What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-09 compared with 2022-03-01 · 516 added, 765 removed, 707 unchanged (64% of the section changed)

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Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income (Loss)

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

Consolidated Statements of Comprehensive ( L oss) Income

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

Schedule II – Valuation and Qualifying Accounts

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on the Financial Statements

Opinion of the Financial Statements

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.

and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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, 2022, 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 9, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

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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 Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Inventory Valuation - Refer to Note 2 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.

As of December 31, 2022 the inventory excess and obsolescence reserve was $15.7 million.

The Company’s inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting.

As described in Note 2 to the consolidated financial statements, the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about future demand, customer preferences, business strategies, and market conditions.

The analysis of the required inventory valuation reserves includes consideration of current inventory levels, historical sales information, forecasted customer demand and current economic conditions and business trends.

Given the quantitative and qualitative materiality of the inventory excess and obsolescence reserve balance, coupled with the judgments necessary to identify and record the inventory excess and obsolescence reserve timely, performing audit procedures to evaluate management’s estimates of the net realizable value for the inventory on-hand as of the reporting date involved a high degree of auditor judgment.

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.

Our audit procedures related to the inventory valuation included the following, among other things:

• We tested the design and operating effectiveness of internal controls over the inventory valuation process, including controls over the inputs that are used in management's valuation of the excess and obsolescence reserve analysis.

• We evaluated the appropriateness and consistency of management’s methodology and assumptions used in determining the inventory valuation of the excess and obsolescence reserve.

• We obtained the Company’s valuation of the inventory excess and obsolescence reserve calculation and tested the mathematical accuracy.

• We tested the accuracy and completeness of the underlying data used in the calculation of the Company’s valuation of the inventory excess and obsolescence reserve.

• We selected a sample of inventory items and compared the recorded unit cost against the most recent sales price to determine if inventory was recorded at lower of cost or net realizable value.

• We selected a sample of inventory items and evaluated historical sales performance relative to management’s conclusions on the ability to sell through the inventory on-hand at the forecasted levels.

/s/ Deloitte & Touche LLP

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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, 2022, of the Company and our report dated March 9, 2023, 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

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Inventories 111,398 189,134

Notes receivable 622 3,151

Note receivable — 622

Prepaid expenses and other current assets 5,032 9,760

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Accrued expenses and other current liabilities 13,208 33,996

Deferred revenue 3,654 18,273

Current portion of lease liabilities 9,099 7,198

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Long-term debt 118,661 119,517

Long-term deferred tax liabilities 5,631 —

Deferred tax liabilities 2,685 5,631

Other long-term liabilities 4,428 3,904

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Additional paid-in capital 783,042 777,074

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

Accumulated other comprehensive loss ( 7,235 ) ( 1,382 )

Accumulated deficit ( 425,931 ) ( 140,516 )

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Years ended December 31,

2021 2020 2019

Net sales $ 344,501 $ 479,420

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Selling, general and administrative 118,604 104,185

Impairment, restructuring and other 297 860 10,035

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

Impairments 192,328 —

Loss from operations ( 281,596 ) ( 2,699 )

Interest expense ( 10,958 ) ( 2,138 )

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

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

Loss on debt extinguishment or modification ( 145 ) ( 680 )

Other income (expense), net 841 ( 204 )

Loss before tax ( 291,858 ) ( 5,721 )

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:

Income tax benefit 6,443 19,137

Net (loss) income $ ( 285,415 ) $ 13,416

Net (loss) income per share:

Basic $ ( 6.35 ) $ 0.34

Diluted $ ( 6.35 ) $ 0.31

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

Weighted-average shares of common stock outstanding:

Basic 44,974,856 39,991,809

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Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

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 )

Net (loss) income $ ( 285,415 ) $ 13,416

Other comprehensive loss:

Foreign currency translation loss ( 5,853 ) ( 1,981 )

Total comprehensive (loss) income $ ( 291,268 ) $ 11,435

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’ EQUITY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except for share amounts)

Preferred Stock Common

Stock Additional

Capital Accumulated

Comprehensive

(Loss) Income Accumulated

Comprehensive Income (Loss) Accumulated

Deficit Total

Stockholders’

Shares Amount Shares Amount

Shares Amount

Balance, January 1, 2021 33,499,953 $ 3 $ 364,248 $ 599 $ ( 153,932 ) $ 210,918

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 $ 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

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

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

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

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

Common stock issued upon exercise of options 8,283 — 75 — — 75

Issuance of common stock for vesting of restricted stock units 818,489 1 — — — 1

Shares repurchased for withholding tax on restricted stock units ( 247,979 ) — ( 2,461 ) — — ( 2,461 )

Issuance of common stock under cashless warrant exercise 99 — — — — —

Stock-based compensation expense — — 8,354 — — 8,354

Net loss — — — — ( 285,415 ) ( 285,415 )

Foreign currency translation loss — — — ( 5,853 ) — ( 5,853 )

Balance, December 31, 2022

45,197,249 $ 5 $ 783,042 $ ( 7,235 ) $ ( 425,931 ) $ 349,881

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

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Years ended December 31,

2021 2020 2019

Operating activities 2022 2021

Net income (loss) $ ( 285,415 ) $ 13,416

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

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

Depreciation, depletion and amortization 41,527 14,934

Provision for (benefit from) doubtful accounts 2,998 ( 110 )

Provision for inventory obsolescence 16,449 1,201

Restructuring expenses 6,091 —

Stock-based compensation expense 8,354 5,006

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Impairment charges 192,328 —

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

Change in fair value of contingent consideration ( 1,560 ) ( 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 )

Deferred income tax benefit ( 9,310 ) ( 20,996 )

Other 1,210 1,364

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Accrued expenses and other current liabilities ( 4,532 ) ( 3,238 )

Deferred revenue ( 13,297 ) 5,080

Lease liabilities ( 7,850 ) ( 4,676 )

Other long-term liabilities ( 370 ) —

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

Net cash provided by (used in) operating activities 21,989 ( 45,067 )

Investing activities

Business combinations, net of cash and cash equivalents 190 ( 462,172 )

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

Issuance of notes receivable — — ( 3,050 )

Proceeds from notes receivable — 2,000 —

Capital expenditures of property, plant and equipment ( 8,229 ) ( 5,402 )

Other ( 448 ) ( 610 )

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

Net cash used in investing activities ( 8,487 ) ( 468,184 )

Hydrofarm Holdings Group, Inc.

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Years ended December 31,

2021 2020 2019

Financing activities

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

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 ( 2,470 ) ( 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 —

Borrowings under revolving credit facilities 853 142,628

Repayments of revolving credit facilities ( 1,102 ) ( 143,003 )

Repayments of Term Loan ( 1,250 ) —

Proceeds from issuance of Term Loan, net of discount and issuance costs — 119,879

Payments to settle contingent consideration ( 15,474 ) —

Other ( 757 ) ( 1,332 )

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

Net cash (used in) provided by financing activities ( 20,200 ) 464,707

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 395 ) ( 27 )

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

Net decrease in cash, cash equivalents and restricted cash ( 7,093 ) ( 48,571 )

Cash, cash equivalents and restricted cash at beginning of year 28,384 76,955

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Right-of-use assets acquired under operating lease obligation 28,972 22,873

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

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Hydrofarm Holdings Group, Inc.

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

The Company is a leading independent manufacturer and distributor of 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

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

The Company is a leading independent manufacturer and distributor of 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, 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.

Initial public offering and follow-on public offering

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

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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.

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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 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and the requirements of the U.S.

Securities and Exchange Commission (“SEC”) for year end financial reporting.

All intercompany balances and transactions have been eliminated in consolidation.

The Company reclassified the balance within "Impairment, restructuring and other" on the consolidated statements of operations for the prior period into "Selling, general and administrative expenses" ("SG&A") to conform to the current period presentation.

The Company reclassified the balance of customer deposits, totaling $ 18,273 as of December 31, 2021, previously reported in "Accounts payable" into "Deferred revenue" in the consolidated balance sheet as of December 31, 2021, to conform to the current period presentation.

Consistent with the reclassifications on the consolidated balance sheet, the Company made corresponding reclassifications to conform with the current period presentation in the consolidated statement of cash flows.

Use of estimates

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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

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

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

Actual results may differ from these estimates.

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

Hydrofarm Holdings Group, Inc.

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(In thousands, except share and per share amounts)

circumstances.

Actual results may differ from these estimates.

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

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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.

Acquisition related costs are recognized in net (loss) income as incurred.

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

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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.

All other subsequent changes in the fair value of contingent consideration classified as a liability are included in net (loss) income 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.

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

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

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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).

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

Restructuring

The Company began a restructuring plan during the quarter ended December 31, 2022, and is undertaking significant actions to streamline operations, reduce costs and improve efficiencies.

The major initiatives of the restructuring plan include (i) narrowing the Company's product and brand portfolio and (ii) the relocation and consolidation of certain manufacturing and distribution centers, including headcount reductions and reorganization to drive a solution based approach.

During the year ended December 31, 2022, the Company recorded pre-tax charges of $ 6,790 relating to the inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $ 897 relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges.

The Company's strategic product consolidation entails removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio, which excludes our garden center business in Canada.

The Company expects the restructuring and related actions to result in cost savings of approximately $ 7,000 on an annualized basis.

The amounts the Company will ultimately realize or disburse could differ from these estimates.

The Company recorded $ 7,466 of restructuring related charges within Cost of goods sold and $ 221 within Selling, general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2022.

The Company's accrued liability for restructuring costs as of December 31, 2022, was $ 696 .

The Company estimates it will incur additional restructuring charges of approximately $ 1.7 million during the first half of 2023.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Segment and entity-wide information

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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:

Sales to external customers and property, plant and equipment, and operating lease right-of-use assets, net in the United States and Canada, determined by the location of the subsidiaries, are shown below.

Other foreign locations, which are immaterial, individually and in the aggregate, are included in the U.S.

Years ended December 31,

2021 2020 2019

United States $ 280,464 $ 399,749

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Canada 36,020 10,551

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

Total property, plant and equipment, and operating lease right-of-use assets, net $ 116,400 $ 95,718

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

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

Concentrations of business and credit risk

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

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.

Accounts receivable expose the Company to credit risks such as collectability and business risks such as customer concentrations.

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

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 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.

No customer accounted for more than 10% of revenues in 2022, or 2021.

No customer accounted for more than 10% of accounts receivable as of December 31, 2022, or December 31, 2021.

One supplier accounted for more than 10 % of purchases in 2022 and 2021.

Fair value measurements

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

The Company has applied the framework for measuring fair value which

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(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 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.

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:

6 unchanged sentences

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 ).

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 and Note 15 - Fair Value Measurements ).

Foreign currency matters

2 unchanged sentences

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.

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

1 unchanged sentence

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.

Translation gains and losses are included in accumulated other comprehensive loss 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.

2 unchanged sentences

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

Restricted cash 1,777 1,777

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

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)

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

As of December 31, 2022, there were no amounts classified as restricted cash, as all previous restrictions lapsed during the year.

Accounts receivable, net

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

Trade accounts receivable represents amounts due from customers.

Other receivables represent other current non-trade receivables.

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.

1 unchanged sentence

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.

Accounts receivable are written off when the receivables are deemed uncollectible.

Inventories consist of finished goods, work-in-process, and raw materials used in manufacturing products.

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

The Company maintains an allowance for excess and obsolete inventory.

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

The estimate for excess and obsolete inventory is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

2 unchanged sentences

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

The Company estimates inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's actions with respect to inventory products and brands being removed from our portfolio.

Hydrofarm's strategic product consolidation entails removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio.

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

1 unchanged sentence

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.

Leases are then classified as either finance or operating, with classification affecting the location 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.

2 unchanged sentences

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.

The incremental borrowing rate is estimated using the currency denomination of the lease and the contractual lease term.

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.

3 unchanged sentences

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

1 unchanged sentence

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.

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

The following table summarizes the estimated useful lives as follows:

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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

The Company has one trade name that is considered to have an indefinite useful life.

Intangible assets are also tested for impairment at least annually and when events or changes in circumstances indicate that, more-likely-than-not, the carrying

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

amount may not be recoverable.

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

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.

1 unchanged sentence

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.

The Company has determined that its reporting units for the purpose of goodwill impairment testing are the U.S.

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

1 unchanged sentence

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.

Note Receivable

In 2019, the Company executed a note receivable secured by equipment to a third-party, the terms of which were amended and restated during the first quarter of 2021.

The note receivable provided for interest and installment payments to the Company, and full maturity of the note in 2024.

During the first quarter of 2022 the third-party defaulted on interest payments, and the Company measured an impairment on the note receivable based on the estimated fair value of the collateral.

The Company recorded an impairment loss of $ 2,636 during the year ended December 31, 2022, respectively, in “Impairments” on the consolidated statements of operations.

There were no impairment losses recorded in the year ended December 31, 2021.

As of December 31, 2022, the note receivable carrying value was $ 475 and is classified in Other assets on the consolidated balance sheet.

Revenue recognition

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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 $ 13,180 , and $ 8,050 in 2022, and 2021, respectively.

2 unchanged sentences

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.

The Company's contract liabilities, which consist primarily of customer deposits are reported within deferred revenue in the consolidated balance sheets, totaled $ 3,654 and $ 18,273 as of December 31, 2022, and 2021, respectively.

There are no significant financing components.

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

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.

Warrants issued in connection with financings

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Stock-based compensation

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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.

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

Service-based awards

2 unchanged sentences

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)

For awards granted after the Company's IPO, 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.

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.

For inputs into the Black-Scholes model, the expected volatility is based on historical implied volatility from recent stock option transactions at the time of grant.

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

3 unchanged sentences

Performance-based awards

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 has granted performance stock unit ("PSU") 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 one year .

The performance-based conditions generally are satisfied upon achieving specified performance targets.

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

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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.

For one award granted in 2020, the market condition was factored into its fair value and the Company used a "Monte Carlo Simulation Method" ("MCSM") to estimate the fair value of the award.

The MCSM assessed 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.

For the years ended December 31, 2022, and 2021, there were no performance awards with market-based conditions granted.

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.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

1 unchanged sentence

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 has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets.

The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income by jurisdiction, and the impact of tax planning strategies.

Changes in the relevant facts can impact the judgment or need for valuation allowances.

In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

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

1 unchanged sentence

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

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

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 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.

The Company reviewed recently issued accounting pronouncements and noted no new pronouncements relevant to the Company.

BUSINESS COMBINATIONS

During 2021, the Company completed five acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of its portfolio of proprietary branded products and specialized manufacturing capabilities.

The Company finalized the determination of its allocation of the purchase price relating to these acquisitions during 2022, and obtained third-party valuation reports of certain tangible and identifiable intangible assets to support its evaluation.

Goodwill arose on the acquisitions because the consideration paid 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.

During 2022, the Company evaluated and adjusted the useful lives of certain intangible assets associated with entities that were acquired during 2021.

In addition, the Company determined that the preliminary allocation of assets acquired related to indefinite lived trade names have a finite useful life because the expected usefulness of the trade names is limited.

As a result of these adjustments to the provisional amounts, the Company recorded $ 5,894 of additional amortization expense during 2022, which related to amortization expense that would have been recorded in the previous reporting period from the acquisition date through December 31, 2021.

The intangible assets were assigned estimated useful lives as follows:

(i) customer relationships:

7 to 12 years, (ii) technology, formulations and recipes:

8 to 12 years, (iii) computer software:

3 years, and (iv) trade names and trademarks:

15 to 20 years.

The financial results of Heavy 16, the H&G Entities, Aurora and the IGE Entities (each as defined below) are included in the U.S.

operating segment since the acquisition date.

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

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(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.

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

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

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

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.

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

As a result, the Company recorded a liability for contingent consideration at its estimated fair value of $ 344 as of the acquisition date in the 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 contingent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements.

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

1 unchanged sentence

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)

The contingent consideration was remeasured to fair value at each reporting date until the contingency was resolved with changes in fair value being recognized within "Selling, general and administrative expenses" ("SG&A") 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.

The change in the fair value of the contingent consideration of $ 144 during the year ended December 31, 2021, was recognized as a benefit in SG&A on the consolidated statement of operations during the period.

There were no changes to the fair value of contingent consideration in 2022, and the balance was paid in April 2022.

The amount of goodwill is fully deductible for tax purposes.

House & Garden Acquisition

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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.

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

The amount of goodwill is not deductible for tax purposes.

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

1 unchanged sentence

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.

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

The preliminary acquisition fair value of the consideration transferred for Aurora was $ 178,871 , consisting of $ 133,962 in cash, $ 25,824 of the Company's common stock, $ 19,300 contingent consideration and $ 215 forgiveness of accounts payable.

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

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

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 .

The amount of goodwill is fully deductible for tax purposes.

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

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

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

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

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

Aurora as of the acquisition date, discounted to a present value as of the acquisition date using a discount rate of 15 %.

That measure was based on significant inputs that are not observable in the market, which utilized Level 3 inputs as defined in ASC 820 - Fair Value Measurements.

The contingent consideration was remeasured to fair value at each reporting date until resolution with changes in fair value recognized within SG&A in the consolidated statements of operations.

As of December 31, 2021, the contingent consideration of $ 16,834 was calculated utilizing actual 2021 EBITDA for the full year ended December 31, 2021.

The change in the fair value of the contingent consideration of $ 2,466 during the year ended December 31, 2021, was recognized as a benefit in SG&A on the consolidated statement of operations during the period.

During 2022, the Company recognized an additional $ 1,560 benefit to SG&A as the contingent consideration was revalued to $ 15,274 , and paid in July 2022 using available cash on hand.

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.

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

The preliminary acquisition fair value of the consideration transferred for Greenstar was $ 83,520 , consisting of $ 85,121 in cash, less $ 1,601 forgiveness of accounts payable, net, and obligations due under a distribution agreement.

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

The 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.

3 unchanged sentences

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:

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

tax purposes.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

The following table sets forth the components and allocation of the purchase price for the Company's acquisition of Heavy 16, the H&G Entities, Aurora, Greenstar and the IGE Entities:

Heavy 16 H&G Entities Aurora Greenstar IGE Entities

Component of Purchase Price:

Amount Amount Amount Amount Amount

Cash $ 60,287 $ 133,483 $ 133,962 $ 85,121 $ 49,129

Common stock 16,736 — 25,824 — 11,051

Forgiveness of contract asset 722

Contingent consideration 344 — 19,300 — —

Forgiveness of assets and liabilities — — ( 215 ) ( 1,601 ) 722

Total purchase price $ 77,367 $ 133,483 $ 178,871 $ 83,520 $ 60,902

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Operating lease right-of-use assets 1,088 1,921 — 2,736 4,447

Other assets 25 213 — 176 —

Accounts payable ( 1,055 ) ( 1,320 ) ( 4,360 ) ( 777 ) ( 21,686 )

2 unchanged sentences

Current portion of long-term debt — — — — ( 482 )

Long-term deferred tax liabilities — ( 25,589 ) — — ( 6,769 )

Long-term lease liabilities ( 868 ) ( 1,501 ) — ( 1,836 ) ( 3,116 )

Long-term debt — — — — ( 1,434 )

Net tangible assets 11,406

Other long-term liabilities — — ( 3,840 ) — —

Net identifiable assets 1,763 ( 16,450 ) 48,107 10,128 6,989

Identifiable intangible assets

Other intangible assets 200 200 824 383 2,430

Customer relationships 5,100 12,500 6,400 11,100 6,300

Trademarks and trade names 18,500 31,400 59,100 9,100 14,000

Technology and formulations & recipes 33,600 56,200 18,000 2,800 3,800

Total identifiable intangible assets 57,400 100,300 84,324 23,383 26,530

Goodwill 18,204 49,633 46,440 50,009 27,383

Total purchase price allocation $ 77,367 $ 133,483 $ 178,871 $ 83,520 $ 60,902

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 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.

1 unchanged sentence

(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,

Supplemental Disclosure of Financial Results

The following represents estimated unaudited consolidated net sales and net income amounts for year ended December 31, 2021, as if the five acquisitions had been included in the consolidated results of the Company for the entire period.

The estimated net income presented below also includes the impact of the aforementioned allocation adjustments to the useful lives of certain intangible assets, resulting in additional expense attributed to the year ended December 31, 2021.

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

December 31, 2021

Estimated ($ in millions)

Net sales $ 596

Net income $ 66

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 ).

Primarily due to a sustained decline in the Company's market value of common stock and market conditions, the Company identified a triggering event requiring a test for impairment as of June 30, 2022.

The Company completed its goodwill impairment testing and recorded an impairment charge of $ 189,572 as the test determined that the carrying value of the reporting units of U.S.

and Canada was in excess of the fair value.

The recognized impairment reduced the goodwill balance to zero as of June 30, 2022.

The impairment was primarily due to a deterioration in customer demand in the U.S.

and Canada caused by macroeconomic and industry conditions.

The Company determined the fair value of the U.S.

and Canada reporting units based on an income approach, using the present value of future discounted cash flows, and based on a market approach.

The fair values were reconciled to the market value of common stock of Hydrofarm to corroborate the estimates used in the interim test for impairment.

Significant estimates used to determine fair value include the weighted average cost of capital, financial forecasts, and pricing multiples derived from publicly-traded companies that are comparable to the reporting units.

Refer to Note 15 - Fair Value Measurements, for further discussion of valuation inputs.

There was no goodwill impairment recognized during the year ended December 31, 2021.

The changes in goodwill are as follows:

Balance at beginning of year $ —

Balance at December 31, 2020 $ —

Acquisition - Heavy 16 18,204

4 unchanged sentences

Foreign currency translation adjustments, net ( 1,172 )

Balance at end of year $ 204,868

Balance at December 31, 2021 $ 204,868

Acquisition - IGE Entities - measurement period adjustments ( 21,304 )

Acquisition - Greenstar - measurement period adjustments 7,000

Acquisition - all others - measurement period adjustments and foreign currency translation adjustments, net ( 992 )

Impairments ( 189,572 )

Balance at December 31, 2022 $ —

Hydrofarm Holdings Group, Inc.

8 unchanged sentences

Customer relationship 99,933 ( 24,533 ) 75,400 101,222 ( 16,517 ) 84,705

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

Technology and formulations & recipes (1)

110,561 ( 3,630 ) 106,931 — — —

Technology, formulations and recipes 114,187 ( 15,344 ) 98,843 110,561 ( 3,630 ) 106,931

Trade names and trademarks 131,410 ( 10,052 ) 121,358 — — —

4,778 ( 4,246 ) 532 2,428 ( 1,744 ) 684

Total finite-lived intangible assets, net 359,716 ( 62,151 ) 297,565 223,025 ( 29,099 ) 193,926

Indefinite-lived intangible asset:

Trade names (1)

120,773 — 120,773 2,801 — 2,801

Indefinite-lived intangible assets:

Trade name 2,801 — 2,801 120,773 — 120,773

Other — — — 120 — 120

Total Intangible assets, net $ 362,517 $ ( 62,151 ) $ 300,366 $ 343,918 $ ( 29,099 ) $ 314,819

( 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.

Amortization expense related to intangible assets was $ 33,308 and $ 10,354 for the years ended December 31, 2022, and 2021, respectively.

Amortization expense includes the impact from intangible assets recorded in connection with five acquisitions completed during the year ended December 31, 2021.

The following are the estimated useful lives and the weighted-average amortization period as of December 31, 2022, for the major classes of finite-lived intangible assets:

Weighted-average amortization period

Computer software 5 years

Customer relationships 7 to 18 years

Technology, formulations and recipes 8 to 12 years

Trade names and trademarks 15 to 20 years

The estimated aggregate future amortization expense for intangible assets subject to amortization as December 31, 2022, is summarized below:

7 unchanged sentences

(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.

EARNINGS (LOSS) PER COMMON SHARE (“EPS”)

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

Diluted EPS represents net (loss) income 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.

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

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

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, 2022, and 2021:

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

Net (loss) income $ ( 285,415 ) $ 13,416

Weighted-average shares of common stock outstanding 44,974,856 39,991,809

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

1 unchanged sentence

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:

Diluted weighted-average shares of common stock outstanding 44,974,856 42,989,195

Basic EPS $ ( 6.35 ) $ 0.34

Diluted EPS $ ( 6.35 ) $ 0.31

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

Years ended December 31,

2021 2020 2019

Shares subject to warrants outstanding — 1,899,435

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 unvested performance based and restricted stock units — 1,311,914

Shares subject to stock options outstanding — 831,517

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

— — 2,078,605

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

Years ended December 31,

Shares subject to warrants outstanding 17,669 17,817

Shares subject to unvested performance based and restricted stock units 1,088,879 71,871

Shares subject to stock options outstanding 670,026 10,641

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

ACCOUNTS RECEIVABLE, NET AND INVENTORIES

10 unchanged sentences

Total inventories $ 111,398 $ 189,134

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

The allowance for inventory obsolescence increased during the year ended December 31, 2022, primarily a result of a reserve for certain lighting products.

Inventories are stated at the lower of cost or net realizable value, and the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions.

The allowance for excess and obsolete inventory is subject to change from period to period based on a number of factors including sales of products, changes in estimates, and disposals.

The Company leases its distribution centers and manufacturing facilities from third parties under various non-cancelable lease agreements expiring at various dates through 2033.

Also, the Company leases some equipment under finance leases.

Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 10 years.

However, these options are generally not reflected in the calculation of the right-of-use assets and lease liabilities due to uncertainty surrounding the likelihood of renewal.

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

The Company has operating subleases which have been accounted for by reference to the underlying asset subject to the lease, primarily as an offset to rent expense within SG&A.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(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:

2 unchanged sentences

Operating ROU assets Operating lease right-of-use assets $ 65,265 $ 45,245

Finance lease assets Property and equipment, net $ 2,365 $ 383

Finance lease assets Property, plant and equipment, net 2,005 2,365

Total leased assets $ 67,270 $ 47,610

Lease liabilities

10 unchanged sentences

Amortization of lease assets Selling, general and administrative 285 291

Amortization of lease assets Cost of goods sold 327 —

Interest on lease liabilities Interest expense 61 33

Gain on lease termination Impairment, restructuring, and other — — ( 160 )

Sublease income Selling, general and administrative ( 1,533 ) ( 277 )

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

In addition to the operating lease costs above, short-term and month-to-month lease expense was $ 341 and $ 2,268 for the years ended December 31, 2022, and 2021, respectively, and other costs associated with operating leases were $ 2,573 and $ 1,957 , respectively, for non-lease components such as common area maintenance and other miscellaneous items.

These costs were included within SG&A in the consolidated statements of operations.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(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, 2022, are as follows:

4 unchanged sentences

2026 9,180 63

2027 8,941 69

Thereafter 25,016 —

5 unchanged sentences

The following table summarizes the weighted-average remaining lease term as of December 31, 2022, and 2021, as well as the weighted-average discount rate on long-term leases for the years ended December 31, 2022, and 2021:

2021 2020 2019

Weighted-average remaining lease term in years:

5 unchanged sentences

Cash paid for amounts included in lease liabilities in 2022, and 2021 were:

For the years ended December 31,

Cash paid for amounts included in lease liabilities:

2021 2020 2019

Operating cash flows from operating leases $ ( 9,035 ) $ ( 5,675 )

1 unchanged sentence

Financing cash flows from finance leases ( 756 ) ( 302 )

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.

1 unchanged sentence

(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

1 unchanged sentence

Machinery and equipment $ 27,832 $ 25,177

Peat bogs and related development 10,761 8,686

Building and improvements 9,920 9,510

Land 6,107 6,120

Leasehold improvements 3,207 2,068

Peat bogs and related development

Computer equipment 3,197 2,079

Furniture and fixtures 3,921 2,867

Computer equipment 3,337 3,197

Leasehold improvements 4,177 3,207

Gross property, plant, and equipment

accumulated depreciation, depletion and amortization ( 8,291 ) ( 5,375 )

66,055 58,764

accumulated depreciation ( 14,920 ) ( 8,291 )

Total property, plant and equipment, net $ 51,135 $ 50,473

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)

Depreciation, depletion and amortization expense related to property, plant, and equipment, net was $ 8,219 and $ 4,580 for the years ended December 31, 2022, and 2021, respectively.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

3 unchanged sentences

Goods in transit accrual 1,172 3,473

Corporate tax accrual 729 585

Income tax accrual 451 729

Contingent consideration — 17,034

1 unchanged sentence

Total accrued expenses and other current liabilities $ 13,208 $ 33,996

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.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Debt is comprised of the following:

Term loan - net of unamortized discount & deferred financing costs of $ 6,025

Term Loan - net of unamortized discount and deferred financing costs of $ 5,142 and $ 6,025 as of December 31, 2022, and December 31, 2021, respectively

$ 118,608 $ 118,975

2 unchanged sentences

Current portion of long-term debt $ 2,011 $ 2,263

Long-term debt - net of discount and deferred financing costs of $ 6,025

Long-term debt - net of discount and deferred financing costs of $ 5,142 and $ 6,025 as of December 31, 2022, and December 31, 2021, respectively

118,661 119,517

Total debt $ 120,672 $ 121,780

Term Loan with Brightwood

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.

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.

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 .

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”).

On October 25, 2021, the Company and certain of its direct and indirect subsidiaries (the "Obligors") entered into a Credit and Guaranty Agreement with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which the Company borrowed a $ 125,000 senior secured term loan (“Term Loan”).

The Term Loan 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.

Deferred financing costs totaled $ 6,190 at the inception of the Term Loan and are being amortized to interest expense over the term of the loan.

For the year ended December 31, 2022, the effective interest rate was 8.30 % and interest expense was $ 10,331 , which includes amortization of deferred financing costs of $ 883 .

The principal amounts of the Term Loan are required to be repaid in consecutive quarterly installments in amounts equal to 0.25 % of the principal amount of the Term Loan, on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date.

The Company is also required to make mandatory prepayments in the event of (i) achieving certain excess cash flow criteria, including the achievement and maintenance of a specific leverage ratio, (ii) selling assets that are collateral, or (iii) upon the issuance, offering, or placement of new debt obligations.

There were no such mandatory prepayments made since inception of the Term Loan.

As of December 31, 2022, and 2021, the outstanding principal balance on the Term Loan was $ 123,750 and $ 125,000 , respectively.

The Term Loan requires the Company to maintain certain reporting requirements, affirmative covenants, and negative covenants, and the Company was in compliance with all requirements as of December 31, 2022.

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.

JPMorgan Revolving Loan Facility

On March 29, 2021, the Obligors entered into a Senior Secured Revolving Credit Facility (the “JPMorgan Revolving Loan 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 Revolving Loan Facility is due on March 29, 2024, or any earlier date on which the revolving commitments are reduced to zero.

The three-year JPMorgan Revolving Loan Facility originally had a borrowing limit of $ 50,000 .

On August 31, 2021, the Obligors entered into an amendment (the "First Amendment") to increase their original borrowing limit to $ 100,000 .

In connection with the First Amendment, the Company's previously acquired subsidiaries became party to the JPMorgan Revolving Loan Facility as either borrowers or as guarantors.

On October 25, 2021, the Company and its subsidiaries entered into a second amendment (the “Second Amendment”), with JPMorgan Chase Bank, N.A., pursuant to which the parties consented to the Term Loan described above, and made certain conforming changes to comport with the Term Loan provisions.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The JPMorgan Revolving Loan Facility was further amended by a third amendment and joinder dated August 23, 2022, (the “Third Amendment”) pursuant to which several previously acquired subsidiaries became parties to the JPMorgan Revolving Loan Facility and granted liens on their assets.

On December 22, 2022, the Company entered into a fourth amendment (the “Fourth Amendment”) pursuant to which the maximum commitment amount under the JPMorgan Revolving Loan Facility was reduced from $ 100,000 to $ 75,000 , a sale-leaseback transaction was permitted, and certain other changes were made, including changing the LIBOR based rates to SOFR based rates.

The Loss on debt modification of $ 145 for the year ended December 31, 2022, resulted primarily from the write-off of unamortized deferred financing costs associated with the modification of the JPMorgan Revolving Loan Facility entered into during the fourth quarter of 2022.

The unamortized debt issuance costs were $ 580 as of December 31, 2022, and are included in Other assets in the consolidated balance sheet.

Debt issuance costs are being amortized to interest expense over the term of the JPMorgan Revolving Loan Facility.

The JPMorgan Revolving Loan Facility is an asset-based facility that is secured by a first lien on the working capital assets of the Company and a second lien on the non-working capital assets of the Company (including most of the Company’s subsidiaries).

The borrowing base is based on a detailed monthly calculation of the sum of (a) a percentage of the Eligible Accounts at such time, plus (b) the lesser of (i) a percentage of the Eligible Inventory, at such time, valued at the lower of cost or market value, determined on a first-in-first-out basis, and (ii) the product of a percentage multiplied by the Net Orderly Liquidation Value percentage identified in the most recent inventory appraisal ordered by the Administrative Agent multiplied by the Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, minus (c) Reserves (each of the defined terms above, as defined in the JPMorgan Revolving Loan Facility documents).

The Company is required to maintain certain reporting requirements, affirmative covenants and negative covenants, pursuant to terms outlined in the agreement.

Additionally, if the Company’s Excess Availability (as defined in the JPMorgan Revolving Loan Facility documents) is less than an amount equal to 10 % of the Aggregate Revolving Commitment (currently $ 75,000 ), the Company will be required to maintain a minimum fixed charge coverage ratio of 1.1 x on a rolling twelve-month basis until the Excess Availability is more than 10 % of the Aggregate Revolving Commitment for thirty consecutive days.

In order to consummate permitted acquisitions or to make restricted payments, the Company would be required to comply with a higher fixed charge coverage ratio of 1.15 x, but no such acquisitions or payments are currently contemplated.

As of December 31, 2022, the Company is in compliance with the covenants contained in the JPMorgan Revolving Loan Facility.

The JPMorgan Revolving Loan Facility provides for various interest rate options including the Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the CB Floating Rate, the Adjusted Daily Simple SOFR, the CBFR, the Canadian Prime Rate, or the CDOR Rate.

The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the CBFR rate) use the Term SOFR Rate plus 1.95 %.

Each rate has a 0.0 % floor.

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

As of December 31, 2022, and 2021, the Company had zero borrowed under the facility, and would be able to borrow approximately $ 40 million under the JPMorgan Revolving Loan Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1 x.

Encina Credit Facility

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

1 unchanged sentence

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

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

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

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.

rate for any period during which the loan was in default.

Deferred financing costs were amortized over the term of the Encina Credit Facility.

2 unchanged sentences

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.

The Encina Credit Facility was replaced in March 2021 by the JPMorgan Revolving Loan 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”).

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 .

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.

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 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)

Other debt as of December 31, 2022, was primarily comprised of $ 1,904 in finance lease obligations and $ 160 in a foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage.

Other debt as of December 31, 2021, was primarily comprised of $ 2,367 in finance lease obligations, $ 438 in a foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage.

Aggregate future principal payments

9 unchanged sentences

STOCKHOLDERS’ EQUITY

Capital stock

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

Restricted stock units 1,087,608

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 (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.

1 unchanged sentence

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.

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

As of December 31, 2022, there were 45,197,249 shares outstanding and 300,000,000 shares authorized.

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.

5 unchanged sentences

The Company agreed to pay a warrant solicitation fee to the Placement Agent equal to five percent of the amount of net cash proceeds solicited by the Placement Agent upon the exercise of certain Investor Warrants following such call for Redemption.

For the 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.

For the year ended December 31, 2021, warrant solicitation fee expense totaled $ 1,949 and was included in SG&A in the consolidated statements of operations.

As of December 31, 2022, the following table summarizes the outstanding warrants:

3 unchanged sentences

Total 17,669 $ 11.30

As of December 31, 2021, the following table summarizes the outstanding warrants:

Number of Warrants Exercise Price

Placement agent warrants 11,810 $ 8.43

Placement agent warrants 6,007 $ 16.86

Total 17,817 $ 11.27

STOCK-BASED COMPENSATION

2 unchanged sentences

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.

The 2020 Plan serves as the successor to the 2019 Plan and 2018 Plan and provides for the issuance of incentive stock options ("ISOs"), stock grants and stock-based awards to employees, directors, and consultants of the Company.

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

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.

As of December 31, 2022, a total of 1,340,129 shares were available for grant under the 2020 Plan.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

The Incentive Plans are administered by the Company's Board of Directors.

Notwithstanding the foregoing, the Board of Directors may delegate concurrent responsibility for administering each plan, including with respect to designated classes of persons eligible to receive an award under each plan, to a committee or committees (which term shall include subcommittees) consisting of one or more members of the Board of Directors (collectively, the “Plan Administrator”), subject to such limitations as the Board of Directors deems appropriate.

In November 2020, the Board of Directors and stockholders approved the 2020 Plan and reserved an aggregate of 2,284,053 shares of common stock for issuance under the 2020 Plan.

Pursuant to the 2020 Plan, the number of shares available for issuance under the 2020 Plan may be increased on January 1 of each year, beginning on January 1, 2021, and ending on January 2, 2030, in an amount equal to the lesser of (i) 4 % of the outstanding shares of the Company’s common stock on such date or (ii) such number of shares determined by the Plan Administrator.

The 2020 Plan provides for the grant of ISOs, nonqualified stock options, stock grants, and stock-based awards that are based in whole or in part by reference to the Company’s common stock.

• The Plan Administrator may grant options designated as incentive stock options or nonqualified stock options.

Generally, the maximum term of an option shall be 10 years from the grant date.

The Plan Administrator shall establish and set forth in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable.

• The Plan Administrator may grant stock grants and stock-based awards, including securities convertible into shares, stock appreciation rights, phantom stock awards or stock units on such terms and conditions which may be based on continuous service with the Company or related company or the achievement of any performance goals, as the Plan 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.

Restricted Stock Unit ("RSU") Activity

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

The awards generally have a time-based vesting requirement (based on continuous employment).

Upon vesting, the RSUs convert into shares of the Company's common stock.

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.

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

During the year ended December 31, 2022, the Company granted RSU awards that are expected to vest either (i) one year on the anniversary of the grant date, (ii) ratably over a three-year period on each anniversary of the grant date, or (iii) with three vesting tranches, the first of which occurred on the grant date, and the following two tranches on each subsequent anniversary of the grant date.

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

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

1 unchanged sentence

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.

The total shares under the unvested RSUs subject to time-based vesting conditions were zero and 111,236 for the years ended December 31, 2022, and 2021, respectively.

For the years ended December 31, 2022, and 2021, there were no performance awards with market-based conditions granted.

The Company recognized $ 7,638 and $ 4,566 of total stock-based compensation expense for RSUs for the years ended December 31, 2022, and 2021, respectively.

For the year ended December 31, 2022, the Company withheld 247,979 of the 818,489 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 tax withholding payments of $ 2,461 were made in 2022 in addition to a tax withholding obligation of $ 9 from 2021.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The following table summarizes the activity related to the Company's RSUs for the year ended December 31, 2022.

For purposes of this table, vested RSUs represent the shares for which the service requirements had been fulfilled as of December 31, 2021:

For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled during the year ended December 31, 2022:

RSUs Weighted

1 unchanged sentence

date fair value

Balance, January 1, 2021

1,857,444 $ 6.55

Balance, December 31, 2021 1,087,608 $ 9.71

Granted 785,486 $ 9.62

Vested ( 824,846 ) $ 9.25

Forfeited ( 55,615 ) $ 35.54

Balance, December 31, 2022

992,633 $ 8.57

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, 2022, and 2021, was $ 7,628 , and $ 6,090 , 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.

As of December 31, 2022, total unamortized stock-based compensation expense related to unvested RSUs was $ 5,920 and the weighted-average period over which the compensation is expected to be recognized is 1.28 years.

As of December 31, 2022, there were 6,357 RSUs which had vested, but were not yet issued due to the recipients' elections to defer the awards.

The tax benefits recognized in the consolidated statements of operations for stock-based compensation arrangements for the years ended December 31, 2022, and 2021, were not material to the financial statements.

There was no tax benefit recognized in 2019.

Performance Stock Unit ("PSU") Activity

During the year ended December 31, 2022, the Company granted PSU awards that are subject to a one-year vesting requirement (based on continuous employment) and contain performance conditions based on certain performance metrics.

The following table summarizes the activity related to the Company's PSUs for the year ended December 31, 2022:

PSUs Weighted

average grant

date fair value

Balance, December 31, 2021 — $ —

Granted 116,113 $ 15.74

Forfeited ( 19,867 ) $ 15.74

Balance, December 31, 2022

96,246 $ 15.74

As of December 31, 2022, total unamortized stock-based compensation cost related to unvested PSUs was $ 101 and the weighted-average period over which the compensation is expected to be recognized is less than one year.

For the year ended December 31, 2022, the Company recognized $ 355 of total stock-based compensation expense for PSUs.

Stock Options

The vesting of stock options is subject to certain change in control provisions as provided in the incentive plan agreements and options may be exercised up to 10 years from the date of issuance.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The following table summarizes the stock option activity for the year ended December 31, 2022:

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remaining contractual

Outstanding as of January 1, 2021

922,796 $ 8.81 $ 1.78 8.08

Outstanding as of December 31, 2021 720,549 $ 9.57 $ 2.21 7.37

Granted 4,250 $ 13.12 $ 12.95

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Outstanding as of December 31, 2022 670,026 $ 9.50 $ 2.05 5.25

720,549 $ 9.57 $ 2.21 7.37

Exercisable as of December 31, 2021

518,034 $ 8.57 $ 1.10 7.25

Unvested as of December 31, 2021

202,515 $ 12.13 $ 5.04 1.96

Options exercisable as of December 31, 2022 599,439 $ 8.90 $ 1.46 5.00

Vested and expected to vest as of December 31, 2022 670,026 $ 9.50 $ 2.05 5.25

720,549 $ 9.57 $ 2.21 7.37

The following table summarizes the unvested stock option activity for the year ended December 31, 2022:

Number Weighted

average grant

date fair value

Unvested as of December 31, 2021 202,515 $ 5.04

Granted 4,250 $ 12.95

Vested ( 98,408 ) $ 3.14

Forfeited ( 37,770 ) $ 7.20

Unvested as of December 31, 2022 70,587 $ 7.02

The weighted average grant date fair value of stock options granted was $ 12.95 and $ 25.58 for the years ended December 31, 2022, and 2021, respectively.

The total fair value of stock options vested for the years ended December 31, 2022, and 2021, was $ 309 , and $ 412 , respectively.

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.

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The valuation model requires the input of highly subjective assumptions.

For inputs into the Black-Scholes model, the expected volatility is based on historical implied volatility from recent stock option transactions at the time of grant.

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 term.

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

Inputs to the model were as follows for the periods indicated:

Years ended December 31,

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 %

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.

Weighted average exercise price of common stock underlying the options $ 13.12 $ 59.03

Volatility 200 % 45 %

Risk-free rate 2.8 % 0.85 %

Dividend yield Nil Nil

Expected term in years 6.0 6.0

For the years ended December 31, 2022, and 2021, respectively, the Company recognized $ 361 and $ 440 of total stock-based compensation expense for stock options.

The total intrinsic value of options exercised was $ 82 and $ 7,448 for the

Hydrofarm Holdings Group, Inc.

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(In thousands, except share and per share amounts)

Loss from continuing operations before tax was as follows:

years ended December 31, 2022, and 2021, respectively.

As of December 31, 2022, the total compensation cost related to unvested awards not yet recognized was $ 407 and the weighted-average period over which the compensation is expected to be recognized is 1.29 years.

(Loss) income before tax was as follows:

Years ended December 31,

2021 2020 2019

United States $ ( 235,215 ) $ ( 9,262 )

Foreign ( 56,643 ) 3,541

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:

Loss before tax $ ( 291,858 ) $ ( 5,721 )

Significant components of income tax (benefit) expense consist of the following:

Years ended December 31,

2021 2020 2019

Total current

Total current expense

( 8,689 ) ( 18,275 )

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2,359 ( 759 )

Total deferred

Total deferred benefit

( 9,310 ) ( 20,996 )

Total income tax (benefit) expense

Total income tax benefit

$ ( 6,443 ) $ ( 19,137 )

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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:

federal statutory tax rates of 21% to income tax benefit consists of the following:

Years ended December 31,

2021 2020 2019

Effective rate reconciliation

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State income taxes, net

68 ( 171 ) ( 1,247 )

Permanent items

Goodwill impairment 23,170 —

Global intangible low-taxed income

2 unchanged sentences

162(m) officers compensation

6,969 3,514 —

Share-based compensation

( 8,118 ) ( 2,834 ) —

Deferred adjustments

67 ( 230 ) 563

Transaction costs

2,410 ( 973 )

Valuation allowance

23,697 ( 20,785 )

Total income tax (benefit) expense

Total income tax benefit

$ ( 6,443 ) $ ( 19,137 )

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Total deferred tax assets

25,298 26,385

Deferred tax liabilities

5 unchanged sentences

Total deferred tax liabilities ( 27,983 ) ( 31,623 )

Net deferred tax (liability) asset

Net deferred tax liability

$ ( 2,685 ) $ ( 5,238 )

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Long-term deferred tax liabilities ( 2,685 ) ( 5,631 )

Net deferred tax (liability) asset $ ( 5,238 ) $ 341

Net deferred tax liability $ ( 2,685 ) $ ( 5,238 )

As of December 31, 2022, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $ 107,100 and $ 80,800 , respectively.

The federal and state NOL carryforwards, if not utilized, will begin to expire in 2037 and 2027, respectively, and $ 93,400 of the federal losses are indefinite.

As of December 31, 2021, the Company had federal and state NOL carryforwards of approximately $ 74,900 and $ 56,900 , respectively.

Foreign NOL carryforwards were approximately $ 15,900 and $ 1,000 at December 31, 2022, and 2021, 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.

The majority of the foreign NOLs have a 20 year carryforward period.

The Company determined the amount of its valuation allowance based on estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income by jurisdiction, and the impact of tax planning strategies.

As of December 31, 2022, and 2021, the Company believes it is more-likely-than-not that it will not be able to realize its U.S.

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deferred tax assets.

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.

The Company has also provided valuation allowances against certain foreign deferred tax assets.

The Company's effective tax rate differs from the U.S.

federal statutory rate primarily due discrete tax benefits relating primarily to measurement period adjustments associated with 2021 acquisitions, the impairment of goodwill for certain 2021 acquisitions which was not deductible for U.S.

tax purposes, increases in the Company's valuation allowance on U.S.

deferred tax assets, and the establishment of a valuation allowance for Canadian deferred tax assets.

In connection with the measurement period adjustments associated with 2021 acquisitions, the Company recorded a net deferred tax liability which provided an additional source of taxable income to support the realization of the pre-existing deferred tax assets.

The Company's income tax benefit was partially offset by income taxes from certain foreign subsidiaries.

Hydrofarm Holdings Group, Inc.

2 unchanged sentences

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.

An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% stockholders in any three-year period.

The Company experienced an aggregate ownership change which exceeded the 50% threshold in connection with the Company's IPO, and future changes in stock ownership may occur.

To the extent that the Company earns net taxable income, the Company's ability to use NOLs to offset such taxable income may be subject to limitations.

The annual limitation resulting from the IPO ownership change is not expected to result in the expiration of the NOL carry forwards before utilization.

In 2022 and 2021, 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.

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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 CARES Act for the year ended December 31, 2021.

COMMITMENTS AND CONTINGENCIES, AND RELATED PARTY TRANSACTIONS

4 unchanged sentences

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

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

For the year ended December 31, 2021, rent expense for the month-to-month lease totaled $ 639 .

FAIR VALUE MEASUREMENTS

Contingent consideration, as described in Note 3 – Business Combinations , is measured at estimated fair value on a recurring basis and based on Level 3 fair value measurements.

The fair value of the contingent consideration for the Heavy 16 and Aurora acquisitions was $ 200 and $ 16,834 , respectively, as of December 31, 2021.

The fair value of the contingent consideration for the Heavy 16 and Aurora acquisitions were both zero as of December 31, 2022, as the liabilities were paid during the year.

The change in the fair value of contingent consideration during the years ended December 31, 2022, and 2021, was a benefit of $ 1,560 and $ 2,610 , respectively, and was recognized in SG&A on the consolidated statements of operations for all periods presented.

The valuation methodology and inputs used in the fair value measurement were disclosed in Note 3 – Business Combinations .

Nonrecurring fair value measurements include the Company’s goodwill impairment recognized during the year ended December 31, 2022, as determined based on unobservable Level 3 inputs.

Refer to Note 4 – Goodwill and Intangible Assets, Net , for further discussion.

The note receivable, as described in Note 2 – Basis of Presentation and Significant Accounting Policies , was measured at fair value on a nonrecurring basis.

During the year ended December 31, 2022, the Company measured an impairment on the note receivable based on the estimated fair value of the collateral, which was considered a Level 3 fair value measurement.

The Company recorded an impairment loss of $ 2,636 during the year ended December 31, 2022, recognized in Impairments on the consolidated statements of operations.

The carrying value of the note receivable was

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

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 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:

$ 475 and $ 3,111 as of December 31, 2022, and 2021, respectively.

As of December 31, 2022, the note receivable was included in Other assets on the consolidated balance sheet.

The following table summarizes the fair value of the Company’s liabilities which are required to be remeasured to fair value on a recurring basis, as described above:

December 31, 2022 December 31, 2021

Fair Value Hierarchy Level

3 unchanged sentences

Estimated Fair Value

Contingent consideration:

Heavy 16 Acquisition

Aurora Acquisition

— — 16,834 16,834

Other Fair Value Measurements

The following table summarizes the fair value of the Company’s assets and liabilities which are provided for disclosure purposes:

December 31, 2022 December 31, 2021

Fair Value Hierarchy Level

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Cash and cash equivalents

2 unchanged sentences

— — 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

Debt facilities

123,750 105,188 125,000 121,250

2,064 2,064 2,805 2,805

The fair value of the Term Loan was estimated based on Level 2 fair value measurements and was based on bank quotes.

The carrying amount of the Term Loan reported above excludes unamortized deferred financing costs and discount.

The carrying amount of Other Debt was $ 2,064 and $ 2,805 as of December 31, 2022, and 2021, respectively, and was primarily comprised of finance lease obligations.

The estimated fair value of Other Debt approximated its carrying value given the applicable interest rates and the nature of the security interest in the Company’s assets, which were considered Level 3 fair value measurements.

Refer to Note 10 – Debt , for further discussion of the Company's debt facilities.

Cash, cash equivalents, and restricted cash included funds deposited in banks, and the carrying values approximated fair values due to their short-term maturities.

The carrying values of other current assets and liabilities including accounts receivable, accounts payable, accrued expenses and other current liabilities approximated their fair value due to their short-term maturities.

The Company did not have any transfers between Levels within the fair value hierarchy during years ended December 31, 2022, and 2021.

SUBSEQUENT EVENTS

In January 2023, Gotham Properties LLC, an Oregon limited liability company and a subsidiary of the Company (“Seller”), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company (“Purchaser”) pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

SUBSEQUENT EVENTS

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)

Balance as of (Benefits) / Other / Balance as of

beginning of year Provisions Deductions end of year

Year ended December 31, 2021

Allowance for doubtful accounts $ 918 $ ( 110 ) $ 348 $ 1,156

Allowance for inventory obsolescence 2,432 1,201 ( 103 ) 3,530

Year ended December 31, 2020

Allowance for doubtful accounts 1,776 83 ( 941 ) 918

Allowance for inventory obsolescence 3,822 ( 803 ) ( 587 ) 2,432

Year ended December 31, 2019

Allowance for doubtful accounts 1,227 933 ( 384 ) 1,776

Allowance for inventory obsolescence 3,219 707 ( 104 ) 3,822

“Eugene Property”) was sold to Purchaser for $ 8,598 and then leased back by Seller (the “Sale-Leaseback Transaction”).

The new lease has a term of 15 years with annual rent starting at $ 731 and fixed increases to the final year when annual rent is $ 964 .

The Company is accounting for the transaction as a failed sale and leaseback which requires retaining the asset associated with the property and recognizing a corresponding financial liability for the cash received.

The Eugene Property serves as the manufacturing and processing site for certain of the Company’s grow media and nutrient brands.

The Company intends to reinvest the net cash proceeds into certain permitted investments in 2023, such as capital expenditures.

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