company determines the fair value of the trade names and compares it to the carrying value.

If the carrying

value of the trade names exceeds the fair value, the Company recognizes an impairment loss in an amount equal to the excess.

Company reviews the carrying amount of goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events

or changes in circumstances indicate that the carrying amount may not be recoverable.

Events that result in an impairment review include

significant changes in the business climate, declines in operating results, or an expectation that the carrying amount may not be recoverable.

When testing goodwill for impairment, the Company first performs 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 amount, the Company tests goodwill for impairment

at the reporting unit level using a two-step approach.

In step one, the Company determines 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 its carrying

value, the Company performs step two, determining the fair value of goodwill and, if the carrying value of goodwill exceeds its implied

fair value, an impairment charge is recorded.

The Company has determined that its reporting units for the purpose of goodwill impairment

testing are the United States and Canada.

Warrants issued in connection

with financings

The Company generally accounts

for warrants issued in connection with debt and equity financings as a component of equity unless the warrants include a conditional

obligation to issue a variable number of shares among other conditions or it is possible that the Company may need to settle the warrants

Definite-lived intangible assets are amortized using the straight-line method over their estimated useful lives.

Certain trademarks and trade names are considered to have indefinite useful lives.

Intangible assets with finite lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

The following are the estimated useful lives for the major classes of definite-lived intangible assets:

Computer software 5 years

Customer relationships 10 to 20 years

Technology and formulations & recipes 10 to 18 years

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

Goodwill is tested for impairment on an annual basis in the fourth quarter and more frequently if indicators of potential impairment exist.

Impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results.

The Company has determined that its reporting units for the purpose of goodwill impairment testing are the United States and Canada.

Goodwill impairment reviews include performing either an initial qualitative or quantitative evaluation for each of the reporting units.

Several methods may be used to estimate a reporting unit’s fair value, including market quotations, asset and liability fair values and other valuation techniques.

If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss.

Intangible assets with indefinite lives are also tested for impairment at least annually and when events or changes in circumstances indicate that, more-likely-than-not, the asset is impaired.

Significant judgment is required in estimating fair values and performing goodwill and indefinite-lived intangible asset impairment tests.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Warrants issued in connection with financings

The Company generally accounts for warrants issued in connection with debt and equity financings as a component of equity unless the warrants include a conditional obligation to issue a variable number of shares among other conditions or it is possible that the Company may need to settle the warrants in cash.

Revenue recognition

The Company early adopted

FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018, with no material impact

on its consolidated financial statements.

ASC 606 requires that revenue

recognized from contracts with customers be disaggregated into categories that depict how the nature, amount, timing and uncertainty

of revenue and cash flows are affected by economic factors.

The Company has determined that revenue is generated from one category which

is the distribution and manufacture of CEA equipment and supplies.

Inventory is maintained in regional distribution centers.

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

Revenue is recognized as

control of promised goods is transferred to customers which generally occurs upon receipt at customers’

locations determined by

the specific terms of the contract.

Arrangements have a single performance obligation and revenue is reported net of variable consideration

which includes applicable volume rebates, cash discounts and sales returns and allowances.

Variable consideration is estimated and recorded

at the time of sale;

ASC 606, Revenue from Contracts with Customers, requires that revenue recognized from contracts with customers be disaggregated into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company has determined that revenue is generated from one category, which is the distribution and manufacture of controlled environment agriculture equipment and supplies.

Revenue is recognized as control of promised goods is transferred to customers which generally occurs upon receipt at customers’ locations determined by the specific terms of the contract.

Arrangements generally have a single performance obligation and revenue is reported net of variable consideration which includes applicable volume rebates, cash discounts and sales returns and allowances.

Variable consideration is estimated and recorded at the time of sale;

these allowances and accruals are not material to the financial statements.

The amount billed to customers

for shipping and handling costs included in net sales was $4,314, $2,790, and $1,826 in 2020, 2019, and 2018, respectively.

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.

Deferred revenues are not

The amount billed to customers for shipping and handling costs included in net sales was $ 8,050 , $ 4,314 , and $ 2,790 in 2021, 2020, and 2019, respectively.

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

The Company does not receive noncash consideration for the sale of goods.

Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract.

The Company's contract liabilities, which consist primarily of customer deposits are reported within accounts payable in the consolidated balance sheets, totaled $ 18,273 and $ 1,079 as of December 31, 2021 and 2020, respectively.

There are no significant financing components.

from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed

on and concurrent with revenue-generating activities under the practical expedient provisions.

Advertising and warranty costs

Advertising costs paid to

third-party vendors totaling $276, $666, and $771 in 2020, 2019, and 2018, respectively, were expensed as incurred.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

estimate of exposure for warranty claims is accrued based on both current and historical product sales data and warranty costs incurred.

Product warranties, where applicable, range from one year to five years.

The Company assesses the adequacy of its recorded warranty liability

periodically and adjusts the amount as necessary.

Warranty expense and the related accrual are not material to the financial statements.

Deferred offering

Company capitalizes certain legal, accounting and other third-party fees that are directly related to an equity financing that is probable

of successful completion until such financing is consummated.

After consummation of an equity financing, these costs are recorded as

a reduction of the proceeds received as a result of the financing.

Should a planned equity financing be abandoned, terminated or significantly

delayed, the deferred offering costs are immediately written off to operating expenses in the consolidated statements of operations in

the period of determination.

Upon the closing of the IPO in December 2020, all deferred offering costs were reclassified from prepaid

expenses and other current assets and recorded as a reduction of the IPO proceeds in additional paid-in capital.

Excluded from revenue are any taxes assessed by governmental authorities, including value-added and other sales-related taxes that are imposed on and concurrent with revenue-generating activities.

Deferred offering costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly related to an equity financing that is probable of successful completion until such financing is consummated.

After consummation of an equity financing, these costs are recorded as a reduction of the proceeds received as a result of the financing.

Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses in the consolidated statements of operations in the period of determination.

Stock-based compensation

Company accounts for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of U.S.

GAAP, which requires compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service

The Company accounts for forfeiture when it occurs, and any compensation expense previously recognized on unvested shares will

be reversed when forfeited.

The Company accounts for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of U.S.

GAAP, which requires compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service period.

The Company accounts for forfeiture when they occur and any compensation expense previously recognized on unvested shares will be reversed when forfeited.

Service-based awards

Company records stock-based compensation expense for restricted stock units (“RSUs”) and service-based stock options on a

straight-line basis over the requisite service period.

fair value of grants of restricted stock is based on the fair value of the common stock underlying the award.

The fair value of the underlying

common stock for grants prior to the Company’s IPO in December 2020 was determined by considering a number of objective, subjective

and highly complex factors including independent third-party valuations of the Company’s common stock, operating and financial

performance, the lack of liquidity of capital stock and general and industry specific economic outlook among other factors.

fair value of option-based awards is estimated using the Black-Scholes valuation model.

The Black-Scholes model requires the use of highly

subjective and complex assumptions, including the option’s expected term and the price volatility of the underlying stock.

inputs into the Black-Scholes model, the expected stock price volatility for the common stock is estimated by taking the average historic

price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option

Industry peers consist of several public companies in the Company’s industry which are of similar size, complexity and

stage of development.

The Company records stock-based compensation expense for restricted stock units (“RSUs”) and service-based stock options on a straight-line basis over the requisite service period.

The fair value of grants of restricted stock is based on the fair value of the common stock underlying the award.

The fair value of the underlying common stock for RSUs prior to the Company’s IPO in December 2020 was determined by considering a number of objective, subjective and highly complex factors including independent third-party valuations of the Company’s common stock, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook among other factors.

For 2021, the fair value of the underlying common stock for RSUs is the closing date price of the Company's common stock at the grant-date.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The fair value of option-based awards is estimated using the Black-Scholes valuation model.

The Black-Scholes model requires the use of highly subjective and complex assumptions.

For inputs into the Black-Scholes model, the expected stock price volatility for the common stock is estimated by taking the average historic price volatility of the Company's common stock or industry peers equivalent.

Industry peers consist of several public companies in the Company’s industry which are of similar size, complexity and stage of development.

The risk-free interest rate for the expected term of the option is based on the U.S.

Treasury implied yield at

the date of grant.

The Company has elected to use the “simplified method”

to determine the expected term which is the midpoint

between the vesting date and the end of the contractual term because it has insufficient history upon which to base an assumption about

the Company believes the simplified method approximates a term if it were to be based on expected life.

The expected dividend

yield is 0.0% as the Company has not paid and does not anticipate paying dividends on its common stock.

Treasury implied yield at the date of grant.

The Company has elected to use the “simplified method” to determine the expected term which is the midpoint between the vesting date and the end of the contractual term because it has insufficient history upon which to base an assumption about the term.

The expected dividend yield is 0.0 % as the Company has not paid and does not anticipate paying dividends on its common stock.

Performance-based awards

Company has granted RSU awards that vest upon the satisfaction of both service-based and performance-based conditions.

The service-based

condition for these awards generally is satisfied over four years.

The performance-based conditions generally are satisfied upon achieving

specified performance targets, such as the occurrence of a qualifying event, defined as the earlier of (i) the closing of certain specific

liquidation or change in control transactions, or (ii) an IPO.

The Company records stock-based compensation expense for performance-based

equity awards on a straight-line basis over the requisite service period and only if performance-based conditions are considered probable

to be satisfied.

The cumulative portion of the service-based award that would have vested prior to the performance condition becoming

probable is recognized once both conditions are satisfied.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The Company has granted RSU awards that vest upon the satisfaction of both service-based and performance-based conditions.

The service-based condition for these awards generally is satisfied over four years .

The performance-based conditions generally are satisfied upon achieving specified performance targets, such as the occurrence of a qualifying event, defined as the earlier of (i) the closing of certain specific liquidation or change in control transactions, or (ii) an IPO.

The Company records stock-based compensation expense for performance-based equity awards on a straight-line basis over the requisite service period and only if performance-based conditions are considered probable to be satisfied.

The cumulative portion of the service-based award that would have vested prior to the performance condition becoming probable is recognized once both conditions are satisfied.

Market-based awards

Company has granted RSUs that vest only upon the satisfaction of both performance-based and market-based conditions.

The performance-based

conditions are satisfied upon achieving specified performance targets, such as the occurrence of a qualifying event, as described above

for performance-based awards.

The market-based condition is satisfied upon the Company’s achievement of a qualifying traded share

price within the specified time frame.

The Company records stock-based compensation expense once the performance condition is satisfied

regardless of whether the market condition is eventually met.

For one award granted in 2020, the market condition was factored into its

estimate the fair value of the award granted in 2020 with the market-based condition, the “Monte Carlo Simulation Method”

(the MCSM) was used which assesses the likelihood of vesting of the RSU grants based on the probability of both a triggering event and

qualifying traded share price within the specified time frame.

The resulting risk-adjusted probability was then applied to the underlying

fair value of common stock incorporating scenarios under which various performance conditions and share price outcomes are modeled over

the course of numerous iterations.

Key assumptions in the MSCM included volatility, time horizon corresponding to the vesting measurement

period of the award forecasted based on daily trading prices, risk free rate, and number of simulation trials.

asset and liability method of accounting for income taxes is followed whereby deferred income tax assets are recognized for deductible

temporary differences and operating loss carryforwards, and deferred income tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting

income tax assets are recognized only to the extent that management determines that it is more likely than not that the deferred income

tax assets will be realized.

Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates

on the date of enactment.

The income tax expense or benefit is the income tax payable or recoverable for the year plus or minus the change

in deferred income tax assets and liabilities during the year.

Company will establish a liability for tax return positions when there is uncertainty as to whether the position will ultimately be sustained.

The Company has granted RSUs that vest only upon the satisfaction of both performance-based and market-based conditions.

The performance-based conditions are satisfied upon achieving specified performance targets, such as the occurrence of a qualifying event, as described above for performance-based awards.

The market-based condition is satisfied upon the Company’s achievement of a qualifying traded share price within the specified time frame.

The Company records stock-based compensation expense once the performance condition is satisfied regardless of whether the market condition is eventually met.

For one award granted in 2020, the market condition was factored into its fair value.

To estimate the fair value of the award granted in 2020 with the market-based condition, the “Monte Carlo Simulation Method” ("MCSM") was used which assesses the likelihood of vesting of the RSU grants based on the probability of both a triggering event and qualifying traded share price within the specified time frame.

The resulting risk-adjusted probability was then applied to the underlying fair value of common stock incorporating scenarios under which various performance conditions and share price outcomes were modeled over the course of numerous iterations.

Key assumptions in the MSCM included volatility, time horizon corresponding to the vesting measurement period of the award forecasted based on daily trading prices, risk free rate, and number of simulation trials.

The asset and liability method of accounting for income taxes is followed whereby deferred income tax assets are recognized for deductible temporary differences and operating loss carryforwards, and deferred income tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes.

Deferred income tax assets are recognized only to the extent that management determines that it is more-likely-than-not that the deferred income tax assets will be realized.

Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The income tax expense or benefit is the income tax payable or recoverable for the year plus or minus the change in deferred income tax assets and liabilities during the year.

The Company will establish a liability for tax return positions when there is uncertainty as to whether the position will ultimately be sustained.

Amounts for uncertain tax positions will be adjusted when new information becomes available or when positions are effectively settled.

The Company will recognize interest expense and penalties related to these unrecognized tax benefits within income tax expense.

GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will

be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of

the position.

The amount recognized is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being

realized upon ultimate settlement with the related tax authority.

Comprehensive loss

Comprehensive

loss consists of two components:

net loss and other comprehensive income.

Other comprehensive income refers to gains that under U.S.

GAAP are recorded directly as an element of stockholders’

equity, but are excluded from net loss, and comprised of currency translation

adjustments relating to the Company’s foreign subsidiaries whose functional currency is not the U.S.

Recently issued accounting

pronouncements

GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

appeals or litigation processes, based on the technical merits of the position.

The amount recognized is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the related tax authority.

Recently issued accounting pronouncements

Adopted in 2021

August 2018, the FASB issued Accounting Standards Update (“ASU”) No.

2018-13, Fair Value Measurement (Topic 820):

Framework —

Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates certain disclosure requirements

for fair value measurement for all entities, requires public entities to disclose certain new information and modifies some disclosure

requirements.

The Company adopted the standard effective January 1, 2020 with no impact on its disclosures about fair value measurements.

March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform

on Financial Reporting , which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships,

and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts, hedging

relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference

The Company adopted the standard effective March 12, 2020 with no impact on the consolidated financial statements and related

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and improving consistent

application of and simplifying U.S.

GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This ASU is effective

for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022.

Early adoption

is permitted (including in an interim period).

The Company early adopted the standard effective October 1, 2020 with no impact on the

consolidated financial statements and related disclosures.

Accounting standards

not yet effective

June 2016, the FASB issued ASU No.

2016-13, Financial Instruments —

Credit Losses:

Measurement of Credit Losses on Financial

Instruments (Topic 326) , with additional amendments issued subsequently.

Topic 326 changes the impairment model for most financial

The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for

Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Early adoption is permitted.

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

October 2020, the FASB issued ASU No.

In October 2020, the FASB issued Accounting Standards Update ("ASU") No.

2020-10, Codification Improvements .

The amendments improve the codification by having all

disclosure-related guidance available in the disclosure sections of the codification.

Prior to this ASU, various disclosure requirements

or options to present information on the face of the financial statements or as a note to the financial statements were not included

in the appropriate disclosure sections of the codification.

The codification improvements also contain various other minor amendments

to the codification that are not expected to have a significant effect on current accounting practice.

The amendments are effective for

annual periods beginning after December 15, 2020 and early adoption is permitted.

The Company is currently evaluating the impact the

adoption of this ASU will have on its consolidated financial statements.

NET LOSS PER COMMON SHARE (“EPS”)

EPS is computed using net loss attributable to common stockholders divided by the weighted-average number of common shares outstanding

during each period, excluding unvested RSUs.

EPS represents net loss attributable to common stockholders divided by the weighted- average number of common shares outstanding during

the period, including common stock equivalents.

Common stock equivalents consist of shares subject to warrants and share-based awards

with exercise prices less than the average market price of the Company’s common stock for the period, to the extent their inclusion

would be dilutive.

Regarding RSUs subject to a market condition, before the end of the contingency period, the number of contingently

issuable shares to be included in diluted EPS would be based on the number of common shares issuable under the terms of the arrangement

if the end of the reporting period was the end of the contingency period, assuming the result would be dilutive.

Those contingently issuable

shares would be included in the denominator of diluted EPS as of the beginning of the period, or as of the grant date of the share-based

payment if later.

Impact of recapitalization and reverse merger on 2018 EPS

FASB ASC 260-10-55-12 states

that nominal issuances of common stock are deemed to be in substance recapitalizations and should be reflected in EPS computations in

a manner similar to a stock split or stock dividend for which retroactive treatment is required.

In August 2018, the holders of

a non-controlling interest in a subsidiary, which was previously presented as NCI, exchanged their interest for 1,593,096 shares of common

stock in the Company (see Note 1, Description of the business, basis of presentation and significant accounting policies - Recapitalization

and reverse merger in 2018 ).

This exchange is deemed to be a nominal issuance of common stock;

accordingly, the exchange is considered

to have occurred as of inception (March 21, 2017) for the purposes of calculation of EPS for 2018.

Furthermore, the net loss allocable

to the NCI is assumed to have converted into a controlling interest as of inception for this purpose.

In accordance with FASB

ASC 805-40-45, the equity structure in the consolidated financial statements following a reverse merger reflects the equity structure

of the legal acquirer (the accounting acquiree), including the equity interests issued by the legal acquirer to effect the merger.

calculating the weighted-average number of common stock outstanding (the denominator of the EPS calculation) during the period in which

the reverse merger occurs:

number of common stock outstanding from the beginning of that period to the acquisition date

shall be computed on the basis of the weighted-average number of common stock of the legal

acquiree (accounting acquirer) outstanding during the period multiplied by the exchange ratio

established in the merger agreement.

number of common stock outstanding from the acquisition date to the end of that period shall

be the actual number of common stock of the legal acquirer (the accounting acquiree) outstanding

during that period.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

EPS for each comparative period before the acquisition date presented in the consolidated financial statements following a reverse merger

shall be calculated by dividing (a) the income of the legal acquiree attributable to common stockholders in each of those periods

by (b) the legal acquiree’s historical weighted average number of common stock outstanding multiplied by the exchange ratio

established in the acquisition agreement.

Net loss per share attributable

to common stockholders

On December 14, 2020, the

Company closed its IPO, in which it issued and sold 9,966,667 shares of its common stock at a price of $20.00 per share.

On that date,

all of the Company’s outstanding Series A Convertible Preferred Stock automatically converted into 2,291,469 shares of common stock.

These shares were included in the Company’s issued and outstanding common stock starting on that date.

following table presents information necessary to calculate basic and diluted EPS for the years ended December 31, 2020, 2019, and 2018

The amendments improve the codification by having all disclosure-related guidance available in the disclosure sections of the codification.

Prior to this ASU, various disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification.

The codification improvements also contain various other minor amendments to the codification that are not expected to have a significant effect on current accounting practice.

The amendments are effective for annual periods beginning after December 15, 2020 and early adoption is permitted.

The Company adopted the standard effective January 1, 2021 with no impact on the consolidated financial statements.

In August 2020, the FASB issued ASU No.

2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity .

This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S.

The amendments are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted.

The Company early adopted the standard effective January 1, 2021 with no impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350) :

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, ” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The Company early adopted the standard effective October 1, 2021 with no impact on the consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) .

The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

Since its original issuance in 2016, the FASB has issued several updates to the original ASU.

The Company recognizes an allowance for credit losses for financial assets carried at amortized cost to present the net amount expected to be collected as of the balance sheet date.

Such allowance is based on the credit losses expected to arise over the life of the asset (contractual term) which includes consideration of prepayments and based on our expectation as of the balance sheet date.

The Company adopted the standard effective October 1, 2021 with no impact on the consolidated financial statements.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 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.

The preliminary acquisition fair value of the consideration transferred for Heavy 16 was $ 77,367 , consisting of $ 60,287 in cash, $ 16,736 of the Company's common stock and $ 344 contingent consideration.

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

The financial results of Heavy 16 are included in the U.S.

operating segment since the acquisition date.

Pursuant to the purchase agreement, the Company may pay up to an additional $ 2,500 of contingent consideration based on $ 200 for each $ 1,000 above a $ 21,000 threshold for net sales in calendar year 2021.

As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $ 344 as of the acquisition date in the consolidated balance sheets.

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

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

a 10 % required revenue metric risk premium and 0.33 % discount periods .

The contingent consideration was divided into thirteen standalone option calculations and utilized the same expected value of revenue which was calculated by discounting forecasted sales, by the revenue return metric, and adding year-to-date net sales.

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 consolidated statements of operations.

As of December 31, 2021, contingent consideration of $ 200 was calculated utilizing actual net sales for the full year ended December 31, 2021 and was included in accrued expenses and other current liabilities in the consolidated balance sheets.

The contingent consideration is expected to be paid in April 2022.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The following table sets forth the components and preliminary allocation of the purchase price for the Company's acquisition of Heavy 16:

Components of Purchase Price:

Cash $ 60,287

Common stock 16,736

Contingent consideration 344

Total purchase price $ 77,367

Acquisition-related costs $ 2,885

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable $ 510

Inventories 1,451

Prepaid expenses and other current assets 34

Property and equipment 1,078

Operating lease right-of-use assets 1,088

Other assets 25

Accounts payable ( 1,055 )

Accrued expenses and other current liabilities ( 226 )

Current portion of lease liabilities ( 274 )

Long-term lease liabilities ( 868 )

Net tangible assets 1,763

Identifiable intangible assets

Other intangible assets 200

Customer relationships 5,100

Trademarks and trade names 18,500

Technology and formulations & recipes 33,600

Total identifiable intangible assets 57,400

Goodwill 18,204

Total purchase price allocation $ 77,367

The Company has obtained a preliminary third-party valuation report of certain tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information.

The primary area that remains preliminary relates to the fair value of all identifiable intangible assets acquired

Goodwill arose on the acquisition of Heavy 16 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 fully deductible for U.S.

tax purposes.

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

The trademarks and trade names are considered to have indefinite useful lives.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

House & Garden Acquisition

On June 1, 2021, the Company acquired 100 % of the issued and outstanding shares of capital stock of House & Garden, Inc.

(“HG”), Humboldt Wholesale, Inc.

(“HW”), Allied Imports & Logistics, Inc.

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

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

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

The preliminary acquisition date fair value of the consideration transferred for the H&G Entities was $ 133,483 in cash.

The financial results of the H&G Entities are included in the U.S.

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 the H&G Entities:

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Component of Purchase Price:

Cash $ 133,483

Total purchase price $ 133,483

Acquisition-related costs $ 4,908

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable $ 3,308

Inventories 6,559

Prepaid expenses and other current assets 493

Property and equipment 358

Operating lease right-of-use assets 1,921

Other assets 213

Accounts payable ( 1,320 )

Accrued expenses and other current liabilities ( 519 )

Current portion of lease liabilities ( 447 )

Long-term deferred tax liabilities ( 25,589 )

Long-term lease liabilities ( 1,501 )

Net tangible assets ( 16,524 )

Identifiable intangible assets

Other intangible assets 200

Customer relationships 12,500

Trademarks and trade names 31,400

Technology and formulations & recipes 56,200

Total identifiable intangible assets 100,300

Goodwill 49,707

Total purchase price allocation $ 133,483

The Company has obtained a preliminary third-party valuation report of certain tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information.

The primary area that remains preliminary relates to the fair value of all identifiable intangible assets acquired

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 U.S.

tax purposes.

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

The trademarks and trade names are considered to have indefinite useful lives.

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

tax purposes.

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 $ 178,871 , consisting of $ 134,961 in cash, $ 25,824 of the Company's common stock, $ 19,300 contingent consideration, less $ 999 escrow receivable, $ 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 exceeded $ 15,556 , the excess was multiplied by eleven to determine contingent consideration.

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

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

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

As of December 31, 2021, contingent consideration of $ 16,834 was calculated utilizing actual 2021 EBITDA for the full year ended December 31, 2021 and was included in accrued expenses and other current liabilities in the consolidated balance sheets.

The contingent consideration and is expected to be paid in April 2022.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 $ 134,961

Common stock 25,824

Contingent consideration 19,300

Forgiveness of accounts payable ( 215 )

Escrow receivable ( 999 )

Total purchase price $ 178,871

Acquisition-related costs $ 6,698

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable $ 6,967

Inventories 11,086

Prepaid expenses and other current assets 1,086

Property, plant and equipment 37,991

Accounts payable ( 4,360 )

Accrued expenses and other current liabilities ( 804 )

Other long-term liabilities ( 3,852 )

Net tangible assets $ 48,114

Identifiable intangible assets

Other intangible assets 824

Customer relationships 6,400

Trademarks and trade names 59,100

Technology and formulations & recipes 18,000

Total identifiable intangible assets 84,324

Goodwill 46,433

Total purchase price allocation $ 178,871

The Company has obtained a preliminary third-party valuation report of tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information.

Accordingly, the preliminary purchase price allocation is subject to change.

The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

The amount of goodwill is fully deductible for U.S.

tax purposes.

Goodwill arose on the acquisition of Aurora 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 customer relationships and technology and formulations & recipes were assigned estimated useful lives of 16 and 18 years, respectively.

The trademarks and trade names are considered to have indefinite useful lives.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 $ 83,520 , consisting of $ 85,121 in cash, less $ 1,601 forgiveness of accounts payable, net, and obligations due under a distribution agreement.

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

The 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 $ 85,121

Forgiveness of accounts payable, net, and obligations due under a distribution agreement ( 1,601 )

Total purchase price $ 83,520

Acquisition-related costs $ 3,451

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable $ 982

Inventories 8,728

Prepaid expenses and other current assets 447

Property and equipment 1,717

Operating lease right-of-use assets 2,736

Other assets 176

Accounts payable ( 777 )

Accrued expenses and other current liabilities ( 1,421 )

Current portion of lease liabilities ( 624 )

Long-term lease liabilities ( 1,836 )

Net tangible assets 10,128

Identifiable intangible assets

Other intangible assets 383

Customer relationships 18,100

Trademarks and trade names 9,100

Technology and formulations & recipes 2,800

Total identifiable intangible assets 30,383

Goodwill 43,009

Total purchase price allocation $ 83,520

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The Company has obtained a preliminary third-party valuation report of certain tangible and identifiable intangible assets and is in the process of reviewing and evaluating the information.

The primary area that remains preliminary relates to the fair value of all identifiable intangible assets acquired.

Accordingly, the preliminary purchase price allocation is subject to change.

The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

The amount of goodwill is not deductible for U.S.

tax purposes, but it is partially deductible for Canadian tax purposes.

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

The trademarks and trade names are considered to have indefinite useful lives.

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 preliminary acquisition fair value of the consideration transferred for the IGE Entities was $ 60,093 , consisting of $ 48,320 in cash, $ 11,051 of the Company's common stock, and $ 722 forgiveness of a contract asset.

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

The forgiveness of contract asset represents an effective settlement of a preexisting relationship between the parties.

The financial results of the IGE Entities are included in the U.S.

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 the IGE Entities:

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Component of Purchase Price:

Cash $ 48,320

Common stock 11,051

Forgiveness of contract asset 722

Total purchase price $ 60,093

Acquisition-related costs $ 1,417

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable $ 4,424

Inventories 27,017

Prepaid expenses and other current assets 466

Property and equipment 3,907

Operating lease right-of-use assets 3,998

Accounts payable ( 21,912 )

Accrued expenses and other current liabilities ( 559 )

Current portion of lease liabilities ( 813 )

Current portion of long-term debt ( 478 )

Long-term lease liabilities ( 3,185 )

Long-term debt ( 1,459 )

Net tangible assets 11,406

Goodwill 48,687

Total purchase price allocation $ 60,093

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

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

The amount of goodwill is not deductible for U.S.

tax purposes.

Supplemental Disclosure of Financial Results

The following represents the unaudited 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 (in millions):

Years ended December 31,

Net loss (2018 assumes retroactive conversion

of NCI into controlling interest)

Cumulative dividends allocated to Series

A Convertible Preferred Stock

Basic and diluted net loss attributable to common stockholders

net loss of dilutive securities using the "if converted" method

Diluted net loss attributable

to common stockholders after adjustment for assumed conversions

Weighted-average shares of common stock outstanding for basic

and diluted EPS (2018 assumes retroactive conversion of NCI into controlling interest)

Basic and diluted net loss per share attributable to

common stockholders

Since the Company was in

a loss position for the years ended December 31, 2020, 2019, and 2018 basic EPS was the same as diluted EPS for the periods presented.

Basic and diluted net 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;

however, the application of the if-converted method to participation in the net loss is anti-dilutive

and therefore the impact is excluded.

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:

Net sales $ 596 $ 492

Net income (loss) $ 79 $ ( 11 )

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 year ended December 31, 2021 were adjusted to exclude the acquisition-related and integration 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.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Year ended December 31,

Net sales $ 76

Net income $ 14

The Company is in the process of 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.

GOODWILL AND INTANGIBLE ASSETS, NET

As of December 31, 2021, the Company completed the acquisitions of Heavy 16, the H&G Entities, Aurora, Greenstar and the IGE Entities (see Note 3 - Business Combinations ).

The changes in goodwill are as follows:

Balance at beginning of year $ —

Acquisition - Heavy 16 18,204

Acquisition - H&G Entities 49,707

Acquisition - Aurora 46,433

Acquisition - Greenstar 43,009

Acquisition - IGE Entities 48,687

Foreign currency translation adjustments, net ( 1,172 )

Balance at end of year $ 204,868

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Intangible Assets, net

Intangible assets, net comprised the following:

December 31, 2021 December 31, 2020

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

Finite-lived intangible assets:

Computer software $ 8,814 $ ( 7,208 ) $ 1,606 $ 7,775 $ ( 5,640 ) $ 2,135

Customer relationship (1)

101,222 ( 16,517 ) 84,705 59,375 ( 12,010 ) 47,365

Technology and formulations & recipes (1)

110,561 ( 3,630 ) 106,931 — — —

2,428 ( 1,744 ) 684 1,156 ( 1,156 ) —

Total finite-lived intangible assets, net 223,025 ( 29,099 ) 193,926 68,306 ( 18,806 ) 49,500

Indefinite-lived intangible asset:

Trade names (1)

120,773 — 120,773 2,801 — 2,801

Other 120 — 120 120 — 120

Total Intangible assets, net $ 343,918 $ ( 29,099 ) $ 314,819 $ 71,227 $ ( 18,806 ) $ 52,421

( 1 ) Includes the intangible assets acquired from Heavy 16, the H&G Entities and Greenstar.

See Note 3 - Business Combinations.

Amortization expense was $ 10,354 , $ 5,154 and $ 5,307 for the years ended December 31, 2021, 2020 and 2019, respectively.

For intangible assets subject to amortization, the weighted-average amortization period as of December 31, 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 December 31, 2021 is summarized below:

Estimated Future Amortization Expense

Year ending December 31,

2022 $ 12,871

Thereafter 144,559

Total $ 193,926

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

NET INCOME (LOSS) 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”).

Diluted EPS represents net income (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding during the period, including common stock equivalents.

Common stock equivalents consist of shares subject to warrants and share-based awards with exercise prices less than the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive.

Regarding RSUs subject to a market condition, before the end of the contingency period, the number of contingently issuable shares (i.e., RSUs) to be included in diluted EPS would be based on the number of common shares issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, assuming the result would be dilutive.

Those contingently issuable shares would be included in the denominator of diluted EPS as of the beginning of the period, or as of the grant date of the share-based payment, if later.

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 (loss) per share attributable to common stockholders

The following table presents information necessary to calculate basic and diluted EPS for the years ended December 31, 2021, 2020 and 2019:

Years ended December 31,

2021 2020 2019

Net income (loss) $ 13,416 $ ( 7,273 ) $ ( 40,083 )

Cumulative dividends allocated to Series A Convertible Preferred Stock — ( 2,597 ) —

Net income (loss) available for distribution 13,416 ( 9,870 ) ( 40,083 )

Undistributed earnings allocable to participating securities — — —

Basic and diluted net income (loss) attributable to common stockholders $ 13,416 $ ( 9,870 ) $ ( 40,083 )

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 $ 13,416 $ ( 9,870 ) $ ( 40,083 )

Weighted-average shares of common stock outstanding for basic net income (loss) per share attributable to common stockholders 39,991,809 21,298,849 20,688,439

Dilutive effect of warrants using the treasury stock method 1,395,393 — —

Dilutive effect of restricted stock units using the treasury stock method 1,068,984 — —

Dilutive effect of stock options using the treasury stock method 533,009 — —

Weighted-average shares of common stock outstanding for diluted net income per share attributable to common stockholders 42,989,195 21,298,849 20,688,439

Basic net income (loss) per share attributable to common stockholders $ 0.34 $ ( 0.46 ) $ ( 1.94 )

Diluted net income (loss) per share attributable to common stockholders $ 0.31 $ ( 0.46 ) $ ( 1.94 )

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Years ended December 31,

2021 2020 2019

Shares subject to warrants outstanding 17,817 3,886,191 3,886,191

Shares subject to unvested restricted stock units with performance and/or time-based vesting conditions — 1,857,444 1,820,598

Shares subject to unvested restricted stock units with time-based vesting conditions 71,871 — —

Shares subject to stock options outstanding 10,641 922,796 819,879

Shares subject to unvested restricted stock units

Series A preferred stock convertible into common shares

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

ACCOUNTS RECEIVABLE,

NET AND INVENTORIES

receivable, net comprised the following:

Shares of common stock subject to conversion of 7,725,045 shares Series A Convertible Preferred Stock

— — 2,078,605

ACCOUNTS RECEIVABLE, NET AND INVENTORIES

Accounts receivable, net comprised the following:

Trade accounts receivable $ 35,511 $ 20,252

1 unchanged sentence

Other receivables 7,129 2,292

Total accounts receivable,

comprised the following:

Total accounts receivable, net $ 41,484 $ 21,626

Inventories comprised the following:

Finished goods $ 145,298 $ 83,213

Work-in-process 5,967 —

Raw materials 41,399 7,837

Allowance for inventory obsolescence ( 3,530 ) ( 2,432 )

Total inventories $ 189,134 $ 88,618

NOTES RECEIVABLE

The Company advanced $2,000

in the form of a note receivable secured by equipment to a third-party in December 2018.

As of December 31, 2019, the principal remained

outstanding and total interest income at 8.0% per annum earned in 2019 was $160.

Interest income recognized in 2020 was $24.

was to mature on the earlier of a) 90 days after abandonment of a potential merger, b) acceleration due to default conditions, or c)

December 2023.

In January 2020, the Company formally abandoned the merger, and all outstanding principal and interest was repaid in February

During 2019, the Company

advanced a total of $2,931 in the form of a note receivable secured by equipment to another third-party, which earned interest at a rate

of 8.0% for total interest earned in 2020 and 2019 of $101 and $119, respectively.

The note was to mature on the earlier of a) four months

or 12 months after abandonment of a potential merger by the third-party or the Company, respectively, b) acceleration due to default

conditions or c) May 29, 2023.

As of December 31, 2019, the third-party had defaulted on the interest payment due on September 20, 2019,

triggering an increase to the default rate of 13%.

In January 2020, the Company formally abandoned the merger and arranged for the principal

balance to be paid in monthly installments of $254 through January 2021.

Effective April 23, 2020, due to the third-party being in default

on the note, the parties entered a forbearance agreement stipulating that payments commenced on May 8, 2020.

As of December 31, 2020,

the third-party had defaulted on the payments.

Effective February 19, 2021, the Company amended and restated the note receivable secured

by equipment to allow the third-party to receive equity financing that will be used to fund operations.

The amended and restated terms

modified a) the interest rate to a range from 6% to 8% over the term of the note, b) the maturity date to December 2024, and c) the installment

payments to a range from 10% to 25% of the unpaid principal balance every six months beginning June 2022.

The accrued interest of $220

as of December 31, 2020 was paid in January 2021.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The Company leases its distribution

centers and certain equipment under operating and finance leases.

As of December 31, 2020 and

2019, no renewal option periods were included in any estimated minimum lease terms as the options were not deemed to be reasonably certain

to be exercised.

The depreciable life of ROU assets and leasehold improvements are limited by the expected lease term.

None of the lease

agreements include variable rental payments that are adjusted periodically for inflation based on the index rate;

rather, most leases

for the distributions centers provide for fixed periodic increases.

The Company’s lease agreements do not contain any residual

value guarantees or unusual restrictive covenants.

Total ROU assets and lease

liabilities were as follows:

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The Company leases its distribution centers and certain manufacturing facilities from third parties under various non-cancelable operating lease agreements.

Also, the Company leases some equipment under finance leases.

As of December 31, 2021 and 2020, no renewal option periods were included in any estimated minimum lease terms as the options were not deemed reasonably certain to be exercised.

Total ROU assets and lease liabilities were as follows:

Balance Sheet Classification 2021 2020

Leased assets

Operating ROU assets at cost

Operating lease right-of-use assets

Accumulated amortization

Operating lease right-of-use assets

Net book value

Finance lease assets at cost

Property and equipment, net

Accumulated amortization

Property and equipment, net

Net book value

Operating ROU assets Operating lease right-of-use assets $ 45,245 $ 18,289

Finance lease assets Property and equipment, net $ 2,365 $ 383

Lease liabilities

Operating leases

Current portion of lease liabilities

Finance leases

Current portion of long-term debt

Operating leases

Long-term lease liabilities

Finance leases

Long-term debt

Operating leases Current portion of lease liabilities $ 7,198 $ 3,701

Finance leases Current portion of long-term debt 739 159

Operating leases Long-term lease liabilities 38,595 15,320

Finance leases Long-term debt 1,628 223

Total lease liabilities $ 48,160 $ 19,403

Total lease income and costs

were as follows:

Total lease income and costs were as follows:

For the years ended December 31,

Classification 2021 2020 2019

Operating lease costs

Selling, general and administrative

Operating lease costs Selling, general and administrative $ 6,664 $ 4,260 $ 4,580

Finance lease costs:

Amortization of lease assets

Selling, general and administrative

Interest on lease liabilities

Interest expense

Gain on lease termination

Impairment, restructuring, and other

Sublease income

Selling, general and administrative

In addition to the operating lease costs above,

short-term and month-to-month lease expense was $1,406 and $1,276 for the years ended December 31, 2020 and 2019, respectively, and other

costs associated with operating leases were $1,464 and $1,496, respectively, for non-lease components such as common area maintenance

and other miscellaneous items.

These costs are included within selling, general and administrative expenses in the consolidated statements

of operations.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The aggregate

future minimum lease payments under long-term noncancelable operating and finance leases with remaining terms greater than one year as

of December 31, 2020 are as follows:

Year ending December 31,

Amortization of lease assets Selling, general and administrative 291 257 239

Interest on lease liabilities Interest expense 33 58 46

Gain on lease termination Impairment, restructuring, and other — — ( 160 )

Sublease income Selling, general and administrative ( 277 ) ( 57 ) ( 369 )

In addition to the operating lease costs above, short-term and month-to-month lease expense was $ 2,268 , $ 1,406 and $ 1,276 for the years ended December 31, 2021, 2020, and 2019, respectively, and other costs associated with operating leases were $ 1,957 , $ 1,464 and $ 1,496 , respectively, for non-lease components such as common area maintenance and other

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

miscellaneous items.

These costs were included within selling, general and administrative expenses in the consolidated statements of operations.

The aggregate future minimum lease payments under long-term non-cancelable operating and finance leases with remaining terms greater than one year as of December 31, 2021 are as follows:

Year ending December 31, Operating Finance

2022 $ 8,569 $ 830

2023 7,924 707

2024 7,182 582

2025 6,442 441

Thereafter 16,300 —

Total rental payments 51,448 2,560

3 unchanged sentences

Long-term portion $ 38,595 $ 1,628

following table summarizes the weighted-average remaining lease term as of December 31, 2020 and 2019 and the weighted-average discount

rate on long-term leases for the years ended December 31, 2020 and 2019:

The following table summarizes the weighted-average remaining lease term as of December 31, 2021, 2020 and 2019 as well as the weighted-average discount rate on long-term leases for the years ended December 31, 2021, 2020 and 2019:

2021 2020 2019

Weighted-average remaining lease term in years:

2 unchanged sentences

Weighted-average discount rate:

Operating leases (for leases expiring after 2020)

Operating leases 3.32 % 4.26 % 4.50 %

Finance leases 4.62 % 5.61 % 7.17 %

Cash paid for amounts included

in lease liabilities in 2020 and 2019 were:

Years ended December

Cash paid for amounts included in lease liabilities in 2021, 2020 and 2019 were:

Cash paid for amounts included in lease liabilities:

2021 2020 2019

Operating cash flows from operating leases $ ( 5,675 ) $ ( 3,917 ) ( 4,225 )

1 unchanged sentence

Financing cash flows from finance leases ( 302 ) ( 674 ) ( 177 )

for leases for 2018 under ASC 840

expense related to certain warehouse, distribution and office facilities, vehicles and office equipment under leases with terms greater

than one year was $6,509 in 2018.

Other costs of $1,169 were associated with month-to-month leases.

These costs are included in selling,

general and administrative expenses in the consolidated statement of operations.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

PROPERTY AND EQUIPMENT, NET

Property and equipment comprised

the following:

In July 2021, the Company 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.

The new lease commencing January 1, 2023 has a term of 120 months with two options to renew for an additional five years each at the greater of an amount equal to the annual rent payable for the last twelve months of the initial term or the then fair market value.

There is no rent abatement.

Monthly rent fee starts at approximate $ 230 , and increases periodically to the final year when the monthly rent is $ 293 .

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 approximately $ 71 , and increases periodically to the final year where the monthly rent is $ 92 .

In January 2022, the Company executed a lease for approximately 303,000 square feet of warehouse in Shoemakersville, Pennsylvania to be available upon expiration of the lease for existing space.

The new lease commencing March 1, 2022 has a term of 84 months with an option to renew for one additional period of five years at the prevailing market rate.

Rent is abated for the first two months .

Thereafter, monthly rent is approximately $ 68 , and increases periodically to the final year where the monthly rent is $ 162 .

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

Year ending December 31,

Thereafter 30,425

Total rental payments $ 51,574

PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net comprised the following:

Machinery and equipment $ 25,177 $ 3,648

Building and improvements 9,510 190

Land 6,120 224

Leasehold improvements 3,207 2,068

Gross property and equipment

accumulated depreciation

Total property and equipment, net

Depreciation and amortization expense related

to property and equipment, was $1,625, $1,688, and $2,391 in 2020, 2019, and 2018, respectively.

INTANGIBLE ASSETS AND GOODWILL

Intangible assets comprised the

December 31, 2020

December 31, 2019

Finite-lived intangible assets:

Computer software

Customer relationship

Total finite-lived intangible assets, net

Indefinite-lived intangible asset:

Total Intangible assets, net

Amortization expense was

$5,154, $5,307, and $5,869 in 2020, 2019, and 2018, respectively.

Estimated aggregate amortization expense for each of the five years

ending December 31, 2021 through 2025 and thereafter is $4,829, $3,846, $3,338, $3,312, $3,303 and $30,872, respectively.

For intangible assets subject

to amortization, the weighted-average amortization period as of December 31, 2020 for computer software and customer relationships, was

5.0 years and 18.0 years, respectively.

Intangible asset impairment

The Company has one type

of indefinite-lived intangible asset, trade names.

If the fair value of the trade names is lower than the carrying amount, an impairment

charge is recognized in an amount equal to the difference.

In 2020 and 2019, the Company performed its annual Step 0 Test and the assessment

of the qualitative factors indicated that it was more likely than not that the fair value of the trade name exceeded its carrying amount.

In 2018, the Company estimated the fair value of the indefinite-lived trade names using the relief from-royalty method and determined

that the fair value of trade names exceeded the carrying value.

Accordingly, no impairment was recognized in 2020, 2019 or 2018.

In 2020, for all amortizable

intangible assets, the Company did not identify any events or changes in circumstances that would indicate that the carrying amount of

the Company’s amortizable intangible assets would not be fully recoverable.

During 2019 and 2018, for

all amortizable intangible assets except for the customer relationships, the Company did not identify any events or changes in circumstances

that would indicate that the carrying amount of the Company’s amortizable intangible assets would not be fully recoverable, therefore,

there was no impairment of these intangible assets recognized in 2019 and 2018.

For the customer relationships,

the undiscounted cash flows over their useful lives were estimated primarily based on management’s assumptions and estimates related

to revenue, compound annual growth rates and direct operating expenses.

The Company used internal financial forecast models that included

historical information and projected growth rates based on various assumption such as consumer health trends, potential medical benefits,

regulatory challenges, and overall market developments.

Revenue was adjusted annually for estimated customer attrition.

For the US customer

relationships in 2019 and 2018, and for the Canadian customer relationships in 2018, the sum of the future estimated undiscounted cash

flows exceeded the carrying values, and accordingly, there was no impairment recognized.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

For Canadian customer relationships

in 2019, the sum of the estimated future undiscounted cash flows was insufficient to recover the asset carrying value.

The Company then

performed Step 2, a computation of fair value, which estimated revenues and direct expenses adjusted for organic growth, customer attrition

and capital expenditures for the remaining life of customer relationships;

a revisionary value was added to the cash flows.

The projected

future cash flows were then discounted to fair value which indicated little or no value associated with the intangible asset.

the carrying value of the customer relationships totaling $5,390 was impaired and the charge was included in impairment, restructuring

and other in the consolidated statements of operations.

Goodwill arose from the acquisition

of certain businesses in Canada and other transactions during the year ended December 31, 2017.

There were no additions to or disposals

of goodwill in 2020, 2019 or 2018, and no impairment of goodwill in 2019.

Goodwill was fully impaired as of December 31, 2018.

for the United States reporting unit had a gross value and corresponding accumulated impairment losses of $32,204 for a net book value

of zero, and goodwill for the Canada reporting unit had a gross value and corresponding accumulated impairment losses totaling $3,244

for a net book value of zero as of both December 31, 2020, and 2019.

In the fourth quarter of

2018, the Company performed Step 1 of the goodwill impairment test to determine if the fair value of the goodwill of the Canadian reporting

unit was greater than the carrying amount.

The fair value of invested capital for the Canadian reporting unit was determined using the

income approach and included a comparison to the value using a market approach for reasonableness.

Internal forecasts were used to estimate

future cash flows, which included assumptions for forecasted revenue growth rates, margin estimates, various expenses, capital additions

and working capital needs, which were consistent with internal projections and operating plans.

A terminal value was included in the

forecast based on capitalization multiple.

The cash flows were discounted using a weighted average cost of capital (“WACC”)

The capitalization multiple and WACC were based in part on rates derived from an analysis of guideline companies, and generally

considered commensurate with the risks and uncertainty inherent in the respective businesses and internally developed forecasts.

result of the completion of Step 1, it was determined that the carrying amount exceeded the fair value of invested capital.

the Company proceeded to Step 2 to measure impairment charges.

Step 2, the fair value of the reporting unit’s “implied goodwill,”

was determined by allocating the reporting unit’s

fair value derived in Step 1 to all of the reporting unit’s assets and liabilities other than goodwill and comparing the result

to the carrying amount of goodwill.

After determining the fair value of the Canadian reporting unit and considering the fair values of

other assets contained therein, the Company concluded that there was no value remaining in the implied fair value of goodwill.

goodwill allocated to the Canadian reporting unit was deemed to be fully impaired, and the Company recognized an impairment charge of

$3,244 in 2018, which is included in impairment, restructuring and other in the consolidated statements of operations.

Additionally,

in 2018, the Company recorded a decrease in deferred tax liabilities and a decrease in the goodwill impairment related to the United

States reporting unit of $528.

above resulted in a net impairment loss of $2,716 in 2018.

Peat bogs and related development

Computer equipment 3,197 2,079

Furniture and fixtures 2,867 1,154

Gross property, plant, and equipment

accumulated depreciation, depletion and amortization ( 8,291 ) ( 5,375 )

Total property, plant and equipment, net $ 50,473 $ 3,988

The table above includes the property, plant, and equipment assets acquired from Heavy 16, the H&G Entities, Aurora, Greenstar, and the IGE Entities (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, depletion and amortization expense related to property, plant, and equipment, net was $ 4,580 for the year ended December 31, 2021.

Depreciation and amortization was $ 1,625 and $ 1,688 for the years ended December 31, 2020 and 2019, respectively.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other

current liabilities comprised the following:

Accrued expenses and other current liabilities comprised the following:

Accrued compensation and benefits $ 3,713 $ 9,902

Goods in transit accrual

Freight, custom and duty accrual 2,094 2,603

Obligations due under a distribution agreement

Costs related to issuance of Series A Convertible Preferred Stock

Goods in transit accrual 3,473 3,845

Corporate tax accrual 729 585

Contingent consideration 17,034 —

Other accrued liabilities 6,953 4,680

Total accrued expenses and other current

The prior year amount for

freight, custom and duty accrual was reclassified from other accrued liabilities to its own line item to conform to the current year

presentation.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

Total accrued expenses and other current liabilities $ 33,996 $ 21,615

The December 31, 2020, amounts for corporate tax accrual was reclassified from other accrued liabilities to a separate line item and the obligations due under a distribution agreement were reclassified to other accrued liabilities to conform to the current year presentation.

Debt is comprised of the following:

December 31, 2020

December 31, 2019

Discount and Deferred

Financing Costs

Line of credit

Current portion

Term loan - net of unamortized discount & deferred financing costs of $ 6,025

$ 118,975 $ —

Other 2,805 1,036

Total debt $ 121,780 $ 1,036

Current portion of long-term debt $ 2,263 $ 746

Long-term debt - net of discount and deferred financing costs of $ 6,025

Total debt $ 121,780 $ 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, as administrative agent

(“Brightwood”), and the lenders party thereto.

Hydrofarm Holdings LLC is a shell entity and a subsidiary of Hydrofarm Holdings

Hydrofarm Holdings LLC’s subsidiary is Hydrofarm, LLC, the primary operating entity of the Company.

The Term Loan was

to mature on May 12, 2022.

The Term Loan was secured by substantially all non-working capital assets and a second lien on working capital

assets of the Term Loan Obligors.

Interest was calculated

at LIBOR plus a margin of 700 basis points on LIBOR based loans assuming the net leverage ratio as defined was met, otherwise at LIBOR

plus a margin of 850 basis points.

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 “Brightwood Term Loan Obligors”) from Brightwood Loan Services LLC.

The Brightwood Term Loan was scheduled 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 Brightwood Term Loan Obligors.

Interest was calculated at LIBOR plus a margin of 700 basis points on LIBOR based loans assuming the net leverage ratio as defined was met, otherwise at LIBOR plus a margin of 850 basis points.

Principal payments at an annual basis of 2.5 % of the original loan amount were due quarterly.

financing costs were being amortized to interest expense over the term of the loan.

The Term Loan has

been subject to numerous amendments since its origination generally in connection with modifications to debt service, interest payments,

interest rates, and debt covenants.

Deferred financing costs were being amortized to interest expense over the term of the loan.

The Brightwood Term Loan was subject to numerous amendments since its origination generally in connection with modifications to debt service, interest payments, interest rates, and debt covenants.

Certain amendments required payments of fees.

All amendments were accounted for as debt modifications.

In order to comply with the

financial covenant provisions as of November 30, 2018, the Term Loan Obligors (and BofA Obligors) issued a cure notice and made

a debt service payment of $1,151 with proceeds from an equity contribution to Hydrofarm Holdings LLC from its ultimate parent, Hydrofarm

Holdings Group, Inc., in January 2019 to the BofA Credit Facility (as defined below).

The Brightwood fourth amendment on March 15,

2019 required that the Term Loan Obligors make a $3,000 principal prepayment on the Term Loan.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

Brightwood sixth amendment dated October 15, 2019, and a related side letter that was amended on January 16, 2020, provided that a portion

of the proceeds raised in the December 2019 offering of Series A Convertible Preferred Stock would be used pay down the Term Loan;

amount was ultimately determined to be $8,370.

As of December 31, 2019, cash of $8,370 is presented as a component of restricted cash

on the accompanying consolidated balance sheet and an equal amount of the Term Loan is included in current portion of long-term debt.

The payment was made in January 2020.

For the year ended

December 31, 2020, the effective interest rate was 10.18%, interest expense was $6,892, and amortization of deferred financing costs

For the year ended December 31, 2019, the effective interest rate was 13.02%, interest expense was $10,151, of which $7,106

was added to the principal, and amortization of deferred financing costs was $483.

For the year ended December 31, 2018, the effective

interest rate was 12.13%, interest expense was $9,191, of which $6,795 was added to the principal, and amortization of deferred financing

costs was $493.

balance of the term loan of $76,610 (including accrued interest) was repaid with proceeds from the IPO on December 14, 2020.

on debt extinguishment of $907 representing unamortized deferred financing costs was recognized at the time of repayment.

Revolving asset-backed credit facilities

May 2017, a credit facility (“BofA Credit facility”) was obtained by Hydrofarm Holdings LLC and certain of its direct and

indirect subsidiaries (the “BofA Obligors”) from Bank of America and the lenders’

party thereto.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The BofA Credit Facility has

been subject to numerous amendments since its origination generally in connection with modifications to debt service, interest payments,

interest rates, debt covenants, extension of due dates and the eventual payoff in July 2019.

Certain amendments required payments of

fees and each amendment was accounted for as a debt modification.

As part of a forbearance agreement,

a stockholder agreed to provide Hydrofarm Holdings LLC with an unsecured subordinated loan of $4,000 for a period and at terms specified

in the forbearance agreement to provide for working capital needs of the BofA Obligors.

On July 11, 2019, Hydrofarm

Holdings LLC and certain of its direct and indirect subsidiaries (the “Encina Obligors”) replaced the BofA Credit Facility

with 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”).

The amount of the facility is limited to the borrowing base (primarily calculated based on eligible accounts receivable and inventory)

subject to certain reserves and limitations.

The Encina Credit Facility is due on the earlier of July 11, 2022 or 90 days prior to the

scheduled maturity date of the Term Loan.

due monthly, is at LIBOR or a base rate, plus an applicable margin ranging between 3.75% to 5.50% per annum determined based on the fixed

charge coverage ratio calculated over an applicable time period.

A fee of 0.50% per annum is charged for available but unused borrowings

An additional 200 basis points is added to the interest rate for any period during

which the loan is in default.

Deferred financing costs are being amortized over the term of the Encina Credit Facility.

Encina Credit Facility is secured by working capital assets and a second lien on non-working capital assets, and requires various restrictive

and protective covenants and financial ratios.

Additionally, the agreement requires the Encina

Obligors to be in compliance with the financial and qualitative covenants of all other existing debt.

The Encina Credit Facility provides

for several financial covenants, as defined and limits on capital expenditures.

Prior to April 2020, the

Encina Credit Facility has been subject to numerous amendments since its origination generally in connection with modifications to available

borrowings, financial covenants, permitted indebtedness and permitted capital expenditures.

In April 2020 and May 2020, the

Encina Credit Facility was amended by the third, fourth and fifth amendments, which (i) replaced the existing “fixed charge

coverage ratio/minimum excess availability”

financial covenant with an amended “availability block”

and increased the

“inventory sublimit,”

each as more fully described in the amendment, (ii) provided for permitted indebtedness related

to the PPP Loan, and (iii) increased permitted capital expenditures during any fiscal year to $750.

In September 2020, the

Encina Credit Facility was amended by the sixth amendment, which (i) further increased the “inventory sublimit”

defined), and (ii) increased permitted capital expenditures during any fiscal year to $2,000.

In December 2020, the Encina Credit

Facility was amended by the seventh amendment, which (i) added to the Loan Agreement the definition of “IPO”

and (ii) amended

and restated the definition of “Change of Control”.

All amendments were accounted for as debt modifications.

For the year ended December 31, 2019, the effective interest rate was 13.02 %, interest expense was $ 10,151 , of which $ 7,106 was added to the principal, and amortization of deferred financing costs was $ 483 .

For the year ended December 31,

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

2020, the effective interest rate was 10.18 %, interest expense was $ 6,892 , and amortization of deferred financing costs was $ 610 .

For the year ended December

31, 2019, the combined effective interest rate for the BofA Credit Facility and the Encina Credit Facility was 9.86%, interest expense

was $2,161, all of which was added to the principal, and amortization of deferred financing costs was $228.

Total combined fees for the

BofA Credit Facility and the Encina Credit Facility of $377 were added to the principal in 2019.

Additionally, the unamortized deferred

financing costs related to the BofA Credit Facility totaling $391 were written off and recognized as a loss on debt extinguishment in

the consolidated statements of operations in 2019.

The effective interest rates on the BofA Credit Facility ranged from 5.00% to 5.06%

in 2018 and the amortization of deferred financing costs was $150 in 2018.

The balance of the Encina

Credit Facility was $0 as of December 31, 2020, which reflects a pay-down of $33,353 with proceeds from the IPO.

The Encina Obligors had

approximately $34,521 available to borrow under the Encina Credit Facility as of December 31, 2020.

The Encina Obligors were

in compliance with all debt covenants as of December 31, 2020 and 2019.

The balance of the Brightwood Term Loan of $ 76,610 (including accrued interest) was repaid with proceeds from the IPO on December 14, 2020.

A loss on debt extinguishment of $ 907 representing unamortized deferred financing costs was recognized at the time of repayment.

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 $ 125,000 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").

D eferred financing costs totaled $ 6,190 and are being amortized to interest expense over the term of the loan.

The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25 % of the $ 125,000 principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date.

The Company is 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.

The Company was in compliance with all reporting requirements, affirmative covenants, and negative covenants as of December 31, 2021.

For the year ended December 31, 2021, the effective interest rate was 1.36 %, interest expense was $ 1,535 , and amortization of deferred financing costs was $ 165 .

Revolving asset-backed credit facilities

Bank of America and Encina Credit Facility

In May 2017, a credit facility (“BofA Credit facility”) was obtained by Hydrofarm Holdings LLC and certain of its direct and indirect subsidiaries (the “BofA Obligors”) from Bank of America and the lenders’ party thereto.

The BofA Credit Facility was subject to numerous amendments since its origination generally in connection with modifications to debt service, interest payments, interest rates, debt covenants, extension of due dates and the eventual payoff in July 2019.

Certain amendments required payments of fees and each amendment was accounted for as a debt modification.

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 Brightwood Term Loan.

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Interest was calculated at LIBOR or a base rate, plus an applicable margin ranging between 3.75 % to 5.50 % per annum determined based on the fixed charge coverage ratio calculated over an applicable time period.

A fee of 0.50 % per annum was charged for available, but unused borrowings as defined.

An additional 200 basis points was added to the interest rate for any period during which the loan was in default.

Deferred financing costs were amortized over the term of the Encina Credit Facility.

The Encina Credit Facility was subject to numerous amendments since its origination generally in connection with modifications to available borrowings, financial covenants, permitted indebtedness and permitted capital expenditures.

Certain amendments required payments of fees.

All amendments were accounted for as debt modifications.

For the year ended December 31, 2019, the combined effective interest rate for the BofA Credit Facility and the Encina Credit Facility was 9.86 %, interest expense was $ 2,161 , all of which was added to the principal, and amortization of deferred financing costs was $ 228 .

Additionally, the unamortized deferred financing costs related to the BofA Credit Facility totaling $ 391 were written off and recognized as a loss on debt extinguishment in the consolidated statements of operations in 2019.

For the year ended December 31, 2020, the effective interest rate was 9.27 %, interest expense was $ 2,248 , and amortization of deferred financing costs was $ 318 .

The balance of the Encina Credit Facility was $ 0 as of December 31, 2020, which reflected a pay-down of $ 33,353 with proceeds from the IPO.

The Encina Obligors had approximately $ 34,521 available to borrow under the Encina Credit Facility as of December 31, 2020.

The Encina Obligors were in compliance with all debt covenants as of December 31, 2020.

The Encina Credit Facility was replaced in March 2021 by the JPMorgan Revolving Credit Facility.

For the year ended December 31, 2021, the Company recognized interest expense of $ 82 .

The unamortized deferred financing costs and early termination fees totaling $ 680 were recognized as a loss on debt extinguishment in the consolidated statements of operations for the year ended December 31, 2021.

JPMorgan Revolving Credit Facility

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

and certain of its 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.

The JPMorgan Credit Facility is due on March 29, 2024.

D eferred financing costs totaled $ 1,226 and are being amortized to interest expense over the term of the loan.

The deferred financing costs for the JPMorgan Credit Facility are included in other assets in the consolidated balance sheets as of December 31, 2021.

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 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.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

On October 25, 2021, the Company and its subsidiaries entered into a second amendment (the “Second Amendment”), with JPMorgan Chase Bank, N.A., pursuant to which the parties consented to the Term Loan and the lien priorities described above, and made certain conforming changes to the provisions of the Term Loan.

All amendments in 2021 were accounted for as debt modifications.

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.

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

For the year ended December 31, 2021, the effective interest rate was 4.36 %, interest expense was $ 117 , and amortization of deferred financing costs was $ 206 .

The balance of the JPMorgan Credit Facility was $ 0 as of December 31, 2021.

The Company had approximately $ 83,619 available to borrow under the Revolver as of December 31, 2021.

The JPMorgan Obligors were in compliance with all debt covenants as of December 31, 2021.

Note under Paycheck Protection Program

In April 2020, the Company

entered into a U.S.

Small Business Administration (“SBA”) Paycheck Protection Program promissory note in the principal amount

of $3,274 with JPMorgan Chase Bank’s SBA loan program under the March 2020 Coronavirus Aid, Relief and Economic Security Act (“CARES

Act”) (the “PPP Loan”).

In April 2020, the Company entered into a U.S.

Small Business Administration (“SBA”) Paycheck Protection Program promissory note in the principal amount of $ 3,274 with JPMorgan Chase Bank’s SBA loan program under the March 2020 Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) (the “PPP Loan”).

The PPP Loan bore interest at 1% per annum and payments were deferred for the first six months.

On October 7, 2020, the Small Business Administration and Treasury Department confirmed a ten-month extension of the deferral period,

granted by the PPP Flexibility Act of 2020, which automatically applied to all PPP Loans.

Interest expense for the year ended December

31, 2020 was $22.

On October 7, 2020, the Small Business Administration and Treasury Department confirmed a ten-month extension of the deferral period, granted by the PPP Flexibility Act of 2020, which automatically applied to all PPP Loans.

Interest expense for the year ended December 31, 2020 was $ 22 .

The maturity date was April 7, 2022.

The full balance of the PPP Loan, including accrued interest, of $3,296 was repaid

on December 15, 2020 with proceeds from the IPO.

Hydrofarm Holdings Group,

NOTES TO THE CONSOLIDATED FINANCIAL

(in thousands, except share

and per share amounts)

The full balance of the PPP Loan, including accrued interest, of $ 3,296 was repaid on December 15, 2020 with proceeds from the IPO.

Debt convertible into preferred stock

In September and October

2019, the Company issued debt to investors convertible into preferred stock for cash of $7,532, less issuance costs of $552, in the form

of unsecured subordinated promissory notes with interest at 6.0% per annum due on March 30, 2020.

The notes contained an automatic

conversion feature triggered by a qualified financing as defined (e.g., private placement or initial public offering) of preferred stock

of $5,000 or more.

The number of shares into which the notes converted was to be based on a formula which divided outstanding principal

and accrued interest by the per share price of the offering.

The conditional share-settled conversion feature was deemed to be embedded

derivative that did not meet the criteria to be bifurcated and carried at fair value;

accordingly, all of the proceeds net of the issuance

costs were allocated to the debt instrument.

In December 2019, the Company

completed an offering of Series A Convertible Preferred Stock which triggered conversion of $7,532 of principal plus $105 of accrued

interest into 2,182,083 shares of Series A Convertible Preferred Stock (see Note 10, Convertible preferred stock and stockholders’

The unamortized deferred financing costs at the time of the conversion of $288 were written-off and are included in loss

on debt extinguishment in the consolidated statements of operations in 2019.

In September and October 2019, the Company issued debt to investors convertible into preferred stock for cash of $ 7,532 , less issuance costs of $ 552 , in the form of unsecured subordinated promissory notes with interest at 6.0 % per annum due on March 30, 2020.

The notes contained an automatic conversion feature triggered by a qualified financing as defined (e.g., private placement or initial public offering) of preferred stock of $ 5,000 or more.

The number of shares into which the notes converted was based on a formula which divided outstanding principal and accrued interest by the per share price of the offering.

The conditional share-settled conversion feature was deemed to be embedded derivative that did not meet the criteria to be bifurcated and carried at fair value;

accordingly, all of the proceeds net of the issuance costs were allocated to the debt instrument.

In December 2019, the Company completed an offering of Series A Convertible Preferred Stock which triggered conversion of $ 7,532 of principal plus $ 105 of accrued interest into 2,182,083 shares of Series A Convertible Preferred Stock (see Note 11, S tockholders’ Equity ).

The total unamortized deferred financing costs was $ 288 and was recognized as a loss on debt extinguishment in the consolidated statements of operations in 2019.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Aggregate future principal payments

As of December 31, 2020,

the aggregate future principal payments under long-term debt are not material to the financial statements and are due on various dates

from 2021 to 2023.

The aggregate future principal payments under finance lease obligations are included in Note 5, Leases .

CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’

As of December 31, 2021, the aggregate future principal payments under long-term debt, excluding payments due under finance lease obligations presented in Note 7, Leases , are as follows:

Year ending December 31,

Thereafter 118,799

Total principal payments under long-term debt $ 125,438

The following is a reconciliation of payment due:

Finance lease obligations Debt Total

Current portion of long-term debt $ 739 $ 1,524 $ 2,263

Long-term debt 1,628 123,914 125,542

Total payments due $ 2,367 $ 125,438 $ 127,805

STOCKHOLDERS’ EQUITY

Capital stock

As of December 31, 2020,

the following summarizes shares authorized, issued and outstanding:

Convertible preferred stock at $0.0001 par value per share

Common stock at $0.0001 par value per share

As of December 31, 2020, the following summarizes

shares reserved for future issuance:

Shares reserved

As of December 31, 2021, the following summarizes shares authorized, issued and outstanding:

Capital stock authorized and outstanding:

authorized Shares

Convertible preferred stock 50,000,000 —

Common stock 300,000,000 44,618,357

As of December 31, 2021, the following summarizes shares of common stock reserved for issuance:

Common stock reserved for issuance:

Shares reserved

Warrants 17,817

2020 Employee, Director, and Consultant Equity Incentive Plan 2,118,067

1 unchanged sentence

Stock options 720,549

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Convertible preferred stock

In December 2019,

the Company issued 7,007,429 shares of Series A Convertible Preferred Stock with a par value of $24,526 in return for cash of $15,439,

conversion of debt with a basis of $7,637, and $1,450 in receivables that were settled in January 2020.

Offering costs totaled $1,274,

of which $1,239 was included in accrued expense and other current liabilities in the consolidated balance sheet as of December 31, 2019.

In January and February 2020, an additional 717,616 shares of preferred stock were issued primarily to existing investors for $2,511,

less offering costs of $169, for net cash proceeds of $2,342.

The Series A Convertible Preferred

Stock was issued at $3.50 and ranked senior to all other classes of preferred and common stock.

The preferred stock agreement provided

for conversion to common stock at a ratio of 3.3712:1 at the option of the holder, a preference on liquidation, voting rights, and liquidity

rights in the event an IPO did not occur within 18 months of the issuance date.

Dividends were provided at a 10% dividend yield, cumulative,

payable in cash or PIK (Series A Convertible Preferred Stock) at the issuer’s discretion;

the rate was to increase to 11% after

the 9-month anniversary and 12% after the 18-month anniversary.

Holdings Group, Inc.

TO THE CONSOLIDATED FINANCIAL STATEMENTS

thousands, except share and per share amounts)

The Series A Convertible Preferred

Stock contained a redemption feature not solely within the control of the Company’s common shareholders and was, therefore, classified

outside of permanent equity.

None of the embedded features required bifurcation from the host instrument.

The preferred stock agreement

provided for mandatory conversion upon a qualified IPO based on a formula.

Under this formula, all outstanding shares of Series A Preferred

Stock converted into 2,291,469 shares of common stock concurrent with the IPO in December 2020.

The cumulative dividend of $2,597 was

settled in cash at the option of the Company rather than in shares of common stock.

Each holder of common stock

is entitled to one vote for each share of common stock.

Common stockholders have no pre-emptive rights to acquire additional shares of

common stock or other securities.

In December 2019, the Company issued 7,007,429 shares of Series A Convertible Preferred Stock (the "Series A preferred stock") with a par value of $ 24,526 in return for cash of $ 15,439 , conversion of debt with a basis of $ 7,637 , and $ 1,450 in receivables that were settled in January 2020, less offering costs totaled $ 1,274 .

In January and February 2020, an additional 717,616 shares of Series A preferred stock were issued primarily to existing investors for $ 2,511 , less offering costs of $ 169 , for net cash proceeds of $ 2,342 .

The Series A preferred stock purchase agreement provided for mandatory conversion upon a qualified IPO based on a formula.

Under this formula, all outstanding shares of Series A preferred stock converted into 2,291,469 shares of common stock concurrent with the IPO in December 2020 and the cumulative dividend of $ 2,597 was settled in cash at the option of the Company rather than in shares of common stock.

Each holder of common stock is entitled to one vote for each share of common stock.

Common stockholders have no pre-emptive rights to acquire additional shares of common stock or other securities.

The common stock is not subject to redemption rights and carries no subscription or conversion rights.

In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies

all liabilities and after provision is made for any class of capital stock having preference over the common stock.

Subject to corporate

regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board.

As of December 31, 2020, and 2019, aggregate

shares of common stock issuable under warrants totaled 3,886,191.

issued to investors in the Offering and Concurrent Offering for the purchase of 3,369,124 shares (the “Investor

Warrants”) are exercisable at $16.86 per share in whole or in part subject to typical adjustments for anti-dilution.

warrants expire three years from December 10, 2020 and are callable by the Company solely at its discretion if certain conditions

Placement agent warrants for the purchase of 172,351 shares of common stock are exercisable at a price of $16.86 per share

and 344,716 are exercisable at a price of $8.43 per share.

Placement agent warrants are exercisable in whole or in part subject

to typical adjustments for anti-dilution and may be exercised on a “cashless”

Restriction on the ability to pay dividends

Under the terms of the

Encina Credit Facility, substantially all consolidated net assets of the Encina Obligors are subject to limitations regarding the

restriction of payment of dividends to any direct or indirect parent.

COMPENSATION AND 401K PLAN

compensation plan overview

Company maintains three equity incentive plans:

the 2018 Equity Incentive Plan (“2018 Plan”), the 2019 Employee, Director

and Consultant Equity Incentive Plan (“2019 Plan”) and the 2020 Employee, Director, and Consultant Equity Incentive Plan

(“2020 Plan”

and collectively, “Incentive Plans”).

The 2020 Plan serves as the successor to the 2019 and 2018

Plans and provides for the issuance of incentive stock options (“ISOs”), nonqualified stock options (“NSOs”),

stock grants and stock-based awards to employees, directors, and consultants of the Company.

No further awards will be issued under the

2018 and 2019 Plans.

Incentive Plans are administered by the Board.

Notwithstanding the foregoing, the Board may delegate concurrent responsibility for administering

each plan, including with respect to designated classes of persons eligible to receive an award under each plan, to a committee or committees

(which term shall include subcommittees) consisting of one or more members of the Board (collectively, the “Plan Administrator”),

subject to such limitations as the Board deems appropriate.

November 2020, the Board and stockholders approved the 2020 Plan and reserved an aggregate of 2,284,053 shares of common stock for issuance

under the 2020 Plan.

Subject to the provision of the 2020 Plan, the number of shares available for issuance under the 2020 Plan will

be increased on January 1 of each year, beginning on January 1, 2021, and ending on January 2, 2030 in an amount equal to the lesser

of (i) 4% of the outstanding shares of the Company’s common stock on such date or (ii) such number of shares determined by the

Plan Administrator.

2020 Plan provides for the grant of ISOs, NSOs, stock grants, and stock-based awards that are based in whole or in part by reference

to the Company’s common stock.

Plan Administrator may grant options designated as incentive stock options or nonqualified

stock options.

Options shall be granted with an exercise price per share not less than 100%

of the fair market value of the common stock on the grant date, subject to certain limitations

and exceptions as described in the plan agreements.

Generally, the maximum term of an option

shall be ten years from the grant date.

The Plan Administrator shall establish and set forth

in each instrument that evidences an option the time at which, or the installments in which,

the option shall vest and become exercisable.

Holdings Group, Inc.

TO THE CONSOLIDATED FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Plan Administrator may grant stock grants and stock-based awards, including securities convertible

into shares, stock appreciation rights, phantom stock awards or stock units on such terms

and conditions which may be based on continuous service with the Company or related company

or the achievement of any performance goals, as the Plan Administrator shall determine in

its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument

evidencing the award.

of December 2020, 2,197,396 shares of common stock are available for grant under the 2020 Plan.

No awards were granted prior to 2019.

of restricted stock units

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

The awards generally have a time-based

vesting requirement (based on continuous employment) and certain awards also have a performance-based vesting requirement (defined as

a liquidity event including an initial public offering);

on the date the performance-based vesting requirement is satisfied, the employee

will become vested in the number of RSUs that have satisfied the time-based vesting requirement, if any.

In November 2020, five new independent

directors were appointed to the Board replacing most of the members who previously served on the Board.

In anticipation of reconstituting

the Board, in October 2020, the compensation committee of the Board approved grants of 74,152 restricted stock units, in the aggregate,

to certain Board members who were being replaced and their affiliates.

These awards were fully vested at the time of grant.

vesting, the RSUs convert into shares of the Company’s common stock and unvested RSUs are not considered outstanding common shares.

following table summarizes the activity related to the Company’s RSUs for the year ended December 31, 2020.

For purposes of this

table, vested RSUs represent the shares for which the performance and service conditions had been fulfilled as of December 31, 2020:

grant date fair value

In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies all liabilities and after provision is made for any class of capital stock having preference over the common stock.

Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board.

Redemption of investor warrants

On July 19, 2021, the Company completed the redemption ("Redemption") of certain of its outstanding warrants (the "Investor Warrants") that were issued in connection with a private placement of units (the "private placement"), each consisting of a share of common stock and a warrant to purchase an additional one-half (1/2) shares of common stock, which concluded in the fall of 2018.

The Company was entitled to redeem all of the outstanding Investor Warrants for a redemption price of $ 0.00033712 per Investor Warrant ("redemption price") if (i) there was an effective registration statement covering the resale of the shares of common stock underlying the Investor Warrants, and (ii) the volume-weighted average price of the Company's common stock for the twenty consecutive trading days prior to the date of the notice of redemption was at least $ 25.28 , of which both requirements were met.

Investor Warrants were exercisable at a price of $ 16.86 per share until July 19, 2021 (the "redemption date").

Any Investor Warrants that remained unexercised immediately after the redemption date were void and no longer exercisable, and the holders of those Investor Warrants were entitled to receive the redemption price.

Prior to the redemption date, 3,367,647 Investor Warrants were exercised, generating total gross proceeds of $ 56,778 .

The Company redeemed 1,491 Investor Warrants at the redemption price.

In connection with the private placement, the Company agreed to engage the placement agent (the "Placement Agent") as the Company's warrant solicitation agent in the event the Investor Warrants were called for Redemption.

The Company agreed to pay a warrant solicitation fee to the Placement Agent equal to five percent of the amount of net cash proceeds solicited by the Placement Agent upon the exercise of certain Investor Warrants following such call for Redemption.

For the year ended December 31, 2021, warrant solicitation fee expense totaled $ 1,949 and was included in selling, general and administrative expenses in the consolidated statements of operations.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Redemption of placement agents warrants

In connection with the private placement, placement agents were issued warrants to purchase 517,067 shares of common stock in the Company of which 172,351 shares subject to warrants are exercisable at a price of $ 16.86 per share and 344,716 shares subject to warrants are exercisable at a price of $ 8.43 per share.

Placement agent warrants are exercisable in whole or in part subject to typical adjustments for anti-dilution and may be exercised on a "cashless" basis.

For the year ended December 31, 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 332,907 placement agent warrants were exercised on as cashless basis at a price of $ 8.43 per share for 289,368 shares of common stock.

As of December 31, 2021, the following table summarizes the outstanding warrants:

Number of Warrants Exercise Price

Placement agent warrants 11,809 $ 8.43

Placement agent warrants 6,008 $ 16.86

Total 17,817 $ 11.27

STOCK-BASED COMPENSATION

Stock-based compensation plan overview

The Company maintains three equity incentive plans:

the 2018 Equity Incentive Plan (“2018 Plan”), the 2019 Employee, Director and Consultant Equity Incentive Plan (“2019 Plan”) and the 2020 Employee, Director, and Consultant Equity Incentive Plan (“2020 Plan” and collectively, “Incentive Plans”).

The 2020 Plan serves as the successor to the 2019 Plan and 2018 Plan and provides for the issuance of incentive stock options ("ISOs"), nonqualified stock options ("NSOs"), stock grants and stock-based awards to employees, directors, and consultants of the Company.

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

Of the total shares available for grant under the 2020 Plan, 2,118,067 shares remain available as of December 31, 2021.

The Incentive Plans are administered by the Board.

Notwithstanding the foregoing, the Board may delegate concurrent responsibility for administering each plan, including with respect to designated classes of persons eligible to receive an award under each plan, to a committee or committees (which term shall include subcommittees) consisting of one or more members of the Board (collectively, the “Plan Administrator”), subject to such limitations as the Board deems appropriate.

In November 2020, the Board and stockholders approved the 2020 Plan and reserved an aggregate of 2,284,053 shares of common stock for issuance under the 2020 Plan.

Subject to the provision of the 2020 Plan, the number of shares available for issuance under the 2020 Plan will be increased on January 1 of each year, beginning on January 1, 2021, and ending on January 2, 2030, in an amount equal to the lesser of (i) 4 % of the outstanding shares of the Company’s common stock on such date or (ii) such number of shares determined by the Plan Administrator.

The 2020 Plan provides for the grant of ISOs, NSOs, stock grants, and stock-based awards that are based in whole or in part by reference to the Company’s common stock.

• The Plan Administrator may grant options designated as incentive stock options or nonqualified stock options.

Options shall be granted with an exercise price per share not less than 100 % of the fair market value of the common stock on the grant date, subject to certain limitations and exceptions as described in the plan agreements.

Generally, the maximum term of an option shall be ten years from the grant date.

The Plan Administrator shall establish and set forth in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

• The Plan Administrator may grant stock grants and stock-based awards, including securities convertible into shares, stock appreciation rights, phantom stock awards or stock units on such terms and conditions which may be based on continuous service with the Company or related company or the achievement of any performance goals, as the Plan Administrator shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the award.

Grants of restricted stock units

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

The awards generally have a time-based vesting condition (based on continuous employment) and certain awards also have a performance-based vesting condition (defined as a qualifying liquidity event including an initial public offering);

on the date the performance-based vesting condition is satisfied, the employee becomes vested in the number of RSUs that have satisfied the time-based vesting condition, if any.

Upon vesting, the RSUs convert into shares of the Company’s common stock.

Through December 8, 2020, no stock-based compensation expense had been recognized for certain awards with a performance-based condition based on the occurrence of a qualifying liquidity event, as such qualifying event was not probable.

Upon the IPO, the performance-based vesting condition was satisfied and the Company recognized $ 2,967 of stock-based compensation expense for RSUs which was the cumulative portion of the service-based awards that vested.

For the year ended December 31, 2020, the Company recognized $ 8,689 of stock-based compensation expense for RSUs.

No stock-based compensation expense was recognized for RSUs for the year ended December 31, 2019.

For the year ended December 31, 2020, the Company withheld 239,702 of the 718,928 shares of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements.

The total tax withholding obligation of $ 6,089 as of December 31, 2020 was included in accrued expenses and other current liabilities in the consolidated balance sheets.

The payment was made in January 2021.

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

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.

The fair value of the award, at the modification date, was $ 3,180 , all of which was recorded as stock-based compensation expense upon the IPO.

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

The total shares under the unvested RSUs subject to time-based vesting conditions were 111,236 as of December 31, 2021.

For the year ended December 31, 2021, there were no performance awards with market-based conditions granted.

For the year ended December 31, 2021, the Company recognized $ 4,566 of total stock-based compensation expense for restricted stock units.

For the year ended December 31, 2021, the Company withheld 268,867 of the 851,741 of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements.

The tax withholding payments of $ 13,936 were made in 2021 in addition to the tax withholding obligation from 2020 paid in 2021 (as described above).

The total tax withholding obligation of $ 9 as of December 31, 2021 was included in accrued expenses and other current liabilities in the consolidated balance sheets.

The following table summarizes the activity related to the Company's RSUs for the year ended December 31, 2021.

For purposes of this table, vested RSUs represent the shares for which the service requirements had been fulfilled as of December 31, 2021:

RSUs Weighted

average grant

date fair value

Balance, January 1, 2021

1,857,444 $ 6.55

Granted 81,905 $ 54.72

Vested ( 851,741 ) $ 7.15

Balance, December 31, 2021

December 8, 2020, no stock-based compensation expense had been recognized for certain awards with a performance condition based on the

occurrence of a qualifying event (i.e., IPO), as such qualifying event was not probable.

Upon the IPO, the performance condition was

met and the Company recognized $2,967 of stock-based compensation expense which was the cumulative portion of the service-based awards

As of December 31, 2020, the performance-based vesting requirement on all outstanding awards had been met.

of December 31, 2020, the Company withheld 239,702 of the 718,928 shares of common stock issued upon vesting of certain RSUs to meet

the employees’

payroll tax withholding requirements.

The total tax withholding obligation of $6,089 as of December 31, 2020 is

included in accrued expenses and other current liabilities in the consolidated balance sheets.

After the IPO, the stock-based compensation

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

The following table

summarizes the grant date fair value, expense for the year ended December 31, 2020 (no expense was recognized during the year ended

December 31, 2019), and the balance of unamortized stock-based compensation related to RSUs as of December 31, 2020:

Grant date fair

RSUs subject only to the passage of time:

Total RSUs vested

RSUs subject only to the passage of time:

RSUs subject to market condition and passage of time:

Total RSUs outstanding

unamortized compensation costs of $8,079 are expected to be recognized over a weighted-average period of approximately 2.56 years.

Holdings Group, Inc.

TO THE CONSOLIDATED FINANCIAL STATEMENTS

thousands, except share and per share amounts)

The award granted to the 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;

key assumptions used on the MCSM included volatility of 52.90%;

time horizon of 2.64 years corresponding to the vesting

measurement period of the award forecasted based on daily trading prices;

risk-free rate of 0.23%;

and 10,000 simulation trials.

fair value of the award at the modification date was $3,180, all of which was recorded as stock-based compensation expense when the performance

condition was met upon the IPO.

The total shares under the unvested RSU subject to a market-based vesting condition are 296,630 as of

December 31, 2020.

tax benefit recognized in the consolidated statements of operations for stock-based compensation arrangements for the year ended December

31, 2020 was not material to the financial statements.

There was no tax benefit in 2019.

issued through December 31, 2020 vest under one of three schedules as follows:

20% vest as of the date of grant, then 1/45 th on

the last day of the month for the following 36 months;

25% vest on the first anniversary of the date of grant, then 1/48 th on

the last day of the month for the following 36 months;

or, options vest upon grant.

Vesting is subject to certain change in control provisions

as provided in the incentive plan agreements and options may be exercised up to 10 years from the date of issuance.

following table summarizes the stock option activity for the year ended December 31, 2020:

exercise price

1,087,608 $ 9.71

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The total fair value of RSUs vested for the years ended December 31, 2021, 2020 and 2019 was $ 6,090 , $ 4,598 , and $ 0 , respectively.

As of December 31, 2021, total unamortized stock-based compensation cost related to unvested RSUs was $ 7,997 and the weighted-average period over which the compensation is expected to be recognized is 1.65 years.

The tax benefits recognized in the consolidated statements of operations for stock-based compensation arrangements for the years ended December 31, 2021 and 2020 were not material to the financial statements.

There was no tax benefit recognized in 2019.

Stock options

The vesting of stock options is subject to certain change in control provisions as provided in the incentive plan agreements and options may be exercised up to 10 years from the date of issuance.

The following table summarizes the stock option activity for the year ended December 31, 2021:

Number Weighted

exercise price Weighted

average grant

date fair value

date fair value Weighted average

remaining contractual

Outstanding at January 1, 2020

Outstanding at December 31, 2020

Outstanding as of January 1, 2021

922,796 $ 8.81 $ 1.78 8.08

Granted 10,641 $ 59.03 $ 25.58

Exercised ( 186,633 ) $ 8.54 $ 0.96

Cancelled ( 510 ) $ 8.43 $ 0.70

Forfeited ( 25,745 ) $ 10.26 $ 5.67

Outstanding as of December 31, 2021

720,549 $ 9.57 $ 2.21 7.37

Exercisable as of December 31, 2021

Unvested at December 31, 2020

518,034 $ 8.57 $ 1.10 7.25

Unvested as of December 31, 2021

202,515 $ 12.13 $ 5.04 1.96

Vested and expected to vest as of December 31, 2021

options represent equity awards of the Company, such awards are fair valued as of the grant date for the purposes of measurement and

recognition under U.S.

720,549 $ 9.57 $ 2.21 7.37

Since stock options represent equity awards of the Company, such awards are fair valued as of the grant date for the purposes of measurement and recognition under U.S.

To measure the fair value of an option, the Black-Scholes valuation model was utilized.

The valuation model

requires the input of highly subjective assumptions.

Inputs to model were as follows for the periods indicated:

The valuation model requires the input of highly subjective assumptions.

Inputs to the model were as follows for the periods indicated:

Years ended December 31,

Fair Value of common stock underlying the options

2021 2020 2019

Fair value of common stock underlying the options $ 59.03 $ 6.07 to $ 17.85

$ 4.82 to $ 6.07

Volatility 45 % 45 % to 55 %

Risk-free rate 0.85 % 0.03 % to 0.89 %

1.37 % to 2.49 %

Risk-free rate

Dividend yield

Expected term in years

Holdings Group, Inc.

TO THE CONSOLIDATED FINANCIAL STATEMENTS

thousands, except share and per share amounts)

estimated fair value of the common stock range used in 2020 was from $6.07 per share to $17.85 per share.

These amounts compare to the

range used of $4.82 to $6.07 per share for all option grants in 2019.

The change in the estimated fair value of common stock was due

to a number of factors including a higher enterprise valuation in 2020 due to improvement in financial performance, namely (i) an increase

in net sales;

and (ii) a higher gross profit margin percentage.

Another factor which impacted assumptions for the fair value of the common

stock during 2020 was a higher probability of a successful IPO compared to assumptions in 2019.

Also, the exercise prices for options

granted after June 2020 were no longer in excess of the fair value of the underlying common share which further increased the option

value compared to awards granted in 2019.

The volatility for the year ended December 31, 2020 increased compared to the same period in

2019 as a result of increases in the volatilities of the public comparable companies used to determine the Company’s volatility.

As result of these factors, the weighted average fair value per share of $0.71 for options outstanding as of January 1, 2020 was increased

to a weighted-average fair value per share of $7.10 for options granted during the year ended December 31, 2020.

compensation expense for stock options was approximately $206 and $208 in 2020 and 2019, respectively, and is included in selling, general

and administrative expenses in the consolidated statements of operations.

No tax benefit related to the stock option expense was recognized

in 2020 and 2019.

of December 31, 2020, total compensation cost related to unvested option awards not yet recognized was $1,231 and the weighted-average

period over which the compensation is expected to be recognized is 2.44 years.

Company maintains a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code, which provides for voluntary

contributions from the Company and its employees.

Contributions from the Company were $191, $190, and nil in 2020, 2019, and 2018, respectively.

from continuing operations before tax was as follows for the years ended:

ended December 31,

Dividend yield Nil Nil Nil

Expected term in years 6.0 5.00 to 5.61

As of December 31, 2021, total compensation cost related to unvested awards not yet recognized was $ 919 and the weighted-average period over which the compensation is expected to be recognized is 1.96 years.

Total compensation expense for stock options was $ 440 , $ 206 , and $ 208 in 2021, 2020, and 2019, respectively.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Loss from continuing operations before tax was as follows:

Years ended December 31,

2021 2020 2019

United States $ ( 9,262 ) $ ( 9,908 ) $ ( 30,409 )

Loss from continuing operations

Holdings Group, Inc.

TO THE CONSOLIDATED FINANCIAL STATEMENTS

thousands, except share and per share amounts)

components of income tax expense (benefit) from continuing operations consist of the following:

ended December 31,

Foreign 3,541 3,211 ( 10,365 )

Loss from continuing operations before tax $ ( 5,721 ) $ ( 6,697 ) $ ( 40,774 )

Significant components of income tax (benefit) expense from continuing operations consist of the following:

Years ended December 31,

2021 2020 2019

Total current

( 18,275 ) — —

( 1,962 ) — —

( 759 ) 52 ( 718 )

Total deferred

tax expense (benefit)

Total income tax expense (benefit)

reconciliation of income tax computed at the U.S.

federal statutory tax rates of 21% to income tax expense (benefit) from continuing

operations consist of the following:

ended December 31,

( 20,996 ) 52 ( 718 )

Total income tax (benefit) expense

$ ( 19,137 ) $ 576 $ ( 691 )

The reconciliation of income tax computed at the U.S.

federal statutory tax rates of 21% to income tax expense (benefit) from continuing operations consist of the following:

Years ended December 31,

2021 2020 2019

Effective rate reconciliation

federal tax benefit

at statutory rate

federal tax benefit at statutory rate

$ ( 1,201 ) $ ( 1,406 ) $ ( 8,563 )

State income taxes, net

68 ( 171 ) ( 1,247 )

Permanent items

1 unchanged sentence

Foreign rate differential

1,032 854 ( 891 )

162(m) officers compensation

6,969 3,514 —

Share-based compensation

( 8,118 ) ( 2,834 ) —

Deferred adjustments

Tax Entity Classification Adjustment

Non-controlling interest

67 ( 230 ) 563

Transaction costs

Valuation allowance

Total income tax expense (benefit)

( 20,785 ) ( 126 ) 9,358

Total income tax (benefit) expense

$ ( 19,137 ) $ 576 $ ( 691 )

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

Deferred income tax assets and liabilities from continuing operations

consists of the following as of:

As of December 31,

Deferred income tax assets and liabilities consist of the following:

Deferred tax assets

Lease liabilities

$ 11,714 $ 4,838

Accrued expenses

2 unchanged sentences

Net operating loss

19,543 17,152

Interest expense

Deferred tax assets

41,277 39,864

Valuation allowance

( 14,892 ) ( 34,434 )

Total deferred tax assets

Deferred tax liabilities

Property and equipment

Intangible assets ( 17,526 ) —

Property, plant and equipment

( 2,518 ) ( 432 )

Operating lease right-of-use assets

( 11,579 ) ( 4,657 )

Total deferred tax liabilities ( 31,623 ) ( 5,089 )

Net deferred tax assets

The deferred income tax

assets included in other long-term assets were $341 and $395 as of December 31, 2020 and 2019, respectively.

As of December 31, 2020,

the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $62,500 and $52,300, respectively.

The federal and state NOL carryforwards, if not utilized, will begin to expire in 2037 and 2027, respectively, and $49,000 of the federal

losses are indefinite.

In 2020, the Company had foreign NOL carryforwards of approximately $3,000.

The foreign NOLs, if not utilized,

will begin to expire in 2037.

The Company determined the

amount of its valuation allowance based on its estimates of taxable income by jurisdiction in which it operates over the periods in which

the related deferred tax assets will be recoverable.

As of December 31, 2020 and 2019, the Company believes it is more-likely-than-not

that it will not be able to realize its US deferred tax assets and therefore has maintained a full valuation allowance against its US

Net deferred tax (liability) asset

$ ( 5,238 ) $ 341

Other long-term assets - deferred tax assets $ 393 $ 341

Long-term deferred tax liabilities ( 5,631 ) —

Net deferred tax (liability) asset $ ( 5,238 ) $ 341

As of December 31, 2021, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $ 74,900 and $ 56,900 , respectively.

The federal and state NOL carryforwards, if not utilized, will begin to expire in 2037 and 2027, respectively, and $ 62,000 of the federal losses are indefinite.

Foreign NOL carryforwards were approximately $ 1,000 and $ 3,000 at December 31, 2021 and 2020, respectively.

The Company determined the amount of its valuation allowance based on its estimates of taxable income by jurisdiction in which it operates over the periods in which the related deferred tax assets will be recoverable.

As of December 31, 2021 and 2020, the Company believes it is more-likely-than-not that it will not be able to realize its U.S.

deferred tax assets and therefore has maintained a full valuation allowance against its U.S.

deferred tax assets.

The Company has also provided a full valuation allowance against the majority of its Canadian and Spanish deferred

Carryforwards of NOLs are

subject to possible limitation should a change in ownership occur, as defined by Internal Revenue Code Section 382.

An ownership change

is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period.

As a result of the

IPO, the aggregate ownership change exceeded the 50% threshold.

The annual limitation resulting from this ownership change is not expected

to result in the expiration of the NOL carry forwards before utilization.

In 2020 and 2019, the Company

did not record any liabilities related to uncertain tax positions.

The Company does not have any tax positions for which it is reasonably

possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2020.

The Company has also provided a full valuation allowance against the majority of its Spanish deferred tax assets.

In connection with the acquisition of shares of H&G, the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of pre-existing deferred tax assets.

As a result, a portion of the Company's valuation allowance was released and the Company recorded a $ 20,785 tax benefit.

The amount of valuation allowance has decreased $ 19,542 for the year ended December 31, 2021.

The decrease is mainly due to deferred tax liabilities recorded as a result of purchase price accounting, slightly offset by other changes in deferred tax assets and liabilities during the year.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

The Company recognizes interest

and penalties relating to unrecognized tax benefits as part of its income tax expense.

The Company’s major filing jurisdictions

are the United States and Canada.

Due to the Company’s net operating loss carryforwards, the Company’s income tax returns

remain subject to examination by federal, foreign and most state taxing authorities for all tax years.

In response to the COVID-19

pandemic, the CARES Act was signed into law in March 2020.

The CARES Act lifts certain deduction limitations originally imposed by the

Tax Cuts and Jobs Act of 2017 (2017 Tax Act).

Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five

years, which was not previously allowed under the 2017 Tax Act.

The CARES Act also eliminates the 80% of taxable income limitations by

allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

Taxpayers may generally

deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for

tax years beginning January 1, 2019 and 2020.

The CARES Act allows taxpayers

with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits

through refunds over a period of years, as originally enacted by the 2017 Tax Act.

The CARES Act raises the corporate charitable deduction

limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.

Carryforwards of NOLs are subject to possible limitation should a change in ownership occur, as defined by Internal Revenue Code Section 382.

An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period.

As a result of the IPO, the aggregate ownership change exceeded the 50% threshold.

The annual limitation resulting from this ownership change is not expected to result in the expiration of the NOL carry forwards before utilization.

In 2021 and 2020, the Company did not record any liabilities related to uncertain tax positions.

The Company does not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2021.

The Company recognizes interest and penalties relating to unrecognized tax benefits as part of its income tax expense.

The Company’s major filing jurisdictions are the United States and Canada.

Due to the Company’s net operating loss carryforwards, the Company’s income tax returns remain subject to examination by federal, foreign and most state taxing authorities for all tax years.

In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020.

The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).

Corporate taxpayers may carry-back NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act.

The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.

The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

The CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.

In addition, the CARES Act allows companies to defer making certain payroll tax payments until future years.

With the enactment of the

CARES Act, the Company does not expect a financial statement impact on income taxes.

The Company has not recorded any income tax expense

or benefit related to the Act for the year ended December 31, 2020.

With the enactment of the CARES Act, the Company does not expect a financial statement impact on income taxes.

The Company has not recorded any income tax expense or benefit related to the CARES Act for the year ended December 31, 2021.

COMMITMENTS AND CONTINGENCIES, AND RELATED PARTY TRANSACTIONS

Purchase commitments

From time to time in the

normal course of business, the Company will enter into agreements with suppliers which provide favorable pricing in return for a commitment

to purchase minimum amounts of inventory over a defined time period.

In June 2020, as part of

negotiations with a 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.

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 return for pricing that would provide the Company with

a minimum gross margin along with the potential for rebates.

Cost of goods sold in 2019 and 2018 include an additional $1,134 and $1,108

for amounts due associated with volumes purchased below minimum thresholds.

Inventory purchased under this agreement totaled $9,146,

$3,641, and $2,644 in 2020, 2019, and 2018, respectively.

Minimum purchase requirements are $3,000, $3,500, $4,000 and $4,500 for 2021,

2022, 2023 and 2024, respectively.

The Company expects that these minimum purchase commitment obligations will be met.

From time to time in the normal course of business, the Company will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period.

Contingencies

In the normal course of

business, certain claims have been brought against the Company and, where applicable, its suppliers.

While there is inherent difficulty

in predicting the outcome of such matters, management has vigorously contested the validity of these claims.

Based on available information,

management believes the claims are without merit and does not expect that the outcome, individually or in the aggregate, would have a

material adverse effect on the consolidated financial positions, results of operations, cash flows or future earnings.

Related party transactions —

Hydrofarm Distribution Center

The Company leases a distribution

center in Petaluma, California from entities in which a related party is an investor.

One lease is month to month and another lease terminated

in June 2019.

In 2020 and 2019, aggregate rent expense was $1,278 and $1,445, respectively.

In the normal course of business, certain claims have been brought against the Company and, where applicable, its suppliers.

While there is inherent difficulty in predicting the outcome of such matters, management has vigorously contested the validity of these claims.

Based on available information, management believes the claims are without merit and does not expect

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

Related party transactions —

Consulting Agreement

In July 2020, the Company

entered into a consulting agreement with a director to serve as an advisor to the Board and the chief executive officer.

The agreement

includes an award of 296,630 restricted stock units.

In November 2020, the related consulting agreement was canceled and the award was

modified (see Note 11, Stock-based compensation and 401K plan ).

Subordinated loans from related party

On May 22, 2018, in

connection with forbearance and amendments to the BofA Credit Facility and Term Loan agreements discussed in Note 9, Debt , the

Company obtained a subordinated note of $4,000 from a stockholder of the Company to fund operations.

Interest was at a rate of 8.24%

per annum with no payment of interest and principal made in cash prior to the maturity date.

On June 29, 2018, in connection with

and under the same terms as the May 22, 2018 subordinated note, an additional amount of $2,000 was secured from the stockholder.

As discussed in Note 1, Description of the business, basis of presentation and significant accounting policies –

Recapitalization

and reverse merger in 2018 , the $4,000 note plus accrued interest of $88 was converted into equity in exchange for shares and warrants.

The $2,000 subordinated loan was repaid in August 2018.

that the outcome, individually or in the aggregate, would have a material adverse effect on the consolidated financial positions, results of operations, cash flows or future earnings.

Related party transactions—Hydrofarm Distribution Center and Certain Facilities

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

For the years ended December 31, 2021, 2020 and 2019, rent expense for the month to month lease totaled $ 639 , $ 1,278 , and $ 1,445 , respectively.

The Company leases certain facilities from a member of management who is also a member in a LLC that is the lessor.

For the year ended December 31, 2021, rent expense for the two leases totaled $ 149 .

Related party transactions — Consulting Agreement

In July 2020, the Company entered into a consulting agreement with a director to serve as an advisor to the Board and the chief executive officer.

The agreement includes an award of 296,630 restricted stock units.

In November 2020, the related consulting agreement was canceled and the award was modified (see Note 12, Stock-based Compensation ).

IMPAIRMENT, RESTRUCTURING AND OTHER

In 2020, the Company incurred

costs related to SEC filings and other transactions.

In 2019 and 2018, certain expenses were incurred primarily related to recognition

of impairment on intangible assets and goodwill as discussed in Note 7, Intangible assets and goodwill ;

restructuring costs;

for various statutory filings;

severance costs for a reduction-in-force;

and, costs to early terminate several leases.

Restructuring

costs were for professional fees related to consultation and assistance with re-engineering initiatives

related to financial reporting, operational processes, and cost savings strategies.

Impairment, restructuring

and other comprised the following:

years ended December 31,

Costs related to SEC filings

Impairment of intangible assets and goodwill

Restructuring costs

Severance costs

Costs related to early termination of leases, net of gains

In 2021, the Company incurred $ 297 of costs primarily related to an aborted convertible loan transaction.

In 2020, the Company incurred $ 860 of costs related to SEC filings and other transactions.

In 2019, the Company recognized $ 10,035 of impairment of intangible assets, several restructuring and recapitalization events, and fees for various statutory filings.

The impairment of intangible assets of $ 5,390 in 2019 was related to the Canadian customer relationships.

FAIR VALUE MEASUREMENTS

The following table summarizes the fair value of the Company’s assets and liabilities for which disclosure of fair value is required:

Fair Value Hierarchy Level

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Cash and cash equivalents

26,607 26,607 75,178 75,178

Restricted cash

1,777 1,777 1,777 1,777

Note receivable

Level 3 3,111 3,111 3,151 3,151

Contingent consideration:

Heavy 16 Acquisition

200 200 N/A N/A

Aurora Acquisition

16,834 16,834 N/A N/A

125,000 121,250 N/A N/A

Revolving asset-backed credit facilities:

Encina Credit Facility

JPMorgan Credit Facility

2,805 2,805 1,036 1,036

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

SUBSEQUENT EVENTS

On March 29, 2021, the Company

and certain of its subsidiaries entered into a Credit Facility agreement with JPMorgan Chase Bank, N.A.

(“Chase”) (the “Chase

Agreement”), whereby Chase agreed to provide a $50,000,000 revolving credit facility with an option to request an increase in the

Revolving Commitment by up to $25 million, drawn in $5.0 million increments, for a total not to exceed $75 million, subject to customary

conditions (“Revolver”).

The Chase Agreement replaced the Encina Credit Facility.

The maturity of the Revolver

is three years from the date of the Chase Agreement.

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

The Chase Agreement

maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants.

The financial

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

The Chase Agreement is secured

by the Company’s assets and the assets of certain of the Company’s subsidiaries obligated under the Chase Agreement.

Valuation and

Qualifying Account

Hydrofarm Holdings Group,

For the years ended December

31, 2020, 2019, and 2018

The Company executed a new operating lease after December 31, 2021, which is described in Note 7 - Leases .

Schedule II – Valuation and

Qualifying Accounts

Hydrofarm Holdings Group, Inc.

For the years ended December 31, 2021, 2020, and 2019

(in thousands)

beginning of year

Balance as of (Benefits) / Other / Balance as of

beginning of year Provisions Deductions end of year

Year ended December 31, 2021

7 unchanged sentences

Allowance for inventory obsolescence 3,219 707 ( 104 ) 3,822

CHANGES IN AND DISAGREEMENTS

WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data